UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
CONTINENTAL AIRLINES, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporations)
0-9781 74-2099724
(Commission File Number) (IRS Employer Identification No.)
2929 Allen Parkway, Houston, Texas 77019
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 713-834-5000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Class A Common Stock, New York Stock Exchange, Inc.
par value $.01 per share
Class B Common Stock, New York Stock Exchange, Inc.
par value $.01 per share
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant was $188.8 million as of March 31, 1995.
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes X No
_______________
As of March 31, 1995, 6,301,056 shares of Class A Common Stock and
20,521,581 shares of Class B Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting
of Stockholders to be held on June 5, 1995: PART III
PART I
ITEM 1. BUSINESS.
Continental Airlines, Inc. (the "Company", the "Reorganized Company" or
"Continental") is a United States air carrier engaged in the business of
transporting passengers, cargo and mail. Continental is the fifth largest
United States airline as measured by 1994 revenue passenger miles and,
together with its wholly owned subsidiary, Continental Express, Inc.
("Express"), and its 91.0%-owned subsidiary, Continental Micronesia, Inc.
("CMI"), serves more than 160 airports worldwide. Internationally,
Continental flies to 54 destinations and offers additional connecting
service through alliances with foreign carriers. Continental is one of the
leading airlines providing service to Mexico and Central America, serving
more destinations there than any other United States airline. Through CMI,
the Company provides extensive service in the western Pacific. The
Company's wholly owned subsidiary, System One Information Management, Inc.
("System One"), operates a travel agency computerized reservation system,
principally in the United States. See Item 1. "Business. System One".
As used in this Form 10-K, the terms "Continental" and "Company" refer to
Continental Airlines, Inc. (or, as required by the context, its
predecessor) and, unless the context indicates otherwise, its subsidiaries.
Chapter 11 Reorganization
The Company reorganized under Chapter 11 of the federal bankruptcy code
effective April 27, 1993 (the "Reorganization"), after having filed for
protection on December 3, 1990. Continental's filing for reorganization
was necessitated primarily by declines in revenue resulting from a
recessionary environment, extreme price competition and significantly
increased fuel prices resulting from the Persian Gulf War.
Pursuant to the Reorganization, Continental Airlines Holdings, Inc.
(together with its subsidiaries, "Holdings" or the "Predecessor Company"),
which had been the Company's parent, merged into the Company. The
previously outstanding publicly held equity interests in Holdings were
cancelled and new stock in the Company was issued. Also pursuant to the
Reorganization, a majority of the Company's equity was issued to Air
Partners, L.P. ("AP") and Air Canada ("AC"), in exchange for their
investments in the Company. Additional shares of common stock were issued
to the Company's retirement plan, and a fixed number of shares of common
stock was issued to or for the benefit of prepetition creditors. See Item
3. "Legal Proceedings. Plan of Reorganization".
During the Chapter 11 case, Continental (i) restructured substantial
amounts of secured aircraft debt and aircraft lease obligations,
significantly reducing its annual payments of principal, interest and rent,
(ii) retired 42 older jet aircraft and (iii) accelerated the scheduled
retirement during 1993, 1994 and 1995 of 52 additional older, Stage II
(noise level) aircraft. Also, the Company resolved (largely on a non-cash
basis) significant claims and contingencies affecting the Company. Such
claims and contingencies included the Company's liability to the Pension
Benefit Guaranty Corporation (the "PBGC") related to pension plans
previously maintained by Eastern Air Lines, Inc. ("Eastern") (the "PBGC
Settlement") and the Company's potential liability to Eastern (or its
creditors) as a result of certain transactions entered into with Eastern
prior to 1989. Certain parties have appealed the disposition of their
claims in the Reorganization. See Item 3. "Legal Proceedings". Pursuant
to the Reorganization, a substantial amount of unsecured prepetition
liabilities was converted to equity, and additional secured and priority
debt was restructured to extend payment dates and/or reduce the interest
charge.
Pursuant to the Reorganization, System One, which had been a subsidiary of
Holdings, was restructured as a wholly owned subsidiary of Continental, two
separate commuter airline subsidiaries were restructured as Express and
Continental's western Pacific operations were restructured by establishing
CMI.
Domestic Operations
Continental operates its domestic route system primarily through three hubs
in Newark, Houston and Cleveland. Continental's hub system allows the
Company to transport passengers between a large number of destinations with
substantially more frequent service than if each route were served
directly. The hub system also allows Continental to add service to a new
destination from a large number of cities using only one or a limited
number of aircraft.
Newark. As of March 31, 1995, Continental operated 55.8% (181 departures)
of the total daily jet departures and, together with Express, accounted for
57.0% (277 departures) of all daily (jet and turboprop) departures from
Newark. Considering the three major airports serving New York City
(Newark, LaGuardia and John F. Kennedy), Continental and Express accounted
for approximately 22.6% of all daily departures, while the next largest
carrier, USAir, Inc. ("USAir"), and its commuter affiliate accounted for
approximately 17.4% of all daily departures as of March 31, 1995.
Houston. As of March 31, 1995, Continental operated 77.9% (255 departures)
of the daily jet departures and, together with Express, accounted for 79.2%
(352 departures) of all daily departures from Houston's Intercontinental
Airport. Southwest Airlines Co. ("Southwest") also has a significant share
of the Houston market, primarily through Hobby Airport. Considering both
Intercontinental and Hobby Airports, as of March 31, 1995, Continental
operated 58.2% and Southwest operated 21.6% of the daily jet departures
from Houston.
Cleveland. As of March 31, 1995, Continental operated 54.8%
(105 departures) of all daily jet departures and, together with Express,
accounted for 60.3% (169 departures) of all daily departures from
Cleveland's Hopkins Airport ("Hopkins"). The next largest carrier, USAir,
and its commuter affiliate accounted for 9.3% of all daily departures from
Hopkins as of March 31, 1995.
Denver. During 1994, the Company significantly reduced operations in
Denver, resulting in the conversion of Denver from a hub to a spoke city.
In August 1993, prior to management's decision to reduce operations in
Denver, Continental operated 165 daily jet departures and 110 daily
turboprop departures from Denver. As of March 31, 1995, Continental
operated only 19 daily jet departures and had terminated all turboprop
operations at Denver. Turboprop service is provided to a number of smaller
regional cities by an unaffiliated third party, G.P. Express Airlines, Inc.
("GP Express"), under a code-share agreement. As a result of this
reduction of operations in Denver, aircraft were redeployed to other hubs
and to non-hub flying. See Item 3. "Legal Proceedings. Denver
International Airport" and Item 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
Greensboro. As of March 31, 1995, Continental operated 56.3%
(57 departures) of all daily jet departures and, together with Express and
GP Express, accounted for 60.8% (90 departures) of all daily departures
from Greensboro's Piedmont Triad International Airport ("Piedmont").
Turboprop service is provided to a number of smaller regional cities by GP
Express under a code-share agreement. The next largest carrier, USAir, and
its commuter affiliate accounted for 21.8% (34 departures) of all daily
departures from Piedmont as of March 31, 1995.
Continental Lite. In 1994, Continental rapidly expanded "Continental Lite"
(a network of short-haul, no-frills, low-fare flights initially referred to
as Peanuts Flights) from 173 daily flights and 19 aircraft serving
14 cities in November 1993 to 1,000 daily flights and 114 aircraft serving
43 cities in September 1994. The rapid growth of Continental Lite was
supplied by redeploying a substantial portion of Continental's capacity,
including aircraft made available by elimination of the Denver hub and by
deliveries of new aircraft under the Company's agreement with The Boeing
Company ("Boeing"). Continental Lite experienced operational problems in
connection with this rapid growth and was not profitable in 1994. At its
peak, approximately 35% of Continental Lite flying consisted of point-to-
point, linear service not integrated with the Company's hubs ("linear
flying"). Linear flying proved to be significantly unprofitable and was
responsible for an estimated 70% of all Continental Lite system losses in
1994. In 1995, the Company is substantially reducing its Continental Lite
operation. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
America West Airlines, Inc. ("America West"). As a limited partner in
AmWest Partners, L.P. ("AmWest"), Continental participated in the
acquisition by AmWest of a portion of the equity of reorganized America
West in connection with America West's emergence from bankruptcy, effective
August 25, 1994. In the transaction, Continental paid $18.8 million for
approximately 4.1% of the equity interest and 17.1% of the voting power of
the reorganized America West. Continental also entered into a series of
agreements with America West, including agreements related to code-sharing
and ground handling, which have created substantial benefits for both
airlines.
Each investor participating in the acquisition did so on individual terms;
Continental and certain other parties invested at the same per share price,
but at a higher price (approximately $9.36 per share as compared to
approximately $7.01 per share) than the price paid by Air Partners, II,
L.P., TPG Partners, L.P. and TPG Parallel I, L.P. (collectively, the "TPG
entities"), partnerships controlled by Mr. David Bonderman, Chairman of the
Board of Continental. However, as between Continental and the TPG
entities, Continental is entitled to receive a 10.0% per year return on its
investment before the TPG entities receive any return and to recoup its
invested capital before the TPG entities recoup their capital.
International Operations and Foreign Carrier Alliances
International Operations. Continental has extensive operations in the
western Pacific conducted by CMI, and has expanded its presence in Mexico
and Central and South America. As measured by available seat miles, as of
March 31, 1995, approximately 25.5% of Continental's operations (including
CMI) were dedicated to international traffic. As of March 31, 1995,
Continental operated seven departures a day to five cities in Europe, with
connecting service to additional cities through alliances with foreign
carriers.
Foreign Carrier Alliances. Over the last decade, major United States
airlines have developed and expanded alliances with foreign air carriers,
generally involving adjacent terminal operations, coordinated flights and
joint marketing. Continental currently has alliances with AC, Scandinavian
Airlines System ("SAS"), Transavia Airlines ("Transavia") and Alitalia
Airlines ("Alitalia") which management believes are important to
Continental's ability to compete as an international airline. In April
1994, Continental entered into a strategic alliance with Alitalia pursuant
to a memorandum of understanding, which provided for a code-share agreement
and a framework for jointly developing new and competitive services between
the United States and Italy. In addition, Continental and Alitalia entered
into a wet lease agreement in May 1994 providing for the sharing of
revenues and expenses associated with such new services. Implementation of
the new alliance began on July 1, 1994, with the commencement of new
service between Newark and Rome. The code-share agreement was given final
approval by both the United States and Italian governments in October 1994.
New service between Newark/Milan and Mexico City/Houston/Rome is planned to
begin in mid 1995.
Continental Micronesia, Inc.
Continental has historically had a strong presence in the western Pacific,
based in part on operations conducted since 1976 under the name
"Continental/Air Micronesia". CMI's operations include a hub operation
based on the neighboring islands of Guam and Saipan. The Guam/Saipan hub
provides scheduled service to seven Japanese cities (more Japanese
destinations than any other United States carrier), Hong Kong, South Korea,
Taiwan, Indonesia, the Philippines and ten islands in the western Pacific.
Effective April 15, 1995, CMI is adding service to Sydney, Australia. In
1995, CMI also plans to add service to Cebu, Philippines, subject to
certain regulatory matters.
Pursuant to the Reorganization, Continental restructured its western
Pacific operations by establishing CMI. Continental provides CMI with
pilots, aircraft and other essential services at a price intended to
approximate Continental's cost of providing the service. CMI is separately
certificated as an airline by the United States Department of
Transportation (the "DOT"), and holds an operating license issued by the
United States Federal Aviation Administration (the "FAA") and foreign route
authority issued by the DOT.
The 9.0% minority interest in CMI is owned by United Micronesia Development
Association, Inc. ("UMDA"), a private company. Under agreements entered
into in connection with the Reorganization, UMDA would have the right to
increase its ownership in CMI to just over 20% in the event any
participating employer in the Company's pension plans failed to make, or
Continental failed to adequately provide for, certain pension plan
payments. CMI also pays UMDA a fee of approximately one percent of CMI's
gross revenues, as defined, which will continue until January 1, 2012.
Prior to the establishment of CMI, Continental had conducted the western
Pacific operations itself under the name Continental/Air Micronesia and had
paid UMDA the one percent fee.
CMI's operations in the western Pacific have consistently provided greater
operating profit margins than Continental's overall operations. Any
significant and sustained decrease in traffic to and from Guam and Saipan
could materially adversely affect the Company. Because the majority of
CMI's traffic originates in Japan, its results of operations are
substantially affected by the Japanese economy and are impacted by changes
in the value of the yen as compared to the dollar. During 1993 and 1994,
the yen generally appreciated against the dollar, resulting in an increase
in CMI's profitability, revenues and, to a lesser extent, expenses.
Continental Express
Continental's jet service at each of its domestic hub cities and at
Greensboro is coordinated with Express, which operates under the name
"Continental Express". Express operates advanced new-generation turboprop
aircraft that average approximately five years of age and seat from 30 to
60 passengers. As of March 31, 1995, Express served 23 destinations from
Houston, 17 from Newark, 16 from Cleveland and 2 from Greensboro. In
general, Express flights are less than 200 miles in length and less than
90 minutes in duration. Management believes the turboprop operations
complement Continental's jet operations by allowing more frequent service
to small cities than could be provided economically with jets and by
carrying traffic that connects onto Continental's jets. In many cases,
Express (and Continental) compete for such connecting traffic with commuter
airlines owned by or affiliated with other major airlines operating out of
the same or other cities.
In May 1994, Express terminated substantially all of its unprofitable
Denver operations, which were taken over by GP Express, an unaffiliated
commuter airline operator. Express has implemented cost-reduction
programs, including substantial workforce reductions. In 1994, Continental
announced it was considering a possible private placement by Express of
less than 20% of the common stock of Express as well as a possible future
distribution by Continental to its stockholders of all or part of the stock
of Express held by Continental. Continental has currently postponed
pursuing these transactions.
Business Strategy
Continental has developed a new strategic program, the Go Forward Plan,
designed to strengthen the Company's domestic hub operations, increase
revenues and cash flows, improve profitability by shrinking excess
capacity, and enhance customer service. Since the Reorganization,
Continental has not been profitable. In late 1993 and throughout 1994, the
Company significantly reduced its presence in Denver, which had
historically been unprofitable for the Company, and redeployed aircraft and
other resources to the eastern United States in connection with the
expansion of Continental Lite. Demand for Continental Lite, particularly
in linear markets, proved insufficient to absorb the Company's excess
capacity, and Continental Lite was not profitable in 1994. Overcapacity
worsened in the latter half of 1994 as Continental's fleet expanded due to
deliveries of new jet aircraft.
During the fourth quarter of 1994, the Company determined that a new
strategic plan was needed to return the Company to profitability and
strengthen its balance sheet. The Go Forward Plan has four key strategic
components: Fly to Win, Fund the Future, Make Reliability a Reality and
Working Together.
Fly to Win. Continental intends to maximize efficiencies and revenues by:
- - - - Strengthening its domestic hub operations by adjusting frequencies and
improving schedules.
- - - - Pricing fares commensurate with market demand and elasticity.
- - - - Reducing Continental Lite flying by approximately one-third, primarily in
linear markets which, at Continental Lite's peak capacity in 1994,
represented approximately 35% of the Continental Lite system but
accounted for an estimated 70% of Continental Lite's 1994 losses.
- - - - Downgauging aircraft and reducing overall capacity by removing from
service 24 less-efficient widebody aircraft and accelerating the
retirement of 23 older Stage II narrowbody aircraft during 1995.
- - - - Modernizing its domestic fleet by placing in service 27 new, more
efficient aircraft in 1995.
- - - - Improving customer service by returning Continental's frequent flyer
program ("OnePass") to its 1993 terms.
- - - - Reducing staff (at all levels) by approximately 4,000 positions to match
the reduction in capacity and to eliminate non-value added activities.
Fund the Future. The Company is taking steps to improve liquidity and, in
the long term, de-leverage the balance sheet by:
- - - - Adjusting Continental's fleet plan by deferring certain aircraft
deliveries, canceling options on aircraft deliveries and removing 24
widebody aircraft and 30 narrowbody aircraft (23 of which are being
retired on an accelerated schedule) from service in 1995.
- - - - Negotiating amendments to certain debt and lease agreements to reduce
cash requirements in 1995 and 1996.
- - - - Evaluating the potential disposition of certain non-strategic assets.
See Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations. Liquidity and Capital Commitments".
Make Reliability a Reality. Continental has placed renewed emphasis on
reliability and has named two executives to improve its on-time
performance, baggage handling and customer satisfaction. Employees will
have the opportunity to earn extra pay each month that the Company meets
certain on-time performance targets as measured by the DOT. In order to
enhance consumer perception of Continental's reliability, consistency and
quality, the Company is completing the refurbishment of its terminal spaces
and fleet interiors and exteriors during the first half of 1995. In
addition, the Company is installing new passenger in-flight
telecommunications and computer facilities on all jet aircraft and expects
that installation will be substantially completed by the end of 1995.
Working Together. Senior management has instituted a new open-door policy
with its employees designed to improve the working environment and
encourage all employees to work together as a team to improve operational
performance and customer service. In support of the new policy, senior
management has hosted hundreds of employees for informal get-togethers and
discussion sessions in the executive offices, and more of these sessions
are scheduled. In addition, the Company has hired new senior executives
with successful records at profitable companies in the areas of pricing,
scheduling, distribution, human resources, airport services, law and
finance.
Continental's alliance with America West is producing further efficiencies
for the two carriers. Task forces have been established to coordinate and
optimize benefits in the areas of code-sharing, frequent flyer programs,
maintenance procurement, station operations and information systems.
Employees
Labor costs are a significant variable that can substantially impact
airline results. For the year 1994, labor costs constituted approximately
27.0% of total operating expenses. While there can be no assurance that
Continental's generally good labor relations and high labor productivity
experienced in the past five years will continue, Continental's management
has established as a significant component of the Go Forward Plan the
preservation of good employee relations.
As of December 31, 1994, Continental had approximately 37,800 full-time
equivalent employees (including approximately 4,800 pilots, 6,400 flight
attendants, 4,900 mechanics, 100 dispatchers, 17,300 customer service
agents, reservations agents, ramp and other airport personnel and 4,300
management and clerical employees), approximately 29.8% of whom were
represented by unions.
The Company and the Independent Association of Continental Pilots ("IACP")
are negotiating an initial collective bargaining agreement for the pilots.
Negotiations have progressed to mediated collective bargaining with the
National Mediation Board ("NMB") - a normal and usual part of the airline
labor negotiation process. The Company is hopeful that a mutually
acceptable agreement can be reached without adverse employee work actions;
however, the ultimate outcome of the Company's negotiations with the IACP
is unknown at this time.
In 1992, Continental and its flight attendants entered into a collective
bargaining agreement with the International Association of Machinists and
Aerospace Workers ("IAM") that has been ratified by the Continental flight
attendants and becomes amendable in 1996. In 1993, the NMB ruled that the
Express flight attendants are also represented by the IAM. Negotiations
between Continental and the IAM have commenced, but the parties have not
yet reached an agreement. The Company is hopeful that the parties can
reach an agreement without adverse employee work actions; however, the
ultimate outcome is unknown at this time. CMI's flight attendants are also
represented by the IAM, but are covered under a separate four-year contract
that was signed in September 1992 and becomes amendable in September 1996.
Continental's dispatchers are represented by the Transport Workers Union
which also represents the dispatchers of Express. CMI's dispatchers are
not represented by a union.
CMI's mechanics and mechanic-related employees are represented by the
International Brotherhood of Teamsters ("IBT") under a collective
bargaining agreement signed in April 1994 which becomes amendable in March
1997. The IBT also represents CMI's agent classification employees located
on Guam whose collective bargaining agreement was also signed in April 1994
and becomes amendable in March 1997.
The other employees of Continental, Express and CMI are not represented by
unions and are not covered by collective bargaining agreements.
The Company has taken several cost containment actions affecting employees.
In 1992, Continental and its subsidiaries implemented across-the-board
salary and wage reductions for all employees, ranging from 5.0% of pay at
the lowest level of compensation to approximately 22.5% of base pay for
Continental's senior management. The reductions, which lowered payroll
expense by approximately 10.0%, were restored in equal increments in
December 1992, April 1993, April 1994 and July 1994. In January 1995,
Continental determined not to make any longevity pay increases and to
eliminate approximately 4,000 positions, including executive and management
positions, during 1995.
Fuel
Fuel costs constituted approximately 13.1% of total operating costs in
1994. Consequently, changes in fuel costs can significantly affect
Continental's operating results. Fuel prices continue to be susceptible to
political events. In the event of any fuel supply shortage, higher fuel
prices or curtailment of scheduled service could result. Continental
cannot predict near or long-term fuel prices. Continental enters into
petroleum purchase option contracts to hedge a portion of its future
purchases against significant increases in the market price of jet fuel.
In December 1994, approximately three months of jet fuel purchases were
hedged by these contracts. In August 1993, the United States increased
taxes on domestic fuel, including aviation fuel, by 4.3 cents per gallon.
Airlines are exempt from this tax increase until October 1, 1995. When
implemented (based on approximately one billion gallons of fuel consumed
domestically in 1994), the fuel tax will increase Continental's annual
costs by approximately $43.9 million. However, it is possible that the
fuel tax exemption will be extended beyond the October 1, 1995 deadline.
Competition and Marketing
The airline industry is highly competitive and susceptible to price
discounting. Continental must compete with carriers having substantially
greater resources, as well as smaller carriers with lower cost structures.
Overall industry profit margins have historically been low and in recent
years, have been substantially negative. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
As is the case with other carriers, most tickets for travel on Continental
are sold by travel agents. Travel agents generally receive commissions
measured by the price of tickets sold. Accordingly, airlines compete not
only with respect to the price of tickets sold but also with respect to the
amount of commissions paid. Airlines often pay additional commissions in
connection with special revenue programs. On February 10, 1995, Delta
Airlines, Inc. ("Delta") became the first major airline to place a $50 cap
on travel agency commissions for round-trip tickets priced over $500.
Other airlines, including Continental, imposed similar commission caps.
However, due to Continental's low fare structure, this change in its
commissions policy is not expected to significantly impact operating
results. See Item 3. "Legal Proceedings. Antitrust Proceedings".
Frequent Flyer Program
Each major airline has established a frequent flyer program designed to
encourage travel on that carrier. Continental sponsors OnePass, which
allows passengers to earn mileage credits by flying Continental and certain
other carriers, including AC, Transavia, Alitalia, America West and SAS
(collectively, the "OnePass Partners"), and by using the services of
hotels, car rental firms and credit card companies participating in the
OnePass program.
Continental accrues the incremental cost associated with the earned flight
awards based on expected redemptions. The incremental cost to transport a
passenger on a free trip includes the cost of incremental fuel, meals,
insurance and miscellaneous supplies and does not include any charge for
potential displacement of revenue passengers or costs for aircraft
ownership, maintenance, labor or overhead allocation.
Continental estimates that as of December 31, 1994 and 1993, the total
available awards under the OnePass program(based on accumulated mileage)
were 1.6 million and 2.5 million roundtrips, respectively, after
eliminating those accounts below the minimum level. Continental estimates
that as of December 31, 1994 and 1993, 1.1 million and 1.5 million,
respectively, of such awards could be expected to be redeemed, and,
accordingly, Continental has recorded a liability with respect to such
awards. The liability for expected redeemed flight awards decreased from
$63.6 million in 1993 to $42 million in 1994 primarily due to a change in
the Company's estimate of awards expected to be redeemed. The difference
between the awards expected to be redeemed and the total awards available
is an estimate, based on historical data, of breakage for those customers
who do not redeem all or part of their mileage for travel awards or use
their awards with another OnePass Partner.
The number of awards used on Continental was approximately 590,000 and
580,000 roundtrips for the years 1994 and 1993, respectively. Such awards
represented approximately 4.6% and 4.7% of Continental's total revenue
passenger miles for each year, respectively. Due to the structure of the
program and the low level of redemptions as a percentage of total travel,
Continental believes that displacement of revenue passengers by passengers
using flight awards has historically been minimal.
Industry Regulation and Airport Access
Continental, CMI and Express operate under certificates of public
convenience and necessity issued by the DOT. Such certificates may be
altered, amended, modified or suspended by the DOT after notice and hearing
if public convenience and necessity so require, or may be revoked for
intentional failure to comply with the terms and conditions of a
certificate. The airlines are also regulated by the FAA, primarily in the
areas of flight operations, maintenance, ground facilities and other
technical matters. Pursuant to these regulations, Continental has
established, and the FAA has approved, a maintenance program for each type
of aircraft operated by the Company that provides for the ongoing
maintenance of such aircraft, ranging from frequent routine inspections to
major overhauls. Recently adopted regulations require phase-out of certain
aircraft and aging aircraft modifications. Such types of regulations can
significantly increase costs and affect a carrier's ability to compete.
The DOT allows local airport authorities to implement procedures designed
to abate special noise problems, provided such procedures do not
unreasonably interfere with interstate or foreign commerce or the national
transportation system. Certain airports, including the major airports at
Boston, Washington, D.C., Chicago, Los Angeles, San Diego and San
Francisco, have established airport restrictions to limit noise, including
restrictions on aircraft types to be used and limits on the number of
hourly or daily operations or the time of such operations. In some
instances these restrictions have caused curtailments in services or
increases in operating costs and such restrictions could limit the ability
of Continental to expand its operations at the affected airports. Local
authorities at other airports are considering adopting similar noise
regulations.
In the last several years, the FAA has issued a number of maintenance
directives and other regulations relating to, among other things,
retirement of older aircraft, collision avoidance systems, airborne
windshear avoidance systems, noise abatement and increased inspections and
maintenance procedures to be conducted on older aircraft.
On March 24, 1995, the FAA issued new regulations relating to commuter
safety. The new regulations are not expected to have a significant impact
on the operations of Express.
Several airports have recently sought to increase substantially the rates
charged to airlines, and the ability of airlines to contest such increases
has been restricted by a recent decision of the United States Supreme
Court. In addition, legislation which became effective June 1, 1992 allows
public airports to impose passenger facility charges of up to $3 per
departing or connecting passenger at such airports. With certain
exceptions, these charges are passed on to the customers.
The FAA has designated John F. Kennedy, LaGuardia, O'Hare and Washington
National airports as "high density traffic airports" and has limited the
number of departure and arrival slots at those airports. Currently, slots
at the high density traffic airports may be voluntarily sold or transferred
between the carriers. The DOT has in the past reallocated slots to other
carriers and reserves the right to withdraw slots. Various amendments to
the slot system, proposed from time to time by the FAA, members of Congress
and others, could, if adopted, significantly affect operations at the high
density traffic airports or expand slot controls to other airports.
Certain of such proposals could restrict the number of flights, limit the
ownership transferability of slots, increase the risk of slot withdrawal,
or otherwise decrease the value of Continental's slots. Continental cannot
predict whether any of these proposals will be adopted.
The award of international routes to United States carriers is regulated by
agreements between the United States and foreign governments. The United
States has in the past generally followed the practice of encouraging
foreign governments to accept multiple carrier designation on foreign
routes, although certain countries have sought to limit the number of
carriers. Foreign route authorities may become less valuable to the extent
that the United States and other countries adopt "open skies" policies
liberalizing entry on international routes. Continental cannot predict
what laws and regulations will be adopted or their impact, but the impact
may be significant. Certain regulatory changes, if proposed and adopted,
could materially adversely affect Continental, could cause defaults under
the Company's secured note agreements with General Electric Capital
Corporation and affiliates (collectively "GE Capital") and could require
charges to the Company's financial statements.
Many aspects of Continental's operations are subject to increasingly
stringent federal, state and local laws protecting the environment. Future
regulatory developments could affect operations and increase operating
costs in the airline industry, including for Continental.
Additional laws and regulations have been proposed or are contemplated that
could significantly increase the cost of airline operations by, for
example, increasing fuel taxes, imposing additional requirements or
restrictions on operations or impairing access to capital markets.
Continental cannot predict what laws and regulations will be adopted or
their impact, but the impact could be significant.
System One
System One develops, markets and distributes travel-related information
management products and services ("IMS") to the worldwide travel-related
services industry and owns, markets and distributes a computerized
reservation system ("CRS") to travel agencies, travel suppliers,
corporations and other customers. System One has approximately a 15% share
of the travel agency business in the United States and has a substantial
market share in Latin America and in the Mid-Pacific/ Micronesia markets.
The travel information supplied by the System One CRS to its subscribers
includes flight availability, fares, hotel accommodations, car rentals,
currency exchange rates and tourist information. System One's IMS business
includes management and accounting systems for large travel agencies as
well as data consolidation and management products. Approximately 12.3% of
System One's 1994 revenues were realized in connection with Continental
bookings.
In 1991, System One signed a 10-year systems management agreement with
Electronic Data Systems ("EDS"). The agreement provides for EDS to manage
the data processing and telecommunications facilities and services used by
System One.
In February and March 1995, System One borrowed additional funds from EDS
on the same terms as the existing loan agreement with EDS. The proceeds
from these borrowings were used to repay a portion of the outstanding
amount due Continental from System One under an intercompany revolving
credit agreement.
Continental and System One are currently negotiating a series of
transactions whereby the existing systems management agreement between
System One and EDS would be terminated and a substantial portion of the
assets (including the travel agent subscriber base and IMS software) and
certain liabilities of System One would be transferred to a newly formed
limited liability company ("New S1") that would be owned equally by System
One (which will remain a wholly owned subsidiary of Continental), EDS and
AMADEUS, a European CRS. Substantially all of System One's remaining
assets (including the CRS software) and liabilities would be transferred to
AMADEUS. In addition to retaining a one-third interest in New S1, the
outstanding indebtedness of System One owed to each of EDS and Continental
would be repaid, and System One would receive cash and an equity interest
in AMADEUS. New S1 would market the AMADEUS CRS and would continue to
develop, market and distribute travel-related IMS. These transactions are
anticipated to close in the second quarter of 1995.
ITEM 2. PROPERTIES.
Flight Equipment
At December 31, 1994, Continental (including CMI) operated a fleet of 330
jet aircraft, as follows:
Seats
Total in Standard Average Age
Type Aircraft Owned Leased Configuration (In Years)
Four Engine
747-200* 3 - 3 392 21.7
747-100* 2 - 2 392 24.0
Three Engine
DC-10-10 6 - 6 287 21.7
DC-10-30 13 - 13 278 16.9
727-200* 65 1 64 149 17.5
Two Engine
A300 21 2 19 257 13.1
737-500 21 - 21 107 0.6
737-300 59 10 49 131 7.2
737-200* 18 9 9 115 25.0
737-100* 13 13 - 107 25.8
757-200 11 - 11 183 0.5
MD-80 67 10 57 141 9.5
DC-9-30* 31 3 28 110 22.4
330 48 282
*Stage II (noise level) aircraft.
All of the aircraft and engines owned by Continental are subject to
mortgages.
Pursuant to the Company's Go Forward Plan, Continental will remove from
service 21 A300 aircraft, three 747 aircraft and 30 727 aircraft (23 of
which are being retired on an accelerated schedule) during 1995. See Item
7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations. Results of Operations. Nonrecurring Charges".
The FAA has adopted rules pursuant to the Airport Noise and Capacity Act of
1990 that require a scheduled phase out of Stage II aircraft during the
1990's. As a result of Continental's acquisition of a number of new
aircraft and the retirement of older Stage II aircraft in recent years,
approximately 60.0% of Continental's current jet fleet was composed of
Stage III aircraft at December 31, 1994. The Company plans to either
retire or install hush kits on the remainder of its Stage II jet fleet
prior to the year 2000 in order to comply with such rules.
Continental has firm commitments to take delivery of 22 new 737 and five
new 757 aircraft in 1995, one new 757 aircraft in 1996 and 43 new jet
aircraft during the years 1998 through 2002. The estimated aggregate cost
of these aircraft is approximately $3.4 billion.
As of December 31, 1994, Express operated a fleet of 76 aircraft, as
follows:
Seats
Total in Standard Average Age
Type Aircraft Owned Leased Configuration (In Years)
ATR-72 2 - 2 60 1.0
ATR-42 42 5 37 46 4.8
EMB 120 32 22 10 30 5.0
76 27 49
In late 1994, the Company returned to the lessor five Beech aircraft, sold
10 Beech aircraft and grounded its fleet of five Dash 7 aircraft.
In December 1994, Express contracted with Beech Acceptance Corporation
("Beech") for the purchase of 25 Beech 1900-D aircraft at an estimated
aggregate cost of $104 million, excluding price escalations. Deliveries of
these aircraft are scheduled in 1995 and 1996.
See Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations. Liquidity and Capital Commitments" for
information regarding capital commitments and financing relating to
aircraft.
Facilities
Continental's principal facilities are located in Newark, Houston,
Cleveland, Guam, Los Angeles, Denver and Honolulu. All such facilities, as
well as substantially all of Continental's other facilities, are leased on
a long-term, net rental basis, with the lessee responsible for maintenance,
taxes, insurance and other facility-related expenses and services. In
certain locations, Continental owns hangars and other facilities on land
leased on a long-term basis, which facilities will become the property of
the lessor on termination of the lease. At each of its hub cities and most
other locations, Continental's passenger and baggage handling space is
leased directly from the airport authority on varying terms dependent on
prevailing practice at each airport.
Denver's Stapleton Airport closed on February 28, 1995 in connection with
the opening of the new Denver International Airport ("DIA"). In 1992, the
Company agreed to lease (i) 20 gates at DIA for a period of five years from
the date DIA opened, (ii) four of such gates for an additional five years
and (iii) a substantial amount of operational space in connection with the
gates. On April 10, 1995, the Company reached an agreement with the City
and County of Denver (the "City") and certain other parties to amend its
lease of facilities at DIA which, among other things, reduces to 10 the
number of gates (and reduces associated operational space) to be leased by
Continental. See Item 3. "Legal Proceedings. Denver International
Airport" and Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations. Liquidity and Capital Commitments".
The Company is negotiating with America West and Frontier Airlines
("Frontier") to sublease up to five of its 10 gates and certain operational
space.
Continental recently finished construction of certain new cargo facilities
at Los Angeles International Airport ("LAX"). Such facilities were
financed with the proceeds from the issuance of $25.3 million of tax-exempt
revenue bonds in December 1994. Continental agreed to fund the principal
and interest payments related to such bonds through long-term lease
agreements. The Company is attempting to sublease the majority of these
facilities.
On November 7, 1994, the Company announced its decision to close its
western United States scheduled maintenance facilities in Los Angeles and
Denver, eliminating approximately 1,640 maintenance positions. Much of the
Company's scheduled maintenance needs are now performed by outside
suppliers who can support the Company's flight operations at locations more
convenient to its primary domestic routes in the eastern, central and
southern regions of the United States.
CMI operates a hub in Guam/Saipan, where the airport has undertaken a major
terminal expansion expected to be completed by 1997. This expansion, while
increasing the number of gates available to CMI, will also increase the
cost of CMI's operations in Guam.
Continental also maintains administrative offices, airport and terminal
facilities, training facilities and other facilities related to the airline
business in the cities it serves.
As of December 31, 1994, Continental remains contingently liable on
$202.1 million of long-term lease obligations of USAir related to the East
End Terminal at LaGuardia. In the event USAir defaults on such
obligations, Continental may be required to cure the default, at which
time it would have the right to reoccupy the terminal.
ITEM 3. LEGAL PROCEEDINGS.
Plan of Reorganization
The Company's Plan of Reorganization, which became effective on April 27,
1993, provides for the full payment of all allowed administrative and
priority claims. Pursuant to the Plan of Reorganization, holders of
allowed general unsecured claims are entitled to participate in a
distribution of 1,900,000 shares of Class A common stock, 5,042,368 shares
of Class B common stock and $6,523,952 of cash and have no further claim
against the Company. The Plan of Reorganization provided for this
distribution to be issued initially in trust to a distribution agent and
thereafter for distributions to be made from the trust from time to time as
disputed claims are resolved. The distribution agent must reserve from
each partial distribution of stock or cash to allow a complete pro rata
distribution to be made to each holder of a disputed claim in the event
such claim is eventually allowed, unless the United States Bankruptcy Court
for the District of Delaware (the "Bankruptcy Court") establishes a lower
reserve or estimates the claim at a lesser amount for purposes of
distribution. As of March 31, 1995, there remained 307,939 shares of
Class A common stock, 1,115,915 shares of Class B common stock, and
approximately $1 million of cash available for distribution. The stock and
cash set aside for distribution to prepetition unsecured creditors was
fixed in the Plan of Reorganization and will not change as claims are
allowed. However, as set forth below, a limited number of proceedings are
still pending in which prepetition creditors seek to impose additional
obligations on the Company.
Bankruptcy Appeals
Several parties appealed the Bankruptcy Court's April 16, 1993 order
confirming the Plan of Reorganization.
A group of bondholders appealed to have the United States District Court
for the District of Delaware (the "District Court") declare invalid the
Plan of Reorganization provisions relating to the allocation for payment of
unsecured creditors and the provisions releasing certain current and former
officers and directors of the Company and its former parent from the claims
of creditors. If the bondholders successfully imposed liability upon such
officers and directors, the Company could be required to indemnify such
individuals. The Company opposed the appeal on the merits and sought
dismissal of certain of the claims as moot due to the substantial
consummation of the Plan of Reorganization. On March 16, 1995, the
District Court dismissed the appeal in part on grounds of mootness and
denied it in part on the merits. The Company does not believe that the
foregoing matter will have a material adverse effect on the Company.
On December 3, 1990, Continental owned 77 aircraft and 81 spare engines (in
four collateral pools) securing debt evidenced by equipment trust
certificates. The trustees for the four collateral pools moved in the
Bankruptcy Court for "adequate protection" payments under Sections 361 and
363 of the federal bankruptcy code for the Company's retention and use of
the aircraft and engines after December 3, 1990, including postpetition
claims for the alleged decline in market value of the aircraft and engines
after December 3, 1990 and claims for deterioration in the condition of the
aircraft and engines in the same period. The Bankruptcy Court rejected the
adequate protection claims that alleged market value decline, and prior to
April 16, 1993, the Company settled all of the adequate protection claims
of the trustees from three of the four collateral pools. The Company also
settled all adequate protection claims of the trustees for the fourth
collateral pool, except for their claim of approximately $117 million for
alleged market value decline of their pool of 29 aircraft and 81 additional
engines. On April 16, 1993, the Bankruptcy Court rejected the market value
decline claims of the trustees for the fourth collateral pool in their
entirety and incorporated those findings into its order confirming the Plan
of Reorganization. The trustees for the fourth collateral pool appealed
from these orders, but failed to obtain a stay pending appeal. The Company
opposed these appeals on the merits and sought dismissal of the appeals on
the grounds they were made moot by the substantial consummation of the Plan
of Reorganization. The District Court dismissed the appeals as moot, and
the trustees appealed to the Third Circuit Court of Appeals seeking review
of the District Court's mootness determination and the Bankruptcy Court's
finding on the merits. Such appeal is still pending. The Company does not
believe that the foregoing matter will have a material adverse effect on
the Company.
On July 19, 1994, the Bankruptcy Court approved a comprehensive settlement
resolving certain claims filed by the Air Line Pilots Association ("ALPA")
and former pilots of Eastern. A group of separately represented Eastern
pilots (the "LPP Claimants") filed an appeal from an order disallowing the
integration of the Eastern pilots seniority list with Continental pilots
seniority list. Continental filed a motion to dismiss as moot the appeals
brought by the LPP Claimants, on the grounds that only ALPA had standing
with regard to this proceeding and ALPA had previously withdrawn a similar
appeal. The motion remains pending. Other Eastern-related claimants,
including a group of 130 Eastern pilots who seek jobs and damages from
Continental based on alleged prepetition promises of employment with
Continental, have filed notices of appeal from the confirmation order. The
Company is opposing these appeals on the merits and, in any event, if such
parties are successful on their claims, their recovery would be limited to
the fixed pools of Company common stock and cash provided for in the Plan
of Reorganization.
Antitrust Proceedings
In March 1994, the United States District Court for the Northern District
of Georgia approved the July 1992 settlement agreement between Continental
and class plaintiffs in the consolidated Domestic Air Transportation
Antitrust Litigation, in which Continental and other airlines were alleged
to have violated the federal antitrust laws by actions related to pricing.
Under the settlement approved by the court, Continental provided
approximately $11 million in transportation certificates to class members,
in full settlement and release of all claims. Pursuant to this agreement
and similar settlements involving other defendant airlines, transportation
certificates totaling $438 million were provided by Continental and other
airlines, which will be valid on any of the settling defendants and will
not be subject to interline reimbursement.
On December 21, 1992, the United States Department of Justice (the "DOJ")
commenced a civil action in the United States District Court for the
District of Columbia against Continental, seven other domestic airlines and
the Airline Tariff Publishing Company, alleging violations of Section 1 of
the Sherman Act by price fixing and maintenance of a "coordination
facilitation device". The suit sought injunctive relief only. All of the
airlines, including Continental, named in the suit have entered into a
consent decree with the DOJ that is intended to restrict, to some extent,
the airlines' pricing practices. This consent decree was approved by the
court on August 10, 1994.
Continental and other airlines were the subjects of a civil investigation
conducted during 1990-1992 by the Attorney General of the State of Florida
and, separately, of a multistate civil investigation that was begun in
December 1992 by the Attorneys General of several other states, including
Colorado, Connecticut, New York, Ohio, Pennsylvania, Utah and Washington.
The investigations sought to determine if the airlines had violated federal
or analogous state laws with respect to pricing or bidding concerning
government air travel. On October 11, 1994, Continental, together with
other airlines, entered into a Settlement Agreement with several states to
settle the claims by the 50 states of price fixing. The Settlement
Agreement requires the airlines to provide a 10% discount off published
domestic fares for eligible government travel during a period no greater
than 18 months. To implement the Settlement Agreement, on November 10,
1994, the State Attorneys General filed a class action complaint against
Continental and the other airlines in the United States District Court for
the District of Columbia, along with a motion for preliminary approval of
the Settlement Agreement. On December 8, 1994, the District Court issued a
preliminary order approving the Settlement Agreement. Final approval of
the Settlement Agreement is still pending. The Company does not believe
that the foregoing matter will have a material adverse effect on the
Company.
On February 9, 1995, Delta imposed dollar limits on the base commissions
it would pay to travel agents on domestic airline tickets. Shortly
thereafter, other airlines, including Continental, imposed similar dollar
limits on their respective commissions. In February and March of 1995,
Continental and six other major United States airlines were sued in a
number of putative class actions, including In re Airline Travel Agents
Antitrust Litigation in the United States District Court for the District
of Minnesota, in which various travel agents allege that Continental and
the other defendants combined and conspired in unreasonable restraint of
trade and commerce in violation of applicable antitrust laws. The
plaintiffs also allege that the defendant airlines unlawfully fixed,
lowered, maintained and stabilized the commissions paid to United States
travel agents. Plaintiffs seek injunctive relief, treble damages,
attorneys fees and related costs. Continental is in the process of
reviewing the specific allegations in light of the pertinent facts and
commencing the preparation of its defense. The Company does not believe
that the foregoing matter will have a material adverse effect on the
Company.
Denver International Airport
In 1992, the Company agreed to lease (i) 20 gates at DIA for a period of
five years from the date DIA opened, (ii) four of such gates for an
additional five years and (iii) a substantial amount of operational space
in connection with the gates and for the terms set forth in the agreement.
During 1994, the Company significantly reduced its Denver operations. The
City filed a complaint on February 22, 1995 against the Company in the
United States District Court for the District of Colorado seeking a
determination that the Company materially breached and repudiated the lease
and a March 1994 agreement to pay certain costs associated with the delays
in opening DIA. In addition, the City sought a judgment declaring the
City's rights and the Company's obligations and the award of an injunction
that the Company perform such obligations. The City also sought attorneys
fees and costs relating to its suit. The Company believes it has defenses
against the City, as well as claims against the City that justify
rescission of the lease or, if rescission is not awarded by the court, a
substantial reduction in the Company's obligations thereunder.
The Company, the City and certain other parties have entered into an
agreement ("Settlement") that was approved by the Denver City Council on
April 10, 1995. The Settlement provides for the release of certain claims
and the settlement of certain litigation filed by the City against the
Company and reduces (i) the full term of the lease to five years, subject
to certain rights of renewal granted to Continental, (ii) the number of
gates leased from 20 to 10, (iii) the amount of leased operational and
other space by approximately 70%. The reduced gates and operational space
exceed Continental's current needs at the airport, and the Company is
negotiating with America West and Frontier to sublease up to five of its
remaining gates and certain operational space. The Company will attempt to
sublease additional facilities and operational space as well. To the
extent Continental is able to sublease any of its gates and operational
space, its costs under the lease would be reduced.
The Settlement may still be challenged by certain parties, including by
other air carriers, and the Company cannot predict what the outcome of any
such challenge would be. Certain air carriers have taken the position that
an insufficient number of carriers have executed the Settlement. Failure
to implement the Settlement could reduce or eliminate the Company's
estimated savings at DIA.
Environmental Proceedings
The Company (including its predecessors) has been identified by the United
States Environmental Protection Agency ("EPA") as a potentially responsible
party at three Superfund sites. At each site, the Company's potential
responsibility is premised on allegations that the Company generated waste
disposed of at such site. The Company believes that, although applicable
case law is evolving and some cases may be interpreted to the contrary, any
claim of liability associated with these sites was discharged by
confirmation of the Company's Plan of Reorganization, principally because
the Company's exposure at each site is based on alleged prepetition offsite
disposal known as of the date of confirmation. Even if the claims were not
discharged, on the basis of currently available information, the Company
believes that its potential liability for a share of the cost to remedy
each site (to the extent the Company is found to have liability) is not
material; however, the Company has not been designated a "de minimis"
contributor at any of such sites by the EPA. The Company does not believe
that the foregoing matters will have a material adverse effect on the
Company. The Company may become involved in other environmental
proceedings, including the investigation and remediation of environmental
contamination at properties or waste disposal sites used or previously used
by the Company.
General
Various other claims and lawsuits against the Company are pending, which
are of the type reasonably foreseeable in view of the nature of the
Company's business. The Company cannot at this time reasonably estimate
the possible loss or range of loss that could be experienced if any of the
claims were successful. Typically, such claims and lawsuits are covered by
insurance. The Company does not believes that the foregoing matters will
have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Continental's Class A and Class B common stock began trading on the New
York Stock Exchange on a when-issued basis on July 14, 1993 and commenced
trading on a regular-way basis on September 2, 1993, following the initial
distribution of stock to the Company's prepetition creditors. On
December 14, 1993, the Company sold 8,086,579 shares of Class B common
stock in an underwritten public offering. Prior to that time, there had
been limited trading volume in the Company's common stock.
The following table gives the high and low sales prices for the stocks as
reported on the New York Stock Exchange for each quarterly period
subsequent to July 1993.
Class A Common Stock Class B Common Stock
High Low High Low
1993 Third Quarter . . . . 30-1/8 17-7/8 30-1/2 17
Fourth Quarter . . . . 27-7/8 16 25-7/8 13
1994 First Quarter. . . . . 30-3/4 18-3/4 27-1/4 16-7/8
Second Quarter . . . . 21 13-1/2 19-3/4 11-1/4
Third Quarter. . . . . 22-1/4 14 21-1/2 13
Fourth Quarter . . . . 18-1/2 8-1/8 18-1/8 7-1/2
The stock of Holdings that was cancelled in the Reorganization was publicly
traded prior to April 28, 1993. Information regarding the price range of
such pre-reorganization trading is not comparable with data provided for
the Class A common stock or the Class B common stock and is not included in
this Form 10-K.
As of March 31, 1995, there were approximately 5,100 and 5,900 holders of
record of Continental's Class A and Class B common stock, respectively.
The Company has not paid dividends on its common stock. The Company
anticipates that no dividends on its common stock will be declared in the
foreseeable future, and that earnings, if any, will be retained for the
development of the Company's business. The Company's loan agreements with
GE Capital prohibit the Company from paying dividends to common
stockholders until February 28, 1997, restrict the subsequent payment of
dividends to common stockholders to a percentage of eligible net income (as
defined) and require CMI to maintain certain minimum cash balances and net
worth levels, which effectively restrict the amount of cash available to
Continental from CMI.
The Company's certificate of incorporation provides that no shares of
capital stock may be voted by or at the direction of persons who are not
United States citizens unless such shares are registered on a separate
stock record. The Company's bylaws further provide that no shares will be
registered on such separate stock record if the amount so registered would
exceed United States foreign ownership restrictions. United States law
currently requires that no more than 25% of the voting stock of the Company
(or any other domestic airline) may be owned directly or indirectly by
persons who are not citizens of the United States. Because AC owns
approximately 23.9% of the voting power of the Company's common stock and
shares of common stock owned by AC have priority over shares held by other
foreign holders, the number of shares that may be voted by other foreign
holders is very limited.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth certain consolidated financial data of (i) the Reorganized Company
at December 31, 1994 and 1993 and for the year ended December 31, 1994 and the period April 28,
1993 through December 31, 1993 and (ii) the Predecessor Company, for the period January 1, 1993
through April 27, 1993 and as of and for the three years ended December 31, 1992 (in millions,
except per share data).
Because consolidated Continental (as reorganized) includes System One and other businesses that
had been consolidated with Holdings prior to April 28, 1993 (but not with pre-reorganization
Continental), the discussion herein generally refers to Holdings' consolidated financial
statements for periods prior to April 28, 1993. As a result of the adoption of fresh start
reporting in accordance with the American Institute of Certified Public Accountants' Statement of
Position 90-7 -"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
("SOP 90-7") upon consummation of the Plan of Reorganization on April 27, 1993, the consolidated
financial statements of the Predecessor Company and the Reorganized Company have not been
prepared on a consistent basis of accounting and are separated by a vertical black line.
Reorganized Company (1) Predecessor Company (1)(2)(3)
April 28, January 1,
Year Ended 1993 through 1993 through
December 31, December 31, April 27, Year Ended December 31,
1994 1993 1993 1992 1991 1990
Operating revenues. . . . . . $5,669.9 $3,910.5 $1,857.2 $5,458.7 $5,450.8 $6,133.9
Operating income (loss) . . . (11.0) 95.4 (113.1) (105.9) (218.9) (426.6)
Loss before extraordinary
gain . . . . . . . . . . . . (613.3) (38.5) (978.6) (125.3) (305.7) (2,402.9)
Net income (loss) (4) . . . . (613.3) (38.5) 2,640.1 (125.3) (305.7) (2,343.9)
Primary and fully diluted
loss per common share:
Before extraordinary
gain . . . . . . . . . . . (23.76) (2.33) * (2.70) (6.74) (58.96)
Extraordinary gain. . . . . - - * - - 1.44
Net loss. . . . . . . . . . (23.76) (2.33) * (2.70) (6.74) (57.52)
(continued on next page)
Reorganized Company (1)(3) Predecessor Company (1)(3)
December 31, December 31,
1994 1993 1992 1991 1990
Total assets. . . . . . . . . . . .$4,601.2 $5,098.5 $3,252.5 $3,522.8 $3,468.7
Estimated liabilities subject
to Chapter 11 reorganization
proceedings. . . . . . . . . . . . - - 3,907.1 4,211.9 4,352.0
Long-term debt and capital
lease obligations. . . . . . . . . 1,202.5 1,775.3 228.0 81.2 -
Minority interest . . . . . . . . . 25.8 21.9 - - -
Redeemable preferred stock. . . . . 52.6 46.9 101.9 101.9 101.9
*Not meaningful.
(1) See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations. Results of Operations" for a discussion of significant transactions in 1994,
1993 and 1992. 1994 results include nonrecurring charges of approximately $446.8 million.
1990 results included net losses of $177.1 million attributable to Eastern and Eastern-
related adjustments aggregating approximately $1.4 billion. Also included in 1990 results
are adjustments aggregating approximately $440.7 million resulting from the Chapter 11
filing by the Predecessor Company and adjustments totaling approximately $270.7 million
recorded in connection with asset impairment. 1990 results include gains on the disposition
of property, equipment and other assets of $100.2 million.
(2) Includes Eastern for periods through April 19, 1990, for which periods and at which date
Eastern was a consolidated subsidiary of Holdings.
(3) Certain reclassifications have been made in prior years' financial statements to conform to
the 1994 presentation.
(4) No cash dividends were paid on common stock during the periods shown.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Continental is the successor to Continental Airlines Holdings, Inc. and
Continental Airlines, Inc. On December 3, 1990, Continental and Holdings
and all their wholly owned domestic subsidiaries filed voluntary petitions
to reorganize under Chapter 11 of the federal bankruptcy code. The
companies' consolidated Plan of Reorganization was confirmed on April 16,
1993 and became effective on April 27, 1993. On such date, Holdings merged
with and into Continental. System One, which had been a subsidiary of
Holdings, was reorganized as a subsidiary of Continental. Because
consolidated Continental (as reorganized) includes System One and other
businesses that had been consolidated with Holdings for periods through
April 27, 1993 (but not with pre-reorganization Continental), the
discussion herein generally refers to Holdings' consolidated financial
statements for periods through April 27, 1993.
On April 27, 1993, the Company adopted fresh start reporting in accordance
with SOP 90-7, which resulted in adjustment of the Company's common
stockholders' equity and the carrying values of assets and liabilities.
The fresh start reporting adjustments, primarily related to the adjustment
of the Company's assets and liabilities to fair market values, have also
affected the Company's statements of operations. The more significant
adjustments related to increased amortization expense relating to routes,
gates and slots and reorganization value in excess of amounts allocable to
identifiable assets; reduced aircraft rent expense; and increased interest
expense.
Adverse Industry Conditions and Competition
The Company has experienced significant losses in the last five fiscal
years. The Company's viability is dependent upon its ability to achieve
and sustain profitable results of operations and thereby obtain access to
external capital sources. During the fourth quarter of 1994, the Company
recorded a nonrecurring charge of approximately $446.8 million. See
"Results of Operations. Nonrecurring Charges".
The airline industry is highly competitive and susceptible to price
discounting, and Continental must compete with carriers having
substantially greater resources, as well as smaller carriers with lower
cost structures. Overall industry profit margins have historically been
low and in recent years, have been substantially negative. Profit levels
are highly sensitive to changes in fuel costs, changes in average yield
(fare levels) and changes in passenger demand. Passenger demand and yield
have been affected by, among other things, the general state of the economy
and fare actions taken by Continental or its competitors.
In addition, a number of new carriers have entered the industry, typically
with low cost structures. In some cases, the new entrants have initiated
or triggered further price discounting. Aircraft, skilled labor and gates
at most airports continue to be available to start-up carriers, and
additional entrepreneurs have indicated that they intend to enter the
airline business. Although management believes Continental may be better
able than several of its major competitors to compete with the fares
offered by start-up carriers because of Continental's lower cost structure,
the entry of new carriers on many of Continental's routes (as well as
increased competition from established carriers) could negatively impact
Continental's results of operations.
Airline Costs
Management believes that the Company's costs will be affected in 1995 by
(i) the full-year impact of the 1994 wage restorations, (ii) higher
aircraft rental expense as new aircraft are delivered, (iii) changes in the
costs of materials and services (in particular, the cost of fuel, which can
fluctuate significantly in response to global market conditions), (iv)
changes in governmental regulations and taxes affecting air transportation
and the costs charged for airport access, (v) changes in the Company's
fleet and related capacity and (vi) the Company's continuing efforts to
reduce costs throughout its operations.
Management believes that maintaining a cost advantage is crucial to the
Company's business strategy, and Continental is pursuing aggressive cost
reduction objectives in virtually all aspects of its operations.
Fuel costs constituted approximately 13.1% of Continental's operating costs
in 1994 and, although Continental has consistently sought to hedge its
short to intermediate term exposure against severe spikes in crude oil
prices, future price changes could materially affect Continental's results
of operations. See Item 1. "Business. Fuel".
In the last several years, the FAA has issued a number of maintenance
directives and other regulations relating to, among other things,
retirement of older aircraft, collision avoidance systems, airborne
windshear avoidance systems, noise abatement and increased inspections and
maintenance procedures to be conducted on older aircraft. These regulatory
actions have imposed, and may in the future impose further, material
unanticipated costs upon the Company and other airlines.
Other
The Company had, as of December 31, 1994, deferred tax assets aggregating
approximately $1.6 billion, including approximately $1.1 billion of net
operating loss carryforwards. The Company recorded a valuation allowance
of $844.2 million against such assets as of December 31, 1994. Realization
of a substantial portion of the Company's remaining net operating loss
carryforwards will require the completion during the next three years of
transactions resulting in recognition of built-in gains for federal income
tax purposes. Although the Company currently intends to consummate one or
more such transactions, in the event the Company were to determine in the
future that no such transactions will be completed, an adjustment to the
deferred tax liability of up to approximately $194 million would be charged
to income in the period such determination was made.
Many aspects of Continental's operations are also subject to increasingly
stringent federal, state and local laws protecting the environment.
Continental has been named as a potentially responsible party at three
cleanup sites which have been designated as Superfund Sites. At sites
where EPA has commenced remedial litigation, potential liability is joint
and several. Continental's alleged volumetric contributions at the sites
are minimal. The Company does not believe that the foregoing matters will
have a material adverse effect on the Company.
Certain Statistical Information
An analysis of statistical information for Continental's jet operations for
each of the three years in the period ended December 31, 1994 is as
follows:
Net Increase/ Net Increase/
(Decrease) (Decrease)
1994 1994-1993 1993 1993-1992 1992
Revenue passengers
(000). . . . . . . 42,202 9.3 % 38,628 0.7 % 38,358
Revenue passenger
miles (millions)
(a). . . . . . . . 41,588 (1.7)% 42,324 (1.7)% 43,072
Available seat miles
(millions) (b) . . 65,861 (1.7)% 67,011 (1.3)% 67,877
Passenger load
factor (c) . . . . 63.1% (0.1) pts. 63.2% (0.3) pts. 63.5%
Breakeven passenger
load factor (d). . 62.9% (0.4) pts. 63.3% (2.1) pts. 65.4%
Passenger revenue
per available
seat mile
(cents) (e). . . . 7.22 0.7 % 7.17 7.7 % 6.66
Operating cost per
available seat
mile (cents) (f) . 7.86 (0.5)% 7.90 4.5 % 7.56
Average yield per
revenue passenger
mile (cents) (g) . 11.44 0.8 % 11.35 8.2 % 10.49
Average fare
per revenue
passenger. . . . . $112.71 (9.3)% $124.32 5.5 % $117.84
Average length of
aircraft flight
(miles). . . . . . 727 (15.1)% 856 0.6 % 851
Average daily util-
ization of each
aircraft (h) . . . 9:57 2.2 % 9:44 1.7 % 9:34
_______________
(a) The number of scheduled miles flown by revenue passengers.
(b) The number of seats available for passengers multiplied by the number
of scheduled miles those seats are flown.
(c) Revenue passenger miles divided by available seat miles.
(d) The percentage of seats that must be occupied by revenue passengers in
order for the airline to breakeven on an income before income taxes
basis, excluding nonrecurring charges, nonoperating items and other
special items. This statistic excludes Express operations.
(e) Passenger revenues divided by available seat miles.
(f) Operating expenses divided by available seat miles. Operating cost
for the year ended December 31, 1993 included approximately
$37 million of nonrecurring items related to the Reorganization.
(g) The average revenue received for each mile a revenue passenger is
carried.
(h) The average block hours flown per day in revenue service per aircraft.
Results of Operations
The following discussion provides an analysis of the Company's results of
operations and reasons for material changes therein for the three years
ended December 31, 1994. The Company's results of operations for the
periods subsequent to April 27, 1993 have not been prepared on a basis of
accounting consistent with its predecessor's results of operations for
periods prior to April 28, 1993 due to the implementation of fresh start
reporting upon the Company's emergence from bankruptcy. Financial
information for 1993 is derived by combining the results of operations of
the Company for the period April 28, 1993 through December 31, 1993 with
those of Holdings for the period January 1, 1993 through April 27, 1993.
Overview of 1994. Continental's 1994 loss before nonrecurring charges was
$166.5 million, or $6.61 per common share (primary and fully diluted). The
1994 net loss of $613.3 million, or $23.76 per common share (primary and
fully diluted), included nonrecurring charges of approximately
$446.8 million, or $17.15 per common share (primary and fully diluted).
See "Nonrecurring Charges" below. The nonrecurring charges and losses in
1994 were caused primarily by major operating changes implemented by
Continental during the year and by a late 1994 build-up of excess fleet and
related operating capacity that the Company was unable to deploy
profitably. Continental's Go Forward Plan, a new, multi-faceted strategy,
is designed to redirect and improve the Company's operations, shrink excess
capacity, improve liquidity and achieve profitability. See Item 1.
"Business. Business Strategy".
Reduction in Western United States Operations. During 1994, Continental
greatly reduced its operations in the western United States. The Company
eliminated its unprofitable Denver hub operation, cutting daily jet
departures from 165 in August 1993, to 86 in July 1994, 59 in September
1994 and 19 at March 31, 1995. Beginning in May 1994, Express also
terminated all Denver turboprop operations. In November 1994, Continental
announced its decision to close its western United States heavy maintenance
facilities in Los Angeles and Denver, eliminating approximately 1,640
maintenance positions.
Continental Lite. In 1994, Continental rapidly expanded Continental Lite
(a network of short-haul, no-frills, low-fare flights initially referred to
as Peanuts Flights), from 173 daily flights and 19 aircraft serving 14
cities in November 1993 to 1,000 daily flights and 114 aircraft serving 43
cities in September 1994. The rapid growth of Continental Lite was
supplied by redeploying a substantial portion of Continental's capacity,
including aircraft made available by elimination of the Denver hub and by
deliveries of new aircraft under the Company's agreement with Boeing.
Continental Lite experienced operational problems in connection with this
rapid growth and was not profitable in 1994. At its peak, approximately
35% of Continental Lite flying consisted of point-to-point, linear service
not integrated with the Company's hubs. Linear flying proved to be
significantly unprofitable and was responsible for an estimated 70% of all
Continental Lite system losses in 1994. As part of its Go Forward Plan,
the Company is substantially reducing Continental Lite operations by
redeploying aircraft out of Continental Lite to replace less efficient,
larger aircraft being retired from long-haul service, and implementing
other changes intended to improve profitability.
Express. Management has implemented strategies designed to improve the
performance of Express, which experienced losses in 1994. In addition to
terminating its significantly unprofitable Denver operations, Express
implemented cost-reduction programs, including substantial workforce
reductions, and has entered into an agreement to acquire 25 new,
operationally efficient, 19-seat turboprop aircraft from Beech Acceptance
Corporation. Fourth quarter results for Express were adversely affected by
an FAA Airworthiness Directive, which prohibited all airlines, including
Express, from flying ATR-42 and ATR-72 aircraft during atmospheric icing
conditions. The Airworthiness Directive was effective December 9, 1994
through January 13, 1995. The FAA may issue further Airworthiness
Directives with respect to the ATR aircraft and it is not possible to
predict the effect, if any, that future directives or other regulatory
actions may have on the use of such aircraft in certain weather conditions.
International. CMI achieved significant profit growth in 1994 and
continued to generate operating profit margins greater than those of the
rest of the Company. The increase in CMI's profits during 1994 reflected
improvement in the Japanese economy, continued appreciation of the Japanese
yen against the dollar (which increased CMI's dollar revenues and, to a
lesser extent, expenses), the severe typhoons and an earthquake at Guam
that adversely affected 1993 results, and continued growth in air traffic
demand in CMI's markets. Continental also expanded its presence in Europe
and South America in 1994 and is one of the leading airlines providing
service to Mexico and Central America, serving more destinations there than
any other United States airline.
Nonrecurring Charges. During the fourth quarter of 1994, the Company
recorded a nonrecurring charge of approximately $446.8 million associated
primarily with (i) the planned early retirement of certain aircraft and
(ii) closed or underutilized airport and maintenance facilities and other
assets.
Approximately $278 million of the nonrecurring charge was associated with
the planned early retirement during 1995 of 24 widebody jet aircraft (21
Airbus A300s and three Boeing 747s), 23 narrowbody Boeing 727 jet aircraft
and five Dash 7 turboprop aircraft, including a provision for the disposal
of the related inventory. All of these aircraft (except for two owned
Airbus A300 aircraft) have remaining lease obligations beyond the planned
retirement dates for such aircraft. The $278 million charge represents the
Company's best estimate of the expected loss based upon, among other
things, the anticipated resolution of negotiations with certain lessors as
well as anticipated sublease rental income of certain aircraft and engines.
To the extent the actual resolution of the negotiations, actual sublease
rental income or other events or amounts vary from the Company's estimates,
the actual charge could be different from the amount estimated.
Approximately $168.8 million of the nonrecurring charge was associated with
the closure of the LAX maintenance facility, underutilized airport
facilities and other assets (primarily associated with DIA). This portion
of the charge relates to the Company's contractual obligations under the
related lease agreements and the write-off of related leasehold
improvements, less an estimated amount for sublease rental income.
However, should actual sublease rental income be different from the
Company's estimates, the actual charge could be different from the amount
estimated.
Approximately $324.2 million of the nonrecurring charge represents an
actual cash outlay to be incurred over the remaining lease terms (of from
one to 15 years) and approximately $122.6 million represents a noncash
charge associated with a write-down of certain assets (principally
inventory and flight equipment) to expected net realizable value.
Continental expects to finance the cash outlays primarily with internally
generated funds.
Comparison of 1994 to 1993. The Company recorded a consolidated loss
before nonrecurring charges of $166.5 million for the year ended
December 31, 1994 as compared to a consolidated loss before extraordinary
gain of $1 billion for the year ended December 31, 1993. The Company's net
loss in 1994 included nonrecurring charges of approximately $446.8 million.
The Company's net income in 1993 included an extraordinary gain of
$3.6 billion primarily related to the discharge of prepetition debt
obligations in the Reorganization.
Passenger revenues of $5 billion in 1994 decreased 1.6%, $79.4 million,
from 1993 due primarily to a 1.7% decrease in Continental's jet revenue
passenger miles resulting from a 1.7% decrease in available seat miles.
Such decrease was partially offset by a 0.8% increase in jet yields.
Cargo, mail and other revenues decreased by 2.8%, $18.3 million, from 1993
to 1994 primarily as a result of Continental's termination of service to
Australia and New Zealand in October 1993 and poor weather in the eastern
United States in the first quarter of 1994.
Wages, salaries and related costs increased 2.0%, $30.2 million, from 1993
to 1994 due to higher wage rates, partially offset by a decrease in the
number of full-time equivalent employees. In July 1992, the Company
implemented an average 10.0% wage reduction, which reduction was restored
in equal increments in December 1992, April 1993 and April 1994, with the
final restoration occurring in July 1994. The number of full-time
equivalent employees decreased from approximately 39,700 as of December 31,
1993 to approximately 37,800 at December 31, 1994.
Rentals and landing fees increased 4.0%, $32 million, from 1993 to 1994.
Rent expense increased primarily as a result of the delivery of new Boeing
737 and 757 aircraft during 1994. Such increase was partially offset by
retirements of leased aircraft and the full year impact in 1994 of the
amortization of deferred credits recorded in connection with the Company's
adjustment of operating leases to fair market value as of April 27, 1993.
Aircraft fuel expense decreased 8.7%, $70.6 million, from 1993 to 1994
primarily due to a reduction in the average price per gallon. The average
price per gallon of fuel decreased 9.7%, from 59.26 cents in 1993 to
53.52 cents in 1994. The quantity of jet fuel used increased from
1.333 billion gallons in 1993 to 1.349 billion gallons used in 1994
principally due to an increase in the frequency of take-offs and landings
associated with Continental Lite operations.
Maintenance, materials and repairs costs decreased 9.5%, $51.8 million,
from 1993 to 1994 primarily due to increased operational efficiencies and
the retirement of older aircraft.
Commissions expense decreased 20.6%, $113.9 million, from 1993 to 1994
primarily due to a decrease in commissionable sales and a reduction in the
aggregate average commission rate.
Depreciation and amortization expense increased 7.9%, $18.9 million, from
1993 to 1994 due primarily to (i) an increase in aircraft operated under
capital leases during the fourth quarter of 1993, (ii) the amortization of
incremental capitalized costs associated with aircraft, and (iii) the
annualized impact of fresh start adjustments relating to aircraft, routes,
gates and slots and Reorganization Value in Excess of Amounts Allocable to
Identifiable Assets.
Other operating expenses increased 3.8%, $50.7 million, from 1993 to 1994
primarily as a result of increases in reservations and sales expense,
advertising expense and other miscellaneous expenses, partially offset by a
decrease in passenger service expenses that consist primarily of catering
costs.
The Company's interest expense increased 10.6%, $23.1 million, from 1993 to
1994 due primarily to a net increase in debt on which the Company was
required to accrue interest. As a result of its Chapter 11 filing, through
April 1993, the Company was not obligated to pay, and accordingly ceased
accruing, contractual interest on its unsecured and undersecured
obligations.
Interest capitalized increased 71.3%, $7.1 million, from 1993 to 1994 due
primarily to an increase in 1994 in the average balance during the year of
purchase deposits for flight equipment.
Interest income increased 20.2%, $3.8 million, from 1993 to 1994 primarily
due to an increase in the average balance of cash and cash equivalents
coupled with an increase in the average interest rate. Interest income
earned on the Company's investments during the period prior to April 28,
1993 was netted against reorganization items in accordance with SOP 90-7.
The Company recorded gains of $10.5 million and $35.4 million in 1994 and
1993, respectively, relating primarily to Continental's disposition of
property, equipment and other assets. In 1994, a gain totaling
$8.5 million related to the sale of 10 Beech aircraft and five spare
engines was recorded. In 1993, the Company recorded a gain of
$34.9 million related to System One's sale to EDS of substantially all of
the assets of its Airline Services Division.
Reorganization items, net, in 1993 included professional fees of
$58.6 million, accruals for rejected aircraft agreements of $153.3 million
and other miscellaneous adjustments of $33.9 million. In addition, in the
second quarter of 1993, fresh start adjustments totaling $719.1 million
were recorded relating to the adjustment of assets and liabilities to fair
market value as well as other miscellaneous fresh start adjustments of
approximately $76.8 million. These fresh start adjustments were partially
offset by the write off of deferred gains on sale/leaseback transactions of
$218.6 million and interest income of $4.5 million.
The Company's other nonoperating income (expense) in 1994 included foreign
exchange losses of $5.2 million (primarily related to Japanese yen-
denominated transactions). Other nonoperating expense in 1993 included
foreign exchange losses (primarily related to Japanese yen, German mark and
British pound denominated transactions), charges totaling approximately
$13.1 million related to the Company's termination of services to Australia
and New Zealand and other expenses primarily related to the abandonment of
airport facilities.
In 1993, the Company recorded an extraordinary gain of $3.6 billion
resulting from the extinguishment of prepetition obligations, including the
write off of a deferred credit related to Eastern of $1.1 billion.
Comparison of 1993 to 1992. The Company recorded a consolidated loss
before extraordinary gains of $1 billion for the year ended December 31,
1993 as compared to a consolidated net loss of $125.3 million in 1992. The
Company's net income in 1993 included an extraordinary gain of
approximately $3.6 billion primarily related to the discharge of
prepetition debt obligations. The net loss in 1992 included gains
aggregating $185 million relating to sales of assets and Eastern-related
adjustments, principally the PBGC Settlement.
Passenger revenues of $5.1 billion in 1993 increased 5.9%, $286.2 million,
from 1992 due primarily to an 8.2% increase in Continental's jet yields,
partially offset by a 1.7% decrease in Continental's jet revenue passenger
miles resulting from a 1.3% decrease in available seat miles. Such
increase reflected $75 million of passenger revenues recorded in the third
quarter of 1993 as a result of the completion of the Company's periodic
evaluation of its air traffic liability account.
Cargo, mail and other revenues increased 3.6%, $22.8 million, from 1992 to
1993 primarily due to an increase in ground handling and similar services.
Wages, salaries and related costs increased 2.5%, $36.6 million, from 1992
to 1993. In July 1992, the Company implemented an average 10.0% wage
reduction which was partially offset by increases in worker's compensation
and medical benefits expenses. In December 1992, 25% of such wage
reduction was restored and in April 1993 another 25% was restored. The
number of full-time equivalent employees increased from approximately
35,600 as of December 31, 1992 to approximately 39,700 as of December 31,
1993.
Rentals and landing fees remained relatively constant in 1993 as compared
to 1992. Rent expense increased due to Continental's leaseback of
previously owned aircraft which were transferred to certain debt holders in
December 1992 and April 1993 in settlement of litigation. These increases
were offset by the amortization of deferred credits recorded in connection
with the Company's adjustment of operating leases to fair market value as
of April 27, 1993.
Aircraft fuel expense decreased 3.0%, $25.4 million, from 1992 to 1993.
The quantity of jet fuel used increased from 1.307 billion gallons in 1992
to 1.333 billion gallons in 1993 due to an increase in Continental's
operating levels, while the average price per gallon of fuel decreased
5.4%, from 62.48 cents per gallon in 1992 to 59.26 cents per gallon in
1993.
Maintenance, materials and repairs increased 7.8%, $39.6 million, from 1992
to 1993 primarily due to outsourcing certain maintenance to third parties.
For outsourcing contracts, 100% of the cost is included in maintenance,
materials and repairs, whereas, when Continental performs its own
maintenance work, a portion of such cost is classified as wages, salaries
and related costs, in accordance with industry practice.
Commissions expense increased 19.8%, $91.5 million, from 1992 to 1993
primarily due to an increase in passenger revenues.
Depreciation and amortization expense remained relatively constant in 1993
as compared to 1992. Depreciation decreased due to a reduction in the
number of owned aircraft as a result of settlements reached in December
1992 and April 1993 with certain aircraft debt holders (which resulted in
the transfer to the debt holders and subsequent leaseback of certain
aircraft). This decrease was substantially offset by the amortization of
intangibles (including Reorganization Value in Excess of Amounts Allocable
to Identifiable Assets) beginning April 28, 1993.
Other operating expenses increased 6.5%, $82.2 million, from 1992 to 1993
due primarily to increases in reservations and sales expense, advertising
expense and other miscellaneous expenses.
The Company's interest expense increased 42.0%, $64.3 million, from 1992 to
1993 due primarily to (i) interest accretion associated with the fair
market value adjustment for operating leases and debt and (ii) a net
increase in debt on which the Company was required to accrue interest.
Interest capitalized increased 69.5%, $4.1 million, from 1992 to 1993 due
primarily to an increase in 1993 in the average balance during the year of
purchase deposits for flight equipment.
Interest income increased 22.9%, $3.5 million, from 1992 to 1993 primarily
due to an increase in funds available for investment. Interest income
earned on the Company's investments during the period prior to April 27,
1993 was netted against reorganization items in accordance with SOP 90-7.
The Company recorded gains on disposition of property, equipment and other
assets of approximately $35.4 million in 1993 relating primarily to System
One's sale to EDS of substantially all of the assets of its Airline
Services Division. The Company recorded gains on disposition of property,
equipment and other assets of approximately $53.2 million in 1992 relating
primarily to Continental's sale to USAir of certain assets at LaGuardia.
In 1992, the Company recorded a $17.3 million gain when it was released
from its guaranty of interest payments on certain Eastern Equipment Trust
Certificates and a $114.5 million net gain in connection with the PBGC
Settlement.
Reorganization items, net, in 1993 included professional fees of
$58.6 million, accruals for rejected aircraft agreements of $153.3 million
and other miscellaneous adjustments of $33.9 million. In addition, in the
second quarter of 1993, fresh start adjustments totaling $719.1 million
were recorded relating to the adjustment of assets and liabilities to fair
market value as well as other miscellaneous fresh start adjustments of
approximately $76.8 million. These fresh start adjustments were partially
offset by the write off of deferred gains on sale/leaseback transactions of
$218.6 million and interest income of $4.5 million.
In 1992, the Company recorded reorganization items, net, totaling
$31.5 million, including $30 million in reorganization-related professional
fees, $6.7 million in net adjustments related to rejected leases and
$10.1 million of miscellaneous items, offset by $15.3 million of interest
income.
Continental's loss on settlement of litigation in 1992 included a
$41.6 million charge recorded in connection with a lawsuit brought by
American General Corporation and American General Life Insurance Company
and $8 million related to the settlement of certain antitrust litigation.
The Company's other nonoperating expense in 1993 included foreign exchange
losses (primarily related to Japanese yen, German mark and British pound
denominated transactions), charges totaling approximately $13.1 million
related to the Company's termination of services to Australia and New
Zealand and other expenses primarily related to the abandonment of airport
facilities. The Company's other nonoperating income in 1992 included
foreign exchange gains of $6.4 million, proceeds of approximately
$4.5 million from Trump Shuttle, Inc. (the "Shuttle") under a settlement
agreement related to the termination of the Shuttle's participation in the
OnePass program, insurance proceeds of $6.4 million and other miscellaneous
items.
In 1993, the Company recorded an extraordinary gain of approximately
$3.6 billion resulting from the extinguishment of prepetition obligations,
including the write off of a deferred credit related to Eastern of
approximately $1.1 billion.
Liquidity and Capital Commitments
As part of the Company's Go Forward Plan, in January 1995 the Company
commenced a series of initiatives designed to improve liquidity in 1995 and
1996. The major liquidity elements of this plan include (i) rescheduling
principal amortization under the Company's loan agreements with its primary
secured lenders (representing approximately $599.4 million of the Company's
outstanding long-term debt at December 31, 1994), (ii) restructuring the
Company's commitments to purchase new Boeing aircraft and related engines,
(iii) deferring or reducing cash requirements associated with certain
existing aircraft, (iv) reducing the Company's lease commitments at DIA and
(v) evaluating the potential disposition of non-core assets. As discussed
below, under agreements in principle and binding agreements reached through
April 12, 1995, the Company has improved its liquidity by an estimated
$231 million in 1995 and $221 million in 1996. This achieves roughly 75%
of the Go Forward Plan liquidity goal.
On March 31, 1995 the Company signed agreements with Boeing and certain
engine manufacturers to defer substantially all aircraft deliveries that
had been scheduled for 1996 and 1997. Five Boeing 767 aircraft that had
been scheduled for delivery to Continental in 1995 have been sold to a
third party. They have been replaced by five Boeing 767's which
Continental will take delivery of starting in 1998. Options to purchase
additional aircraft have been canceled. On March 30, 1995 Continental
amended its principal secured loan agreements with GE Capital and General
Electric Company (collectively, the "Lenders") to defer 1995 and 1996
principal payments and amended certain of its operating lease agreements
with one of the Lenders to defer 1995 rental obligations. Continental
agreed, among other things, to obtain concessions from certain aircraft
lessors. Continuing deferrals of these principal and operating lease
payments will be suspended if specified portions of such concessions are
not obtained by May 31 and June 30, 1995 or if other covenants are not
complied with. If the required concessions are obtained at a later date,
the deferrals will resume. As discussed immediately below, the Company has
reached agreements with some of these lessors and is in negotiations with
the remaining lessors. The Company anticipates that it will be successful
in timely obtaining the required concessions. These agreements with
Boeing, the engine manufacturers and the Lenders will improve the Company's
1995 and 1996 liquidity by approximately $167 million and $161 million,
respectively.
In connection with the Go Forward Plan, the Company is retiring from
service 24 less efficient widebody aircraft during 1995. In February 1995,
the Company began paying market rentals, which are significantly less than
contractual rentals on these aircraft, and began ceasing all rental
payments as the aircraft are removed from service. In addition, in
February 1995 Continental reduced its rental payments on an additional 11
widebody aircraft leased at significantly above-market rates. The Company
began negotiations in February 1995 with the relevant lessors of the 35
widebody aircraft to amend the lease repayment schedules or provide,
effective February 1, 1995, alternative compensation, which could include
debt securities convertible into equity, in lieu of current cash payments.
As of April 12, 1995, the Company had entered into agreements or agreements
in principle with lessors of 16 of these aircraft that will improve the
Company's liquidity by an estimated $44 million and $40 million in 1995 and
1996, respectively.
On April 10, 1995, the Denver City Council approved an agreement among the
City and County of Denver, the Company and certain signatory airlines
amending the Company's lease of facilities at DIA by reducing the Company's
lease term to five years, reducing to 10 the number of gates (and reducing
associated space) leased by the Company and making certain changes in the
rates and charges under the lease. The agreement also provides for the
release of certain claims and the settlement of certain litigation filed by
the City and County of Denver against the Company. See Item 3. "Legal
Proceedings. Denver International Airport". The agreement is expected to
result in annual reduction in costs to the Company of approximately
$20 million over the life of the lease.
Continental and System One are currently negotiating a series of
transactions whereby the existing systems management agreement between
System One and EDS would be terminated and a substantial portion of the
assets (including the travel agent subscriber base and IMS software) and
certain liabilities of System One would be transferred to a newly formed
limited liability company (New S1) that would be owned equally by System
One (which will remain a wholly owned subsidiary of Continental), EDS and
AMADEUS, a European CRS. Substantially all of System One's remaining
assets (including the CRS software) and liabilities would be transferred to
AMADEUS. In addition to retaining a one-third interest in New S1, System
One would receive cash proceeds and an equity interest in AMADEUS and the
outstanding indebtedness of System One owed to each of EDS and Continental
would be repaid. New S1 would market the AMADEUS CRS and would continue to
develop, market and distribute travel-related IMS. These transactions are
anticipated to close in the second quarter of 1995.
Continental's failure to make required payments to the Lenders, the City
and County of Denver and certain aircraft lessors as described above
constituted events of default under the respective agreements with such
parties. The agreements reached through April 12, 1995 with the Lenders,
the City and County of Denver and two aircraft lessors have cured defaults
under their respective agreements. As of April 12, 1995, defaults under
the remaining widebody aircraft leases were continuing due to the
nonpayment of rents, which could entitle the lessors to pursue contractual
remedies, including seeking to take possession of the leased aircraft. As
of April 12, 1995, the Company is in negotiations with these remaining
lessors and has received proposals from lessors representing a majority of
the Company's agreements currently in default. The Company believes it
will be able to successfully conclude the remaining negotiations and thus
avoid any material adverse effect on the Company. In addition, under
"cross default" provisions, the payment defaults create defaults under a
significant number of Continental's other lease and debt agreements, and
the Company's obligations under the agreements subject to such cross
defaults are also eligible to be accelerated. However, in the opinion of
the Company, it is unlikely that lessors or creditors will exercise
remedies under cross default provisions because (i) the Company is making
all required contractual payments under the applicable agreements, (ii) the
contractual payments on a substantial majority of aircraft leases are at
current market rates, (iii) taking possession of the aircraft would cause
the lessors or lenders to incur remarketing costs, and (iv) exercise of
remedies could expose lessors and lenders to "lender liability" litigation.
Additionally, the Company has made substantial progress in negotiations
with lenders and lessors to cure the payment defaults and expects to
complete all such negotiations by June 30, 1995, and as a result all events
of default, including cross defaults, should be eliminated. Consequently,
the Company does not expect the cross defaults to have a material adverse
effect on the Company.
As a result of the FAA Airworthiness Directive which forced the partial
grounding of the Company's ATR commuter fleet in late 1994 and early 1995,
the Company withheld January and February lease payments totaling
$7 million on those ATR aircraft leased by the manufacturer. The Company's
non-payment of rentals may have resulted in an event of default under the
related lease agreements with ATR. As of April 12, 1995, the Company was
engaged in discussions with ATR concerning compensation, if any, to be
received by the Company as a result of the grounding, and the Company had
received a proposal from ATR that, if accepted, would cure the payment
default. In addition because of a decrease in the value of certain
collateral, the Company may have been in default under the debt agreement
relating to the financing of the Company's LAX maintenance facility. At
March 31, 1995 the principal balance of the applicable obligation was
approximately $64 million and at April 12, 1995, the Company was in
negotiations with the creditor. As a result of the progress in the ATR and
LAX maintenance facility negotiations, the Company does not anticipate that
the foregoing matters will have a material adverse effect on the Company.
The Company has no current plans to take other actions in the future that
would constitute additional events of default.
As a result of the defaults and cross-defaults described above that were
continuing at April 12, 1995, approximately $489.9 million of the Company's
long-term debt and capital lease obligations were classified as debt and
capital leases in default within current liabilities as of December 31,
1994. While the Company does not believe it is probable that it will be
required to fund such defaulted obligations in the next twelve months,
generally accepted accounting principles require that such defaulted
obligations be classified as current liabilities at December 31, 1994. In
addition, certain operating leases with remaining aggregate rentals of
$1.4 billion as of December 31, 1994 were in default or cross default at
April 12, 1995. See Notes 5 and 6 of the Notes to the Consolidated
Financial Statements included in Item 8. Financial Statements and
Supplementary Data.
Continental has firm commitments to take delivery of 22 new 737 and five
new 757 aircraft in 1995, one new 757 aircraft in 1996 and 43 new jet
aircraft during the years 1998 through 2002. The estimated aggregate cost
of these aircraft is approximately $3.4 billion. In December 1994, Express
contracted with Beech for the purchase and financing of 25 Beech 1900-D
aircraft at an estimated aggregate cost of $104 million, excluding price
escalations. Deliveries of the Beech aircraft are scheduled in 1995 and
1996. As of December 31, 1994, Continental had made deposits on jet and
turboprop aircraft orders of approximately $166.1 million, of which
$29.6 million was refunded in January 1995 and $22.6 million was refunded
in April 1995 in connection with the rescheduling of aircraft deliveries.
The Company currently anticipates that the firm financing commitments
available to it with respect to its acquisition of new Boeing and Beech
aircraft will be sufficient to fund all deliveries scheduled during the
years 1995 and 1996.
Continental's capital expenditures during 1994 aggregated approximately
$131.1 million, which primarily related to aircraft modifications,
passenger terminal facility improvements, and ground, telecommunications
and computer equipment. Continental expects its 1995 capital expenditures,
exclusive of aircraft, to aggregate approximately $83 million primarily
relating to aircraft modifications, passenger terminal facility
improvements and office, maintenance, telecommunications and ground
equipment.
As of December 31, 1994, the Company had approximately $396.3 million in
cash and cash equivalents as compared to $721 million as of December 31,
1993. The $324.7 million decrease resulted from approximately
$246.6 million of net cash used by financing activities and $121.4 million
of net cash used by investing activities, offset by $43.3 million of net
cash provided by operating activities.
Continental does not have general lines of credit, and substantially all of
its assets, including the stock of its subsidiaries, are encumbered.
Approximately $118.7 million and $102.4 million of cash and cash
equivalents at December 31, 1994 and 1993, respectively, were held in
restricted arrangements relating primarily to workers' compensation claims
and in accordance with the terms of certain other agreements. In addition,
CMI is required by its loan agreement with GE Capital to maintain certain
minimum cash balances and net worth levels, which effectively restrict the
amount of cash available to Continental from CMI. As of December 31, 1994,
CMI had a minimum cash balance requirement of $23.7 million.
Continental currently believes that its cash on hand, together with cash
expected to be generated from operations, cash anticipated to be generated
from disposition of non-strategic assets and available aircraft financing,
will be sufficient to fund its operations, fleet commitments and expected
capital expenditures for fiscal 1995.
Item 8. Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements
Page No.
Report of Independent Auditors F-2
Report of Independent Public Accountants F-3
Consolidated Statements of Operations for each of the
Three Years in the Period Ended December 31, 1994 F-5
Consolidated Balance Sheets as of December 31,
1994 and 1993 F-7
Consolidated Statements of Cash Flows for each of the
Three Years in the Period Ended December 31, 1994 F-9
Consolidated Statements of Redeemable and Nonredeemable
Preferred Stock and Common Stockholders' Equity
(Deficit) for each of the Three Years in the Period
Ended December 31, 1994 F-13
Notes to Consolidated Financial Statements F-15
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Continental Airlines, Inc.
We have audited the accompanying consolidated balance sheets of Continental
Airlines, Inc. (the "Company") as of December 31, 1994 and 1993, and the
related consolidated statements of operations, redeemable and non-
redeemable preferred stock and common stockholders' equity and cash flows
for the year ended December 31, 1994 and for the period April 28, 1993
through December 31, 1993. We have also audited the accompanying
consolidated statements of operations, redeemable and nonredeemable
preferred stock and common stockholders' equity and cash flows for the
period from January 1, 1993 through April 27, 1993 of Continental Airlines
Holdings, Inc. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, the
Company's consolidated Plan of Reorganization was confirmed by the
bankruptcy court on April 16, 1993 and became effective April 27, 1993. As
a result, Continental Airlines Holdings, Inc. (the "Predecessor Company")
merged with and into the Company (the "Reorganized Company") effective
April 27, 1993. The Company also adopted fresh start reporting effective
April 27, 1993 and, as a result, the consolidated financial information for
the period after April 27, 1993 is presented on a different basis of
accounting than for the period before April 28, 1993 and, therefore, is not
comparable.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of the Company as of December 31, 1994 and 1993, the consolidated
results of its operations and its cash flows for the year ended
December 31, 1994 and the period from April 28, 1993 to December 31, 1993
and the consolidated results of operations and cash flows of Continental
Airlines Holdings, Inc., for the period from January 1, 1993 through
April 27, 1993, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Houston, Texas
April 12, 1995
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Continental Airlines Holdings, Inc.:
We have audited the accompanying consolidated statements of operations,
nonredeemable preferred stock and common stockholders' deficit and cash
flows of Continental Airlines Holdings, Inc. (a Delaware corporation) and
its subsidiaries, entities in Chapter 11 reorganization proceedings
(Holdings), for the year ended December 31, 1992. These financial
statements and the schedules referred to below are the responsibility of
Holdings' management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and
cash flows of Holdings for the year ended December 31, 1992, in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared on a
going concern basis. Holdings has experienced significant operating losses
in 1990, 1991 and 1992. Furthermore, Holdings is subject to additional
uncertainties, including litigation and significant liquidity concerns,
which management expects will be substantially resolved upon emergence from
bankruptcy and the consummation of the investment by Air Partners, L.P. and
Air Canada. In January 1993, Holdings filed a revised second amended joint
plan of reorganization and related disclosure statement with the bankruptcy
court. If a plan of reorganization is not approved by the bankruptcy
court, there is substantial doubt about Holdings' ability to continue as a
going concern. In the event a plan of reorganization is approved by the
bankruptcy court, the reorganized company will adopt fresh start reporting;
however, in the long-term, the reorganized company's viability will be
dependent upon its ability to achieve successful future operations. The
accompanying consolidated 1992 financial statements do not include any
adjustments relating to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities that might
be necessary should Holdings be unable to continue in existence nor do the
consolidated financial statements reflect the adjustments required by fresh
start reporting.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules for Holdings for 1992
listed in the index to financial statement schedules are presented for
purposes of complying with the Securities and Exchange Commission's rules
and are not part of the basic financial statements. These schedules have
been subjected to the auditing procedures applied in the audits of the
basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Houston, Texas
March 12, 1993
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of dollars, except per share data)
Reorganized Company Predecessor Company
Period from
Reorganization Period from
(April 28, January 1,
Year Ended 1993 through 1993 through Year Ended
December 31, December 31, April 27, December
31,
1994 1993) 1993 1992
Operating Revenues:
Passenger . . . . . . . .$5,036,057 $3,493,070 $1,622,406 $4,829,273
Cargo, mail and other . . 633,874 417,457 234,752 629,436
5,669,931 3,910,527 1,857,158 5,458,709
Operating Expenses:
Wages, salaries and
related costs. . . . . . 1,531,588 999,467 501,901 1,464,783
Rentals and landing fees. 825,469 519,443 273,977 797,495
Aircraft fuel . . . . . . 741,374 540,078 271,935 837,451
Maintenance, materials
and repairs. . . . . . . 495,333 363,175 183,930 507,508
Commissions . . . . . . . 438,883 377,537 175,283 461,305
Depreciation and
amortization . . . . . . 257,765 162,050 76,795 238,441
Other . . . . . . . . . . 1,390,490 853,328 486,475 1,257,576
5,680,902 3,815,078 1,970,296 5,564,559
Operating Income (Loss). . (10,971) 95,449 (113,138) (105,850)
Nonoperating Income
(Expense):
Interest expense. . . . . (240,575) (165,484) (52,023) (153,207)
Interest capitalized. . . 16,988 8,156 1,759 5,851
Interest income . . . . . 22,569 14,242 - -
Gain on disposition of
property, equipment
and other assets, net. . 10,471 4,100 31,250 53,230
Eastern-related
adjustments. . . . . . . - - - 131,797
Reorganization items,
net. . . . . . . . . . . - - (818,551) (31,549)
Loss on settlement
of litigation. . . . . . - - - (49,619)
Nonrecurring charges. . . (446,796) - - -
Other, net. . . . . . . . (2,798) (7,958) (25,742) 24,554
(640,141) (146,944) (863,307) (18,943)
Loss before Income Taxes,
Minority Interest and
Extraordinary Gain. . . . (651,112) (51,495) (976,445) (124,793)
Income Tax (Provision)
Benefit . . . . . . . . . 42,150 12,785 (2,140) (540)
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of dollars, except per share data)
Reorganized Company Predecessor Company
Period from
Reorganization Period from
(April 28, January 1,
Year Ended 1993 through 1993 through Year Ended
December 31, December 31, April 27, December
31,
1994 1993) 1993 1992
Loss before Minority
Interest and
Extraordinary Gain . . .$ (608,962) $ (38,710) $ (978,585) $ (125,333)
Minority Interest. . . . . (4,380) 161 - -
Loss before
Extraordinary Gain. . . . (613,342) (38,549) (978,585) (125,333)
Extraordinary Gain . . . . - - 3,618,723 -
Net Income (Loss). . . . . (613,342) (38,549) 2,640,138 (125,333)
Preferred Dividend
Requirements and
Accretion to Liquidation
Value . . . . . . . . . . (5,690) (3,531) - -
Income (Loss) Applicable
to Common Shares. . . . .$ (619,032) $ (42,080) $2,640,138 $ (125,333)
Primary and Fully Diluted
Loss per Common Share . .$ (23.76) $ (2.33) $ N.M.* $ (2.70)
*N.M. - Not meaningful - Historical per share data for the Predecessor
Company is not meaningful since the Company has been recapitalized
and has adopted fresh start reporting as of April 27, 1993.
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except for share data)
December 31, December 31,
ASSETS 1994 1993
Current Assets:
Cash and cash equivalents, including
restricted cash and cash equivalents of
$118,732 and $102,439, respectively. . . . . $ 396,298 $ 721,038
Accounts receivable, net of allowance for
doubtful receivables of $37,809 and
$35,046, respectively. . . . . . . . . . . . 375,621 334,828
Spare parts and supplies, net of allowance
for obsolescence of $36,325 and $4,621,
respectively . . . . . . . . . . . . . . . . 141,781 161,856
Prepayments and other . . . . . . . . . . . . 76,260 79,404
Total current assets . . . . . . . . . . . . 989,960 1,297,126
Property and Equipment:
Owned property and equipment:
Flight equipment . . . . . . . . . . . . . . 1,004,337 951,881
Other. . . . . . . . . . . . . . . . . . . . 281,605 284,362
1,285,942 1,236,243
Less: Accumulated depreciation. . . . . . . 207,206 69,022
1,078,736 1,167,221
Purchase deposits for flight equipment. . . . 166,052 166,984
Capital leases:
Flight equipment . . . . . . . . . . . . . . 400,037 394,236
Other. . . . . . . . . . . . . . . . . . . . 17,045 2,142
417,082 396,378
Less: Accumulated amortization. . . . . . . 69,103 23,838
347,979 372,540
Total property and equipment. . . . . . . . 1,592,767 1,706,745
Other Assets:
Routes, gates and slots, net of accumulated
amortization of $96,642 and $39,241,
respectively . . . . . . . . . . . . . . . . 1,591,140 1,672,759
Reorganization value in excess of amounts
allocable to identifiable assets, net of
accumulated amortization of $31,197 and
$13,838, respectively. . . . . . . . . . . . 318,206 335,565
Other assets, net . . . . . . . . . . . . . . 109,109 86,301
Total other assets. . . . . . . . . . . . . 2,018,455 2,094,625
Total Assets. . . . . . . . . . . . . . . $4,601,182 $5,098,496
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except for share data)
December 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993
Current Liabilities:
Debt and capital lease obligations in default . $ 489,865 $ -
Current maturities of long-term debt. . . . . . 126,186 176,228
Current maturities of capital leases. . . . . . 25,788 40,556
Accounts payable. . . . . . . . . . . . . . . . 629,939 566,268
Air traffic liability . . . . . . . . . . . . . 584,108 590,994
Accrued payroll and pensions. . . . . . . . . . 178,648 167,859
Accrued other liabilities . . . . . . . . . . . 373,273 364,204
Total current liabilities. . . . . . . . . . . 2,407,807 1,906,109
Long-Term Debt . . . . . . . . . . . . . . . . . 1,038,165 1,369,885
Capital Leases . . . . . . . . . . . . . . . . . 164,349 405,387
Deferred Credits and Other Long-Term
Liabilities:
Deferred income taxes. . . . . . . . . . . . . 28,100 50,767
Deferred credit - operating leases . . . . . . 137,606 288,556
Accruals for aircraft retirements and
excess facilities . . . . . . . . . . . . . . 391,947 -
Other. . . . . . . . . . . . . . . . . . . . . 251,118 288,395
Total deferred credits and other
long-term liabilities. . . . . . . . . . . . 808,771 627,718
Commitments and Contingencies
Minority Interest. . . . . . . . . . . . . . . . 25,800 21,935
Redeemable Preferred Stock (aggregate
redemption value - $55,966 and $50,497,
respectively) . . . . . . . . . . . . . . . . . 52,606 46,916
Common Stockholders' Equity:
Class A common stock - $.01 par, 50,000,000
shares authorized; 6,301,056 shares and
6,013,216 shares issued and outstanding at
December 31, 1994 and 1993, respectively. . . 63 60
Class B common stock - $.01 par, 100,000,000
shares authorized; 20,403,512 shares and
19,509,352 shares issued and outstanding at
December 31, 1994 and 1993, respectively. . . 204 195
Additional paid-in capital . . . . . . . . . . 778,382 764,274
Accumulated deficit. . . . . . . . . . . . . . (651,891) (38,549)
Unearned portion of restricted stock issued
for future service. . . . . . . . . . . . . . (13,872) -
Additional minimum pension liability . . . . . (6,549) (5,434)
Unrealized loss on marketable equity
securities. . . . . . . . . . . . . . . . . . (2,218) -
Treasury stock - 30,000 shares in 1994 . . . . (435) -
Total common stockholders' equity . . . . . . 103,684 720,546
Total Liabilities and
Stockholders' Equity. . . . . . . . . . . $4,601,182 $5,098,496
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Reorganized Company Predecessor Company
Period from
Reorganization Period from
(April 28, January 1,
Year Ended 1993 through 1993 through Year Ended
December 31, December 31, April 27, December
31,
1994 1993) 1993 1992
Cash Flows From
Operating Activities:
Net income (loss) . . . .$(613,342) $(38,549) $2,640,138 $(125,333)
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Depreciation and
amortization . . . . . 257,765 162,050 76,795 232,199
Nonrecurring charges. . 446,796 - - -
Provision for
doubtful receivables.. 24,913 11,640 7,643 23,214
Amortization of
deferred credits . . . (62,942) (43,196) (13,289) (42,573)
Amortization of re-
stricted stock
grants . . . . . . . . 5,502 - - -
Gain on disposition
of property,
equipment and other
assets, net. . . . . . (10,471) (4,100) (31,250) (53,230)
Extraordinary credit -
gain on discharge
of debt, net . . . . . - - (3,618,723) -
Loss on settlement
of litigation. . . . . - - - 49,619
Eastern-related
adjustments. . . . . . - - - (131,797)
Reorganization
items, net . . . . . . - - 779,460 (1,485)
Deferred income tax
benefit. . . . . . . . (42,150) (12,850) - -
Other, net. . . . . . . 34,231 9,694 16,195 25,156
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Reorganized Company Predecessor Company
Period from
Reorganization Period from
(April 28, January 1,
Year Ended 1993 through 1993 through Year Ended
December 31, December 31, April 27, December
31,
1994 1993) 1993 1992
Changes in operating
assets and
liabilities:
(Increase) decrease
in accounts
receivable. . . . . .$(64,081) $ 112,556 $ (132,472) $ 139,544
(Increase) decrease
in spare parts and
supplies. . . . . . . (10,038) 2,854 365 (514)
(Increase) decrease
in prepayments and
other assets. . . . . (12,084) 14,010 34,503 7,336
Increase in accounts
payable . . . . . . . 88,635 15,121 74,929 48,571
Increase (decrease)
in air traffic
liability . . . . . . (6,886) (95,557) 109,587 90,680
Increase (decrease)
in accrued
liabilities,
deferred credits
and other . . . . . . 7,413 (68,858) 129,748 73,216
Net cash provided by
operating activities.. 43,261 64,815 73,629 334,603
Cash Flows from
Investing Activities:
Proceeds from
disposition of
property, equipment
and other assets . . . . 28,459 4,395 36,123 63,304
Capital expenditures. . .(131,050) (236,228) (67,425) (132,994)
Investment in
America West . . . . . . (18,771) - - -
Other, net. . . . . . . . - - - 1,013
Net cash used by
investing activities. .(121,362) (231,833) (31,302) (68,677)
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Reorganized Company Predecessor Company
Period from
Reorganization Period from
(April 28, January 1,
Year Ended 1993 through 1993 through Year Ended
December 31, December 31, April 27, December
31,
1994 1993) 1993 1992
Cash Flows from
Financing Activities:
Proceeds from
issuance of long-term
debt . . . . . . . . . .$ 33,561 $ 89,820 $ 308,536 $ 22,598
Payments on long-term
debt and capital lease
obligations. . . . . . .(280,200) (120,964) (106,296) (231,046)
Proceeds from issuance
of preferred and
common stock, net. . . . - 153,060 122,004 -
Net cash provided
(used) by financing
activities. . . . . . .(246,639) 121,916 324,244 (208,448)
Net Increase (Decrease)
in Cash and Cash
Equivalents . . . . . . .(324,740) (45,102) 366,571 57,478
Cash and Cash Equivalents
Beginning of Period . . . 721,038 766,140 399,569 342,091
Cash and Cash Equivalents
End of Period . . . . . .$ 396,298 $ 721,038 $ 766,140 $ 399,569
Supplemental Cash Flow
Information:
Interest paid. . . . . .$ 202,319 $ 92,590 $ 30,926 $ 108,558
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Reorganized Company Predecessor Company
Period from
Reorganization Period from
(April 28, January 1,
Year Ended 1993 through 1993 through Year Ended
December 31, December 31, April 27, December
31,
1994 1993) 1993 1992
Financing and
Investing Activities
Not Affecting Cash:
Capital lease
obligations incurred. .$ 14,053 $ 1,259 $ - $ -
Reclassification of
accrued rent and
interest to long-
term debt . . . . . . .$ 28,177 $ 73,416 $ 113,496 $ 84,901
Capitalization of
operating leases
due to renegotiated
terms . . . . . . . . .$ - $ 136,510 $ - $ 27,065
Property and
equipment acquired
through the issuance
of debt . . . . . . . .$ 10,494 $ 1,679 $ - $ 59,868
Financed purchase
deposits for
flight equipment. . . .$ 21,519 $ 33,124 $ - $ -
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE AND NONREDEEMABLE
PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands of dollars)
Additional
Preferred Common Paid-In Accumulated
Stock Stock Capital Deficit Other
Balance, December 31, 1991. . . . . . . . . . . . . . . . $102,246 $467 $1,094,775 $(4,823,720) $(12,024)
Net Loss. . . . . . . . . . . . . . . . . . . . . . . . . - - - (125,333) -
Conversion of 6-3/4% Nonredeemable Preferred to Common. . (38) 3 35 - -
Balance, December 31, 1992. . . . . . . . . . . . . . . . 102,208 470 1,094,810 (4,949,053) (12,024)
Net Income (1/1/93 - 4/27/93) . . . . . . . . . . . . . . - - - 2,640,138 -
Net Loss (4/28/93 - 12/31/93) . . . . . . . . . . . . . . - - - (38,549) -
Conversion of 6-3/4% Nonredeemable Preferred to Common. . (1) - 1 - -
Reorganization Items:
Fresh Start Adjustments. . . . . . . . . . . . . . . . . - - - 2,308,915 12,024
Cancellation of Stock. . . . . . . . . . . . . . . . . . (102,207) (470) (1,094,811) - -
Issuance of Stock in Connection with Emergence from
Bankruptcy. . . . . . . . . . . . . . . . . . . . . . . 43,385 174 614,826 - -
Issuance of Stock in Connection with Public Offering. . . - 81 152,979 - -
Accumulated Unpaid Dividends:
8% Cumulative Redeemable Preferred . . . . . . . . . . . 932 - (932) - -
12% Cumulative Redeemable Preferred. . . . . . . . . . . 2,465 - (2,465) - -
Accretion to Redemption Value for 8% Preferred. . . . . . 134 - (134) - -
Additional Minimum Pension Liability. . . . . . . . . . . - - - - (5,434)
Balance, December 31, 1993. . . . . . . . . . . . . . . . 46,916 255 764,274 (38,549) (5,434)
Net Loss. . . . . . . . . . . . . . . . . . . . . . . . . - - - (613,342) -
Restricted Stock Grant to Employees . . . . . . . . . . . - 12 20,004 - (20,016)
Amortization of Restricted Stock Grants . . . . . . . . . - - - - 5,503
Accumulated Unpaid Dividends:
8% Cumulative Redeemable Preferred . . . . . . . . . . . 1,468 - (1,468) - -
12% Cumulative Redeemable Preferred. . . . . . . . . . . 4,000 - (4,000) - -
Accretion to Redemption Value for 8% Preferred. . . . . . 222 - (222) - -
Additional Minimum Pension Liability. . . . . . . . . . . - - - - (1,115)
Unrealized Loss on Marketable Equity Securities . . . . . - - - - (2,218)
Forfeiture of Restricted Class B Stock. . . . . . . . . . - - (206) - 206
Balance, December 31, 1994. . . . . . . . . . . . . . . . $ 52,606 $267 $ 778,382 $ (651,891) $(23,074)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE AND NONREDEEMABLE
PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY (DEFICIT)
NUMBER OF SHARES
Redeemable Nonredeemable Class A Class B
Preferred Preferred Common Common Other Common Treasury
Stock Stock Stock Stock Stock Stock
Balance, December 31, 1991. . . . . . . . 30,139 53,080,830 - - 46,745,170 597,539
Conversion of 6-3/4% Nonredeemable
Preferred to Common. . . . . . . . . . . - 384,091 - - 256,042 -
Balance, December 31, 1992. . . . . . . . 30,139 53,464,921 - - 47,001,212 597,539
Conversion of 6-3/4% Nonredeemable
Preferred to Common. . . . . . . . . . . - (2,550) - - 1,700 -
Reorganization Items:
Cancellation of Stock. . . . . . . . . . (30,139) (53,462,371) - - (47,002,912) (597,539)
Issuance of Stock in Connection
with Emergence from Bankruptcy. . . . . 471,000 - 6,013,216 11,422,773 - -
Issuance of Stock in Connection
with Public Offering . . . . . . . . . . - - - 8,086,579 - -
Balance, December 31, 1993. . . . . . . . 471,000 - 6,013,216 19,509,352 - -
Conversion of Class B to Class A
by Air Canada. . . . . . . . . . . . . . - - 287,840 (287,840) - -
Restricted Stock Grant to Employees . . . - - - 1,182,000 - -
Forfeiture of Restricted Class B
Stock. . . . . . . . . . . . . . . . . . - - - - - 30,000
Balance, December 31, 1994. . . . . . . . 471,000 - 6,301,056 20,403,512 - 30,000
CONTINENTAL AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continental Airlines, Inc. (the "Company", the "Reorganized Company" or
"Continental") is the successor to Continental Airlines Holdings, Inc.
(together with its subsidiaries "Holdings" or the "Predecessor Company")
and Continental Airlines, Inc. On December 3, 1990, Continental and
Holdings and all their wholly owned domestic subsidiaries filed voluntary
petitions to reorganize under Chapter 11 of the federal bankruptcy code.
The Companies' consolidated Plan of Reorganization was confirmed on
April 16, 1993 and became effective on April 27, 1993 (the
"Reorganization"). On such date, Holdings merged with and into
Continental. System One Information Management, Inc. ("System One"), which
had been a subsidiary of Holdings, was reorganized as a subsidiary of
Continental. Because consolidated Continental (as reorganized) includes
System One and other businesses that had been consolidated with Holdings
prior to April 27, 1993 (but not with pre-reorganization Continental), the
discussion herein includes references to Holdings' consolidated financial
statements for periods prior to April 27, 1993. On April 27, 1993,
Continental adopted fresh start reporting in accordance with the American
Institute of Certified Public Accountants' Statement of Position 90-7 -
"Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code" ("SOP 90-7"), which resulted in adjustments to the Company's common
stockholders' equity and the carrying values of assets and liabilities.
Accordingly, the Company's post-reorganization balance sheet and statements
of operations have not been prepared on a consistent basis of accounting
with the pre-reorganization balance sheet and statements of operations.
For accounting purposes, the inception date for the Reorganized Company is
deemed to be April 28, 1993. A vertical black line is shown in the
consolidated financial statements to separate Continental from the
Predecessor Company since they have not been prepared on a consistent basis
of accounting.
NOTE 1 - LIQUIDITY
During the fourth quarter of 1994, the Company determined that a new
strategic plan, the Go Forward Plan, was needed to return the Company to
profitability and strengthen its balance sheet. As part of the Company's
Go Forward Plan, in January 1995, the Company commenced a series of
initiatives designed to improve liquidity in 1995 and 1996. The major
liquidity elements of this plan include (i) rescheduling principal
amortization under the Company's loan agreements with its primary secured
lenders (representing approximately $599.4 million of the Company's
outstanding long-term debt at December 31, 1994), (ii) restructuring the
Company's commitments to purchase new Boeing aircraft and related engines,
(iii) deferring or reducing cash requirements associated with certain
existing aircraft, (iv) reducing the Company's lease commitments at Denver
International Airport ("DIA") and (v) evaluating the potential disposition
of non-core assets. As discussed below, under agreements in principle and
binding agreements reached through April 12, 1995, the Company has improved
its liquidity by an estimated $231 million in 1995 and $221 million in
1996. This achieves roughly 75% of the Go Forward Plan liquidity goal.
On March 31, 1995 the Company signed agreements with The Boeing Company
("Boeing") and certain engine manufacturers to defer substantially all
aircraft deliveries that had been scheduled for 1996 and 1997. Five Boeing
767 aircraft that had been scheduled for delivery to Continental in 1995
have been sold to a third party. They have been replaced by five Boeing
767's which Continental will take delivery of starting in 1998. Options to
purchase additional aircraft have been canceled. On March 30, 1995
Continental amended its principal secured loan agreements with General
Electric Capital Corporation and affiliates (collectively, "GE Capital")
and General Electric Company (collectively, the "Lenders") to defer 1995
and 1996 principal payments and amended certain of its operating lease
agreements with one of the Lenders to defer 1995 rental obligations.
Continental agreed, among other things, to obtain concessions from certain
aircraft lessors. Continuing deferrals of these principal and operating
lease payments will be suspended if specified portions of such concessions
are not obtained by May 31 and June 30, 1995 or if other covenants are not
complied with. If the required concessions are obtained at a later date,
the deferrals will resume. As discussed immediately below, the Company has
reached agreements with some of these lessors and is in negotiations with
the remaining lessors. The Company anticipates that it will be successful
in timely obtaining the required concessions. These agreements with
Boeing, the engine manufacturers and the Lenders will improve the Company's
1995 and 1996 liquidity by approximately $167 million and $161 million,
respectively.
In connection with the Go Forward Plan, the Company is retiring from
service 24 less efficient widebody aircraft during 1995. In February 1995,
the Company began paying market rentals, which are significantly less than
contractual rentals on these aircraft, and began ceasing all rental
payments as the aircraft are removed from service. In addition, in
February 1995 Continental reduced its rental payments on an additional 11
widebody aircraft leased at significantly above-market rates. The Company
began negotiations in February 1995 with the relevant lessors of the 35
widebody aircraft to amend the lease repayment schedules or provide,
effective February 1, 1995, alternative compensation, which could include
debt securities convertible into equity, in lieu of current cash payments.
As of April 12, 1995, the Company had entered into agreements or agreements
in principle with lessors of 16 of these aircraft that will improve the
Company's liquidity by an estimated $44 million and $40 million in 1995 and
1996, respectively.
On April 10, 1995, the Denver City Council approved an agreement among the
City and County of Denver (the "City"), the Company and certain signatory
airlines amending the Company's lease of facilities at DIA by reducing the
Company's lease term to five years, reducing to 10 the number of gates (and
reducing associated space) leased by the Company and making certain changes
in the rates and charges under the lease. The agreement also provides for
the release of certain claims and the settlement of certain litigation
filed by the City against the Company. See Note 13. The agreement is
expected to result in annual reduction in costs to the Company of
approximately $20 million over the life of the lease.
Continental and System One are currently negotiating a series of
transactions whereby the existing systems management agreement between
System One and Electronic Data System ("EDS") would be terminated and a
substantial portion of the assets (including the travel agent subscriber
base and travel-related information management products and services
("IMS") software) and certain liabilities of System One would be
transferred to a newly formed limited liability company ("New S1") that
would be owned equally by System One (which will remain a wholly owned
subsidiary of Continental), EDS and AMADEUS, a European computerized
reservation system ("CRS"). Substantially all of System One's remaining
assets (including the CRS software) and liabilities would be transferred to
AMADEUS. In addition to retaining a one-third interest in New S1, System
One would receive cash proceeds and an equity interest in AMADEUS and the
outstanding indebtedness of System One owed to each of EDS and Continental
would be repaid. New S1 would market the AMADEUS CRS and would continue to
develop, market and distribute travel-related IMS. These transactions,
which are expected to result in a gain, are anticipated to close in the
second quarter of 1995.
Continental's failure to make required payments to the Lenders, the City
and County of Denver and certain aircraft lessors as described above
constituted events of default under the respective agreements with such
parties. The agreements reached through April 12, 1995 with the Lenders,
the City and County of Denver and two aircraft lessors have cured the
defaults under their respective agreements. As of April 12, 1995, defaults
under the remaining widebody aircraft leases were continuing due to the
nonpayment of rents, which could entitle the lessors to pursue contractual
remedies, including seeking to take possession of the leased aircraft. As
of April 12, 1995, the Company is in negotiations with these remaining
lessors and has received proposals from lessors representing a majority of
the Company's agreements currently in default. The Company believes it
will be able to successfully conclude the remaining negotiations and thus
avoid any material adverse effect on the Company. In addition, under
"cross default" provisions, the payment defaults create defaults under a
significant number of Continental's other lease and debt agreements, and
the Company's obligations under the agreements subject to such cross
defaults are also eligible to be accelerated. However, in the opinion of
the Company, it is unlikely that lessors or creditors will exercise
remedies under cross default provisions because (i) the Company is making
all required contractual payments under the applicable agreements, (ii) the
contractual payments on a substantial majority of aircraft leases are at
current market rates, (iii) taking possession of the aircraft would cause
the lessors or lenders to incur remarketing costs, and (iv) exercise of
remedies could expose lessors and lenders to "lender liability" litigation.
Additionally, the Company has made substantial progress in negotiations
with lenders and lessors to cure the payment defaults and expects to
complete all such negotiations by June 30, 1995, and as a result all events
of default, including cross defaults, should be eliminated. Consequently,
the Company does not expect the cross defaults to have a material adverse
effect on the Company.
As a result of the Federal Aviation Administration ("FAA") Airworthiness
Directive which forced the partial grounding of the Company's ATR commuter
fleet in late 1994 and early 1995, the Company withheld January and
February lease payments totaling $7 million on those ATR aircraft leased by
the manufacturer. The Company's non-payment of rentals may have resulted
in an event of default under the related lease agreements with ATR. As of
April 12, 1995, the Company was engaged in discussions with ATR concerning
compensation, if any, to be received by the Company as a result of the
grounding, and the Company had received a proposal from ATR that, if
accepted, would cure the payment default. In addition because of a
decrease in the value of certain collateral, the Company may have been in
default under the debt agreement relating to the financing of the Company's
Los Angeles International Airport ("LAX") maintenance facility. At
March 31, 1995 the principal balance of the applicable obligation was
approximately $64 million and at April 12, 1995, the Company was in
negotiations with the creditor. As a result of the progress in the ATR and
LAX maintenance facility negotiations, the Company does not anticipate that
the foregoing matters will have a material adverse effect on the Company.
The Company has no current plans to take other actions in the future that
would constitute additional events of default.
As a result of the defaults and cross-defaults described above that were
continuing at April 12, 1995, approximately $489.9 million of the Company's
long-term debt and capital lease obligations were classified as debt and
capital leases in default within current liabilities as of December 31,
1994. While the Company does not believe it is probable that it will be
required to fund such defaulted obligations in the next twelve months,
generally accepted accounting principles require that such defaulted
obligations be classified as current liabilities at December 31, 1994. In
addition, certain operating leases with remaining aggregate rentals of
$1.4 billion as of December 31, 1994 were in default or cross default at
April 12, 1995. See Notes 5 and 6.
NOTE 2 - PREDECESSOR COMPANY CHAPTER 11 REORGANIZATION
On April 16, 1993, the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court") confirmed the Plan of Reorganization of
Holdings and all its subsidiaries that had filed for Chapter 11
reorganization, including, among others, Continental, System One and
Chelsea Catering Corporation ("Chelsea") (collectively, the "Debtors").
The Reorganization became effective on April 27, 1993 (the "Effective
Date"). The Reorganization resolved several large contingent claims that
had burdened the Company. Such claims and contingencies included the
Company's liability to the Pension Benefit Guaranty Corporation (the
"PBGC") related to pension plans previously maintained by Eastern Air
Lines, Inc. ("Eastern") (the "PBGC Settlement") and the Company's potential
liability to Eastern (or its creditors) as a result of certain transactions
entered into with Eastern prior to 1989. Certain of Eastern's former
employees continue to assert claims against the Company, including demands
that former Eastern pilots be integrated into Continental's work force.
Pursuant to the Reorganization, pre-existing equity interests of the
Company were cancelled, the Company's obligations to other prepetition
creditors were restructured and general unsecured nonpriority prepetition
creditors became entitled, in full satisfaction of their claims, to share
in $6,523,952 of cash and fixed pools of Class A Common Stock ("Class A")
and Class B Common Stock ("Class B") of the Reorganized Company.
Pursuant to the Reorganization, on the Effective Date, all of the Debtors
other than Continental were merged with and into Continental. Continental
capitalized two wholly owned subsidiaries, Continental Express, Inc.
("Express") and System One, which continue the commuter airline and
computer reservations and related businesses, respectively, of certain of
the Debtors, by transferring certain assets and liabilities to such
subsidiaries. Also, on the Effective Date, Continental transferred the
assets of its Continental/Air Micronesia division to Continental
Micronesia, Inc. ("CMI"), an indirect subsidiary 91.0%-owned by Continental
which continues Continental's western Pacific operations.
As part of the Reorganization and an Investment Agreement dated
November 12, 1992, as amended, between Continental, Holdings, Air Partners,
L.P. ("AP") and Air Canada ("AC"), on the Effective Date (i) AP purchased
for an aggregate of $55 million (less certain fees) 2,740,000 shares of
Class A and 2,260,000 shares of Class B and warrants to purchase an
aggregate of 1,519,734 additional shares of Class A and
3,382,632 additional shares of Class B; (ii) AC purchased for an aggregate
of $55 million (less certain fees) 1,373,216 shares of Class A and
3,626,784 shares of Class B and warrants to purchase an aggregate of
1,367,880 additional shares of Class A and 4,849,755 additional shares of
Class B; (iii) enRoute Enterprises USA Inc., an indirect wholly owned
subsidiary of AC, purchased 300,000 shares of Continental's 12% Cumulative
Preferred Stock ("12% Preferred Stock") for $30 million; (iv) Continental
issued to itself, as Distribution Agent, 1,900,000 shares of its Class A
and 5,042,368 shares of its Class B for the benefit of general unsecured
creditors under the Plan of Reorganization; (v) Continental issued
493,621 shares of Class B to the Master Trust for the Continental Airlines,
Inc. Retirement Plan; and (vi) Continental issued to GE Capital, as
commitment consideration for its loan to CMI, 171,000 shares of its newly-
authorized 8% Cumulative Preferred Stock ("8% Preferred Stock"). As a
result of such issuances, as of April 27, 1993, AC had 28.7% of the equity
interest and 24.3% of the voting power and AP had 28.7% of the equity
interest and 41.5% of the voting power of Continental without giving effect
to the warrants.
Nonoperating reorganization items recorded by the Predecessor Company
consisted of the following (in millions):
Period from
January 1, 1993
through
April 27, 1993 1992
Reorganization Costs:
Professional fees. . . . . . . . . . . . $ 58.6 $30.0
Interest income. . . . . . . . . . . . . (4.5) (15.3)
Rejected aircraft agreements . . . . . . 153.3 6.7
Other. . . . . . . . . . . . . . . . . . 33.9 10.1
Revaluation of Assets and Liabilities:
Fair market value adjustments. . . . . . 719.1 -
Write off of deferred gains on
sale/leaseback transactions . . . . . . (218.6) -
Other. . . . . . . . . . . . . . . . . . 76.8 -
$818.6 $31.5
NOTE 3 - FRESH START REPORTING
In connection with its emergence from bankruptcy on April 27, 1993,
Continental adopted fresh start reporting in accordance with SOP 90-7. The
fresh start reporting common equity value of $615 million was determined by
the Company with the assistance of its financial advisors. The significant
factors used in the determination of this value were analyses of publicly
available information of other companies believed to be comparable to the
Company, industry, economic and overall market conditions and historical
and estimated performance of the airline industry; discussions with various
potential investors; and certain financial analyses, including discounted
future cash flows.
Under fresh start reporting, the reorganization value of the entity has
been allocated to the Reorganized Company's assets and liabilities on a
basis substantially consistent with the purchase method of accounting. The
portion of reorganization value not attributable to specific tangible or
identifiable intangible assets of the Reorganized Company has been
reflected as "Reorganization Value in Excess of Amounts Allocable to
Identifiable Assets" in the accompanying consolidated balance sheet as of
December 31, 1993. The fresh start reporting adjustments, primarily
related to the adjustment of the Company's assets and liabilities to fair
market values, will have a significant effect on the Company's future
statements of operations. The more significant adjustments relate to
increased depreciation and amortization expense relating to aircraft,
routes, gates and slots and reorganization value in excess of amounts
allocable to identifiable assets; reduced aircraft rent expense; and
increased interest expense.
The effects of the Plan of Reorganization and fresh start reporting on the Company's consolidated
balance sheet as of April 27, 1993 are as follows (in thousands):
Predecessor Issuance Reorganized
Company's Debt of Debt Fresh Start Company's
Balance Sheet Discharge and Stock Adjustments Balance Sheet
ASSETS April 27, 1993 (a) (b) (c) April 27, 1993
Current Assets:
Cash and cash equivalents. . . . . $ 377,102 $ - $389,038 $ - $ 766,140
Accounts receivable, net . . . . . 459,024 - - - 459,024
Spare parts and supplies, net. . . 194,679 - - (23,440) 171,239
Prepayments and other. . . . . . . 94,271 - - (209) 94,062
Total current assets. . . . . . . 1,125,076 - 389,038 (23,649) 1,490,465
Property and Equipment, net . . . . 1,907,819 - - (467,553) 1,440,266
Other Assets:
Routes, gates and slots. . . . . . - - - 1,712,000 1,712,000
Reorganization value in excess of
amounts allocable to identifiable
assets. . . . . . . . . . . . . . - - - 349,403 349,403
Other assets . . . . . . . . . . . 73,414 - 15,995 (1,628) 87,781
Total other assets. . . . . . . . 73,414 - 15,995 2,059,775 2,149,184
Total Assets . . . . . . . . . . $3,106,309 $ - $405,033 $1,568,573 $5,079,915
Predecessor Issuance Reorganized
Company's Debt of Debt Fresh Start Company's
LIABILITIES AND Balance Sheet Discharge and Stock Adjustments Balance Sheet
STOCKHOLDERS' EQUITY (DEFICIT) April 27, 1993 (a) (b) (c) April 27, 1993
Current Liabilities:
Current maturities of
long-term debt. . . . . . . . . $ 104,705 $ 70,306 $(40,000) $ 185 $ 135,196
Current maturities of
capital leases. . . . . . . . . 590 29,851 - - 30,441
Accounts payable . . . . . . . . 564,421 20,898 - 9,806 595,125
Air traffic liability. . . . . . 686,551 - - - 686,551
Accrued payroll and pensions . . 164,945 16,170 - 11,007 192,122
Accrued other liabilities. . . . 264,988 75,216 (3,952) 129,107 465,359
Total current liabilities . . . 1,786,200 212,441 (43,952) 150,105 2,104,794
Estimated Liabilities Subject
to Chapter 11 Reorganization
Proceedings. . . . . . . . . . . 3,859,715 (3,859,715) - - -
Long-term Debt. . . . . . . . . . 268,119 806,647 310,000 (31,233) 1,353,533
Capital Leases. . . . . . . . . . 24,033 277,970 - (758) 301,245
Deferred Credits and Other
Long-Term Liabilities:
Deferred income taxes . . . . . - - - 100,000 100,000
Deferred credit related
to Eastern . . . . . . . . . . 1,056,496 (1,056,496) - - -
Deferred credit -
operating leases . . . . . . . - - - 329,546 329,546
Other . . . . . . . . . . . . . 254,340 430 - (44,458) 210,312
Total deferred credits and
other long-term
liabilities . . . . . . . . . 1,310,836 (1,056,066) - 385,088 639,858
Minority Interest . . . . . . . . - - - 22,100 22,100
Predecessor Issuance Reorganized
Company's Debt of Debt Fresh Start Company's
LIABILITIES AND Balance Sheet Discharge and Stock Adjustments Balance Sheet
STOCKHOLDERS' EQUITY (DEFICIT) April 27, 1993 (a) (b) (c) April 27, 1993
Redeemable Preferred Stock. . . . $ 101,938 $ - $ 43,385 $ (101,938) $ 43,385
Nonredeemable Preferred Stock
and Common Stockholders'
Equity (Deficit):
Series C convertible
preferred stock. . . . . . . . 204 - - (204) -
6-3/4% cumulative convertible
junior preferred stock . . . . 65 - - (65) -
Class A common stock. . . . . . - - 60 - 60
Class B common stock. . . . . . - - 114 - 114
Common stock. . . . . . . . . . 470 - - (470) -
Additional paid-in capital. . . 1,094,811 - 109,900 (589,885) 614,826
Retained earnings (deficit) . . (5,328,058) 3,618,723 (14,474) 1,723,809 -
Common treasury stock . . . . . (12,024) - - 12,024 -
Total nonredeemable
preferred stock and
common stockholders'
equity (deficit) . . . . . . (4,244,532) 3,618,723 95,600 1,145,209 615,000
Total Liabilities and
Stockholders' Equity
(Deficit) . . . . . . . . . $3,106,309 $ - $405,033 $1,568,573 $5,079,915
(a) To record the discharge or reclassification of prepetition obligations (Estimated Liabilities
Subject to Chapter 11 Reorganization Proceedings) pursuant to the Reorganization.
Substantially all of these obligations are only entitled to receive such distributions of
cash and common stock as provided under the Reorganization. A portion of Estimated
Liabilities Subject to Chapter 11 Reorganization Proceedings was restructured and will
continue, as restructured, to be liabilities of the Reorganized Company.
(b) To record proceeds received from issuance of new debt and equity securities and the pay down
of the Company's revolving credit facility with The Chase Manhattan Bank, N.A. ("Chase").
(c) To record adjustments to reflect assets and liabilities at fair market value (including the
establishment of Reorganization Value in Excess of Amounts Allocable to Identifiable Assets),
the establishment of the Reorganized Company's equity value of $615 million through the
cancellation of the Predecessor Company's equity and establishment of the minority interest.
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation -
The consolidated financial statements of the Reorganized Company
include the accounts of Continental and its wholly owned operating
subsidiaries, System One and Express, as well as CMI. The minority
interest holder of CMI has rights to acquire the minimum number of
additional shares of CMI necessary to cause Continental's equity
interest to decline below 80.0% if certain events relating to the
defined benefit plans of Continental occur. The consolidated
financial statements of the Predecessor Company include the accounts
of Holdings and its wholly owned operating subsidiaries, Continental,
System One and Chelsea.
The companies operate within the air transportation industry. All
significant intercompany transactions have been eliminated in
consolidation.
(b) Cash and Cash Equivalents -
Cash and cash equivalents consist of cash and short-term, highly
liquid investments which are readily convertible into cash and have
original maturities of three months or less. Approximately
$118.7 million and $102.4 million of cash and cash equivalents at
December 31, 1994 and December 31, 1993, respectively, were held in
restricted arrangements relating primarily to payments for workers'
compensation claims and in accordance with the terms of certain other
agreements.
(c) Spare Parts and Supplies -
Flight equipment expendable parts and supplies were recorded at fair
market values (which approximated average cost) as of April 27, 1993;
subsequent purchases are valued at average cost. An allowance for
obsolescence for flight equipment expendable parts and supplies is
accrued to allocate the costs of these assets, less an estimated
residual value, over the estimated useful lives of the related
aircraft and engines.
(d) Property and Equipment -
Property and equipment were recorded at fair market values as of
April 27, 1993; subsequent purchases are valued at cost and are
depreciated to estimated residual values over their estimated useful
lives using the straight-line method. Estimated useful lives for such
assets are 15 to 28 years from date of manufacture for all owned jet
and certain commuter aircraft; 9 to 21 years, depending on the lease
period, for aircraft acquired under long-term capital leases; and 2 to
25 years for other property and equipment, including airport facility
improvements. Effective April 27, 1993, Continental revised the
estimated useful lives of its Stage III aircraft from 28 years from
date of manufacture to 25 years.
(e) Intangible Assets -
Routes are amortized on a straight-line basis over 40 years, gates
over the stated term of the related lease and slots over 20 years.
Routes, gates and slots are comprised of the following (in millions):
Balance at Accumulated Amortization
December 31, 1994 at December 31, 1994
Routes . . . . . . $ 967.2 $41.4
Gates. . . . . . . 470.5 40.5
Slots. . . . . . . 153.4 14.7
$1,591.1 $96.6
Reorganization value in excess of amounts allocable to identifiable
assets is amortized on a straight-line basis over 20 years. The
carrying value of intangible assets is reviewed if the facts and
circumstances suggest that it may be impaired. If this review
indicates that the Company's intangible assets will not be
recoverable, as determined based on the undiscounted cash flows over
the remaining amortization period, the Company's carrying value of the
intangible assets is reduced by the estimated shortfall of cash flows.
(f) Air Traffic Liability -
Passenger revenues are recognized when transportation is provided
rather than when a ticket is sold. The amount of passenger ticket
sales not yet recognized as revenue is reflected in the accompanying
consolidated balance sheets as air traffic liability. The Company
performs periodic evaluations of this estimated liability, and any
adjustments resulting therefrom, which can be significant, are
included in results of operations for the periods in which the
evaluations are completed. In the third quarter of 1993, the Company
recorded an adjustment to increase passenger revenues by $75 million
as a result of completion of a periodic evaluation.
Continental sponsors a frequent flyer program ("OnePass") and records
an estimated liability for the incremental cost associated with
providing the related free transportation at the time a free travel
award is earned. The liability is adjusted periodically based on
awards earned and awards redeemed.
(g) Passenger Traffic Commissions -
Passenger traffic commissions are recognized as expense when the
transportation is provided and the related revenue is recognized. The
amount of passenger traffic commissions not yet recognized as expense
is included in prepayments and other in the accompanying consolidated
balance sheets.
(h) Deferred Income Taxes -
Deferred income taxes reflect the net tax effects of temporary
differences between the financial reporting carrying amounts of assets
and liabilities and the income tax amounts.
(i) Deferred Credit - Aircraft Operating Leases -
Aircraft operating leases were adjusted to fair market value at
April 27, 1993. The net present value of the difference between the
stated lease rates and the fair market rates has been recorded as a
deferred credit in the accompanying consolidated balance sheets. The
deferred credit is increased through charges to interest expense and
decreased on a straight-line basis as a reduction in rent expense over
the applicable lease periods, generally one to 15 years.
(j) Maintenance and Repair Costs -
Maintenance and repair costs for owned and leased flight equipment,
including the overhaul of aircraft components, are charged to
operating expense as incurred.
(k) Petroleum Option Contracts -
Gains on petroleum option contracts are recognized as a component of
fuel expense when the underlying fuel being hedged is used.
(l) Earnings (Loss) per Share -
Earnings (loss) per common share computations are based upon earnings
(loss) applicable to common shares and the average number of shares of
common stock and dilutive common stock equivalents (stock options,
warrants and restricted stock) outstanding. The number of shares used
in the computation for the year ended December 31, 1994 and the period
April 28, 1993 through December 31, 1993 was 26,056,897 and
18,022,918, respectively. Preferred stock dividend requirements
(including additional dividends on unpaid dividends) and accretion to
redemption value on preferred stock increased the net loss for this
computation by approximately $5.7 million and $3.5 million for the
year ended December 31, 1994 and for the period April 28, 1993 through
December 31, 1993, respectively. On the Effective Date, all of the
outstanding common and preferred stock of Holdings was cancelled.
Information regarding the earnings (loss) per share computation
relating to the pre-reorganization stock is not comparable with data
provided for Class A and Class B and is therefore not included.
(m) Reclassifications -
Certain reclassifications have been made in the prior year's financial
statements to conform to the current year presentation.
NOTE 5 - LONG-TERM DEBT
Continental's long-term debt was recorded at fair market value at April 27,
1993. The fair market value adjustment is amortized to interest expense
over the life of the debt. Long-term debt as of December 31 is summarized
as follows (in millions of dollars):
1994 1993
Secured
Notes payable to GE Capital and affiliates,
interest rates of 8.64% to 12.0% and floating
interest rates of LIBOR plus 4.0%, payable
through 2005 . . . . . . . . . . . . . . . . . . . $ 599.4 $ 603.1
Notes payable, interest rates of 5.84% to 18.38%
(imputed interest rates approximate stated
interest rates), payable through 2005. . . . . . . 274.6 276.7
Notes payable, interest rates of 6% to 12.25%
(imputed interest rates of 7.86% to 9.9%),
payable through 2008 . . . . . . . . . . . . . . . 278.2 332.5
Floating rate notes, interest rates of prime
plus 0.5% to 3.05% and LIBOR plus 0.75% to
3.75% and Eurodollar plus 0.75%, payable
through 2007 . . . . . . . . . . . . . . . . . . . 148.9 159.1
Other . . . . . . . . . . . . . . . . . . . . . . . 15.2 18.0
Unsecured
Notes payable, interest rates of 6.94% to 12%
(imputed interest rates 16.3% to 21.8%),
payable through 2005 . . . . . . . . . . . . . . . 112.4 181.6
Other . . . . . . . . . . . . . . . . . . . . . . . 9.5 1.6
1,438.2 1,572.6
Less: debt in default. . . . . . . . . . . . . . . 264.7 -
Less: current maturities . . . . . . . . . . . . . 126.2 176.2
Less: fair market value adjustment . . . . . . . . 9.1 26.5
Total . . . . . . . . . . . . . . . . . . . . . . . $1,038.2 $1,369.9
Substantially all of Continental's property, equipment and spare parts and
supplies are subject to agreements securing indebtedness of Continental.
Continental has various loan and lease obligations with GE Capital which
were renegotiated in March 1995. In addition, the Company is in default
under various loan agreements. See Note 1.
Continental and CMI have various loan agreements containing significant
financial covenants including, among other things, minimum cash balance
requirements, consolidated net worth requirements, restrictions on the
payment of dividends, restrictions on new borrowings and mandatory
prepayments upon sale of certain assets. As of December 31, 1994, CMI had
a minimum cash balance requirement of $23.7 million, net assets of
$286.7 million and was restricted from paying dividends in excess of
approximately $48.7 million.
In December 1993, the Company obtained a $50 million secured revolving
credit facility, the proceeds from which must be used to finance certain
aircraft purchase deposits. During 1994, Continental drew down
approximately $21.5 million and repaid a total of $31.6 million of such
facility. The revolving credit agreement contains a financial covenant
relating to minimum cash balance requirements and is collateralized by
certain accounts receivable and the related aircraft agreements.
Maturities of long-term debt due over the next five years (including the
scheduled repayments of debt in default) are as follows (in millions):
Year ending December 31,
1995. . . . . . . . . . . . . . . . . . . . . $175.3
1996. . . . . . . . . . . . . . . . . . . . . 156.3
1997. . . . . . . . . . . . . . . . . . . . . 188.1
1998. . . . . . . . . . . . . . . . . . . . . 168.3
1999. . . . . . . . . . . . . . . . . . . . . 176.9
As of December 31, 1994 and 1993, the prime, LIBOR and Eurodollar rates
associated with Continental's indebtedness approximated 8.5% and 6.0%, 6.5%
and 3.4%, and 6.3% and 4.0%, respectively.
NOTE 6 - LEASES
Continental leases certain aircraft and other assets under long-term lease
arrangements. Other leased assets include real property, airport and
terminal facilities, sales offices, maintenance facilities, training
centers and general offices. Most leases also include renewal options and
some aircraft leases include purchase options.
At December 31, 1994, the scheduled future minimum lease payments under
capital leases and the scheduled future minimum lease rental payments
required under aircraft and engine operating leases that have initial or
remaining noncancellable lease terms in excess of one year are as follows
(in millions):
Capital Operating
Leases Leases*
Year ended December 31,
1995. . . . . . . . . . . . . . . . . . . . . . $ 93.5 $ 586.4
1996. . . . . . . . . . . . . . . . . . . . . . 94.9 551.1
1997. . . . . . . . . . . . . . . . . . . . . . 89.9 492.7
1998. . . . . . . . . . . . . . . . . . . . . . 83.0 434.2
1999. . . . . . . . . . . . . . . . . . . . . . 79.3 396.2
Later years . . . . . . . . . . . . . . . . . . 160.2 2,578.4
Total minimum lease payments. . . . . . . . . . . . 600.8 $5,039.0
Less: amount representing interest . . . . . . . . 185.5
Present value of capital leases . . . . . . . . . . 415.3
Less: capital lease obligations in default . . . . 225.1
Less: current maturities of capital leases . . . . 25.8
Long-term capital leases. . . . . . . . . . . . . . $164.4
______________
* These amounts have not been reduced to reflect the Company's fresh start-
related revaluation of leases to fair market value as of April 27, 1993
(see Note 4(i)).
In March and April 1995, the Company successfully completed negotiations
with lessors of 11 narrowbody aircraft and 16 widebody aircraft which
resulted in the deferral of payments due in 1995 and 1996 to later years.
Such deferrals are not reflected in the tables above. Operating leases
with remaining lease payments of $1.4 billion as of December 31, 1994 are
in default as of April 12, 1995. Scheduled repayments have not been
adjusted in the above table. See Note 1.
Not included in the above operating lease table is approximately
$240 million in annual minimum lease payments relating to non-aircraft
leases, principally airport and terminal facilities and related equipment.
See Note 1 for a discussion of the Denver lease.
The Company's total rental expense for all operating leases, net of
sublease rentals, was $674.6 million, $666.2 million and $645.9 million in
1994, 1993 and 1992, respectively.
As of December 31, 1994, Continental remains contingently liable on
$202.1 million of long-term lease obligations of USAir, Inc. ("USAir")
related to the East End Terminal at LaGuardia. In the event USAir defaults
on such obligations, Continental may be required to cure the default, at
which time it would have the right to reoccupy the terminal.
NOTE 7 - FINANCIAL INSTRUMENTS
(a) Cash equivalents -
Cash equivalents consist primarily of commercial paper with maturities
of three months or less and approximate fair value due to the short
maturity of three months or less.
(b) Investment in Marketable Equity Securities -
Continental's investment in America West is classified as available-
for-sale and carried at aggregate market value of $16.6 million at
December 31, 1994. An unrealized loss of $2.2 million representing
the excess of cost over market value is reflected in stockholders'
equity.
(c) Petroleum Option Contracts -
The Company enters into petroleum option contracts to protect against
a sharp increase in jet fuel prices. These option contracts generally
cover the Company's forecasted jet fuel needs for the next three to
six months. At December 31, 1994, the Company had options outstanding
with an aggregate contract value of approximately $140 million. At
December 31, 1994, the fair value of the option contracts was
immaterial as the strike price under these contracts exceeded the
current spot rate. During the year ended December 31, 1994, option
hedging activities reduced fuel expense by approximately $2.2 million,
net of the premiums associated with these options.
The Company is exposed to credit loss in the event of nonperformance
by the counterparty on the petroleum option contracts, however, the
Company does not anticipate nonperformance by this counterparty. The
amount of such exposure is generally the unrealized gains, if any, on
such option contracts.
(d) Debt -
The fair value of the Company's debt with a carrying value of
$1.34 billion and $1.53 billion as of December 31, 1994 and
December 31, 1993, respectively, estimated based on the discounted
amount of future cash flows using the current incremental rate of
borrowing for a similar liability or quoted market prices,
approximates $1.29 billion and $1.56 billion, respectively. The fair
value of the remaining debt (with a carrying value of approximately
$84.4 million and $53.1 million, respectively, and primarily relating
to modification notes) was not practicable to estimate due to the
large number and small dollar amounts of these notes.
NOTE 8 - PREFERRED AND COMMON STOCK
On the Effective Date, all of the then outstanding equity securities of the
Predecessor Company were cancelled, including all outstanding common and
preferred stock of Continental and Holdings. Continental's Restated
Certificate of Incorporation authorizes the issuance of 10 million shares
of preferred stock, 50 million shares each of Class A, Class C Common Stock
("Class C") and Class D Common Stock ("Class D") and 100 million shares of
Class B.
Redeemable Preferred Stock
Pursuant to the Plan of Reorganization and the Investment Agreement, newly
authorized shares of redeemable preferred stock were issued. Redeemable
preferred stock consists of the following:
December 31, December 31,
1994 1993
(millions)
12% Preferred Stock, 1,000,000 shares
authorized, 300,000 shares issued and
outstanding, redemption value -
$36,465,154 and $32,465,055,
respectively . . . . . . . . . . . . . . $36.5 $32.5
8% Preferred Stock, 171,000 shares
authorized, issued and outstanding,
redemption value - $19,500,450 and
$18,032,270, respectively. . . . . . . . 16.1 14.4
$52.6 $46.9
Holders of 12% Preferred Stock and 8% Preferred Stock are entitled to
receive, when and if declared by the Board of Directors (the "Board") out
of legally available funds of the Company, cumulative dividends payable
quarterly in cash at an annual rate of $12 and $8 per share for 12%
Preferred Stock and 8% Preferred Stock, respectively. To the extent net
income, as defined, for any calendar quarter is less than the amount of
dividends due on all outstanding shares of 12% Preferred Stock for such
quarter, the Board may declare dividends payable in additional shares of
12% Preferred Stock in lieu of cash. At any time, the Company may redeem,
in whole or in part, on a pro rata basis among the stockholders, any
outstanding shares of 12% Preferred Stock or 8% Preferred Stock. All
outstanding shares of both series of preferred stock are mandatorily
redeemable on April 27, 2003 out of legally available funds. In each case,
the redemption price is $100 per share plus accrued unpaid dividends.
Neither series of preferred stock is convertible into shares of common
stock and neither series has voting rights, except under limited
circumstances. The 8% Preferred Stock ranks pari passu with the 12%
Preferred Stock as to payment of dividends and liquidation. As of December
31, 1994, the Company had approximately $8.9 million of dividends on its
preferred stock in arrears.
The Company recorded a $222,000 and $134,000 charge against additional
paid-in capital related to the accretion of the difference between
redemption value and fair market value at date of issuance for the 8%
Preferred Stock for the year ended December 31, 1994 and for the period
from April 28, 1993 through December 31, 1993, respectively.
Common Stock
Continental has two classes of common stock outstanding, Class A and
Class B. Holders of shares of Class A and Class B are entitled to receive
dividends when and if declared by the Board. Each share of Class A is
entitled to 10 votes per share and each share of Class B is entitled to one
vote per share. Pursuant to a stockholders' agreement, AC and AP have
agreed to vote their shares for the election of six directors nominated by
AC, six directors nominated by AP and six directors not affiliated with AP
or AC. AC has the right, subject to foreign ownership restrictions, to
convert shares of Class B into shares of Class A. Also, AC has the limited
right, in certain circumstances, to convert its Class A into Class C and AP
has the limited right, in certain circumstances, to convert its Class A
into Class D. No person may hold or own Class C or Class D stock,
respectively, other than AC and certain of its affiliates or AP and certain
of its affiliates. The Class C and Class D common stock, if issued, would
preserve the rights of each of AC and AP, respectively, to elect six
directors to the Company's Board in certain circumstances, including a sale
by the other party of its stock.
On December 14, 1993, the Company sold 8,086,579 shares of Class B common
stock in an underwritten public offering realizing net proceeds of
approximately $153.1 million. In January 1994, AC converted 287,840 shares
of Class B into an equal number shares of Class A to preserve its
percentage of total voting power. In July 1994, 1,000,000 shares of
restricted Class B were granted and issued to substantially all employees
at or below the manager or equivalent level and 182,000 shares of
restricted Class B were granted and issued to key officers. See Note 9.
As of December 31, 1994, AC had 18.7% of the equity interest and 23.9% of
the voting power and AP had 18.7% of the equity interest and 35.6% of the
voting power.
Warrants
The Company has outstanding 11,120,001 Class A Warrants and Class B
Warrants (collectively, the "Warrants") of which 4,902,366 Warrants are
held by AP and 6,217,635 Warrants are held by AC. Each Warrant entitles
the holder to purchase one share of Class A or Class B. The Warrants are
exercisable as follows: (i) 7,413,334 Warrants (1,964,534 Class A Warrants
and 5,448,800 Class B Warrants) have an initial exercise price of $15 per
share, and (ii) 3,706,667 Warrants (923,080 Class A Warrants and
2,783,587 Class B Warrants) have an initial exercise price of $30 per
share. The warrants expire on April 27, 1998.
NOTE 9 - STOCK PLANS AND AWARDS
On March 4, 1994, the Board of Directors adopted the Continental Airlines,
Inc. 1994 Employee Stock Purchase Plan (the "Stock Purchase Plan")
effective July 1, 1994 and the Continental Airlines, Inc. 1994 Incentive
Equity Plan (the "Incentive Plan"), which plans were approved by the
stockholders of the Company at the annual stockholders' meeting on June 30,
1994.
Under the Company's Stock Purchase Plan, all full and part-time employees
of the Company who are on the United States payroll may purchase shares of
Class B at 85% of the lower of fair market value on the first or last
business day of a calendar quarter. Subject to adjustment, a maximum of
4,000,000 shares of Class B are authorized for purchase under the Stock
Purchase Plan. In January 1995, 118,069 shares of Class B were issued in
connection with the Stock Purchase Plan.
Under the Incentive Plan, key officers and employees of the Company and its
subsidiaries may be selected by the Human Resources Committee of the Board
of Directors (the "Committee") to receive any or all of the following:
stock options, restricted stock, long-term incentive awards and annual
incentive awards subject to adjustment. The Incentive Plan also provides
for each outside director to receive on the day following the annual
stockholders meeting options to purchase 1,500 shares of Class B. Subject
to adjustment, the number of shares of Class B that may be issued under the
Incentive Plan will not in the aggregate exceed 2,300,000. The following
table summarizes stock option transactions pursuant to the Company's
Incentive Plan for the year ended December 31, 1994:
Granted*. . . . . . . . . . . . . . . . . . . . . . . . . 2,111,000
Exercised . . . . . . . . . . . . . . . . . . . . . . . . -
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . (265,000)
Outstanding at December 31, 1994. . . . . . . . . . . . . 1,846,000
Average option price per share:
Options exercised. . . . . . . . . . . . . . . . . . . . -
Options outstanding at end of year . . . . . . . . . . . $20.13
Options exercisable at end of year. . . . . . . . . . . . 123,875
* The option price for all stock options is equal to 100% of the fair
market value of Continental's common stock at the date of grant.
The stock options generally vest over a four-year period.
In addition, the Incentive Plan permits awards of restricted stock to
participants, subject to one or more restrictions, including a restriction
period and a purchase price, if any, to be paid by the participant, as
determined by the Committee. The number of shares of common stock that may
be granted or sold as restricted stock under the Incentive Plan may not in
the aggregate exceed 300,000 shares of Class B. As of December 31, 1994,
152,000 shares of restricted stock were outstanding with no cost to the
participants. These shares vest over a two-year period. During 1994,
30,000 shares were forfeited and returned to treasury stock. At
December 31, 1994, 302,000 shares of common stock were available for future
grants of stock options or restricted stock under the Incentive Plan.
Additionally, on March 4, 1994, the Board approved a one-time grant of
1,000,000 shares of restricted stock to substantially all employees at or
below the Manager level. These shares were issued at no cost to the
employee and vest over a four-year period. Unvested shares of restricted
stock are subject to certain transfer restrictions and forfeiture under
certain circumstances. The unearned portion of restricted stock issued for
future service, representing the fair market value of the stock on the date
of award, is being amortized to wages, salaries and related costs over the
vesting period.
The Board of Directors, on March 4, 1994, also approved a profit sharing
program under which 15% of the Company's pre-tax earnings (before unusual
or nonrecurring items) will be distributed each year to all employees on a
pro rata basis according to base salary.
NOTE 10 - EMPLOYEE BENEFIT PLANS
The Company has noncontributory defined benefit pension and defined
contribution (including 401(k) savings) plans. Substantially all domestic
employees of the Company are covered by one or more of these plans. The
benefits under the active defined benefit pension plan are based on years
of service and an employee's final average compensation. Total pension
expense for the defined benefit plans was $50.7 million, $52.1 million and
$36 million and total expense for the defined contribution plans was
$0.9 million, $0.3 million and $2.1 million for 1994, 1993 and 1992,
respectively.
Net periodic pension cost of the Company's defined benefit plans for 1994,
1993 and 1992 included the following components (in millions):
Period from Period from
April 28, January 1,
1993 through 1993 through
December 31, April 27,
1994 1993 1993 1992
Service cost - benefits earned
during the year. . . . . . . . $39.3 $25.7 $13.9 $31.5
Interest cost on projected
benefit obligations. . . . . . 38.9 22.6 8.9 21.2
Return on plan assets . . . . . 14.0 (15.5) (10.1) (12.4)
Net amortization and deferral . (41.5) 1.0 5.6 (4.3)
Net periodic pension costs. . $50.7 $33.8 $18.3 $36.0
In connection with the Reorganization, the Company recorded an additional
liability of approximately $146.1 million (not included in pension expense
above) related to the grant of past service credit under the Company's
retirement plan for domestic employees and the recognition of unamortized
losses and costs. The following table sets forth the defined benefit
plans' funded status amounts as of December 31, 1994 and 1993 (in
millions):
1994 1993
Accumulated Assets Accumulated Assets
Benefits Exceed Benefits Exceed
Exceed Accumulated Exceed
Accumulated
Assets Benefits Assets Benefits
Actuarial present value of
benefit obligations:
Vested. . . . . . . . . . . $257.0 $ 66.0 $264.1 $71.6
Non-vested. . . . . . . . . 15.8 0.5 23.8 1.2
Accumulated benefit obliga-
tions. . . . . . . . . . . . 272.8 66.5 287.9 72.8
Effect of projected future
salary increases . . . . . . 99.4 - 121.3 -
Projected benefit obligation. 372.2 66.5 409.2 72.8
Plan assets at fair value . . 209.7 75.5 201.7 84.6
Projected benefit obligation
in excess of (less than)
plan assets. . . . . . . . . 162.5 (9.0) 207.5 (11.8)
Unrecognized net gain (loss). 39.9 (7.4) (20.1) (2.3)
Additional minimum liability. 6.5 - 5.4 -
Accrued (prepaid) pension
liability . . . . . . . . . $208.9 $(16.4) $192.8 $(14.1)
In accordance with Statement of Financial Accounting Standards No. 87
"Employers' Accounting for Pensions", an additional minimum pension
liability for certain plans, representing the excess of accumulated
benefits over plan assets and accrued pension costs, was recognized at
December 31, 1994 and 1993. A corresponding amount was recognized as a
separate reduction to stockholders' equity.
Plan assets consist primarily of equity securities, long-term debt
securities and short-term investments. Pursuant to the Reorganization, the
PBGC Settlement and the Investment Agreement, on April 27, 1993,
Continental issued 493,621 shares of Class B to the Master Trust for the
Continental Airlines, Inc. Retirement Plan.
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 8.75%, 7.50% and
8.25% for 1994, 1993 and 1992, respectively. The expected long-term rate
of return on assets (which is used to calculate the Company's return on
pension assets for the current year) was 9.25%, 9.25% and 9.97% for 1994,
1993 and 1992, respectively. The weighted average rate of salary increases
was 4.3%, 5.3% and 6.3% for 1994, 1993 and 1992, respectively. The
unrecognized net gain (loss) are amortized on a straight-line basis over
the average remaining service period of employees expected to receive a
plan benefit.
Continental's policy is to fund the noncontributory defined benefit pension
plans in accordance with Internal Revenue Service ("IRS") requirements as
modified, to the extent applicable, by agreements with the IRS.
NOTE 11 - INCOME TAXES
Effective April 27, 1993, the Reorganized Company adopted the liability
method of accounting for income taxes required by SFAS No. 109 (which was
adopted January 1, 1993 by the Predecessor Company). Under the provisions
of SFAS 109, the Company elected not to restate prior years' consolidated
financial statements. The cumulative effect of initial adoption on prior
years' retained earnings was not material. Additionally, as of January 1,
1993, the effect of the adoption of SFAS 109 upon income before income
taxes was not material.
The reconciliation of income tax computed at the United States federal
statutory tax rates to income tax benefit for the year ended December 31,
1994 and the period April 28, 1993 through December 31, 1993 are as follows
(in millions):
Amount Percent
1994 1993 1994 1993
Income tax benefit at United States
statutory rates. . . . . . . . . . . . $(227.9) $(18.0) (35.0)% (35.0)%
State income tax benefit. . . . . . . . (19.6) (2.5) (3.0) (4.9)
Amortization of reorganization value
in excess of amounts allocable to
identifiable assets. . . . . . . . . . 6.1 4.8 0.9 9.4
Meals and entertainment disallowance. . 6.6 1.4 1.0 2.7
Impact of change in federal tax rates . - 1.5 - 2.9
Net operating loss not benefitted . . . 192.6 - 29.6 -
Income tax benefit, net . . . . . . . . $ (42.2) $(12.8) (6.5)% (24.9)%
The significant component of the provision for income taxes for the year
ended December 31, 1994 and the period April 28, 1993 through December 31,
1993 was a deferred tax benefit of $42.2 million and $12.8 million,
respectively.
The provision for income taxes of the Predecessor Company for the period
from January 1 through April 27, 1993 and for the year ended December 31,
1992 was $2.1 million and $0.5 million, respectively. The provision for
income taxes of the Predecessor Company represents only state income taxes.
Due to losses generated, there is no provision for federal income taxes for
the period from January 1, 1993 through April 27, 1993 and for the year
ended December 31, 1992.
The provision for income taxes for the period from April 28, 1993 through
December 31, 1993 reflects an increase of $1.5 million which is related to
the increase in the corporate tax rate from 34.0% to 35.0% enacted by the
Revenue Reconciliation Act of 1993.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the related amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets
as of December 31, 1994 and 1993 are as follows (in millions):
1994 1993
Spare parts and supplies, fixed assets and
intangibles . . . . . . . . . . . . . . . . . . $ 668.0 $ 745.3
Deferred gain . . . . . . . . . . . . . . . . . . 84.8 92.1
Other, net. . . . . . . . . . . . . . . . . . . . 8.6 21.3
Gross deferred tax liabilities. . . . . . . . . . 761.4 858.7
Capital and safe harbor lease activity. . . . . . (24.0) (40.5)
Accrued liabilities . . . . . . . . . . . . . . . (343.1) (287.4)
Revaluation of leases . . . . . . . . . . . . . . (80.1) (136.9)
Net operating loss carryforwards. . . . . . . . . (1,068.7) (919.5)
Investment tax credit carryforwards . . . . . . . (44.7) (54.5)
Gross deferred tax assets . . . . . . . . . . . . (1,560.6) (1,438.8)
Deferred tax assets valuation allowance . . . . . 844.2 667.3
Net deferred tax liability. . . . . . . . . . . . 45.0 87.2
Less current deferred tax liability . . . . . . . 16.9 36.4
Non-current deferred tax liability. . . . . . . . $ 28.1 $ 50.8
At December 31, 1994, the Company has net operating loss carryforwards of
approximately $2.7 billion for income tax purposes that will expire from
1995 through 2009 and investment tax credit carryforwards of approximately
$44.7 million that will expire through 2001. As a result of the change in
ownership of the Company on April 27, 1993, the ultimate utilization of the
Company's net operating losses and investment tax credits could be limited.
For financial reporting purposes, a valuation allowance of $844.2 million
has been recognized to offset the deferred tax assets related to a portion
of those carryforwards. The Company has considered prudent and feasible
tax planning strategies in assessing the need for the valuation allowance.
The Company has assumed $194 million of benefit attributable to such tax
planning strategies. In the event the Company were to determine in the
future that any such tax planning strategies would not be implemented, an
adjustment to the deferred tax liability would be charged to income in the
period such determination was made. In the event the Company recognizes
additional tax benefits related to net operating loss carryforwards and
investment tax credit carryforwards attributable to the Predecessor
Company, those benefits would be applied to reduce Reorganization Value in
Excess of Amounts Allocable to Identifiable Assets and other intangibles to
zero, and thereafter as an addition to paid-in capital.
The deferred tax valuation allowance increased from $667.3 million at
December 31, 1993 to $844.2 million at December 31, 1994. This increase is
related to deferred tax assets associated with certain nonrecurring charges
and net operating losses that may not be realizable.
Approximately $545 million of the Company's net operating losses can only
be used to offset the separate parent company taxable income of Continental
Airlines, Inc. Approximately $17.8 million of the Company's investment
tax credits can only be used to offset the separate parent company tax
liability of Continental Airlines, Inc.
NOTE 12 - NONRECURRING CHARGES
During the fourth quarter of 1994, the Company recorded a nonrecurring
charge of approximately $446.8 million associated primarily with (i) the
planned early retirement of certain aircraft and (ii) closed or
underutilized airport and maintenance facilities and other assets.
Approximately $278 million of the nonrecurring charge was associated with
the planned early retirement during 1995 of 24 widebody jet aircraft
(21 Airbus A300s and three Boeing 747s), 23 narrowbody Boeing 727 jet
aircraft and five Dash 7 turboprop aircraft, including a provision for the
disposal of the related inventory. All of these aircraft (except for two
owned Airbus A300 aircraft) have remaining lease obligations beyond the
planned retirement dates for such aircraft. The $278 million charge
represents the Company's best estimate of the expected loss based upon,
among other things, the anticipated resolution of negotiations with certain
lessors as well as anticipated sublease rental income of certain aircraft
and engines. To the extent the actual resolution of the negotiations,
actual sublease rental income or other events or amounts vary from the
Company's estimates, the actual charge could be different from the amount
estimated.
Approximately $168.8 million of the nonrecurring charge was associated with
the closure of the LAX maintenance facility, underutilized airport
facilities and other assets (primarily associated with DIA). This portion
of the charge relates to the Company's contractual obligations under the
related lease agreements and the write-off of related leasehold
improvements, less an estimated amount for sublease rental income.
However, should actual sublease rental income be different from the
Company's estimates, the actual charge could be different from the amount
estimated.
Approximately $324.2 million of the nonrecurring charge represents an
actual cash outlay to be incurred over the remaining lease terms (of from
one to 15 years) and approximately $122.6 million represents a noncash
charge associated with a write-down of certain assets (principally
inventory and flight equipment) to expected net realizable value.
Continental expects to finance the cash outlays primarily with internally
generated funds.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Capital Commitments
On March 31, 1995, the Company signed agreements with Boeing and certain
engine manufacturers that would defer certain aircraft and engine
deliveries that previously were scheduled to occur in 1996 and 1997, to
cancel orders for certain option aircraft and to obtain refunds of deposits
corresponding to the revised delivery schedule.
Continental has firm commitments to take delivery of 22 new 737 and five
new 757 aircraft in 1995, one new 757 aircraft in 1996 and 43 new jet
aircraft during the years 1998 through 2002. The estimated aggregate cost
of these aircraft is approximately $3.4 billion. In December 1994, Express
contracted with Beech Acceptance Corporation ("Beech") for the purchase and
financing of 25 Beech 1900-D aircraft at an estimated aggregate cost of
$104 million, excluding price escalations. Deliveries of the Beech
aircraft are scheduled in 1995 and 1996. As of December 31, 1994,
Continental had made deposits on jet and turboprop aircraft orders of
approximately $166.1 million.
Continental expects its 1995 capital expenditures, exclusive of aircraft,
to aggregate approximately $83 million primarily relating to aircraft
modifications, passenger terminal facility improvements and office,
maintenance, telecommunications and ground equipment.
See Note 1 for a discussion of debt and operating lease obligations in
default. See Note 6 for a discussion of Continental's contingent liability
on long-term lease obligations.
Legal Proceedings
In 1992, the Company agreed to lease (i) 20 gates at DIA for a period of
five years from the date DIA opened, (ii) four of such gates for an
additional five years and (iii) a substantial amount of operational space
in connection with the gates and for the terms set forth in the agreement.
During 1994, the Company significantly reduced its Denver operations. The
City filed a complaint on February 22, 1995 against the Company in the
United States District Court for the District of Colorado seeking a
determination that the Company materially breached and repudiated the lease
and a March 1994 agreement to pay certain costs associated with the delays
in opening DIA. In addition, the City sought a judgment declaring the
City's rights and the Company's obligations and the award of an injunction
that the Company perform such obligations. The City also sought attorneys
fees and costs relating to its suit. The Company believes it has defenses
against the City, as well as claims against the City that justify
rescission of the lease or, if rescission is not awarded by the court, a
substantial reduction in the Company's obligations thereunder.
The Company, the City and certain other parties have entered into an
agreement ("Settlement") that was approved by the Denver City Council on
April 10, 1995. The Settlement provides for the release of certain claims
and the settlement of certain litigation filed by the City against the
Company and reduces (i) the full term of the lease to five years, subject
to certain rights of renewal granted to Continental, (ii) the number of
gates leased from 20 to 10, (iii) the amount of leased operational and
other space by approximately 70%. The reduced gates and operational space
exceed Continental's current needs at the airport, and the Company is
negotiating with America West Airlines, Inc. ("America West") and Frontier
Airlines to sublease up to five of its remaining gates and certain
operational space. The Company will attempt to sublease additional
facilities and operational space as well. To the extent Continental is
able to sublease any of its gates and operational space, its costs under
the lease would be reduced.
The Settlement may still be challenged by certain parties, including by
other air carriers, and the Company cannot predict what the outcome of any
such challenge would be. Certain air carriers have taken the position that
an insufficient number of carriers have executed the Settlement. Failure
to implement the Settlement could reduce or eliminate the Company's
estimated savings at DIA.
Certain parties continue to seek recovery for claims that were subject to
the Company's Plan of Reorganization. For the most part, if such parties
were successful on their claims, their recovery would be limited to the
fixed pools of Company common stock and cash provided for in the Plan of
Reorganization. Nevertheless, certain claims, if successful, could result
in additional obligations being imposed upon the Company, including the
possible indemnification of certain current and former officers and
directors of the Company or its former parent. In addition, the Company is
a party to certain lawsuits, and the subject of certain claims, which arose
after the Company's bankruptcy proceedings were commenced and in the
ordinary course of the Company's business. Although the amount sought in
certain of these claims and proceedings is substantial, the Company cannot
at this time reasonably estimate the possible loss or range of loss that
could be experienced if any of the claims were successful. However, the
Company believes that the resolution of these matters is unlikely to have a
material adverse effect on the Company.
NOTE 14 - RELATED PARTY TRANSACTIONS
The following is a summary of significant related party transactions which
have occurred during 1994 and the period April 28, 1993 through
December 31, 1993 other than those discussed elsewhere in the Notes to
Consolidated Financial Statements.
CMI and United Micronesia Development Association, Inc. ("UMDA"), the
minority stockholder of CMI, have a services agreement whereby UMDA is paid
a fee for certain services, which fee approximates 1.0% of CMI's revenues.
For the year ended December 31, 1994 and the period April 28, 1993 through
December 31, 1993, these fees totaled approximately $4.8 million and
$3.5 million, respectively. As of December 31, 1994 and 1993, the Company
had a payable to UMDA totaling approximately $7.2 million and $7.3 million,
respectively. The payable bears interest at 12.0% per annum and matures in
2011. Annual principal and interest payments on the payable aggregating
$1,000,000 per year are applied to reduce the 1.0% fee.
In connection with AC's investment in the Company, AC, AP 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 AC. The Company and AC have entered into a series
of synergies 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
synergies agreements allocate potential benefits to the Company and AC 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, Continental paid AC
$29.1 million and $9 million for the year ended December 31, 1994 and from
the period April 28, 1993 through December 31, 1993, respectively,
primarily relating to aircraft maintenance. Continental also reimbursed AC
and AP in 1993 for fees incurred in connection with their investment in
Continental of $6.9 million and $11.1 million, respectively.
GE Capital and General Electric Company, owner of 171,000 shares of the
Company's 8% Preferred Stock, provide certain services to Continental such
as repairing engines and the leasing of certain aircraft. Continental also
has loans payable to GE Capital. See Note 5.
Under the amended agreements with GE Capital, if Air Partners disposes of
any of its Class A shares, Continental must prepay deferred amounts
totaling approximately $146 million and, at Continental's election, either
(i) prepay loans totaling $150 million or (ii) pledge its Air Micronesia,
Inc. stock as collateral for all GE Capital obligations.
The Company and America West have entered into a series of agreements
during 1994 related to code-sharing and ground handling. The services
provided are considered normal to the daily operations of both airlines.
As a result of these agreements, Continental paid America West $0.5 million
in 1994.
NOTE 15 - FOREIGN OPERATIONS
Continental conducts operations to various foreign countries. Operating
revenues from foreign operations are as follows (in millions):
Year Ended December 31,
1994 1993 1992
Latin America $ 310 $ 278 $ 283
Atlantic 400 384 375
Pacific 678 630 712
$1,388 $1,292 $1,370
NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited summarized financial data by quarter for 1994 and 1993 is as follows (in millions, except
per share data):
Period Period
from from
April 1, April 28,
Three 1993 1993
Months through through
Ended April 27, June 30, Three Months Ended
March 31, 1993 1993 June 30 September 30 December 31
1994
Operating revenues . . . . $1,356.5 $ - $ - $1,390.5 $1,513.7 $1,409.2
Operating income (loss). . (55.2) - - (1.5) 82.8 (37.1)
Nonoperating income
(expense), net. . . . . . (58.4) - - (51.5) (50.0) (480.2)
Net income (loss). . . . . (71.6) - - (49.0) 30.6 (523.3)
Primary and fully diluted
earnings (loss) per
common share (a). . . . . (2.86) - - (1.97) 1.03 (19.66)
1993
Operating revenues . . . . 1,383.2 473.9 977.6 - 1,564.2 1,368.8
Operating income (loss). . (55.2) (58.0) (4.1) - 91.0 8.6
Nonoperating income
(expense), net. . . . . . (52.7) (810.6) (32.0) - (67.1) (47.8)
Extraordinary gain . . . . - 3,618.7 - - - -
Net income (loss). . . . . (109.5) 2,749.6 (24.4) - 12.4 (26.5)
Primary and fully diluted
earnings (loss) per
common share (b). . . . . N.M.* N.M.* (1.45) - 0.53 (1.47)
(a) The sum of the four quarterly earnings (loss) per share amounts in 1994 does not agree with
the loss per share as calculated for the full year due to the issuance of restricted stock
in 1994.
(b) The sum of the four quarterly earnings (loss) per share amounts in 1993 does not agree with
the loss per share as calculated for the full year due to the issuance of a large number of
shares of the Class B common stock in December 1993.
*N.M. - Not meaningful. Historical per share data for the Predecessor Company is not meaningful
since the Company was recapitalized and adopted fresh start reporting as of April 27, 1993.
During the third quarter of 1994, the Company recorded a favorable
adjustment of $23.4 million as a result of the Company's estimate of awards
expected to be redeemed for travel on Continental under its frequent flyer
program.
During the fourth quarter of 1994, nonrecurring charges of approximately
$446.8 million were recorded for costs associated with grounding aircraft,
reducing operations at certain airport facilities and modifying certain
aircraft and facilities lease agreements.
During the first quarter of 1993, reorganization-related charges of
$11.6 million were partially offset by interest income of $3.1 million.
During the second quarter of 1993, the Company recorded a gain of
$34.9 million related to System One's sale to EDS of substantially all of
the assets of its Airline Services Division. In addition, reorganization-
related charges of $234.2 million were recorded. Fresh start adjustments
totaling $719.1 million were recorded relating to the adjustment of assets
and liabilities to fair market value as well as other miscellaneous fresh
start adjustments of approximately $76.8 million. These fresh start
adjustments were partially offset by the write-off of deferred gains on
sale/leaseback transactions of $218.6 million. The Company recorded an
extraordinary gain of approximately $3.6 billion resulting from the
extinguishment of prepetition obligations, including the write-off of a
deferred credit related to Eastern of approximately $1.1 billion.
During the third quarter of 1993, the Company recorded nonoperating charges
totaling approximately $13.1 million related to the Company's termination
of services to Australia and New Zealand and other expenses primarily
related to the abandonment of airport facilities. Also included in
passenger revenues is $75 million recorded as a result of completion of the
Company's periodic evaluation of its air traffic liability account.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
There were no changes in or disagreements on any matters of accounting
principles or financial statement disclosure between the Company and its
independent public accountants during the registrant's two most recent
fiscal years or any subsequent interim period.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference from the Company's definitive proxy
statement for the annual meeting of stockholders to be held on June 5,
1995.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's definitive proxy
statement for the annual meeting of stockholders to be held on June 5,
1995.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's definitive proxy
statement for the annual meeting of stockholders to be held on June 5,
1995.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's definitive proxy
statement for the annual meeting of stockholders to be held on June 5,
1995.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following financial statements are included in Item 8. "Financial
Statements and Supplementary Data.":
Report of Independent Auditors
Report of Independent Public Accountants
Consolidated Statements of Operations for each of the Three Years in
the
Period Ended December 31, 1994
Consolidated Balance Sheets as of December 31, 1994 and 1993
Consolidated Statements of Cash Flows for each of the Three Years in
the
Period Ended December 31, 1994
Consolidated Statements of Redeemable and Nonredeemable Preferred
Stock
and Common Stockholders' Equity (Deficit) for each of the Three
Years
in the Period Ended December 31, 1994
Notes to Consolidated Financial Statements
(b) Financial Statement Schedules:
Report of Independent Auditors
Schedule I - Condensed Financial Information of Registrant (Parent
Company Only)
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because they are inapplicable,
not required, or the information is included elsewhere in the
consolidated financial statements or notes thereto.
(c) Reports on Form 8-K.
None.
(d) See accompanying Index to Exhibits.
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of Continental
Airlines, Inc. (the "Company") as of December 31, 1994 and 1993, and for
the year ended December 31, 1994 and the period from April 28, 1993 through
December 31, 1993, and the consolidated statements of operations,
redeemable and nonredeemable preferred stock and common stockholders'
equity and cash flows for the period from January 1, 1993 through April 27,
1993 for Continental Airlines Holdings, Inc., and have issued our report
thereon dated April 12, 1995 (included elsewhere in this Form 10-K). Our
audits also included the financial statement schedules for these related
periods listed in Item 14(b) of this Form 10-K. These schedules are the
responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Houston, Texas
April 12, 1995
CONTINENTAL AIRLINES, INC.
(Parent Company Only)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF OPERATIONS (a)(b)
(In thousands of dollars)
April 28, 1993
Year ended through
December 31, 1994 December 31, 1993
Operating Revenues:
Passenger. . . . . . . . . . . . . . . $4,210,628 $2,954,485
Cargo, mail and other. . . . . . . . . 411,452 298,078
4,622,080 3,252,563
Operating Expenses:
Wages, salaries and related costs. . . 1,346,841 873,889
Rentals and landing fees . . . . . . . 746,640 465,671
Aircraft fuel. . . . . . . . . . . . . 641,772 469,338
Maintenance, materials and repairs . . 366,204 272,898
Commissions. . . . . . . . . . . . . . 352,705 301,201
Depreciation and amortization. . . . . 210,797 133,335
Other. . . . . . . . . . . . . . . . . 1,041,541 624,627
4,706,500 3,140,959
Operating Income (Loss) . . . . . . . . (84,420) 111,604
Nonoperating Income (Expense):
Interest expense . . . . . . . . . . . (193,487) (136,499)
Interest income. . . . . . . . . . . . 20,002 15,638
Interest income from subsidiaries. . . 12,235 4,991
Nonrecurring charges . . . . . . . . . (433,812) -
Other, net . . . . . . . . . . . . . . 8,315 (6,996)
(586,747) (122,866)
Loss before Equity in Net Losses of
Subsidiaries and Income Taxes. . . . . (671,167) (11,262)
Equity in Net Losses of
Subsidiaries . . . . . . . . . . . . . (14,801) (26,158)
Income Tax Expense. . . . . . . . . . . 72,626 (1,129)
Net Loss. . . . . . . . . . . . . . . . $ (613,342) $ (38,549)
These Statements should be read in conjunction with the Consolidated
Financial Statements and Notes thereto and Notes to Schedule I.
CONTINENTAL AIRLINES, INC.
(Parent Company Only)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET (a)(b)
(In thousands of dollars, except for share data)
December 31, December
31,
ASSETS 1994 1993
Current Assets:
Cash and cash equivalents, including
restricted cash and cash equivalents of
$118,732 and $102,439, respectively . . . . . $ 325,728 $ 680,962
Accounts receivable, net . . . . . . . . . . . 281,734 309,455
Accounts receivable from subsidiaries, net . . 64,447 -
Notes receivable from subsidiaries . . . . . . 97,825 46,221
Spare parts and supplies, net. . . . . . . . . 119,796 136,522
Prepayments and other. . . . . . . . . . . . . 70,369 70,707
Total current assets. . . . . . . . . . . . . 959,899 1,243,867
Property and Equipment:
Owned property and equipment, net of
accumulated depreciation of $180,281 and
$62,297, respectively . . . . . . . . . . . . 1,017,317 1,111,110
Purchase deposits for flight equipment . . . . 166,052 166,984
Capital leases, net of accumulated
amortization of $58,169 and $19,291,
respectively . . . . . . . . . . . . . . . . 311,299 329,473
Total property and equipment . . . . . . . . 1,494,668 1,607,567
Other Assets:
Routes, gates and slots, net of accumulated
amortization of $73,041 and $29,730,
respectively. . . . . . . . . . . . . . . . . 1,051,141 1,118,670
Reorganization value in excess of amounts
allocable to identifiable assets, net of
accumulated amortization of $22,999 and
$10,585, respectively . . . . . . . . . . . . 210,659 223,073
Investment in subsidiaries . . . . . . . . . . 257,502 272,303
Notes receivable from subsidiaries . . . . . . - 56,875
Other assets, net. . . . . . . . . . . . . . . 66,467 43,935
Total other assets . . . . . . . . . . . . . 1,585,769 1,714,856
Total Assets . . . . . . . . . . . . . . . $4,040,336 $4,566,290
These Statements should be read in conjunction with the Consolidated
Financial Statements and Notes thereto and Notes to Schedule I.
CONTINENTAL AIRLINES, INC.
(Parent Company Only)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET (a)(b)
(In thousands of dollars, except for share data)
December 31, December
31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993
Current Liabilities:
Debt and capital lease obligations
in default. . . . . . . . . . . . . . . . . . $ 489,865 $ -
Current maturities of long-term debt (c) . . . 108,620 160,250
Current maturities of capital leases . . . . . 18,278 33,620
Accounts payable . . . . . . . . . . . . . . . 548,258 472,762
Accounts payable to subsidiaries, net. . . . . - 10,795
Air traffic liability. . . . . . . . . . . . . 551,810 590,994
Accrued other liabilities. . . . . . . . . . . 492,885 459,602
Total current liabilities . . . . . . . . . . 2,209,716 1,728,023
Long-Term Debt (c). . . . . . . . . . . . . . . 859,773 1,178,989
Capital Leases. . . . . . . . . . . . . . . . . 119,798 353,606
Deferred Credits and Other Long-Term
Liabilities. . . . . . . . . . . . . . . . . . 694,759 538,210
Commitments and Contingencies (d)
Redeemable Preferred Stock (aggregate
liquidation value - $55,966 and $50,497,
respectively) (e) . . . . . . . . . . . . . . 52,606 46,916
Common Stockholders' Equity:
Class A common stock - $.01 par, 50,000,000
shares authorized; 6,301,056 shares and
6,013,216 shares issued and outstanding
at December 31, 1994 and 1993,
respectively (e) . . . . . . . . . . . . . . 63 60
Class B common stock - $.01 par,
100,000,000 shares authorized;
20,403,512 shares and 19,509,352 shares
issued and outstanding at December 31,
1994 and 1993, respectively (e). . . . . . . 204 195
Additional paid-in capital. . . . . . . . . . 778,382 764,274
Accumulated deficit . . . . . . . . . . . . . (651,891) (38,549)
Unearned portion of restricted stock
issued for future services . . . . . . . . . (13,872) -
Additional minimum pension liability. . . . . (6,549) (5,434)
Unrealized loss on marketable equity
securities . . . . . . . . . . . . . . . . . (2,218) -
Treasury stock - 30,000 shares in 1994. . . . (435) -
Total common stockholders' equity. . . . . . 103,684 720,546
Total Liabilities and Stockholders' Equity $4,040,336 $4,566,290
These Statements should be read in conjunction with the Consolidated
Financial Statements and Notes thereto and Notes to Schedule I.
CONTINENTAL AIRLINES, INC.
(Parent Company Only)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS (a)(b)
(In thousands of dollars)
April 28, 1993
Year ended through
December 31, 1994 December 31, 1993
Net cash provided (used) by
operating activities . . . . . . . . $(39,447) $ 62,612
Cash Flows from Investing
Activities:
Proceeds from disposition of
property, equipment and other
assets . . . . . . . . . . . . . . 27,643 94
Capital expenditures . . . . . . . . (99,826) (217,059)
Investment in America West . . . . . (18,771) -
Net cash used by investing
activities . . . . . . . . . . . . (90,954) (216,965)
Cash Flows from Financing
Activities:
Proceeds from issuance of
long-term debt, net. . . . . . . . 30,980 89,820
Payments on long-term debt and
capital lease obligations . . . . . (255,813) (108,578)
Net proceeds from issuance of
common stock. . . . . . . . . . . . - 153,060
Net cash provided (used) by
financing activities . . . . . . . (224,833) 134,302
Net Decrease in Cash and Cash
Equivalents. . . . . . . . . . . . . (355,234) (20,051)
Cash and Cash Equivalents -
Beginning of Period. . . . . . . . . 680,962 701,013
Cash and Cash Equivalents -
End of Period. . . . . . . . . . . . $325,728 $680,962
These Statements should be read in conjunction with the Consolidated
Financial Statements and Notes thereto and Notes to Schedule I.
NOTES TO SCHEDULE I
(a) See Notes 1 and 2 to Notes to Consolidated Financial Statements for a
discussion of Continental Airlines, Inc. (the "Company" or
"Continental") liquidity and predecessor company's emergence from
bankruptcy.
(b) The Condensed Financial Information of Registrant includes the
accounts of Continental and its wholly owned subsidiary, Rubicon
Indemnity, Ltd., a subsidiary formed for workers' compensation
reinsurance purposes. This subsidiary has been included in Schedule I
to properly reflect the parent company's workers' compensation
liability.
(c) Continental's long-term debt (parent company only) was recorded at
fair market value at April 27, 1993. The fair market value adjustment
is amortized to interest expense over the life of the debt. See
Note 5 to Notes to Consolidated Financial Statements. Long-term debt
as of December 31, 1994 and 1993 is summarized as follows (in
millions):
1994 1993
Secured
Notes payable to GE Capital, interest rates of
8.64% to 12.0% and floating interest rates of
LIBOR plus 4.0%, payable through 2005. . . . . . .$ 439.4 $ 443.1
Notes payable, interest rates of 5.84% to 18.38%
(imputed interest rates approximate stated
interest rates), payable through 2005. . . . . . . 240.9 234.9
Notes payable, interest rates of 6% to 12.25%
(imputed interest rates of 7.86% to 9.9%),
payable through 2008 . . . . . . . . . . . . . . . 278.2 332.5
Floating rate notes, interest rates of prime
plus 0.5% to 3.05%, LIBOR plus 0.75% to
3.75% and Eurodollar plus 0.75%, payable
through 2007. . . . . . . . . . . . . . . . . . . 148.9 159.1
Other . . . . . . . . . . . . . . . . . . . . . . . 15.0 15.7
Unsecured
Notes payable, interest rates of 6.94% to 12%
(imputed interest rates of 16.3% to 21.8%),
payable through 2005 . . . . . . . . . . . . . . . 112.3 179.9
Other . . . . . . . . . . . . . . . . . . . . . . . 7.6 0.6
1,242.3 1,365.8
Less: debt in default. . . . . . . . . . . . . . . 264.7 -
Less: current maturities . . . . . . . . . . . . . 108.6 160.3
Less: fair market value adjustment . . . . . . . . 9.2 26.5
Total . . . . . . . . . . . . . . . . . . . . . . .$ 859.8 $1,179.0
Long-term debt maturities, excluding $9.2 million of non-cash fair
market value adjustments, due over the next five years are as follows
(in millions):
Year ending December 31,
1995. . . . . . . . . . . . . . . . . . . . . . . $157.8
1996. . . . . . . . . . . . . . . . . . . . . . . 144.2
1997. . . . . . . . . . . . . . . . . . . . . . . 167.2
1998. . . . . . . . . . . . . . . . . . . . . . . 142.4
1999. . . . . . . . . . . . . . . . . . . . . . . 154.3
The above maturities have not been adjusted to reflect the potential
acceleration of certain obligations due to defaults under the loan
agreements.
(d) See Note 13 of Notes to Consolidated Financial Statements.
(e) See Note 8 of Notes to Consolidated Financial Statements.
(f) See Note 6 of Notes to Consolidated Financial Statements for a
discussion of operating lease obligations in default.
(g) The Company has not paid dividends on its common stock.
On April 27, 1993, Continental adopted fresh start reporting in accordance
with Statement of Position 90-7 - "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code", which resulted in adjustments to
the Company's common stockholders' equity and the carrying values of assets
and liabilities. Accordingly, the Parent Company only post-reorganization
balance sheets and statements of operations have not been prepared on a
consistent basis of accounting with the Parent Company only pre-
reorganization balance sheet and statements of operations. See Note 3 of
Notes to Consolidated Financial Statements.
CONTINENTAL AIRLINES HOLDINGS, INC.
(Parent Company Only)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF OPERATIONS (a)
(In thousands of dollars)
Predecessor Company
Period from
January 1,
1993 through Year ended
April 27, December 31,
1993 1992
Operating Revenues (lease revenue and
management fees from subsidiaries) (a) . . $ 32,598 $ 101,554
Operating Expenses:
Wages, salaries and related costs. . . . . 727 2,544
Rentals. . . . . . . . . . . . . . . . . . 15,317 48,225
Depreciation and amortization. . . . . . . 4,719 14,533
Other. . . . . . . . . . . . . . . . . . . 676 3,112
21,439 68,414
Operating Income. . . . . . . . . . . . . . 11,159 33,140
Nonoperating Income (Expense):
Interest expense . . . . . . . . . . . . . (5,023) (16,579)
Gain (loss) on disposition of property,
equipment and other assets, net . . . . . (5) 1
Eastern-related pension adjustments. . . . - 114,547
Eastern liquidation-related adjustments. . - 17,250
Reorganization items, net. . . . . . . . . (134,287) 5,201
Other, net . . . . . . . . . . . . . . . . 861 2,853
Total nonoperating income (expense),
net. . . . . . . . . . . . . . . . . . . (138,454) 123,273
Income (Loss) Before Equity in Net Loss
of Subsidiaries and Extraordinary Gain . . (127,295) 156,413
Equity in Net Losses of Subsidiaries. . . . 837,625 (281,746)
Income (Loss) Before Extraordinary Gain . . 710,330 (125,333)
Extraordinary Gain. . . . . . . . . . . . . 1,929,808 -
Net Income (Loss) . . . . . . . . . . . . . $2,640,138 $(125,333)
These Statements should be read in conjunction with the Consolidated
Financial Statements and Notes thereto and Notes to Schedule I.
CONTINENTAL AIRLINES HOLDINGS, INC.
(Parent Company Only)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS (a)
(In thousands of dollars)
Predecessor Company
Period from
January 1,
1993 through Year ended
April 27, December 31,
1993 1992
Net cash provided by operating
activities . . . . . . . . . . . . . . . . $ 121 $ 2,439
Cash Flows from Investing Activities:
Proceeds from disposition of property
and equipment . . . . . . . . . . . . . . - -
Capital expenditures . . . . . . . . . . . (4) (5)
Cash received from affiliates. . . . . . . - 39
Other. . . . . . . . . . . . . . . . . . . - 974
Net cash provided by investing
activities . . . . . . . . . . . . . . . (4) 1,008
Cash Flows from Financing Activities:
Proceeds from issuance of long-term
debt, net . . . . . . . . . . . . . . . . - (188)
Payments on long-term debt and capital
lease obligations . . . . . . . . . . . . (442) (13,487)
Net cash used by financing activities . . . (442) (13,675)
Net increase (decrease) in cash and cash
equivalents. . . . . . . . . . . . . . . . (325) (10,228)
Cash and Cash Equivalents - Beginning of
Period . . . . . . . . . . . . . . . . . . 9,182 19,410
Cash and Cash Equivalents - End of Period . $8,857 $ 9,182
These Statements should be read in conjunction with the Consolidated
Financial Statements and Notes thereto and Notes to Schedule I.
(a) The Condensed Financial Information of Registrant includes the
accounts of Continental Airlines Holdings, Inc. ("Holdings") and
certain special purpose subsidiaries (together, "CTA"), primarily
formed to provide fuel purchasing services to Holdings' airline
subsidiaries and to finance aircraft leased to Continental.
(b) Prepetition long-term debt for CTA totaling approximately
$312.9 million at December 31, 1992 was included in Estimated
Liabilities Subject to Chapter 11 Reorganization Proceedings.
Pursuant to the Reorganization and the PBGC Settlement, the PBGC
receives the equity interest in all of CTA's debt-owned aircraft with
the debt totaling approximately $135.2 million. Therefore, scheduled
maturities for long-term debt of CTA are immaterial.
(c) CTA did not pay dividends on its common stock in 1992.
CONTINENTAL AIRLINES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1994, 1993, and 1992
(In thousands of dollars)
Allowance
for Doubtful Allowance for
Receivables Obsolescence
Balance, December 31, 1991 . . . $51,450 $65,643
Additions charged to expense . 23,214 12,978
Deductions from reserve. . . . (25,844) (341)
Other. . . . . . . . . . . . . (181) 1,770
Balance, December 31, 1992 . . . 48,639 80,050
Additions charged to expense . 19,283 9,890
Deductions from reserve. . . . (32,190) (1,946)
Other. . . . . . . . . . . . . (686) (83,373) (a)
Balance, December 31, 1993 . . . 35,046 4,621
Additions charged to expense . 24,913 32,294
Deductions from reserve. . . . (21,204) (739)
Other. . . . . . . . . . . . . (946) 149
Balance, December 31, 1994 . . . $37,809 $36,325
(a) Primarily represents fresh start adjustments in accordance with
SOP 90-7.
INDEX TO EXHIBITS
OF
CONTINENTAL AIRLINES, INC.
2.1 Revised Third Amended Disclosure Statement Pursuant to
Section 1125 of the Bankruptcy Code with Respect to Debtors'
Revised Second Amended Joint Plan of Reorganization Under Chapter
11 of the United States Bankruptcy Code, as filed with the
Bankruptcy Court on January 13, 1993 -- incorporated by reference
from Exhibit 2.1 to Continental's Annual Report on Form 10-K for
the year ended December 31, 1992 (File no. 0-09781) (the
"1992 10-K").
2.2 Modification of Debtors' Revised Second Amended Joint Plan of
Reorganization dated March 12, 1993 -- incorporated by reference
to Exhibit 2.2 to Continental's Current Report on Form 8-K, dated
April 16, 1993 (the "April 8-K").
2.3 Second Modification of Debtors' Revised Second Amended Joint Plan
of Reorganization, dated April 8, 1993 -- incorporated by
reference to Exhibit 2.3 to the April 8-K.
2.4 Third Modification of Debtors' Revised Second Amended Joint Plan
of Reorganization, dated April 15, 1993 -- incorporated by
reference to Exhibit 2.4 to the April 8-K.
2.5 Confirmation Order, dated April 16, 1993 -- incorporated by
reference to Exhibit 2.5 to the April 8-K.
3.1 Restated Certificate of Incorporation of Continental --
incorporated by reference to Exhibit 4.1 to the April 8-K.
3.2 By-laws of Continental -- incorporated by reference to
Exhibit 4.4 to the April 8-K.
4.1 Specimen Class B Common Stock Certificates of the Company --
incorporated by reference to Exhibit 4.1 to Continental's Form S-
1 Registration Statement (No. 33-68870) (the "1993 S-1").
4.2 Certificate of Designation of 12% Cumulative Preferred Stock --
incorporated by reference to Exhibit 4.2 to the April 8-K.
4.3 Certificate of Designation of 8% Cumulative Preferred Stock --
incorporated by reference to Exhibit 4.3 to Continental's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1993.
4.4 Certificate of Correction to Certificate of Designation of 8%
Cumulative Preferred Stock -- incorporated by reference to
Exhibit 4.4 to the 1993 S-1.
4.5 Subscription and Stockholders' Agreement - incorporated by
reference to Exhibit 4.5 to the April 8-K.
4.6 Registration Rights Agreement dated as of April 27, 1993, among
Continental, Air Partners and Air Canada -- incorporated by
reference to Exhibit 4.6 to the April 8-K.
4.7 Warrant Agreement dated as of April 27, 1993, between Continental
and Continental as warrant agent -- incorporated by reference to
Exhibit 4.7 to the April 8-K.
4.8 Loan Agreement dated as of April 27, 1993, among Continental
Micronesia, Air Micronesia, Inc. and GE Capital -- incorporated
by reference to Exhibit 4.8 to the April 8-K.
4.8(a) Waiver, Consent and Amendment to CMI Loan Agreement, dated as of
March 30, 1995, among CMI, Air Micronesia, Inc. and GE Capital --
filed herewith. (2)
4.9 Loan Agreements dated as of April 27, 1993, between ASATT Corp.
and Continental -- incorporated by reference to Exhibit 4.9 to
the April 8-K.
4.9(a) Waiver, Consent and Amendment to Series B-1 Loan Agreement, dated
as of March 30, 1995, between Continental and Global Project &
Structured Finance Corporation (successor by merger to ASATT
Corp.) -- filed herewith. (2)
4.9(b) Waiver, Consent and Amendment to Series B-2 Loan Agreement, dated
as of March 30, 1995, between Continental and Global Project &
Structured Finance Corporation (successor by merger to ASATT
Corp.) -- filed herewith. (2)
4.10 Loan Agreement dated as of April 27, 1993, between Continental
and General Electric Company, individually and as agent --
incorporated by reference to Exhibit 4.10 to the 1993 S-1.
4.10(a) Waiver, Consent and Amendment to Consolidation Loan Agreement,
dated as of March 30, 1995, between Continental and General
Electric Company, individually and as agent -- filed herewith.
(2)
4.11 Master Restructuring Agreement, dated as of March 30, 1995,
between Continental and GE Capital -- filed herewith. (2)
4.12 Agreement by Continental to furnish to the Commission, upon
request, copies of certain instruments defining the rights of
holders of long-term debt of the kind described in Item 601(b)(4)
of Regulation S-K -- incorporated by reference to Exhibit 4.11 to
the 1993 S-1.
10.1 Master Agreement among Continental, System One and EDS,
Continental Services Agreement between Continental and EDS, CRS
Services Agreement between System One and EDS, and ASD Services
and Acquisition Agreement between System One and EDS, each dated
as of May 1, 1991 -- incorporated by reference to Exhibit 10.1 to
Holdings' Quarterly Report on Form 10-Q for the quarter ended
June 30, 1991. (1)
10.2 Litigation Settlement Agreement, dated as of August 31, 1992,
among the Pension Benefit Guaranty Corporation and, jointly and
severally, each of the debtors (as defined) -- incorporated by
reference to Exhibit 10.10 to the 1992 10-K.
10.3 Agreement of Lease dated as of January 11, 1985, between the Port
Authority of New York and New Jersey and People Express Airlines,
Inc., regarding Terminal C (the "Terminal C Lease") --
incorporated by reference to Exhibit 10.61 to the Annual Report
on Form 10-K of People Express Airlines, Inc. for the year ended
December 31, 1984.
10.4 Assignment of Lease with Assumption and Consent dated as of
August 15, 1987, among the Port Authority of New York and New
Jersey, People Express Airlines, Inc. and Continental --
incorporated by reference to Exhibit 10.2 to Continental's Annual
Report on Form 10-K for the year ended December 31, 1987 (the
"1987 10-K").
10.5 Supplemental Agreements Nos. 1 through 6 to the Terminal C
Lease -- incorporated by reference to Exhibit 10.3 to the
Continental 1987 10-K.
10.6 Supplemental Agreement No. 7 to the Terminal C Lease --
incorporated by reference to Exhibit 10.4 to Continental's Annual
Report on Form 10-K for the year ended December 31, 1988.
10.7 Supplemental Agreements No. 8 through 11 to the Terminal C
Lease -- incorporated by reference to Exhibit 10.10 to the
1993 S-1.
10.8(a)* Employment Agreement between the Company and Robert Ferguson --
incorporated by reference to Exhibit 10.11(a) to the 1993 S-1.
10.8(b)* Termination Agreement between the Company and Robert Ferguson --
filed herewith.
10.8(c)* Employment Agreement between the Company and Charles Goolsbee --
incorporated by reference to Exhibit 10.11(b) to the 1993 S-1.
10.8(d)* Memorandum of Agreement between the Company and Charles
Goolsbee -- filed herewith.
10.8(e)* Employment Agreement between the Company and Gordon Bethune --
filed herewith.
10.8(f)* Employment Agreement between the Company and Daniel Garton --
incorporated by reference to Exhibit 10.2 to Continental's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1994 (the "1994 Third Quarter 10-Q").
10.8(g)* Employment Agreement between the Company and John Luth --
incorporated by reference to Exhibit 10.3 to the 1994 Third
Quarter 10-Q.
10.8(h)* Letter Agreement between the Company and John Luth -- filed
herewith.
10.8(i)* Employment Agreement between the Company and Donald Valentine --
filed herewith.
10.9* Continental Airlines, Inc. 1994 Incentive Equity Plan --
incorporated by reference to Exhibit 4.3 to the Company's Form S-
8 Registration Statement (No. 33-81324).
10.10 Not used.
10.11 Purchase Agreement No. 1782, including exhibits and side letters
thereto, between the Company and Boeing, effective April 27,
1993, relating to the purchase of Boeing 737-524 aircraft --
incorporated by reference to Exhibit 10.1 to Continental's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1993
(the "June 10-Q"). (1)
10.11(a) Supplemental Agreement No. 6 to Purchase Agreement No. 1782
between the Company and Boeing, dated March 31, 1995, relating to
the purchase of Boeing 737-524 aircraft -- filed herewith. (2)
10.12 Purchase Agreement No. 1783, including exhibits and side letters
thereto, between the Company and Boeing, effective April 27,
1993, relating to the purchase of Boeing 757-224 aircraft --
incorporated by reference to Exhibit 10.2 to the June 10-Q. (1)
10.12(a) Supplemental Agreement No. 4 to Purchase Agreement No. 1783
between the Company and Boeing, dated March 31, 1995, relating to
the purchase of Boeing 757-224 aircraft -- filed herewith. (2)
10.13 Purchase Agreement No. 1784, including exhibits and side letters
thereto, between the Company and Boeing, effective April 27,
1993, relating to the purchase of Boeing 767-324ER aircraft --
incorporated by reference to Exhibit 10.3 to the June 10-Q. (1)
10.13(a) Supplemental Agreement No. 3 to Purchase Agreement No. 1784
between the Company and Boeing, dated March 31, 1995, relating to
the purchase of Boeing 767-324ER aircraft -- filed herewith. (2)
10.14 Purchase Agreement No. 1785, including exhibits and side letters
thereto, between the Company and Boeing, effective April 27,
1993, relating to the purchase of Boeing 777-224 aircraft --
incorporated by reference to Exhibit 10.4 to the June 10-Q. (1)
10.14(a) Supplemental Agreement No. 3 to Purchase Agreement No. 1785
between the Company and Boeing, dated March 31, 1995, relating to
the purchase of Boeing 777-224 aircraft -- filed herewith. (2)
10.15 Lease Agreement dated as of May 1992 between the City and County
of Denver, Colorado and Continental regarding Denver
International Airport -- incorporated by reference to
Exhibit 10.17 to the 1993 S-1.
10.15(a) Supplemental Lease Agreement, including an exhibit thereto, dated
as of April 3, 1995 between the City and County of Denver,
Colorado and Continental and United Air Lines, Inc. regarding
Denver International Airport -- filed herewith.
10.16 Stock Subscription Warrant of Continental Micronesia granted to
United Micronesia Development Association, Inc. -- incorporated
by reference to Exhibit 10.18 to the 1993 S-1.
10.17 Lease Agreement, as amended and supplemented, between the Company
and the City of Houston, Texas regarding Terminal C of Houston
Intercontinental Airport -- incorporated by reference to
Exhibit 10.5 to Continental's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1993 (the "September 10-Q").
10.18 Agreement and Lease dated as of May 1987, as supplemented,
between the City of Cleveland, Ohio and Continental regarding
Cleveland Hopkins International Airport -- incorporated by
reference to Exhibit 10.6 to the September 10-Q.
10.19 Third Revised Investment Agreement dated April 21, 1994 between
America West Airlines, Inc. and AmWest Partners, L.P. --
incorporated by reference to Exhibit 1 to the August 25, 1994
Schedule 13D.
22.1 List of Subsidiaries of Continental -- incorporated by reference
to Exhibit 22.1 to the 1993 S-1.
23.1 Consent of Ernst & Young LLP -- filed herewith.
23.2 Consent of Arthur Andersen LLP -- filed herewith.
25.1 Powers of attorney executed by certain directors and officers of
Continental -- filed herewith.
27.1 Financial Data Schedule -- filed herewith.
__________
*These exhibits relate to management contracts or compensatory plans or
arrangements.
(1) The Commission has granted confidential treatment for a portion of this
agreement.
(2) The Company has applied to the Commission for confidential treatment of
a portion of this exhibit.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
CONTINENTAL AIRLINES, INC.
By /s/ DANIEL P. GARTON
Daniel P. Garton
Senior Vice President and
Chief Financial Officer
Date: April 12, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant
in the capacities and on the dates indicated.
Signature Capacity Date
(i) Principal Executive Officer:
GORDON M. BETHUNE* President, April 12, 1995
Gordon M. Bethune Chief Executive Officer
and Director
(ii) Principal Financial Officer:
/s/ DANIEL P. GARTON Senior Vice President April 12, 1995
Daniel P. Garton and Chief Financial
Officer
(iii) Principal Accounting Officer:
/s/ MICHAEL P. BONDS Staff Vice President April 12, 1995
Michael P. Bonds and Controller
(iv) A Majority of the Directors:
THOMAS J. BARRACK, JR.* Director April 12, 1995
Thomas J. Barrack, Jr.
DAVID BONDERMAN* Director and April 12, 1995
David Bonderman Chairman of the Board
JOEL H. COWAN* Director April 12, 1995
Joel H. Cowan
PATRICK FOLEY* Director April 12, 1995
Patrick Foley
ROWLAND C. FRAZEE* Director April 12, 1995
Rowland C. Frazee
HOLLIS L. HARRIS* Director April 12, 1995
Hollis L. Harris
ROBERT L. LUMPKINS* Director April 12, 1995
Robert L. Lumpkins
DOUGLAS McCORKINDALE* Director April 12, 1995
Douglas McCorkindale
DAVID E. MITCHELL, O.C.* Director April 12, 1995
David E. Mitchell, O.C.
RICHARD W. POGUE* Director April 12, 1995
Richard W. Pogue
WILLIAM S. PRICE* Director April 12, 1995
William Price
DONALD L. STURM* Director April 12, 1995
Donald L. Sturm
CLAUDE I. TAYLOR, O.C.* Director April 12, 1995
Claude I. Taylor, O.C.
KAREN HASTIE WILLIAMS* Director April 12, 1995
Karen Hastie Williams
CHARLES A. YAMARONE* Director April 12, 1995
Charles A. Yamarone
*By /s/ Daniel P. Garton
Daniel P. Garton
Attorney-in-Fact
April 12, 1995