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 SEPTEMBER 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE 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, Suite 2010
Houston, Texas 77019
(Address of principal executive offices)
(Zip Code)
713-834-2950
(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 October 13, 1995, 6,301,056 shares of Class A common stock and
21,276,963 shares of Class B common stock were outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions of dollars, except per share data)
Three Months Nine Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Operating Revenues:
Passenger. . . . . . . $1,402 $1,351 $3,997 $3,797
Cargo, mail and
other . . . . . . . . 113 163 405 464
1,515 1,514 4,402 4,261
Operating Expenses:
Wages, salaries and
related costs . . . . 356 394 1,079 1,144
Aircraft fuel. . . . . 171 196 508 544
Commissions. . . . . . 126 107 376 338
Aircraft rentals . . . 122 107 370 316
Maintenance, materials
and repairs . . . . . 119 109 317 374
Other rentals and
landing fees. . . . . 87 103 271 293
Depreciation and
amortization. . . . . 63 65 192 190
Other. . . . . . . . . 318 350 998 1,036
1,362 1,431 4,111 4,235
Operating Income. . . . 153 83 291 26
Nonoperating Income
(Expense):
Interest expense . . . (52) (59) (162) (183)
Interest capitalized . 1 3 5 10
Interest income. . . . 9 6 22 17
Other, net . . . . . . 2 - 110 (4)
(40) (50) (25) (160)
Income (Loss) Before Income
Taxes and Minority
Interest . . . . . . . 113 33 266 (134)
Income Tax Benefit
(Provision). . . . . . - - (78) 47
Income (Loss) Before
Minority Interest. . . 113 33 188 (87)
Minority Interest . . . (2) (2) (5) (3)
Net Income (Loss) . . . 111 31 183 (90)
Preferred Dividend
Requirements and
Accretion to
Liquidation Value. . . (5) (2) (8) (5)
Income (Loss) Applica-
ble to Common Shares . $ 106 $ 29 $ 175 $ (95)
Earnings (Loss) per
Common and Common
Equivalent Share . . . $ 3.09 $ 1.03 $ 5.87 $(3.69)
Earnings (Loss) per
Common Share Assuming.
Full Dilution. . . . . $ 2.68 $ 1.03 $ 5.35 $(3.69)
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
September 30, December 31,
ASSETS 1995 1994
(Unaudited)
Current Assets:
Cash and cash equivalents, including
restricted cash and cash equivalents of
$127 and $119, respectively . . . . . . . . $ 603 $ 396
Accounts receivable, net . . . . . . . . . . 417 376
Spare parts and supplies, net. . . . . . . . 146 142
Prepayments and other. . . . . . . . . . . . 75 76
Total current assets. . . . . . . . . . . . 1,241 990
Property and Equipment:
Owned property and equipment:
Flight equipment. . . . . . . . . . . . . . 1,059 1,004
Other . . . . . . . . . . . . . . . . . . . 278 282
1,337 1,286
Less: Accumulated depreciation . . . . . . 275 207
1,062 1,079
Purchase deposits for flight equipment . . . 42 166
Capital leases:
Flight equipment. . . . . . . . . . . . . . 401 400
Other . . . . . . . . . . . . . . . . . . . 27 17
428 417
Less: Accumulated amortization . . . . . . 109 69
319 348
Total property and equipment . . . . . . . 1,423 1,593
Other Assets:
Routes, gates and slots, net . . . . . . . . 1,545 1,591
Reorganization value in excess of amounts
allocable to identifiable assets, net . . . 255 318
Investments. . . . . . . . . . . . . . . . . 159 17
Other assets, net. . . . . . . . . . . . . . 69 92
Total other assets . . . . . . . . . . . . 2,028 2,018
Total Assets . . . . . . . . . . . . . . $4,692 $4,601
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions of dollars, except share data)
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
(Unaudited)
Current Liabilities:
Debt and capital lease obligations in default. $ - $ 490
Current maturities of long-term debt . . . . . 196 126
Current maturities of capital leases . . . . . 53 26
Accounts payable . . . . . . . . . . . . . . . 604 630
Air traffic liability. . . . . . . . . . . . . 687 584
Accrued payroll and pensions . . . . . . . . . 176 179
Accrued other liabilities. . . . . . . . . . . 314 373
Total current liabilities . . . . . . . . . . 2,030 2,408
Long-Term Debt. . . . . . . . . . . . . . . . . 1,384 1,038
Capital Leases. . . . . . . . . . . . . . . . . 331 164
Deferred Credits and Other Long-Term
Liabilities:
Deferred income taxes . . . . . . . . . . . . 97 28
Deferred credit - operating leases. . . . . . 106 138
Accruals for aircraft retirements and
excess facilities. . . . . . . . . . . . . . 186 392
Other . . . . . . . . . . . . . . . . . . . . 229 251
Total deferred credits and other
long-term liabilities . . . . . . . . . . . 618 809
Commitments and Contingencies
Minority Interest . . . . . . . . . . . . . . . 29 26
Redeemable Preferred Stock (aggregate
redemption value - $40 and $56,
respectively). . . . . . . . . . . . . . . . . 40 53
Common Stockholders' Equity:
Class A common stock - $.01 par, 50,000,000
shares authorized; 6,301,056 shares
issued and outstanding. . . . . . . . . . . . - -
Class B common stock - $.01 par, 100,000,000
shares authorized; 21,276,713 and 20,403,512
shares issued, respectively . . . . . . . . . - -
Additional paid-in capital . . . . . . . . . . 732 778
Accumulated deficit. . . . . . . . . . . . . . (469) (652)
Unvested portion of restricted stock . . . . . (11) (14)
Additional minimum pension liability . . . . . (7) (7)
Unrealized gain (loss) on marketable equity
securities. . . . . . . . . . . . . . . . . . 15 (2)
Treasury stock - 30,000 shares
at December 31, 1994. . . . . . . . . . . . . - -
Total common stockholders' equity. . . . . . 260 103
Total Liabilities and Stockholders' Equity. $4,692 $4,601
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
CONTINENTAL AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
Nine Months
Ended September 30,
1995 1994
(Unaudited) (Unaudited)
Net Cash Provided by Operating Activities . . . $283 $ 69
Cash Flows from Investing Activities:
Investment in America West . . . . . . . . . . - (19)
Proceeds from disposition of property,
equipment and other assets. . . . . . . . . . 13 2
Capital expenditures, net of returned
purchase deposits . . . . . . . . . . . . . . (63) (189)
Purchase deposits refunded in connection
with aircraft delivered . . . . . . . . . . . 97 67
Proceeds from System One transactions. . . . . 40 -
Net cash provided (used) by investing
activities . . . . . . . . . . . . . . . . . 87 (139)
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt, net. 8 30
Payments on long-term debt and capital lease
obligations . . . . . . . . . . . . . . . . . (168) (180)
Proceeds from issuance of common stock . . . . 11 -
Purchase of warrants . . . . . . . . . . . . . (14) -
Net cash used by financing activities . . . . (163) (150)
Net Increase (Decrease) in Cash and
Cash Equivalents . . . . . . . . . . . . . . . 207 (220)
Cash and Cash Equivalents-Beginning of Period . 396 721
Cash and Cash Equivalents-End of Period . . . . $603 $501
Supplemental Cash Flow Information:
Interest paid. . . . . . . . . . . . . . . . . $136 $146
Income taxes paid. . . . . . . . . . . . . . . $ 9 $ -
Investing and Financing Activities Not
Affecting Cash:
Reclassification of accrued rent, capital
leases and interest to long-term debt . . . . $ 42 $ 25
Capital lease obligations incurred . . . . . . $ 9 $ 10
Property and equipment acquired through the
issuance of debt. . . . . . . . . . . . . . . $ 21 $ 10
Financed purchase deposits for flight
equipment . . . . . . . . . . . . . . . . . . $ 5 $ 18
Return of financed purchase deposits . . . . . $ 10 $ -
Reclassification of accrued management fees
to long-term debt . . . . . . . . . . . . . . $ 21 $ -
Investment in AMADEUS. . . . . . . . . . . . . $120 $ -
Reduction of debt in connection with
System One transactions . . . . . . . . . . . $ 42 $ -
Issuance of debt in connection with purchase
of Air Canada warrants. . . . . . . . . . . . $ 42 $ -
Issuance of convertible secured debentures
in connection with the aircraft settlements . $165 $ -
Conversion of preferred stock into
long-term debt. . . . . . . . . . . . . . . . $ 21 $ -
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 consolidated 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. 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
The Company has retired 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 were removed from
service. In addition, in the first quarter of 1995, Continental reduced
its rental payments on an additional 11 widebody aircraft leased at
significantly above-market rates. These actions caused a significant
number of defaults and cross defaults in various long-term debt, capital
lease and operating lease agreements. The Company began negotiations in
February 1995 with the lessors of (or lenders with respect to) these 35
widebody aircraft to amend the payment schedules and provide, effective
February 1, 1995, alternative compensation, including, in certain cases,
convertible secured debentures in lieu of current cash payments. The
Company has reached resolutions covering all 35 widebody aircraft, thereby
curing defaults under the related agreements and the resulting cross
defaults. The last such resolution was achieved during the fourth quarter
of 1995. In connection with these resolutions, Continental issued
convertible secured debentures in an aggregate principal amount of
$165 million, including payment-in-kind interest of $7 million as of
September 30, 1995, entered into certain agreements including restructured
leases and made certain payments to lessors and lenders. See Item 2.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Commitments".
The Company had also been in default under the debt agreement relating to
the financing of the Company's Los Angeles International Airport ("LAX")
maintenance facility. On September 29, 1995, the Company consummated a
restructuring of such indebtedness, which involved the issuance of
approximately $65 million in principal amount (including payment-in-kind
interest of $2 million) of unsecured indebtedness payable in installments
between 1997 and 2000, in exchange for all of the indebtedness and accrued
but unpaid interest thereon formerly secured by the Company's LAX
maintenance facility and related equipment. This restructuring cured the
defaults under the indebtedness and related cross defaults.
NOTE 2 - EARNINGS (LOSS) PER SHARE
The earnings (loss) per common share computations are based upon earnings
(loss) applicable to common shares and the average number of shares of
common stock, common stock equivalents (stock options, warrants and
restricted stock) and potentially dilutive securities (convertible secured
debentures) outstanding. The number of shares used in the primary earnings
per share computations for the three and nine months ended September 30,
1995 was 35,366,465 and 32,257,088, respectively. The number of shares
used in the fully diluted earnings per share computations for the three and
nine months ended September 30, 1995 was 40,969,811 and 34,124,870,
respectively. The number of shares used in the primary and fully diluted
computations for both the three and nine months ended September 30, 1994
was 28,988,888 and 25,522,568, respectively. Preferred stock dividend
requirements, including additional dividends on unpaid dividends, accretion
to redemption value and the accelerated accretion on the redeemed Series A
8% Cumulative Preferred Stock ("Series A 8% Preferred") caused by the
exchange thereof for debt of the Company on September 29, 1995 (see Note 4)
decreased net income for this computation by approximately $5 million and
$8 million for the three and nine months ended September 30, 1995,
respectively.
NOTE 3 - CONVERTIBLE SECURED DEBENTURES
As of September 30, 1995, Continental had issued approximately $139 million
(including payment-in-kind interest of $6 million) of its Series A 6%
Convertible Secured Debentures ("Series A Debentures") and $26 million
(including payment-in-kind interest of $1 million) of its Series B 8%
Convertible Secured Debentures ("Series B Debentures") in connection with
the settlements entered into with certain widebody aircraft lessors and
lenders. See Item 2. "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Commitments".
Principal payments under the Series A Debentures are due in ten equal
semiannual installments beginning August 1, 1997. Principal payments under
the Series B Debentures are due in thirteen equal quarterly installments
beginning February 1, 1997. The Series A Debentures provide for interest
to be paid in additional Series A Debentures from February 1, 1995 through
January 31, 1997, and the Series B Debentures provide for interest to be
paid in additional Series B Debentures from February 1, 1995 through
January 31, 1996. The Series A and Series B Debentures may be converted by
their respective holders at any time on or after August 1, 1996, if not
previously redeemed by the Company, into shares of Continental's Class B
Common Stock ("Class B") at an initial price of $26 per share. The
Series A Debentures may be called for redemption at any time by Continental
at par, and the Series B Debentures may be called for redemption at any
time by Continental with a 15% redemption premium.
NOTE 4 - PREFERRED AND COMMON STOCK
Redeemable Preferred Stock. In June 1995, Continental issued two new
series of preferred stock in exchange for its previously existing preferred
stock. Effective June 30, 1995 and in exchange for the 171,000 shares of
8% Cumulative Preferred Stock outstanding as of June 30, 1995 and all of
the accrued and unpaid dividends accumulated thereon as of such date, the
Company issued 202,784 shares of its new Series A 8% Preferred. On
September 29, 1995, Continental issued a secured promissory note (the
"Redemption Loan") with a principal amount of approximately $21 million to
an affiliate of General Electric Capital Corporation ("GE Capital") in
exchange for its 202,784 shares of Series A 8% Preferred, together with
accumulated dividends thereon (representing all of the outstanding Series A
8% Preferred). The Redemption Loan bears interest at 8.0% per annum from
September 29, 1995 through March 31, 1996 and 9.86% per annum thereafter.
Effective June 30, 1995 and in exchange for the 300,000 shares of 12%
Cumulative Preferred Stock outstanding as of June 30, 1995 and all of the
accrued and unpaid dividends accumulated thereon as of such date, the
Company issued 386,358 shares of its new Series A 12% Cumulative Preferred
Stock ("Series A 12% Preferred") to an affiliate of Air Canada. Holders of
Series A 12% Preferred are entitled to receive, when and if declared by the
Board of Directors, cumulative dividends payable quarterly in additional
shares of such preferred stock for dividends accumulating through
December 31, 1996, and thereafter in cash at an annual rate of $12 per
share. To the extent net income, as defined, for any calendar quarter is
less than the amount of dividends due on all outstanding shares of Series A
12% Preferred for such quarter, the Board may declare dividends payable in
additional shares of Series A 12% Preferred 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 Series A 12% Preferred, and all
outstanding shares are mandatorily redeemable on April 27, 2003 out of
legally available funds. The redemption price is $100 per share plus
accrued unpaid dividends. The Series A 12% Preferred is not convertible
into shares of common stock and has no voting rights, except under limited
circumstances.
NOTE 5 - PASSENGER REVENUES
In the third quarter of 1994, the Company recorded a $23 million favorable
adjustment as a result of a change in the Company's estimate of awards
expected to be redeemed for travel on Continental under its frequent flyer
program.
NOTE 6 - INCOME TAXES
A provision for income taxes was recorded in the second quarter of 1995
related to the System One Information Management, Inc. ("System One")
transactions. See Note 9. No provision for income taxes was recorded for
the three months ended September 30, 1995 and no additional provision was
recorded for the nine months ended September 30, 1995 since the Company had
incurred net operating losses for which a tax benefit had not previously
been recorded. However, the Company recorded a current provision in the
amount of $9 million for alternative minimum taxes for the nine months
ended September 30, 1995. This provision was fully offset by a deferred
tax benefit related to alternative minimum tax credit carryforwards.
The income tax benefit for the nine months ended September 30, 1994 differs
from the federal statutory rate principally due to an increase in the
deferred tax valuation allowance related to a portion of the Company's net
operating losses that may not be realizable, state taxes and certain
nondeductible expenses. A provision was not recorded for the three months
ended September 30, 1994 since the Company had incurred net operating
losses for which a tax benefit had not previously been recorded.
NOTE 7 - NONRECURRING CHARGES
During the fourth quarter of 1994, the Company recorded a nonrecurring
charge of approximately $447 million associated primarily with (i) the
planned early retirement of certain aircraft and (ii) closed or
underutilized facilities and other assets. Approximately $324 million of
the nonrecurring charge represented an actual cash outlay to be incurred
over terms of from one to 15 years and approximately $123 million
represented a noncash charge associated with a write-down of certain assets
(principally inventory and flight equipment to expected net realizable
value).
Approximately $218 million of the anticipated cash outlay 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. The majority of these
aircraft had remaining lease obligations beyond the planned retirement
dates for such aircraft. As a result of agreements with affected lessors,
$165 million (including payment in kind interest through September 30,
1995) of Series A and Series B Debentures were issued to certain lessors
and lenders to satisfy the remaining obligations related to these retired
aircraft. This amount, together with other costs incurred related to the
retirement of these aircraft, reduced the accruals for aircraft retirements
and excess facilities in the accompanying consolidated balance sheet by
approximately $198 million during the nine months ended September 30, 1995.
Approximately $106 million of the anticipated cash outlay was associated
with the closure of the LAX maintenance facility and underutilized airport
facilities (primarily associated with the new Denver International Airport
("DIA")). As of September 30, 1995, approximately $8 million of the
anticipated cash outlay had been incurred.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
A group of former bondholders appealed to have the United States District
Court for the District of Delaware (the "District Court") declare invalid
the Company's April 1993 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 had
successfully imposed liability upon such officers and directors, the
Company could have been 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.
Plaintiffs appealed to the Third Circuit Court of Appeals (the "Third
Circuit"), and on July 7, 1995, the Company settled this litigation by
paying $400,000 for the benefit of bondholders. On August 15, 1995, the
Third Circuit dismissed the appeal.
On December 3, 1990, the Company 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
United States Bankruptcy Court for the District of Delaware (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. Prior to
April 16, 1993, the Company settled all of the adequate protection claims
of the trustees, except for a claim of approximately $117 million for
alleged market value decline of 29 aircraft and 81 spare engines in the
fourth collateral pool. 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 seeking review of the District Court's mootness determination and
the Bankruptcy Court's finding on the merits. The Third Circuit heard oral
arguments from the parties in September 1995. Such appeal is still
pending. The Company does not believe that the foregoing matter will have
a material adverse effect on the Company.
The Company, the City and County of Denver (the "City") and certain other
parties entered into an agreement (the "DIA Settlement") that was approved
by the Denver City Council on April 10, 1995 and relates to gates and
operational space at DIA. The DIA 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 the Company, (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 number of
gates and operational space exceed the Company's current needs at the
airport. The Company is finalizing the sublease of four gates and certain
operational space to another carrier, and is negotiating a sublease of one
additional gate and certain operational space with a different carrier.
The Company will attempt to sublease additional facilities and operational
space as well. To the extent the Company is able to sublease additional
gates and operational space, its costs under the lease will be reduced.
Another air carrier filed a complaint with the Department of Transportation
("DOT") alleging that the DIA Settlement had increased its rates and
charges at DIA and such carrier had not approved the changes to the rates
and charges. DOT dismissed the air carrier's complaint. The DIA
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. If the DIA Settlement were successfully challenged,
the Company believes it has defenses against the City, as well as claims
against the City that would justify rescission of the lease or, if
rescission were not awarded by the court, a substantial reduction in the
Company's obligations thereunder. See Item 2. "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity
and Capital Commitments". A successful challenge to the DIA Settlement
could reduce or eliminate the Company's estimated savings at DIA.
On February 9, 1995, Delta Air Lines, Inc. imposed dollar limits on the
base commissions it would pay to travel agents on domestic airline tickets.
Shortly thereafter, other airlines, including the Company, imposed similar
dollar limits on their respective commissions. In February and March of
1995, the Company and six other major United States airlines were sued in a
number of putative class actions, which have been consolidated as In re
Airline Travel Agents Antitrust Litigation in the United States District
Court for the District of Minnesota (the "Court"), in which various travel
agents allege that the Company 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. On
August 23, 1995, the Court denied plaintiff's motion for a preliminary
injunction and denied defendants' motion for summary judgment. On
September 12, 1995, defendants filed a motion to certify an interlocutory
appeal to the Eighth Circuit Court of Appeals regarding the standard of
review for summary judgment to be applied by the Court in a conspiracy case
under the antitrust laws. Such motion was denied on September 27, 1995.
The Company is in the process of preparing for further discovery in this
litigation. The Company does not believe that the foregoing matter will
have a material adverse effect on the Company.
On May 2, 1995, GATX Third Aircraft Corporation ("GATX") filed an action in
the Superior Court of California for the County of San Francisco against
Continental and several unnamed "Doe" defendants with respect to one A300
aircraft (the "GATX litigation"). GATX alleged that Continental had
breached the terms of an aircraft lease between GATX and Continental. GATX
sought the return of the aircraft and engines, damages of $436,000 for
unpaid rent, damages of $20 million (less the fair market value of the
aircraft) in liquidation of its claims for future rent, costs and interest.
The Company settled such litigation in October 1995 in a manner consistent
with other lease restructurings effected by the Company. The settlement
did not have a material adverse effect on the Company.
On July 7, 1995, The Nippon Credit Bank, Ltd. ("Nippon") filed a suit
against Continental in the United States District Court in Los Angeles,
California with respect to a Boeing 747 aircraft leased by Continental.
Nippon alleged that events of default existed under the lease based on a
delay by Continental in making rent payments from March through June of
1995 and Continental's decision to cease flying the aircraft. Nippon
claimed approximately $37 million in liquidated damages. Because
Continental had made all rent payments due under the lease (including
interest at a rate specified in the lease) and believed it was in
compliance with all requirements of the lease, Continental denied the
existence of any event of default under the lease. Continental agreed to
purchase Nippon's loan and settle this litigation in November 1995. The
settlement will not have a material adverse effect on the Company.
In conjunction with the issuance of the Series A and Series B Debentures,
the Company has issued five contingent promissory notes aggregating
$57 million to the holders of the debentures. Such notes will be
automatically discharged once the debentures are either paid in full,
converted to common stock or otherwise satisfied. Inasmuch as the Company
believes it will pay the debentures in full, it does not anticipate that
any payments will be made under the notes. Consequently, the notes have
not been reflected as debt in the accompanying consolidated balance sheet.
In August 1993, the United States increased taxes on domestic fuel,
including aircraft fuel, by 4.3 cents per gallon. Airlines were exempt
from this tax increase until October 1, 1995, and pending legislation in
Congress would continue the exemption through February 28, 1997. There can
be no assurance that the continuation of this exemption will be enacted, or
if enacted, the terms on which and the period for which the exemption will
be effective. Continental has begun making its regular semi-monthly
deposits based on the increased fuel tax. If ultimately implemented, the
fuel tax would increase the annual operating expenses of Continental and
Continental Express, Inc. ("Express"), the Company's wholly owned commuter
subsidiary, by approximately $36 million based on projected domestic fuel
consumption levels during 1996. See Item 2. "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Commitments".
NOTE 9 - OTHER
Continental CRS Interests, Inc. ("Continental CRS"). Continental and its
subsidiary, System One, entered into a series of transactions on April 27,
1995 whereby a substantial portion of System One's assets (including the
travel agent subscriber base and travel-related information management
products and services software), as well as certain liabilities of System
One, were transferred to a newly formed limited liability company, System
One Information Management, L.L.C. ("LLC"). LLC is owned equally by
Continental CRS (which was formerly named System One and remains a wholly
owned subsidiary of Continental), Electronic Data Systems Corporation
("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. In addition to the
one-third interest in LLC, Continental CRS received cash proceeds of
$40 million and an equity interest in AMADEUS valued at $120 million, and
outstanding indebtedness of $42 million of System One owed to EDS was
extinguished. System One's revenues, included in cargo, mail and other
revenue, and related net earnings are not material to the consolidated
financial statements of Continental. In connection with these
transactions, the Company recorded a pretax gain of $108 million, which
amount was included in Other Nonoperating Income (Expense) in the
accompanying consolidated statement of operations for the nine months ended
September 30, 1995. The related tax provision totaled $78 million (which
differs from the federal statutory rate due to certain nondeductible
expenses), for a net gain of $30 million.
Pilot Contracts. The Company and its pilots (excluding Express pilots)
entered into a collective bargaining agreement with the Independent
Association of Continental Pilots ("IACP") that was ratified by the pilots
and becomes amendable in July 1997. The new agreement provides for a $20
million cash payment by the Company (which was accrued in the second
quarter of 1995 and paid in the fourth quarter of 1995), a 2.5% longevity
wage increase on July 1, 1995, a $10 million cash payment on April 1, 1996,
a 13.5% wage increase on July 1, 1996 and a 5.0% wage increase on June 30,
1997. Under the agreement the pilots agreed to forego their participation
in employee profit sharing for 1995 and 1996.
Express and its pilots have entered into a collective bargaining agreement
with the IACP that was ratified by Express pilots and becomes amendable on
October 1, 1997. The new agreement provides for an approximately $2
million cash payment by Express (half of which was paid upon ratification
and half of which is payable on January 1, 1996), 2.5% wage increases on
July 1, 1996 and June 30, 1997, profitability bonuses and participation in
Continental's on-time performance bonus plan.
NOTE 10 - RELATED PARTY TRANSACTIONS
On July 27, 1995 and August 10, 1995, Air Partners purchased from the
Company an aggregate of 154,113 and 328,660 shares of Class B common stock,
respectively, at purchase prices of $15.86 per share (with respect to a
total of 355,330 shares) and $13.40 per share (with respect to a total of
127,443 shares). Of the total, 158,320 shares were purchased pursuant to
the exercise of antidilution rights granted to Air Partners under the
Certificate of Incorporation and the remaining 324,453 shares were
purchased pursuant to the exercise of antidilution rights granted to Air
Canada under the Certificate of Incorporation (which rights were purchased
by Air Partners immediately prior to their exercise on August 10, 1995).
On September 29, 1995, Continental purchased from Air Canada warrants to
purchase an aggregate of 1,367,880 shares of Continental's Class A Common
Stock ("Class A") and 4,849,755 shares of Class B for an aggregate purchase
price of approximately $56 million (including a waiver fee of $5 million
paid to a major creditor of the Company), of which Continental paid
approximately $14 million in cash and a $42 million unsecured one-year note
(the "Air Canada Warrant Repurchase"). The $5 million waiver fee has been
included in Other Nonoperating Income (Expense) in the accompanying
consolidated statement of operations for the three and nine months ended
September 30, 1995. The note bears 8.0% interest from September 29, 1995
through December 31, 1995, 10.0% interest from January 1, 1996 through
March 31, 1996, 12.0% interest from April 1, 1996 through June 30, 1996 and
14.0% interest from July 1, 1996 through September 30, 1996. The
6,217,635 warrants purchased had exercise prices of $15.00 per share (as to
3,706,667 shares) and $30.00 per share (as to 2,510,968 shares).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
An analysis of statistical information for Continental's jet operations for
the periods indicated is as follows:
Three Months Ended Net
September 30, Increase/
1995 1994 (Decrease)
Revenue passengers (thousands). . . . 9,695 11,629 (16.6)%
Revenue passenger miles
(millions) (a) . . . . . . . . . . . 10,757 11,616 (7.4)%
Available seat miles (millions) (b) . 15,312 17,259 (11.3)%
Block hours (thousands) (c) . . . . . 275 295 (6.8)%
Passenger load factor (d) . . . . . . 70.3% 67.3% 3.0 pts.
Breakeven passenger load factor (e) . 62.7% 63.0% (0.3) pts.
Passenger revenue per available
seat mile (cents) (f) . . . . . . . 8.61 7.38 16.7 %
Operating cost per available seat
mile (cents) (g). . . . . . . . . . 8.44 7.56 11.6 %
Operating cost per block hour . . . . $4,690 $4,419 6.1 %
Average yield per revenue
passenger mile (cents) (h). . . . . 12.26 10.97 11.8 %
Average fare per revenue passenger. . $136.04 $109.57 24.2 %
Average length of aircraft
flight (miles). . . . . . . . . . . 858 707 21.4 %
Average daily utilization of
each aircraft (hours) (i) . . . . . 9:45 10:10 (4.1)%
Actual aircraft in fleet at end
of period. . . . . . . . . . . . . . 311 321 (3.1)%
Nine Months Ended Net
September 30, Increase/
1995 1994 (Decrease)
Revenue passengers (thousands). . . . 28,597 31,493 (9.2)%
Revenue passenger miles
(millions) (a) . . . . . . . . . . . 30,577 31,154 (1.9)%
Available seat miles (millions) (b) . 46,496 48,632 (4.4)%
Block hours (thousands) (c) . . . . . 826 851 (2.9)%
Passenger load factor (d) . . . . . . 65.8% 64.1% 1.7 pts.
Breakeven passenger load factor (e) . 61.1% 63.2% (2.1) pts.
Passenger revenue per available
seat mile (cents) (f) . . . . . . . 8.12 7.36 10.3 %
Operating cost per available seat
mile (cents) (g). . . . . . . . . . 8.27 7.92 4.4 %
Operating cost per block hour . . . . $4,653 $4,521 2.9 %
Average yield per revenue
passenger mile (cents) (h). . . . . 12.34 11.49 7.4 %
Average fare per revenue passenger. . $131.98 $113.64 16.1 %
Average length of aircraft
flight (miles). . . . . . . . . . . 831 728 14.1 %
Average daily utilization of
each aircraft (hours) (i) . . . . . 9:35 9:56 (3.5)%
Actual aircraft in fleet at end
of period. . . . . . . . . . . . . . 311 321 (3.1)%
(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) The number of hours an aircraft is operated in revenue service from
gate-to-gate.
(d) Revenue passenger miles divided by available seat miles.
(e) 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.
(f) Passenger revenues divided by available seat miles.
(g) Operating expenses divided by available seat miles.
(h) The average revenue received for each mile a revenue passenger is
carried.
(i) 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 and nine
months ended September 30, 1995 as compared to the corresponding periods
ended September 30, 1994.
Due to greater demand for air travel during the summer months, revenues in
the airline industry in the third quarter of the year tend to be
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. The Company's results of operations
have typically 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 the Company and its competitors.
Comparison of Three Months Ended September 30, 1995 to Three Months Ended
September 30, 1994
The Company recorded consolidated net income of $111 million for the three
months ended September 30, 1995 as compared to consolidated net income of
$31 million for the three months ended September 30, 1994. In the third
quarter of 1994, the Company recorded a $23 million favorable adjustment as
a result of a change in the Company's estimate of awards expected to be
redeemed under its frequent flyer program.
Implementation of the Company's route realignment and capacity
rationalization initiatives reduced Continental's capacity in the third
quarter of 1995 by 11.3%, while traffic in this period declined only 7.4%,
producing a 3.0 percentage point increase in load factor to 70.3%. This
higher load factor, combined with an 11.8% increase in average yield per
revenue passenger mile, contributed to a 3.8% increase in passenger
revenues to $1.4 billion despite the decreased capacity.
Cargo, mail and other revenues decreased 30.7%, $50 million, in the three
months ended September 30, 1995 as compared to the same period in the prior
year, principally as a result of the System One transactions, which were
effective April 27, 1995. See Note 9.
Wages, salaries and related costs decreased 9.6%, $38 million, during the
quarter ended September 30, 1995 as compared to the same period in 1994,
primarily due to a reduction in the number of full-time equivalent
employees from approximately 38,400 as of September 30, 1994 to
approximately 32,400 as of September 30, 1995. Such decrease was partially
offset by accruals for employee profit sharing and other incentive
programs, including the payment of bonuses for on-time airline performance.
In addition, wage rates were impacted by a longevity pay increase for
substantially all employee groups, effective July 1, 1995.
Aircraft fuel expense decreased 12.8%, $25 million, in the three months
ended September 30, 1995 compared to the same period in 1994. The quantity
of jet fuel used dropped 14.3% from 353.3 million gallons in the third
quarter of 1994 to 302.8 million gallons in the third quarter of 1995,
principally reflecting capacity reductions and increased stage lengths.
Such decrease was partially offset by a 1.7% increase in the average price
per gallon from 54.0 cents in 1994 to 54.9 cents in 1995.
Commissions expense increased 17.8%, $19 million, in the quarter ended
September 30, 1995 as compared to the same period in the prior year,
primarily due to increased passenger revenues and higher average effective
commission rates associated with the Company's targeted travel agency
initiatives and the elimination of noncommissionable Continental Lite
fares.
Aircraft rentals increased 14.0%, $15 million, for the three months ended
September 30, 1995 compared to the same period in 1994, primarily as a
result of the delivery of new Boeing 737 and 757 aircraft during late 1994
and throughout 1995. Such increase was partially offset by retirements and
groundings of certain leased aircraft.
Maintenance, materials and repairs costs increased 9.2%, $10 million,
during the quarter ended September 30, 1995 as compared to the same period
in 1994, principally due to the volume and timing of engine overhauls as
part of the Company's ongoing maintenance program, partially offset by the
replacement of older aircraft with new aircraft.
Other rentals and landing fees decreased 15.5%, $16 million, for the three
months ended September 30, 1995 compared to the same period in 1994,
principally due to reduced facility rentals and landing fees resulting from
downsizing operations.
Other operating expense decreased 9.1%, $32 million, in the three months
ended September 30, 1995 as compared to the same period in the prior year,
primarily as a result of the System One transactions (which were effective
April 27, 1995) coupled with decreases in advertising expense, aircraft
servicing expense and other miscellaneous expense.
Interest expense decreased 11.9%, $7 million, during the three months ended
September 30, 1995 as compared to the same period in 1994, primarily due to
(i) the reduced accretion of deferred credits recorded in connection with
the Company's adjustment of operating leases to fair market value as of
April 27, 1993 and (ii) principal reductions of long-term debt and capital
lease obligations. Such decrease was partially offset by accrued interest
on the Series A and Series B Debentures. See Note 3.
Interest income increased 50.0%, $3 million, in the third quarter of 1995
compared to the same period in the prior year, principally due to an
increase in the average interest rate earned on investments coupled with an
increase in the average balance of cash and cash equivalents.
The Company's other nonoperating income (expense) in the quarter ended
September 30, 1995 included a $5 million pretax charge (14 cents and 12
cents per primary and fully diluted share, respectively) related to the Air
Canada Warrant Repurchase. See Note 10.
No provision for income taxes was recorded for the three months ended
September 30, 1995 or the three months ended September 30, 1994 as a result
of the utilization of net operating loss carryforwards ("NOLs") for which a
tax benefit had not previously been recorded.
Comparison of Nine Months Ended September 30, 1995 to Nine Months Ended
September 30, 1994
The Company recorded consolidated net income of $183 million for the nine
months ended September 30, 1995 as compared to a consolidated net loss of
$90 million for the nine months ended September 30, 1994. The Company's
net income in the nine months ended September 30, 1995 included a $30
million net gain on the System One transactions. See Note 9. In the third
quarter of 1994, the Company recorded a $23 million favorable adjustment as
a result of a change in the Company's estimate of awards expected to be
redeemed under its frequent flyer program.
Implementation of the Company's route realignment and capacity
rationalization initiatives reduced Continental's capacity in the first
nine months of 1995 by 4.4%, while traffic in this period declined only
1.9%, producing a 1.7 percentage point increase in load factor to 65.8%.
This higher load factor, combined with a 7.4% increase in average yield per
revenue passenger mile, contributed to a 5.3% increase in passenger
revenues to $4 billion despite the decreased capacity.
Cargo, mail and other revenues decreased 12.7%, $59 million, in the first
nine months of 1995 compared to the same period in the prior year,
principally as a result of the System One transactions, which were
effective April 27, 1995. See Note 9.
Wages, salaries and related costs decreased 5.7%, $65 million, during the
first nine months of 1995 compared to the same period in 1994, primarily
due to a reduction in the number of full-time equivalent employees from
approximately 38,400 as of September 30, 1994 to approximately 32,400 as of
September 30, 1995. Such decrease was partially offset by accruals for a
$20 million cash payment to the pilots upon ratification of a new
collective bargaining agreement (see Note 9) and employee profit sharing
and other incentive programs, including the payment of bonuses for on-time
airline performance. In addition, wage rates were impacted by a longevity
pay increase for substantially all employee groups, effective July 1, 1995,
and 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.
Aircraft fuel expense decreased 6.6%, $36 million, in the first nine months
of 1995 compared to the same period in 1994. The quantity of jet fuel used
dropped 8.8% from 1.004 billion gallons in 1994 to 915.3 million gallons in
1995, principally reflecting capacity reductions and increased stage
lengths. Such decrease was partially offset by a 2.5% increase in the
average price per gallon from 52.7 cents in 1994 to 54.0 cents in 1995.
Commissions expense increased 11.2%, $38 million, in the first nine months
of 1995 as compared to the first nine months of 1994, primarily due to
increased passenger revenues and higher average effective commission rates
associated with the Company's targeted travel agency initiatives and the
elimination of noncommissionable Continental Lite fares.
Aircraft rentals increased 17.1%, $54 million, for the first nine months of
1995 compared to the same period in 1994, primarily as a result of the
delivery of new Boeing 737 and 757 aircraft during late 1994 and throughout
1995. Such increase was partially offset by retirements and groundings of
certain leased aircraft.
Maintenance, materials and repairs costs decreased 15.2%, $57 million,
during the first nine months of 1995 compared to the same period in 1994,
principally due to the replacement of older aircraft with new aircraft and
the volume and timing of overhauls as part of the Company's ongoing
maintenance program, partially offset by the shift of scheduled maintenance
work to outside suppliers.
Other rentals and landing fees decreased 7.5%, $22 million, for the nine
months ended September 30, 1995 compared to the same period in 1994,
principally due to reduced facility rentals and landing fees resulting from
downsizing operations.
Interest expense decreased 11.5%, $21 million, during the first nine months
of 1995 compared to the same period in 1994, primarily due to (i) the
reduced accretion of deferred credits recorded in connection with the
Company's adjustment of operating leases to fair market value as of
April 27, 1993 and (ii) principal reductions of long-term debt and capital
lease obligations. Such decrease was partially offset by accrued interest
on the Series A and Series B Debentures. See Note 3.
Interest capitalized decreased 50.0%, $5 million, in the first nine 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 increased 29.4%, $5 million, in the first nine months of
1995 compared to the same period in 1994, principally due to an increase in
the average interest rate earned on investments, partially offset by a
decrease in the average balance of cash and cash equivalents.
The Company's other nonoperating income (expense) in the first nine months
of 1995 included a pretax gain of $108 million from the System One
transactions and a $5 million pretax charge (14 cents and 12 cents per
primary and fully diluted share, respectively) related to the Air Canada
Warrant Repurchase.
The tax provision related to the System One transactions totaled
$78 million (which differs from the federal statutory rate due to certain
nondeductible expenses), for a net gain of $30 million. See Note 4 and
Note 9. Other nonoperating income (expense) in the first nine months of
1994 included foreign exchange and other losses of $9 million (related to
the Japanese yen) and charges totaling approximately $2 million relating to
the closing of certain airport stations.
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 included (i) rescheduling
principal amortization under the Company's loan agreements with its primary
secured lenders (representing approximately $599 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, by implementing the liquidity elements of the Go Forward Plan, the
Company expects to improve its liquidity by approximately $250 million in
1995 and approximately $275 million in 1996.
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
were sold to a third party. They will be replaced by five Boeing 767
aircraft of which Continental will take delivery starting in 1998. Options
to purchase additional aircraft were canceled. Furthermore, on March 30,
1995 Continental amended its principal secured loan agreements with GE
Capital and General Electric Company ("GE") (collectively, the "Lenders")
to defer 1995 and 1996 principal payments and amended certain of its
operating lease agreements with the Lenders to defer 1995 rental
obligations. In connection with the Lender's loan and lease agreement
amendments, Continental agreed, among other things, to obtain concessions
from certain aircraft lessors, all of which have subsequently been
obtained.
The Company has retired 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 were removed from
service. In addition, in the first quarter of 1995, Continental reduced
its rental payments on an additional 11 widebody aircraft leased at
significantly above-market rates. These actions caused a significant
number of defaults and cross defaults in various long-term debt, capital
lease and operating lease agreements. The Company began negotiations in
February 1995 with the lessors of (or lenders with respect to) these 35
widebody aircraft to amend the payment schedules and provide, effective
February 1, 1995, alternative compensation, including, in certain cases,
convertible secured debentures in lieu of current cash payments. The
Company has reached resolutions covering all 35 widebody aircraft, thereby
curing defaults under the related agreements and the resulting cross
defaults. The last such resolution was achieved during the fourth quarter
of 1995. In connection with these resolutions, Continental issued
convertible secured debentures in an aggregate principal amount of
$165 million, including payment-in-kind interest of $7 million as of
September 30, 1995, entered into certain agreements including restructured
leases and made certain payments to lessors and lenders.
The Company had been in default under its lease of facilities at DIA. 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 by reducing the Company's lease term
to five years, reducing to ten 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 cured the default, and also
provided for the release of certain claims and the settlement of certain
litigation filed by the City against the Company. See Note 8.
The Company had also been in default under the debt agreement relating to
the financing of the Company's LAX maintenance facility. On September 29,
1995, the Company consummated a restructuring of such indebtedness, which
involved the issuance of approximately $65 million in principal amount
(including payment-in-kind interest of $2 million) of unsecured
indebtedness payable in installments between 1997 and 2000, in exchange for
all of the indebtedness and accrued but unpaid interest thereon formerly
secured by the Company's LAX maintenance facility and related equipment.
This restructuring cured the defaults under the indebtedness and related
cross defaults.
As a result of the 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 has settled its claims with ATR and is in the
process of implementing the terms of the settlement.
As part of its plan to dispose of non-core assets, Continental entered into
a series of transactions with respect to System One on April 27, 1995. See
Note 9.
On September 29, 1995, Continental purchased from Air Canada warrants to
purchase approximately 6.2 million shares of Continental's common stock.
See Note 10. Also, on September 29, 1995, Continental issued a secured
promissory note with a principal amount of approximately $21 million to an
affiliate of GE Capital in exchange for its 202,784 shares of Series A 8%
Preferred, together with accumulated dividends thereon. See Note 4.
The Company had, as of December 31, 1994, deferred tax assets aggregating
approximately $1.6 billion, including approximately $1.1 billion of NOLs.
The Company recorded a valuation allowance of $844 million against such
assets as of December 31, 1994. Realization of a substantial portion of
the Company's remaining NOLs will require the completion by April 27, 1998
of transactions resulting in recognition of built-in gains for federal
income tax purposes. Although the Company has consummated one such
transaction (see Note 9) and currently intends to consummate one or more
additional transactions, in the event the Company were to determine in the
future that not all such transactions will be completed, an adjustment to
the deferred tax liability of up to approximately $116 million would be
charged to income in the period such determination was made.
As a result of NOLs, the Company does not currently expect to pay United
States federal income taxes (other than alternative minimum tax) prior to
1998. Additionally, for financial reporting purposes in 1995, the Company
has utilized NOLs for which a tax benefit had not previously been recorded
to offset tax expense. As of December 31, 1994 the Company had
approximately $385 million of such unbenefitted NOLs. To the extent the
Company's aggregate taxable income after December 31, 1994 for financial
statement purposes exceeds such amount, it will record a tax expense for
financial statement purposes. Section 382 of the Internal Revenue Code
imposes limitations on a corporation's ability to utilize NOLs if it
experiences a more than 50% ownership change over a three-year period. No
assurance can be given that future transactions, whether within or outside
the control of the Company, would not cause a change in ownership, thereby
substantially restricting the use of NOLs in future periods for both
federal income tax and financial reporting purposes.
Continental has firm commitments to take delivery of an additional four new
737 and two new 757 aircraft through early 1996 and 43 new jet aircraft
during the years 1998 through 2002. Although there may be delays of
scheduled aircraft deliveries in 1995 and 1996 as a result of a strike by
Boeing machinists, the Company does not believe that any such delays will
have a material adverse effect on the Company. The estimated aggregate
cost of these aircraft is approximately $2.8 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 November 3, 1995, six Beech 1900-D aircraft had been
delivered. In connection with the rescheduling of jet aircraft deliveries,
$72 million of purchase deposits was refunded to the Company in the first
nine months of 1995. 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. Furthermore, the Company
currently anticipates that it will have remaining financing commitments
from aircraft manufacturers of approximately $575 million for jet aircraft
deliveries beyond 1996.
Continental expects its cash outlays for 1995 and 1996 capital
expenditures, exclusive of aircraft acquisitions, to aggregate
approximately $85 million and $120 million, respectively, in each case
primarily relating to mainframe, software application and automation
infrastructure projects, aircraft modifications and mandatory maintenance
projects, passenger terminal facility improvements and office, maintenance,
telecommunications and ground equipment. As of September 30, 1995,
approximately $49 million of 1995 total expected capital expenditures,
exclusive of aircraft acquisitions, had been incurred.
As of September 30, 1995, the Company had $603 million in cash and cash
equivalents, compared to $396 million as of December 31, 1994. Net cash
provided by operating activities increased $214 million during the nine
months ended September 30, 1995 compared to the same period in the prior
year principally due to earnings improvement. In addition, net cash
provided by investing activities increased $226 million primarily as a
result of cash proceeds received from the System One transactions in 1995
and an increase in purchase deposits refunded in 1995 due to canceled
aircraft options, delivery deferrals or delivery of aircraft, as well as
higher capital expenditures during 1994 relating to purchase deposits on
jet and turboprop aircraft and expenditures relating to the Company's
discontinued Continental Lite operations. Net cash used by financing
activities for the nine months ended September 30, 1995 compared to the
same period in the prior year increased $13 million primarily due to the
purchase of Air Canada's outstanding stock warrants in 1995.
Continental does not have general lines of credit, and substantially all of
its assets, including the stock of its subsidiaries, are encumbered.
Approximately $127 million and $119 million of cash and cash equivalents at
September 30, 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. Continental
and Continental Micronesia, Inc. ("CMI"), a 91% owned subsidiary, have
secured borrowings from the Lenders which as of September 30, 1995
aggregated $659 million. CMI's secured loans contain significant financial
covenants, including requirements to maintain a minimum cash balance and
consolidated net worth, restrictions on unsecured borrowings and mandatory
prepayments on the sale of most assets. These financial covenants limit
the ability of CMI to pay dividends to Continental. As of September 30,
1995, CMI had a minimum cash balance requirement of $28 million. In
addition, certain of Continental's secured loans require the Company to,
among other things, maintain a minimum monthly operating cash flow and
cumulative operating cash flow, a minimum monthly cash balance and a
minimum ratio of operating cash flow to fixed charges. Continental also is
prohibited generally from paying cash dividends in respect of its capital
stock, from purchasing or prepaying indebtedness and from incurring
additional secured indebtedness.
The Company has entered into petroleum option contracts to protect against
a sharp increase in jet fuel prices and CMI has entered into an average
rate option contract to hedge a portion of its yen-denominated ticket sales
against a significant depreciation in the value of the yen versus the U.S.
dollar. The petroleum option contracts generally cover the Company's
forecasted jet fuel needs for the next three to six months and the average
rate option contract covers a portion of CMI's yen-denominated ticket sales
through December 31, 1995. At September 30, 1995, the Company had
petroleum option contracts outstanding with an aggregate contract value of
approximately $160 million and CMI had an average rate option contract
outstanding with a contract value of approximately $185 million. At
September 30, 1995, the fair value of the option contracts was immaterial
as the strike price under these contracts exceeded the spot rate. The
Company and CMI are exposed to credit loss in the event of nonperformance
by the counterparties on the option contracts; however, management does not
anticipate nonperformance by these counterparties. The amount of such
exposure is generally the unrealized gains, if any, on such option
contracts.
The Company intends to conduct financing efforts, the proceeds of which are
intended to be used for the redemption or repurchase of the Series A
Debentures and the Series B Debentures, the prepayment of a note issued to
Air Canada in connection with the Air Canada Warrant Repurchase and the
payment of certain other obligations. There can be no assurance that the
Company will consummate any such financing.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Note 8 of Notes to Consolidated Financial Statements.
ITEM 2. CHANGES IN SECURITIES.
The Company retired all of the shares of its Series A 8% Cumulative
Preferred Stock on September 29, 1995.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
See Note 1 of Notes to Consolidated Financial Statements.
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:
3.1 By-Laws of Continental, as amended to date.
4.1 Certificate of Elimination with respect to the
Certificate of Designations of Series A 8% Cumulative
Preferred Stock.
10.1 First Amendment to Continental Airlines, Inc. 1994
Incentive Equity Plan.
11.1 Statement Regarding Computation of Per Share Earnings.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
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: November 9, 1995 by: /s/ Lawrence W. Kellner
Lawrence W. Kellner
Senior Vice President and
Chief Financial Officer
(On behalf of Registrant)
Date: November 9, 1995 /s/ Michael P. Bonds
Michael P. Bonds
Staff Vice President and Controller
(Principal Accounting Officer)