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SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act ofPROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Amendment No.(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_][ ]
Check the appropriate box:
[_][ ] Preliminary Proxy Statement [_][ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_][ ] Definitive Additional Materials
[_][ ] Soliciting Material Pursuant to Sectionsec. 240.14a-11(c) or Sectionsec. 240.14a-12
Continental Airlines, Inc.
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(Name of Registrant as Specified In Itsin its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_][ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)(l) and
0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_]- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[_][ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
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Notes:- --------------------------------------------------------------------------------
[LOGO OF CONTINENTAL2
[CONTINENTAL AIRLINES APPEARS HERE]LOGO]
April 4, 199715, 1998
To Our Stockholders:
On behalf of the Board of Directors, we are pleased to invite you to attend
the Continental Airlines, Inc. 19971998 Annual Meeting of Stockholders. As indicated
in the attached notice, the meeting will be held at the J.W.
Marriott Hotel, 5150 Westheimer,The Hyatt Regency, 1200
Louisiana Street, Houston, Texas on Friday,Thursday, May 16, 1997,21, 1998, at 9:30 a.m., local
time. At the meeting, in addition to acting on the matters described in the
attached proxy statement, there will be an opportunity to discuss other matters
of interest to you as a stockholder.
Please date, sign and mail the enclosed proxy card in the envelope
provided, even if you plan to attend the meeting in person. We look forward to
seeing you in Houston.
Cordially,
/S//s/ GORDON BETHUNE
Gordon Bethune
Chairman of the Board and Chief
Executive Officer
/S//s/ GREG BRENNEMAN
Greg Brenneman
President and Chief Operating
Officer
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CONTINENTAL AIRLINES, INC.
2929 ALLEN PARKWAY, SUITE 2010
HOUSTON, TEXAS 77019
-------------------------------------
NOTICE OF 19971998 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 16, 1997
----------------21, 1998
---------------------
NOTICE IS HEREBY GIVEN that the 19971998 Annual Meeting of Stockholders of
Continental Airlines, Inc., a Delaware corporation (the "Company" or
"Continental"), will be held at the J.W. Marriott Hotel, 5150 Westheimer,The Hyatt Regency, 1200 Louisiana Street,
Houston, Texas on Friday,Thursday, May 16, 1997,21, 1998, at 9:30 a.m., local time, for the
following purposes:
1. To elect thirteen directors to serve until the next annual meeting
of stockholders;
2. To consider and act upon a proposal to approve certain amendments to the Company's 1994 Incentive Equity Plan, as amended;
3. To consider and act upon a proposal to approve the Company's 1997
Employee Stock Purchase Plan;
4. To consider and act upon a proposal to approve the Company's 19971998
Stock Incentive Plan;
5.3. To consider and act upon a proposal to ratify the appointment of
Ernst & Young LLP independent public accountants, as independent auditors of the Company and its
subsidiaries for 1997;1998; and
6.4. To consider and act upon any other matters that may properly come
before the Annual Meeting or any adjournment or adjournments thereof.
The holders of record of the Company's common stock at the close of
business on March 21, 199727, 1998 are entitled to notice of and to vote at the Annual
Meeting.
By Order of the Board of Directors,
/s/ JEFFERYJEFFREY A. SMISEK
Jeffery A. Smisek
Secretary
Houston, Texas
April 4, 199715, 1998
PLEASE SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY BY MAIL IN
THE ENCLOSED ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON.
NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES. IF YOU DO ATTEND THE
MEETING IN PERSON AND DESIRE TO WITHDRAW YOUR PROXY, YOU MAY DO SO IN THE MANNER
DESCRIBED IN THE ENCLOSED PROXY STATEMENT AND VOTE PERSONALLY ON ALL MATTERS
BROUGHT BEFORE THE MEETING.
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CONTINENTAL AIRLINES, INC.
2929 ALLEN PARKWAY, SUITE 2010
HOUSTON, TEXAS 77019
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PROXY STATEMENT
19971998 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 16, 1997
----------------21, 1998
---------------------
This proxy statement is furnished in connection with the solicitation by
and on behalf of the Board of Directors of Continental Airlines, Inc., a
Delaware corporation (the "Company" or "Continental"), of proxies to be voted at
the 19971998 Annual Meeting of Stockholders of the Company or any adjournment or
adjournments thereof (the "Meeting"), to be held at the J.W. Marriott Hotel,
5150 Westheimer,The Hyatt Regency, 1200
Louisiana Street, Houston, Texas on Friday,Thursday, May 16, 1997,21, 1998, at 9:30 a.m., local
time, for the purposes set forth in the accompanying Notice of 19971998 Annual
Meeting of Stockholders. This proxy statement and the accompanying proxy,
together with a copy of the Company's 19961997 Annual Report, are being first mailed
to stockholders on or about April 4, 1997.15, 1998.
THE PROXY
Stockholders giving proxies may revoke them at any time before they are
voted by notifying the Secretary of the Company in writing of such revocation or
by delivering to such Secretary a duly executed proxy bearing a later date. Any
such revocation or subsequent proxy must be received prior to the commencement
of voting at the Meeting to be effective. If a proxy is properly signed by a
holder of common stock and is not revoked, it will be voted at the Meeting in
the manner specified on the proxy or, if no manner is specified, it will be
voted "FOR" the election of directors nominated by the Board of Directors of the
Company (the "Board of Directors" or the "Board") and "FOR" approval of the
other matters set forth in the accompanying Notice.
The Company will bear the costs of the solicitation of proxies. In addition
to the solicitation of proxies by mail, proxies may also be solicited by
telephone, telegram, fax and in person by regular employees and directors of the
Company, none of whom will receive additional compensation therefor, and by
Morrow & Co., Inc., which the Company has retained to assist in the solicitation
of proxies for a fee estimated not to exceed $6,500 plus reasonable
out-of-pocket expenses. Arrangements will be made with brokerage houses and with
other custodians, nominees and fiduciaries to forward proxy soliciting materials
to beneficial owners, and the Company will reimburse such persons for their
reasonable out-of-pocket expenses incurred in connection therewith.
RECORD DATE AND VOTING SECURITIES
The Board of Directors fixed the close of business on March 21, 199727, 1998 as the
record date for the determination of stockholders entitled to notice of and to
vote at the Meeting. At the close of business on the record date, the Company
had outstanding 8,594,3648,379,464 shares of Class A common stock, par value $.01 per
share, and 48,968,30350,738,288 shares of Class B common stock, par value $.01 per share.
Continental's Restated Certificate of Incorporation ("Charter") authorizes
the issuance of up to 10 million shares of preferred stock, 50 million shares
each of Class A common stock and Class D common stock, and 200 million shares of
Class B common stock. No shares of Class D common stock have been issued.
Subject to certain limitations on voting by non-U.S. citizens, each share of
Class A common stock is entitled to ten votes per share and each share of Class
B common stock is entitled to one vote per share. Shares of Class A common stock
may be converted at any time into shares of Class B common stock. The holders of
shares representing a majority of the aggregate voting power of the outstanding
voting securities entitled to vote at the Meeting, present or represented by
proxy, will constitute a quorum for the transaction of business at the Meeting.
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In establishing the presence of a quorum, abstentions and broker non-votes
(if any) will be included in the determination of the number of shares
represented at the Meeting. Abstentions are treated as votes cast and thus will
have the same effect as a vote against a proposal. As to a specific proposal,
however, broker non-votes are not treated as votes cast or shares entitled to
vote with respect to such matter and thus will not affect the election of
directors (who will be elected by a plurality of the votes cast for directors),
or the outcome of the proposals to (i) approve the proposed
amendment to the Company's 1994 Incentive Equity Plan, (ii) approve the Company's 1997 Employee Stock Purchase Plan, (iii) approve the Company's 19971998 Stock Incentive
Plan or (iv) ratify the appointment of independent auditors (each of which requires
approval by a majority of the votes cast on the applicable proposal).
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE PROPOSALS
CONTAINED IN THIS PROXY STATEMENT.
LIMITATION ON VOTING BY FOREIGN OWNERS
The Charter defines "Foreign Ownership Restrictions" as "applicable
statutory, regulatory and interpretive restrictions regarding foreign ownership
or control of U.S. air carriers (as amended or modified from time to time).".
Such restrictions currently require that no more than 25% of the voting stock of
the Company be owned or controlled, directly or indirectly, by persons who are
not U.S. Citizens ("Foreigners") for purposes of the Foreign Ownership
Restrictions, and that the Company's president and at least two-
thirdstwo-thirds of its
directors be U.S. Citizens. For purposes of the Charter, "U.S. Citizen" means
(i) an individual who is a citizen of the United States; (ii) a partnership each
of whose partners is an individual who is a citizen of the United States; or
(iii) a corporation or association organized under the laws of the United States
or a State, the District of Columbia, or a territory or possession of the United
States, of which the president and at least two-
thirdstwo-thirds of the board of directors
and other managing officers are citizens of the United States, and in which at
least 75% of the voting interest is owned or controlled by persons who are
citizens of the United States. The Charter provides that no shares of capital
stock may be voted by or at the direction of Foreigners, unless such shares are
registered on a separate stock record (the "Foreign Stock Record") maintained by
the Company for the registration of ownership of voting stock by Foreigners. The
Company's bylaws ("Bylaws") further provide that no shares will be registered on
the Foreign Stock Record if the amount so registered would cause the Company to
violate the Foreign Ownership Restrictions or adversely affect the Company's
operating certificates or authorities. Registration on the Foreign Stock Record
is made in chronological order based on the date the Company receives a written
request for registration, except that shares acquired by Air Partners, L.P., a
Texas limited partnership ("Air Partners"), in connection with its original
investment in the Company that are subsequently transferred to any Foreigner are
entitled to be registered prior to, and to the exclusion of, other shares.
RECENT DEVELOPMENTS
On January 26, 1998, the Company announced that, in connection with an
agreement by Air Partners to dispose of its interest in the Company to an
affiliate of Northwest Airlines, Inc. ("Northwest"), the Company had entered
into a long-term global alliance with Northwest ("Northwest Alliance") involving
schedule coordination, frequent flyer reciprocity, executive lounge access,
airport facility coordination, code sharing, the formation of a joint venture
among the two carriers and KLM Royal Dutch Airlines ("KLM") with respect to
their trans-Atlantic services, cooperation regarding other alliance partners of
the two carriers and regional alliance development, certain coordinated sales
programs, preferred reservations displays and other activities.
The Northwest Alliance is expected to be phased in over a multi-year
period. A significant portion of the alliance activities will commence promptly.
Code sharing will commence, subject to governmental approvals, with the Company
initially placing its designator code on all of Northwest's international
flights (other than its trans-Atlantic flights) and those Northwest domestic
flights which create international connecting itineraries to and from Latin
America. Thereafter, subject to governmental approval and approval by
Northwest's pilots under their collective bargaining agreement, (i) Northwest
and the Company anticipate entering into a joint venture among themselves and
KLM with respect to their respective trans-Atlantic flights, (ii) Northwest
anticipates placing its designator code on substantially all of the Company's
other international flights, and (iii) Northwest and the Company each anticipate
placing their respective designator codes on substantially all of the other
carrier's domestic flights.
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The Company estimates that the alliance, when fully phased in over a
three-year period, will generate in excess of $500 million in additional annual
pre-tax operating income for the carriers, and anticipates that approximately
45% of such pre-tax operating income will accrue to the Company. The Company
believes that a significant portion of the alliance synergies allocable to the
Company can be achieved even without the activities that are subject to approval
of Northwest's pilots.
The Company also announced on January 26, 1998 that Air Partners, the
holder of approximately 14% of the Company's equity and approximately 51% of its
voting power (after giving effect to the exercise of warrants), had entered into
an agreement to dispose of its interest in the Company to an affiliate of
Northwest (the "Air Partners Transaction") in exchange for approximately $308
million in cash and equity securities of an affiliate of Northwest valued at
approximately $211 million. According to a Schedule 13D filed with the
Securities and Exchange Commission (the "SEC" or the "Commission") by an
affiliate of Northwest, the cash consideration will be provided from working
capital and the proceeds of unsecured borrowings in the public capital markets.
The Air Partners Transaction is subject to, among other matters, governmental
approval and expiration of applicable waiting periods under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976. The agreement also extends
to an affiliate of Air Partners a right of first offer to purchase certain
shares of Class A common stock of the Company to be acquired by Northwest or its
affiliates if such entities intend to dispose of those securities prior to the
fifth anniversary of the closing of the Air Partners Transaction.
In January 1997,connection with the Air Canada,Partners Transaction, the Company entered into a
Canadian corporationcorporate governance agreement with certain affiliates of Northwest (the
"Northwest Parties") designed to assure the independence of the Company's Board
and Continental's only
significant foreign stockholdermanagement during the six-year term of the governance agreement. Under the
corporate governance agreement, as amended, the Northwest Parties have agreed
not to beneficially own voting securities of the Company in 1996, soldexcess of 50.1% of
the fully diluted voting power of the Company's voting securities, subject to
certain exceptions involving third-party acquisitions or tender offers for 15%
or more of the voting power of the Company's voting securities and a limited
exception permitting a one-time ownership of approximately 50.4% of the fully
diluted voting power. The Northwest Parties have agreed to deposit all itsvoting
securities of the Company beneficially owned by them in a voting trust with an
independent voting trustee requiring that such securities be voted (i) on all
matters other than the election of directors, either as recommended by the
Company's Board of Directors (a majority of whom must be independent directors
as defined in the agreement) or in the same proportion as the votes cast by
other holders of voting securities, and (ii) in the election of directors, for
the election of independent directors nominated by the Board of Directors;
provided, that in the event of a merger or similar business combination or a
recapitalization, liquidation or similar transaction, a sale of all or
substantially all of the Company's assets, or an issuance of voting securities
which would represent more than 20% of the voting power of the Company prior to
issuance, or any amendment of the Charter or Bylaws that would materially and
adversely affect Northwest, the shares includedmay be voted as directed by the Northwest
Party owning such shares, and if a third party is soliciting proxies in
connection with an election of directors, the shares may be voted at the option
of such Northwest Party either as recommended by the Company's Board of
Directors or in the same proportion as the votes cast by the other holders of
voting securities.
The Northwest Parties have also agreed to certain restrictions on the
Foreigntransfer of voting securities owned by them, have agreed not to seek to affect
or influence the Company's Board of Directors or the control of the management
of the Company or the business, operations, affairs, financial matters or
policies of the Company or to take certain other actions, and have agreed to
take all actions as are necessary to cause independent directors to at all times
constitute at least a majority of the Company's Board of Directors. The Company
has agreed to cause one designee of a Northwest Party reasonably acceptable to
the Board of Directors to be appointed to the Company's Board immediately after
the closing of the Air Partners Transaction, and has agreed to grant preemptive
rights to a Northwest Party with respect to certain issuances of Class A common
stock and Class B common stock. The Northwest Parties have agreed that certain
specified actions, together with any material transactions between the Company
and Northwest or its affiliates, including any modifications or waivers of the
corporate governance agreement and the alliance agreement, may not be taken
without the prior approval of a majority of the Board of Directors, including
the affirmative vote of a majority of the
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independent directors. The governance agreement also provides for the Company to
adopt a shareholder rights plan with reasonably customary terms and conditions,
with an acquiring person threshold of 15% and with appropriate exceptions for
the Northwest Parties for actions permitted by and taken in compliance with the
corporate governance agreement.
The corporate governance agreement provides that, if after three years
Northwest's pilots have not consented to those portions of the alliance
agreement requiring their consent and the Company, at its election, then chooses
to terminate the alliance agreement, the Northwest Parties can elect either to
dispose of their shares in the Company or negotiate with a committee of
independent directors of the Company regarding a merger. If a merger agreement
cannot be reached within six months of the establishment of the committee,
certain appraisal procedures are specified. If upon completion of the appraisal
procedures, Northwest is unwilling to enter into a merger agreement at the value
for the shares not held by the Northwest Parties determined by such appraisal
procedures, then the Northwest Parties must sell their voting securities, and if
the Company and the committee are unwilling to approve a merger agreement at
such value, then the corporate governance agreement (except for certain
provisions requiring continuing independent directors and approval by a majority
of such independent directors of material transactions between the Company and
the Northwest Parties) will expire.
The corporate governance agreement will otherwise expire after the sixth
anniversary of the date of closing of the Air Partners Transaction, or if
earlier, upon the date that the Northwest Parties cease to beneficially own
voting securities representing at least 10% of the fully diluted voting power of
the Company's voting securities. Upon a termination of the above described terms
of the governance agreement, the Northwest Parties must nonetheless take such
actions as are necessary to cause the Company's Board of Directors to at all
times include at least five directors who are independent of and otherwise
unaffiliated with Northwest or the Company and their respective affiliates, and
any material transaction between the Company and Northwest or its affiliates, or
relating to the governance agreement or the alliance agreement, may not be taken
without prior approval thereof by a majority vote of the independent directors.
The alliance agreement provides that if after four years the Company has
not entered into a code share with KLM or is not legally able (but for
aeropolitical restrictions) to enter into a new trans-Atlantic joint venture
with KLM and Northwest and place its airline code on certain Northwest flights,
Northwest can elect to (i) cause good faith negotiations among the Company, KLM
and Northwest as to the impact, if any, on the contribution to the joint venture
resulting from the absence of the code share, and the Company will reimburse the
joint venture for the amount of any loss until it enters into a code share with
KLM, or (ii) terminate (subject to cure rights of the Company) after one year's
notice any or all of such alliance agreement and any or all of the agreements
contemplated thereunder.
The closing of the Air Partners Transaction will constitute a "Change in
Control" for purposes of the Company's 1994 Incentive Equity Plan, as amended
(the "1994 Plan"), the 1997 Stock Record.
2Incentive Plan, as amended (the "1997 Plan"),
the Company's executive bonus program (the "Executive Bonus Program") and the
Company's employment agreements with its management. Upon a Change in Control,
all options granted to participants under the 1994 Plan and the 1997 Plan
immediately vest and become exercisable in full and all outstanding restricted
stock vests in full. As of the end of April 1998, there will be unvested options
with respect to approximately 2.6 million shares of Class B common stock
outstanding and 35,000 shares of unvested restricted stock outstanding, all of
which will vest upon a Change in Control. There were approximately 560 employee
participants in the 1994 Plan and/or the 1997 Plan as of March 27, 1998. Under
the Executive Bonus Program, if a participant's participation in the program or
his employment is terminated (or constructively terminated as described in the
program) other than for cause or for other specified exceptions during the year
in which a Change in Control occurs, the participant will receive an amount
equal to 125% of his base salary less any bonuses earlier received by the
participant under the program during such year. There were 25 participants in
the Executive Bonus Program as of March 27, 1998. Under the Company's employment
agreements with Mr. Bethune and Mr. Brenneman, if either executive terminates
his employment with the Company for any reason following a Change in Control,
such executive is entitled to payment of the severance specified in his
agreement. Under the Company's employment agreements with Messrs. Kellner,
McLean and Smisek (and certain other officers of the Company), if such
executive's employment with the
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Company is terminated within two years following a Change in Control (other than
by the Company for cause or upon such executive's death or disability and other
than voluntarily (without constructive termination) by the executive), the
executive is entitled to an enhanced severance payment from the Company. In
connection with and conditioned on the closing of the Air Partners Transaction,
the Company has agreed to pay stay bonuses to the named executive officers and
certain other officers of the Company. See "Certain Transactions."
VOTING RIGHTS AND PRINCIPAL STOCKHOLDERS
The following table sets forth, as of March 21, 199727, 1998 (except as otherwise
set forth below), certain information with respect to persons owning
beneficially (to the knowledge of the Company) more than five percent of any
class of the Company's voting securities. The table also sets forth the
respective general voting power of such persons. Information in the table is
based on reports that have been filed with Securities and Exchange Commission
(the "SEC" or the "Commission")SEC pursuant to the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and information furnished
to the Company by such holders. In accordance with regulations promulgated by
the Commission, the table reflects for each beneficial owner the exercise of
warrants or the conversion of convertible securities (exercisable or convertible
within 60 days after the record date)March 27, 1998) owned by such beneficial owner, but, in
determining the percentage ownership and general voting power of such person,
does not assume the exercise of warrants or the conversion of securities owned
by any other person.
AMOUNT
AND NATURE GENERAL
NAME AND ADDRESS OF BENEFICIAL PERCENT VOTING
OF BENEFICIAL HOLDER TITLE OF CLASS OWNERSHIP OF CLASS POWER(1)
-------------------- -------------------- ------------- -------- --------As part of the Air Partners L.P.(2)Transaction, certain affiliates of Northwest
(Northwest Airlines Corporation and Newbridge Parent Corporation, the address of
which is 5101 Northwest Drive, St. Paul, Minnesota 55111-3034) have agreed to
acquire Air Partners' interests in the Company, along with the Class A common
stock 8,519,468 (3) 73.2% 52.7%
2420 Texas Commerce
Tower Class B common stock 4,150,885 (4) 7.8%
201 Main Street
Fort Worth, TX 75102
American General
Corporationowned by certain affiliates of Air Partners, including Bonderman Family
Limited Partnership, 1992 Air, Inc. and Air Saipan, Inc. In addition, such
affiliates of Northwest have agreed to acquire an additional 979,000 shares of
Class A common stock 1,548,992 (5) 16.9% 11.5%
2929 Allen Parkwayowned by certain third parties in exchange for
approximately $59.5 million in cash, conditioned on the closing of the Air
Partners Transaction. According to a statement on Schedule 13D filed with the
SEC by an affiliate of Northwest, such consideration is expected to be funded
from Northwest's general working capital and from the proceeds of unsecured
borrowings in the public capital markets. As a result of such agreements, such
affiliates of Northwest may be deemed to beneficially own an aggregate of
9,514,868 shares of Class BA common stock 755,273 (6) 1.5%
Houston, TX 77019
The Capital Group
Companies, Inc.of the Company, comprising 83.3% of the
outstanding Class BA common stock 2,822,400 (7) 5.5% 2.1%
333 South Hope Street
Los Angeles, CA 90071(assuming exercise of all outstanding warrants
to purchase Class A common stock) and 57.7% of the general voting power (50.4%
of the fully diluted voting power of the Company as of March 27, 1998) of the
Company. The Equitable Companies
Incorporatedvoting and disposition of this stock are limited by the terms of
the governance agreement between the Company and the Northwest Parties. See
"Recent Developments." Northwest has informed the Company that it intends to
cause the Class BA common stock 6,158,604 (8) 12.6% 4.6%
787 Seventh Avenue
New York, NY 10019
FMR Corp. Class B common stock 3,751,748 (9) 7.5% 2.8%
82 Devonshire Street
Boston, MA 02109
Vanguard/Windsor Fund,
Inc. Class B common stock 4,000,000 (10) 8.2% 3.0%
Post Office Box 2600
Valley Forge, PA 19482
Wellington Management
Company, LLP Class B common stock 5,159,697 (11) 10.5% 3.8%
75 State Street
Boston, MA 02109outstanding on the record date and subject to the
Air Partners Transaction (5,496,400 shares), with respect to which it has been
granted a limited proxy, to vote with respect to the proposal to approve the
Company's 1998 Stock Incentive Plan in the same proportion as the votes cast by
other holders of voting securities of the Company.
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AMOUNT
AND NATURE GENERAL
NAME AND ADDRESS OF BENEFICIAL PERCENT VOTING
OF BENEFICIAL HOLDER TITLE OF CLASS OWNERSHIP OF CLASS POWER(1)
-------------------- -------------- ------------- -------- --------
Air Partners, L.P.(2) Class A common stock 8,302,656(3) 72.7% 50.3%
2420 Texas Commerce Tower
201 Main Street
Fort Worth, TX 75102
American General Corporation Class A common stock 1,548,992(4) 17.3% 11.1%
2929 Allen Parkway Class B common stock 566(5) (5)
Houston, TX 77019
The Equitable Companies
Incorporated Class B common stock 11,225,564(6) 22.1% 8.3%
1290 Avenue of the Americas
New York, NY 10104
Goldman, Sachs & Co. Class B common stock 2,888,474(7) 5.7% 2.2%
85 Broad Street
New York, NY 10004
Invesco PLC Class B common stock 2,620,200(8) 5.2% 2.0%
11 Devonshire Square
London, England EC2M 4YR
Morgan Stanley, Dean Witter, Class B common stock 7,118,753(9) 14.0% 5.3%
Discover & Co.
1585 Broadway
New York, NY 10036
Neuberger & Berman, LLC Class B common stock 5,968,785(10) 11.8% 4.4%
605 Third Ave.
New York, NY 10158-3698
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(1) Each share of Class A common stock is entitled to ten votes, and each share
of Class B common stock is entitled to one vote. General Voting Power
includes the combined total of the votes attributable to Class A common
stock and Class B common stock. Shares of Class A common stock may be
converted at any time into shares of Class B common stock. Because the
Class A common stock has ten votes per share and the Class B common stock
has one vote per share, such conversions effectively increase the relative
voting power of those Class A stockholders who do not convert.
3
(2) Based on reports filed with the Commission pursuant to the Exchange Act in
December 1996,and
information provided to the Company, the general partners of Air Partners
are 1992 Air GP, managing general partner, and Air II General, Inc. The
general partners of 1992 Air GP are 1992 Air, Inc., majority general
partner, and Air Saipan, Inc. David Bonderman is the controlling
shareholder of Air II General, Inc. and 1992 Air, Inc. and accordingly may
be deemed the beneficial owner of shares held by Air Partners. In addition, Mr.
Bonderman also holds, directly and indirectly, limited partnership
interests in Air Partners. Mr.
Bonderman also holds director stock options to purchase 11,000Not included in the amounts shown are (a)
180,483 shares of Class B common stock (including 2,000and 16,000 such shares subject to
stockholder
approval at the Meeting) and may be deemed to own 127,304 shares of Class
B commondirector stock ownedoptions held by 1992 Air, Inc. that are not included in the
amounts shown.Mr. Bonderman, Family Limited Partnership, of which David
Bonderman is the general partner, holds(b) 16,400 shares of Class A
common stock and 682,450 shares of Class B common stock that are not included inheld by Bonderman
Family Limited Partnership ("BFLP"), of which Mr. Bonderman is the amounts shown.general
partner, and (c) 213,110 shares of Class A common stock beneficially owned
by 1992 Air, Inc. On the basis of certain provisions of the Air Partners
limited partnership agreement, of Air Partners, the holders of limited partnership
interests in Air Partnerspartners may be deemed to beneficially ownthe owners of
the shares beneficially owned by Air Partners that are attributable to
their respective limited partnership interests. In addition, such limited
partners, together with Air Partners, may be deemed to be acting as a group
for purposes of the federal securities laws. Bonderman Family
Limited Partnership,BFLP, Bondo Air Limited
Partnership ("Bondo Air") and Donald Sturm, a director of the Company, each
holds limited partnership interests in Air Partners. However, each such
party, pursuant to Rule 13d-
413d-4 under the Exchange Act, disclaims beneficial
ownership of the shares attributable to their respective interests. The
estate of Larry Hillblom, solely in its capacity as the sole
6
10
shareholder of Air Saipan, Inc., may be deemed the beneficial owner of
shares held by Air Partners. In addition, the estate of Mr. Hillblom also
holds limited partnership interests in Air Partners. Alfredo Brener,
through a limited partnership whose corporate general partner he controls,
owns warrants to purchase a 98.5% limited partnership interest in Bondo
Air, and on the basis of certain provisions of the limited partnership
agreement of Bondo Air, Mr. Brener may be deemed to beneficially own such
limited partnership interests and, in turn, the shares attributable to
Bondo Air's limited partnership interest in Air Partners. However, Mr.
Brener, pursuant to Rule 13d-4 under the Exchange Act, disclaims beneficial
ownership of all such shares. As part of the Air Partners Transaction, the
general partners and limited partners of Air Partners have agreed to
dispose of their partnership interests in Air Partners (and thus the
beneficial ownership of Class A common stock owned by Air Partners) to an
affiliate of Northwest, and BFLP, 1992 Air, Inc. and Air Saipan, Inc. have
agreed to dispose of the Class A common stock of the Company held by them
to such affiliate of Northwest.
(3) Includes 3,039,468 shares issuable upon exercise of warrants held by Air
Partners to purchase Class A common stock.Partners. Air Partners may be deemed to have sole voting and dispositive power with respect to 5,480,000 shares
and shared voting and dispositive
power with respect to none ofall such shares.
(4) Represents shares subject to warrants held by Air Partners to purchase
Class B common stock. As of March 21, 1997, Air Partners did not own
directly any shares of Class B common stock. Does not include the
8,519,468 shares of Class A common stock shown above which are convertible
into an equal number of shares of Class B common stock.
(5) The shares reported represent the proportionate interest in shares
beneficially owned by Air Partners, of which American General Corporation
("American General") is a limited partner, including shares issuable upon
exercise of warrants held by Air Partners to purchase 552,630 shares of
Class A common stock. On the basis of certain provisions of the limited
partnership agreement of Air Partners, American General may be deemed to
beneficially own the shares beneficially owned by Air Partners that are
attributable to such limited partnership interest. However, American
General, pursuant to Rule 13d-4 under the Exchange Act, disclaims
beneficial ownership of all such shares. American General may be deemed to
share voting and dispositive power with respect to all such shares.
(6) The reported shares include 566American General has agreed to dispose of its limited partnership interest
in Air Partners to an affiliate of Northwest as part of the Air Partners
Transaction.
(5) Represents shares held by an indirect wholly owned subsidiary of American
General and 754,707 shares issuable upon exerciseless than 1% of warrants held by Air Partners to purchasethe outstanding Class B common stock and
attributable to the limited partnership interest of American General in
Air Partners.stock. American
General may be deemed to share voting and dispositive power with respect to
all such shares. Does not include the 1,548,992 shares of Class A common
stock shown above which are convertible into an equal number of shares of
Class B common stock. (7) Based on a report filed with the Commission under the Exchange Act on
February 14, 1997 and information provided to the Company, The Capital
Group Companies, Inc. ("Capital Group") is the parent company ofSee also note 4,
six investment management companies. The reported shares are held by
accounts under the discretionary investment management of one or more of
such companies or their affiliated entities and not for the account of any
such company or entity. No such account owns 5% or more of the Class B
common stock. Capital Group may be deemed to have sole voting power with
respect to 416,000 of the shares shown and sole dispositive power with
respect to all of the shares shown in the table. Capital Group does not
share voting or dispositive power with respect to any of such shares. The
shares reported include 1,396,300 shares of Class B common stock issuable
upon conversion of the Company's 8 1/2% Convertible Preferred Securities of
Trust and 1,010,100 shares of Class B common stock issuable upon conversion
of the Company's 6 3/4% Convertible Subordinated Notes due April 15, 2006.
(8)above.
(6) As of JanuaryDecember 31, 1997, based on a report filed with the Commission
pursuant to the Exchange Act onin February 10, 19971998 by The Equitable Companies
Incorporated ("Equitable"), AXA-UAP (which beneficially owns a majority
interest in Equitable), and fivefour French mutual insurance companies (AXA
Assurances I.A.R.D. Mutuelle, AXA Assurances Vie Mutuelle,
Alpha Assurances I.A.R.D. Mutuelle, Alpha Assurances
Vie Mutuelle and AXA Courtage Assurance Mutuelle (as a group, which
beneficially own a majority interest in AXA-UAP))., and their subsidiaries.
The shares shown represent beneficial ownership by registered broker-dealer
or investment advisor subsidiaries of Equitable. According to such report,
none of such subsidiaries has an interest in the reported securities
representing greater than 5% of the Class B common stock other than
Alliance Capital Management L.P. (8,296,286 shares) and Equitable Life
Assurance Society of the United States (2,929,200 shares). Equitable may be
deemed to have sole voting power with respect to 6,079,1043,901,759 shares, shared
voting power with respect to 75,0007,315,700 shares, sole dispositive power with
respect to 6,154,10411,225,490 shares and shared dispositive power with respect to
4,50074 shares.
(9)(7) Based on reportsa report filed with the Commission under the Exchange Act onin
February 6, 1997,1998, the shares reported represent the aggregated beneficial
ownership by FMR Corp.of Goldman, Sachs & Co. ("FMR"Goldman") (together with its wholly owned
subsidiaries) and Fidelity International LimitedThe Goldman Sachs Group,
L.P. ("Fidelity"Goldman Group") (as. Goldman made such filing as a registered broker
dealer and investment adviser or theadvisor and Goldman Group filed as a parent holding
company. Each of the investment adviser to various
fundsGoldman and accounts). The shares reported include 331,180 shares of Class B
common stock issuable upon conversion of the Company's 6 3/4% Convertible
Subordinated Notes due April 15, 2006 and 668,171 shares of Class B common
stock issuable upon conversion of the Company's 8 1/2% Convertible
Preferred Securities of Trust. FMRGoldman Group may be deemed to have soleshared
voting power with respect to 455,9912,758,774 shares, and soleshared dispositive power
with respect to 3,625,548 shares. Fidelity may be deemed to have2,888,474 shares and sole voting and dispositive power with
respect to 99,200none of the reported shares.
(8) Based on a report filed with the Commission under the Exchange Act in
February 1998, the shares reported represent the aggregated beneficial
ownership of group members including Aim Management
7
11
Group Inc., Amvescap Group Services, Inc., Avescap PLC, AVZ, Inc., Invesco
Capital Management, Inc., Invesco Funds Group, Inc., Invesco Management &
Research, Inc., Invesco North American Holdings, Inc., Invesco PLC, Invesco
Realty Advisers, Inc., and Invesco, Inc., each of which is organized under
the laws of England. Such report indicates that Avescap PLC is a parent
holding company. Each entity may be deemed to have shared voting and
dispositive power with respect to all of the reported shares and sole
voting and dispositive power with respect to none of the reported shares.
(9) Based on a report filed with the Commission under the Exchange Act in March
1998, the shares reported represent the aggregated beneficial ownership of
Morgan Stanley, Dean Witter, Discover & Co. ("Morgan Stanley") and its
wholly owned subsidiary Morgan Stanley Asset Management Inc. ("MSAM"),
which reports holdings representing greater than 5% of the Class B common
stock. Each reporting company is a registered investment adviser. Morgan
Stanley may be deemed to have shared voting power with respect to 5,311,253
shares and shared dispositive power with respect to all reported shares.
MSAM may be deemed to have shared voting power with respect to 3,516,700
shares and shared dispositive power with respect to 5,097,200 shares.
Neither FMR nor Fidelityreporting company has sharedsole voting or dispositive power with respect
to any of the shares
shown. Members of the Edward D. Johnson 3d family own approximately 49% of
the voting power of FMR and, through a partnership controlled by Mr.
Johnson and members of his family, approximately 47% of the voting power
of Fidelity.reported shares.
(10) Based on a report filed with the Commission under the Exchange Act onin
February 7, 19971998, the shares reported represent the aggregated beneficial
ownership of Neuberger & Berman, LLC and information provided toNeuberger & Berman Management
Incorporated. The filing persons reported the Company,
Vanguard/Windsor Fund, Inc. isamounts as a registered
broker dealer, investment company withadvisor and investment company. The reporting
persons may be deemed to have sole voting power with respect to 2,237,785
shares, shared voting power with respect to 3,692,900 shares, sole
dispositive power with respect to no shares and shared dispositive power
with respect to all of the shares
shown. See note 11.
(11) Based on a report filed with the Commission under the Exchange Act on
February 18, 1997, the shares reported are owned by certain clients of
Wellington Management Company, LLP ("Wellington"), which acts as an
investment adviser to such clients. According to such report, none of
such clients has an interest in the reported securities representing
greater than 5% of the Class B common stock other than Vanguard/Windsor
Fund, Inc. See note 10. Wellington may be deemed to share voting power
with respect to 284,045 shares and to share dispositive power with
respect to all of the shares shown. Wellington does not have sole voting
or dispositive power with respect to any such5,968,785 shares.
5
BENEFICIAL OWNERSHIP OF COMMON STOCK BY DIRECTORS AND EXECUTIVE OFFICERS
The following table shows, as of March 21, 1997,27, 1998, the number of shares of
Class B common stock beneficially owned by each of the current directors, the
executive officers named below in the Summary Compensation Table, and all
executive officers and directors as a group. The beneficial ownershipAlso reflected in the amounts shown
are shares of Class A common stock, by certainwhich are convertible into an equal number
of such persons is describedshares of Class B common stock and are set forth in the footnotes to the
table. See also "Voting Rights and Principal Stockholders."
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT
NAME OF BENEFICIAL OWNERS OWNERSHIP(1) OF CLASS
------------------------- ------------ --------
Thomas J. Barrack, Jr............................ 16,600 (2)Jr.................................. 21,600(2) *
Lloyd M. Bentsen, Jr............................. 14,160 (3)Jr................................... 19,160(3) *
Gordon M. Bethune................................ 211,450 (4)Bethune...................................... 335,692(4) *
David Bonderman.................................. 5,157,007 (5) 9.7%Bonderman........................................ 9,411,099(5) 15.9%
Gregory D. Brenneman............................. 263,911 (6)Brenneman................................... 308,653(6) *
Patrick Foley.................................... 1,218,343 (7) 2.5%Foley.......................................... 1,814,190(7) 3.5%
Lawrence W. Kellner.............................. 73,409 (8)Kellner.................................... 92,748(8) *
Douglas H. McCorkindale.......................... 11,000 (9)McCorkindale................................ 16,000(9) *
C.D. McLean...................................... 75,295 (10)McLean............................................ 98,614(10) *
George G.C. Parker............................... 6,400 (11)G. C. Parker.................................... 11,400(11) *
Richard W. Pogue................................. 11,000 (9)(12)Pogue....................................... 2,000(12) *
William S. Price III............................. 4,161,885 (13) 7.8%III................................... 8,318,656(13) 14.1%
Jeffery A. Smisek................................ 77,799 (12)Smisek...................................... 108,992(12)(14) *
Donald L. Sturm.................................. 751,009 (15) 1.5%Sturm........................................ 1,125,289(15) 2.2%
Karen Hastie Williams............................ 11,000 (9)Williams.................................. 16,000(9) *
Charles A. Yamarone.............................. 16,000 (16)Yamarone.................................... 21,000(16) *
All executive officers and directors as a group.. 7,395,105 (17) 13.7%group........ 12,156,197(17) 20.0%
- --------------
*Less---------------
* Less than 1%
8
12
(1) The persons listed have the sole power to vote and dispose of the shares
beneficially owned by them except as otherwise indicated. See also the
previous table and text under the caption "Voting Rights and Principal
Stockholders."
(2) Includes 8,00013,000 shares subject to vested director stock options, (including
2,000 shares subject to stockholder approval at the Meeting), and 3,000
shares held in trust for the benefit of Mr. Barrack's children as to which
shares Mr. Barrack disclaims beneficial ownership.
(3) Includes 5,00010,000 shares subject to a vested director stock option which is
subject to stockholder approval at the Meeting.options.
(4) Includes 210,834334,167 shares subject to vested options, or vesting within 60
days after March 21, 1997.27, 1998.
(5) Includes 11,00016,000 shares subject to vested director stock options (including
2,000 shares subject to stockholder approval at the Meeting),and 682,450
shares beneficially owned by BFLP. Mr. Bonderman Family Limited Partnershipis the sole general
partner of BFLP and 127,304has the sole power to vote and dispose of the shares
beneficially owned by it. Also includes the following shares of Class A
common stock: 5,263,188 shares beneficially owned by Air Partners, 213,110
shares beneficially owned by 1992 Air, Inc., 16,400 beneficially owned by
BFLP and 3,039,468 shares subject to warrants owned by Air Partners. Mr.
Bonderman may be deemed to own beneficially the shares beneficially owned
by Air Partners. See generally note 2 to the previous table.
Also includes 4,150,885(6) Includes 270,167 shares subject to warrantsvested options, or vesting within 60
days after March 27, 1998, and 37,500 restricted shares scheduled to vest
on April 27, 1998.
(7) Includes 16,000 shares subject to vested director stock options and 645,940
shares held by DHL Management Services, Inc. ("DHL"). Also includes 741,165
shares of Class A common stock representing DHL's proportionate interest in
Class A common stock beneficially owned by Air Partners whichand 411,085 shares
of such stock subject to warrants representing DHL's proportionate interest
in warrants to purchase Class A common stock owned by Air Partners. DHL,
and Mr. BondermanFoley as President of DHL, may be deemed to ownshare voting and
dispositive power with respect to all such shares.
(8) Includes 66,668 shares subject to vested options, or vesting within 60 days
after March 27, 1998, and 25,000 restricted shares scheduled to vest on
June 5, 1998.
(9) Represents shares subject to vested director stock options.
(10) Includes 98,168 shares subject to vested options, or vesting within 60 days
after March 27, 1998.
(11) Includes 10,000 shares subject to vested director stock options.
(12) Includes 2,000 shares of Class A common stock.
(13) Includes 16,000 shares of Class B common stock subject to vested director
stock options. Also includes 5,263,188 shares of Class A common stock
beneficially owned by Air Partners, and 3,039,468 shares of Class A common
stock subject to warrants held by Air Partners, which Mr. Price may be
deemed to own beneficially through shared voting and dispositive power as a
Managing Director of Air Partners.
Does not
include 16,400 shares of Class A common stock beneficially owned by
Bonderman Family Limited Partnership. Also does not include 5,480,000
shares of Class A common stock beneficially owned by Air Partners or
3,039,468 such shares subject to warrants owned by Air Partners, which
Messrs. Bonderman and Price also may be deemed to own beneficially. All
such shares of Class A common stock are convertible into an equal number
of shares of Class B common stock.
(6)(14) Includes 188,834104,168 shares subject to vested options, or vesting within 60
days after March 21, 1997, and 75,000 restricted shares scheduled to vest
in 50% increments on April 27, 1997 and 1998.
6
(7) Includes 11,000(15) Shares of Class B common stock shown include 16,000 shares subject to
vested director stock options, (including
2,000 shares subject to stockholder approval at the Meeting). Also
includes 645,940 shares held by DHL Management Services, Inc. ("DHL
Management") and 561,403 shares representing the proportionate interest of
DHL Management in shares issuable upon exercise of warrants held by Air
Partners to purchase shares of Class B common stock. Does not include
741,165 shares of Class A common stock representing DHL Management's
proportionate interest in Class A common stock beneficially owned by Air
Partners or 411,085 shares of such stock subject to warrants representing
DHL Management's proportionate interest in warrants to purchase Class A
common stock owned by Air Partners, each of which shares is convertible
into an equal number of shares of Class B common stock. DHL Management,
and Mr. Foley as President of DHL Management, may be deemed to share
voting and dispositive power with respect to all such shares.
(8) Includes 23,334 shares subject to vested options, or vesting within 60
days after March 21, 1997, and 50,000 restricted shares scheduled to vest
in 50% increments on June 5, 1997 and 1998.
(9) Represents shares subject to vested director stock options (including
2,000 shares subject to stockholder approval at the Meeting).
(10) Includes 60,834 shares subject to vested options, or vesting within 60
days after March 21, 1997.
(11) Includes 5,000 shares subject to vested director stock options (including
2,000 shares subject to stockholder approval at the Meeting).
(12) Does not include 2,000 shares of Class A common stock, which are
convertible into an equal number of shares of Class B common stock.
(13) Includes 11,000 shares subject to vested director stock options
(including 2,000 shares subject to stockholder approval at the Meeting).
Also includes shares of Class B common stock subject to warrants held by
Air Partners, but does not include shares of Class A common stock held by
Air Partners or subject to warrants held by Air Partners, each as
described in note 5, above.
(14) Includes 60,834 shares subject to vested options, or vesting within 60
days after March 21, 1997.
(15) Includes 11,000 shares subject to vested director stock options
(including 2,000 shares subject to stockholder approval at the Meeting).
Also includes 60,400 shares held in trusts for the benefit
of Mr. Sturm's children 30,200and 130,200 shares held in a charitable trust for
which Mr. Sturm acts as Trustee, and 350,879 shares representing the proportionate
interest of Mr. Sturm in shares issuable upon exercise of warrants held
by Air Partners to purchase shares of Class B common stock. Does not
includeTrustee. Also includes 463,230 shares of Class A
common stock representing Mr. Sturm's proportionate interest in Class A
common stock beneficially owned by Air Partners orand 256,929 shares of such
stock subject to warrants representing Mr. Sturm's proportionate interest
in warrants to purchase Class A common
stock owned by Air Partners, each of which shares is convertible into an
equal number of shares of Class B common stock.Partners. Mr. Sturm is a limited partner of Air
Partners and, as such, may be deemed to share voting and dispositive power
with respect to the shares beneficially owned by Air Partners that are
attributable to such limited partnership interest.
(16) Includes 8,00013,000 shares subject to vested director stock options (including
2,000 shares subject to stockholder approval at the Meeting).options.
(17) Includes 981,6741,587,441 shares of Class B common stock subject to vested
options, or vesting within 60 days after March 21, 1997,27, 1998, which are held by
executive officers and non-
employeenon-employee directors of the Company and 4,150,8853,039,468
shares of Class A common stock subject to warrants owned by Air Partners.
See notes 5, 7, 13 and 15. Does not include
the followingAlso includes 5,496,698 shares of Class A common
stock: 5,480,000 shares
beneficially owned by Air Partners, 3,039,468 shares subject to warrants
owned by Air Partners, 16,400 shares beneficially owned by Bonderman
Family Limited Partnership or 5,200 shares held by certain executive
officers and directors. See, e.g., note 12. Such shares of Class A common
stock are convertible into an equal number of shares of Class B common
stock.
79
13
GENERAL INFORMATION
BOARD OF DIRECTORS MEETINGS
Regular meetings of the Board of Directors are generally held four times
per year, and special meetings are scheduled when required. The Board held four
regular meetings and one special meeting in 1996.1997.
STANDING COMMITTEES OF THE BOARD
The Audit Committee has the authority and power to act on behalf of the
Board of Directors with respect to the appointment of independent auditors for
the Company and with respect to authorizing any special audit or audit-related
activities which, in its discretion, are deemed necessary to perform its
functions. The committee monitors the audit activities of the Company and its
subsidiaries to assure that they have implemented proper internal accounting
controls. The committee, which consists of four non-employee directors, met
fourthree times in 1996.1997.
The Executive Committee exercises certain powers of the Board of Directors
between Board meetings. The committee, which consists of two non-employee
directors and one officer-director of the Company, held no formal meetings in
1996,1997, but took numerous actions by unanimous written consent.
The Finance and Strategy Committee reviews the Company's annual budget, its
short and long-term strategic plans and its plans for raising capital and
increasing liquidity, and makes recommendations to the Board of Directors
regarding implementation of those plans as the committee deems appropriate. The
committee, which consists of two officer-directors and three non-employee
directors, met two
timesonce in 1996.1997.
The Human Resources Committee has the authority and power to act on behalf
of the Board of Directors with respect to all matters relating to the employment
of senior officers by the Company and its subsidiaries, including but not
limited to approval of compensation, benefits, incentives and employment
contracts and administration ofadministers the 1994 Plan, the 1997 Plan, the Company's 1994 and 1997employee
stock purchase and equity incentive plans.profit sharing plans and the Executive Bonus Program. The
committee, which consists of four non-employee directors, met threetwo times in 1996.1997.
The Company does not have a nominating committee.
During 1996,1997, each director of the Company other than Messrs. Bentsen, Foley
and McCorkindale attended more than 75% of the sumall of the meetings of
the Board and each standing committee of which he or she was a member.
COMPENSATION OF DIRECTORS
Members of the Board of Directors who are not full-time employees of the
Company are paid $20,000 per year, $2,000 (or $3,000 for the chairperson) for
each Board and committee meeting physically attended, $1,000 for each Board
meeting attended by telephone, and $500 for each committee meeting attended by
telephone. Directors who conduct Company business in their capacities as
directors on behalf of the Company at the request of the Board or the Chairman
of the Board are paid (i) for telephone participation in Board and Committee
meetings as if they were physically present, if their conducting Company
business makes it reasonably impracticable for them to attend the meeting in
person, and (ii) $3,000 per day spent outside the United States while conducting
such Company business. An additional $2,000 was paid in 1997 to non-employee
members of the Executive Committee to compensate them for substantial attention
to substantive Company matters not addressed in a meeting of the Executive
Committee. The Board authorized compensation for members of a special committee
formed to review the Air Partners Transaction and related matters in the amount
of $2,000 for each meeting attended personally or by telephone and a one-time
fee of $25,000 for the chairman of the committee in recognition of the
substantial demands placed on his time while serving as such chair. The
committee, which was comprised of Messrs. Bentsen, McCorkindale, Parker
(Chairman), Pogue and Yamarone, met twice in 1997. Stock options relating to
3,0005,000 shares of Class B common stock have
been automaticallyare granted to non-employee directors on the day
following each annual meeting of stockholders and bear exercise prices equal to
the fair market value of such stock on such date. If the amendmentsA grant of options to the Company's
1994 Incentive Equity Plan are approved by stockholders at the Meeting, such
annual grant will be increased to coverpurchase
5,000 shares of Class B common stock and will beis also made in addition to directors who are first
elected to the Board other than at an annual
10
14
meeting of stockholders. Such amendments would be
effective as of September 1996. See "Proposal 2: Approval of the Third
Amendment to the 1994 Incentive Equity Plan." If the 1997 Stock Incentive Plan
is approved by stockholders, the Company intends to discontinue such grants
under the 1994 Incentive Equity Plan and commence such grants under the 1997
Stock Incentive Plan on the date of the Meeting. In addition, each non-
employeenon-employee director receives certain
lifetime flight benefits, including space-
availablecomprised of space-available personal and family
flight passes, a travel card permitting positive space travel by the director,
the director's family and certain other individuals (which is taxable to the
director, subject to the payment of certain of such taxes by the Company during
Board service), a frequent flyer card and an airport lounge card. 8
During 1997,
the value imputed by the Company to the use of such flight benefits by the
Company's non-employee directors, including the payment of related taxes by the
Company, ranged from approximately $1,000 to $8,000.
Full-time employees of the Company who serve as directors receive
reimbursement of expenses incurred in attending meetings, in addition to flight
and other benefits provided in their employment agreements or shared generally
by other employees of the Company.
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
Company's current executive officers:
NAME, AGE AND POSITION TERM OF OFFICE AND BUSINESS NAME, AGE AND POSITION EXPERIENCE
---------------------- -----------------------------------------------------------------
GORDON M. BETHUNE, age 55 Chairman of the Board and Chief56..................... Chairman of the Board and Chief Executive
ExecutiveChairman of the Board and Officer since September Officer 1996. Director since
Chief Executive Officer August 1994; President and Chief Executive
Officer (November 1994-September 1996);
President and Chief Operating Officer
(February 1994-
November1994-November 1994); various
positions with The Boeing Company commencing
in 1988, including Vice President and GeneralGen-
eral Manager of the Commercial Airplane Group
Renton Division, Vice President and General
Manager of the Customer Services Division and
Vice President of Airline Logistics Support.
GREGORY D. BRENNEMAN, age 3536.................. President and Chief Operating Officer since
President, Chief Operating Officer Officer since September 1996.
and Director Director since June 1995;
and Director Chief Operating Officer (May 1995-
September1995-September
1996); Consultant to the Company
(February-April 1995); various positions,
including Vice President, with Bain & Company,Com-
pany, Inc. (consulting firm) for more than
five years; Director of Browning-Ferris
Industries, Inc.
LAWRENCE W. KELLNER, age 3839................... Executive Vice President and Chief Financial
Executive Vice President and Financial Officer since November 1996. Senior Vice
Chief Financial Officer 1996. Senior Vice President and Chief Financial Officer (June
1995-
November1995-November 1996); Executive Vice President
and Chief Financial Officer of American
Savings Bank, F.A. (November 1992-May 1995);
Director of Belden & Blake Corporation.
C.D. McLEAN, age 56........................... Executive Vice President and
Director of Loan Management of
American Real Estate Group, an
affiliate of American Savings Bank,
F.A. (February 1992-October 1992);-- Operations since
Executive Vice President and Chief
Financial Officer of The Koll Co.
(real estate development and
management) (1987-1992).
C.D. McLEAN, age 55 Executive Vice President--
Executive Vice President--Operations-- Operations since November 1996. Senior Vice
President--OperationsPresident -- Operations (April 1994-November
1996); Executive Vice President--Presi-
dent -- Operations (January 1992-March 1994)
of Leisure Air, Inc.; self-
employed (March 1990-December
1991); Senior Vice President--
Flight Operations (May 1989-
February 1990) of Braniff Airlines,
Inc.
JEFFERY A. SMISEK, age 4243..................... Executive Vice President, General Counsel and
Executive Vice President, Counsel and Secretary since November 1996. Senior Vice
General Counsel and Secretary November 1996. Senior Vice President and Secretary (April 1995-November
1996); General Counsel since March 1995;
Partner, Vinson & Elkins L.L.P. (law firm)
prior to March 1995 for more than five years.
MICHAEL H. CAMPBELL, age 48 Senior Vice President--Human
Senior Vice President--Human Resources and Labor Relations since
Resources and Labor Relations January 1997. Partner, Ford &
Harrison LLP (law firm) 1978 to
present.years;
Director of Tuboscope Inc.
911
15
NAME, AGE AND POSITION TERM OF OFFICE AND BUSINESS EXPERIENCE
---------------------- --------------------------------------
MICHAEL H. CAMPBELL, age 49................... Senior Vice President -- Human Resources and
Senior Vice President -- Human Labor Relations since January 1997. Partner,
Resources and Labor Relations Ford & Harrison LLP (law firm) 1978 to
December 1997.
MARK A. ERWIN, age 4142......................... Senior Vice President--AirportPresident -- Airport Services
Senior Vice President--Airport Serv-President -- Airport Services since April 1995. Vice President--
icesPresident -- Newark Hub
(1994-1995); Staff Vice President--AirportPresident -- Airport
Services Planning (1991-1994); Staff Vice
President -- International Division
(1990-1991).
J. DAVID GRIZZLE, age 4243...................... Senior Vice President--CorporatePresident -- Corporate Development
Senior Vice President--Corporate DevelopmentPresident -- Corporate since November 1996. Vice
Development President--AlliancePresident -- Alliance Development (April
1995-November 1996); Vice President--President -- Asia
and Pacific Development (May 1993-
April1993-April 1995);
various positions with the Company prior to
May 1993 for more than five years.
GEORGE L. MASON, age 5051....................... Senior Vice President--TechnicalPresident -- Technical Operations
Senior Vice President--Technical OperationsPresident -- Technical since November 1996. Vice
Operations President--TechnicalPresident -- Technical Operations (March
1994-November 1996); Vice President--Presi-
dent -- Operations of Tramco Inc. (a division
of BF Goodrich Aerospace) (February 1992-March
1994);.
JAMES B. REAM, age 42......................... Senior Vice President--Maintenance & EngineeringPresident -- Asia since March
Senior Vice President -- Asia 1998; President and Chief Operating Officer of
MidwayContinental Micronesia, Inc. ("CMI") (October
1996-present); Executive Vice President and
Chief Operating Officer of CMI (June
1996-October 1996); Vice President -- Finance
of Continental Airlines, Inc. (January 1991-
November 1991)(December
1994-June 1996); Managing
Director -- Financial Planning of American
Airlines, Inc. (1992-1994).
BONNIE S. REITZ, age 4445....................... Senior Vice President--SalesPresident -- Sales and
Senior Vice President--SalesPresident -- Sales and Distribution since November 1996. Vice
Distribution President--MarketingPresident -- Marketing and Sales (August
1994-November 1996); Vice President--Presi-
dent -- Marketing and Sales of System One
Information Management, Inc. (1989-
1994)(1989-1994).
BARRY P. SIMON, age 5455........................ Senior Vice President--InternationalPresident -- International since
Senior Vice President--International sincePresident -- International November 1996. Senior Vice President--EuropePresident -- Europe
(June 1995-November 1996); Senior Vice President--StrategicPresi-
dent -- Strategic Business Units (April 1995-June1995-
June 1995); Senior Vice President--WidebodyPresident -- Widebody
Division (August 1994-April 1995); Senior Vice
President and General Counsel (June
1990-August 1994), except Senior Vice
President, General Counsel and Director, GAF
Corporation (January-
March(January-March 1993).
KUNIAKI TSURUTA, age 6162....................... Senior Vice President--PurchasingPresident -- Purchasing and
Senior Vice President--PurchasingPresident -- Purchasing and Materials Services since November 1996. andVice
Materials Services Vice President--PurchasingPresident -- Purchasing (April 1994-
November1994-November
1996); President and Chief Operating Officer
of Piedmont Aerospace, Inc. (February
1992-April 1994); Senior Vice President--Cost
Management and Material Services of
Midway Airlines, Inc. (March 1989-July
1991).
12
16
NAME, AGE AND POSITION TERM OF OFFICE AND BUSINESS EXPERIENCE
---------------------- --------------------------------------
JANET P. WEJMAN, age 39 Senior Vice President and Chief40....................... Senior Vice President and Chief Information
Senior Vice President and Chief Officer since November Information Officer 1996. Vice President
Information Officer and Chief Information Officer (February
1996-
November1996-November 1996); President, North Western
Aviation, Inc. (flight school in Chicago,
Illinois) (since August 1995); independent
consultant (August 1995-February1995- February 1996);
Assistant Vice President of System Technology
and User Training, Chicago & North Western
Railroad (August 1992-August 1995);
Director of Micro System Development,
Covia Partnership (computer
reservations system) (August 1991-
August 1992).
There is no family relationship between any of the executive officers. All
officers are appointed by the Board of Directors to serve until their
resignation, death or removal.
10
COMPENSATION OF EXECUTIVE OFFICERS
The following tables set forth (i) the aggregate amount of remuneration
paid by the Company during 1997, 1996 1995 and 19941995 to the chief executive officer
and the four other most highly compensated executive officers of the Company in
1996,1997, (ii) the number of shares of Class B common stock subject to options
granted to such individuals during 19961997 and the hypotheticalBlack-Scholes value thereof
assuming specified annual rates of Class B common stock price appreciation
during the option term and
(iii) information regarding stock options exercised in 19961997 and the value of the
options held by such individuals at the end of 1996.1997.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------------------------- --------------------------------------------
---------------------------------- RESTRICTED SECURITIES NAME AND PRINCIPALALL OTHER
OTHER ANNUAL STOCK UNDERLYING ALL OTHERANNUAL
NAME AND PRINCIPAL POSITION YEAR(1) SALARY BONUS COMPENSATION AWARDS(2) OPTIONS COMPENSATION
--------------------------------------------- ------- -------- ------------------ ------------ ---------- ---------- ------------
Gordon M. Bethune....... 1996 $604,755Bethune.................. 1997 $755,750 $937,500 $ 882,292 $ 1,052 (3)2,005(3) $ 0 220,000 $1,572,500 (4)150,000 $ 0
Chairman of the Board and 1996 604,755 882,292 1,052(3) 0 220,000 1,572,500(4)
Chief Executive Officer 1995 561,012 550,000 278,638 (5)278,638(5) 0 50,000 (6) 522,978 (7)
Chief Executive Officer 1994 434,185 1,500,000 (8) 85,018 (9) 1,240,625 500,000 (6) 286,969 (10)50,000(6) 522,978(7)
Gregory D. Brenneman.... 1996 $535,500Brenneman............... 1997 $583,410 $718,749 $ 787,502 $ 5,957 (3)9,011(3) $ 0 154,00090,000 $ 776,563 (4)0
President and Chief Operating 1996 535,500 787,502 5,957(3) 0 154,000 776,563(4)
Officer 1995 338,726 354,039 56,459 (11)56,459(8) 1,200,000 550,000 79,016 (12)
1994 -- -- -- -- -- --79,016(9)
Lawrence W. Kellner..... 1996 $390,172Kellner................ 1997 $427,172 $525,000 $ 569,128 $ 7,106 (3)7,279(3) $ 0 70,00060,000 $ 0
Executive Vice President 1995 193,369 438,500 (13) 17,928 (3) 862,500 150,000 32,718 (12)1996 390,172 569,128 7,106(3) 0 70,000 0
and Chief Financial Officer 1994 -- -- -- -- -- --1995 193,369 438,500(10) 17,928(3) 862,500 150,000 32,718(9)
C.D. McLean............. 1996 $321,625McLean........................ 1997 $381,600 $468,752 $ 473,438 $ 3,586 (3)3,511(3) $ 0 70,00060,000 $ 0
Executive Vice President 1996 321,625 473,438 3,586(3) 0 70,000 0
-- Operations 1995 305,604 300,000 514 (3)514(3) 115,000 50,000 (14)50,000(11) 0
--Operations 1994 182,557 0 8,807 (3) 0 100,000 (14) 13,531 (12)
Jeffery A. Smisek....... 1996 $316,415Smisek.................. 1997 $355,992 $437,500 $ 465,625 $ 4,766 (3)9,561(3) $ 0 70,00060,000 $ 0
Executive Vice President, 1995 205,166 213,911 3,869 (3) 115,000 150,0001996 316,415 465,625 4,766(3) 0 70,000 0
General Counsel and Secretary 1994 -- -- -- -- -- --1995 205,166 213,911 3,869(3) 115,000 150,000 0
- ----------------------
(1) Messrs. Bethune, Brenneman, Kellner McLean and Smisek commenced employment with the Company
in February 1994, April 1995, June 1995 April
1994 and March 1995, respectively.
(2) Determined based on the closing price of the Class B common stock on the
date the restricted shares were granted. At the end of 1996,1997, the aggregate
number of restricted shares held by Messrs. Bethune, Brenneman, Kellner,
McLean and Smisek was zero, 75,000, 50,000, 10,00037,500, 25,000, zero and 10,000,zero, respectively,
and the value of such shares was $0, $2,118,750, $1,412,500,
$282,500,$1,804,688, $1,203,125, $0 and $282,500,$0,
respectively, based on the December 31, 19961997 closing price of the Class B
common stock of $28.25. The shares granted to
Mr. Bethune vested in 50% increments on March 15, 1995 and 1996.$48.125. The shares held by Mr. Brenneman vestvested in 25%
increments on October 27, 1995 and April 27, 1996 and 1997 and the
remaining shares are scheduled to vest on April 27, 1998. The shares held
by Mr. Kellner vestvested in 25% increments on December 6, 1995 and June 5,
1996 and 1997 and the remaining shares are scheduled to vest on June 5,
1998. The shares held by Messrs. McLean and Smisek vestvested in 50% increments
on April 4, 1996 and
13
17
1997. Although the Company has paid no dividends on its common stock, any
dividends would be payable upon both vested and non-vested shares. All
unvested restricted stock will vest upon the closing of the Air Partners
Transaction. See "Recent Developments."
(3) Represents a tax adjustment relating to (i) certain moving expenses paid by
the Company and/or (ii) certain travel benefits provided by the Company.
(4) Represents payments made to Messrs. Bethune and Brenneman in connection
with the waiver of certain rights under their respective employment
agreements.
See "Certain Transactions."
(5) Represents a tax adjustment relating to termination of certain supplemental
retirement plan benefits ($277,159) and certain travel benefits provided by
the Company ($1,479). See note 7 below.
(6) In addition, of the optionsDoes not include an option to purchase 250,000 shares granted to Mr.
Bethune in 1994 the exercise
price of 250,000 optionsthat was adjustedrepriced in 1995 from $7.0625 per share to $5.50
per share (which exceeded the market value of the Class B common stock on
the date of such adjustment) to comply with the terms of Mr. Bethune's
agreements with the Company.
(7) Represents payment in lieu of certain supplemental executive retirement
plan benefits previously provided under Mr. Bethune's employment agreement.
11
(8) Represents a bonus in connection with certain amendments to Mr. Bethune's
employment agreement which were made as the result of an offer of
employment to Mr. Bethune by one of the Company's competitors.
(9) Represents a tax adjustment relating to (i) certain moving expenses paid
by the Company and (ii) other costs of Mr. Bethune's relocation to
Houston, Texas.
(10) Represents (i) $144,463 paid to compensate Mr. Bethune for the forfeiture
of certain benefits under his prior employer's compensation program when
he joined the Company, (ii) $107,957 for other costs of Mr. Bethune's
relocation to Houston, Texas (see note 9) and (iii) $34,549 for moving
expenses (see note 9).
(11) Represents a tax adjustment relating to (i) certain moving expenses paid by
the Company, (ii) reimbursement for other costs of Mr. Brenneman's
relocation to Houston, Texas and (iii) certain travel benefits provided by
the Company.
(12)(9) Represents certain moving expenses paid by the Company in connection with
the named executives' relocation to Houston, Texas and, for Mr. Brenneman,
other costs of Mr. Brenneman's relocation to Houston, Texas (see note 11)8).
(13)(10) Includes $176,000 signing bonus.
(14) All of the options(11) Does not include an option to purchase 100,000 shares granted to Mr. McLean
in 1994 werethat was repriced in 1995 from $10.6875 to $8.00 per share.
In addition, Mr. McLean was awarded an
option in 1995 to purchase an additional 50,000 shares at a price of
$8.00 per share.
OPTION GRANTS DURING 19961997
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS
OPTION TERM
----------------------------------------------- -------------------------------------------------------------------------
NUMBER OF PERCENTAGEPERCENT OF
SECURITIES TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE GRANT DATE
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME GRANTED(1) FISCAL YEAR ($/SHARE) DATE 5% 10%VALUE(2)
---- ---------- --------------- --------- ---------- ------------------ ----------
Gordon M. Bethune.......Bethune........ 150,000 4.6% $23.00 02/01/01 $953,171 $2,106,260
70,000 2.2 29.69 04/19/01 574,148 1,268,7167.8% $28.625 2/28/02 $1,175,155
Gregory D. Brenneman....Brenneman..... 90,000 2.8 23.00 02/01/01 571,903 1,263,756
64,000 2.0 29.69 04/19/01 524,935 1,159,9694.7 28.625 2/28/02 705,093
Lawrence W. Kellner..... 50,000 1.5 23.00 02/01/01 317,724 702,087
20,000 .6 29.69 04/19/01 164,042 362,490Kellner...... 60,000 3.1 28.625 2/28/02 470,062
C.D. McLean............. 50,000 1.5 23.00 02/01/01 317,724 702,087
20,000 .6 29.69 04/19/01 164,042 362,490McLean.............. 60,000 3.1 28.625 2/28/02 470,062
Jeffery A. Smisek....... 50,000 1.5 23.00 02/01/01 317,724 702,087
20,000 .6 29.69 04/19/01 164,042 362,490Smisek........ 60,000 3.1 28.625 2/28/02 470,062
- -----------------------
(1) The options with an exercise price of $23.00 per share vest in annual one-
third increments commencing February 1, 1997, and the options with an
exercise price of $29.69 per share vest in annual one-third increments commencing April 19, 1997.February 28,
1998. All such options will vest upon the closing of the Air Partners
Transaction. See "Recent Developments."
(2) Estimated using the Black-Scholes option pricing model. Such model requires
the input of highly subjective assumptions, including expected stock price
volatility. The model was developed for use in estimating the fair value of
traded options, which have no vesting restrictions and are fully
transferable, unlike the Company's employee stock options. These
differences, and changes in the subjective input assumptions, can materially
affect the estimated values shown. Consequently, such model does not
necessarily provide a reliable estimate of the options' value. The estimated
values shown are based on the following input assumptions: risk-free
interest rate of 6.1%; dividend yield of 0%; volatility factor of the
expected market price of the Company's common stock of 34%; and a weighted
average expected life of the options of 2.5 years.
14
18
AGGREGATED OPTION EXERCISES IN 19961997 AND YEAR-END OPTION VALUES
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-OPTIONS AT
SHARES OPTIONS AT FISCAL YEAR- THE-MONEY OPTIONS AT
ENDYEAR-END FISCAL YEAR-END
SHARESYEAR-END(1)
ACQUIRED VALUE ------------------------- ---------------------------------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------------------------- ---------- ----------- ------------- ----------- -------------
Gordon M. Bethune ...... 275,000 $5,559,875 -0- 495,000 $-0- $6,870,313Bethune......... 137,500 $3,479,688 73,334 434,166 $1,686,471 $12,072,123
Gregory D. Brenneman ... 275,000 5,045,813 -0- 429,000 -0- 6,041,250Brenneman...... 137,500 3,222,656 51,334 330,166 1,147,096 9,566,342
Lawrence W. Kellner .... 75,000 1,329,275 -0- 145,000 -0- 1,734,375Kellner....... 37,500 1,012,500 23,334 144,166 541,681 3,734,569
C.D. McLean ............ 75,000 1,406,163 -0- 145,000 -0- 1,781,250McLean............... 37,500 900,000 23,334 144,166 541,681 3,758,006
Jeffery A. Smisek ...... 75,000 1,649,963 -0- 145,000 -0- 1,950,000Smisek......... 37,500 979,375 23,334 144,166 541,681 3,842,381
- ---------------
(1) Determined based on the closing price of the Class B common stock on
December 31, 1997 of $48.125.
EMPLOYMENT AGREEMENTS
Continental has entered into an employment agreement with Mr. Bethune
relating to his service as an officer of the Company. The agreement provides for
an annual base salary of not less than $550,000,$750,000, participation in
12
any Company
cash bonus program at the maximum level available to any executive, a
supplemental executive retirement plan, flight benefits and certain other
matters. Pursuant to the supplemental executive retirement plan, Mr. Bethune
receives a base retirement benefit in the form of an annual straight life
annuity in an amount equal to the product of (1) 1.6% times (2) the number of
his credited years of service (with the executive receiving an additional three
years of credited service if he receives a severance payment under his
employment agreement) times (3) his final average compensation. Amounts payable
under the Company's Retirement Plan are offset against such retirement benefit.
The agreement may be terminated at any time by either party, with or without
cause. The agreement is in effect until June 6, 1999 and is automatically
extended for an additional three-year period on each successive third
anniversary of such date, unless earlier terminated. If Mr. Bethune's employment
is terminated (A) because the Company elects to permit his employment agreement
to expire, (B) by the Company for reasons other than death, incapacity, cause or
material breach of the agreement, or (C) by Mr. Bethune due to certain specified
reasons, including a material diminution in responsibility, or for any reason
following a Change in Control (as defined in the Company's 1994 Incentive Equity Plan, as amended)Plan) then the Company
shall (i) cause all options and shares of restricted stock awarded to Mr.
Bethune to vest immediately upon such termination, (ii) make a lump-sum cash
severance payment to Mr. Bethune (calculated as described below), (iii) provide
Mr. Bethune with out-placement services and (iv) provide Mr. Bethune and his
eligible dependents with certain insurance benefits. In addition, following
his termination of his employment by the Company for any reason, or if Mr. Bethune
elects to terminate his employment for any reason, benefits under the
supplemental executive retirement plan will continue to be payable, and Mr.
Bethune will be provided flight benefits substantially identical to those
currently provided to non-employee directors. The severance payment referred to
above is equal to three times the sum of (a) Mr. Bethune's then current annual
base salary (of not less than $550,000)$750,000) and (b) a deemed annual bonus equal to
the Bonus Percentage (defined below) of such salary. The "Bonus Percentage" is
equal to the annual percentage of base salary (i.e., 0% to 125%) paid or payable
under the Company's Executive Bonus Program with respect to the most recently
ended fiscal year prior to the executive's termination of employment.
Additionally, the Company is required to maintain life insurance on his behalf
in an amount equal to the severance payment described above. Mr. Bethune is
indemnified by the Company for his tax obligations with respect to payments
under the agreement or otherwise to the extent that such payments are subject to
an excise or other special additional tax that would not have been imposed
absent such payments. See also "Recent Developments" and "Certain Transactions."
Continental has entered into an employment agreement with Mr. Brenneman
relating to his service as an officer of the Company. The agreement provides for
an annual base salary of not less than $525,000,$575,000, participation in any Company
cash bonus program at the maximum level available to any executive, flight
benefits and certain other matters. The agreement may be terminated at any time
by either party, with or without cause. The agreement is in effect until June 6,
1999 and is automatically extended for an additional
15
19
three-year period on each successive third anniversary of such date. If Mr.
Brenneman's employment is terminated (A) because the Company elects to permit
his employment agreement to expire, (B) by the Company for reasons other than
death, incapacity, cause or material breach of the agreement, or (C) by Mr.
Brenneman due to certain specified reasons, including a material diminution in
responsibility, or for any reason following a Change in Control (as defined in
the Company's 1994 Incentive Equity Plan, as amended)Plan) then the Company shall (i) cause all options and shares of
restricted stock awarded to Mr. Brenneman to vest immediately upon such
termination, (ii) make a lump-sum cash severance payment to Mr. Brenneman
(calculated as described below), (iii) provide Mr. Brenneman with out-placement
services and (iv) provide Mr. Brenneman and his eligible dependents with certain
insurance benefits. In addition, following his termination of his employment by the
Company for any reason, or if Mr. Brenneman elects to terminate his employment
for any reason, he will be provided with flight benefits substantially identical
to those currently provided to non-employee directors. The severance payment is
equal to three times the sum of (a) Mr. Brenneman's then current annual base
salary (of not less than $525,000)$575,000) and (b) a deemed annual bonus equal to the
Bonus Percentage of such salary. Additionally, the Company is required to
maintain life insurance on his behalf in an amount equal to the severance
payment described above. Mr. Brenneman is indemnified by the Company for his tax
obligations with respect to payments under the agreement or otherwise to the
extent that such payments are subject to an excise or other special additional
tax that would not have been imposed absent such payments. See also "Recent
Developments" and "Certain Transactions."
Continental has entered into an employment agreement with each of Messrs.
Kellner, McLean and Smisek, which agreements contain substantially identical
terms and provide for an annual base salary of not less than $350,000,
$300,000$420,000, $375,000
and $300,000,$350,000, respectively, participation in any Company cash bonus program at
the
13
maximum level available to any executive, flight benefits and certain other
matters. Each of the agreements may be terminated at any time by either party,
with or without cause. Each agreement is for a four-year term of employment
ending in June 1999. If the applicable executive's employment is terminated (A)
by the Company for reasons other than death, incapacity, cause or material
breach of the agreement, or (B) by the executive for certain specified reasons,
including a material diminution in responsibility, then the Company shall (i)
make a lump-sum cash severance payment to the executive (calculated as described
below), (ii) provide the executive with out-placement services and (iii) provide
the executive and his eligible dependents with certain insurance benefits. In
addition, following any such termination (or expiration of the agreement), or if
the executive elects to terminate his employment for any reason, each agreement
provides the executive with flight benefits substantially identical to those
currently provided to non-employee directors. The severance payment referenced
above is equal to the product of (A) the sum of (1) the executive's then current
annual base salary and (2) a deemed annual bonus equal to the Bonus Percentage
of such salary, multiplied by (B) a fraction, the numerator of which is the
number of months in the severance period (described below) and the denominator
of which is 12. If the executive's employment is terminated within two years
after a Change in Control (as defined in the Company's 1994 Incentive Equity Plan, as amended)Plan) the severance period
means the period commencing on the date of termination and continuing for 36
months. If the executive's employment is terminated prior to a Change in Control
or after the date which is two years after a Change in Control, the severance
period means the period commencing on the date of termination and continuing for
24 months. Each of the executives is indemnified by the Company for his tax
obligations with respect to payments under his agreement or otherwise to the
extent that such payments are subject to an excise or other special additional
tax that would not have been imposed absent such payments. See also "Recent
Developments" and "Certain Transactions" regarding certain
employment agreement amendments during 1996.Transactions."
RETIREMENT PLAN
The Continental Airlines, Inc. Retirement Plan (the "Retirement Plan"),
adopted in 1988, is a noncontributory, defined benefit pension plan.
Substantially all employees of Continental and certain designated affiliates are
eligible to participate in the Retirement Plan. The following table represents
the estimated annual benefits payable in the form of a single life annuity to
participants in specified service and compensation categories under the
Retirement Plan. Under the Retirement Plan, final average compensation means the
average of the participant's highest five consecutive years of compensation
during the last ten calendar years with Continental and its affiliates. Final
average compensation includes regular pay and shift
16
20
differential, but excludes bonuses, overtime, severance pay, incentive and other
special forms of pay. Regulations under the Internal Revenue Code of 1986, as
amended (the "Code"), previously limitedlimit the compensation covered by the Retirement Plan to
$235,840$160,000 in 1997 and since December 1994 have
limited such1998. This limit is indexed and is increased from time to
time in accordance with IRS regulations. The table reflects benefit amounts
calculated using the compensation to $150,000.limit and average social security wage base in
effect for participants who reach age 65 in 1998.
PENSION PLAN TABLE
YEARS OF SERVICE
---------------------------------------------------------------------------------------------------------
FINAL AVERAGE COMPENSATION 5 10 15 20 25 30
- -------------------------- ------- ------- ------- ------- ------- ---------------
$100,000......................$100,000.................... $ 7,624 $15,240 $22,856 $30,471 $38,091 $ 45,700
$125,000...................... 9,676 19,342 29,007 38,672 48,343 58,000
$150,000...................... 11,728 23,443 35,158 46,874 58,595 70,300
$175,000...................... 12,966 26,731 40,496 54,261 68,026 81,798
$200,000...................... 14,197 30,012 45,827 61,641 77,456 93,279
$225,000...................... 15,429 33,293 51,157 69,022 86,886 104,7607,541 $15,081 $22,622 $30,163 $37,703 $45,244
$125,000.................... 9,591 19,181 28,772 38,363 47,953 57,544
$150,000.................... 11,641 23,281 34,922 46,563 58,203 69,844
$160,000.................... 12,461 24,921 37,382 49,843 62,303 74,764
The estimated credited years of service for Messrs. Bethune, Brenneman,
Kellner, McLean and Smisek are three years, two years, twofour years, three years, three years, four years
and twothree years, respectively. In addition, Mr. Bethune's employment agreement
provides for certain supplemental retirement benefits, which benefits will be
offset by amounts received under the Retirement Plan. See "Employment
Agreements," above. Under the Retirement Plan,
a retired participant's annual benefit commencing at or after the normal
retirement age of 65 (60 for pilots) is equal to 1.19% of the participant's final average
compensation plus 0.45% of the participant's final average compensation in
excess of the average Social Security wage base, multiplied by the participant's
years of participation up to a maximum of 30 years.
1417
21
PERFORMANCE GRAPH
The following graph compares the cumulative total return on the Class B
common stock (the more widely traded of the Company's common stocks) with the
cumulative total returns (assuming reinvestment of dividends) on the Standard &
Poor's Airline Index and the Standard & Poor's 500 Stock Index as if $100 were
invested in the Class B common stock and each such index on July 14, 1993, the
date on which the Company's common stock began trading on the New York Stock
Exchange on a "when-issued" basis.
[GRAPH APPEARS HERE]
Measurement Period Continental S&P Airline S&P 500
(Fiscal Year Covered) Airlines Index Index
7/14/93 100 100 100
12/31/93 79.61 108.56 104.97
12/30/94 35.92 75.75 106.35
12/29/95 168.93 110.63 146.32
12/31/96 219.42 121.28 179.92
12/31/97 373.79 204.11 239.39
7/14/93 12/31/93 12/30/94 12/29/95 12/31/96 12/31/97
------- -------- -------- -------- -------- --------
Continental Airlines................ $100.00Airlines... $100 $ 79.61 $ 35.92 $168.93 $219.42 $373.79
S&P Airline Index................... 100.00 108.56Index...... $100 $108.56 $ 75.75 110.63 121.28$110.63 $121.28 $204.11
S&P 500 Index....................... 100.00 104.97 106.35 146.32 179.92Index.......... $100 $104.97 $106.35 $146.32 $179.92 $239.39
1518
22
EXECUTIVE COMPENSATION REPORT OF THE HUMAN RESOURCES COMMITTEE
To the Stockholders of Continental Airlines, Inc.:
This report to the stockholders is submitted by the Human Resources
Committee of the Board of Directors of Continental Airlines, Inc. (the
"Committee").
General Compensation Strategy
In its previous reports to stockholders, the Committee explained the
process it used to develop its compensation strategy and the nature of that
strategy. In 1996,1997, the Committee continued and refined its compensation strategy, which is
to:
.- Develop an appropriate linkage between compensation levels and the
creation of stockholder value
.- Provide that the total compensation program will be able to attract,
motivate and retain employees of outstanding talent
.- Achieve competitiveness of total compensation
.- Focus on variable pay to provide incentive to improve performance
In considering appropriate executive compensation levels for 1996,1997, the
Committee applied these factors to available marketplace compensation data for
U.S. airlines of comparable size, including industry peer airlines shown in the
performance graph. The elements of compensation included in the competitive
analysis were base salaries, annual incentives and long-term incentives.
In 1996, the CommitteeHaving generally enhanced executive base salaries to further the
competitiveness of total compensation. Sincecompensation in 1996, the Company's executives had
successfully managedCommittee did not raise
executive salaries across the operationalboard in 1997. The salaries of certain officers
who were promoted at the end of 1996 were adjusted to reflect their advancement.
The salaries of Messrs. Brenneman and financial turnaroundKellner were also modestly increased, but
the Committee left the primary emphasis for executive officer compensation on
incentive pay. The Company continued to raise the salaries and wages of
non-executive employees to be more competitive with industry standards, and in
September 1997 the Company announced its intention to bring all employees to
industry standard wages over a three-year period. Nearly all employees other
than officers of the Company they became more subject to attractive competing offers from other employers.
As a result, the Committee believed it was appropriate to increase executives'
base pay, while providing incentive compensation structures to further the
Company's financial progress. Executives may significantly increase their payare incentivized through the Company's incentive programs. In 1996, these incentive programs
included stock options and a management bonus plan. Non-executive base pay was
also increased for many classes of employees, and further incentives were
effected through the Company's broad-based profit
sharing plan and on-time arrival bonuses.bonus structure, and all employees are able to
participate in the Company's success through participation in the employee stock
purchase plan approved by stockholders at the 1997 annual meeting. Executives'
incentives are linked to the Company's performance through the quarterly
Executive Bonus Program and through the award of stock options. No shares of
restricted stock were awarded in 1997.
In conducting the programs applicable to executives, the Committee
considered the effects of Section 162(m) of the Code, which denies publicly held
companies a tax deduction for annual compensation in excess of one million
dollars paid to their chief executive officer or any of their four other most
highly compensated executive officers who are employed on the last day of a
given year, unless their compensation is based on performance criteria that are
established by a committee of outside directors and approved, as to their
material terms, by such company's stockholders. Stock options under the 1994 Incentive Equity Plan, as well as those proposed to be
authorized under the 1997
Stock Incentive Plan, and incentive compensation received under the Company's
Executive Bonus Program, are designed to qualify as performance-based
compensation under Section 162(m), and the Committee believes that these items
should be excluded from the limitation on deductibility. However, other awards,
such as restricted stock grants that have been made in previous years, do not so
qualify and are subject to the limitation on deductibility. Although certain
amounts recorded as compensation by the Company to certain of the most highly
compensated officers of the Company with respect to 19961997 were limited by Section
162(m), such limitation did not result in the payment of increased taxes by the
Company in 19961997 due to the Company's significant net operating loss
carryforwards.
Base Salaries. As noted above, the Company raised certain executive
salary levelssalaries in 19961997 in connection with enhanced responsibilities and to be more closely competitive tofurther
align the salaries of certain executives with their peers in the industry. As
discussed below, this includes the Company's financial and operational turnaround was successfully executed and
the Company begansalary of Mr. Bethune. In addition to more closely resemble other of its major competitors, the
Committee believed it was necessary to provide more competitivetheir
retention elements, base salaries
in order to retain and attract highly talented executives. The specific
competitive markets considered depend on the nature and level of the
16
positions in question and the labor markets from which qualified individuals
are recruited. Base salary levels are also dependent on the performance of
each individual employee over time. Thus, employees
19
23
who sustain higher levels of performance over time will have correspondingly
higher salaries. Salary adjustments are based on general levels of market
increases in salaries, individual performance, overall financial results and
changes in job duties and responsibilities. All base salary increases are based
on a philosophy of pay-for-performance.
Incentive Compensation. The Committee believes that appropriate base
salaries must be coupled with incentive compensation that not only attracts and
retains qualified employees, but rewards them for increased performance.
Ownership by management and other employeesCompensation linked to the performance of the Company's common stock is one of
the best incentives to align employees' interests with those of stockholders and
to enhance performance. The Company maintainedmaintains an employee stock purchase plan
open to substantially all employees of the Company from
1994 through 1996, and is proposing that stockholders approve the Company's
1997 Employee Stock Purchase Plan at the Meeting. The Company also maintains
the 1994 Incentive Equity Plan and is proposing that stockholders approve the
Company's 1997 Stock Incentive Plan. Eacha stock incentive plan, each of these planswhich
is designed to encourage employees, including the Company's executive officers
and key employees, to identify their interests with those of stockholders and
enhance the Company's performance. In addition, the Company maintains a profit
sharing plan, under which 15% of the Company's pre-tax earnings (before unusual
or nonrecurring items) is distributed to substantially all non-management
employees of the Company (other than employees whose collective bargaining
agreement provides otherwise)otherwise or who participate in profit sharing arrangements
required by local law) each year on a pro rata basis according to base salary.
Based on 19961997 earnings, the Company distributed approximately $68$105 million in
profit sharing payments to its employees in February 1997.1998. Finally, the Company
maintains a management bonus program and a non-management on-time performance
bonus to focus employees on common goals and to encourage them to work together
to achieve profitability. The Committee believes that these incentives playedplay a
significant part in the Company's continuing operational
improvement and its record financial performance in 1996.
1996success.
1997 Executive Compensation
Base Salaries. As described above, and based in part on the Company's continued
operational and financial performance in 19951996 and 1996, fouron the salaries of their peers
in the industry, two of the executive officers named above in the Summary
Compensation Table received basemodest salary increases in 1996. In 1995, the Committee had not generally increased the salaries of
its five most highly compensated officers, notwithstanding the Company's
turnaround, preferring to await full year results. Certain1997. As described below,
Mr. Bethune also received a base salary increase. As discussed above, certain
other executive officers also received salary increases during 1995in 1997 in accordance
with the criteria set forth above under "Base Salaries."In late 1996, the Committee determined
to review all future executive officer salaries annually at the first meeting
of the Committee each year.
Stock Incentives. Consistent with its compensation strategy, the Company
awarded stock options to executive officers and key employees during 1996.1997.
Options granted to the five most highly compensated officers, as well as stock
option exercises by those individuals, are described in the Summary Compensation
and other tables included above. Options granted during 19961997 bear five-year
terms and vest ratably over three years. In addition toThe Company made no restricted stock
options, the Company awarded 20,000 restricted shares of Class B common stock
to a new executive officergrants in 1996. These shares are scheduled to vest over a
two-year period.1997.
Other Plans. In 1996, the Committee adopted theThe Company's Executive Bonus Program
which makes the Company's
executive officers and certain additional officers nominated by the Chief
Executive Officer and approved by the Committee eligible to receive on a fiscal
quarterly basis a cash bonus of up to 125% of their salary for such quarter
based on the Company's cumulative net income earned through such quarter as
compared to the cumulative net income targeted through such quarter in the
Company's annual financial plan approved by the Board. The stockholders approved
the plan which became effective in the
second quarter of 1996, to ensure that amounts received thereunder by the Chief Executive
Officer and the other four most highly compensated executive officers would be
eligible for deduction by the Company under Section 162(m) of the Code. For the first quarter of 1996, participants in the Executive
Bonus Program had participated in a special cash bonus program that paid
quarterly cash bonuses similarly to those contained in the Executive Bonus
Program. The
Company maintained a separate annual bonus program for other managersofficers and
management employees throughout 1996.
171997.
20
199624
1997 CEO Compensation
In early 1996,1997, the Committee increased Mr. Bethune's salary from $550,000$600,000
to $600,000$750,000 in light of (i) Mr. Bethune's performance in leading the Company's
turnaround, (ii) the salaries of Mr. Bethune's peers in the industry and (iii)
the record financial and operating results achieved by the Company in both 1995
and the well developed financial and operating plan
prepared for 1996. The Committee believed thatbelieves the increasedincrease was appropriate under the base
salary coupled
withcriteria detailed above and recognizes Mr. Bethune's value to the
Executive Bonus Program, would appropriately incentivizeCompany. The Committee does not anticipate such significant salary increases for
Mr. Bethune for 1996.in the future. In addition, in February 1996,1997, the Committee awarded
Mr. Bethune a stock option to purchase 150,000 shares of Class B common stock.
In connection
with certain amendments to the Company's 1994 Incentive Equity Plan approved
by stockholders at the 1996 annual meeting and a waiver by Mr. Bethune of
certain rights under his outstanding stock options, Mr. Bethune (along with
substantially all other optionees) was granted an option equal to 10% of the
amount of the options previously granted to him.
Respectfully submitted,
Human Resources Committee
Richard W. Pogue, Chairman
Thomas J. Barrack, Jr., Chairman
Douglas McCorkindale
George G.C.G. C. Parker
Charles A. Yamarone
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's executive compensation programs are administered by the Human
Resources Committee of the Board of Directors. The committee is currently
composed of four independent, non-employee directors, and no member of the
committee has been an officer or employee of the Company or any of its
subsidiaries. Karen Hastie Williams, who chaired the Human Resources Committee
during the first half of 1996, is a Partner of Crowell & Moring, a law firm
that has provided services to the Company and its subsidiaries for many years.
The Company's fee arrangement with Crowell & Moring is negotiated on the same
basis as the Company's arrangements with its other outside legal counsel and
is subject to the same terms and conditions. The fees paid by the Company to
Crowell & Moring are comparable to those it pays to other law firms for
similar services.
CERTAIN TRANSACTIONS
Until its divestment of the Company's shares in January 1997, Air Canada
owned in excess of five percent of the Company's Class B common stock. In
connection with Air Canada's investment in the Company, Air Canada, Air Partners
and the Company agreed to identify and pursue opportunities to achieve cost
savings, revenue enhancement or other synergies from areas of joint operation
between the Company and Air Canada. The Company and Air Canada entered into a
series of synergy agreements, primarily in the areas of aircraft maintenance and
commercial and marketing alliances (including agreements regarding coordination
of connecting flights). The Company believes that the synergy agreements
allocate potential benefits to the Company and Air Canada in a manner that is
equitable and commercially reasonable, and contain terms at least as favorable
to the Company as could be obtained from unrelated parties. As a result of these
agreements, during 19961997 Continental paid Air Canada $16$30 million, and Air Canada
paid Continental $17$16 million, primarily relating to aircraft maintenance.
In May 1996,April 1997, Continental redeemed for cash all of the 460,247 outstanding
shares of its Series A 12% Cumulative Preferred Stock held by an affiliate of
Air Canada converted all of its 3,322,112 shares of Class A
common stock into Class B common stock (pursuant to certain rights granted to
it under the Company's Charter) and sold, on the open market, 4,400,000 shares
of the Company's Class B common stock pursuant to a registered secondary
offering. In connection with such sale by Air Canada and certain investors in
Air Partners, certain costs of the offering were paid byfor $100 per share plus accrued dividends thereon. The redemption
price, including accrued dividends, totaled $48 million.
On June 2, 1997, the Company pursuant
to a Stockholders' Agreement, as amended, among the Company,purchased for $94 million from Air Partners and
Air Canada. Such costs approximated $350,000.
18
On November 21, 1996, Air Partners exercised its right to sell to the
Company, and the Company subsequently purchased, for $50 million,
warrants to purchase 2,614,3793,842,542 shares of Class B common stock (representing a
portion of the total warrants held by Air Partners) pursuant. The purchase price
represented the intrinsic value of the warrants (the difference between the
closing market price of the Class B common stock on May 28, 1997 ($34.25) and
the applicable exercise price). The Company anticipates that Air Partners will
exercise warrants to anpurchase 3,039,468 shares of Class A common stock
(representing the remaining warrants held by Air Partners) on or before April
27, 1998 (the expiration date of such warrants). The aggregate exercise price of
such warrants is approximately $28.4 million.
In July 1997, the Company purchased the rights of United Micronesia
Development Association, Inc. ("UMDA"), a corporation controlled by the estate
of Larry Hillblom, to receive future payments under a services agreement between
UMDA and Continental's then 91% indirectly owned subsidiary, Continental
Micronesia, Inc. ("CMI") (pursuant to which CMI was to pay UMDA approximately 1%
of the gross revenues of CMI, as defined, through January 1, 2012,) and UMDA's
9% interest in the parent of CMI, Air
21
25
Micronesia, Inc. ("AMI"), terminated the Company's obligations to UMDA under a
settlement agreement entered into earlier in 1996 with the Company.
In connection with Air Canada's partial divestiture1987, and terminated substantially all of
the Company's shares
in May 1996, issues arose underother contractual arrangements between the change in control provisions of certain ofCompany, AMI and CMI, on the Company's employment agreementsone
hand, and employee benefit plans. The employment
agreements of Messrs. Bethune, Brenneman andUMDA on the other named executive
officers were amended in connection with such transactions to provide a
revised change in control definition thathand, for an aggregate consideration of $73 million.
CMI paid UMDA $1.5 million for the Company believes is appropriate
in light of the changes to its equity ownership structure and to extendyear ended December 31, 1997 under the terms
of such agreements for one year. Each of such persons (together with
substantially all employees holding outstanding options) was also granted
options (subject to certain conditions) in an amount equal to 10% of the amount of the options previously granted to him, subject to each such person
agreeing that the revised change in control definition would be applicable to
his employment, optionservices agreement.
The Company and restricted stock agreements, as applicable. In
connection with the amendment of Mr. Bethune's employment and other benefit
agreements, the Company made a payment to Mr. Bethune of $1,572,500 and made
$115,000 in charitable contributions in Mr. Bethune's name, including to the
employee assistance fund of Continental. In connection with the amendment of
Mr. Brenneman's employment and other benefit agreements, the Company made a
payment to Mr. Brenneman of $776,563 and made $700,000 in charitable
contributions in Mr. Brenneman's name, including to the employee assistance
fund of Continental. In connection with the amendment of the employment and
other benefit agreements of the other named executive officers, such officers
were provided enhanced flight benefits.
In connection with the emergence from bankruptcy in August 1994 of America West Airlines, Inc. ("America West"), Continental acquired approximately 4.1%
of the equityin which Mr.
Bonderman holds a significant interest, (1,833,739 shares of common stock) and 17.1% of the
voting power (exclusive of warrants to purchase an additional 802,860 shares
of common stock) of the reorganized America West. In February 1996,
Continental sold approximately 1.4 million shares of America West's common
stock, realizing net proceeds of approximately $25 million and recognizing a
gain of $13 million in an underwritten public offering. In May 1996,
Continental sold all of its 802,860 America West warrants, realizing net
proceeds of $7 million and recognizing a gain of $5 million. As of March 21,
1997, Continental held approximately 1.0% of the equity interest and 7.9% of
the voting power of America West. Through partnerships that he controls, David
Bonderman, a director of the Company, has significant interests in both
America West and the Company.
The Company and America West entered into a series of agreements
during 1994 related to code-sharing and ground handling that have created
substantial benefits for both airlines. The services provided are considered
normal to the daily operations of both airlines. As a result of these
agreements, Continental paid America West $15$16 million and America West paid
Continental $22$23 million in 1996.
Continental Micronesia, Inc. ("CMI"), a 91%-owned subsidiary of the Company,
and United Micronesia Development Association, Inc. ("UMDA"), which is
controlled by the estate of Larry Hillblom (see note 2 to table on page 3) and
is the minority stockholder of CMI, have a services agreement whereby UMDA is
paid a fee of 1.0% of CMI's gross revenue, as defined, with a term through
January 1, 2012. During 1996, these fees totaled $6 million. As of December
31, 1996, the Company had a payable of $7 million maturing in 2011 to UMDA.
Annual payments of such payable aggregating $1 million per year are applied to
reduce the 1.0% fee. In addition, in connection with its $320 million secured
term loan financing in July 1996, CMI paid UMDA a dividend of approximately
$13 million.1997.
The Company's Senior Vice President--HumanPresident -- Human Resources and Labor Relations,
Michael H. Campbell, iswas a partner with the law firm of Ford & Harrison LLP.LLP
through December 1997. During the period that Mr. Campbell serves as a full-time employee of
Continental,1997, the Company payspaid Ford & Harrison LLP legal
fees of $37,500 per month and providesprovided no cash compensation to Mr. Campbell.Campbell
until November 1997.
Karen Hastie Williams is a partner of Crowell & Moring, a law firm that has
provided services to the Company and its subsidiaries for many years. The
Company's fee arrangement with Crowell & Moring is negotiated on the same basis
as the Company's arrangements with its other outside legal counsel and is
subject to the same terms and conditions. The fees paid by the Company to
Crowell & Moring are comparable to those it pays to other law firms for similar
services.
Each of Messrs. Bethune, Brenneman, Kellner, McLean and Smisek has entered
into a Stay Bonus Agreement with the Company, pursuant to which the Company has
agreed to pay a stay bonus of $6,660,000 in the case of Mr. Bethune, $4,500,000
in the case of Mr. Brenneman, and $2,250,000 in the case of each of Messrs.
Kellner, McLean and Smisek, payable in equal monthly installments over the
fifteen-month period following the closing of the Air Partners Transaction;
provided that the applicable executive remains in the employ of the Company
during the month in which the payment is made or, if the executive's employment
is terminated by the Company, such termination is not for cause. In addition,
the Company has agreed to make charitable contributions in the executive's name,
including to the We Care Trust (the employee assistance charitable fund of
Continental), in the amount of $340,000 in the case of Mr. Bethune, $1,000,000
in the case of Mr. Brenneman, and $250,000 in the case of each of Messrs.
Kellner, McLean and Smisek, in equal monthly installments over the same period
and subject to the same provisos. The Company's Human Resources Committee has
been considering amendments to the Company's employment agreements with certain
of its senior executives in light of the anticipated Air Partners Transaction,
and anticipates taking action with respect to appropriate amendments later in
1998.
The Company awarded
Mr. Campbell 20,000 restricted shareshas also entered into stay bonus agreements with certain of Class B common stock, scheduledits
other officers calling for payment of up to vestan aggregate of $9.5 million over a
fifteen-month period following the closing of the Air Partners Transaction and
has implemented a severance program with respect to certain officers and other
managers who participate in 50% increments in December 1997 and 1998, and an option to purchase
150,000 shares of Class B common stock under the Company's 1994 Incentive
Equity Plan,stock option program but who do not
have employment agreements with the Company as amended, which
19
option is scheduled to vest in one-third increments in December 1997, 1998 and
1999 and has an exercise price of $25.25 per share (the market value of the Class B common stockdate of a Change in
Control (within the meaning of the new Change in Control provision contained in
the Company's proposed 1998 Stock Incentive Plan, but excluding the change in
control to be caused by the Air Partners Transaction) of the Company
("Participating Managers"), which are effective as of the closing of the Air
Partners Transaction. Pursuant to such severance program, if there is a Change
in Control of the Company (within the meaning of the new Change in Control
provision contained in the Company's proposed 1998 Stock Incentive Plan) and the
chief executive officer of the Company prior to the Change in Control is not the
chief executive officer of the Company, the other entity involved in the Change
in Control transaction and certain affiliates for at least six months following
the Change in Control, and within two years after the Change in Control the
Participating Manager's employment by the Company and its subsidiaries is
terminated by the Company other than for Cause (as defined in the program),
Disability (as defined in the program) or death, the Participating Manager will
receive a severance payment in an amount equal to $20 million times a fraction,
the numerator of which is such Participating Manager's annual base salary as in
effect on the date of grant). Continental also provides certain
housingthe Change in Control, and flight benefitsthe denominator of which
22
26
is the aggregate base salaries, as in effect on such date, of all Participating
Managers. At March 27, 1998, approximately 475 employees would be eligible to
Mr. Campbell, while medical and other benefits
are provided by Ford & Harrison LLP.participate in the severance program.
PROPOSAL 1:
ELECTION OF DIRECTORS
It is the intention of the persons named in the enclosed form of proxy,
unless otherwise instructed, to vote duly executed proxies for the election of
each nominee for director listed below. Pursuant to the Company's Bylaws,
directors will be elected by a plurality of the votes duly cast at the Meeting.
If elected, such nominee will hold office until the next annual meeting of
stockholders and until his or her respective successor has been duly elected and
has qualified. Management does not contemplate that any of the nominees will
become unavailable to serve for any reason, but if that should occur before the
Meeting, proxies will be voted for another nominee or nominees to be selected by
the Board of Directors.
Air Partners has the limited right, in certain circumstances, to convert
its Class A common stock into Class D common stock. No person may hold or own
Class D common stock other than Air Partners and certain of its affiliates. The
Class D common stock, if issued, would permit Air Partners to elect one-
thirdone-third of
the directors to the Company's Board. To date, no shares of Class D common stock
have been issued. In the Air Partners Transaction, affiliates of Northwest will
acquire Air Partners and will be able to exercise Air Partners' rights under
this provision.
Continental's Board of Directors currently consists of thirteen persons.
Pursuant to the governance agreement described above in "Recent Developments,"
the Company and the Northwest Parties agreed to take all actions necessary
following the closing of the Air Partners Transaction to cause Independent
Directors (as therein defined) to constitute at least a majority of the Board of
Directors. Ms. Williams and Messrs. Bentsen, Foley, McCorkindale, Parker, Pogue,
Sturm and Yamarone are "Independent Directors" as defined by the governance
agreement. Pursuant to the governance agreement, the Company has also agreed to
cause a designee of an affiliate of Northwest reasonably acceptable to the
Company's Board of Directors to be appointed to the Company's Board of Directors
immediately after the closing of the Air Partners Transaction. At the date
hereof, no such person has been designated by the Northwest affiliate. Such
designee shall not be an officer or employee of Northwest or the Company or any
of their respective affiliates, or any person who has served in any such
capacity within the prior three years. Should the Air Partners Transaction close
prior to the date of the Meeting, the Company anticipates that its Board of
Directors will expand the size of the Board from thirteen to fourteen members
and elect such designee to the newly created position for a term expiring at the
Meeting, and that its Board of Directors will also elect such designee to the
vacant position immediately following the Meeting.
There is no family relationship between any of the nominees for director or
between any nominee and any executive officer.
The following table shows, with respect to each nominee, (i) such person's
name and age, (ii) the period for which such person has served as a director of
the Company, (iii) all positions and offices with the Company currently held by
the nominee and his or her principal occupation and business experience during
the last five years, (iv) other directorships held by the nominee and (v) the
standing committees of the Board of Directors of which he or she is a member.
Each of the nominees is currently a director of the Company.
NAME, AGE, POSITION
AND COMMITTEE MEMBERSHIPS TERM OF OFFICE AND BUSINESS EXPERIENCE
------------------------- --------------------------------------
THOMAS J. BARRACK, JR., age 4950............. Director since August 1994. Chief Executive
(Human Resources Committee) Officer of Colony Capital, Inc. and Colony
Advisors, Inc. (real estate investments)
since 1991; Officer of Keystone, Inc. (a
private investment firm) (1987-1991);
Director of Virgin/MGM Cinemas (U.K.).
23
27
NAME, AGE, POSITION
AND COMMITTEE MEMBERSHIPS TERM OF OFFICE AND BUSINESS EXPERIENCE
------------------------- --------------------------------------
LLOYD M. BENTSEN, JR., age 7677.............. Director since September 1996. Shareholder
(Audit Committee) of Verner, Liipfert, Bernhard, McPherson
and Hand (law firm) since 1995; United
States Secretary of the Treasury
(1993-1995); Member of the United States
Senate (1971-1993); Chairman of the Board
of Directors of New Holland N.V.; Director
of: American International Group, Inc.;
FEMSA; IVAX Corp.; PanEnergy Corp.
GORDON M. BETHUNE, age 5556.................. Director since August 1994. Chairman of the
Chairman of the Board and Chief Executive Board and Chief Executive Officer since
Chief Executive Officer (Executive Committee, Finance and September 1996. President and Chief
Strategy Committee) Executive
(Executive Committee, Officer (November 1994-September
1996);
Finance and Strategy President and Chief Operating
Officer (February
Committee) 1994-November 1994);
various positions with The Boeing Company
commencing in 1988, including Vice
President and General Manager of the
Commercial Airplane Group Renton Division,
Vice President and General Manager of the
Commercial Airplane Group Renton Division, Vice
President and General Manager of the Customer Services Division and Vice
President of Airline Logistics Support.
20
NAME, AGE, POSITION
AND COMMITTEE MEMBERSHIPS TERM OF OFFICE AND BUSINESS EXPERIENCE
------------------------- --------------------------------------
DAVID BONDERMAN, age 5455.................... Director since April 1993. Chairman of the
Board
(Executive Committee, Finance and Board (May 1993-September 1996); Managing
Director of
Finance and Strategy Air Partners, L.P. since November 1992;
Committee) PrincipalPartner of Texas Pacific Group (a private
investment firm) since 1992; Chief Operating
Officer of Keystone, Inc. (a private investment
firm) (1983-1992);
Director of: Bell & Howell Holdings
Company; National Education
Corporation; Carr Realty Company; Virgin/MGM
Cinemas (U.K.); Beringer Wine Estates; Denbury
Resources, Inc.; Ryanair, Ltd.; Washington Mutual, Inc.
GREGORY D. BRENNEMAN, age 3536............... Director since June 1995. President and
Chief
President and Chief Operating Officer since September 1996. Chief Operating Officer since September
(Finance and Strategy Committee) 1996. Chief Operating Officer (May
1995-September 1996); (Finance and Strategy Consultant to the
Company (February-April 1995);
Committee) various
positions, including Vice President, with
Bain & Company, Inc. (consulting firm) for
more than five years; Director of Browning-
FerrisBrown-
ing-Ferris Industries, Inc.
PATRICK FOLEY, age 6566...................... Director since April 1993. Chairman of the
(Audit Committee) Board, President and Chief Executive
Officer of DHL Airways, Inc. since 1988;
Director of: Foundation Health Corporation;Systems,
Inc.; Glenborough Realty Trust, Inc.;
Flextronics International Ltd.; Del Monte
Foods Company.
DOUGLAS McCORKINDALE, age 5758............... Director since April 1993. Vice Chairman
(Human Resources Committee) and (Audit Committee) Chief Financial and Administrative OfficerPresident of Gannett Co., Inc. (a
nationwide diversified communications
company) since 1984; Director of:
a groupSeptember 1997; Vice
Chairman and Chief Financial and
Administrative Officer of Gannett Co., Inc.
(1984 - 1997); Director of: a group of
Prudential Mutual Funds; Frontier
Corporation.
24
28
NAME, AGE, POSITION
AND COMMITTEE MEMBERSHIPS TERM OF OFFICE AND BUSINESS EXPERIENCE
------------------------- --------------------------------------
GEORGE G.C.G. C. PARKER, age 5859................ Director since June 1996. Associate Dean
(Finance and Strategy Committee, Human for
(Executive Committee, Academic Affairs and Director of MBA
Resources Committee) Program
Finance and Strategy since 1993; Dean Witter Professor
of Finance and Committee, Human Resources Management (since 1996) and
Professor of
Committee) Management (1973-1996) at the
Graduate School of Business, Stanford
University; Director of: California
Casualty Group of Insurance Companies; Bailard,Bai-
lard, Biehl, and Kaiser, Inc.; RCM
EquityRCM/Dresdner
Global Mutual Funds; H. Warshow & Sons, Inc.; Zurich
Reinsurance Centre,
Inc.; Community First Banking Group.
RICHARD W. POGUE, age 6869................... Director since April 1993. Senior Advisor
(Executive Committee) of Dix
(Human Resources Committee) & Eaton (a public relations firm)
since 1994; Senior Partner (1993-1994) and
Managing Partner (1984-1992) of Jones, Day,
Reavis & Pogue (law firm); Director of:
Derlan Industries, Ltd.; M.A. Hanna Co.;
KeyCorp; LAI Associates, Inc.; OHM
Corporation;
Redland PLC; Rotek Incorporated; TRW Inc.
WILLIAM S. PRICE III, age 4041............... Director since April 1993. Managing Director ofPartner
(Finance and Strategy Air Partners, L.P. since November 1992;
Committee) Principal of Texas Pacific Group (a private
investment firm) since 1992; Vice
President--President -- Strategic Planning and
Business Development of GE Capital
Corporation (1991-1992); Vice President of
Bain & Company, Inc. (consulting firm)
(1985-1991); Chairman of the Executive
Committee of the Board of Directors of:
Favorite Brands, Inc.; Director of Belden &
Blake Corporation; Beringer Wine Estates;
Director ofDel Monte Foods Company; Denbury Resources,
Inc.
21
NAME, AGE, POSITION
AND COMMITTEE MEMBERSHIPS TERM OF OFFICE AND BUSINESS EXPERIENCE
------------------------- --------------------------------------
; VSP, Holdings, Inc.; Zilog, Inc.
DONALD L. STURM, age 6566.................... Director since April 1993. Chairman of the
Board
(Audit Committee) Board and Chief Executive Officer of:
Community First Bankshares, Inc. (which
owns four banks in Colorado) since 1993;
Community First Bancorp, Inc. (which owns
four banks in Wyoming) since 1993; Sturm Investment, Inc. (which owns one
bank in Illinois) since 1983; Premier
Bancorp, Inc. (which owns one bank in
Kansas) since 1996; FirstWorld
Communications, Inc. (local telephone
exchange carrier) since January 1998;
Continental Can Company, Inc., and various
subsidiaries and affiliated corporations
(1984-
1991)(1984-1991); various positions culminating
in Vice Chairman of Peter Kiewit Sons, Inc.
(1963-1991).
KAREN HASTIE WILLIAMS, age 5253.............. Director since April 1993. Partner of
(Audit Committee) Crowell &
(Audit Committee) Moring (law firm) since 1982;
Director of: Federal National Mortgage
Association; Crestar Financial Corporation;
Gannett Co., Inc.; SunAmerica, Inc.;
Washington Gas Light Company; SunAmerica, Inc.Company.
CHARLES A. YAMARONE, age 3839................ Director since January 1995. Executive Vice
(Human Resources Committee) President of Libra Investments, Inc.
("Libra") since January 1997; Executive
Vice President and Research Director of
Libra (July 1994-January 1997); Senior Vice
President and General Counsel of Libra
(1991-1994); Senior Vice President--
Legal and SecretaryDirector of Columbia Savings (1990-
1991); Director of: El Paso Electric
Company;
LIVE Entertainment, Inc.Company.
25
29
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF THE NOMINEES
NAMED ABOVE, WHICH IS DESIGNATED AS PROPOSAL NO. 1 ON THE ENCLOSED PROXY.
PROPOSAL 2:
APPROVAL OF THE
THIRD AMENDMENT TO
THE 19941998 STOCK INCENTIVE EQUITY PLAN
SubjectGENERAL
The Human Resources Committee recognized that options representing the
substantial majority of the value of all outstanding options of the Company
would vest by the end of April 1998, irrespective of and unrelated to whether
the Air Partners Transaction closed, due to the approvalvesting of stockholders,lower exercise price
options, which were issued principally in April 1995 and February 1996, and the
Boardsignificant increase in value of Directors,the Company's Class B common stock since those
dates. For example, over 71% of the value of Mr. Bethune's options and over 76%
of the value of Mr. Brenneman's options (measured by the difference between the
market value of the Company's Class B common stock, assumed to be $57 per share
for purposes of this calculation, and the exercise price of the relevant
options) vest by the end of April 1998, and over 62% of the value of all the
Company's officers' options (measured on the recommendationsame basis) vests by the end of
April 1998.
The Human Resources Committee also recognized that the Company's existing
stock option plans did not contain sufficient authorized shares to provide
appropriate incentives for the Company's managers, and that the Change in
Control features of the Company's existing plans would need to be modified with
respect to future grants to take into account the Air Partners Transaction. As a
result, the Human Resources Committee has amended the Company's
1994 Incentive Equity Plan, as amended (the "1994 Plan"). The proposed
amendment (the "Third Amendment"), the text of which is attached as Appendix A
to this proxy statement, would increase the number of shares subject to stock
options granted to the Company's outside directors each year from 3,000 shares
of Class B common stock to 5,000 such shares. As described above (see "General
Information--Compensation of Directors"), as part of the compensation paid
annually to the Company's non-employee directors, on the day following each
annual meeting of stockholders non-employee directors have been automatically
awarded stock options that bear exercise prices equal to the fair market value
of the Class B common stock on such date. The Human Resources Committee of the
Board recommended this increase to the Board of Directors, and the Board
approved the increase as part of the overall review of the director
compensation structure.
In addition to the foregoing increase, the Third Amendment provides for an
automatic grant of an option to purchase 5,000 shares of Class B common stock
uponthat it adopt a
director's first election to the Board of Directors other than at an
annual meeting. The exercise price of such option would equal the fair market
value of the Class B common stock on the date of grant. Such amendment will
permit the Company to provide the same incentives to join the Board when
filling vacancies during the year as exist for potential directors to be
elected at an annual meeting. The Company currently has 11 non-employee
directors, 10 of whom have been granted an additional
22
2,000-share stock option and one of whom has been granted an initial-election
option to purchase 5,000 shares, in each case subject to stockholder approval
of the Third Amendment at the Meeting.
Subsequent to the adoption of the Third Amendment, the Board of Directors,
upon the recommendation of the Human Resources Committee, adopted the 1997
Stock Incentive Plan. See "Proposal 4: Approval of the 1997 Stock Incentive
Plan." Since substantially all shares authorized for use under the 1994 Plan
have been used in connection with option or restricted stock grants, the
Company does not anticipate that grants will be made in the future under the
1994 Plan (including grants of options to non-employee directors), absent
forfeitures of outstanding grants which would restore shares for availability
under the 1994 Plan. The Company does, however, anticipate making annual
grants of options to non-employee directors (and grants when filling vacancies
on the board) under the 1997new 1998 Stock Incentive Plan substantially identicalcontaining sufficient shares to appropriately
incentivize the Company's managers and containing a new Change in Control
definition, and also amend the Company's existing stock option plans to conform
them to the grants under the 1994 Plan (as amended by the Third Amendment) described
above. See "Proposal 4: Approval of the 1997new 1998 Stock Incentive Plan" and "--New
Plan Benefits" at the end of Proposal 4 for an indication of awards under the
amended 1994 Plan and the 1997 Stock Incentive Plan.
In addition to annual non-employee director stock option grants, the 1994
Plan provides for the award of stock options, restricted stock and annual and
long-term incentive awards to employees of the Company and its subsidiaries.
Approximately 400 employees (substantially all of the Company's management-
level employees) are eligible for awards under the 1994 Plan. No annual or
long-term incentive awards are currently outstanding under the 1994 Plan, and
none are currently contemplated. As of March 21, 1997, approximately 6,000,000
shares of Class B common stock were subject to outstanding employee and non-
employee stock options under the 1994 Plan and 173,000 restricted shares were
outstanding under the 1994 Plan. The majority of outstanding employee stock
options have five-year terms and vest over a three-year period, while non-
employee director stock options have ten-year terms and vest on the day
following their grant. Outstanding restricted stock grants vest over a two- or
three-year period. The 1994 Plan does not permit discounted stock options to
be awarded, and all grants have been made with an exercise price equal to the
closing price of the Class B common stock on the date of grant. All awards of
restricted stock have been made without a purchase price. As of March 21,
1997, the closing price of the Class B common stock was $32.375. The exercise
prices of options outstanding under the 1994 Plan range from $3.875 to $31.00.
The 1994 Plan may be amended by the Board in the future, but may not be so
amended without further approval by the stockholders of the Company if such
amendment would materially increase the benefits awardable thereunder or the
cost to the Company of administering the plan.
The federal income tax consequences to the Company and participants with respect to stock options and restricted stock awarded undergranted after
the 1994 Plan are
similar to the federal income tax consequences associated with such awards
made under the Company's 1997 Stock Incentive Plan. For a summary of such
federal income tax consequences, see "Proposal 4: Approvalclosing of the 1997 Stock
Incentive Plan--United States Federal Income Tax Consequences."
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE THIRD
AMENDMENT TO THE 1994 INCENTIVE EQUITY PLAN, AS AMENDED, AS DESCRIBED ABOVE
AND AS SET FORTH IN APPENDIX A, WHICH IS DESIGNATED AS PROPOSAL NO. 2 ON THE
ENCLOSED PROXY.
23
PROPOSAL 3:
APPROVAL OF THE
1997 EMPLOYEE STOCK PURCHASE PLAN
GENERAL
TheAir Partners Transaction. On April 14, 1998, the Board of
Directors adopted the Continental Airlines, Inc. 1997 Employee
Stock Purchase Plan (the "Purchase Plan") on November 25, 1996, subject to
approval by the stockholders of the Company within 12 months thereafter. The
purpose of the Purchase Plan is to provide an incentive to employees of the
Company to acquire or increase an ownership interest in the Company through
the purchase of shares of Class B common stock.
SUMMARY OF PURCHASE PLAN
The following general description of certain features of the Purchase Plan
is qualified in its entirety by reference to the Purchase Plan, which is
attached as Appendix B. Capitalized terms not otherwise defined herein have
the meanings ascribed to them in the Purchase Plan.
Shares Available under the Purchase Plan; Adjustments. Subject to adjustment
as provided in the Purchase Plan, the number of shares of Class B common stock
that may be purchased by participating employees under the Purchase Plan will
not in the aggregate exceed 1,750,000 shares, which may be originally issued
or reacquired shares, including shares bought on the market or otherwise for
purposes of the Purchase Plan. Such number of shares is subject to adjustment
in the event of a change in the Class B common stock by reason of a stock
dividend or by reason of a subdivision, stock split, reverse stock split,
recapitalization, reorganization, combination, reclassification of shares or
other similar change. Upon any such event, the maximum number of shares that
may be subject to any option, and the number and purchase price of shares
subject to options outstanding under the Purchase Plan, will also be adjusted
accordingly.
Eligibility. All employees of the Company and its Participating Companies
(currently Continental Express, Inc. and Continental Micronesia, Inc.) as of a
Date of Grant (the first day of the Option Period) are eligible to participate
in the Purchase Plan; provided, however, that an eligible employee may not
participate if such employee would own (directly or indirectly) 5% or more of
the total combined voting power of all classes of stock of the Company or a
subsidiary, taking into account options to purchase stock and stock that may
be purchased under the Purchase Plan. At the present time, no employee of the
Company would be prevented from participating by reason of this limitation.
Approximately 38,000 employees are eligible to participate in the Purchase
Plan.
Participation. An eligible employee may elect to participate in the Purchase
Plan for the six-month period beginning January 1, 1997 and thereafter for any
calendar quarter during the period from July 1, 1997 to December 31, 2001, by
designating a percentage of such employee's Eligible Compensation to be
deducted from compensation for each pay period and paid into the Purchase Plan
for such employee's account. The designated percentage may not be less than 1%
nor more than 10%. An eligible employee may participate in the Purchase Plan
only by means of payroll deduction. No employee will be granted an option
under the Purchase Plan that permits such employee's rights to purchase Class
B common stock to accrue at a rate that exceeds $25,000 of fair market value
of such stock (determined at the time such option is granted) for the calendar
year in which such option is outstanding. Unless an employee's payroll
deductions are withdrawn (as described below), the aggregate payroll
deductions credited to the employee's account will be used to purchase shares
of Class B common stock at the end of the Option Period. The per share
purchase price of the Class B common stock will be 85% of the lesser of the
fair market value of the Class B common stock on the Date of Grant or on the
Date of Exercise (the last day of the Option Period). For all purposes under
the Purchase Plan, the fair market value of a share of Class B common stock on
a particular date shall be equal to the closing price of such stock on the New
York Stock Exchange on that date as reported by The Wall Street Journal in the
New York Stock Exchange Composite Transactions (or, if no shares of Class B
common stock have been traded on that date, on the next
24
regular business date on which shares of the Class B common stock are so
traded). Payroll deductions will be included in the general funds of the
Company, free of any trust or other arrangement and may be used for any
corporate purpose. No interest will be paid or credited to any Participant.
Changes in and Withdrawal of Payroll Deductions. A Participant may elect to
decrease, suspend or resume payroll deductions during a relevant Option Period
by delivering to the Company a new payroll deduction authorization in the
manner specified by the Company. A Participant may withdraw in whole from the
Purchase Plan, but not in part, at any time prior to the Date of Exercise
relating to a particular Option Period by timely delivering to the Company a
notice of withdrawal in the manner specified by the Company. The Company
promptly will refund to the Participant the amount of the Participant's
payroll deductions under the Purchase Plan that have not been otherwise
returned or used upon exercise of options, and thereafter the Participant's
payroll deduction authorization and interest in unexercised options under the
Purchase Plan will terminate.
Delivery of Shares; Restrictions on Transfer. As soon as practicable after
each Date of Exercise, the Company will deliver to a custodian (currently
Harris Trust and Savings Bank) one or more certificates representing (or shall
otherwise cause to be credited to the account of such custodian) the total
number of whole shares of Class B common stock respecting options exercised on
such Date of Exercise in the aggregate (for both whole and fractional shares)
of all of the participating eligible employees under the Purchase Plan. Any
remaining amount representing a fractional share will not be certificated (or
otherwise so credited) and will be carried forward to the next Date of
Exercise for certification (or credit) as part of a whole share. Such
custodian will keep accurate records of the beneficial interests of each
Participant in such shares by means of Participant accounts under the Purchase
Plan, and will provide each eligible employee with quarterly or such other
periodic statements with respect thereto as the Human Resources Committee may
specify. A Participant may not generally transfer or otherwise dispose of the
shares for a period of six months from the Date of Exercise. During this six-
month period, the Company (or the custodian) will retain custody of the
shares.
Termination of Employment; Leaves of Absence. Except as described below, if
the employment of a Participant terminates for any reason, then the
Participant's participation in the Purchase Plan ceases and the Company will
refund the amount of such Participant's payroll deductions under the Purchase
Plan that have not yet been otherwise returned or used upon exercise of
options. If the employment of a Participant terminates after June 30, 1997,
due to retirement, death or disability, the Participant, or the Participant's
personal representative, as applicable, may elect either to (i) withdraw all
of the accumulated unused payroll deductions and Class B common stock credited
to the Participant's account or (ii) exercise the Participant's option for the
purchase of Class B common stock at the end of the Option Period. Any excess
cash in such account would be returned to the Participant or such personal
representative. If no such election is timely received by the Company, the
Participant or personal representative will automatically be deemed to have
elected the second alternative.
During a paid leave of absence approved by the Company and meeting Internal
Revenue Service regulations, a Participant's elected payroll deductions will
continue. A Participant may not contribute to the Purchase Plan during an
unpaid leave of absence. If a Participant takes an unpaid leave of absence
that is approved by the Company, meets Internal Revenue Service regulations,
and begins within 90 days prior to the last day of an Option Period, then such
Participant's payroll deductions for such Option Period that were made prior
to such leave may remain in the Purchase Plan and be used to purchase Class B
common stock on the Date of Exercise relating to such Option Period. If a
Participant takes a leave of absence not described above, then the Participant
will be considered to have withdrawn from the Purchase Plan.
Restriction Upon Assignment of Option. An option granted under the Purchase
Plan may not be transferred other than by will or the laws of descent and
distribution. Subject to certain limited exceptions, each option is
exercisable, during the employee's lifetime, only by the employee to whom
granted.
Administration and Amendments. The Purchase Plan is to be administered by
the Human Resources Committee of the Board. In connection with its
administration of the Purchase Plan, the Committee is authorized to interpret
the Purchase Plan.
25
The Purchase Plan may be amended from time to time by the Board or the Human
Resources Committee; provided, however, that no change in any option
theretofore granted may be made that would impair the rights of a Participant
without the consent of such Participant.
The benefits and amounts to be received by any Participant under the
Purchase Plan are not currently determinable. See "Proposal 4: Approval of the
1997 Stock Incentive Plan--New Plan Benefits."
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a brief summary of certain of the U.S. federal income tax
consequences of certain transactions under the Purchase Plan based on federal
income tax laws in effect on January 1, 1997. This summary applies to the
Purchase Plan as normally operated and is not intended to provide or
supplement tax advice to eligible employees. The summary contains general
statements based on current U.S. federal income tax statutes, regulations and
currently available interpretations thereof. This summary is not intended to
be exhaustive and does not describe state, local or foreign tax consequences
or the effect, if any, of gift, estate and inheritance taxes. The Purchase
Plan is not qualified under Section 401(a) of the Code.
Tax Consequences to Participants. A Participant's payroll deductions to
purchase Class B common stock are made on an after-tax basis. There is no tax
liability to the Participant when shares of Class B common stock are purchased
pursuant to the Purchase Plan. However, the Participant may incur tax
liability upon disposition (including by way of gift) of the shares acquired
under the Purchase Plan. The Participant's U.S. federal income tax liability
will depend on whether the disposition is a qualifying disposition or a
disqualifying disposition as described below.
If a qualifying disposition of the shares is made by the Participant (i.e.,
a disposition that occurs more than two years after the first day of the
Option Period in which the shares were purchased), or in the event of death
(whenever occurring) while owning the shares, the Participant will recognize
in the year of disposition (or, if earlier, the year of the Participant's
death) ordinary income in an amount equal to the lesser of (i) the excess of
the fair market value of the shares at the time of disposition (or death) over
the Option Price or (ii) 15% of the fair market value of the shares at the
Date of Grant (the beginning of the Option Period). Upon the sale of the
shares, any amount realized in excess of the ordinary income recognized by the
Participant will be taxed to the Participant as a long-term capital gain. If
the shares are sold at less than the Option Price, then there will be no
ordinary income. Instead, the Participant will have a capital loss equal to
the difference between the sales price and the Option Price.
If a disqualifying disposition of the shares is made (i.e., a disposition
(other than by reason of death) within two years after the first day of the
Option Period in which the shares were purchased) the Participant generally
will recognize ordinary income in the year of disposition in an amount equal
to any excess of the fair market value of the shares at the Date of Exercise
over the Option Price for the shares (even if no gain is realized on the sale
or if a gratuitous transfer is made). Any further gain (or loss) realized by
the Participant generally will be taxed as short-term or long-term capital
gain (or loss) depending on the holding period.
Tax Consequences to the Company or Participating Company. The Company, or
the Participating Company for which a Participant performs services, will be
entitled to a deduction only if the Participant makes a disqualifying
disposition of any shares purchased under the Purchase Plan. In such case, the
Company or such Participating Company can deduct as a compensation expense the
amount that is ordinary income to the Participant provided that, among other
things, (i) the amount meets the test of reasonableness, is an ordinary and
necessary business expense and is not an "excess parachute payment" within the
meaning of Section 280G of the Code, (ii) any applicable withholding
obligations are satisfied and (iii) the one million dollar limitation of
Section 162(m) of the Code is not exceeded.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE 1997 EMPLOYEE
STOCK PURCHASE PLAN, AS DESCRIBED ABOVE AND AS SET FORTH IN APPENDIX B, WHICH
IS DESIGNATED AS PROPOSAL NO. 3 ON THE ENCLOSED PROXY.
26
PROPOSAL 4:
APPROVAL OF THE
1997 STOCK INCENTIVE PLAN
GENERAL
The Board of Directors adopted the Continental Airlines, Inc. 19971998 Stock Incentive Plan (the
"Incentive Plan" or the "1998 Plan") on February 28, 1997,, subject to approval by the stockholders of
the Company at the Meeting.Meeting, and so amended the Company's existing stock option
plans.
The purpose of the Incentive Plan is to enable the Company and its
subsidiaries to attract ableand retain capable persons to serve as directors and
employees and to provide a means whereby those individuals upon whom the
responsibilities of the successful administration and management of the Company
and its subsidiaries rest, and whose present and potential contributions to the
welfare of the Company and its subsidiaries are of importance, can acquire and
maintain stock ownership, thereby strengthening their concern for the welfare of
the Company and its subsidiaries. A further purpose of the Incentive Plan is to
provide such individuals with additional incentive and reward opportunities
designed to enhance the profitable growth of the Company and its subsidiaries.
SUMMARY OF INCENTIVE PLAN
The following general description of certain features of the Incentive Plan
is qualified in its entirety by reference to the Incentive Plan, which is
attached as Appendix C.A. Capitalized terms not otherwise defined herein have the
meanings ascribed to them in the Incentive Plan.
The Incentive Plan provides that the Company may grant the option to
purchase shares of Class B common stock or shares of Restricted Stock to certain
employees or directors. The terms applicable to these various types of Awards,
including those terms that may be established by the Administrator when making
or administering particular Awards, are set forth in detail in the Incentive
Plan. The Administrator may make Awards under the Incentive Plan until February 28, 2007.April 14,
2008. The Incentive Plan will remain in effect until all options granted under
the Incentive Plan have been satisfied or expired and all shares of Restricted
Stock granted under the Incentive Plan have vested or been forfeited.
26
30
Eligibility. Awards may be granted only to persons who, at the time of
grant, are directors of the Company or employees of the Company or one of its
subsidiaries. Awards may be granted on more than one occasion to the same
person, and subject to the limitations set forth in the Incentive Plan, Awards
consisting of options may include an Incentive Stock Option or an option that
is not an Incentive Stock Option or any combination thereof, and Awards may consist of any combination of options and Restricted
Stock. As of March 21,
1997,27, 1998, 11 non-employee directors and approximately 400500
employees (substantially all of the Company's management-level employees) were
eligible to receive Awards under the Incentive Plan.
Stock Options. The Administrator may grant options that entitle the
recipient to purchase shares of Class B common stock at a price equal to or
greater than market value on the date of grant. The market value of a share of
Class B common stock was $32.375$57.0625 on March 21, 1997,27, 1998, which was the closing price
of the Class B common stock on the New York Stock Exchange on that date. The
option price is payable in full in the manner specified by the Administrator.
Options granted under the Incentive Plan may be options that are intended
to qualify as "incentive stock options" within the meaning of Section 422 of the
Code or options that are not intended to so qualify. An Incentive Stock Option
may only be granted to an individual who is an employee at the time the option
is granted. No Incentive Stock Option may be granted to an individual if, at the
time the option is granted, such individual owns stock possessing more than 10%
of the total combined voting power of all classes of stock of the Company (or of
its parent or subsidiary corporation, within the meaning of Section 422(b)(6) of
the Code), unless (i) at the time such option is granted the option price is at
least 110% of the Market Value per Share of the Class B common stock subject to
the option and (ii) such option by its terms is not exercisable after the
expiration of five years from the date of grant.
27
Each Option Agreement must specify the effect of termination of employment
or Board membership, as applicable, on the exercisability of the option. An
Option Agreement may provide for the payment of the option price, in whole or in
part, by delivery of a number of shares of Class B common stock (plus cash if
necessary) having a market valueMarket Value per shareShare equal to such option price. Moreover,
an Option Agreement may provide for a "cashless exercise" of the option by
establishing procedures satisfactory to the Administrator with respect thereto.
The terms and conditions of the respective Option Agreements need not be
identical.
Restricted Stock. A grant of Restricted Stock constitutes an immediate
transfer to the recipient of record and beneficial ownership of the shares of
Restricted Stock in consideration of the performance of services by the
recipient (or other consideration determined by the Administrator). The
recipient is entitled immediately to voting and other ownership rights in the
shares, subject to restrictions referred to in the Incentive Plan or contained
in the related Restricted Stock Agreement. The transfer may be made without
additional consideration or in consideration of a payment by the recipient that
is less than the market value of the shares on the date of grant. Each grant
may, in the discretion of the Administrator, limit the recipient's dividend
rights during the period in which the shares are subject to a substantial risk
of forfeiture and restrictions on transfer.
Restricted Stock must be subject, for a period or periods determined by the
Administrator at the date of grant, to one or more restrictions, including,
without limitation, a restriction that constitutes a "substantial risk of
forfeiture" within the meaning of Section 83 of the Code and applicable
interpretive authority thereunder. For example, an award could provide that the
Restricted Stock would be forfeited if the recipient ceased to serve the Company
as an employee during a specified period. In order to enforce these forfeiture
provisions, the transferability of Restricted Stock during the period or periods
during which such restrictions are to continue will be prohibited or restricted
in a manner and to the extent prescribed by the Administrator at the date of
grant. The Incentive Plan provides for a shorter period during which the
forfeiture provisions are to apply in the event of a Change in Control of the
Company.
The Human Resources Committee has resolved that all future grants of
Restricted Stock under the Company's stock incentive plans (including the 1998
Plan) shall vest over at least a three-year period, or over at least a one-year
period if vesting is performance based (or as otherwise provided in the
applicable plan or award agreement, such as upon a Change in Control).
27
31
Shares Subject to the Incentive Plan. Subject to adjustment as provided in
the Incentive Plan, the aggregate number of shares of Class B common stock that
may be issued under the Incentive Plan shall not exceed 2,000,0005,500,000 shares. There
are approximately 750,000 shares of Class B common stock available to be issued
under the Company's other stock option plans. Shares shall be deemed to have
been issued under the Incentive Plan only to the extent actually issued and
delivered pursuant to an option or a grant of Restricted Stock. To the extent
that an option or a grant of Restricted Stock lapses or the rights of the
recipient with respect thereto terminate, any shares of Class B common stock
then subject to such option or grant of Restricted Stock will again be available
for grant under the Incentive Plan. The maximum number of shares of Class B
common stock that (i) may be subject to options granted to any one individual
during any calendar year may not exceed 200,000750,000 shares and (ii) may be granted
as Restricted Stock may not exceed 100,000250,000 shares (in each case subject to
adjustment as provided in the Incentive Plan). The limitation set forth in
clause (i) of the preceding sentence shall be applied in a manner which will
permit compensation generated in connection with options awarded under the
Incentive Plan by the Human Resources Committee to constitute "performance
based" compensation for purposes of Section 162(m) of the Code, including,
without limitation, counting against such maximum number of shares, to the
extent required under Section 162(m) of the Code and applicable interpretive
authority thereunder, any shares subject to options that are canceled or
repriced.
Change in Control. As used in the Incentive Plan, the term "Change in
Control" means (except as otherwise provided in an applicable agreement
evidencing an Award), if the Air Partners Transaction closes: (a) any person is
or becomes the beneficial owner of securities representing the greater of (i)
25% of the combined voting power of the Company's outstanding securities and
(ii) the proportion of the combined voting power of the Company's outstanding
securities beneficially owned by Northwest Airlines Corporation ("Northwest")
and any person controlling, controlled by or under common control with
Northwest; (b) individuals who constituted the Board as of February 26, 1998
cease for any reason to constitute at least a majority of the Board (unless such
individual's election is approved by a vote of a majority of the incumbent board
or such individual was nominated by an Excluded Person, as described below); (c)
any merger, consolidation or other reorganization or similar transaction in
which the Company is not the "Controlling Corporation" (as described below); or
(d) any sale of all or substantially all of the Company's assets, other than to
Excluded Persons or any sale of all or substantially all of the Company's assets
to Northwest or any person controlling, controlled by or under common control
with Northwest.
Beneficial ownership as described in clause (a) above does not include
beneficial ownership by (1) the Company or any subsidiary of the Company, (2)
any employee benefit plan of the Company (with certain exceptions), (3)
Northwest or any person controlling, controlled by or under common control with
Northwest (unless Northwest is controlled by or under common control with Delta
Air Lines, Inc.), or (4) certain persons, and certain affiliates of such
persons, controlling Air Partners prior to the acquisition of Air Partners by
Northwest (persons referred to in clauses (1) through (4) above are referred to
as "Excluded Persons"). The persons in clause (3) of the previous sentence are
not deemed to be Excluded Persons if Northwest (together with any person
controlling, controlled by or under common control with Northwest) ceases to
beneficially own at least 25% of the combined voting power of the Company's
outstanding securities for 30 consecutive calendar days. The exclusion described
in clause (4) of the second preceding sentence will cease to have any effect
(and the persons described therein will cease to be Excluded Persons) if the
person acquiring beneficial ownership is not controlled by David Bonderman or
James Coulter or the person acquiring beneficial ownership (together with any
person controlling, controlled by or under common control with such person)
ceases to beneficially own at least 25% of the combined voting power of the
Company's outstanding securities for 30 consecutive calendar days.
For purposes of clause (c) above, the Company will generally be considered
the "Controlling Corporation" in any merger, consolidation, reorganization or
similar transaction unless either (1) the Company's stockholders immediately
prior to such transaction (excluding the other party to the transaction and
persons acting in concert with such other party) would not, immediately after
such transaction, beneficially own securities of the resulting entity that would
entitle them to elect a majority of the board of the resulting entity,
28
32
or (2) those persons constituting the Company's board of directors immediately
prior to such transaction would not, immediately after such transaction,
constitute a majority of the directors of the resulting entity.
If the Air Partners Transaction does not close, the term "Change in
Control" means: (a) any person is or becomes the beneficial owner of securities
representing the greater of (i) 25% of the combined voting power of the
Company's outstanding securities and (ii) the proportion of the combined voting
power of the Company's outstanding securities beneficially owned by Air Partners
and any person controlling, controlled by or under common control with Air
Partners; (b) individuals who constituted the Board as of February 28, 1997
cease for any reason to constitute at least a majority of the Board (unless such
individuals' election is approved by a vote of a majority of the incumbent
board); (c) any merger, consolidation or other reorganization or similar
transaction in which the Company is not the "Controlling Corporation" (as
described below); or (d) any sale of all or substantially all of the Company's
assets, other than to "Excluded Persons" (as described below). Beneficial
ownership as described in clause (a) above does not include beneficial ownership
by (1) the Company or any subsidiary of the Company, (2) any employee benefit
plan of the Company (with certain exceptions) or (3) Air 28
Partners or any person
controlling, controlled by or under common control with Air Partners (with
certain exceptions)(persons (persons referred to in clauses (1) through (3) above are
referred to as "Excluded Persons"). The persons in clause (3) of the previous
sentence are not deemed to be Excluded Persons if Air Partners ceases to
beneficially own at least 25% of the combined voting power of the Company's
outstanding securities for 30 consecutive calendar days or if there occurs a
"change in the ownership or effective control" (within the meaning of Section
280G of the Code) of Air Partners. For purposes of clause (c) above, the Company
will generally be considered the "Controlling Corporation" in any merger,
consolidation, reorganization or similar transaction unless either (1) the
Company's stockholders immediately prior to such transaction (excluding the
other party to the transaction and persons acting in concert with such other
party) would not, immediately after such transaction, beneficially own
securities of the resulting entity that would entitle them to elect a majority
of the board of directors of the resulting entity or (2) those persons
constituting the Company's board of directors immediately prior to such
transaction would not, immediately after such transaction, constitute a majority
of the directors of the resulting entity.
Upon the occurrence of a Change in Control, with respect to each recipient,
(AA) all options granted to such recipient and outstanding at such time shall
immediately vest and become exercisable in full, whether or not otherwise
exercisable
for a period of thirty (30) calendar days following the occurrence of the
Change in Control (but subject, in the case of Incentive Stock Options, to certain
limitations) and, except as required by law, all restrictions on the transfer of
shares acquired pursuant to such options shall terminate and (BB) all
restrictions applicable to such recipient's Restricted Stock shall be deemed to
have been satisfied and such Restricted Stock shall vest in full.
Provision is made for payment under the Incentive Plan (except as otherwise
provided in the applicable Option Agreement) of (i) any excise taxes due under
Section 4999 of the Code with respect to amounts that are vested and/or payable
due to a Change in Control plus (ii) any taxes due on the payment of such excise
taxes described in clause (i).
Transferability. No options (other than Incentive Stock Options) are
transferable by the recipient except (i) by will or the laws of descent and
distribution, (ii) by a qualified domestic relations order or (iii) with the
consent of the Administrator. An Incentive Stock Option is not transferable
other than by will or the laws of descent and distribution and may not be
exercised during the optionee's lifetime except by the optionee or the
optionee's guardian or legal representative.
At the discretion of the Administrator, a percentage of the aggregate
shares of Common Stock obtained from exercise of an option shall not be
transferable prior to the earliest to occur of (x) termination of the relevant
option term, (y) the optionee's retirement, death or disability or (z)
termination of the Optionee'soptionee's employment with the Company and its subsidiaries.
Adjustments. The maximum number of shares that may be issued under the
Incentive Plan, as well as the number or type of shares subject to outstanding
options and Restricted Stock grants and the applicable option prices per share
shall be adjusted appropriately in the event of stock dividends, spin-offs of
assets or other extraordinary dividends, stock splits, combinations of shares,
recapitalizations, mergers, consolidations, reorganizations, liquidations,
issuances of rights or warrants, and similar transactions or events.
29
33
Administration and Amendments. The Incentive Plan provides that a committee
comprised solely of two or more "outside directors" (as defined by Section
162(m) of the Code and applicable interpretive authority thereunder and within
the meaning of the term "Non-Employee Director" as defined by Rule 16b-3 under
the Exchange Act) serves as the Administrator of Awards under the Incentive Plan
with respect to persons subject to Section 16 of the Exchange Act. Until
otherwise determined by the Board, the Human Resources Committee serves as such
committee under the Incentive Plan. The Chief Executive Officer of the Company
serves as Administrator with respect to any person not subject to Section 16 of
the Exchange Act.
The Board in its discretion may terminate the Incentive Plan at any time
with respect to any shares of Class B common stock for which Awards have not yet
been granted. The Board has the right to alter or amend the Incentive Plan or
any part thereof from time to time; provided that no change in any Award
theretofore 29
granted may be made which would impair the rights of the recipient
thereof without the consent of such recipient. Without stockholder approval, the
Board may not amend the Incentive Plan to (a) increase the maximum aggregate
number of shares that may be issued under the Incentive Plan or (b) change the
class of individuals eligible to receive Awards under the Incentive Plan.
NEW PLAN BENEFITS
The following table sets forth asCompany anticipates that all or a substantial portion of March 21, 1997 benefits that have been
awarded to the specified individuals and groupsoptions
available for grant under the Incentive Plan (except as specified below) subjectwill be awarded to eligible
employees during 1998, promptly following the approvaldetermination by the Human
Resources Committee of the Incentive Plan by
stockholders atsize and terms of option grants. Although the Meeting. Annual benefits that may be awardedHuman
Resources Committee has not yet determined the size and terms of option grants
under the Incentive Plan, it currently anticipates being in a given year are not known. Approximately 390,000 of the
shares subjectposition to options awardedreport
to the officers named in the table wereBoard with respect to its discussions concerning compensation, including
options, granted underat the 1994 Plan. The options covering such
shares are, in all material respects, the same as options covering shares
granted under the Incentive Plan (except that such grants under the 1994 Plan
are not subject to stockholder approval). It is not anticipated that any
further material awards will be made to employees under the 1994 Plan, and no
information is included in the table relating to the 1994 Plan.
To date, no grants have been made under the Incentive Plan to non-employee
directors. However, commencing on the datenext regularly scheduled meeting of the Meeting,Board immediately
following the Meeting. In addition, the Company anticipates that options to
purchase 5,000 shares of Class B common stock are expected towill be awarded under the
Incentive Plan to each of the Company's non-employee directors elected at the
Meeting if the Incentive Plan is approved by stockholders. For information relating to grants made to the non-employee directors in 1996, including those subject to stockholder
approval at the Meeting, see "Proposal 2: Approval of the Third Amendment to
1994 Incentive Equity Plan."
Finally, no information is included with respect to the Purchase Plan since
the shares to be purchased thereunder are subject to the discretion of
employees and cannot be calculated.
1997 STOCK INCENTIVE PLAN BENEFITS
STOCK
OPTIONS
GRANTED
NAME AND POSITION 2/28/97 (1)
----------------- -----------
Gordon M. Bethune.................................................. 150,000
Chairman of the Board and Chief Executive Officer
Gregory D. Brenneman............................................... 90,000
President and Chief Operating Officer
Lawrence W. Kellner................................................ 60,000
Executive Vice President and Chief Financial Officer
C.D. McLean........................................................ 60,000
Executive Vice President--Operations
Jeffery A. Smisek.................................................. 60,000
Executive Vice President, General Counsel and Secretary
All current executive officers, as a group......................... 640,000
All current directors (other than executive officers) as a group... 0
All employees (other than executive officers) as a group........... 967,000
- --------
(1) See discussion above. The dollar values of the options set forth in the
table will depend upon the future market prices of the Class B common
stock and are not currently determinable. It is also not feasible to
determine the benefitsCompany's stockholders, or amounts that would have been received or
allocated if these awards had been in effect during the last completed
fiscal year. The options shown have five-year terms, represent the right
to purchase Class B common stock at an exercise price of $28.625 per share
and vest in 33 1/3% increments on February 28, 1998, 1999 and 2000. Such
options are not intended to qualify as Incentive Stock Options. Grants
made
under the Incentive Plan are subject to stockholder approval of the
Incentive Plan. The closing sales price of the Class B commonCompany's other stock was
$32.375 per share on March 21, 1997.
30
option plans. See "General Information."
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a brief summary of certain of the U.S. federal income tax
consequences of certain transactions under the Incentive Plan based on federal
income tax laws in effect on January 1, 1997.1998. This summary applies to the
Incentive Plan as normally operated and is not intended to provide or supplement
tax advice to eligible employees or directors. The summary contains general
statements based on current U.S. federal income tax statutes, regulations and
currently available interpretations thereof. This summary is not intended to be
exhaustive and does not describe state, local or foreign tax consequences or the
effect, if any, of gift, estate and inheritance taxes.
Tax Consequences to Recipients
Non-qualified Stock Options. In general: (i) no income will be recognized
by an optionee at the time a non-qualified stock option is granted; (ii) at the
time of exercise of a non-qualified stock option, ordinary income will be
recognized by the optionee in an amount equal to the difference between the
option price paid for the shares and the fair market value of the shares if they
are nonrestricted on the date of exercise; and (iii) at the time of sale of
shares acquired pursuant to the exercise of a non-qualified stock option, any
appreciation (or depreciation) in the value of the shares after the date of
exercise will be treated as either short-term or long-terma capital gain (or loss) depending on how long the shares have been held..
The total number of shares of Class B common stock subject to options
granted to any one recipient during any calendar year is limited under the
Incentive Plan for the purpose of qualifying any compensation realized upon
exercise of such options that are granted by the Human Resources Committee as
"performance-based compensation" as defined in Section 162(m) of the Code in
order to preserve tax deductions by the Company with respect to any such
compensation in excess of one million dollars paid to "Covered Employees" (i.e.,
the Company's Chief Executive Officer and the four highest compensated officers
of the
30
34
Company or those individuals deemed to be executive officers of the Company
(other than the Chief Executive Officer) and who are officers of the Company on
the last day of the year in question). Options granted by the Chief Executive
Officer will not qualify as "performance-based compensation" and will be subject
to the limitation on deductibility under Section 162(m) of the Code; however, it
is not anticipated that the Chief Executive Officer would have the authority to
make grants to Covered Employees.
Incentive Stock Options. No income generally will be recognized by an
optionee upon the grant or exercise of an Incentive Stock Option. However, upon
exercise, the difference between the fair market value and the exercise price
may be subject to the alternative minimum tax. If shares of Class B common stock
are issued to an optionee pursuant to the exercise of an Incentive Stock Option
and no disqualifying disposition of the shares is made by the optionee within
two years after the date of grant or within one year after the transfer of the
shares to the optionee, then upon the sale of the shares any amount realized in
excess of the option price will be taxed to the optionee as long-terma capital gain and
any loss sustained will be a long-term capital loss.
If shares of Class B common stock acquired upon the exercise of Incentive
Stock Options are disposed of prior to the expiration of either holding period
described above, the optionee generally will recognize ordinary income in the
year of disposition in an amount equal to any excess of the fair market value of
the shares at the time of exercise (or, if less, the amount realized on the
disposition of the shares in a sale or exchange) over the option price paid for
the shares. Any further gain (or loss) realized by the optionee generally will
be taxed as a short-term or long-term capital gain (or loss) depending on
the holding period..
As described above with respect to non-qualified stock options, the
Incentive Plan has been designed to qualify any ordinary compensation income
recognized by optionees with respect to Incentive Stock Options granted by the
Human Resources Committee as "performance-based compensation" as defined in
Section 162(m) of the Code.
Restricted Stock. A recipient of Restricted Stock generally will be subject
to tax at ordinary income tax rates on the fair market value of the Restricted
Stock reduced by any amount paid by the recipient at such time as the 31
shares are
no longer subject either to a risk of forfeiture or restrictions on transfer for
purposepurposes of Section 83 of the Code. However, a recipient who so elects under
Section 83(b) of the Code within 30 days of the date of transfer of the shares
will have taxable ordinary income on the date of transfer of the shares equal to
the excess of the fair market value of the shares (determined without regard to
the risk of forfeiture or restrictions on transfer) over any purchase price paid
for the shares. If a Section 83(b) election is made and the shares are
subsequently forfeited, the recipient will not be allowed to take a deduction
for the value of the forfeited shares. If a Section 83(b) election has not been
made, any dividends received with respect to Restricted Stock that are subject
at that time to a risk of forfeiture or restrictions on transfer generally will
be treated as compensation that is taxable as ordinary income to the recipient;
otherwise the dividends will be treated as dividends. Awards of Restricted Stock
to Covered Employees will not qualify as "performance-based compensation" and
the Company will be subject to the limitation on deductibility under Section
162(m) of the Code.
Special Rules Applicable to Officers and Directors. In limited circumstances
where the sale of stock that is received as the result of a grant of an award
could subject an officer or director to suit under Section 16(b) of the
Exchange Act, the tax consequences to the officer or director may differ from
the tax consequences described above. In these circumstances, unless a special
election has been made, the principal difference usually will be to postpone
valuation and taxation of the stock received so long as the sale of the stock
received could subject the officer or director to suit under Section 16(b) of
the Exchange Act, but not longer than six months.
Tax Consequences to the Company or Subsidiary
Section 162(m) of the Code limits the ability of the Company to deduct
compensation paid during a fiscal year to a Covered Employee in excess of one
million dollars, unless such compensation is based on performance criteria
established by the Human Resources Committee or meets another exception
specified in Section 162(m) of the Code. Certain awards described above will not
qualify as "performance-based compensation" or meet any other exception under
Section 162(m) of the Code and, therefore, the Company's deductions with respect
to such awards will be subject to the limitations imposed by such Section. To
the extent a recipient recognizes ordinary income in the circumstances described
above, the Company or subsidiary for which the recipient performs services will
be entitled to a corresponding deduction provided that, among other things, (i)
the income meets the test of reasonableness, is an ordinary and necessary
business expense and is not an "excess parachute payment" within the meaning of
Section 280G of the Code and (ii) either the compensation is "performance-based"
within the meaning of Section 162(m) of the Code or the one million dollar
limitation of Section 162(m) of the Code is not exceeded. No deduction will be
31
35
available to the Company or any subsidiary for any amount paid under the
Incentive Plan with respect to (i) any excise taxes due under Section 4999 of
the Code with respect to amounts that are vested and/or payable due to a Change
in Control and (ii) any taxes due on the payment of such excise taxes described
in clause (i).
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE 19971998 STOCK
INCENTIVE PLAN AS DESCRIBED ABOVE AND AS SET FORTH IN APPENDIX C,A, WHICH IS
DESIGNATED AS PROPOSAL NO. 42 ON THE ENCLOSED PROXY.
32
PROPOSAL 5:3:
RATIFICATION OF APPOINTMENT
OF INDEPENDENT AUDITORS
The firm of Ernst & Young LLP has been the Company's independent auditors
since 1993, and the Board of Directors desires to continue to engage the
services of this firm for the fiscal year ending December 31, 1997.1998. Accordingly,
the Board of Directors, upon the recommendation of the Audit Committee, has
reappointed Ernst & Young LLP to audit the financial statements of the Company
and its subsidiaries for fiscal 19971998 and report thereon. Stockholders are being
asked to vote upon the ratification of such appointment. If stockholders do not
ratify such appointment, the Audit Committee and Board will reconsider such
appointment.
Representatives of Ernst & Young LLP will be present at the Meeting and
will be available to respond to appropriate questions and make a statement
should they so desire.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THE
APPOINTMENT OF THE INDEPENDENT AUDITORS, WHICH IS DESIGNATED AS PROPOSAL NO. 53
ON THE ENCLOSED PROXY.
OTHER MATTERS
Management knows of no business to be presented for action at the Meeting
other than that described in this proxy statement. If any other matters should
properly come before the Meeting calling for a vote of the stockholders, it is
the intention of the persons named in the accompanying proxy, unless otherwise
directed in such proxy, to vote on such matters in accordance with their best
judgment.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Each director, executive officer (and, for a specified period, certain
former directors and executive officers) and each holder of greater than ten
percent of a class of the Company's equity securities is required to report to
the Commission his or her pertinent position or relationship, as well as
transactions in such securities, by certain specified dates. A report during
19961997 with respect to one transaction was filed after the specified filing date
by David Loeser,each of Donald Sturm, a formerdirector, and Barry Simon, an executive officer of the Company.
1998officer.
1999 ANNUAL MEETING
Any stockholder who desires to present proposals at the 19981999 annual meeting
of stockholders and to have such proposals set forth in the proxy statement and
form of proxy mailed in conjunction with such annual meeting must submit such
proposals in writing to the Secretary of the Company notno later than December 5, 1997.16,
1998. The Company's Bylaws require that for nominations of persons for election
to the Board of Directors of the Company or the proposal of business to be
considered by the stockholders at an annual meeting, a stockholder must give
timely written notice thereof. To be timely for the 19981999 annual meeting of
stockholders, such notice must be delivered to the Secretary of the Company at
the principal executive offices of the Company not less than 70 days nor more
than 90 days prior to May 16, 1998,21, 1999, provided, that if the 19981999 annual meeting of
stockholders is advanced by more than 20 days, or delayed by more than 70 days,
from May 16, 1998,21, 1999, such notice must be delivered not earlier than the ninetieth
day prior to the 19981999 annual meeting and not
32
36
later than the close of business on the later of (a) the seventieth day prior to
the 19981999 annual meeting or (b) the tenth day following the day on which public
announcement of the date of the 19981999 annual meeting is first made. The
stockholder's notice must contain and be accompanied by certain information as
specified in the Bylaws. It is recommended that any stockholder desiring to make
a nomination or submit a proposal for consideration obtain a copy of the
Company's Bylaws, which may be obtained without charge from the Secretary of the
Company upon written request addressed to the Secretary at the Company's
principal executive offices.
33
EVEN IF YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN, DATE AND MAIL PROMPTLY
THE ENCLOSED PROXY.
By Order of the Board of Directors,
/S/ JEFFERY/s/ JEFFREY A. SMISEK
Jeffery A. Smisek
Secretary
Houston, Texas
April 4, 199715, 1998
THE COMPANY WILL FURNISH TO INTERESTED SECURITY HOLDERS WITHOUT CHARGE,
UPON WRITTEN REQUEST, A COPY OF ITS ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1996.1997. THE COMPANY WILL FURNISH ANY EXHIBIT TO SUCH
REPORT, UPON WRITTEN REQUEST, TO ANY SECURITY HOLDER REQUESTING SUCH REPORT UPON
PAYMENT OF REASONABLE FEES RELATING TO THE COMPANY'S FURNISHING SUCH EXHIBIT.
REQUESTS FOR COPIES SHOULD BE ADDRESSED TO THE SECRETARY OF THE COMPANY AT THE
COMPANY'S HEADQUARTERS: 2929 ALLEN PARKWAY, SUITE 2010, HOUSTON, TEXAS 77019.
3433
37
APPENDIX A
THIRD AMENDMENT TO
CONTINENTAL AIRLINES, INC.
1994 INCENTIVE EQUITY PLAN
The Board of Directors (the "Board") of Continental Airlines, Inc. (the
"Company") adopted the Continental Airlines, Inc. 1994 Incentive Equity Plan,
as amended (the "Plan"), on March 4, 1994, subject to approval by the
stockholders of the Company, which was obtained at the Company's 1994 Annual
Meeting of Stockholders. Subject to applicable provisions of Paragraph 15 of
the Plan, the Board retained the right to amend the Plan, which was amended by
the First Amendment to Continental Airlines, Inc. 1994 Incentive Equity Plan,
approved by the stockholders at the Company's 1995 annual meeting, and by the
Second Amendment to Continental Airlines, Inc. 1994 Incentive Equity Plan,
approved by the stockholders at the Company's 1996 annual meeting. The Board
has determined by resolutions adopted on September 30, 1996 that the Plan be
further amended (the "Third Amendment") as follows. Capitalized terms not
otherwise defined in this Third Amendment to the Plan have the meanings
ascribed thereto in the Plan.
The Plan is hereby amended as follows:
1. The first clause of Paragraph 5 of the Plan is hereby amended to read in
its entirety as follows:
"5. OUTSIDE DIRECTOR STOCK OPTIONS. Notwithstanding any other provision
of the Plan, (A) each Outside Director shall automatically receive on the
day of each annual stockholders meeting (and, if such director is first
elected to the Board after September 1, 1996 other than at an annual
stockholders meeting, on the later of (i) the date of such director's
first election to the Board or (ii) September 30, 1996) a grant of
options to purchase 5,000 shares of Common Stock, and (B) each Outside
Director who was elected as a director of the Company on June 26, 1996
shall automatically receive, on September 30, 1996 (which shall be the
date of grant thereof), a grant of options to purchase 2,000 shares of
Common Stock, in each case in accordance with the following provisions:"
2. Clause (a) of Paragraph 5 of the Plan is hereby amended to read in its
entirety as follows:
"(a) The Committee and Board shall have no discretion with respect to
Outside Director Stock Options. Each grant will be made with an Option
Price equal to 100% of the Market Value per Share on the date of grant
thereof."
A-1
APPENDIX B
CONTINENTAL AIRLINES, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
1. PURPOSE. The Continental Airlines, Inc. 1997 Employee Stock Purchase Plan
(the "Plan") is intended to provide an incentive for employees of Continental
Airlines, Inc. (the "Company") and any Participating Company (as defined in
paragraph 3) to acquire or increase a proprietary interest in the Company
through the purchase of shares of the Company's Class B common stock, par
value $.01 per share (the "Stock"). The Plan is intended to qualify as an
"Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code
of 1986, as amended (the "Code"). The provisions of the Plan shall be
construed in a manner consistent with the requirements of that section of the
Code.
2. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Human
Resources Committee (the "Committee") of the Board of Directors of the Company
(the "Board"). Subject to the provisions of the Plan, the Committee shall
interpret the Plan and all options granted under the Plan, make such rules as
it deems necessary for the proper administration of the Plan and make all
other determinations necessary or advisable for the administration of the
Plan. In addition, the Committee shall correct any defect, supply any omission
or reconcile any inconsistency in the Plan, or in any option granted under the
Plan, in the manner and to the extent that the Committee deems desirable to
carry the Plan or any option into effect. The Committee shall, in its sole
discretion, make such decisions or determinations and take such actions, and
all such decisions, determinations and actions taken or made by the Committee
pursuant to this and the other paragraphs of the Plan shall be conclusive on
all parties. The Committee shall not be liable for any decision, determination
or action taken in good faith in connection with the administration of the
Plan. The Committee shall have the authority to delegate routine day-to-day
administration of the Plan to such officers and employees of the Company as
the Committee deems appropriate.
3. PARTICIPATING COMPANIES. The Committee may designate any present or
future parent or subsidiary corporation of the Company that is eligible by law
to participate in the Plan as a "Participating Company" by written instrument
delivered to the designated Participating Company. Such written instrument
shall specify the effective date of such designation and shall become, as to
such designated Participating Company and persons in its employment, a part of
the Plan. The terms of the Plan may be modified as applied to the
Participating Company only to the extent permitted under Section 423 of the
Code. Transfer of employment among the Company and Participating Companies
(and among any other parent or subsidiary corporation of the Company) shall
not be considered a termination of employment hereunder. Any Participating
Company may, by appropriate action of its Board of Directors, terminate its
participation in the Plan. Moreover, the Committee may, in its discretion,
terminate a Participating Company's Plan participation at any time.
4. ELIGIBILITY. Subject to the provisions hereof, all employees of the
Company and the Participating Companies who are employed by the Company or any
Participating Company as of a Date of Grant (as defined in subparagraph 6(a))
shall be eligible to participate in the Plan; provided, however, that no
option shall be granted to an employee if such employee, immediately after the
option is granted, owns stock possessing five percent or more of the total
combined voting power or value of all classes of stock of the Company or of
its parent or subsidiary corporations (within the meaning of Sections
423(b)(3) and 424(d) of the Code).
5. STOCK SUBJECT TO THE PLAN. Subject to the provisions of paragraph 12, the
aggregate number of shares that may be sold pursuant to options granted under
the Plan shall not exceed 1,750,000 shares of the authorized Stock, which
shares may be unissued or reacquired shares, including shares bought on the
market or otherwise for purposes of the Plan. Should any option granted under
the Plan expire or terminate prior to its exercise in full, the shares
theretofore subject to such option may again be subject to an option granted
under the Plan. Any shares that are not subject to outstanding options upon
the termination of the Plan shall cease to be subject to the Plan.
B-1
6. GRANT OF OPTIONS.
(a) GENERAL STATEMENT; "DATE OF GRANT"; "OPTION PERIOD"; "DATE OF EXERCISE".
Following the effective date of the Plan and continuing while the Plan remains
in force, the Company shall offer options under the Plan to purchase shares of
Stock to all eligible employees who elect to participate in the Plan. Except
as otherwise determined by the Committee, these options shall be granted on
January 1, 1997, and, thereafter, on the first day of each successive July,
October, January and April (each of which dates is herein referred to as a
"Date of Grant"). Except as provided in paragraph 12, the term of each option
granted on January 1, 1997, shall be for six months, and the term of each
option granted thereafter shall be for three months (each of such six-month
and three-month periods is herein referred to as an "Option Period"), which
shall begin on a Date of Grant and end on the last day of each Option Period
(herein referred to as a "Date of Exercise"). Subject to subparagraph 6(e),
the number of shares subject to an option for a participant shall be equal to
the quotient of (i) the aggregate payroll deductions withheld on behalf of
such participant during the Option Period in accordance with subparagraph
6(b), divided by (ii) the Option Price (as defined in subparagraph 7(b)) of
the Stock applicable to the Option Period, including fractions; provided,
however, that the maximum number of shares that may be subject to any option
for a participant may not exceed 2,500 (subject to adjustment as provided in
paragraph 12).
(b) ELECTION TO PARTICIPATE; PAYROLL DEDUCTION AUTHORIZATION. An eligible
employee may participate in the Plan only by means of payroll deduction.
Except as provided in subparagraph 6(g), each eligible employee who elects to
participate in the Plan shall deliver to the Company, within the time period
prescribed by the Committee, a written payroll deduction authorization in a
form prepared by the Company whereby he gives notice of his election to
participate in the Plan as of the next following Date of Grant, and whereby he
designates an integral percentage of his Eligible Compensation (as defined in
subparagraph 6(d)) to be deducted from his compensation for each pay period
and paid into the Plan for his account. The designated percentage may not be
less than 1% nor exceed 10%.
(c) CHANGES IN PAYROLL AUTHORIZATION. A participant may withdraw from the
Plan as provided in paragraph 8. In addition, a participant may decrease the
percentage rate of his payroll deduction authorization referred to in
subparagraph 6(b) or suspend or resume payroll deductions during the relevant
Option Period by delivering to the Company a new payroll deduction
authorization in a form prepared by the Company. Such decrease, suspension or
resumption will be effective as soon as administratively feasible after
receipt of the participant's new payroll deduction authorization form.
(d) "ELIGIBLE COMPENSATION" DEFINED. The term "Eligible Compensation" means
regular straight-time earnings or base salary, except that such term shall not
include payments for overtime, incentive compensation, bonuses or other
special payments.
(e) $25,000 LIMITATION. No employee shall be granted an option under the
Plan which permits his rights to purchase Stock under the Plan and under all
other employee stock purchase plans of the Company and its parent and
subsidiary corporations to accrue at a rate which exceeds $25,000 of fair
market value of such Stock (determined at the time such option is granted) for
each calendar year in which such option is outstanding at any time (within the
meaning of Section 423(b)(8) of the Code). Any payroll deductions in excess of
the amount specified in the foregoing sentence shall be returned to the
participant as soon as administratively feasible after the next following Date
of Exercise.
(f) LEAVES OF ABSENCE. During a paid leave of absence approved by the
Company and meeting the requirements of Treasury Regulation (S) 1.421-7(h)(2),
a participant's elected payroll deductions shall continue. A participant may
not contribute to the Plan during an unpaid leave of absence. If a participant
takes an unpaid leave of absence that is approved by the Company, meets the
requirements of Treasury Regulation (S) 1.421-7(h)(2), and begins within 90
days prior to the last day of an Option Period, then such participant's
payroll deductions for such Option Period that were made prior to such leave
may remain in the Plan and be used to purchase Stock under the Plan on the
Date of Exercise relating to such Option Period. If a participant takes a
leave of absence that is not described in the first or third sentence of this
subparagraph 6(f), then he shall be considered to have withdrawn from the Plan
pursuant to the provisions of paragraph 8 hereof.
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(g) CONTINUING ELECTION. Subject to the limitation set forth in subparagraph
6(e), a participant (i) who has elected to participate in the Plan pursuant to
subparagraph 6(b) as of a Date of Grant and (ii) who takes no action to change
or revoke such election as of the next following Date of Grant and/or as of
any subsequent Date of Grant prior to any such respective Date of Grant shall
be deemed to have made the same election, including the same attendant payroll
deduction authorization, for such next following and/or subsequent Date(s) of
Grant as was in effect immediately prior to such respective Date of Grant.
Payroll deductions that are limited by subparagraph 6(e) shall re-commence at
the rate provided in such participant's payroll deduction authorization at the
beginning of the first Option Period that is scheduled to end in the following
calendar year, unless the participant changes the amount of his payroll
deduction authorization pursuant to paragraph 6, withdraws from the Plan as
provided in paragraph 8 or is terminated from the Plan as provided in
paragraph 9.
7. EXERCISE OF OPTIONS.
(a) GENERAL STATEMENT. Subject to the limitation set forth in subparagraph
6(e), each participant in the Plan automatically and without any act on his
part shall be deemed to have exercised his option on each Date of Exercise to
the extent of his unused payroll deductions under the Plan and to the extent
the issuance of Stock to such participant upon such exercise is lawful.
(b) "OPTION PRICE" DEFINED. The term "Option Price" shall mean the per share
price of Stock to be paid by each participant on each exercise of his option,
which price shall be equal to 85% of the fair market value of the Stock on the
Date of Exercise or on the Date of Grant, whichever amount is lesser. For all
purposes under the Plan, the fair market value of a share of Stock on a
particular date shall be equal to the closing price of the Stock on the New
York Stock Exchange, Inc. on that date as reported by The Wall Street Journal
in the New York Stock Exchange Composite Transactions (or, if no shares of
Stock have been traded on that date, on the next regular business date on
which shares of the Stock are so traded).
(c) DELIVERY OF SHARES; RESTRICTIONS ON TRANSFER. As soon as practicable
after each Date of Exercise, the Company shall deliver to a custodian selected
by the Committee one or more certificates representing (or shall otherwise
cause to be credited to the account of such custodian) the total number of
whole shares of Stock respecting options exercised on such Date of Exercise in
the aggregate (for both whole and fractional shares) of all of the
participating eligible employees hereunder. Any remaining amount representing
a fractional share shall not be certificated (or otherwise so credited) and
shall be carried forward to the next Date of Exercise for certification (or
credit) as part of a whole share. Such custodian shall keep accurate records
of the beneficial interests of each participating employee in such shares by
means of participant accounts under the Plan, and shall provide each eligible
employee with quarterly or such other periodic statements with respect thereto
as may be directed by the Committee. If the Company is required to obtain from
any U.S. commission or agency authority to issue any such shares, the Company
shall seek to obtain such authority. Inability of the Company to obtain from
any commission or agency (whether U.S. or foreign) authority which the
Company's General Counsel or his designee deems necessary for the lawful
issuance of any such shares shall relieve the Company from liability to any
participant in the Plan except to return to him the amount of his payroll
deductions under the Plan which would have otherwise been used upon exercise
of the relevant option. Except as hereinafter provided, for a period of six
months (or such other period as the Committee may from time to time specify
with respect to a particular grant of options) after the Date of Exercise of
an option (the "Restriction Period"), the shares of Stock issued in connection
with such exercise may not be sold, assigned, pledged, exchanged, hypothecated
or otherwise transferred, encumbered or disposed of by the optionee who has
purchased such shares; provided, however, that such restriction shall not
apply to the transfer, exchange or conversion of such shares of Stock pursuant
to a merger, consolidation or other plan of reorganization of the Company, but
the stock, securities or other property (other than cash) received upon any
such transfer, exchange or conversion shall also become subject to the same
transfer restrictions applicable to the original shares of Stock, and shall be
held by the custodian, pursuant to the provisions hereof. Upon the expiration
of such Restriction Period, the transfer restrictions set forth in this
subparagraph 7(c) shall cease to apply and the optionee may, pursuant to
procedures established by the Committee and the custodian, direct the sale or
distribution of some or all of the whole shares of Stock in his
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Company stock account that are not then subject to transfer restrictions and,
in the event of a sale, request payment of the net proceeds from such sale.
Further, upon the termination of the optionee's employment with the Company
and its parent or subsidiary corporations by reason of death, permanent and
total disability (within the meaning of Section 22(e)(3) of the Code) or
retirement that entitles the optionee to an early or normal retirement benefit
under any defined benefit pension plan of the Company or a Participating
Company, the transfer restrictions set forth in this subparagraph 7(c) shall
cease to apply and the custodian shall, upon the request of such optionee (or
as applicable, such optionee's personal representative), deliver to such
optionee a certificate issued in his name representing (or otherwise credit to
an account of such optionee) the aggregate whole number of shares of Stock in
his Company stock account under the Plan. At the time of distribution of such
shares, any fractional share in such Company stock account shall be converted
to cash based on the fair market value of the Stock on the date of
distribution and such cash shall be paid to the optionee. The Committee may
cause the Stock issued in connection with the exercise of options under the
Plan to bear such legends or other appropriate restrictions, and the Committee
may take such other actions, as it deems appropriate in order to reflect the
transfer restrictions set forth in this subparagraph 7(c) and to assure
compliance with applicable laws.
8. WITHDRAWAL FROM THE PLAN.
(a) GENERAL STATEMENT. Any participant may withdraw in whole from the Plan
at any time prior to the Date of Exercise relating to a particular Option
Period. Partial withdrawals shall not be permitted. A participant who wishes
to withdraw from the Plan must timely deliver to the Company a notice of
withdrawal in a form prepared by the Company. The Company, promptly following
the time when the notice of withdrawal is delivered, shall refund to the
participant the amount of his payroll deductions under the Plan which have not
yet been otherwise returned to him or used upon exercise of options; and
thereupon, automatically and without any further act on his part, his payroll
deduction authorization and his interest in unexercised options under the Plan
shall terminate.
(b) ELIGIBILITY FOLLOWING WITHDRAWAL. A participant who withdraws from the
Plan shall be eligible to participate again in the Plan upon expiration of the
Option Period during which he withdrew (provided that he is otherwise eligible
to participate in the Plan at such time).
9. TERMINATION OF EMPLOYMENT.
(a) GENERAL STATEMENT. Except as provided in subparagraph 9(b), if the
employment of a participant terminates for any reason whatsoever, then his
participation in the Plan automatically and without any act on his part shall
terminate as of the date of the termination of his employment. The Company
shall promptly refund to him the amount of his payroll deductions under the
Plan which have not yet been otherwise returned to him or used upon exercise
of options, and thereupon his interest in unexercised options under the Plan
shall terminate.
(b) TERMINATION BY RETIREMENT, DEATH OR DISABILITY AFTER JUNE 30, 1997. If
the employment of a participant terminates after June 30, 1997, due to (i)
retirement that entitles the participant to an early or normal retirement
benefit under any defined benefit pension plan of the Company or a
Participating Company, (ii) death or (iii) permanent and total disability
(within the meaning of Section 22(e)(3) of the Code), the participant, or the
participant's personal representative, as applicable, will have the right to
elect, no later than 10 days prior to the last day of the Option Period during
which such retirement, death or disability occurred, either to:
(1) withdraw all of the accumulated unused payroll deductions and shares
of Stock credited to the participant's account under the Plan (whether or
not the Restriction Period with respect to such shares has expired); or
(2) exercise the participant's option for the purchase of Stock on the
last day of the Option Period during which termination of employment occurs
for the purchase of the number of full shares of Stock which the
accumulated payroll deductions at the date of the participant's termination
of employment will purchase at the applicable Option Price (subject to
subparagraph 6(e)), with any excess cash in such account to be returned to
the participant or such personal representative.
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The participant or, if applicable, such personal representative, must make
such election by giving written notice to the Committee in such manner as the
Committee prescribes. In the event that no such written notice of election is
timely received by the Committee, the participant or personal representative
will automatically be deemed to have elected as set forth in clause (2) above,
and promptly after the exercise so described in clause (2) above, all shares
of Stock in such participant's account under the Plan will be distributed to
the participant or such personal representative.
10. RESTRICTION UPON ASSIGNMENT OF OPTION. An option granted under the Plan
shall not be transferable otherwise than by will or the laws of descent and
distribution. Subject to subparagraph 9(b), each option shall be exercisable,
during his lifetime, only by the employee to whom granted. The Company shall
not recognize and shall be under no duty to recognize any assignment or
purported assignment by an employee of his option or of any rights under his
option or under the Plan.
11. NO RIGHTS OF STOCKHOLDER UNTIL EXERCISE OF OPTION. With respect to
shares of Stock subject to an option, an optionee shall not be deemed to be a
stockholder, and he shall not have any of the rights or privileges of a
stockholder, until such option has been exercised. With respect to an
individual's Stock held by the custodian pursuant to subparagraph 7(c), the
custodian shall, as soon as practicable, pay the individual any cash dividends
attributable thereto and shall, in accordance with procedures adopted by the
custodian, facilitate the individual's voting rights attributable thereto.
12. CHANGES IN STOCK; ADJUSTMENTS. Whenever any change is made in the Stock,
by reason of a stock dividend or by reason of subdivision, stock split,
reverse stock split, recapitalization, reorganization, combination,
reclassification of shares or other similar change, appropriate action will be
taken by the Committee to adjust accordingly the number of shares subject to
the Plan, the maximum number of shares that may be subject to any option, and
the number and Option Price of shares subject to options outstanding under the
Plan.
If the Company shall not be the surviving corporation in any merger or
consolidation (or survives only as a subsidiary of another entity), or if the
Company is to be dissolved or liquidated, then, unless a surviving corporation
assumes or substitutes new options (within the meaning of Section 424(a) of
the Code) for all options then outstanding, (i) the Date of Exercise for all
options then outstanding shall be accelerated to a date fixed by the Committee
prior to the effective date of such merger or consolidation or such
dissolution or liquidation and (ii) upon such effective date any unexercised
options shall expire and the Company promptly shall refund to each participant
the amount of such participant's payroll deductions under the Plan which have
not yet been otherwise returned to him or used upon exercise of options.
13. USE OF FUNDS; NO INTEREST PAID. All funds received or held by the
Company under the Plan shall be included in the general funds of the Company
free of any trust or other restriction, and may be used for any corporate
purpose. No interest shall be paid or credited to any participant.
14. TERM OF THE PLAN. The Plan shall be effective upon the date of its
adoption by the Board, provided the Plan is approved by the stockholders of
the Company within 12 months thereafter. Notwithstanding any provision in the
Plan, no option granted under the Plan shall be exercisable prior to such
stockholder approval, and, if the stockholders of the Company do not approve
the Plan by the Date of Exercise of the first option granted hereunder, then
the Plan shall automatically terminate, no options may be exercised thereunder
and the Company promptly shall refund to each participant the amount of such
participant's payroll deductions under the Plan; and thereupon, automatically
and without any further act on his part, his payroll deduction authorization
and his interest in unexercised options under the Plan shall terminate. Except
with respect to options then outstanding, if not sooner terminated under the
provisions of paragraph 15, the Plan shall terminate upon and no further
payroll deductions shall be made and no further options shall be granted after
December 31, 2001.
15. AMENDMENT OR TERMINATION OF THE PLAN. The Board in its discretion may
terminate the Plan at any time with respect to any Stock for which options
have not theretofore been granted. The Board and the Committee shall each have
the right to alter or amend the Plan or any part thereof from time to time;
provided,
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however, that no change in any option theretofore granted may be made that
would impair the rights of the optionee without the consent of such optionee.
16. SECURITIES LAWS. The Company shall not be obligated to issue any Stock
pursuant to any option granted under the Plan at any time when the offer,
issuance or sale of shares covered by such option has not been registered
under the Securities Act of 1933, as amended, or does not comply with such
other state, federal or foreign laws, rules or regulations, or the
requirements of any stock exchange upon which the Stock may then be listed, as
the Company or the Committee deems applicable and, in the opinion of legal
counsel for the Company, there is no exemption from the requirements of such
laws, rules, regulations or requirements available for the offer, issuance and
sale of such shares. Further, all Stock acquired pursuant to the Plan shall be
subject to the Company's policies concerning compliance with securities laws
and regulations, as such policies may be amended from time to time. The terms
and conditions of options granted hereunder to, and the purchase of shares by,
persons subject to Section 16 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), shall comply with any applicable provisions of
Rule 16b-3. As to such persons, this Plan shall be deemed to contain, and such
options shall contain, and the shares issued upon exercise thereof shall be
subject to, such additional conditions and restrictions as may be required
from time to time by Rule 16b-3 to qualify for the maximum exemption from
Section 16 of the Exchange Act with respect to Plan transactions.
17. NO RESTRICTION ON CORPORATE ACTION. Nothing contained in the Plan shall
be construed to prevent the Company or any subsidiary from taking any
corporate action that is deemed by the Company or such subsidiary to be
appropriate or in its best interest, whether or not such action would have an
adverse effect on the Plan or any option granted under the Plan. No employee,
beneficiary or other person shall have any claim against the Company or any
subsidiary as a result of any such action.
18. MISCELLANEOUS PROVISIONS.
(a) PARENT AND SUBSIDIARY CORPORATIONS. For all purposes of the Plan, a
corporation shall be considered to be a parent or subsidiary corporation of
the Company only if such corporation is a parent or subsidiary corporation of
the Company within the meaning of Sections 424(e) or (f) of the Code.
(b) NUMBER AND GENDER. Wherever appropriate herein, words used in the
singular shall be considered to include the plural and words used in the
plural shall be considered to include the singular. The masculine gender,
where appearing in the Plan, shall be deemed to include the feminine gender.
(c) HEADINGS. The headings and subheadings in the Plan are included solely
for convenience, and if there is any conflict between such headings or
subheadings and the text of the Plan, the text shall control.
(d) NOT A CONTRACT OF EMPLOYMENT; NO ACQUIRED RIGHTS. The adoption and
maintenance of the Plan shall not be deemed to be a contract between the
Company or any Participating Company and any person or to be consideration for
the employment of any person. Participation in the Plan at any given time
shall not be deemed to create the right to participate in the Plan, or any
other arrangement permitting an employee of the Company or any Participating
Company to purchase Stock at a discount, in the future. The rights and
obligations under any participant's terms of employment with the Company or
any Participating Company shall not be affected by participation in the Plan.
Nothing herein contained shall be deemed to give any person the right to be
retained in the employ of the Company or any Participating Company or to
restrict the right of the Company or any Participating Company to discharge
any person at any time, nor shall the Plan be deemed to give the Company or
any Participating Company the right to require any person to remain in the
employ of the Company or such Participating Company or to restrict any
person's right to terminate his employment at any time. The Plan shall not
afford any participant any additional right to compensation as a result of the
termination of such participant's employment for any reason whatsoever.
(e) COMPLIANCE WITH APPLICABLE LAWS. The Company's obligation to offer,
issue, sell or deliver Stock under the Plan is at all times subject to all
approvals of and compliance with any governmental authorities
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(whether domestic or foreign) required in connection with the authorization,
offer, issuance, sale or delivery of Stock as well as all federal, state,
local and foreign laws. Without limiting the scope of the preceding sentence,
and notwithstanding any other provision in the Plan, the Company shall not be
obligated to grant options or to offer, issue, sell or deliver Stock under the
Plan to any employee who is a citizen or resident of a jurisdiction the laws
of which, for reasons of its public policy, prohibit the Company from taking
any such action with respect to such employee.
(f) SEVERABILITY. If any provision of the Plan shall be held illegal or
invalid for any reason, said illegality or invalidity shall not affect the
remaining provisions hereof; instead, each provision shall be fully severable
and the Plan shall be construed and enforced as if said illegal or invalid
provision had never been included herein.
(g) GOVERNING LAW. All provisions of the Plan shall be construed in
accordance with the laws of Texas except to the extent preempted by federal
law.
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APPENDIX C
CONTINENTAL AIRLINES, INC.
19971998 STOCK INCENTIVE PLAN
I. PURPOSE
The purpose of the CONTINENTAL AIRLINES, INC. 19971998 STOCK INCENTIVE PLAN is
to provide a means through which Continental Airlines, Inc. and its subsidiaries
may attract able persons to serve as directors, or to enter or remain in the
employ of the Company (as defined below) or its subsidiaries, and to provide a
means whereby those individuals upon whom the responsibilities of the successful
administration and management of the Company and its subsidiaries rest, and
whose present and potential contributions to the welfare of the Company and its
subsidiaries are of importance, can acquire and maintain stock ownership,
thereby strengthening their concern for the welfare of the Company and its
subsidiaries. A further purpose of the Plan is to provide such individuals with
additional incentive and reward opportunities designed to enhance the profitable
growth of the Company and its subsidiaries. Accordingly, the Plan provides that
the Company may grant to certain employees or directors shares of Restricted
Stock, or the option to purchase shares of Common Stock, as hereinafter set
forth. Options granted under the Plan may be either Incentive Stock Options or
options that do not constitute Incentive Stock Options.
II. DEFINITIONS
The following definitions (including any plural thereof) shall be
applicable throughout the Plan unless specifically modified by any Section:
(a) "ADMINISTRATOR" means (i) in the context of Awards made to, or the
administration (or interpretation of any provision) of the Plan as it relates
to, any person who is subject to Section 16 of the Exchange Act (including any
successor section to the same or similar effect, "Section 16"), the Committee,
or (ii) in the context of Awards made to, or the administration (or
interpretation of any provision) of the Plan as it relates to, any person who is
not subject to Section 16, the Chief Executive Officer of the Company (if(or, if
the Chief Executive Officer is not a Director of the Company)Company, the Committee).
(b) "AWARD" means an Option or grant of Restricted Stock.
(c) "BOARD" means the Board of Directors of the Company.
(d) "CODE" means the Internal Revenue Code of 1986, as amended. Reference
in the Plan to any section of the Code shall be deemed to include any amendments
or successor provisions to such section and any regulations promulgated under
such section.
(e) "COMMITTEE" means a committee of the Board comprised solely of two or
more outside Directors (within the meaning of the term "outside directors" as
used in section 162(m) of the Code and applicable interpretive authority
thereunder and within the meaning of "Non-Employee Director" as defined in Rule
16b-3). Such committee shall be the Human Resources Committee of the Board
unless and until the Board designates another committee of the Board to serve as
Administrator as described in the Plan.
(f) "COMMON STOCK" means the Class B common stock, $.01 par value, of the
Company, or any security into which such Common Stock may be changed by reason
of any transaction or event of the type described in Section IX(b).
(g) "COMPANY" shall mean Continental Airlines, Inc., a Delaware
corporation, or any successor thereto.
(h) "DIRECTOR" means an individual elected to the Board by the stockholders
of the Company or by the Board under applicable corporate law who is serving on
the Board on the date the Plan is adopted by the Board or is elected to the
Board after such date.
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38
(i) "DISABILITY" means any complete and permanent disability as defined in
section 22(e)(3) of the Code.
(j) "EMPLOYEE" means any person (which may include a Director) in an
employment relationship with the Company or any parent or subsidiary corporation
(as defined in section 424 of the Code).
(k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
(l) "INCENTIVE STOCK OPTION" means an incentive stock option within the
meaning of section 422 of the Code.
(m) "MARKET VALUE PER SHARE" means, as of any specified date, the closing
sale price of the Common Stock on that date (or, if there are no sales on that
date, the last preceding date on which there was a sale) in the principal
securities market in which the Common Stock is then traded. If the Common Stock
is not publicly traded at the time a determination of "Market Value per Share"
is required to be made hereunder, the determination of such amount shall be made
by the Administrator in such manner as it deems appropriate.
(n) "OPTION" means an option to purchase Common Stock granted under Section
VII of the Plan and includes both Incentive Stock Options to purchase Common
Stock and Options that do not constitute Incentive Stock Options to purchase
Common Stock.
(o) "OPTION AGREEMENT" means a written agreement between the Company and an
Optionee with respect to, and evidencing the grant of, an Option.
(p) "OPTIONEE" means an employee or Director who has been granted an
Option.
(q) "PLAN" means the Continental Airlines, Inc. 19971998 Stock Incentive Plan,
as amended from time to time.
(r) "RESTRICTED STOCK" means shares of Common Stock granted pursuant to
Section VIII of the Plan as to which neither the substantial risk of forfeiture
nor the restriction on transfers referred to therein has expired.
(s) "RESTRICTED STOCK AGREEMENT" means a written agreement between the
Company and a recipient of Restricted Stock with respect to, and evidencing the
grant of, Restricted Stock.
(t) "RULE 16B-3" means Rule 16b-3 under the Exchange Act, as such rule may
be amended from time to time, and any successor rule, regulation or statute
fulfilling the same or similar function.
(u) "SUBSIDIARY" means any entity (other than the Company) with respect to
which the Company, directly or indirectly through one or more other entities,
owns equity interests possessing 50 percent or more of the total combined voting
power of all equity interests of such entity (excluding voting power that arises
only upon the occurrence of one or more specified events).
III. EFFECTIVE DATE AND DURATION OF THE PLAN
The Plan shall become effective upon the date of its adoption by the Board;
provided, that the Plan is approved by the stockholders of the Company within
twelve months thereafter. Notwithstanding any provision of the Plan or of any
Option Agreement or Restricted Stock Agreement, no Option shall be exercisable,
and no shares of Restricted Stock shall vest, prior to such stockholder
approval. No further Options or Restricted Stock may be granted under the Plan
after ten years from the date the Plan is adopted by the Board. The Plan shall
remain in effect until all Options granted under the Plan have been satisfied or
expired, and all shares of Restricted Stock granted under the Plan have vested
or been forfeited.
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39
IV. ADMINISTRATION
(a) ADMINISTRATOR. The Plan shall be administered by the Administrator, so
that Awards made to, and the administration (or interpretation of any provision)
of the Plan as it relates to, any person who is subject to Section 16, shall be
made or effected by the Committee, and Awards made to, and the administration
(or interpretation of any provision) of the Plan as it relates to, any person
who is not subject to Section 16, shall be made or effected by the Chief
Executive Officer of the Company (if(or, if the Chief Executive Officer is not a
Director of the Company)Company, the Committee).
(b) POWERS. Subject to the express provisions of the Plan, the
Administrator shall have authority, in its discretion, to determine which
employees or Directors shall receive an Award, the time or times when such Award
shall be granted, whether an Incentive Stock Option or nonqualified Option shall
be granted, and the number of shares to be subject to each Award. In making such
determinations, the Administrator shall take into account the nature of the
services rendered by the respective employees or Directors, their present and
potential contribution to the Company's success and such other factors as the
Administrator in its discretion shall deem relevant. Subject to the express
provisions of the Plan, the Administrator shall also have the power to construe
the Plan and the respective agreements executed hereunder, to prescribe rules
and regulations relating to the Plan, and to determine the terms, restrictions
and provisions of the Option Agreements and the Restricted Stock Agreements,
including such terms, restrictions and provisions as shall be requisite in the
judgment of the Administrator to cause designated Options to qualify as
Incentive Stock Options, and to make all other determinations necessary or
advisable for administering the Plan. The Administrator may correct any defect
or supply any omission or reconcile any inconsistency in the Plan or in any
agreement relating to an Award in the manner and to the extent it shall deem
expedient to carry it into effect. The determination of the Administrator on the
matters referred to in this Section IV shall be conclusive; provided, however,
that in the event of any conflict in any such determination as between the
Committee and the Chief Executive Officer of the Company, each acting in
capacity as Administrator of the Plan, the determination of the Committee shall
be conclusive.
V. SHARES SUBJECT TO THE PLAN; GRANT OF OPTIONS; GRANT OF RESTRICTED STOCK
(a) SHARES SUBJECT TO THE PLAN. Subject to adjustment as provided in
Section IX(b), the aggregate number of shares of Common Stock that may be issued
under the Plan shall not exceed 2,000,0005,500,000 shares. Shares shall be deemed to have
been issued under the Plan only to the extent actually issued and delivered
pursuant to an Option or a grant of Restricted Stock. To the extent that an
Option or a grant of Restricted Stock lapses or the rights of the recipient with
respect thereto terminate, any shares of Common Stock then subject to such
Option or grant of Restricted Stock shall again be available for grant under the
Plan. Notwithstanding any provision in the Plan to the contrary, the maximum
number of shares of Common Stock that (i) may be subject to Options granted to
any one individual during any calendar year may not exceed 200,000750,000 shares, and
(ii) may be granted as Restricted Stock may not exceed 100,000250,000 shares (in each
case subject to adjustment as provided in Section IX(b)). The limitation set
forth in clause (i) of the preceding sentence shall be applied in a manner which
will permit compensation generated in connection with Options awarded under the
Plan by the Committee to constitute "performance based" compensation for
purposes of section 162(m) of the Code, including, without limitation, counting
against such maximum number of shares, to the extent required under section
162(m) of the Code and applicable interpretive authority thereunder, any shares
subject to Options that are canceled or repriced.
(b) GRANT OF OPTIONS. The Administrator may from time to time grant Options
to one or more employees or Directors determined by it to be eligible for
participation in the Plan in accordance with the terms of this Plan.
(c) GRANT OF RESTRICTED STOCK. The Administrator may from time to time
grant Restricted Stock to one or more employees or Directors determined by it to
be eligible for participation in the Plan in accordance with the terms of this
Plan.
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40
(d) STOCK OFFERED. Subject to the limitations set forth in Section V(a)
above, the stock to be offered pursuant to an Award may be authorized but
unissued Common Stock or Common Stock previously issued and outstanding and
reacquired by the Company. Any of such shares which remain unissued and which
are not subject to outstanding Awards at the termination of the Plan shall cease
to be subject to the Plan but, until termination of the Plan, the Company shall
at all times make available a sufficient number of shares to meet the
requirements of the Plan.
VI. ELIGIBILITY
Awards may be granted only to persons who, at the time of grant, are
employees or Directors. An Award may be granted on more than one occasion to the
same person and, subject to the limitations set forth in the Plan, Awards
consisting of Options may include an Incentive Stock Option or an Option that is
not an Incentive Stock Option or any combination thereof, and Awards may consist
of any combination of Options and Restricted Stock.
VII. STOCK OPTIONS
(a) OPTION PERIOD. The term of each Option shall be as specified by the
Administrator at the date of grant.
(b) LIMITATIONS ON EXERCISE OF OPTION. An Option shall be exercisable in
whole or in such installments and at such times as determined by the
Administrator at the date of grant.
(c) SPECIAL LIMITATIONS ON INCENTIVE STOCK OPTIONS. An Incentive Stock
Option may be granted only to an individual who is an employee at the time the
Option is granted. To the extent that the aggregate Market Value per Share
(determined at the time the respective Incentive Stock Option is granted) of
Common Stock with respect to which Incentive Stock Options granted after 1986
are exercisable for the first time by an individual during any calendar year
under all incentive stock option plans of the Company and its parent and
subsidiary corporations exceeds $100,000, such Incentive Stock Options shall be
treated as Options which do not constitute Incentive Stock Options. The
Administrator shall determine, in accordance with applicable provisions of the
Code, Treasury Regulations and other administrative pronouncements, which of an
Optionee's Incentive Stock Options will not constitute Incentive Stock Options
because of such limitation and shall notify the Optionee of such determination
as soon as practicable after such determination. No Incentive Stock Option shall
be granted to an individual if, at the time the Option is granted, such
individual owns stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company or of its parent or subsidiary
corporation, within the meaning of section 422(b)(6) of the Code, unless (i) at
the time such Option is granted the option price is at least 110% of the Market
Value per Share of the Common Stock subject to the Option and (ii) such Option
by its terms is not exercisable after the expiration of five years from the date
of grant. An Incentive Stock Option shall not be transferable otherwise than by
will or the laws of descent and distribution, and shall be exercisable during
the Optionee's lifetime only by such Optionee or the Optionee's guardian or
legal representative.
(d) OPTION AGREEMENT. Each Option shall be evidenced by an Option Agreement
in such form and containing such provisions not inconsistent with the provisions
of the Plan as the Administrator from time to time shall approve, including,
without limitation, provisions to qualify an Incentive Stock Option under
section 422 of the Code. Each Option Agreement shall specify the effect of
termination of (i) employment, or (ii) membership on the Board, as applicable,
on the exercisability of the Option. An Option Agreement may provide for the
payment of the option price, in whole or in part, by delivery of a number of
shares of Common Stock (plus cash if necessary) having a Market Value per Share
equal to such option price. Moreover, an Option Agreement may provide for a
"cashless exercise" of the Option by establishing procedures satisfactory to the
Administrator with respect thereto. The terms and conditions of the respective
Option Agreements need not be identical.
C-4
(e) OPTION PRICE AND PAYMENT. The price at which a share of Common Stock
may be purchased upon exercise of an Option shall be set forth in the Option
Agreement and shall be determined by the Administrator
A-4
41
but, subject to adjustment as provided in Section IX(b), such purchase price
shall not be less than the Market Value per Share of a share of Common Stock on
the date such Option is granted. The Option or portion thereof may be exercised
by delivery of an irrevocable notice of exercise to the Company, as specified by
the Administrator. The purchase price of the Option or portion thereof shall be
paid in full in the manner specified by the Administrator. Separate stock
certificates shall be issued by the Company for those shares acquired pursuant
to the exercise of an Incentive Stock Option and for those shares acquired
pursuant to the exercise of any Option that does not constitute an Incentive
Stock Option.
(f) STOCKHOLDER RIGHTS AND PRIVILEGES. The Optionee shall be entitled to
all the privileges and rights of a stockholder only with respect to such shares
of Common Stock as have been purchased under the Option and for which
certificates representing such Common Stock have been registered in the
Optionee's name.
(g) OPTIONS IN SUBSTITUTION FOR STOCK OPTIONS GRANTED BY OTHER
CORPORATIONS. Options may be granted under the Plan from time to time in
substitution for stock options held by individuals employed by corporations who
become employees as a result of a merger or consolidation or other business
combination of the employing corporation with the Company or any subsidiary.
VIII. RESTRICTED STOCK
(a) OWNERSHIP OF RESTRICTED STOCK. Each grant of Restricted Stock will
constitute an immediate transfer of record and beneficial ownership of the
shares of Restricted Stock to the recipient of the grant in consideration of the
performance of services by such recipient (or other consideration determined by
the Administrator), entitling the recipient to all voting and other ownership
rights, but subject to the restrictions hereinafter referred to or contained in
the related Restricted Stock Agreement. Each grant may, in the discretion of the
Administrator, limit the recipient's dividend rights during the period in which
the shares of Restricted Stock are subject to a substantial risk of forfeiture
and restrictions on transfer.
(b) SUBSTANTIAL RISK OF FORFEITURE AND RESTRICTIONS ON TRANSFER. Each grant
of Restricted Stock will provide that (i) the shares covered thereby will be
subject, for a period or periods determined by the Administrator at the date of
grant, to one or more restrictions, including, without limitation, a restriction
that constitutes a "substantial risk of forfeiture" within the meaning of
section 83 of the Code and applicable interpretive authority thereunder, and
(ii) during such period or periods during which such restrictions are to
continue, the transferability of the Restricted Stock subject to such
restrictions will be prohibited or restricted in a manner and to the extent
prescribed by the Administrator at the date of grant.
(c) RESTRICTED STOCK HELD IN TRUST. Shares of Common Stock awarded pursuant
to a grant of Restricted Stock will be held in trust by the Company for the
benefit of the recipient until such time as the applicable restriction on
transfer thereof shall have expired or otherwise lapsed, at which time
certificates representing such Common Stock will be delivered to the recipient.
(d) RESTRICTED STOCK AGREEMENT; CONSIDERATION. Each grant of Restricted
Stock shall be evidenced by a Restricted Stock Agreement in such form and
containing such provisions not inconsistent with the provisions of the Plan as
the Administrator from time to time shall approve. The terms and conditions of
the respective Restricted Stock Agreements need not be identical. Each grant of
Restricted Stock may be made without additional consideration or in
consideration of a payment by the recipient that is less than the Market Value
per Share on the date of grant, as determined by the Administrator.
C-5
IX. RECAPITALIZATION, REORGANIZATION AND CHANGE IN CONTROL
(a) NO EFFECT ON RIGHT OR POWER. The existence of the Plan and the Awards
granted hereunder shall not affect in any way the right or power of the Board or
the stockholders of the Company or any subsidiary to make or authorize any
adjustment, recapitalization, reorganization or other change in the Company's or
any subsidiary's capital structure or its business, any merger or consolidation
of the Company or any subsidiary, any issue of debt or equity securities ahead
of or affecting Common Stock or the rights thereof, the dissolution or
liquidation of the Company or any subsidiary or any sale, lease, exchange or
other disposition of all or any part of its assets or business or any other
corporate act or proceeding.
A-5
42
(b) CHANGES IN COMMON STOCK. The provisions of Section V(a) imposing limits
on the numbers of shares of Common Stock covered by Awards granted under the
Plan, as well as the number or type of shares or other property subject to
outstanding Options and Restricted Stock grants and the applicable option prices
per share, shall be adjusted appropriately by the Committee in the event of
stock dividends, spin offs of assets or other extraordinary dividends, stock
splits, combinations of shares, recapitalizations, mergers, consolidations,
reorganizations, liquidations, issuances of rights or warrants and similar
transactions or events.
(c) CHANGE IN CONTROL.*(1) As used in the Plan (except as otherwise
provided in an applicable Option Agreement or Restricted Stock Agreement), the
term "Change in Control" shall mean:
(aa) any person (within the meaning of Section 13(d) or 14(d) under the
Exchange Act, including any group (within the meaning of Section 13(d)(3) under
the Exchange Act), a "Person") is or becomes the "beneficial owner" (as such
term is defined in Rule 13d-3 promulgated under the Exchange Act), directly or
indirectly, of securities of the Company (such Person being referred to as an
"Acquiring Person") representing the greater of (x) 25% of the combined voting
power of the Company's outstanding securities and (y) the proportion of the
combined voting power of the Company's outstanding securities represented by
securities of the Company beneficially owned, directly or indirectly, by
Air Partners, L.P.Northwest Airlines Corporation ("Air
Partners"Northwest") and any Person controlling,
controlled by or under common control with Air PartnersNorthwest at the time of reference
(excluding, for purposes of determining such proportion of the combined voting
power under this clause (y), any securities beneficially owned by Air PartnersNorthwest (and
any Person controlling, controlled by or under common control with Air
Partners)Northwest)
which are deemed beneficially owned by such Acquiring Person); other than
beneficial ownership by (i) the Company or any subsidiary of the Company, (ii)
any employee benefit plan of the Company or any Person organized, appointed or
established pursuant to the terms of any such employee benefit plan (unless such
plan or Person is a party to or is utilized in connection with a transaction led
by Outside Persons), or (iii) Air PartnersNorthwest or any Person (other than any air carrier that is not the
Company and that is currently controlled by or under common control with
Air Partners, or a holding company or subsidiary of any such air carrier) controlling, controlled by or
under common control with Northwest (unless Northwest is controlled by or under
common control with Delta Air PartnersLines, Inc.), or (iv) (I) 1992 Air, Inc., (II) any
Person who controlled 1992 Air, Inc. as of February 26, 1998, including David
Bonderman and James Coulter, or (III) any Person controlled by any such Person
(Persons referred to in clauses (i) through (iii)(iv) hereof are hereinafter referred
to as "Excluded Persons"); or
(bb) individuals who constituted the Board as of February 28, 199726, 1998 (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board, provided that any individual becoming a director subsequent to February
28, 199726, 1998 whose appointment to fill a vacancy or to fill a new Board position or
whose nomination for election by the Company's shareholders was approved by a
vote of at least a majority of the directors then comprising the Incumbent Board
or who was nominated for election by Excluded Persons shall be considered as
though such individual were a member of the Incumbent Board; or
(cc) the Company merges with or consolidates into or engages in a
reorganization or similar transaction with another entity (including Northwest)
pursuant to a transaction in which the Company is not the "Controlling
Corporation"; or
(dd) the Company sells or otherwise disposes of all or substantially all of
its assets, other than to Excluded Persons.
C-6
Persons, or the Company sells or otherwise
disposes of all or substantially all of its assets to Northwest or any Person
controlling, controlled by or under common control with Northwest.
For purposes of clause (aa) above, if at any time there exist securities of
different classes entitled to vote separately in the election of directors, the
calculation of the proportion of the voting power held by a beneficial owner of
the Company's securities shall be determined as follows: first, the proportion
of the voting power represented by securities held by such beneficial owner of
each separate class or group of classes voting
- ---------------
*1. If the acquisition of Air Partners' interest in the Company contemplated
by the Investment Agreement dated as of January 25, 1998 among Northwest,
Newbridge Parent Corporation, Air Partners, L.P., the partners of Air Partners,
L.P. signatory thereto, Bonderman Family Limited Partnership, 1992 Air, Inc. and
Air Saipan, Inc., as amended by Amendment No. 1 thereto dated as of February 27,
1998, is not consummated, there shall automatically be substituted, in lieu of
the Change in Control provision of the Plan (Section IX(c)) set forth herein,
the alternate Change in Control provision attached to the Plan and captioned
"Alternate Change in Control Provision".
A-6
43
separately in the election of directors shall be determined, provided that
securities representing more than 50% of the voting power of securities of any
such class or group of classes shall be deemed to represent 100% of such voting
power; second, such proportion shall then be multiplied by a fraction, the
numerator of which is the number of directors which such class or classes is
entitled to elect and the denominator of which is the total number of directors
elected to membership on the Board at the time; and third, the product obtained
for each such separate class or group of classes shall be added together, which
sum shall be the proportion of the combined voting power of the Company's
outstanding securities held by such beneficial owner.
For purposes of clause (aa) above, the term "Outside Persons" means any
Persons other than (I) Persons described in clauses (aa)(i) or (iii) or (iv)
above (as to Persons described in clause (aa)(iii) or (iv) above, while they are
Excluded Persons) orand (II) members of senior management of the Company in office
immediately prior to the time the Acquiring Person acquires the beneficial
ownership described in clause (aa).
For purposes of clause (cc) above, the Company shall be considered to be
the Controlling Corporation in any merger, consolidation, reorganization or
similar transaction unless either (1) the shareholders of the Company
immediately prior to the consummation of the transaction (the "Old
Shareholders") would not, immediately after such consummation, beneficially own,
directly or indirectly, securities of the resulting entity entitled to elect a
majority of the members of the Board of Directors or other governing body of the
resulting entity or (2) those persons who were directors of the Company
immediately prior to the consummation of the proposed transaction would not,
immediately after such consummation, constitute a majority of the directors of
the resulting entity, provided that (I) there shall be excluded from the
determination of the voting power of the Old Shareholders securities in the
resulting entity beneficially owned, directly or indirectly, by the other party
to the transaction and any such securities beneficially owned, directly or
indirectly, by any Person acting in concert with the other party to the
transaction, (unless such other party or such Person is Air Partners, if
Air Partners has not ceased to be an Excluded Person), (II) there shall be excluded from the determination of the voting
power of the Old Shareholders securities in the resulting entity acquired in any
such transaction other than as a result of the beneficial ownership of Company
securities prior to the transaction and (III) persons who are directors of the
resulting entity shall be deemed not to have been directors of the Company
immediately prior to the consummation of the transaction if they were elected as
directors of the Company within 90 days prior to the consummation of the
transaction.
The exclusion described in clause (aa)(iii) above shall cease to have any
force or effect (and the Persons described therein shall cease to be Excluded
Persons) if (A) Air PartnersNorthwest (together with any Person controlling, controlled by or
under common control with Northwest) ceases to be, for a period of thirty
consecutive calendar days, the beneficial owner, directly or indirectly, of
securities of the Company representing at least 25% of the combined voting power
of the Company's outstanding securitiessecurities. The exclusion described in clause
(aa)(iv) above shall cease to have any force or effect (and the Persons
described therein shall cease to be Excluded Persons) if (A) the Person
acquiring beneficial ownership is not controlled by David Bonderman or James
Coulter, or (B) there occursthe Person acquiring beneficial ownership (together with any
Person controlling, controlled by or under common control with such Person)
ceases to be, for a "change inperiod of thirty consecutive calendar days, the ownershipbeneficial
owner, directly or effective control" (within the meaningindirectly, of section 280Gsecurities of the Code)Company representing at
least 25% of Air Partners.the combined voting power of the Company's outstanding securities.
Upon the occurrence of a Change in Control, with respect to each recipient
of an Award hereunder, (AA) all Options granted to such recipient and
outstanding at such time shall immediately vest and become exercisable in full whether
or not otherwise exercisable, for a period of thirty (30) calendar days
following the occurrence of the Change in Control
(but subject, however, in the case of Incentive Stock Options, to the aggregate
fair market value, determined as of the date the Incentive Stock Options are
granted, of the stock with respect to which Incentive Stock Options are
exercisable for the first time by such recipient during any calendar year not
exceeding $100,000) and, except as required by law, all restrictions on the
transfer of shares acquired pursuant to such Options shall terminate and (BB)
all restrictions applicable to such recipient's Restricted Stock shall be deemed
to have been satisfied and such Restricted Stock shall vest in full.
In addition, except as otherwise provided in the applicable Option
Agreement, if a recipient of an Award hereunder becomes entitled to one or more
payments (with a "payment" including, without limitation, the vesting of an
Award) pursuant to the terms of the Plan (the "Total C-7
Payments"), which are or
become subject
A-7
44
to the tax imposed by section 4999 of the Code (or any similar tax that may
hereafter be imposed) (the "Excise Tax"), the Company or subsidiary for whom the
recipient is then performing services shall pay to the recipient an additional
amount (the "Gross-Up Payment") such that the net amount retained by the
recipient, after reduction for any Excise Tax on the Total Payments and any
federal, state and local income or employment tax and Excise Tax on the Gross-Up
Payment, shall equal the Total Payments. For purposes of determining the amount
of the Gross-Up Payment, the recipient shall be deemed (aa) to pay federal
income taxes at the highest stated rate of federal income taxation (including
surtaxes, if any) for the calendar year in which the Gross-Up Payment is to be
made (for 1996,1998, the highest stated rate is 39.6%); and (bb) to pay any
applicable state and local income taxes at the highest stated rate of taxation
(including surtaxes, if any) for the calendar year in which the Gross-Up Payment
is to be made. Any Gross-Up Payment required hereunder shall be made to the
recipient at the same time any Total Payment subject to the Excise Tax is paid
or deemed received by the recipient.
X. AMENDMENT AND TERMINATION OF THE PLAN
The Board in its discretion may terminate the Plan at any time with respect
to any shares of Common Stock for which Awards have not theretofore been
granted. The Board shall have the right to alter or amend the Plan or any part
thereof from time to time; provided that no change in any Award theretofore
granted may be made which would impair the rights of the recipient thereof
without the consent of such recipient, and provided further that the Board may
not, without approval of the stockholders of the Company, amend the Plan to (a)
increase the maximum aggregate number of shares that may be issued under the
Plan or (b) change the class of individuals eligible to receive Awards under the
Plan.
XI. MISCELLANEOUS
(a) NO RIGHT TO AN OPTION OR RESTRICTED STOCK. Neither the adoption of the
Plan nor any action of the Board or the Administrator shall be deemed to give an
employee or Director any right to be granted an Award or any other rights
hereunder except as may be evidenced by an Option Agreement or Restricted Stock
Agreement duly executed and delivered on behalf of the Company, and then only to
the extent and on the terms and conditions expressly set forth therein. The Plan
shall be unfunded. The Company shall not be required to establish any special or
separate fund or to make any other segregation of funds or assets to assure the
performance of its obligations under any Award.
(b) NO EMPLOYMENT OR MEMBERSHIP RIGHTS CONFERRED. Nothing contained in the
Plan shall (i) confer upon any employee any right with respect to continuation
of employment with the Company or any subsidiary or (ii) interfere in any way
with the right of the Company or any subsidiary to terminate his or her
employment at any time. Nothing contained in the Plan shall confer upon any
Director any right with respect to continuation of membership on the Board.
(c) OTHER LAWS; WITHHOLDING. The Company shall not be obligated to issue
any Common Stock pursuant to any Award granted under the Plan at any time when
the shares covered thereby have not been registered under the Securities Act of
1933, as amended, and such other state and federal laws, rules and regulations
as the Company or the Administrator deems applicable and, in the opinion of
legal counsel to the Company, there is no exemption from the registration
requirements of such laws, rules and regulations available for the issuance and
sale of such shares. No fractional shares of Common Stock shall be delivered,
nor shall any cash in lieu of fractional shares be paid. The Company shall have
the right to (i) make deductions from any settlement or exercise of an Award
made under the Plan, including the delivery of shares, or require shares or cash
or both be withheld from any Award, in each case in an amount sufficient to
satisfy withholding of any federal, state or local taxes required by law, or
(ii) take such other action as may be necessary or appropriate to satisfy any
such tax withholding obligations. The Administrator may determine the manner in
which such tax withholding may be satisfied, and may permit shares of Common
Stock (together with cash, as appropriate) to be used to satisfy required tax
withholding based on the Market Value per Share of any such shares of Common
Stock, as of the date of delivery of shares in
satisfactionlast trading day preceding the exercise or settlement of the
applicable Award.
C-8A-8
45
(d) NO RESTRICTION ON CORPORATE ACTION. Subject to the restrictions
contained in Section X, nothing contained in the Plan shall be construed to
prevent the Company or any subsidiary from taking any corporate action, whether
or not such action would have an adverse effect on the Plan or any Award granted
hereunder. No employee, Director, beneficiary or other person shall have any
claim against the Company or any subsidiary as a result of any such action.
(e) RESTRICTIONS ON TRANSFER OF OPTIONS AND CERTAIN UNDERLYING SHARES. An
Option (other than an Incentive Stock Option, which shall be subject to the
transfer restrictions set forth in Section VII(c)) shall not be transferable
otherwise than (i) by will or the laws of descent and distribution, (ii)
pursuant to a qualified domestic relations order as defined by the Code or Title
I of the Employee Retirement Income Security Act of 1974, as amended, or the
rules thereunder, or (iii) with the consent of the Administrator. In the
discretion of the Administrator, a percentage (determined by the Administrator
and set forth in the applicable Option Agreement) of the aggregate shares of
Common Stock obtained from exercises of an Option (which percentage may be
satisfied out of particular exercises as determined by the Administrator and set
forth in the applicable Option Agreement) shall not be transferable prior to the
earliest to occur of (x) the termination of the relevant Option term (or such
shorter period as may be determined by the Administrator and set forth in the
Option Agreement), (y) the Optionee's retirement, death or Disability, or (z)
termination of the Optionee's employment with the Company and its subsidiaries.
(f) GOVERNING LAW. The Plan shall be construed in accordance with the laws
of the State of Delaware.
C-9A-9
46
ALTERNATE CHANGE IN CONTROL PROVISION*(2)
(c) CHANGE IN CONTROL. As used in the Plan, the term "Change in Control" shall
mean:
(aa) any person (within the meaning of Section 13(d) or 14(d) under the
Exchange Act, including any group (within the meaning of Section 13(d)(3) under
the Exchange Act), a "Person") is or becomes the "beneficial owner" (as such
term is defined in Rule 13d-3 promulgated under the Exchange Act), directly or
indirectly, of securities of the Company (such Person being referred to as an
"Acquiring Person") representing the greater of (x) 25% of the combined voting
power of the Company's outstanding securities and (y) the proportion of the
combined voting power of the Company's outstanding securities represented by
securities of the Company beneficially owned, directly or indirectly, by Air
Partners, L.P. ("Air Partners") and any Person controlling, controlled by or
under common control with Air Partners at the time of reference (excluding, for
purposes of determining such proportion of the combined voting power under this
clause (y), any securities beneficially owned by Air Partners (and any Person
controlling, controlled by or under common control with Air Partners) which are
deemed beneficially owned by such Acquiring Person); other than beneficial
ownership by (i) the Company or any subsidiary of the Company, (ii) any employee
benefit plan of the Company or any Person organized, appointed or established
pursuant to the terms of any such employee benefit plan (unless such plan or
Person is a party to or is utilized in connection with a transaction led by
Outside Persons), or (iii) Air Partners or any Person (other than any air
carrier that is not the Company and that is currently controlled by or under
common control with Air Partners, or a holding company or subsidiary of any such
air carrier) controlling, controlled by or under common control with Air
Partners (Persons referred to in clauses (i) through (iii) hereof are
hereinafter referred to as "Excluded Persons"); or
(bb) individuals who constituted the Board as of February 28, 1997 (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board, provided that any individual becoming a director subsequent to February
28, 1997 whose appointment to fill a vacancy or to fill a new Board position or
whose nomination for election by the Company's shareholders was approved by a
vote of at least a majority of the directors then comprising the Incumbent Board
or who was nominated for election by Excluded Persons shall be considered as
though such individual were a member of the Incumbent Board; or
(cc) the Company merges with or consolidates into or engages in a
reorganization or similar transaction with another entity pursuant to a
transaction in which the Company is not the "Controlling Corporation"; or
(dd) the Company sells or otherwise disposes of all or substantially all of
its assets, other than to Excluded Persons.
For purposes of clause (aa) above, if at any time there exist securities of
different classes entitled to vote separately in the election of directors, the
calculation of the proportion of the voting power held by a beneficial owner of
the Company's securities shall be determined as follows: first, the proportion
of the voting power represented by securities held by such beneficial owner of
each separate class or group of classes voting separately in the election of
directors shall be determined, provided that securities representing more than
50% of the voting power of securities of any such class or group of classes
shall be deemed to represent 100% of such voting power; second, such proportion
shall then be multiplied by a fraction, the numerator of which is the number of
directors which such class or classes is entitled to elect and the denominator
of which is the total number of directors elected to membership on the Board at
the time; and third, the product obtained for each such separate class or group
of classes shall be added together, which sum shall be the proportion of the
combined voting power of the Company's outstanding securities held by such
beneficial owner.
For purposes of clause (aa) above, the term "Outside Persons" means any
Persons other than Persons described in clauses (aa)(i) or (iii) above (as to
Persons described in clause (aa)(iii) above, while they are
- ---------------
*2. If the acquisition of Air Partners' interest in the Company contemplated
by the Investment Agreement dated as of January 25, 1998 among Northwest,
Newbridge Parent Corporation, Air Partners, L.P., the partners of Air Partners,
L.P. signatory thereto, Bonderman Family Limited Partnership, 1992 Air, Inc. and
Air Saipan, Inc., as amended by Amendment No. 1 thereto dated as of February 27,
1998, is not consummated, there shall automatically be substituted, in lieu of
the Change in Control provision of the Plan (Section IX(c)) set forth herein,
this alternate Change in Control provision captioned "Alternate Change in
Control Provision".
A-10
47
Excluded Persons) or members of senior management of the Company in office
immediately prior to the time the Acquiring Person acquires the beneficial
ownership described in clause (aa).
For purposes of clause (cc) above, the Company shall be considered to be
the Controlling Corporation in any merger, consolidation, reorganization or
similar transaction unless either (1) the shareholders of the Company
immediately prior to the consummation of the transaction (the "Old
Shareholders") would not, immediately after such consummation, beneficially own,
directly or indirectly, securities of the resulting entity entitled to elect a
majority of the members of the Board of Directors or other governing body of the
resulting entity or (2) those persons who were directors of the Company
immediately prior to the consummation of the proposed transaction would not,
immediately after such consummation, constitute a majority of the directors of
the resulting entity, provided that (I) there shall be excluded from the
determination of the voting power of the Old Shareholders securities in the
resulting entity beneficially owned, directly or indirectly, by the other party
to the transaction and any such securities beneficially owned, directly or
indirectly, by any Person acting in concert with the other party to the
transaction (unless such other party or such Person is Air Partners, if Air
Partners has not ceased to be an Excluded Person), (II) there shall be excluded
from the determination of the voting power of the Old Shareholders securities in
the resulting entity acquired in any such transaction other than as a result of
the beneficial ownership of Company securities prior to the transaction and
(III) persons who are directors of the resulting entity shall be deemed not to
have been directors of the Company immediately prior to the consummation of the
transaction if they were elected as directors of the Company within 90 days
prior to the consummation of the transaction.
The exclusion described in clause (aa)(iii) above shall cease to have any
force or effect (and the Persons described therein shall cease to be Excluded
Persons) if (A) Air Partners ceases to be, for a period of thirty consecutive
calendar days, the beneficial owner, directly or indirectly, of securities of
the Company representing at least 25% of the combined voting power of the
Company's outstanding securities or (B) there occurs a "change in the ownership
or effective control" (within the meaning of section 280G of the Code) of Air
Partners.
Upon the occurrence of a Change in Control, with respect to each recipient
of an Award hereunder, (AA) all Options granted to such recipient and
outstanding at such time shall immediately vest and become exercisable in full
(but subject, however, in the case of Incentive Stock Options, to the aggregate
fair market value, determined as of the date the Incentive Stock Options are
granted, of the stock with respect to which Incentive Stock Options are
exercisable for the first time by such recipient during any calendar year not
exceeding $100,000) and, except as required by law, all restrictions on the
transfer of shares acquired pursuant to such Options shall terminate and (BB)
all restrictions applicable to such recipient's Restricted Stock shall be deemed
to have been satisfied and such Restricted Stock shall vest in full.
In addition, if a recipient of an Award hereunder becomes entitled to one
or more payments (with a "payment" including, without limitation, the vesting of
an Award) pursuant to the terms of the Plan (the "Total Payments"), which are or
become subject to the tax imposed by section 4999 of the Code (or any similar
tax that may hereafter be imposed) (the "Excise Tax"), the Company or subsidiary
for whom the recipient is then performing services shall pay to the recipient an
additional amount (the "Gross-Up Payment") such that the net amount retained by
the recipient, after reduction for any Excise Tax on the Total Payments and any
federal, state and local income or employment tax and Excise Tax on the Gross-Up
Payment, shall equal the Total Payments. For purposes of determining the amount
of the Gross-Up Payment, the recipient shall be deemed (aa) to pay federal
income taxes at the highest stated rate of federal income taxation (including
surtaxes, if any) for the calendar year in which the Gross-Up Payment is to be
made (for 1996, the highest stated rate is 39.6%); and (bb) to pay any
applicable state and local income taxes at the highest stated rate of taxation
(including surtaxes, if any) for the calendar year in which the Gross-Up Payment
is to be made. Any Gross-Up Payment required hereunder shall be made to the
recipient at the same time any Total Payment subject to the Excise Tax is paid
or deemed received by the recipient.
A-11
48
COMMON STOCK COMMON STOCK
CONTINENTAL AIRLINES, INC.
P ANNUAL MEETING OF STOCKHOLDERS --- MAY 16, 1997
P21, 1998
R THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
RO The undersigned hereby authorizes Gordon M. Bethune, Jeffery A. Smisek
O and
Scott R. Peterson, and each of them, with full power of substitution, to
X represent and vote the stock of the undersigned in
X Continental Airlines,
Inc. as directed and, in their sole discretion, on all other matters that
Y may properly come before the Annual Meeting of Y Stockholders to be held on
May 16, 1997,21, 1998, and at any adjournment or adjournments thereof, as if the
undersigned were present and voting thereat. The undersigned acknowledges
receipt of the notice of annual meeting and proxy statement with respect to
such Annual Meeting and certifies that, to the knowledge of the undersigned,
all equity securities of the Company owned of record or beneficially by the
undersigned are owned and controlled only by U.S. Citizens (as defined in
the proxy statement), except as indicated on the reverse side hereof.
WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING, PLEASE EXECUTE AND
RETURN THIS PROXY, WHICH MAY BE REVOKED AT ANY TIME PRIOR TO ITS USE.
Nominees for Director:
Thomas J. Barrack, Jr., Lloyd M. Bentsen, Jr., ----------------------------THIS FORM OF PROXY RELATES
Gordon M. Bethune, David Bonderman, |THIS FORM OF PROXY RELATES |
Gregory D. Brenneman, Patrick Foley, |TOTO BOTH CLASS A AND CLASS B
|Gregory D. Brenneman, Patrick Foley, COMMON STOCK. IF YOU
Douglas H. McCorkindale, George G.C.G. C. Parker, |COMMON STOCK. IF YOU RECEIVED|RECEIVED TWO PROXY CARDS,
Richard W. Pogue, William S. Price III, |TWO PROXY CARDS, PLEASE |EXECUTE AND
Donald L. Sturm,Strum, Karen Hastie Williams, |EXECUTE AND RETURN EACH. |
Charles A. Yamarone ------------------------------
This proxy, when properly executed, will be voted in the manner directed by
the undersigned stockholder(s). IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED "FOR" THE ELECTION OF DIRECTORS NOMINATED BY THE BOARD OF DIRECTORS
(PROPOSAL 1) AND "FOR" PROPOSALS 2,3,42 AND 5.3.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSALS 1,2,3,41, 2 AND 5.
[SEE REVERSE]3.
SEE REVERSE
49
CONTINENTAL AIRLINES, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. O
[ ]
[ ]
1. ELECTION OF DIRECTORS For Withhold For Against Abstain
See Reverse Side. All All 3. Approval of 1997 Employee Stock [ ] [ ] [ ]
Purchase Plan.
For, except vote withheld from the [ ] [ ]
following nominee(s): 4. Approval of 1997 Stock Incentive [ ] [ ] [ ]
Plan.
For Against Abstain
[ ] [ ] [ ] 5. Ratification of Appointment of [ ] [ ] [ ]
_____________________________________ Independent Auditors.
2. Approval of Third Amendment to the 1994
Incentive Equity Plan.
Please mark this box ONLY if any Class A or [ ]
Class B common stock owned of record or
beneficially by you is owned or controlled by
Foreigners (as defined in the proxy statement),
and indicate the number and class so owned or
controlled by Foreigners.
Class A_______________________________________
Class B_______________________________________
Dated:________________,1997
Signature(s)_________________________________________________
_____________________________________________________________For Withhold For All
All All Except
1. Election of Directors
See Reverse Side. O O O
For, except vote withheld from
the following nominee(s):
________________________________________ For Against Abstain
2. Approval of 1998 Stock Incentive Plan. O O O
3. Ratification of Appointment of
Independent Auditors. O O O
Please mark this box ONLY if any Class A
or Class B common stock owned of record or
beneficially by you is owned or controlled O
by Foreigners (as defined in the proxy
statement), and indicate the number and
class so owned or controlled by Foreigners.
Class A ___________________________________
Class B ___________________________________
Dated: ___________________, 1998
Signature(s) ______________________________
___________________________________________
NOTE: Please sign exactly as name appears
hereon. Joint owners should each sign. When
signing as attorney, executor, administrator,
trustee or guardian, please give full title
as such.
. FOLD AND DETACH HERE.HERE