UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
Commission File Number 0-9781
CONTINENTAL AIRLINES, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2099724
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2929 Allen Parkway
Houston, Texas 77019
(Address of principal executive office)
(Zip Code)
713-834-5000
(Registrant's telephone number including area code)
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 whether the registrant has filed all documents
and reports required to be filed by Sections 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 April 30, 1995, 6,301,056 shares of Class A common stock and
20,636,065 shares of Class B common stock were outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of dollars, except per share data)
Three Months Three Months
Ended Ended
March 31, March 31,
1995 1994
(Unaudited) (Unaudited)
Operating Revenues:
Passenger. . . . . . . . . . . . . . . . . . . $1,239,913 $1,205,463
Cargo, mail and other. . . . . . . . . . . . . 168,430 151,036
1,408,343 1,356,499
Operating Expenses:
Wages, salaries and related costs. . . . . . . 366,088 372,814
Rentals and landing fees . . . . . . . . . . . 215,019 204,539
Aircraft fuel. . . . . . . . . . . . . . . . . 168,473 174,567
Commissions. . . . . . . . . . . . . . . . . . 119,172 121,229
Maintenance, materials and repairs . . . . . . 97,438 135,024
Depreciation and amortization. . . . . . . . . 63,904 61,848
Other. . . . . . . . . . . . . . . . . . . . . 350,735 341,677
1,380,829 1,411,698
Operating Income (Loss) . . . . . . . . . . . . 27,514 (55,199)
Nonoperating Income (Expense):
Interest expense . . . . . . . . . . . . . . . (53,367) (62,483)
Interest capitalized . . . . . . . . . . . . . 1,145 3,116
Interest income. . . . . . . . . . . . . . . . 5,564 5,379
Gain on disposition of property,
equipment and other assets, net . . . . . . . 768 2,705
Other, net . . . . . . . . . . . . . . . . . . (10,026) (7,152)
(55,916) (58,435)
Loss before Income Taxes and Minority Interest. (28,402) (113,634)
Income Tax Benefit. . . . . . . . . . . . . . . - 42,847
Loss before Minority Interest . . . . . . . . . (28,402) (70,787)
Minority Interest . . . . . . . . . . . . . . . (1,754) (795)
Net Loss. . . . . . . . . . . . . . . . . . . . (30,156) (71,582)
Preferred Dividend Requirements and
Accretion to Liquidation Value . . . . . . . . (1,514) (1,364)
Loss Applicable to Common Shares. . . . . . . . $ (31,670) $ (72,946)
Primary and Fully Diluted Loss per
Common Share . . . . . . . . . . . . . . . . . $ (1.21) $ (2.86)
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
March 31, December 31,
ASSETS 1995 1994
(Unaudited)
Current Assets:
Cash and cash equivalents, including
restricted cash and cash equivalents of
$115,153 and $118,732, respectively . . . . $ 416,767 $ 396,298
Accounts receivable, net . . . . . . . . . . 446,110 375,621
Spare parts and supplies, net. . . . . . . . 140,988 141,781
Prepayments and other. . . . . . . . . . . . 75,064 76,260
Total current assets. . . . . . . . . . . . 1,078,929 989,960
Property and Equipment:
Owned property and equipment:
Flight equipment. . . . . . . . . . . . . . 1,014,989 1,004,337
Other . . . . . . . . . . . . . . . . . . . 290,364 281,605
1,305,353 1,285,942
Less: Accumulated depreciation . . . . . . 232,876 207,206
1,072,477 1,078,736
Purchase deposits for flight equipment . . . 107,732 166,052
Capital leases:
Flight equipment. . . . . . . . . . . . . . 399,941 400,037
Other . . . . . . . . . . . . . . . . . . . 26,493 17,045
426,434 417,082
Less: Accumulated amortization . . . . . . 81,800 69,103
344,634 347,979
Total property and equipment . . . . . . . 1,524,843 1,592,767
Other Assets:
Routes, gates and slots, net . . . . . . . . 1,576,469 1,591,140
Reorganization value in excess of amounts
allocable to identifiable assets, net . . . 313,867 318,206
Other assets, net. . . . . . . . . . . . . . 111,112 109,109
Total other assets . . . . . . . . . . . . 2,001,448 2,018,455
Total Assets . . . . . . . . . . . . . . $4,605,220 $4,601,182
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except for share data)
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
(Unaudited)
Current Liabilities:
Debt and capital lease obligations in default. $ 616,403 $ 489,865
Current maturities of long-term debt . . . . . 88,897 126,186
Current maturities of capital leases . . . . . 24,638 25,788
Accounts payable . . . . . . . . . . . . . . . 604,514 629,939
Air traffic liability. . . . . . . . . . . . . 653,844 584,108
Accrued payroll and pensions . . . . . . . . . 168,059 178,648
Accrued other liabilities. . . . . . . . . . . 382,311 373,273
Total current liabilities . . . . . . . . . . 2,538,666 2,407,807
Long-Term Debt. . . . . . . . . . . . . . . . . 939,957 1,038,165
Capital Leases. . . . . . . . . . . . . . . . . 166,501 164,349
Deferred Credits and Other Long-Term
Liabilities:
Deferred income taxes . . . . . . . . . . . . 28,100 28,100
Deferred credit - operating leases. . . . . . 131,121 137,606
Accruals for aircraft retirements and
excess facilities. . . . . . . . . . . . . . 391,298 391,947
Other . . . . . . . . . . . . . . . . . . . . 251,682 251,118
Total deferred credits and other
long-term liabilities . . . . . . . . . . . 802,201 808,771
Commitments and Contingencies
Minority Interest . . . . . . . . . . . . . . . 27,554 25,800
Redeemable Preferred Stock (aggregate
redemption value - $57,420 and $55,966,
respectively). . . . . . . . . . . . . . . . . 54,120 52,606
Common Stockholders' Equity:
Class A common stock - $.01 par, 50,000,000
shares authorized; 6,301,056 shares
issued and outstanding. . . . . . . . . . . . 63 63
Class B common stock - $.01 par, 100,000,000
shares authorized; 20,521,581 and 20,403,512
shares issued . . . . . . . . . . . . . . . . 205 204
Additional paid-in capital . . . . . . . . . . 777,764 778,382
Accumulated deficit. . . . . . . . . . . . . . (682,047) (651,891)
Unvested portion of restricted stock . . . . . (12,553) (13,872)
Additional minimum pension liability . . . . . (6,549) (6,549)
Unrealized loss on marketable equity
securities. . . . . . . . . . . . . . . . . . (45) (2,218)
Treasury stock - 50,000 and 30,000 shares. . . (617) (435)
Total common stockholders' equity. . . . . . 76,221 103,684
Total Liabilities and Stockholders' Equity. $4,605,220 $4,601,182
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
CONTINENTAL AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Three Months Three Months
Ended Ended
March 31, March 31,
1995 1994
(Unaudited) (Unaudited)
Net Cash Provided by Operating Activities . . . $ 52,136 $ 11,169
Cash Flows from Investing Activities:
Proceeds from disposition of property,
equipment and other assets. . . . . . . . . . 2,870 2,115
Capital expenditures . . . . . . . . . . . . . (18,368) (68,569)
Purchase deposits refunded . . . . . . . . . . 29,613 -
Net cash provided (used) by investing
activities . . . . . . . . . . . . . . . . . 14,115 (66,454)
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt, net. 5,694 9,713
Payments on long-term debt and capital lease
obligations . . . . . . . . . . . . . . . . . (52,620) (52,348)
Proceeds from issuance of common stock . . . . 1,144 -
Net cash used by financing activities . . . . (45,782) (42,635)
Net Increase (Decrease) in Cash and
Cash Equivalents . . . . . . . . . . . . . . . 20,469 (97,920)
Cash and Cash Equivalents-Beginning of Period . 396,298 721,038
Cash and Cash Equivalents-End of Period . . . . $416,767 $623,118
Supplemental Cash Flow Information:
Interest paid. . . . . . . . . . . . . . . . . $ 29,794 $ 41,817
Financing Activities Not Affecting Cash:
Reclassification of accrued rent and interest
to long-term debt . . . . . . . . . . . . . . $ 8,678 $ 13,526
Capital lease obligations incurred . . . . . . $ 8,415 $ 1,209
Property and equipment acquired through the
issuance of debt. . . . . . . . . . . . . . . $ - $ 7,031
Financed purchase deposits for flight
equipment . . . . . . . . . . . . . . . . . . $ - $ 8,509
Return of financed purchase deposits . . . . . $ 10,028 $ -
Reclassification of accrued management fees
to long-term debt . . . . . . . . . . . . . . $ 21,304 $ -
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
CONTINENTAL AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In the opinion of management, the unaudited financial statements included
herein contain all adjustments necessary to present fairly the financial
position, results of operations and cash flows for the periods indicated.
Such adjustments are of a normal recurring nature. Certain
reclassifications have been made to the prior year's financial statements
to conform to the 1995 presentation. The accompanying consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto contained in the Annual Report
of Continental Airlines, Inc. (the "Company" or "Continental") on Form 10-K
for the year ended December 31, 1994.
NOTE 1 - LIQUIDITY
Continental is continuing negotiations with certain creditors and lessors
regarding the modification of contractual obligations. Certain long-term
debt and capital lease obligations were in default or cross default as of
May 11, 1995. In accordance with generally accepted accounting principles,
such defaulted obligations have been classified as current liabilities as
of March 31, 1995. However, the Company does not believe it probable that
it will be required to fund such defaulted obligations in the next
12 months. In addition, certain operating leases were in default or cross
default as of May 11, 1995. The Company received a notice of lease
termination dated April 18, 1995 from one lessor relating to one A300
aircraft, and such lessor sued the Company and certain other persons on
May 2, 1995. The notice of lease termination resulted in additional cross
defaults as of March 31, 1995. See Item 2. "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
NOTE 2 - 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
computations for the three months ended March 31, 1995 and March 31, 1994
was 26,330,102 and 25,522,568, 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 $1.5 million and $1.4 million for the
three months ended March 31, 1995 and 1994, respectively.
NOTE 3 - PREFERRED STOCK
As of March 31, 1995 and December 31, 1994, the Company had approximately
$10.3 million and $8.9 million, respectively, of dividends on its preferred
stock in arrears. The Company has agreed with its principal lender to
cause dividends payable on such preferred stock during the period from
March 1, 1995 to February 28, 1997 to be paid only in additional shares of
such preferred stock.
NOTE 4 - INCOME TAXES
A provision (benefit) was not recorded for the three months ended March 31,
1995 due to the fact that utilization of the net operating loss for the
period is not assured. The income tax benefit for the three months ended
March 31, 1994 is based on the estimated annual effective tax rate which
differs from the federal statutory rate of 35%, principally due to state
income taxes and certain nondeductible expenses.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Denver. In 1992, the Company agreed to lease (i) 20 gates at the new
Denver International Airport ("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 and County
of Denver (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, 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 and (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. and Frontier Airlines, Inc. 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 will 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 will be. Certain air carriers have challenged the
Settlement, taking the position that less than the required number of
carriers have approved the changes to the airline rates and charges
methodology at DIA that result from the Settlement. In the event the
Settlement of the suit is successfully challenged, 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 were not awarded by the
court, a substantial reduction in the Company's obligations thereunder.
Nevertheless, failure to implement the Settlement could reduce or eliminate
the Company's estimated savings at DIA.
NOTE 6 - SUBSEQUENT EVENT
Continental CRS Interests, Inc. In 1991, System One Information
Management, Inc. ("System One"), a wholly owned subsidiary of the Company,
signed a 10-year systems management agreement with Electronic Data Systems
Corporation ("EDS"). The agreement provided for EDS to manage the data
processing and telecommunications facilities and services used by System
One.
Effective April 27, 1995, Continental and System One completed a series of
transactions whereby the existing systems management agreement between
System One and EDS was 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 were transferred to a newly formed limited liability company,
System One Information Management, L.L.C. ("LLC"). In connection with
these transactions, System One changed its name to Continental CRS
Interests, Inc. ("CRS Interests"). LLC is owned equally by CRS Interests,
a 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 were transferred to
AMADEUS. The transaction resulted in CRS Interests retaining a one-third
interest in LLC, receiving cash proceeds of approximately $40 million and
receiving a 12.4% equity interest in Amadeus. LLC will market the AMADEUS
CRS and will continue to develop, market and distribute travel-related IMS.
The Company anticipates that it will recognize a substantial gain relating
to the transaction in the second quarter.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
An analysis of statistical information for Continental's jet operations is
as follows:
Three Months Ended Net
March 31, Increase/
1995 1994 (Decrease)
Revenue passengers (thousands). . . . 9,141 9,348 (2.2) %
Revenue passenger miles
(millions) (a) . . . . . . . . . . . 9,561 9,303 2.8 %
Available seat miles (millions) (b) . 16,003 15,284 4.7 %
Passenger load factor (c) . . . . . . 59.7% 60.9% (1.2) pts.
Breakeven passenger load factor (d) . 58.2% 63.1% (4.9) pts.
Passenger revenue per available
seat mile (cents) (e) . . . . . . . 7.37 7.42 (0.7) %
Operating cost per available seat
mile (cents) (f). . . . . . . . . . 7.90 8.38 (5.7) %
Average yield per revenue
passenger mile (cents) (g). . . . . 12.34 12.19 1.2 %
Average fare per revenue passenger. . $129.10 $121.33 6.4 %
Average length of aircraft
flight (miles). . . . . . . . . . . 803 764 5.1 %
Average daily utilization of
each aircraft (h) . . . . . . . . . 9:34 9:35 (0.2) %
Actual aircraft in fleet at end
of period. . . . . . . . . . . . . . 324 319 1.6 %
(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 break even on an income before income taxes
basis, excluding nonrecurring charges, nonoperating items and other
special items.
(e) Passenger revenues divided by available seat miles.
(f) Operating expenses divided by available seat miles.
(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.
Due to the greater demand for air travel during the summer months, revenues
in the airline industry in the third quarter of the year are generally
significantly greater than revenues in the first quarter of the year and
moderately greater than revenues in the second and fourth quarters of the
year for the majority of air carriers. Continental's results of operations
usually have reflected this seasonality, but have also been impacted by
numerous other factors that are not necessarily seasonal, including the
general state of the United States and Japanese economies and fare actions
taken by Continental and its competitors.
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-month
period ended March 31, 1995 as compared to the three-month period ended
March 31, 1994.
The Company recorded a consolidated net loss of $30.2 million for the three
months ended March 31, 1995 as compared to a consolidated net loss of
$71.6 million for the three months ended March 31, 1994.
Passenger revenues of $1.2 billion for the first three months of 1995
increased 2.9%, $34.5 million, as compared to the same period in 1994, due
primarily to a 1.2% increase in Continental's jet yield and a 2.8% increase
in jet revenue passenger miles.
Cargo, mail and other revenues increased 11.5%, $17.4 million, in the first
three months of 1995 compared to the same period in the prior year
principally as a result of increased fees for worldwide travel-related
services performed by System One.
Wages, salaries and related costs decreased 1.8%, $6.7 million, during the
first three months of 1995 compared to the same period in 1994 primarily
due to a decrease in the number of full-time equivalent employees from
approximately 40,300 as of March 31, 1994 to approximately 35,000 as of
March 31, 1995. Such decrease was partially offset by the impact of wage
restorations resulting from an average 10.0% wage reduction implemented by
the Company in July 1992, which reduction was restored in equal increments
in December 1992, April 1993, April 1994 and July 1994.
Rentals and landing fees increased 5.1%, $10.5 million, for the first three
months of 1995 compared to the same period in 1994. Rent expense increased
primarily as a result of the delivery of new Boeing 737 and 757 aircraft
during 1994 and early 1995. Such increase was partially offset by
retirements and groundings of leased aircraft and reduced facility rentals
and landing fees resulting from downsizing operations.
Aircraft fuel expense decreased 3.5%, $6.1 million, in the first three
months of 1995 compared to the same period in 1994. The average price per
gallon decreased 2.0%, from 53.67 cents in 1994 to 52.61 cents in 1995.
The quantity of jet fuel used also decreased from 316.6 million gallons
used in 1994 to 312.4 million gallons used in 1995.
Maintenance, materials and repairs costs decreased 27.8%, $37.6 million,
during the first three months of 1995 compared to the same period in 1994
principally due to (i) the replacement of older aircraft with new aircraft,
(ii) the closure of maintenance facilities in Los Angeles and Denver and
(iii) the shift of scheduled maintenance work to outside suppliers who can
support the Company's flight operations at a lower cost and at locations
more convenient to its primary routes.
Other operating expense increased 2.7%, $9.1 million, in the first three
months of 1995 compared to the same period in 1994 primarily as a result of
increases in reservations and sales expense, aircraft servicing expense and
other miscellaneous expenses, partially offset by decreases in advertising
expense and catering expense.
Interest expense decreased 14.6%, $9.1 million, during the first three
months of 1995 compared to the same period in 1994 principally due to
principal reductions of long-term debt and capital lease obligations.
Interest capitalized decreased 63.3%, $2 million, in the first three months
of 1995 compared to the same period in 1994 primarily due to a decrease in
the average balance of purchase deposits for flight equipment.
Interest income remained relatively constant in the first three months of
1995 compared to the same period in 1994 principally due to an increase in
the average interest rate, offset by a decrease in the average balance of
cash and cash equivalents.
The Company's other nonoperating income (expense) in the first three months
of 1995 primarily included foreign exchange and other losses of $9.6
million (related to the Japanese yen and Mexican peso). Other nonoperating
income (expense) in the first three months of 1994 included foreign
exchange and other losses of $4.9 million (related to Japanese yen-
denominated transactions) and charges totaling approximately $2.3 million
relating to the closing of certain airport stations.
LIQUIDITY AND CAPITAL COMMITMENTS
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 DIA and
(v) evaluating the potential disposition of non-core assets. As discussed
below, under agreements in principle and binding agreements reached through
May 11, 1995, the Company has improved its liquidity by an estimated
$256 million in 1995 and $240 million in 1996. This achieves roughly 82%
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 of which Continental will take delivery 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 below, the Company has reached
agreements or agreements in principle with some of these lessors and
continues 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 and provide,
effective February 1, 1995, alternative compensation, which will include
debt securities convertible into equity, in lieu of current cash payments.
As of May 11, 1995, the Company had entered into agreements or agreements
in principle with lessors of 26 of these aircraft that, when consummated,
are expected to improve the Company's liquidity by an estimated $69 million
and $59 million in 1995 and 1996, respectively.
On April 10, 1995, the Denver City Council approved an agreement among 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. The agreement is expected to result in annual reduction in
costs to the Company of approximately $20 million over the life of the
lease.
As part of its plan to dispose of non-core assets, effective April 27,
1995, Continental and System One completed a series of transactions whereby
the existing systems management agreement between System One and EDS was
terminated and a substantial portion of the assets (including the travel
agent subscriber base and IMS software) and certain liabilities of System
One were transferred to a newly formed limited liability company (LLC). In
connection with these transactions, System One changed its name to
Continental CRS Interests, Inc. ("CRS Interests"). LLC is owned equally by
CRS Interests, a subsidiary of Continental, EDS and AMADEUS, a European
CRS. Substantially all of System One's remaining assets (including the CRS
software) and liabilities were transferred to AMADEUS. The transaction
resulted in CRS Interests retaining a one-third interest in LLC, receiving
cash proceeds of approximately $40 million and receiving a 12.4% equity
interest in Amadeus. LLC will market the AMADEUS CRS and will continue to
develop, market and distribute travel-related IMS. The Company anticipates
that it will recognize a substantial gain relating to the transaction in
the second quarter.
Continental's failure to make required payments to the Lenders, the City
and certain aircraft lessors as described above constituted events of
default under the respective agreements with such parties. The agreements
reached through May 11, 1995 with the Lenders, the City and two aircraft
lessors have cured defaults under their respective agreements. As of
May 11, 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. Additionally, the Company received a notice of lease
termination dated April 18, 1995 from one lessor relating to one A300
aircraft, and such lessor sued the Company and certain other persons on
May 2, 1995. The notice of lease termination resulted in additional cross
defaults and accordingly, such defaulted debt and capital lease obligations
have been classified as current liabilities as of March 31, 1995 in
accordance with generally accepted accounting principles. As of May 11,
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 and the
notice of lease termination from a lessor of one A300 aircraft 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 declared in default. 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 defaults and
expects to complete substantially all such negotiations by June 30, 1995.
The Company does not believe that any events of default or cross default
that remain after June 30, 1995 will have a material adverse effect on the
Company.
As a result of a Federal Aviation Administration 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
May 11, 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, the Company is 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 May 11, 1995, the Company was in
negotiations with the creditor. As a result of the current status of 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 May 11, 1995, approximately $616.4 million of the Company's
long-term debt and capital lease obligations were classified as debt and
capital lease obligations in default within current liabilities as of
March 31, 1995. While the Company does not believe it is probable that it
will be required to fund such defaulted obligations in the next 12 months,
generally accepted accounting principles require that such defaulted
obligations be classified as current liabilities at March 31, 1995. In
addition, certain operating leases with remaining aggregate rentals of
$2.6 billion as of March 31, 1995 were in default or cross default at
May 11, 1995.
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. As of May 11, 1995, 12 new
737 and two new 757 aircraft had been delivered. The estimated aggregate
cost of these aircraft is approximately $3.4 billion. In December 1994,
Continental Express, Inc. ("Express"), a wholly owned subsidiary,
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, 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 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 March 31, 1995, the Company had approximately $416.8 million in cash
and cash equivalents as compared to $396.3 million as of December 31, 1994.
Net cash provided by operating activities increased by approximately
$41 million during the three months ended March 31, 1995 compared to the
same period in the prior year principally due to earnings improvement. In
addition, net cash provided by investing activities increased by
approximately $80.6 million primarily due to higher capital expenditures
during 1994 relating to purchase deposits on turboprop and jet aircraft and
expenditures for Continental Lite.
Continental does not have general lines of credit, and substantially all of
its assets, including the stock of its subsidiaries, are encumbered.
Approximately $115.2 million and $118.7 million of cash and cash
equivalents at March 31, 1995 and December 31, 1994, respectively, were
held in restricted arrangements relating primarily to workers' compensation
claims and in accordance with the terms of certain other agreements. In
addition, Continental Micronesia, Inc. ("CMI"), a 91.0%-owned subsidiary,
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 March 31, 1995,
CMI had a minimum cash balance requirement of $25 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
The Company's loan agreements with GE Capital prohibit Continental
from paying cash dividends to common stockholders through
February 28, 1997 and thereafter only on preferred stock currently
outstanding to Air Canada and GE Capital.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
As more fully discussed in Item 2. "Management's Discussion and
Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Commitments", Continental is in default and
cross-default on certain long-term debt and capital and operating
lease obligations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3 By-laws of Continental, as amended to date -- filed
herewith.
(b) Reports on Form 8-K:
(i) Report dated January 26, 1995 reporting an Item 5.
"Other Event". No financial statements were filed with
the report, which announced a preliminary unaudited loss
for fiscal year 1994 and adoption of the Go Forward
Plan, the Company's new corporate strategy.
(ii) Report dated March 31, 1995 reporting an Item 5. "Other
Event". No financial statements were filed with the
report, which announced a postponement in the filing of
the Company's annual report on Form 10-K.
SIGNATURES
Pursuant to the requirements 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.
(Registrant)
Date: May 11, 1995 by: /s/ Daniel P. Garton
Daniel P. Garton
Senior Vice President and
Chief Financial Officer
(On behalf of Registrant)
Date: May 11, 1995 by: /s/ Michael P. Bonds
Michael P. Bonds
Staff Vice President and Controller
(Principal Accounting Officer)
INDEX TO EXHIBITS
OF
CONTINENTAL AIRLINES, INC.
3 By-laws of Continental, as amended to date -- filed herewith.