UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A-1
(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, 1999
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.)
1600 Smith Street, Dept. HQSEO
Houston, Texas 77002
(Address of principal executive offices)
(Zip Code)
713-324-2950
(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 _____
_______________
As of July 16, 1999, 11,406,580 shares of Class A common stock and
61,079,850 shares of Class B common stock were outstanding.
ITEM 1. FINANCIAL STATEMENTS are amended and restated in their
entirety as follows:
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
(Unaudited) (Unaudited)
Operating Revenue:
Passenger . . . . . . . $2,028 $1,888 $3,928 $3,602
Cargo and mail. . . . . 70 68 137 136
Other . . . . . . . . . 100 80 189 152
2,198 2,036 4,254 3,890
Operating Expenses:
Wages, salaries and
related costs. . . . . 622 521 1,238 1,018
Aircraft rentals. . . . 189 162 373 318
Maintenance, materials
and repairs. . . . . . 155 152 298 305
Aircraft fuel . . . . . 154 183 304 373
Commissions . . . . . . 142 152 285 293
Other rentals and
landing fees . . . . . 121 99 235 200
Depreciation and
amortization . . . . . 88 72 173 140
Other . . . . . . . . . 471 415 932 813
1,942 1,756 3,838 3,460
Operating Income . . . . 256 280 416 430
Nonoperating Income
(Expense):
Interest expense. . . . (57) (44) (110) (84)
Interest capitalized. . 16 15 29 28
Interest income . . . . 15 14 30 26
Other, net. . . . . . . (4) 10 9 12
(30) (5) (42) (18)
(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,
1999 1998 1999 1998
(Unaudited) (Unaudited)
Income before Income
Taxes, Cumulative
Effect of a Change in
Accounting Principle
and Extraordinary
Charge. . . . . . . . . $ 226 $ 275 $ 374 $ 412
Income Tax Provision . . (89) (105) (147) (157)
Distributions on
Preferred Securities
of Trust, Net of
Applicable Income
Taxes of $2 and $4,
respectively. . . . . . - (3) - (7)
Income before Cumulative
Effect of a Change in
Accounting Principle
and Extraordinary
Charge. . . . . . . . . 137 167 227 248
Cumulative Effect of a
Change in Accounting
Principle, Net of
Applicable Income Taxes
of $3 . . . . . . . . . - - (6) -
Extraordinary Charge,
Net of Applicable
Income Taxes of $2. . . - (4) - (4)
Net Income . . . . . . . $ 137 $ 163 $ 221 $ 244
(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,
1999 1998 1999 1998
(Unaudited) (Unaudited)
Earnings per Common Share:
Income Before Cumulative
Effect of Change in
Accounting Principle and
Extraordinary Charge. $ 1.93 $ 2.74 $ 3.25 $ 4.13
Cumulative Effect of a
Change in Accounting
Principle, net of tax - - (0.08) -
Extraordinary Charge,
net of tax. . . . . . - (0.06) - (0.05)
Net Income . . . . . . $ 1.93 $ 2.68 $ 3.17 $ 4.08
Earnings per Common Share
Assuming Dilution:
Income Before Cumulative
Effect of Change in
Accounting Principle and
Extraordinary Charge. $ 1.80 $ 2.11 $ 2.98 $ 3.16
Cumulative Effect of a
Change in Accounting. - - (0.07) -
Principle, net of tax
Extraordinary Charge,
net of tax. . . . . . - (0.05) - (0.04)
Net Income . . . . . . $ 1.80 $ 2.06 $ 2.91 $ 3.12
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for share data)
June 30, December 31,
ASSETS 1999 1998
(Unaudited)
Current Assets:
Cash and cash equivalents, including
restricted cash and cash equivalents
of $11 . . . . . . . . . . . . . . . . . $1,259 $1,399
Accounts receivable, net. . . . . . . . . 496 449
Spare parts and supplies, net . . . . . . 207 166
Deferred income taxes . . . . . . . . . . 234 234
Prepayments and other . . . . . . . . . . 175 106
Total current assets . . . . . . . . . . 2,371 2,354
Property and Equipment:
Owned property and equipment:
Flight equipment . . . . . . . . . . . . 3,181 2,459
Other. . . . . . . . . . . . . . . . . . 765 632
3,946 3,091
Less: Accumulated depreciation. . . . . 727 625
3,219 2,466
Purchase deposits for flight equipment 538 410
Capital leases:
Flight equipment. . . . . . . . . . . . . 372 361
Other . . . . . . . . . . . . . . . . . . 57 56
429 417
Less: Accumulated amortization . . . . . 192 178
237 239
Total property and equipment . . . . . . 3,994 3,115
Other Assets:
Routes, gates and slots, net. . . . . . . 1,156 1,181
Investments . . . . . . . . . . . . . . . 152 151
Other assets, net . . . . . . . . . . . . 270 285
Total other assets . . . . . . . . . . . 1,578 1,617
Total Assets. . . . . . . . . . . . . . $7,943 $7,086
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for share data)
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
(Unaudited)
Current Liabilities:
Current maturities of long-term debt. . . $ 189 $ 184
Current maturities of capital leases. . . 46 47
Accounts payable. . . . . . . . . . . . . 827 843
Air traffic liability . . . . . . . . . . 1,037 854
Accrued payroll and pensions. . . . . . . 221 265
Accrued other liabilities . . . . . . . . 244 249
Total current liabilities. . . . . . . . 2,564 2,442
Long-Term Debt . . . . . . . . . . . . . . 2,630 2,267
Capital Leases . . . . . . . . . . . . . . 208 213
Deferred Credits and Other Long-Term
Liabilities:
Deferred income taxes . . . . . . . . . . 521 372
Accruals for aircraft retirements and
excess facilities. . . . . . . . . . . . 77 95
Other . . . . . . . . . . . . . . . . . . 328 393
Total deferred credits and other
long-term liabilities . . . . . . . . . 926 860
Commitments and Contingencies
Continental-Obligated Mandatorily
Redeemable Preferred Securities of
Subsidiary Trust Holding Solely
Convertible Subordinated
Debentures. . . . . . . . . . . . . . . . - 111
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for share data)
June 30, December 31,
1999 1998
(Unaudited)
Common Stockholders' Equity:
Class A common stock - $.01 par,
50,000,000 shares authorized;
11,406,580 and 11,406,732 shares
issued and outstanding in 1999
and 1998, respectively . . . . . . . . . $ - $ -
Class B common stock - $.01 par,
200,000,000 shares authorized;
63,923,431 and 53,370,741 shares
issued, respectively . . . . . . . . . . 1 1
Additional paid-in capital . . . . . . . 872 634
Retained earnings . . . . . . . . . . . . 880 659
Accumulated other comprehensive income. . (69) (88)
Treasury stock - 1,783,413 and 399,524
Class B shares, respectively, at cost. . (69) (13)
Total common stockholders' equity. . . . 1,615 1,193
Total Liabilities and Stockholders'
Equity . . . . . . . . . . . . . . . . $7,943 $7,086
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Six Months
Ended June 30,
1999 1998
(Unaudited)
Net cash provided by operating
activities. . . . . . . . . . . . . . .$ 398 $ 549
Cash Flows from Investing Activities:
Purchase deposits paid in connection
with future aircraft deliveries. . . . (685) (361)
Purchase deposits refunded in
connection with aircraft delivered . . 522 287
Capital expenditures. . . . . . . . . . (313) (311)
Proceeds from sale of investments . . . 20 9
Purchase of short-term investments. . . - (117)
Investment in Partner Airlines. . . . . - (53)
Other . . . . . . . . . . . . . . . . . (9) (6)
Net cash used by investing
activities. . . . . . . . . . . . . . (465) (552)
Cash Flows from Financing Activities:
Proceeds from issuance of long-term
debt, net. . . . . . . . . . . . . . . 230 395
Payments on long-term debt and
capital lease obligations. . . . . . . (159) (301)
Purchase of Class B common stock. . . . (171) (120)
Proceeds from issuance of common stock. 19 44
Dividends paid on preferred securities
of trust . . . . . . . . . . . . . . . - (11)
Other . . . . . . . . . . . . . . . . . 8 39
Net cash (used) provided by
financing activities. . . . . . . . . (73) 46
Net (Decrease) Increase in Cash and
Cash Equivalents. . . . . . . . . . . . (140) 43
Cash and Cash Equivalents - Beginning
of Period (A) . . . . . . . . . . . . . 1,388 1,010
Cash and Cash Equivalents - End of
Period (A). . . . . . . . . . . . . . . $1,248 $1,053
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Six Months
Ended June 30,
1999 1998
(Unaudited)
Supplemental Cash Flow Information:
Interest paid . . . . . . . . . . . . . $ 101 $ 72
Income taxes paid . . . . . . . . . . . $ 8 $ 4
Investing and Financing Activities
Not Affecting Cash:
Property and equipment acquired
through the issuance of debt . . . . . $ 501 $ 263
Capital lease obligations incurred. . . $ 21 $ 109
Conversion of trust originated
preferred securities . . . . . . . . . $ 111 $ -
Conversion of 6-3/4% Convertible
Subordinated Notes . . . . . . . . . . $ 230 $ -
(A) Excludes restricted cash of $11 million and $15 million at
January 1, 1999 and 1998, respectively, and $11 million and $14
million at June 30, 1999 and 1998, respectively.
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, 1998
(the "1998 10-K").
Certain reclassifications have been made in the prior year's
financial statements to conform to the current year presentation.
NOTE 1 - EARNINGS PER SHARE
The following table sets forth the computations of basic and
diluted earnings per share (in millions):
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
Numerator:
Income before cumulative effect
of change in accounting
principle and extraordinary
charge . . . . . . . . . . . . $137 $167 $227 $248
Cumulative effect of change in
accounting principle, net of
applicable income taxes. . . . - - (6) -
Extraordinary charge, net of
applicable income taxes. . . . - (4) - (4)
Numerator for basic earnings
per share - net income . . . . 137 163 221 244
Effect of dilutive securities:
Preferred Securities of Trust . - 3 - 7
6-3/4% convertible subordinated
notes. . . . . . . . . . . . . 1 2 3 4
1 5 3 11
Numerator for diluted earnings
per share - net income after
assumed conversions. . . . . . $138 $168 $224 $255
Denominator:
Denominator for basic earnings
per share - weighted-average
shares . . . . . . . . . . . . 70.9 60.7 69.7 59.9
Effect of dilutive securities:
Employee stock options . . . . 1.7 2.0 1.5 2.0
Warrants . . . . . . . . . . . - 0.7 - 1.7
Preferred Securities of Trust. - 10.3 0.1 10.3
6-3/4% convertible subordinated
notes . . . . . . . . . . . . 4.2 7.6 5.9 7.6
Dilutive potential common
shares. . . . . . . . . . . . 5.9 20.6 7.5 21.6
Denominator for diluted
earnings per share - adjusted
weighted-average and assumed
conversions. . . . . . . . . . 76.8 81.3 77.2 81.5
NOTE 2 - INCOME TAXES
Income taxes for the three and six months ended June 30, 1999 and
1998 were provided at the estimated annual effective tax rate.
Such rate differs from the federal statutory rate of 35%, primarily
due to state income taxes and the effect of certain expenses that
are not deductible for income tax purposes.
At December 31, 1998, the Company had estimated net operating
losses ("NOLs") of $1.1 billion for federal income tax purposes
that will expire through 2009 and federal investment tax credit
carryforwards of $45 million that will expire through 2001. As a
result of a change in ownership of the Company on April 27, 1993,
the ultimate utilization of the Company's NOLs and investment tax
credits may be limited. Reflecting this limitation, the Company
recorded a valuation allowance of $263 million as of December 31,
1998.
To the extent the Company were to determine in the future that
additional NOLs of the Company's predecessor could be recognized in
the accompanying consolidated financial statements, such benefit
would reduce routes, gates and slots.
NOTE 3 - COMPREHENSIVE INCOME
The Company includes unrealized gains and losses on available-for-
sale securities, changes in minimum pension liabilities and changes
in the fair value of derivative financial instruments which qualify
for hedge accounting in other comprehensive income. During the
second quarter of 1999 and 1998, total comprehensive income
amounted to $128 and $158 million, respectively. For the six
months ended 1999 and 1998, total comprehensive income amounted to
$240 million and $243 million, respectively. The significant
difference between net income and total comprehensive income during
the first half of 1999 was attributable to the $17 million net
increase in fair value (net of applicable income taxes and hedge
ineffectiveness) related to petroleum swap contracts and call
options held by the Company as of June 30, 1999 to hedge a portion
of anticipated jet fuel purchases through October 1999.
NOTE 4 - CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
Continental adopted Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities ("SOP 98-5)") in the first quarter of
1999. SOP 98-5 amended Statement of Position 88-1, "Accounting for
Developmental and Preoperating Costs, Purchases and Exchanges of
Take-Off and Landing Slots, and Airframe Modifications" by
requiring preoperating costs related to the integration of new
types of aircraft to be expensed as incurred and requiring all
unamortized start-up costs (e.g., pilot training costs related to
induction of new aircraft) to be expensed upon adoption. This
resulted in the Company recording a $6 million cumulative effect of
a change in accounting principle, net of tax, in the first quarter
of 1999.
NOTE 5 - PREFERRED SECURITIES OF TRUST
In December 1998, the Company called for redemption its remaining
8-1/2% Convertible Trust Originated Preferred Securities ("TOPrS")
then outstanding. As a result, the remaining 2,298,327 TOPrS were
converted into 4,752,522 shares of Class B common stock during
January 1999.
NOTE 6 - 6-3/4% CONVERTIBLE SUBORDINATED NOTES DUE 2006
On April 15, 1999, the Company exercised its right and called for
redemption on May 25, 1999, all $230 million of its 6-3/4%
Convertible Subordinated Notes due 2006. The notes were converted
into 7,617,120 shares of Class B common stock during May 1999.
NOTE 7 - REGULATORY MATTERS
The Company recently received approval from the Port Authority of
New York and New Jersey for a major facility expansion at Newark
International Airport ("Newark"). Major construction is scheduled
to begin in August 1999 and to be completed in 2002.
As more fully described in the Risk Factors section of the
Company's 1998 10-K, airlines are subject to extensive regulatory
and legal compliance requirements that engender significant costs
and in some cases reduce revenue. For instance, "passenger bill of
rights" legislation has been introduced in Congress that would,
among other things, require the payment of compensation to
passengers as a result of certain delays, and limit the ability of
carriers to prohibit or restrict usage of certain tickets in
manners currently prohibited or restricted. The Department of
Transportation (the "DOT") has proposed rules that would
significantly limit major carriers' ability to compete with new
entrant carriers. If adopted, these measures could have the effect
of raising ticket prices, reducing revenue and increasing costs.
The Federal Aviation Administration has designated John F. Kennedy
International Airport ("John F. Kennedy"), New York LaGuardia
Airport ("LaGuardia"), Chicago O'Hare International Airport
("O'Hare") and Ronald Reagan Washington National Airport in
Washington, D.C. ("Reagan National") as "high density traffic
airports" and has limited the number of departure and arrival slots
at those airports. Currently, such slots may be voluntarily sold
or transferred between carriers. The DOT has in the past
reallocated slots to other carriers and reserves the right to
withdraw slots. Various amendments to the slot system proposed
from time to time could, if adopted, significantly affect
operations at high density traffic airports, significantly change
the value of the slots, grant slots to other carriers or for route
or aircraft specific usage, expand slots to other airports or
eliminate slots entirely. The DOT has proposed the elimination of
slot restrictions at high density airports other than Reagan
National. Legislation containing a similar proposal which could
eliminate slots as early as 2002 at O'Hare and 2007 at LaGuardia
and John F. Kennedy, and which doubles the maximum passenger
facilities charges permitted to be charged by airport authorities,
has passed the full House of Representatives. The Company cannot
predict whether any of these proposals will be adopted. However,
if legislation or regulation eliminating slots is adopted, the
value of such slots could be deemed to be permanently impaired,
resulting in a loss being charged to earnings for the relevant
period. Moreover, the elimination of slots could have an adverse
effect upon future results of operations of the Company.
NOTE 8 - OTHER
On January 5, 1999, the Company's mechanics ratified an initial
three-year collective bargaining agreement between the Company and
the International Brotherhood of Teamsters ("IBT"). The contract
becomes amendable in January 2002.
In February 1999, the Company completed an offering of $806 million
of pass-through certificates to be used to finance (either through
leveraged leases or secured debt financings) the debt portion of
the acquisition cost of 22 aircraft scheduled to be delivered from
March 1999 through September 1999.
The Company holds a membership interest in The SITA Foundation
("SITA"), an organization providing data communication services to
the airline industry. SITA's primary asset is an ownership
interest in Equant N.V. ("Equant"). In February 1999, SITA sold a
portion of its Equant interest in a secondary public offering and
distributed the pro rata proceeds to certain of its members
(including Continental) that elected to participate in the
offering. Continental recorded a gain of $20 million ($12 million
after tax) related to this transaction. The gain is included in
other nonoperating income (expense) in the accompanying
consolidated statement of operations.
In March 1999, the Company obtained a $160 million Credit Facility,
with a maturity date of March 2001, to finance pre-delivery
deposits for certain new Boeing aircraft to be delivered between
March 1999 and March 2002.
On April 15, 1999, the Company announced a $500 million increase in
the size of its common stock repurchase program, bringing the total
size of the program to $800 million. As of July 16, 1999, the
Company had repurchased 9,812,200 shares of Class B common stock
for $437 million.
In May 1999, the Company completed an offering of $742 million of
pass-through certificates to be used to finance (through either
leveraged leases or secured debt financings) the debt portion of
the acquisition cost of 21 new Boeing aircraft scheduled for
delivery from July 1999 to December 1999.
In July 1999, a tentative initial agreement was reached between
Continental Express, Inc. ("Express"), a wholly owned subsidiary of
the Company, and the IBT, which represents Express's mechanics.
The IBT will now present the tentative agreement to the covered
employees for ratification, a process that is expected to be
completed by mid-August 1999. If ratified, the agreement will
become amendable in January 2003.
During the three months ended June 30, 1999, the Company recognized
approximately a $36 million gain on its fuel hedging program. The
gain is included in fuel expense in the accompanying consolidated
statement of operations.
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: July 23, 1999 by: /s/ Lawrence W. Kellner
Lawrence W. Kellner
Executive Vice President and
Chief Financial Officer
(On behalf of Registrant)
Date: July 23, 1999 /s/ Michael P. Bonds
Michael P. Bonds
(Chief Accounting Officer)