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 JUNE 30, 1996
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 July 19, 1996, 9,280,000 shares of Class A common stock and
46,636,026 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 Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
(Unaudited) (Unaudited)
Operating Revenue:
Passenger . . . . . . . $1,519 $1,355 $2,894 $2,595
Cargo, mail and other . 120 123 234 292
1,639 1,478 3,128 2,887
Operating Expenses:
Wages, salaries and
related costs. . . . . 378 357 742 723
Aircraft fuel . . . . . 180 168 357 337
Aircraft rentals. . . . 127 124 251 247
Commissions . . . . . . 137 131 263 250
Maintenance, materials
and repairs. . . . . . 119 101 231 198
Other rentals and
landing fees . . . . . 85 93 169 185
Depreciation and
amortization . . . . . 67 65 132 129
Other . . . . . . . . . 317 330 634 680
1,410 1,369 2,779 2,749
Operating Income . . . . 229 109 349 138
Nonoperating Income
(Expense):
Interest expense. . . . (42) (56) (89) (110)
Interest capitalized. . - 3 1 4
Interest income . . . . 10 8 19 13
Other, net. . . . . . . 9 117 21 108
(23) 72 (48) 15
Income before Income
Taxes and Minority
Interest. . . . . . . . 206 181 301 153
Income Tax Provision . . (32) (78) (33) (78)
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions of dollars, except per share data)
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
(Unaudited) (Unaudited)
Income before Minority
Interest. . . . . . . . $ 174 $ 103 $ 268 $ 75
Minority Interest. . . . (1) (1) (2) (3)
Distributions on
Preferred Securities
of Trust. . . . . . . . (6) - (11) -
Net Income . . . . . . . 167 102 255 72
Preferred Dividend
Requirements and
Accretion to
Liquidation Value . . . (1) (2) (2) (3)
Income Applicable to
Common Shares . . . . . $ 166 $ 100 $ 253 $ 69
Earnings per Common
and Common Equivalent
Share . . . . . . . . . $ 2.53 $ 1.51 $ 3.90 $ 1.15
Earnings per Common
Share Assuming Full
Dilution. . . . . . . . $ 2.04 $ 1.49 $ 3.25 $ 1.10
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions of dollars, except for share data)
June 30, December 31,
ASSETS 1996 1995
(Unaudited)
Current Assets:
Cash and cash equivalents, including
restricted cash and cash equivalents
of $104 and $144, respectively . . . . . $ 825 $ 747
Accounts receivable, net. . . . . . . . . 461 351
Spare parts and supplies, net . . . . . . 162 127
Prepayments and other . . . . . . . . . . 79 90
Total current assets . . . . . . . . . . 1,527 1,315
Property and Equipment:
Owned property and equipment:
Flight equipment . . . . . . . . . . . . 1,115 1,107
Other. . . . . . . . . . . . . . . . . . 297 288
1,412 1,395
Less: Accumulated depreciation. . . . . 333 285
1,079 1,110
Purchase deposits for flight equipment 59 48
Capital leases:
Flight equipment. . . . . . . . . . . . . 410 394
Other . . . . . . . . . . . . . . . . . . 29 28
439 422
Less: Accumulated amortization . . . . . 141 119
298 303
Total property and equipment . . . . . . 1,436 1,461
Other Assets:
Routes, gates and slots, net. . . . . . . 1,502 1,531
Reorganization value in excess of
amounts allocable to identifiable
assets, net. . . . . . . . . . . . . . . 244 251
Investments . . . . . . . . . . . . . . . 135 163
Other assets, net . . . . . . . . . . . . 106 100
Total other assets . . . . . . . . . . . 1,987 2,045
Total Assets. . . . . . . . . . . . . . $4,950 $4,821
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions of dollars, except for share data)
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
(Unaudited)
Current Liabilities:
Current maturities of long-term debt. . . $ 180 $ 163
Current maturities of capital leases. . . 60 58
Accounts payable. . . . . . . . . . . . . 596 617
Air traffic liability . . . . . . . . . . 762 579
Accrued payroll and pensions. . . . . . . 193 181
Accrued other liabilities . . . . . . . . 317 386
Total current liabilities. . . . . . . . 2,108 1,984
Long-Term Debt . . . . . . . . . . . . . . 1,163 1,352
Capital Leases . . . . . . . . . . . . . . 272 306
Deferred Credits and Other Long-Term
Liabilities:
Deferred income taxes . . . . . . . . . . 71 46
Deferred credit - aircraft operating
leases . . . . . . . . . . . . . . . . . 83 97
Accruals for aircraft retirements and
excess facilities. . . . . . . . . . . . 142 175
Other . . . . . . . . . . . . . . . . . . 244 246
Total deferred credits and other
long-term liabilities . . . . . . . . . 540 564
Commitments and Contingencies
Minority Interest. . . . . . . . . . . . . 28 27
Continental-Obligated Mandatorily
Redeemable Preferred Securities of
Subsidiary Trust Holding Solely
Convertible Subordinated Debentures (A) . 242 242
Redeemable Warrants. . . . . . . . . . . . 50 -
Redeemable Preferred Stock (aggregate
redemption value - $43 and $41,
respectively) . . . . . . . . . . . . . . 43 41
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions of dollars, except for share data)
June 30, December 31,
1996 1995
(Unaudited)
Common Stockholders' Equity:
Class A common stock - $.01 par,
50,000,000 shares authorized;
9,280,000 and 12,602,112 shares
issued and outstanding,
respectively . . . . . . . . . . . . . . $ - $ -
Class B common stock - $.01 par,
200,000,000 shares authorized;
46,631,326 and 42,856,548 shares
issued and outstanding, respectively . . - -
Additional paid-in capital . . . . . . . 686 733
Accumulated deficit . . . . . . . . . . . (173) (428)
Unvested portion of restricted stock. . . (7) (10)
Additional minimum pension liability. . . (8) (8)
Unrealized gain on marketable
equity securities. . . . . . . . . . . . 6 18
Total common stockholders' equity. . . . 504 305
Total Liabilities and Stockholders'
Equity . . . . . . . . . . . . . . . . $4,950 $4,821
(A) The sole assets of the Trust are convertible subordinated
debentures with an aggregate principal amount of $250 million,
which bear interest at the rate of 8-1/2% per annum and mature
on December 1, 2020. Upon repayment, the Continental-
Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust will be mandatorily redeemed.
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)
Six Months
Ended June 30,
1996 1995
(Unaudited)
Net Cash Provided by Operating
Activities. . . . . . . . . . . . . . . $395 $166
Cash Flows from Investing Activities:
Proceeds from sale of America West
stock and warrants . . . . . . . . . . 32 -
Proceeds from disposition of property,
equipment and other assets . . . . . . 4 4
Proceeds from sale/leaseback
transaction. . . . . . . . . . . . . . 12 -
Capital expenditures, net of returned
purchase deposits in 1995. . . . . . . (96) (41)
Purchase deposits refunded in
connection with aircraft delivered . . 12 46
Proceeds from System One transactions . - 40
Net cash provided (used) by
investing activities. . . . . . . . . (36) 49
Cash Flows from Financing Activities:
Proceeds from issuance of long-term
debt, net. . . . . . . . . . . . . . . 241 8
Payments on long-term debt and
capital lease obligations. . . . . . . (516) (119)
Proceeds from issuance of common
stock. . . . . . . . . . . . . . . . . 5 2
Dividends paid on preferred securities
of trust . . . . . . . . . . . . . . . (11) -
Net cash used by financing activities. (281) (109)
Net Increase in Cash and
Cash Equivalents. . . . . . . . . . . . 78 106
Cash and Cash Equivalents - Beginning
of Period . . . . . . . . . . . . . . . 747 396
Cash and Cash Equivalents - End of
Period. . . . . . . . . . . . . . . . . $825 $502
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
Six Months
Ended June 30,
1996 1995
(Unaudited)
Supplemental Cash Flow Information:
Interest paid . . . . . . . . . . . . . $ 85 $ 97
Income taxes paid . . . . . . . . . . . $ 1 $ 4
Investing and Financing Activities
Not Affecting Cash:
Property and equipment acquired
through the issuance of debt . . . . . $ 41 $ 9
Reclassification of accrued rent,
capital leases and interest to
long-term debt . . . . . . . . . . . . $ 10 $ 30
Capital lease obligations incurred. . . $ 2 $ 9
Financed purchase deposits for
flight equipment . . . . . . . . . . . $ 13 $ 5
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
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, as amended, for the year ended
December 31, 1995.
NOTE 1 - STOCK SPLIT
On June 26, 1996, the Board of Directors of the Company declared a
two-for-one stock split (the "Stock Split") pursuant to which (a)
one share of the Company's Class A common stock, par value $.01 per
share ("Class A common stock"), was issued for each share of Class
A common stock outstanding on July 2, 1996 (the "Record Date") and
(b) one share of the Company's Class B common stock, par value $.01
per share ("Class B common stock"), was issued for each share of
Class B common stock outstanding on the Record Date. Shares
issuable pursuant to the Stock Split were distributed on or about
July 16, 1996. All share and earnings per share information for
prior periods has been adjusted for the Stock Split.
NOTE 2 - EARNINGS PER SHARE
The earnings per common share computations are based upon earnings
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 (e.g.,
convertible securities) outstanding, as adjusted for the Stock
Split. The number of shares used in the primary earnings per share
computations for the three and six months ended June 30, 1996 was
65,621,986 and 64,845,570, respectively. The number of shares used
in the fully diluted earnings per share computations for the three
and six months ended June 30, 1996 was 83,972,375 and 81,299,724,
respectively. The number of shares used in both the primary and
fully diluted earnings per share computations for the three and six
months ended June 30, 1995 was 70,029,394 and 69,964,776,
respectively. Preferred stock dividend requirements, including
additional dividends on unpaid dividends and accretion to
redemption value, decreased net income for this computation by
approximately $1 million and $2 million for the three and six
months ended June 30, 1996, respectively, and $2 million and $3
million for the three and six months ended June 30, 1995,
respectively.
NOTE 3 - INCOME TAXES
Income taxes for the three and six months ended June 30, 1996 are
provided at the estimated effective tax rate, which differs from
the federal statutory rate of 35%, primarily due to net operating
losses ("NOLs") for which a tax benefit had not previously been
recorded, state and foreign income taxes and the effect of certain
expenses that are not deductible for income tax purposes.
Continental recognized the remainder of its previously unbenefitted
post reorganization NOLs during the second quarter of 1996. A
provision for taxes was recorded for the three and six months ended
June 30, 1995 related to the System One Information Management,
Inc. ("System One") transactions. No additional provision was
recorded since the Company had incurred NOLs for which a tax
benefit had not previously been recorded.
At December 31, 1995, the Company had NOL carryforwards of $2.5
billion for federal income tax purposes (of which $1.2 billion are
not subject to the limitations of Section 382 of the Internal
Revenue Code ("Section 382")) that will expire from 1995 through
2009 and investment tax credit carryforwards of $45 million that
will expire through 2001. As a result of the change in ownership
of the Company on April 27, 1993, the ultimate utilization of the
Company's NOLs and investment tax credits could be limited.
For financial reporting purposes, a valuation allowance has been
recognized to offset the deferred tax assets related to a portion
of the NOLs. The Company has considered prudent and feasible tax
planning strategies in assessing the need for the valuation
allowance. The Company initially assumed $194 million of benefit
attributable to such tax planning strategies. The Company
consummated the System One transactions, which had the effect of
realizing approximately $78 million of the built-in gains required
to be realized, and currently intends to consummate one or more
additional transactions. In the event the Company were to
determine in the future that any such tax planning strategies would
not be implemented, an adjustment to the net deferred tax liability
of up to $116 million would be charged to income in the period such
determination was made. In the event the Company recognizes
additional tax benefits related to NOLs and investment tax credit
carryforwards attributable to the Company's predecessor, which
include the accounts of Continental Airlines Holdings, Inc. and the
pre-reorganized Company, those benefits would be applied to reduce
reorganization value in excess of amounts allocable to identifiable
assets and other intangibles to zero, and thereafter as an addition
to paid-in capital.
NOTE 4 - OTHER
Financing Transactions
In the first and second quarters of 1996, the Company financed one
owned aircraft and exercised its right under 22 existing leveraged
aircraft leases to cause the owner/lessor's debt underlying these
leases to be refinanced. In connection with these financings, the
Company leased the aircraft through pass-through trusts ("Trusts")
rather than directly from the equipment provider to reduce
Continental's overall financing costs. The lower borrowing costs
obtained in the refinancing allowed Continental's operating lease
expense for the affected aircraft to be reduced by more than $17
million annually. In connection with the refinancing, Trusts were
created to hold new non-recourse equipment notes (with the
exception that equipment notes with respect to one owned aircraft
were issued by Continental). The Trusts issued pass-through
certificates representing interests in the equipment notes.
Inasmuch as (i) the owner/lessor has a substantial investment in
the aircraft, (ii) the pass-through certificates are secured by the
aircraft and an assignment of the corresponding leases and lease
rentals payable by Continental, and (iii) the pass-through
certificates are not direct obligations of, or guaranteed by,
Continental, the Trusts (and the corresponding debt and interest
expense) are not included in the accompanying consolidated
financial statements. Continental has both renewal options and
fair market value purchase options under the related aircraft
leases.
During January and February 1996, the Company repurchased or
redeemed without prepayment penalty the remaining amount of its
Series A convertible secured debentures for $125 million (including
payment-in-kind interest of $7 million).
In March 1996, Continental issued $230 million of 6-3/4%
convertible subordinated notes due April 15, 2006. The notes are
convertible into Class B common stock at an initial conversion
price of $30.195 per share (adjusted for the Stock Split). The
notes are redeemable at the option of the Company on or after April
15, 1999, at specified redemption prices.
In March 1996, Continental repaid $257 million of secured
indebtedness to General Electric Company and affiliates
(collectively, "GE") (of which $47 million was required as a result
of the convertible notes financing described above and the America
West Airlines, Inc. ("America West") stock sale (discussed below)
and $210 million was an optional prepayment), which eliminated
certain restrictive covenants.
In March 1996, Continental Express, Inc. ("Express") entered into
an agreement to acquire eight new ATR aircraft. As of July 1996,
three of these aircraft have been delivered. These aircraft will
be accounted for as operating leases when delivered. In
conjunction with the acquisition, in 1996, the Company will return
eight older ATR aircraft accounted for as capital leases.
Other
In February 1996, the Company sold approximately 1.4 million shares
of its 1.8 million shares of America West common stock in an
underwritten public offering realizing net proceeds of
approximately $25 million and recognizing a gain of $12.5 million.
In addition, in May 1996, the Company sold all of its 802,860
America West warrants held, realizing net proceeds of $7 million
and recognizing a gain of $5 million. The gains are included in
other nonoperating income. The Company now owns approximately 1.0%
of the equity interest and 7.9% of the voting power of America
West.
On June 26, 1996, the stockholders of the Company approved an
amendment to the Company's 1994 Incentive Equity Plan (the
"Incentive Plan") which increased the maximum number of shares of
Class B common stock that may be issued under the Incentive Plan
from 6,000,000 to 9,000,000 shares, in the aggregate, on a post-
Stock Split basis.
NOTE 5 - RELATED PARTY TRANSACTIONS
In May 1996, the Company entered into an agreement with Air
Partners, L.P. ("Air Partners") for the sale by Air Partners to the
Company from time to time, at Air Partners' election, for the one-
year period beginning August 15, 1996, of up to an aggregate of $50
million in intrinsic value (based on the then-current Class B
common stock price minus exercise price) of Air Partners' Class B
warrants. The purchase price would be payable in cash. The Board
of Directors has authorized the Company to publicly issue up to $50
million of Class B common stock in connection with any such
purchase. In connection with this agreement, the Company has
reclassified $50 million from common equity to redeemable warrants.
On May 14, 1996, Air Canada exchanged 1,661,056 shares of Class A
common stock for 1,661,056 shares of Class B common stock (on a
pre-Stock Split basis) pursuant to certain rights granted to it
under the Company's Certificate of Incorporation.
See Item 5. "Other Information" for certain information with
respect to changes in Air Partners' and Air Canada's beneficial
ownership of the Company's common stock.
In connection with the Company's $320 million secured term loan
financing (see Note 6), Continental Micronesia, Inc. ("CMI"), a
91%-owned subsidiary of Continental, paid its 9% minority interest
holder, United Micronesia Development Association, Inc., a dividend
of approximately $13 million.
NOTE 6 - SUBSEQUENT EVENTS
On July 2, 1996, the Company announced its plan to expand its gates
and related facilities in Terminal B as well as planned
improvements at Terminal C at Continental's Houston
Intercontinental Airport hub. The expansion is expected to cost
approximately $115 million, which the Company expects will be
funded principally by the issuance of tax-exempt debt by the
applicable municipal authority. In connection therewith, the
Company expects to enter into long-term leases (or amendments to
existing leases) with the applicable municipal authority containing
rental payments sufficient to service the related tax-exempt debt.
On July 22, 1996, CMI consummated a $320 million secured term loan
financing with a group of banks and other financial institutions.
The loan was made in two tranches - a $180 million five-year
amortizing term loan and a $140 million seven-year amortization
extended loan. The loan is secured by the stock of CMI and
substantially all of its unencumbered assets, consisting primarily
of CMI's route authorities, and is guaranteed by Continental and
Air Micronesia, Inc. ("AMI"), CMI's parent company.
CMI used the net proceeds of the financing to prepay $160 million
in principal amount of indebtedness to GE and to pay transaction
costs, and Continental used the $136 million in proceeds received
by it as an indirect dividend from CMI, together with approximately
$28 million in cash on hand, to prepay $164 million in principal
amount of indebtedness to GE. In connection with the prepayment,
Continental will take a $6 million after tax extraordinary charge
to consolidated earnings relating to early extinguishment of debt
in the third quarter of 1996.
The bank financing is expected to reduce interest expense by $6
million in the first year, based on current rates. The bank
financing does not contain any restrictive covenants at the
Continental parent level, and none of the assets of the parent
company (other than its stock in AMI) is pledged in connection with
the financing. Accordingly, this transaction frees up over $1
billion of collateral at Continental Airlines which was previously
pledged under the terms of the GE debt agreements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
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 six months ended June 30, 1996 as compared to the
three and six months ended June 30, 1995.
The following discussion may contain forward-looking statements.
In connection therewith, please see the risk factors set forth in
the Company's Form 10-K, as amended, for the year ended December
31, 1995 and in the Company's registration statements filed with
the Securities and Exchange Commission under the Securities Act of
1933, as amended, since December 31, 1995. The risk factors set
forth on pages 6 through 9 of the Company's registration statement
on Form S-3 (Registration No. 333-04601) are hereby incorporated by
reference.
Comparison of Three Months Ended June 30, 1996 to Three Months
Ended June 30, 1995
The Company recorded consolidated net income of $167 million and
$102 million for the three months ended June 30, 1996 and 1995,
respectively. Continental's financial and operating performance
improved significantly in the second quarter of 1996 compared to
the second quarter of 1995, reflecting, among other things,
continued implementation of the Company's strategic program to
enhance the fundamentals of its operations, rationalize capacity
(including the elimination of "Continental Lite" operations -- a
network of short-haul, no-frills, low-fare flights), improve
customer service and employee relations and strengthen
Continental's balance sheet and liquidity. In addition, management
believes that the Company benefitted significantly from the
expiration of the aviation trust fund tax (the "ticket tax") on
December 31, 1995, although the amount of any such benefit directly
resulting from the expiration of the ticket tax cannot be precisely
determined. Legislation is currently pending in the United States
Congress which, if adopted, would reimpose a ticket tax for some
period of time. Management believes that the reimposition of the
ticket tax will have a negative impact on the Company, although the
amount directly resulting from the reimposition of the ticket tax
cannot be precisely determined.
A decrease in capacity of 0.2%, combined with a 2.6% increase in
traffic, produced a 1.9 percentage point increase in load factor to
69.5%. This higher load factor, combined with an 8.3% increase in
the average yield per revenue passenger mile, contributed to a
12.1% increase in passenger revenue to $1.5 billion.
Cargo, mail and other revenue decreased 2.4%, $3 million, in the
three months ended June 30, 1996 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). This decrease
was partially offset by an increase in other revenue primarily
resulting from a wet lease agreement with Alitalia Linee Aeree
Italiane S.p.a. ("Alitalia Airlines"), an increase in charter
revenue related to military charters and an agreement with DHL
International to operate a sorting and distribution hub.
Wages, salaries and related costs increased 5.9%, $21 million,
during the quarter ended June 30, 1996 as compared to the same
period in 1995, primarily due to an increase in employee profit
sharing accruals and the payment of bonuses for on-time airline
performance.
Aircraft fuel expense increased 7.1%, $12 million, in the three
months ended June 30, 1996 as compared to the same period in the
prior year. The average price per gallon increased 6.1% from
54.51 cents in the second quarter of 1995 to 57.81 cents in the
second quarter of 1996. The Company realized $15 million of
hedging gains in the second quarter of 1996.
Aircraft rentals increased 2.4%, $3 million, for the three months
ended June 30, 1996 compared to the same period in 1995, primarily
as a result of the delivery of new aircraft throughout 1996. Such
increase was partially offset by retirements and groundings of
certain leased aircraft.
Commissions expense increased 4.6%, $6 million, in the quarter
ended June 30, 1996 as compared to the same period in the prior
year, primarily due to increased passenger revenue, offset by a
decrease in the percentage of commissionable revenue.
Maintenance, materials and repairs increased 17.8%, $18 million,
during the quarter ended June 30, 1996 as compared to the same
period in 1995, due principally to the volume and timing of engine
overhauls as part of the Company's ongoing maintenance program.
Other rentals and landing fees decreased 8.6%, $8 million, for the
three months ended June 30, 1996 compared to the same period in
1995, principally due to reduced facility rentals and landing fees
resulting from capacity reductions.
Other operating expense decreased 3.9%, $13 million, in the three
months ended June 30, 1996 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 and other miscellaneous expense.
Interest expense decreased 25.0%, $14 million, during the three
months ended June 30, 1996 as compared to the same period in 1995,
primarily due to principal reductions of long-term debt and capital
lease obligations and 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.
Interest income increased 25.0%, $2 million, in the second quarter
of 1996 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 invested
balance of cash and cash equivalents.
The Company's other nonoperating income (expense) in the quarter
ended June 30, 1996 included a $5 million gain related to the sale
of the America West warrants, as well as foreign currency gains
(primarily related to the Japanese yen). Other nonoperating income
(expense) in the second quarter of 1995 consisted primarily of a
pre-tax gain of $108 million from the System One transactions.
The income tax provision for the three months ended June 30, 1996
of $32 million consists of federal, state and foreign income taxes.
During the second quarter of 1996, the Company fully utilized
previously unbenefitted post reorganization NOLs and began accruing
income tax expense. A provision for federal income taxes was
recorded for the three months ended June 30, 1995 related to the
System One transactions. No additional provision was recorded due
to the previously incurred NOLs for which a tax benefit had not
previously been recorded.
Comparison of Six Months Ended June 30, 1996 to Six Months Ended
June 30, 1995
The Company recorded consolidated net income of $255 million and
$72 million for the six months ended June 30, 1996 and 1995,
respectively.
Implementation of the Company's route realignment and capacity
rationalization initiatives reduced capacity by 4.7% in the first
six months of 1996 as compared to the same period in 1995. This
decrease in capacity, combined with a 2.3% increase in traffic,
produced a 4.7 percentage point increase in load factor to 68.3%.
This higher load factor, combined with a 7.9% increase in the
average yield per revenue passenger mile, contributed to an 11.5%
increase in passenger revenue to $2.9 billion despite the decreased
capacity.
Cargo, mail and other revenue decreased 19.9%, $58 million, in the
six months ended June 30, 1996 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). Partially
offsetting such decrease was an increase in other revenue resulting
from a wet lease agreement with Alitalia Airlines.
Wages, salaries and related costs increased 2.6%, $19 million,
during the six months ended June 30, 1996 as compared to the same
period in 1995, primarily due to an increase in employee profit
sharing accruals and the payment of bonuses for on-time airline
performance, offset by a reduction in the average number of full-
time equivalent employees.
Aircraft fuel expense increased 5.9%, $20 million, in the six
months ended June 30, 1996 as compared to the same period in the
prior year. The average price per gallon increased 9.4% from
53.54 cents in the first six months of 1995 to 58.55 cents in the
first six months of 1996. Such increase was offset in part by a
3.4% decrease in the quantity of jet fuel used from 612 million
gallons in the first six months of 1995 to 591 million gallons in
the first six months of 1996, principally reflecting capacity
reductions and increased stage lengths. The Company realized $21
million of hedging gains in the six months ended June 30, 1996.
Commissions expense increased 5.2%, $13 million, in the six months
ended June 30, 1996 as compared to the same period in the prior
year, primarily due to increased passenger revenue, partially
offset by a decrease in the percentage of commissionable revenue.
Maintenance, materials and repairs increased 16.7%, $33 million,
during the six months ended June 30, 1996 as compared to the same
period in 1995, principally due to the volume and timing of engine
overhauls as part of the Company's ongoing maintenance program.
Other rentals and landing fees decreased 8.6%, $16 million, for the
six months ended June 30, 1996 compared to the same period in 1995,
principally due to reduced facility rentals and landing fees
resulting from capacity reductions.
Other operating expense decreased 6.8%, $46 million, in the six
months ended June 30, 1996 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 and other miscellaneous expense.
Interest expense decreased 19.1%, $21 million, during the six
months ended June 30, 1996 as compared to the same period in 1995,
primarily due to principal reductions of long-term debt and capital
lease obligations and 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.
Interest income increased 46.2%, $6 million, in the first six
months of 1996 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 invested
balance of cash and cash equivalents.
The Company's other nonoperating income (expense) in the six months
ended June 30, 1996 included a $12.5 million gain related to the
sale of approximately 1.4 million shares of America West common
stock (19 cents and 15 cents per primary and fully diluted share,
respectively), a $5 million gain related to the sale of the America
West warrants, and foreign currency gains (primarily related to the
Japanese yen). Other nonoperating income (expense) in the first
six months of 1995 consisted of a pre-tax gain of $108 million from
the System One transactions.
The income tax provision for the six months ended June 30, 1996 of
$33 million consists of federal, state and foreign income taxes.
During the second quarter of 1996, the Company fully utilized
previously unbenefitted post reorganization NOLs, and began
accruing income tax expense. A provision for federal income taxes
was recorded for the six months ended June 30, 1995 related to the
System One transactions. No additional provision was recorded due
to the previously incurred NOLs for which a tax benefit had not
previously been recorded.
An analysis of statistical information for Continental's jet
operations for the periods indicated is as follows:
Three Months Ended Net
June 30, Increase/
1996 1995 (Decrease)
Revenue passenger miles
(millions) (a). . . . . . . . . .10,527 10,259 2.6 %
Available seat miles
(millions) (b). . . . . . . . . .15,152 15,180 (0.2)%
Block hours (thousands) (c). . . . 279 270 3.3 %
Passenger load factor (d). . . . . 69.5% 67.6% 1.9 pts.
Breakeven passenger load
factor (e). . . . . . . . . . . . 59.4% 62.5% (3.1) pts.
Passenger revenue per available
seat mile (cents) (f) . . . . . . 9.35 8.40 11.3 %
Total revenue per available
seat mile (cents) (g) . . . . . . 10.23 9.18 11.4 %
Operating cost per available
seat mile (cents) (h) . . . . . . 8.81 8.48 3.9 %
Operating cost per block hour . .$4,782 $4,777 0.1 %
Average yield per revenue
passenger mile (cents) (i). . . . 13.46 12.43 8.3 %
Average fare per revenue
passenger . . . . . . . . . . . .$144.55 $130.66 10.6 %
Revenue passengers (thousands) . . 9,799 9,761 0.4 %
Average length of aircraft
flight (miles). . . . . . . . . . 888 834 6.5 %
Average daily utilization of
each aircraft (hours) (j) . . . . 9:48 9:19 5.2 %
Actual aircraft in fleet at
end of period (k) . . . . . . . . 317 317 -
Six Months Ended Net
June 30, Increase/
1996 1995 (Decrease)
Revenue passenger miles
(millions) (a). . . . . . . . . .20,279 19,820 2.3 %
Available seat miles
(millions) (b). . . . . . . . . .29,703 31,183 (4.7)%
Block hours (thousands) (c). . . . 549 551 (0.4)%
Passenger load factor (d). . . . . 68.3% 63.6% 4.7 pts.
Breakeven passenger load
factor (e). . . . . . . . . . . . 60.2% 60.3% (0.1) pts.
Passenger revenue per available
seat mile (cents) (f) . . . . . . 9.13 7.87 16.0 %
Total revenue per available
seat mile (cents) (g) . . . . . . 10.00 8.65 15.6 %
Operating cost per available
seat mile (cents) (h) . . . . . . 8.86 8.18 8.3 %
Operating cost per block hour . .$4,794 $4,639 3.3 %
Average yield per revenue
passenger mile (cents) (i). . . . 13.37 12.39 7.9 %
Average fare per revenue
passenger . . . . . . . . . . . .$143.59 $129.90 10.5 %
Revenue passengers (thousands) . .18,886 18,902 (0.1)%
Average length of aircraft
flight (miles). . . . . . . . . . 882 818 7.8 %
Average daily utilization of
each aircraft (hours) (j) . . . . 9:42 9:27 2.6 %
Actual aircraft in fleet at
end of period (k) . . . . . . . . 317 317 -
(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 revenue divided by available seat miles.
(g) Total revenue divided by available seat miles.
(h) Operating expenses divided by available seat miles.
(i) The average revenue received for each mile a revenue passenger
is carried.
(j) The average block hours flown per day in revenue service per
aircraft.
(k) 1996 includes four all cargo 727 aircraft at CMI.
LIQUIDITY AND CAPITAL COMMITMENTS
In the first half of 1996, the Company completed a number of
transactions intended to strengthen its long-term financial
position and enhance earnings. During January and February,
Continental repurchased or redeemed without prepayment penalty the
remaining amount of its Series A convertible secured debentures for
$125 million (including payment-in-kind interest of $7 million).
In February, Continental sold approximately 1.4 of the 1.8 million
shares it owned in America West, realizing net proceeds of
approximately $25 million and recognizing a gain of approximately
$12.5 million. In addition, in May, Continental sold all of its
802,860 America West warrants held, realizing proceeds of
approximately $7 million and recognizing a gain of $5 million. On
March 26, Continental issued $230 million of 6-3/4% convertible
subordinated notes. The net proceeds from this offering and from
the America West stock sale, as well as cash on hand, were used for
the repayment of certain outstanding GE indebtedness totaling $257
million (of which $47 million was required as a result of the
convertible notes financing and the America West stock sale and
$210 million was an optional prepayment). In the first and second
quarter, the Company financed one owned aircraft and exercised its
right under 22 existing leveraged aircraft leases to cause the
owner/lessor's debt underlying these leases to be refinanced. The
lower borrowing costs obtained in the refinancing allowed
Continental's operating lease expense for the affected aircraft to
be reduced by more than $17 million annually. In July, CMI
consummated a $320 million secured term loan financing with a group
of banks and other financial institutions. Continental and CMI
have used the net proceeds, together with available cash, to prepay
approximately $324 million in principal amount of GE indebtedness.
The bank financing is expected to reduce interest expense by $6
million in the first year, based on current rates. The bank
financing does not contain any restrictive covenants at the
Continental parent level, and none of the assets of the parent
company (other than its stock in AMI) is pledged in connection with
the financing. Accordingly, this transaction frees up over $1
billion of collateral at Continental Airlines which was previously
pledged under the terms of the GE debt agreements. See Note 6.
As a result of NOLs, the Company will not pay United States federal
income taxes (other than alternative minimum tax) until it has
recorded approximately an additional $1.2 billion of taxable income
following December 31, 1995. Section 382 imposes limitations on a
corporation's ability to utilize NOLs if it experiences an
"ownership change". In general terms, an ownership change may
result from transactions increasing the ownership of certain
stockholders in the stock of a corporation by more than 50
percentage points over a three-year period. The sale of the
Company's common stock in a secondary offering (see Item 5. "Other
Information") gave rise to an increase in percentage ownership by
certain stockholders for this purpose. The Company believes that
such percentage increase will not give rise to an ownership change
under Section 382 as a result of the secondary offering. However,
no assurance can be given that future transactions, whether within
or outside the control of the Company, will not cause a change in
ownership, thereby substantially limiting the potential utilization
of the NOLs in a given future year. In the event that an ownership
change should occur, utilization of Continental's NOLs would be
subject to an annual limitation under Section 382 determined by
multiplying the value of the Company's stock (including both common
and preferred stock) at the time of the ownership change by the
applicable long-term tax exempt rate (which is 5.78% for June
1996). Unused annual limitation may be carried over to later
years, and the amount of the limitation may under certain
circumstances be increased by the built-in gains in assets held by
the Company at the time of the change that are recognized in the
five-year period after the change. Under current conditions, if an
ownership change were to occur, Continental's NOL utilization would
be limited to approximately $100 million per year.
At June 30, 1996, the Company had firm commitments with The Boeing
Company ("Boeing") to take delivery of 43 new jet aircraft during
the years 1997 through 2002 with an estimated aggregate cost of
$2.6 billion. Subsequently, the Company amended the terms of its
commitments with Boeing to take delivery of a total of 61 jet
aircraft during the years 1997 through 2003 with options for an
additional 23 aircraft. The estimated aggregate cost of these
aircraft is $2.7 billion. These amendments changed the aircraft
mix and timing of delivery of aircraft, in order to more closely
match Continental's anticipated future aircraft needs. In
addition, the Company took delivery of three Beech 1900-D aircraft
in the second quarter of 1996 and an additional four such aircraft
are scheduled to be delivered later in 1996. The Company currently
anticipates that the firm financing commitments available to it
with respect to its acquisition of new aircraft from Boeing and
Beech Acceptance Corporation will be sufficient to fund all new
aircraft deliveries scheduled during 1996, and that it will have
remaining financing commitments from aircraft manufacturers of
$676 million for jet aircraft deliveries beyond 1996. The Company
has also entered into letters of intent with several outside
parties to lease three DC10-30 aircraft and to purchase three DC10-
30's. These six aircraft are expected to be delivered by mid-year
1997, and the Company expects to finance the aircraft to be
purchased from available cash or from third party sources.
In addition, in March 1996, Express entered into an agreement to
acquire eight new ATR aircraft that are expected to be placed into
service during 1996. As of July 1996, three of these aircraft have
been delivered. The aircraft will be accounted for as operating
leases. In conjunction with the acquisition, in 1996, the Company
will return eight older ATR aircraft accounted for as capital
leases. Express is also in discussions with aircraft manufacturers
regarding the leasing by Express of regional jet aircraft, which
the Company anticipates would be accounted for as operating leases.
Continental expects its cash outlays for 1996 capital expenditures,
exclusive of aircraft acquisitions, to aggregate $120 million
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. Continental's capital expenditures during the six
months ended June 30, 1996, aggregated $55 million, exclusive of
aircraft acquisitions.
The Company expects to fund its 1996 and future capital commitments
through internally generated funds, together with general Company
financings and aircraft financing transactions. However, there can
be no assurance that sufficient financing will be available for all
aircraft and other capital expenditures not covered by firm
financing commitments.
In July 1996, the Company announced its plan to expand its gates
and related facilities in Terminal B as well as planned
improvements at Terminal C at Continental's Houston
Intercontinental Airport hub. The expansion is expected to cost
approximately $115 million, which the Company expects will be
funded principally by the issuance of tax-exempt debt by the
applicable municipal authority. In connection therewith, the
Company expects to enter into long-term leases (or amendments to
existing leases) with the applicable municipal authority containing
rental payments sufficient to service the related tax-exempt debt.
As of June 30, 1996, the Company had $825 million in cash and cash
equivalents, compared to $747 million as of December 31, 1995. Net
cash provided by operating activities increased $229 million during
the six months ended June 30, 1996 compared to the same period in
the prior year principally due to earnings improvement. Net cash
used by investing activities for the six months ended June 30, 1996
compared to the same period in the prior year increased $85
million, primarily as a result of higher capital expenditures in
1996, slightly offset by proceeds received from the sale of (i)
approximately 1.4 million shares of Continental's America West
stock and (ii) all of Continental's America West warrants. Net
cash used by financing activities increased $172 million primarily
due to the repayment of long-term debt, using in part the proceeds
received from the issuance of the 6-3/4% convertible subordinated
notes.
Continental does not have general lines of credit and has
significant encumbered assets.
Approximately $104 million and $144 million of cash and cash
equivalents at June 30, 1996 and December 31, 1995, respectively,
were held in restricted arrangements relating primarily to workers'
compensation claims and in accordance with the terms of certain
other agreements. The $320 million financing consummated by CMI in
July 1996 contains significant financial covenants relating to CMI,
including maintenance of a minimum fixed charge coverage ratio, a
minimum consolidated net worth and minimum liquidity, and covenants
restricting CMI's leverage, its incurrence of certain indebtedness
and its pledge of assets. The financial covenants also limit the
ability of CMI to pay dividends to Continental.
The Company has entered into petroleum option contracts to provide
some short-term protection against a sharp increase in jet fuel
prices, and CMI has entered into average rate option contracts to
hedge a portion of its Japanese yen-denominated ticket sales
against a significant depreciation in the value of the yen versus
the United States dollar. The petroleum option contracts generally
cover the Company's forecasted jet fuel needs for approximately six
months, and the average rate option contracts cover a portion of
CMI's yen-denominated ticket sales for the next three to nine
months. At June 30, 1996, the Company had petroleum option
contracts outstanding with an aggregate notional value of
$324 million and CMI had average rate option contracts outstanding
with a contract value of $109 million. At June 30, 1996, the
carrying value of the option contracts was immaterial. 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 International Association of Machinists and Aerospace Workers
("IAM") representing the Company's Continental Airlines unit flight
attendants recently ratified a three and one-half year collective
bargaining agreement providing for base wage increases in each year
of the contract, a one-time adjustment to certain base wage scales
as an equitable adjustment, an increase in per diem payments and
other matters, including productivity improvements. In addition,
effective July 1, 1996, Continental implemented pay increases for
substantially all of its non-unionized employees as part of a
three-year plan to increase base wages to be more comparable to
industry wages. The Company anticipates that the pay increases for
Continental's flight attendants and its non-unionized employees
will result in a cumulative increase in wages, salaries and related
costs (assuming no change in the Company's operations) of $137
million through 1999 (approximately $30 million through the
remainder of 1996, $67 million through 1997, $107 million through
1998 and $137 million through 1999). In addition, under the
Company's existing collective bargaining agreement with the union
representing its jet pilots, those pilots received a 13.5% wage
increase on July 1, 1996 and will receive a 5% wage increase on
June 30, 1997. The Company anticipates that it will be able to
offset a significant portion of these wage and other cost increases
with increased labor productivity, reduced interest and lease
expenses, reduced distribution costs and other cost savings.
Management also believes that the Company's costs are likely to be
affected in 1996 by (i) higher aircraft rental expense as new
aircraft are delivered, (ii) changes in the costs of materials and
services (in particular, the cost of fuel, which can fluctuate
significantly in response to global market conditions),
(iii) changes in governmental regulations and taxes affecting air
transportation and the costs charged for airport access,
(iv) changes in the Company's fleet and related capacity and
(v) the Company's continuing efforts to reduce costs throughout its
operations, including reduced maintenance costs with new aircraft,
reduced distribution expense from using E-Ticket and the Internet
for bookings and reduced interest expense.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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 United States
District Court for the District of Delaware (the "District
Court") dismissed the appeals as moot, and the trustees appealed
to the Third Circuit Court of Appeals (the "Third Circuit")
seeking review of the District Court's mootness determination
and the Bankruptcy Court's finding on the merits. The Third
Circuit affirmed the District Court's dismissal in February
1996, but subsequently granted a rehearing en banc on May 14,
1996. The Company is still awaiting a decision from the en banc
rehearing by the Third Circuit. The Company does not believe
that the foregoing matter will have a material adverse effect on
the Company.
ITEM 2. CHANGES IN SECURITIES.
On June 26, 1996, at the Company's annual meeting of
stockholders (the "Annual Meeting"), the Company's stockholders
approved changes proposed by the Company to its Certificate of
Incorporation, which together with amendments to the Company's
Bylaws previously approved by the Company's Board of Directors
(collectively, the "Amendments"), generally eliminate special
classes of directors (except for Air Partners' right to elect
one-third of the directors in certain circumstances as described
below) and supermajority provisions, and make a variety of other
modifications aimed at streamlining the Company's corporate
governance structure. The amendments to the Company's
Certificate of Incorporation included elimination of Class C
common stock, $.01 par value (the "Class C common stock"), of
the Company as an authorized class of capital stock and changed
the rights of holders of Class D common stock, $.01 par value
(the "Class D common stock"), with respect to election of
directors - holders of Class D common stock are now entitled to
elect one-third of the directors. Pursuant to the Certificate
of Incorporation, Class D common stock is solely issuable to Air
Partners and certain of its affiliates. There is currently no
Class D common stock outstanding. The Amendments, as a whole,
reflect the reduction of Air Canada's equity interest in the
Company and the decision of the former directors designated by
Air Canada not to stand for reelection, along with the
expiration of various provisions of the Company's Certificate of
Incorporation and Bylaws specifically included at the time of
the Company's reorganization in 1993.
The Amendments also provide that, at any time after January 1,
1997, shares of Class A common stock will become freely
convertible into an equal number of shares of Class B common
stock. Under agreements put in place at the time of the
Company's reorganization in 1993, and designed in part to ensure
compliance with the foreign ownership limitations applicable to
United States air carriers in light of the substantial stake in
the Company then held by Air Canada, holders of Class A common
stock were not permitted under the Company's Certificate of
Incorporation to convert their shares to Class B common stock.
In recent periods, the market price of Class A common stock has
generally been below the market price of Class B common stock,
which the Company believes is attributable in part to the
reduced liquidity present in the trading market for Class A
common stock. A number of Class A common stockholders requested
that the Company provide for free convertibility of Class A
common stock into Class B common stock, and in light of the
reduction of Air Canada's equity stake, the Company determined
that the restriction was no longer necessary. Any such
conversion would effectively increase the relative voting power
of those Class A common stockholders who do not convert.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Stockholders was held on June
26, 1996. The following individuals were elected to the
Company's Board of Directors to hold office for the ensuing
year:
Nominee Votes For Votes Withheld
Thomas J. Barrack, Jr. 77,374,763 34,174
Gordon M. Bethune 77,373,754 35,183
David Bonderman 77,373,628 35,309
Gregory D. Brenneman 77,373,665 35,272
Patrick Foley 77,373,812 35,125
Douglas H. McCorkindale 77,373,812 35,125
George G. C. Parker 77,373,691 35,246
Richard W. Pogue 77,373,812 35,125
William S. Price III 77,373,812 35,125
Donald L. Sturm 77,373,812 35,125
Karen Hastie Williams 77,373,812 35,125
Charles A. Yamarone 77,374,025 34,912
An amendment to the Company's 1994 Incentive Equity Plan (the
"Incentive Plan") was proposed to (i) increase the number of
shares of Class B common stock covered by the Incentive Plan by
3,000,000 shares (from 6,000,000 to 9,000,000 on a post-Stock
Split basis) and (ii) amend the provisions of the Incentive Plan
relating to a "Change in Control", and was voted on by the
stockholders as follows:
Votes Votes Broker
Votes For Against Abstaining Non-Votes
59,666,954 4,995,621 228,601 12,517,761
A proposal to adopt the Executive Bonus Program to attract and
retain key officers of the Company and to compensate such
officers based on performance goals consisting of achievement of
cumulative quarterly net income targets of the Company contained
in the annual financial plan of the Company prior to and for the
applicable fiscal year was voted on by the stockholders as
follows:
Votes Votes Broker
Votes For Against Abstaining Non-Votes
76,738,079 438,196 232,662 -0-
A proposal to amend and restate the Company's Restated
Certificate of Incorporation was proposed to (i) increase the
total number of shares of Class B common stock authorized for
issuance by 100 million shares, (ii) eliminate the 50 million
shares of Class C common stock currently authorized for
issuance, (iii) permit shares of Class A common stock to be
converted into shares of Class B common stock, (iv) delete the
requirement that the Board of Directors be comprised of 18
members, (v) delete the supermajority voting requirements, (vi)
delete the requirement that the Board of Directors receive a
"fairness opinion" from an independent investment banking firm
when considering mergers or similar corporate transactions,
(vii) delete anti-dilution rights held by Air Canada and provide
appropriate adjustment of the purchase price relating to Air
Partner's antidilution rights in the event of a stock split,
stock dividend or similar transaction, and (viii) delete the
prohibition on the issuance by the Company of any non-voting
equity securities which was part of the Company's reorganization
in 1993, was voted on by the stockholders as follows:
Votes Votes Broker
Votes For Against Abstaining Non-Votes
64,418,204 257,205 215,767 12,517,761
A proposal to ratify the appointment of Ernst & Young LLP as the
Company's independent auditors for the fiscal year ending
December 31, 1996 was voted on by the stockholders as follows:
Votes Votes Broker
Votes For Against Abstaining Non-Votes
77,352,170 30,828 25,939 -0-
ITEM 5. OTHER INFORMATION.
On April 19, 1996, the Company's Board of Directors approved
certain agreements (the "Agreements") with its two major
stockholders, Air Canada and Air Partners. The Agreements
contain a variety of arrangements intended generally to reflect
the intention that Air Canada has expressed to the Company of
divesting its investment in Continental by early 1997, subject
to market conditions. Air Canada has indicated to the Company
that its original investment in Continental has become less
central to Air Canada in light of other initiatives it has
undertaken - particularly expansion within Canada and
exploitation of the 1995 Open Skies agreement to expand Air
Canada's own flights into the U.S. Because of these
initiatives, Air Canada has determined it appropriate to
redeploy the funds invested in the Company into other uses in
Air Canada's business. The Agreements also reflect the
distribution by Air Partners, effective March 29, 1996, to its
investors (the "AP Investors") of all of the shares of the Class
B common stock held by Air Partners and the desire of some of
the AP Investors to realize the increase in value of their
investment in the Company by selling all or a portion of their
shares of Class B common stock.
Among other things, the Agreements required the Company to file
a registration statement under the Securities Act of 1933 to
permit the sale by Air Canada of 2,200,000 shares of Class B
common stock held by it and by certain of the AP Investors of an
aggregate of 1,730,240 such shares (on a pre-Stock Split basis)
pursuant to an underwritten public offering arranged by the
Company (the "Secondary Offering"). The Secondary Offering was
completed on May 14, 1996. The Agreements provided for the
following additional steps to be taken in connection with the
completion of the Secondary Offering:
in light of its reduced equity stake in the Company, Air
Canada was no longer entitled to designate nominees to the
Board of Directors of the Company, caused the four then-
present or former members of the Air Canada board who served
as directors of Continental to decline nomination for
reelection as directors and converted all of its Class A
common stock to Class B common stock;
Air Canada and Air Partners entered into a number of
agreements restricting, prior to December 16, 1996, further
disposition of the common stock of the Company held by either
of them; and
each of the existing stockholders' agreement and registration
rights agreement among the parties were modified in a number
of respects to reflect, among other matters, the changing
composition of the respective equity interests of the parties.
After such sale and the conversion by Air Canada of its Class A
common stock into Class B common stock, Air Canada holds
approximately 10.0% of the common equity interests and 4.0% of
the general voting power of the Company, and Air Partners holds
approximately 9.8% of the common equity interests and 39.4% of
the general voting power of the Company. If all of the warrants
held by Air Partners were exercised, approximately 23.3% of the
common equity interests and 52.1% of the general voting power
would be held by Air Partners.
The Company and Air Canada also entered into a memorandum of
understanding regarding modifications to the Company's existing
"synergy" agreements with Air Canada, which covered items such
as maintenance and ground facilities, and resolved certain
outstanding commercial issues under the agreements and modified
the agreements to reflect Continental's and Air Canada's current
needs.
In May 1996, the Company entered into an agreement with Air
Partners for the sale by Air Partners to the Company from time
to time at Air Partners' election for the one-year period
beginning August 15, 1996, of up to an aggregate of $50 million
in intrinsic value (then-current Class B common stock price
minus exercise price) of Air Partners' Class B warrants. The
purchase price would be payable in cash. The Board of Directors
has authorized the Company to publicly issue up to $50 million
of Class B common stock in connection with any such purchase.
In connection with this agreement, the Company has reclassified
$50 million from common equity to redeemable warrants.
Because certain aspects of the Agreements raised issues under
the change in control provisions of certain of the Company's
employment agreements and employee benefit plans, these
agreements and plans were modified to provide a revised change
of control definition that the Company believes is appropriate
in light of the changes to its equity ownership structure. In
connection with the modifications, payments were made to certain
employees, benefits were granted to certain employees and
options equal to 10% of the amount of the options previously
granted to each optionee were granted (subject to certain
conditions) to substantially all employees holding outstanding
options.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3.1 Amended and Restated Certificate of Incorporation
of the Company -- incorporated by reference to
Exhibit 4.1(a) to Continental's Form S-8
Registration Statement (No. 333-06993) (the "1996
S-8").
3.2 By-Laws of the Company -- incorporated by
reference to Exhibit 4.2 to the 1996 S-8.
4.1 Amendment to Stockholders' Agreement dated April
19, 1996 among the Company, Air Partners and Air
Canada -- incorporated by reference to Exhibit
10.1 to Continental's Form S-3 Registration
Statement (No. 333-02701) (the "1996 S-3").
4.2 Amended and Restated Registration Rights
Agreement dated April 19, 1996 among the Company,
Air Partners and Air Canada -- incorporated by
reference to Exhibit 10.2 to the 1996 S-3.
10.1* Amended and restated employment agreement between
the Company and Gordon M. Bethune. (1)
10.2* Amended and restated employment agreement between
the Company and Gregory D. Brenneman. (1)
10.3* Amended and restated employment agreement between
the Company and Lawrence W. Kellner. (1)
10.4* Form of amendment to employment agreement between
the Company and Lawrence W. Kellner, C. D. McLean
and Barry P. Simon. (1)
10.5* Second Amendment to Continental Airlines, Inc.
1994 Incentive Equity Plan -- incorporated by
reference to Exhibit 4.3(c) to the 1996 S-8.
10.6 Supplemental Agreement No. 6 to Purchase
Agreement No. 1783 between the Company and
Boeing, dated June 13, 1996, relating to the
purchase of Boeing 757-224 aircraft. (2)
10.6(a) Supplemental Agreement No. 7 to Purchase
Agreement No. 1783 between the Company and
Boeing, dated July 23, 1996, relating to the
purchase of Boeing 757-224 aircraft. (2)
10.7 Supplemental Agreement No. 4 to Purchase
Agreement No. 1785 between the Company and
Boeing, dated July 23, 1996, relating to the
purchase of Boeing 777-224 aircraft. (2)
10.8 Purchase Agreement No. 1951, including exhibits
and side letters thereto, between the Company and
Boeing, dated July 23, 1996, relating to the
purchase of Boeing 737-724 and 737-824 aircraft.
(2)
11.1 Statement Regarding Computation of Per Share
Earnings
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
(i) Report dated May 7, 1996, reporting an Item 5.
"Other Event". No financial statements were filed
with the report which announced the filing of a
preliminary proxy statement with the Securities and
Exchange Commission.
(ii) Report dated June 27, 1996 reporting an Item 5.
"Other Event". No financial statements were filed
with the report which announced the filing of a
definitive proxy statement with the Securities and
Exchange Commission and that the Company's Board of
Directors had approved a two-for-one stock split,
payable on July 16, 1996 to holders of record of
its Class B common stock and Class A common stock
on July 2, 1996.
__________
*These exhibits relate to management contracts or
compensatory plans or arrangements.
(1) Filed herewith.
(2) The Company has applied to the Commission for
confidential treatment of a portion of this exhibit.
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: August 1, 1996 by: /s/ Lawrence W. Kellner
Lawrence W. Kellner
Senior Vice President and
Chief Financial Officer
(On behalf of Registrant)
Date: August 1, 1996 /s/ Michael P. Bonds
Michael P. Bonds
Vice President and Controller
(Chief Accounting Officer)