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<SEC-DOCUMENT>0000319687-99-000003.txt : 19990226
<SEC-HEADER>0000319687-99-000003.hdr.sgml : 19990226
ACCESSION NUMBER: 0000319687-99-000003
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 26
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990225
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CONTINENTAL AIRLINES INC /DE/
CENTRAL INDEX KEY: 0000319687
STANDARD INDUSTRIAL CLASSIFICATION: AIR TRANSPORTATION, SCHEDULED [4512]
IRS NUMBER: 742099724
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 001-10323
FILM NUMBER: 99550460
BUSINESS ADDRESS:
STREET 1: 1600 SMITH STREET
STREET 2: DEPT HQSEO
CITY: HOUSTON
STATE: TX
ZIP: 77002
BUSINESS PHONE: 7138342950
FORMER COMPANY:
FORMER CONFORMED NAME: PEOPLE EXPRESS AIRLINES INC
DATE OF NAME CHANGE: 19890726
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
0-9781
(Commission File Number)
CONTINENTAL AIRLINES, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2099724
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1600 Smith Street, Dept. HQSEO, Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 713-324-2950
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Class A Common Stock, New York Stock Exchange
par value $.01 per share
Class B Common Stock, New York Stock Exchange
par value $.01 per share
Series A Junior Participating New York Stock Exchange
Preferred Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting and non-voting common
equity stock held by non-affiliates of the registrant was $1.9
billion as of February 17, 1999.
_______________
As of February 17, 1999, 11,406,732 shares of Class A Common
Stock and 57,400,355 shares of Class B Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting
of Stockholders to be held on May 18, 1999: PART III
<PAGE>
PART I
ITEM 1. BUSINESS.
Continental Airlines, Inc. (the "Company" or "Continental") is a
major United States air carrier engaged in the business of
transporting passengers, cargo and mail. Continental is the fifth
largest United States airline (as measured by 1998 revenue
passenger miles) and, together with its wholly owned subsidiaries,
Continental Express, Inc. ("Express") and Continental Micronesia,
Inc. ("CMI"), each a Delaware corporation, serves 206 airports
worldwide at February 1, 1999. As of February 1, 1999, Continental
flies to 127 domestic and 79 international destinations and offers
additional connecting service through alliances with domestic and
foreign carriers. Continental directly serves 13 European cities,
eight South American cities and Tokyo and is one of the leading
airlines providing service to Mexico and Central America, serving
more destinations there than any other United States airline.
Through its Guam hub, CMI provides extensive service in the western
Pacific, including service to more Japanese cities than any other
United States carrier.
As used in this Form 10-K, the terms "Continental" and "Company"
refer to Continental Airlines, Inc. and its subsidiaries, unless
the context indicates otherwise. This Form 10-K may contain
forward-looking statements. In connection therewith, please see
the cautionary statements contained in Item 1. "Business - Risk
Factors Relating to the Company" and "Business - Risk Factors
Relating to the Airline Industry" which identify important factors
that could cause actual results to differ materially from those in
the forward-looking statements.
Business Strategy
In 1995, Continental implemented a plan, labeled the "Go Forward
Plan", which was a "back to basics" approach focusing on improving
profitability and financial condition, delivering a consistent,
reliable, quality product to customers and improving employee
morale and working conditions. The Company's 1999 strategic plan,
as discussed below, retains the four basic components of the Go
Forward Plan: Fly to Win, Fund the Future, Make Reliability a
Reality and Working Together, with initiatives intended to build
upon Continental's operational and strategic strengths.
Fly to Win
The Company's 1999 Fly to Win initiatives center around three
principal themes: Grow Hub Operations, Improve Business/Leisure
Mix and Strengthen Alliance Network.
<PAGE>
Grow Hub Operations. Continental will continue to add select
flights and refine its flight schedules to maximize the potential
of its hubs. In addition, Continental plans to focus on expanding
international traffic through service to new destinations and
additional code-sharing and other marketing alliances with foreign
carriers.
Management believes that by adding domestic and international
flights to the Company's hubs, attracting more international
passengers through alliances with foreign carriers and further
refining the efficiency of the Company's hub operations,
Continental will continue to capture additional flow traffic
through its hubs and attract a larger share of higher-yielding
business travelers.
Improve Business/Leisure Mix. The Company's passenger load factors
increased from 70.9% in 1997 to 72.1% in 1998, facilitating
management of the business/leisure traveler mix on its aircraft.
Since business travelers typically pay a higher fare (on a revenue-
per-seat-mile basis) for the convenience of being able to make and
change last minute travel plans, increases in business traffic
contribute disproportionately to incremental profitability.
Unrestricted business fares accounted for approximately 44.3% of
the Company's domestic passenger revenue in 1998 compared to 43.8%
in 1997 (excluding Express). Many of the Company's product and
schedule improvements have been made to appeal to business
travelers. The Company has invested in state-of-the-art revenue
management and pricing systems to enhance its ability to manage its
fare mix.
Strengthen Alliance Network. Management believes that
strengthening the Company's network of alliance partners will allow
it to compete with larger global airline alliances, better leverage
the Company's hub assets and result in improved returns to the
Company. Focusing on strategic global alliances allows the Company
to benefit from the strengths of its alliance partners in their
local markets while reducing the Company's reliance on any
individual alliance partner.
The Company seeks alliance relationships that, together with the
Company's own flying, will permit expanded service through Newark
to major destinations in Latin America, Europe and Asia, and
expanded service through Houston to Latin America and Europe as
well as service to Japan. Route authorities that would be required
for the Company's own service to certain of these destinations are
not currently available to the Company. In November 1998, the
Company began implementing its long-term global alliance with
Northwest Airlines, Inc. ("Northwest"), which will continue to be
phased in over a multi-year period. See "Domestic Carrier
Alliances" and "Foreign Carrier Alliances" below for a discussion
of alliances recently entered into with other carriers.
<PAGE>
Fund the Future
Having achieved its 1995 goals of building the Company's overall
liquidity and improving its financial condition, management shifted
its financial focus in 1996 and 1997 to target the Company's
interest and lease expenses. In 1998, the Company concentrated on
securing favorable financing for new aircraft and other assets as
well as buying back common stock.
In 1998 and early 1999, the Company completed a number of
transactions intended to strengthen its long-term financial
position and enhance earnings:
- - In February 1998, the Company completed an offering of $773
million of pass-through certificates used to finance (through
either leveraged leases or secured debt financings) the debt
portion of the acquisition cost of 24 aircraft delivered from
February 1998 through December 1998.
- - During the first quarter of 1998, Continental completed several
offerings totaling approximately $98 million aggregate principal
amount of tax-exempt special facilities revenue bonds to finance
or refinance certain airport facility projects. These bonds are
payable solely from rentals paid by Continental under long-term
lease agreements with the respective governing bodies.
- - In April 1998, the Company completed an offering of $187 million
of pass-through certificates used to refinance the debt related
to 14 aircraft currently owned by Continental.
- - During the fourth quarter of 1998, the Company completed an
offering of $524 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 up to 14
aircraft scheduled to be delivered from December 1998 through May
1999.
- - In November 1998, the Company exercised its right and called for
redemption approximately half of its outstanding 8-1/2%
Convertible Trust Originated Preferred Securities ("TOPrS"). The
TOPrS were convertible into shares of Class B common stock at a
conversion price of $24.18 per share of Class B common stock. As
a result of the call for redemption, 2,688,173 TOPrS were
converted into 5,558,649 shares of Class B common stock. In
December 1998, the Company called for redemption the remaining
outstanding TOPrS. As a result of the second call, the remaining
2,298,327 TOPrS were converted into 4,752,522 shares of Class B
common stock during January 1999.
- - In December 1998, the Company sold $200 million principal amount
of 8% unsecured senior notes due in December 2005. The proceeds
will be used for general corporate purposes.
<PAGE>
- -In February 1999, the Company completed an offering of $806
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 up to 22 aircraft
scheduled to be delivered from March 1999 through September 1999.
The focus in 1999 is to maintain stable cash balances while
continuing to secure financing for aircraft deliveries in 1999 and
beyond and, under appropriate circumstances, buy back common stock
or common stock equivalents. The Company expects to continue,
through refinancings and other initiatives, to eliminate excess
interest and lease expenses and complete its transition from Stage
2 to Stage 3 aircraft.
Make Reliability a Reality
Customer service continues to be a principal focus in 1999.
Management believes Continental's on-time performance record is
crucial to its other operational objectives and, together with its
initiatives to improve baggage handling and customer satisfaction
and appropriately manage involuntary denied boardings, is an
important tool to attract higher-margin business travelers.
Continental's goal for 1999 is to be ranked monthly by the
Department of Transportation ("DOT") among the top half of major
air carriers (excluding those airlines who do not report
electronically) in on-time performance, baggage handling, customer
satisfaction and avoidance of involuntary denied boarding. For
1998, Continental ranked sixth in on-time performance, second in
baggage handling, fifth in fewest customer complaints and first in
fewest involuntary denied boardings. In 1998, bonuses of $65 were
paid to substantially all employees for each month that Continental
ranked second or third or achieved 80% or above (for arrivals
within 14 minutes) in on-time performance, and bonuses of $100 were
paid for each month that Continental ranked first among the top 10
U.S. air carriers (excluding those airlines who do not report
electronically) in on-time performance. For 1998, a total of $23
million of on-time bonuses were paid. This successful on-time
performance bonus program continues in 1999.
In addition to programs intended to improve Continental's standings
in DOT performance data, the Company has acted in a number of
additional areas to enhance its attractiveness to business
travelers and the travel agent community. Specifically,
Continental implemented various initiatives designed to offer
travelers cleaner and more attractive aircraft interiors,
consistent interior and exterior decor, first class seating on all
jet aircraft (other than regional jets), better meals and greater
benefits under its award-winning frequent flyer program.
Continental continues to make product improvements, such as new and
refurbished Presidents Clubs with specialty bars, and on-board
specialty coffees and microbrewery beer, among others. All the
Company's jets expected to remain in service after 1999 now have
reliable air-to-ground telephone service for customers, and its new
long-range jets have state-of-the-art video equipment.
In January 1998, Continental launched its TransContinental service
whereby passengers traveling coast-to-coast from Newark
International Airport ("Newark") experience new enhancements on
their flights, including new check-in options at nine New York
locations, flexible meal options and door-to-door pick-up service.
In addition, the Company successfully integrated the Boeing 777 and
737-700/800 aircraft into its fleet. The Company has also
continued to refine its award-winning BusinessFirst service.
Working Together
Management believes that Continental's employees are its greatest
asset, as well as the cornerstones of improved reliability and
customer service. Management has introduced a variety of programs
to increase employee participation and foster a sense of shared
community. These initiatives include significant efforts to
communicate openly and honestly with all employees through daily
news bulletins, weekly voicemail updates from the Company's Chief
Executive Officer, monthly and quarterly Continental publications,
videotapes mailed to employees reporting on the Company's growth
and progress, Go Forward Plan bulletin boards in over 600 locations
system-wide, and daily news electronic display signs in many
Continental employee locations. In addition, regularly scheduled
visits to airports throughout the route system are made by the
senior executives of the Company (each of whom is assigned an
airport for this purpose). Monthly meetings open to all employees,
as well as other periodic on-site visits by management, are
designed to encourage employee participation, knowledge and
cooperation. Continental was recently named among the best
companies to work for in America, finishing 40th in Fortune
Magazine's 1998 "100 Best Companies to Work for in America" list.
Continental also reached long-term agreements with a majority of
its employee workgroups regarding wages, benefits and other
workplace matters.
Continental's goals for 1999 include (i) to be ranked among the top
three major air carriers in employee measures such as turnover,
lost time, productivity and on-the-job injury claims, (ii) to
continue working with all employee groups in a way that is fair to
both the employees and the Company, (iii) to continue to improve
work environment safety, and (iv) to maintain Continental as one of
the 100 best companies to work for in America.
In September 1997, Continental announced that it intended to bring
all employees to industry standard wages over a three-year period,
and has made substantial progress in doing so. See "Employees"
below.
Domestic Operations
Continental operates its domestic route system primarily through
its hubs at Newark, George Bush Intercontinental Airport ("Bush
Intercontinental") in Houston and Hopkins International Airport
("Hopkins International") in Cleveland. The Company's hub system
allows it to transport passengers between a large number of
destinations with substantially more frequent service than if each
route were served directly. The hub system also allows Continental
to add service to a new destination from a large number of cities
using only one or a limited number of aircraft. Each of
Continental's domestic hubs is located in a large business and
population center, contributing to a high volume of "origin and
destination" traffic.
Newark. As of February 1, 1999, Continental operated 55% (237
departures) of the average daily jet departures (excluding regional
jets) and, together with Express, 58% (333 departures) of all
average daily departures (jet, regional jet and turboprop) from
Newark. Considering the three major airports serving New York City
(Newark, LaGuardia and John F. Kennedy), Continental and Express
accounted for 24% of all daily departures, while the next largest
carrier, American Airlines, Inc., and its commuter affiliate
accounted for 14% of all daily departures.
Houston. As of February 1, 1999, Continental operated 78%
(328 departures) of the average daily jet departures (excluding
regional jets) and, together with Express, 82% (467 departures) of
all average daily departures from Bush Intercontinental. Southwest
Airlines Co. ("Southwest") also has a significant share of the
Houston market through Hobby Airport. Considering both Bush
Intercontinental and Hobby Airport, Continental operated 56% and
Southwest operated 25% of the daily jet departures (excluding
regional jets) from Houston.
Cleveland. As of February 1, 1999, Continental operated 51% (86
departures) of the average daily jet departures (excluding regional
jets) and, together with Express, 65% (232 departures) of all
average daily departures from Hopkins International. The next
largest carrier, US Airways, Inc. ("US Airways"), accounted for 6%
of all daily departures.
Continental Express. Continental Airlines' jet service at each of
its domestic hub cities is coordinated with Express, which operates
new-generation turboprop aircraft and regional jets under the name
"Continental Express". The turboprop aircraft average
approximately seven years of age and seat 64 or fewer passengers
while the regional jets average one year of age and seat 50
passengers.
As of February 1, 1999, Express served 30 destinations from Newark
(15 by regional jet), 32 destinations from Bush Intercontinental
(12 by regional jet) and 41 destinations from Hopkins International
(13 by regional jet). In addition, commuter feed traffic is
currently provided by other code-sharing partners. See "Domestic
Carrier Alliances" below.
Management believes Express's turboprop and regional jet operations
complement Continental's jet operations by allowing more frequent
service to small cities than could be provided economically with
conventional jet aircraft and by carrying traffic that connects
onto Continental's jets. In many cases, Express (and Continental)
compete for such connecting traffic with commuter airlines owned by
or affiliated with other major airlines operating out of the same
or other cities. Continental believes that Express's new regional
jets provide greater comfort and enjoy better customer acceptance
than turboprop aircraft. The regional jets also allow Express to
serve certain routes that cannot be served by its turboprop
aircraft.
Domestic Carrier Alliances. Pursuant to the Company's Fly to Win
initiative under the Go Forward Plan, Continental has entered into
and continues to develop alliances with domestic carriers:
- - In January 1998, the Company announced that it had entered into
a long-term global alliance with Northwest ("Northwest
Alliance"). The Northwest Alliance includes the placing by each
carrier of its code on a large number of the flights of the other
and reciprocal frequent flyer programs and executive lounge
access. Significant other joint marketing activities will be
undertaken, while preserving the separate identities of the
carriers. See "Risk Factors Relating to the Company - Risks
Regarding Continental/Northwest Alliance".
- - Continental has a series of agreements with America West
Airlines, Inc. ("America West"), including agreements related to
code-sharing and ground handling, which have created substantial
benefits for both airlines. These code-sharing agreements cover
63 city-pairs at February 1, 1999, and allow Continental to link
additional destinations to its route network and derive
additional traffic from America West's distribution strength in
cities where Continental has less sales presence. The sharing of
facilities and employees by Continental and America West in their
respective key markets has resulted in significant cost savings.
- - Continental has a code-sharing agreement with Gulfstream
International Airlines, Inc. ("Gulfstream") which commenced in
April 1997. Gulfstream serves as a connection for Continental
passengers throughout Florida as well as six markets in the
Bahamas.
- - Continental has a code-sharing arrangement with Colgan Air, Inc.
which commenced in July 1997 on flights connecting in four cities
in the eastern United States and offers connections for
Continental passengers to 11 cities in the Northeastern and mid-
Atlantic regions of the United States.
- - Continental has a code-sharing agreement with Mesaba Aviation,
Inc. ("Mesaba"), operating as a Northwest affiliate, which
commenced on January 14, 1999. Mesaba serves as a connection for
Continental passengers through Detroit and Minneapolis/St. Paul.
- - Continental and CMI entered into a cooperative marketing
agreement with Hawaiian Airlines that began October 1, 1997 on
flights connecting in Honolulu.
<PAGE>
International Operations
International Operations. Continental directly serves destinations
throughout Europe, Canada, Mexico, Central and South America, and
the Caribbean, as well as Tokyo, and has extensive operations in
the western Pacific conducted by CMI. As measured by 1998
available seat miles, approximately 33.8% of Continental's jet
operations, including CMI, were dedicated to international traffic,
compared with 31.4% in 1997. Continental anticipates that a
majority of its capacity growth in 1999 will be international. As
of February 1, 1999, the Company offered 132 weekly departures to
13 European cities and marketed service to 33 other cities through
code-sharing agreements. Continental is one of the leading
airlines providing service to Mexico and Central America, serving
more destinations there than any other United States airline.
The Company's Newark hub is a significant international gateway.
From Newark at February 1, 1999, the Company serves 13 European
cities and four Canadian cities, three Mexican cities, two Central
American cities, six South American cities and six Caribbean
destinations, and markets other destinations through code-sharing
arrangements with foreign carriers. In addition, Continental
commenced non-stop service to Tokyo in November 1998, and has
announced plans to begin non-stop service to Amsterdam (subject to
government approval), Brussels, Tel Aviv and Zurich in 1999.
The Company's Houston hub is the focus of its operations in Mexico
and Central America. As of February 1, 1999, Continental flies
from Houston to 13 cities in Mexico, every country in Central
America, five cities in South America, two Caribbean destinations,
three cities in Canada and two cities in Europe. In addition,
Continental commenced non-stop service to Tokyo in January 1999,
and has been tentatively awarded non-stop service to Sao Paulo.
Continental also flies to Toronto, San Juan and Cancun from its hub
in Cleveland and has announced service to London, subject to
receipt of appropriate take-off and landing slots at Gatwick
airport.
Continental Micronesia. CMI is a United States-certificated
international air carrier engaged in the business of transporting
passengers, cargo and mail in the western Pacific. From its hub
operations based on the island of Guam, CMI provides service to
eight cities in Japan, more than any other United States carrier,
as well as other Pacific rim destinations, including Taiwan, the
Philippines, Hong Kong, Australia, New Caledonia and Indonesia.
Service to these Japanese cities and certain other Pacific Rim
destinations is subject to a variety of regulatory restrictions
limiting the ability of other carriers to service these markets.
CMI is the principal air carrier in the Micronesian Islands, where
it pioneered scheduled air service in 1968. CMI's route system is
linked to the United States market through Honolulu, which CMI
serves non-stop from both Tokyo and Guam, and Tokyo. CMI and
Continental also maintain a code-sharing agreement and coordinate
schedules on certain flights from the west coast of the United
States to Honolulu, and from Honolulu to Guam and Tokyo, to
facilitate travel from the United States into CMI's route system.
Foreign Carrier Alliances. Over the last decade, major United
States airlines have developed and expanded alliances with foreign
air carriers, generally involving adjacent terminal operations,
coordinated flights, code-sharing and other joint marketing
activities. Continental is the sole major United States carrier to
operate a hub in the New York City area. Consequently, Continental
believes it is uniquely situated to attract alliance partners from
Europe, the Far East and South America and has aggressively pursued
such alliances. The Company believes that the Northwest Alliance
will enhance its ability to attract foreign alliance partners. See
"Risk Factors Relating to Continental - Risks Regarding
Continental/Northwest Alliance".
Continental believes that developing a network of international
alliance partners will better leverage the Company's hub assets by
attracting high-yield flow traffic and by strengthening
Continental's position in large, local (non-connecting) markets and
will result in improved returns to the Company. Additionally,
Continental can enlarge its scope of service more rapidly and enter
additional markets with lower capital and start-up costs through
formation of alliances with partners as compared with entering
markets independently of other carriers.
Continental has a goal of developing alliance relationships that,
together with the Company's own flying, will permit expanded
service through Newark and Houston to major destinations in South
America, Central America, Europe and Asia. Route authorities
necessary for the Company's own service to certain of these
destinations are not currently available to the Company.
Continental has implemented international code-sharing agreements
with Alitalia Linee Aeree Italiane, S.P.A. ("Alitalia"), Transavia
Airlines, CSA Czech Airlines, British Midland, China Airlines, EVA
Airways Corporation, an airline based in Taiwan, Virgin Atlantic
Airways ("Virgin"), Viacao Aerea Sao Paulo ("VASP") and Societe Air
France ("Air France"), and is in the process of implementing a
code-share agreement and other joint marketing and service
agreements with Compania Panamena de Aviacion, S.A., 49% of the
common equity of which is owned by Continental. Upon receipt of
government approval, Continental will commence code-sharing
arrangements with Aeroservicios Carabobo S.A., a Venezuelan
carrier, Avant Airlines, a Chilean carrier, and Air Aruba. In
addition, the Northwest Alliance contemplates formation of a joint
venture with KLM Royal Dutch Airlines ("KLM"), a Dutch carrier.
Continental has entered into joint market agreements with Air China
and Aerolineas Centrales de Colombia, for which government approval
has not yet been sought.
Certain of Continental's code-sharing agreements involve block-
space arrangements (pursuant to which carriers agree to share
capacity and bear economic risk for blocks of seats on certain
routes). Alitalia has agreed to purchase blocks of seats on
Continental flights between Newark and Rome and Milan. VASP has
agreed to purchase blocks of seats on Continental flights between
Newark and Rio de Janeiro and Sao Paulo. Continental and Air
France purchase blocks of seats on each other's flights between
Houston and Newark and Paris. Continental and Virgin exchange
blocks of seats on each other's flights between Newark and London.
Continental's agreement with Virgin also includes the purchase by
Continental of blocks of seats on eight other routes flown by
Virgin between the United Kingdom and the United States.
The majority of the Company's alliance agreements provide that a
party may terminate the agreement upon certain changes in ownership
or control of the other party. As a result of the transfer by
Continental's principal stockholder of its Continental Class A
common stock to an affiliate of Northwest (which affiliate is
referred to hereafter together with Northwest as "Northwest"),
certain of the Company's alliance partners could rely on such
provision to attempt to terminate their alliance relationship with
the Company. To date, none has done so, and the Company does not
believe that the Northwest transaction would provide the basis for
such a termination.
The Company might enter into other code-sharing, joint marketing
and block-space agreements in 1999, which might include the Company
undertaking the financial commitment to purchase seats from other
carriers.
Employees
As of December 31, 1998, the Company had approximately 43,900 full-
time equivalent employees, including approximately 19,200 customer
service agents, reservations agents, ramp and other airport
personnel, 7,750 flight attendants, 7,000 management and clerical
employees, 6,150 pilots, 3,650 mechanics and 150 dispatchers.
Labor costs are a significant component of the Company's expenses
and can substantially impact airline results. In 1998, labor costs
(including employee incentives) constituted 31.1% of the Company's
total operating expenses (excluding fleet disposition/impairment
loss). While there can be no assurance that the Company's
generally good labor relations and high labor productivity will
continue, management has established as a significant component of
its business strategy the preservation of good relations with the
Company's employees, approximately 40% of whom are represented by
unions. In September 1997, the Company announced a plan to bring
all employees to industry standard wages no later than the end of
the year 2000. Wage increases began in 1997, and will continue to
be phased in through 2000 as revenue, interest rates and rental
rates reach industry standards.
<PAGE>
The following is a table of the Company's, Express's and CMI's
principal collective bargaining agreements, and their respective
amendable dates:
<TABLE>
<CAPTION>
Approximate Contract
Employee Number of Representing Amendable
Group Employees Union Date
<S> <C> <C> <C>
Continental Pilots 5,050 Independent October 2002
Association
of Continental
Pilots
Express Pilots 1,100 Independent October 2002
Association
of Continental
Pilots
Dispatchers 150 Transport Workers October 2003
Union of America
Continental 3,220 International January 2002
Mechanics Brotherhood of
Teamsters
Express Mechanics 280 International (Negotiations
Brotherhood of for initial
Teamsters contract
ongoing)
CMI Mechanics 150 International March 2001
Brotherhood of
Teamsters
Continental 6,925 International December 1999
Flight Attendants Association of
Machinists and
Aerospace Workers
Express 375 International November 1999
Flight Attendants Association of
Machinists and
Aerospace Workers
CMI 450 International June 2000
Flight Attendants Association of
Machinists and
Aerospace Workers
CMI Fleet and 300 International March 2001
Passenger Service Brotherhood of
Employees Teamsters
</TABLE>
The other employees of Continental, Express and CMI are not covered
by collective bargaining agreements.
Competition and Marketing
The airline industry is highly competitive and susceptible to price
discounting. The Company competes with other air carriers that
have substantially greater resources (and in certain cases, lower
cost structures) as well as smaller air carriers with low-cost
structures. Overall industry profit margins have historically been
low. However, during 1995 through 1998, industry profit margins
improved substantially. See Item 1. "Business. Risk Factors
Relating to the Airline Industry" and Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations".
As with other carriers, most tickets for travel on Continental are
sold by travel agents. Travel agents generally receive commissions
measured by the price of tickets sold. Accordingly, airlines
compete not only with respect to the price of tickets sold, but
also with respect to the amount of commissions paid. Airlines
often pay additional commissions in connection with special revenue
programs.
In 1998, Continental Airlines continued to expand its electronic
ticketing ("E-Ticket") product to international destinations. E-
Tickets result in lower distribution costs to the Company while
providing enhanced customer and revenue information. Continental
recorded over $2.4 billion in E-Ticket sales in 1998, representing
27% of total customers traveling by the end of 1998. Further
expansion in 1999 will complete the offering of E-Ticket to all
international destinations, expand the number of E-Ticket machines
in major airports, and enhance the Company's ability to interline
with other carriers on a bilateral basis. The Company expects
these features to contribute to an increase in E-Ticket usage and
a further reduction in distribution costs.
Frequent Flyer Program
Each major airline has established a frequent flyer program
designed to encourage repeat travel on its system. Continental's
OnePass program allows passengers to earn mileage credits by flying
Continental and certain other carriers including Northwest, America
West, Alitalia and Air France. The Company also sells mileage
credits to hotels, car rental agencies, credit card companies and
others participating in the OnePass program.
Continental accrues the incremental cost associated with the earned
flight awards based on expected redemptions. The incremental cost
to transport a passenger on a free trip includes the cost of
incremental fuel, meals, telecommunications, insurance and
miscellaneous supplies and does not include any charge for
potential displacement of revenue passengers or costs for aircraft
ownership, maintenance, labor or overhead allocation. Due to the
structure of the program and the low level of redemptions as a
percentage of total travel, Continental believes that displacement
of revenue passengers by passengers using flight awards has
historically been minimal. The number of awards used on
Continental represented less than 7% of Continental's total revenue
passenger miles in each of the years 1998 and 1997.
During the fourth quarter of 1998, Continental, as part of the
Northwest Alliance, entered into a frequent flyer arrangement with
Northwest designed to allow Continental and Northwest to combine
their frequent flyer programs while continuing to administer them
as two separate programs.
Industry Regulation and Airport Access
Continental and its subsidiaries operate under certificates of
public convenience and necessity issued by the DOT. Such
certificates may be altered, amended, modified or suspended by the
DOT if public convenience and necessity so require, or may be
revoked for intentional failure to comply with the terms and
conditions of a certificate.
The airlines are also regulated by the Federal Aviation
Administration ("FAA"), primarily in the areas of flight
operations, maintenance, ground facilities and other technical
matters. Pursuant to these regulations, Continental has
established, and the FAA has approved, a maintenance program for
each type of aircraft operated by the Company that provides for the
ongoing maintenance of such aircraft, ranging from frequent routine
inspections to major overhauls. Certain regulations require phase-
out of certain aircraft and modifications to aging aircraft. Such
regulations can significantly increase costs and affect a carrier's
ability to compete.
The DOT allows local airport authorities to implement procedures
designed to abate special noise problems, provided such procedures
do not unreasonably interfere with interstate or foreign commerce
or the national transportation system. Certain airports, including
the major airports at Boston, Washington, D.C., Chicago, Los
Angeles, San Diego, Orange County and San Francisco, have
established airport restrictions to limit noise, including
restrictions on aircraft types to be used and limits on the number
of hourly or daily operations or the time of such operations. In
some instances, these restrictions have caused curtailments in
services or increases in operating costs, and such restrictions
could limit the ability of Continental to expand its operations at
the affected airports. Local authorities at other airports are
considering adopting similar noise regulations.
Airports from time to time seek to increase the rates charged to
airlines, and the ability of airlines to contest such increases has
been restricted by federal legislation, DOT regulations and
judicial decisions. In addition, public airports generally impose
passenger facility charges ("PFC's") of up to $3 per departing or
connecting passenger. Congress has from time to time considered
legislation increasing PFC's, and the Company is unable to predict
whether PFC's will increase. With certain exceptions, these
charges are passed on to the customers.
The FAA has designated John F. Kennedy, LaGuardia, O'Hare and Wash-
ington National airports as "high density traffic airports" and has
limited the number of departure and arrival slots at those
airports. Currently, slots at the high density traffic airports
may be voluntarily sold or transferred between the carriers. The
DOT has in the past reallocated slots to other carriers and
reserves the right to withdraw slots. Various amendments to the
slot system, proposed from time to time by the FAA, members of
Congress and others, could, if adopted, significantly affect
operations at the high density traffic airports or expand slot
controls to other airports. Certain of such proposals could
restrict the number of flights, limit transfer of the ownership of
slots, increase the risk of slot withdrawals or require charges to
the Company's financial statements. The DOT recently proposed the
elimination of slot restrictions at high-density airports.
Continental cannot predict whether any of these proposals will be
adopted.
The availability of international routes to United States carriers
is regulated by treaties and related agreements between the United
States and foreign governments. The United States has in the past
generally followed the practice of encouraging foreign governments
to accept multiple carrier designation on foreign routes, although
certain countries have sought to limit the number of carriers.
Foreign route authorities may become less valuable to the extent
that the United States and other countries adopt "open skies"
policies liberalizing entry on international routes. Continental
cannot predict what laws and regulations will be adopted or their
impact, but the impact may be significant.
Many aspects of Continental's operations are subject to
increasingly stringent federal, state and local laws protecting the
environment. Future regulatory developments could adversely affect
operations and increase operating costs in the airline industry.
Risk Factors Relating to the Company
Leverage and Liquidity. Continental has a higher proportion of
debt compared to its equity capital than some of its principal
competitors. In addition, a majority of Continental's property and
equipment is subject to liens securing indebtedness. Accordingly,
Continental may be less able than some of its competitors to
withstand a prolonged recession in the airline industry or respond
as flexibly to changing economic and competitive conditions.
As of December 31, 1998, Continental had approximately $2.7 billion
(including current maturities) of long-term debt and capital lease
obligations and had approximately $1.3 billion of Continental-
obligated mandatorily redeemable preferred securities of subsidiary
trust and common stockholders' equity. As of December 31, 1998,
Continental had $1.4 billion in cash and cash equivalents.
Continental has lines of credit totaling $225 million and
significant encumbered assets.
<PAGE>
Continental has substantial commitments for capital expenditures,
including for the acquisition of new aircraft. As of February 8,
1999, Continental had agreed to acquire a total of 109 Boeing jet
aircraft through 2005. The Company anticipates taking delivery of
57 Boeing jet aircraft in 1999. Continental also has options for
an additional 114 aircraft (exercisable subject to certain
conditions). The estimated aggregate cost of the Company's firm
commitments for Boeing aircraft is approximately $5.4 billion.
Continental currently plans to finance its new Boeing aircraft with
a combination of enhanced pass through trust certificates, lease
equity and other third-party financing, subject to availability and
market conditions. As of February 8, 1999, Continental had
approximately $1.1 billion in financing arranged for such future
Boeing deliveries. In addition, Continental had commitments or
letters of intent for backstop financing for approximately one-
third of the anticipated remaining acquisition cost of such Boeing
deliveries. In addition, at February 8, 1999, Continental has firm
commitments to purchase 32 spare engines related to the new Boeing
aircraft for approximately $167 million, which will be deliverable
through December 2004.
As of February 8, 1999, Express had firm commitments for 37 Embraer
ERJ-145 ("ERJ-145") 50-seat regional jets and 25 Embraer ERJ-135
("ERJ-135") 37-seat regional jets, with options for an additional
125 ERJ-145 and 50 ERJ-135 aircraft exercisable through 2008.
Express anticipates taking delivery of 19 ERJ-145 and six ERJ-135
regional jets in 1999. Neither Express nor Continental will have
any obligation to take any of the firm ERJ-145 aircraft that are
not financed by a third party and leased to Continental.
For 1998, cash expenditures under operating leases relating to
aircraft approximated $702 million, compared to $626 million for
1997, and approximated $263 million relating to facilities and
other rentals compared to $236 million in 1997. Continental
expects that its operating lease expenses for 1999 will increase
over 1998 amounts.
Additional financing will be needed to satisfy the Company's
capital commitments. Continental cannot predict whether sufficient
financing will be available for capital expenditures not covered by
firm financing commitments.
Continental's History of Operating Losses. Continental recorded
net income (including special charges) of $383 million in 1998,
$385 million in 1997, $319 million in 1996 and $224 million in
1995. However, Continental experienced significant operating
losses in the previous eight years. Historically, the financial
results of the U.S. airline industry have been cyclical.
Continental cannot predict whether current industry conditions will
continue.
Aircraft Fuel. Fuel costs constitute a significant portion of
Continental's operating expense. Fuel costs were approximately
10.2% of operating expenses for the year ended December 31, 1998
(excluding fleet disposition/impairment loss) and 13.6% for the
year ended December 31, 1997. Fuel prices and supplies are
influenced significantly by international political and economic
circumstances. Continental enters into petroleum swap contracts,
petroleum call option contracts and jet fuel purchase commitments
to provide some short-term protection (generally three to six
months) against a sharp increase in jet fuel prices. The Company's
fuel hedging strategy could result in the Company not fully
benefiting from certain fuel price declines. If a fuel supply
shortage were to arise from a disruption of oil imports or
otherwise, higher fuel prices or curtailment of scheduled airline
service could result. Significant changes in fuel costs would
materially affect Continental's operating results.
Labor Matters. In September 1997, the Company announced a plan to
bring all employees to industry standard wages no later than the
end of the year 2000. Wage increases began in 1997, and will
continue to be phased in through 2000, as revenue, interest rates
and rental rates reach industry standards.
Certain Tax Matters. At December 31, 1998, Continental had
estimated net operating loss carryforwards ("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 the change in ownership
of Continental on April 27, 1993, the ultimate utilization of
Continental's NOLs and investment tax credits could be limited.
Reflecting this possible limitation, Continental has recorded a
valuation allowance of $263 million at December 31, 1998.
Continental had, as of December 31, 1998, deferred tax assets
aggregating $803 million, including $372 million of NOLs. During
the first quarter of 1998, the Company consummated several
transactions, the benefit of which resulted in the elimination of
reorganization value in excess of amounts allocable to identifiable
assets of $164 million. During the third and fourth quarters of
1998, the Company determined that additional NOLs of the Company's
predecessor could be benefitted and accordingly reduced both the
valuation allowance and routes, gates and slots by $190 million.
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 further reduce routes, gates and slots.
As a result of NOLs, Continental will not pay United States federal
income taxes (other than alternative minimum tax) until it has
earned approximately an additional $1.1 billion of taxable income
following December 31, 1998. Section 382 of the Internal Revenue
Code ("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. 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
Continental's stock at the time of the ownership change by the
applicable long-term tax-exempt rate (which was 4.71% for February
1999). Any 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
Continental 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 annual NOL
utilization would be limited to approximately $102 million per year
other than through the recognition of future built-in gain
transactions.
On November 20, 1998, Northwest completed its acquisition of
certain equity of the Company previously held by Air Partners, L.P.
("Air Partners") and its affiliates, together with certain Class A
common stock of the Company held by certain other investors,
totaling 8,661,224 shares of the Class A common stock (the "Air
Partners Transaction"). Based on information currently available,
the Company does not believe that the Air Partners Transaction
resulted in an ownership change for purposes of Section 382.
Continental Micronesia. Because the majority of CMI's traffic
originates in Japan, its results of operations are substantially
affected by the Japanese economy and changes in the value of the
yen as compared to the dollar. As a result of the devaluation of
the yen against the dollar, a weak Japanese economy and increased
fuel costs, CMI's operating earnings declined during 1996 and 1997.
Although CMI's results in Asia have declined significantly in
recent years, the Company successfully redeployed CMI capacity into
the stronger domestic markets and CMI's most recent results have
improved.
To reduce the potential negative impact on CMI's earnings, the
Company has entered into forward contracts and purchased foreign
currency average rate option contracts as a hedge against a portion
of its expected net yen cash flow position. As of December 31,
1998, the Company had hedged approximately 100% of its first and
second quarter 1999 projected net yen-denominated cash flows and
75% of its third quarter 1999 projected net yen-denominated cash
flows.
Principal Stockholder. As of December 31, 1998, Northwest held
approximately 13.5% of the common equity interest and 45.8% of the
fully-diluted voting power of the Company. In addition, Northwest
holds a limited proxy to vote certain additional shares of the
Company's common stock that would raise its voting power to
approximately 50.3% of the Company's fully diluted voting power.
In connection with the Air Partners Transaction, the Company
entered into a corporate governance agreement with certain
affiliates of Northwest (the "Northwest Parties") designed to
assure the independence of the Company's Board and management
during the six-year term of the governance agreement. Under the
governance agreement, as amended, the Northwest Parties have agreed
not to beneficially own voting securities of the Company in excess
of 50.1% of the fully diluted voting power of the Company's voting
securities, subject to certain exceptions, including third-party
acquisitions or tender offers for 15% or more of the voting power
of the Company's voting securities and a limited exception
permitting a one-time ownership of approximately 50.4% of the fully
diluted voting power. The Northwest Parties have deposited all
voting securities of the Company beneficially owned by them (other
than the shares for which they hold only a limited proxy) in a
voting trust with an independent voting trustee requiring that such
securities be voted (i) on all matters other than the election of
directors, in the same proportion as the votes cast by other
holders of voting securities, and (ii) in the election of
directors, for the election of independent directors (who must
constitute a majority of the Board) nominated by the Board of
Directors. However, in the event of a merger or similar business
combination or a recapitalization, liquidation or similar
transaction, a sale of all or substantially all of the Company's
assets, or an issuance of voting securities that would represent
more than 20% of the voting power of the Company prior to issuance,
or any amendment of the Company's charter or bylaws that would
materially and adversely affect Northwest (each, an "Extraordinary
Transaction"), the shares may be voted as directed by the Northwest
Party owning such shares, and if a third party is soliciting
proxies in an election of directors, the shares may be voted at the
option of such Northwest Party either as recommended by the
Company's Board of Directors or in the same proportion as the votes
cast by the other holders of voting securities.
The Northwest Parties have also agreed to certain restrictions on
the transfer of voting securities owned by them, have agreed not to
seek to affect or influence the Company's Board of Directors or the
control of the management of the Company or the business,
operations, affairs, financial matters or policies of the Company
or to take certain other actions, and have agreed to take all
actions necessary to cause independent directors to at all times
constitute at least a majority of the Company's Board of Directors.
The Company has granted preemptive rights to a Northwest Party with
respect to issuances of Class A common stock and certain issuances
of Class B common stock. The Northwest Parties have agreed that
certain specified actions, together with any material transactions
between the Company and Northwest or its affiliates, including any
modifications or waivers of the governance agreement or the
alliance agreement, may not be taken without the prior approval of
a majority of the Board of Directors, including the affirmative
vote of a majority of the independent directors. The governance
agreement also required the Company to adopt a shareholder rights
plan with reasonably customary terms and conditions, with an
acquiring person threshold of 15% and with appropriate exceptions
for the Northwest Parties for actions permitted by and taken in
compliance with the governance agreement. A rights plan meeting
these requirements was adopted effective November 20, 1998.
The governance agreement will expire on November 20, 2004, or if
earlier, upon the date that the Northwest Parties cease to
beneficially own voting securities representing at least 10% of the
fully diluted voting power of the Company's voting securities.
However, in response to concerns raised by the Department of
Justice ("DOJ") in its antitrust review of the Northwest Alliance,
the Air Partners Transaction and the related governance agreement
between the Company and the Northwest Parties (collectively, the
"Northwest Transaction"), a supplemental agreement was adopted,
which extended the effect of a number of the provisions of the
governance agreement for an additional four years. For instance,
the Northwest Parties must act to ensure that a majority of the
Company's Board is comprised of independent directors, and certain
specified actions, together with material transactions between the
Company and Northwest or its affiliates, including any
modifications or waivers of the supplemental agreement or the
alliance agreement, may not be taken without the prior approval of
a majority of the Board of Directors, including the affirmative
vote of a majority of the independent directors. The Northwest
Parties will continue to have the right to vote in their discretion
on any Extraordinary Transaction during the supplemental period,
but also will be permitted to vote in their discretion on other
matters up to 20% of the outstanding voting power (their remaining
votes to be cast neutrally, except in a proxy contest, as
contemplated in the governance agreement), subject to their
obligation set forth in the previous sentence. If, during the term
of the supplemental agreement, the Company's rights plan were
amended to allow certain parties to acquire more shares than is
currently permitted, or if the rights issued thereunder were
redeemed, the Northwest Parties could vote all of their shares in
their discretion. Certain transfer limitations are imposed on the
Northwest Parties during the supplemental period. The Company has
granted preemptive rights to a Northwest Party with respect to
issuances of Class A common stock and certain issuances of Class B
common stock that occur during such period. The Company has agreed
to certain limitations upon its ability to amend its charter,
bylaws, executive committee charter and rights plan during the term
of the supplemental agreement. Following the supplemental period,
the supplemental agreement requires the Northwest Parties to take
all actions necessary to cause Continental's Board to have at least
five independent directors, a majority of whom will be required to
approve material transactions between Continental and Northwest or
its affiliates, including the amendment, modification or waiver of
any provisions of the supplemental agreement or the alliance
agreement.
In certain circumstances, particularly in cases where a change in
control of the Company could otherwise be caused by another party,
Northwest could exercise its voting power so as to delay, defer or
prevent a change in control of the Company.
Risks Regarding Continental/Northwest Alliance. In November 1998,
the Company and Northwest began implementing a long-term global
alliance involving extensive code-sharing, frequent flyer
reciprocity, and other cooperative activities.
Continental's ability to implement the Northwest Alliance
successfully and to achieve the anticipated benefits is subject to
certain risks and uncertainties, including (a) disapproval or delay
by regulatory authorities or adverse regulatory developments; (b)
competitive pressures, including developments with respect to
alliances among other air carriers; (c) customer reaction to the
alliance, including reaction to differences in products and
benefits provided by Continental and Northwest; (d) economic
conditions in the principal markets served by Continental and
Northwest; (e) increased costs or other implementation
difficulties, including those caused by employees; (f)
Continental's ability to modify certain contracts that restrict
certain aspects of the alliance; and (g) the outcome of lawsuits
commenced by certain stockholders of Continental challenging the
Northwest Transaction and certain related matters.
The alliance agreement provides that if after four years the
Company has not entered into a code share with KLM or is not
legally able (but for aeropolitical restrictions) to enter into a
new trans-Atlantic joint venture with KLM and Northwest and place
its airline code on certain Northwest flights, Northwest can elect
to (i) cause good faith negotiations among the Company, KLM and
Northwest as to the impact, if any, on the contribution to the
joint venture resulting from the absence of the code share, and the
Company will reimburse the joint venture for the amount of any loss
until it enters into a code share with KLM, or (ii) terminate
(subject to cure rights of the Company) after one year's notice any
or all of such alliance agreement and any or all of the agreements
contemplated thereunder.
On October 23, 1998, the DOJ filed a lawsuit against Northwest and
Continental challenging Northwest's acquisition of an interest in
Continental. The DOJ did not seek to preliminarily enjoin the
transaction before it closed on November 20, 1998, nor is the DOJ
challenging the Northwest Alliance at this time, although the DOJ
has informed the parties that it continues to investigate certain
specific aspects of the alliance. Continental is in the process of
implementing its alliance with Northwest. While it is not possible
to predict the ultimate outcome of this litigation, management does
not believe that this litigation will have a material adverse
effect on Continental.
The DOT is reviewing the changes in Continental's ownership
pursuant to DOT procedures for confirming the continuing fitness of
airlines when their ownership changes. In connection with this
review, DOT has exempted Continental and Northwest from regulatory
provisions which DOT has interpreted to require approval for de
facto route transfers when one airline holding international route
authority acquires control of another airline holding international
route authority, and has deferred action until December 10, 1999 as
to its review of the governance and other agreements between
Continental and Northwest to determine whether there has been a de
facto route transfer.
If DOT were to conclude that a de facto route transfer of
Continental routes to Northwest were occurring, it would institute
a proceeding to determine whether such a transfer was in the public
interest. In the past, DOT has approved numerous transfers, but it
has also concluded on occasion that certain overlapping routes in
limited-entry markets should not be transferred. In those
instances, DOT has decided those routes should instead become
available to other airlines to enhance competition on overlapping
routes or between two countries. Continental and Northwest operate
overlapping flights on certain limited entry routes, and
Continental and Northwest offer service between their primary U.S.
hubs and various other countries. If DOT were to institute a route
transfer proceeding, it could consider whether certain of
Continental's international routes overlapping with Northwest's on
a point-to-point or country-to-country basis should be transferred
to Northwest or to another airline. Continental believes that
Northwest has not acquired control of Continental, and that there
is a significant question as to DOT's authority to apply a de facto
route transfer theory to the current relationship between Northwest
and Continental. Continental would vigorously oppose any attempt
by DOT to institute a route transfer proceeding which would
consider any reductions in Continental's route authorities.
Stockholder Litigation. Following the announcement of the
Northwest Transaction, to the Company's knowledge as of February 1,
1999, six separate lawsuits had been filed against the Company and
its Directors and certain other parties (the "Stockholder
Litigation"). The complaints in the Stockholder Litigation, which
were filed in the Court of Chancery of the State of Delaware in and
for New Castle County and seek class certification, and which have
been consolidated under the caption In re Continental Airlines,
Inc. Shareholder Litigation, generally allege that the Company's
Directors improperly accepted the Northwest Transaction in
violation of their fiduciary duties owed to the public stockholders
of the Company. They further allege that Delta Air Lines, Inc.
submitted a proposal to purchase the Company which, in the
plaintiffs' opinion, was superior to the Northwest Transaction.
The Stockholder Litigation seeks, inter alia, to enjoin the
Northwest Transaction and the award of unspecified damages to the
plaintiffs.
While there can be no assurance that the Stockholder Litigation
will not result in a delay in the implementation of any aspect of
the Northwest Transaction, or the enjoining of the Northwest
Transaction, the Company believes the Stockholder Litigation to be
without merit and intends to defend it vigorously.
Year 2000 Computer Risk. The Year 2000 issue arises as a result of
computer programs having been written using two digits (rather than
four) to define the applicable year, among other problems. Any
information technology ("IT") systems that have time-sensitive
software might recognize a date using "00" as the year 1900 rather
than the year 2000, which could result in miscalculations and
system failures. The problem also extends to many "non-IT"
systems; that is, operating and control systems that rely on
embedded chip systems. In addition, the Company is at risk from
Year 2000 failures on the part of third-party suppliers and
governmental agencies with which the Company interacts.
The Company uses a significant number of computer software programs
and embedded operating systems that are essential to its
operations. For this reason, the Company implemented a Year 2000
project in late 1996 so that the Company's computer systems would
function properly in the year 2000 and thereafter. The Company's
Year 2000 project involves the review of a number of internal and
third-party systems. Each system is subjected to the project's
five phases which consist of systems inventory, evaluation and
analysis, modification implementation, user testing and integration
compliance. The systems are currently in various stages of
completion. The Company anticipates completing its review of
systems in the second quarter of 1999 and believes that, with
modifications to its existing software and systems and/or
conversions to new software, the Year 2000 issue will not pose
significant operational problems for its computer systems.
The Company has also initiated communications and on-site visits
with its significant suppliers, vendors and governmental agencies
with which its systems interface and exchange data or upon which
its business depends. The Company is coordinating efforts with
these parties to minimize the extent to which its business may be
vulnerable to their failure to remediate their own Year 2000
problems. The Company's business is dependent upon certain
domestic and foreign governmental organizations or entities such as
the FAA that provide essential aviation industry infrastructure.
There can be no assurance that the systems of such third parties on
which the Company's business relies (including those of the FAA)
will be modified on a timely basis. The Company's business,
financial condition or results of operations could be materially
adversely affected by the failure of its equipment or systems or
those operated by other parties to operate properly beyond 1999.
Although the Company currently has day-to-day operational
contingency plans, management is in the process of updating these
plans for possible Year 2000-specific operational requirements.
The Company anticipates completing the revision of current
contingency plans and the creation of additional contingency plans
by September 1999. In addition, the Company will continue to
monitor third-party (including governmental) readiness and will
modify its contingency plans accordingly. While the Company does
not currently expect any significant modification of it operations
in response to the Year 2000 issue, in a worst-case scenario the
Company could be required to alter its operations significantly.
Risks Factors Relating to the Airline Industry
Competition and Industry Conditions. The airline industry is
highly competitive and susceptible to price discounting. Carriers
have used discount fares to stimulate traffic during periods of
slack demand, to generate cash flow and to increase market share.
Some of Continental's competitors have substantially greater
financial resources or lower cost structures than Continental.
Airline profit levels are highly sensitive to changes in fuel
costs, fare levels and passenger demand. Passenger demand and fare
levels have in the past been influenced by, among other things, the
general state of the economy (both in international regions and
domestically), international events, airline capacity and pricing
actions taken by carriers. Domestically, from 1990 to 1993, the
weak U.S. economy, turbulent international events and extensive
price discounting by carriers contributed to unprecedented losses
for U.S. airlines. In the last several years, the U.S. economy has
improved and excessive price discounting has abated. Continental
cannot predict the extent to which these industry conditions will
continue.
In recent years, the major U.S. airlines have sought to form
marketing alliances with other U.S. and foreign air carriers. Such
alliances generally provide for "code-sharing", frequent flyer
reciprocity, coordinated scheduling of flights of each alliance
member to permit convenient connections and other joint marketing
activities. Such arrangements permit an airline to market flights
operated by other alliance members as its own. This increases the
destinations, connections and frequencies offered by the airline,
which provide an opportunity to increase traffic on its segment of
flights connecting with its alliance partners. The Northwest
Alliance is an example of such an arrangement, and Continental has
existing alliances with numerous other air carriers. Other major
U.S. airlines have alliances or planned alliances more extensive
than Continental's. Continental cannot predict the extent to which
it will benefit from its alliances or be disadvantaged by competing
alliances.
Regulatory Matters. Airlines are subject to extensive regulatory
and legal compliance requirements that engender significant costs.
In the last several years, the FAA has issued a number of
directives and other regulations relating to the maintenance and
operation of aircraft that have required significant expenditures.
Some FAA requirements cover, among other things, retirement of
older aircraft, security measures, collision avoidance systems,
airborne windshear avoidance systems, noise abatement, commuter
aircraft safety and increased inspections and maintenance
procedures to be conducted on older aircraft. Continental expects
to continue incurring expenses in complying with the FAA's
regulations.
Additional laws, regulations, taxes and airport rates and charges
have been proposed from time to time that could significantly
increase the cost of airline operations or reduce revenues.
Congress and the DOT have also proposed the regulation of airlines'
competitive responses and other activities, including ticketing
practices and the treatment of customers. Restrictions on the
ownership and transfer of airline routes and takeoff and landing
slots have also been proposed. The ability of United States
carriers to operate international routes is subject to change
because the applicable arrangements between the United States and
foreign governments may be amended from time to time, or because
appropriate slots or facilities are not made available.
Continental cannot provide assurance that laws or regulations
enacted in the future will not adversely affect it.
Seasonal Nature of Airline Business. Due to the greater demand for
air travel during the summer months, revenue in the airline
industry in the third quarter of the year is generally
significantly greater than revenue in the first quarter of the year
and moderately greater than revenue in the second and fourth
quarters of the year for the majority of air carriers.
Continental's results of operations generally reflect this
seasonality, but have also been impacted by numerous other factors
that are not necessarily seasonal, including the extent and nature
of competition from other airlines, fare wars, excise and similar
taxes, changing levels of operations, fuel prices, foreign currency
exchange rates and general economic conditions.<PAGE>
ITEM 2. PROPERTIES.
Flight Equipment
As shown in the following table, Continental's (including CMI's)
jet aircraft fleet (excluding regional jets) consisted of 363 jets
and was comprised of 13 different types and series of aircraft at
December 31, 1998.
<TABLE>
<CAPTION>
Seats
Total in Standard Average Age
Type Aircraft Owned Leased Configuration (In Years)
<S> <C> <C> <C> <C> <C>
Four Engine
747-200* 3 1 2 426 25.9
Three Engine
DC-10-10 5 - 5 287 26.1
DC-10-30 31 6 25 242 22.8
727-200* 32 4 28 149 22.4
Two Engine
777-200 6 1 5 283 0.2
737-800 15 - 15 155 0.4
737-700 16 - 16 124 0.5
757-200 32 5 27 183 2.6
737-500 67 15 52 104 2.7
737-300 65 14 51 128 11.4
737-200* 2 2 - 100 29.5
MD-80 69 17 52 141 14.0
DC-9-30* 20 3 17 103 26.8
363 68 295 11.6
</TABLE>
*Stage 2 (noise level) aircraft (excluding five 727 aircraft
operated by CMI) which are scheduled to be replaced prior to the
year 2000.
The table above excludes six all-cargo 727 CMI aircraft and one
A300 and one 747 Continental aircraft that were removed from
service in 1995 and 1998, respectively.
A majority of the aircraft and engines owned by Continental are
subject to mortgages.
The FAA has adopted rules pursuant to the Airport Noise and
Capacity Act of 1990 that require a scheduled phase-out of Stage 2
aircraft during the 1990s. As a result of Continental's
acquisition of a number of new aircraft and the retirement of older
Stage 2 aircraft in recent years, 84.3% of Continental's current
jet fleet was composed of Stage 3 aircraft at December 31, 1998.
The Company plans to retire the remainder of its Stage 2 jet fleet
(excluding five 727 aircraft operated by CMI) prior to the year
2000 in order to comply with such rules. Scheduled deliveries of
the Company's new Boeing aircraft on order are expected to reduce
the average age of the Company's jet fleet (excluding regional
jets) from 11.6 years to 8.6 years by the end of 1999.
During 1998, Continental took delivery of a total of 65 new Boeing
aircraft which consisted of sixteen 737-500 aircraft, sixteen 737-
700 aircraft, seventeen 737-800 aircraft, ten 757-200 aircraft and
six 777-200 aircraft. The Company anticipates taking delivery of
57 new Boeing aircraft in 1999.
As of December 31, 1998, Express operated a fleet of 127 aircraft,
as follows:
<TABLE>
<CAPTION>
Seats
Total in Standard Average Age
Type Aircraft Owned Leased Configuration (In Years)
<S> <C> <C> <C> <C> <C>
Turboprop
ATR-72 3 3 - 64 4.4
ATR-42-320 30 3 27 46 8.9
ATR-42-500 8 - 8 48 2.3
EMB-120 26 16 10 30 9.2
Beech 1900-D 25 25 - 19 2.9
Regional jets
ERJ-145 35 - 35 50 1.0
127 47 80 5.1
</TABLE>
The table above excludes one ATR-42 aircraft owned by the Company
and currently leased to a third party and six EMB-120s owned by the
Company but removed from service for remarketing. On January 26,
1999, one such EMB-120 was sold.
During 1998, Express took delivery of 18 ERJ-145 aircraft. Express
anticipates taking delivery of another 18 ERJ-145 aircraft and six
new ERJ-135 aircraft in 1999.
See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital
Commitments" for a discussion of the Company's order for new firm
commitment aircraft and related financing arrangements.
Facilities
The Company's principal facilities are located at Newark, Bush
Intercontinental in Houston, Hopkins International in Cleveland and
A.B. Won Pat International Airport in Guam. All these facilities,
as well as substantially all of Continental's other facilities, are
leased on a long-term, net-rental basis, and Continental is
responsible for maintenance, taxes, insurance and other facility-
related expenses and services. In certain locations, Continental
owns hangars and other facilities on land leased on a long-term
basis, which facilities will become the property of the lessor on
termination of the lease. At each of its three domestic hub cities
and most other locations, Continental's passenger and baggage
handling space is leased directly from the airport authority on
varying terms dependent on prevailing practice at each airport.
In July 1996, the Company announced plans to expand its gates and
related facilities into Terminal B at Bush Intercontinental, as
well as planned improvements at Terminal C and the construction of
a new automated people mover system linking Terminal B and Terminal
C. In April 1997 and January 1999, the City of Houston completed
the offering of $190 million and $46 million, respectively,
aggregate principal amount of tax-exempt special facilities revenue
bonds (the "IAH Bonds"). The IAH Bonds are unconditionally
guaranteed by Continental. In connection therewith, the Company
has entered into long-term leases (or amendments to existing
leases) with the City of Houston providing for the Company to make
rental payments sufficient to service the related tax-exempt bonds,
which have a term no longer than 30 years. The majority of the
Company's expansion and improvements at Bush Intercontinental are
expected to be completed during the summer of 1999.
In 1998, the Company built a wide-body aircraft maintenance hangar
in Honolulu, Hawaii at an approximate cost of $25 million. The
construction was financed by tax-exempt special facilities revenue
bonds issued by the State of Hawaii. In connection therewith, the
Company has entered into long-term leases providing for the Company
to make rental payments sufficient to service the related tax-
exempt bonds.
In 1998, Continental completed construction of a new hangar and
improvements to a cargo facility at Newark. Continental completed
the financing of these projects in April 1998 with $23 million of
tax-exempt bonds issued by the New Jersey Economic Development
Authority. Continental is also planning a major facility expansion
at Newark which will require, among other matters, agreements to be
reached with the applicable airport authority and significant tax-
exempt bond financing for the project.
Continental has commenced the expansion of its facilities at
Hopkins International, which expansion is expected to be completed
in the third quarter of 1999. The expansion, which will include a
new jet concourse for the regional jet service offered by Express,
as well as other facility improvements, is expected to cost
approximately $156 million and is being funded principally by a
combination of tax-exempt special facilities revenue bonds (issued
in March 1998) and general airport revenue bonds (issued in
December 1997) by the City of Cleveland. In connection therewith,
Continental has entered into a long-term lease with the City of
Cleveland under which rental payments will be sufficient to service
the related bonds.
The Company has lease agreements with the City and County of Denver
covering ten gates and several support facilities at Denver
International Airport. The gates and facilities exceed
Continental's needs at the airport and the Company has subleased a
portion of the space.
The Company has cargo facilities at Los Angeles International
Airport. In July 1996, the Company subleased such facilities to
another carrier. If such carrier fails to comply with its
obligations under the sublease, the Company would be required to
perform those obligations.
CMI operates a hub on the island of Guam. In September 1996, the
Guam International Airport Authority completed the first phase of
a $240 million airport terminal expansion and renovation project.
This provided new arrival facilities, inbound baggage carousels and
customs halls and increased the number of gates available to CMI
from six to 12. The second (and final) phase of the project was
completed in November 1998. This added five new gates, additional
ticket counters and a new pier-sort outbound baggage system. The
completed project tripled the size of the terminal complex.
Continental also maintains administrative offices, airport and
terminal facilities, training facilities and other facilities
related to the airline business in the cities it serves.
Continental remains contingently liable until December 1, 2015, on
$202 million of long-term lease obligations of US Airways related
to the East End Terminal at LaGuardia Airport in New York. If US
Airways defaulted on these obligations, Continental could be
required to cure the default, at which time it would have the
right to reoccupy the terminal.<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
Antitrust Litigation
United States of America v. Northwest Airlines Corp. & Continental
Airlines, Inc., in the United States District Court for the
Eastern District of Michigan, Southern Division. In this
litigation, the Antitrust Division of the Department of Justice is
challenging under Section 7 of the Clayton Act and Section 1 of the
Sherman Act the acquisition by Northwest of shares of Continental's
Class A common stock bearing, together with certain shares for
which Northwest has a limited proxy, more than 50% of the fully
diluted voting power of all Continental stock. The government's
position is that, notwithstanding various agreements that severely
restrict Northwest's ability to exercise voting control over
Continental and are designed to assure Continental's competitive
independence, Northwest's control of the Class A common stock will
reduce actual and potential competition in various ways and in a
variety of markets. Continental believes that because of
agreements restricting Northwest's right to exercise control over
Continental, the companies remain independent competitors;
Northwest's stock acquisition was made solely for investment
purposes and thus is expressly exempt under Section 7 of the
Clayton Act; and Northwest's stock acquisition was necessary in
order for Northwest and Continental to enter into an alliance
agreement that is highly pro-competitive. The government seeks an
order requiring Northwest to divest all voting stock in Continental
on terms and conditions as may be agreed to by the government and
the Court. No specific relief is sought against Continental.
Environmental Proceedings
Under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended (commonly known
as "Superfund") and similar state environment cleanup laws,
generators of waste disposed of at designated sites may, under
certain circumstances, be subject to joint and several liability
for investigation and remediation costs. The Company (including
its predecessors) has been identified as a potentially responsible
party at four federal and two state sites that are undergoing or
have undergone investigation or remediation. The Company believes
that, although applicable case law is evolving and some cases may
be interpreted to the contrary, some or all of any liability claims
associated with these sites were discharged by confirmation of the
Company's Plan of Reorganization, principally because the Company's
exposure is based on alleged offsite disposal known as of the date
of confirmation. Even if any such claims were not discharged, on
the basis of currently available information, the Company believes
that its potential liability for its allocable share of the cost to
remedy each site (to the extent the Company is found to have
liability) is not, in the aggregate, material; however, the Company
has not been designated a "de minimis" contributor at any of such
sites.
<PAGE>
The Company is also involved in other environmental matters,
including the investigation and/or remediation of environmental
conditions at properties used or previously used by the Company.
Although the Company is not currently subject to any environmental
cleanup orders imposed by regulatory authorities, it is undertaking
voluntary investigation or remediation at certain properties in
consultation with such authorities. The full nature and extent of
any contamination at these properties and the parties responsible
for such contamination have not been determined, but based on
currently available information, the Company does not believe that
any environmental liability associated with such properties will
have a material adverse effect on the Company.
Stockholder Litigation
Following the announcement of the Northwest Transaction, to the
Company's knowledge as of February 1, 1999, six separate lawsuits
had been filed against the Company and its Directors and certain
other parties. The complaints in the Stockholder Litigation, which
were filed in the Court of Chancery of the State of Delaware in and
for New Castle County and seek class certification, and which have
been consolidated under the caption In re Continental Airlines,
Inc. Shareholder Litigation, generally allege that the Company's
Directors improperly accepted the Northwest Transaction in
violation of their fiduciary duties owed to the public stockholders
of the Company. They further allege that Delta Air Lines, Inc.
submitted a proposal to purchase the Company which, in the
plaintiffs' opinion, was superior to the Northwest Transaction.
The Stockholder Litigation seeks, inter alia, to enjoin the
Northwest Transaction and the award of unspecified damages to the
plaintiffs.
While there can be no assurance that the Stockholder Litigation
will not result in a delay in the implementation of any aspect of
the Northwest Transaction, or the enjoining of the Northwest
Transaction, the Company believes the Stockholder Litigation to be
without merit and intends to defend it vigorously.
General
Various other claims and lawsuits against the Company are pending
that are of the type generally consistent with the Company's
business. The Company cannot at this time reasonably estimate the
possible loss or range of loss that could be experienced if any of
the claims were successful. Typically, such claims and lawsuits
are covered in whole or in part by insurance. The Company does not
believe that the foregoing matters will have a material adverse
effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Continental's common stock trades on the New York Stock Exchange.
The table below shows the high and low sales prices for the
Company's Class A common stock and Class B common stock as reported
on the New York Stock Exchange during 1997 and 1998.
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock
High Low High Low
<S> <C> <C> <C> <C>
1997 First Quarter . . . 33-3/4 27 33-5/8 27
Second Quarter. . . 36-3/4 30-1/8 35-7/8 29-1/2
Third Quarter . . . 41-7/16 34 41-3/8 34
Fourth Quarter. . . 50-1/2 38-1/2 50-3/16 38-5/8
1998 First Quarter . . . 64-1/4 47-3/4 62-1/16 44
Second Quarter. . . 64-1/2 55-3/4 64 54-1/16
Third Quarter . . . 64-3/4 36-1/2 65-1/8 35-3/4
Fourth Quarter. . . 43-5/16 30-7/8 42-13/16 28-7/8
</TABLE>
As of February 17, 1999, there were approximately 2,953 and 15,494
holders of record of Continental's Class A common stock and Class B
common stock, respectively.
The Company has paid no cash dividends on its common stock.
Because management believes it is important to continue
strengthening the Company's balance sheet and liquidity, the
Company has no current intention of paying cash dividends on its
common stock. During 1998, the Company's Board of Directors
authorized the expenditure of up to $300 million to repurchase
shares of the Company's Class A and Class B common stock or
securities convertible into Class B common stock. As of February
17, 1999, the Company has repurchased 4,952,700 Class B common
shares for $240 million. Certain of the Company's credit
agreements and indentures restrict the ability of the Company and
certain of its subsidiaries to pay cash dividends by imposing
minimum unrestricted cash requirements on the Company, limiting the
amount of such dividends when aggregated with certain other
payments or distributions and requiring that the Company comply
with other covenants specified in such instruments.
The Company's Certificate of Incorporation provides that no shares
of capital stock may be voted by or at the direction of persons who
are not United States citizens unless such shares are registered on
a separate stock record. The Company's Bylaws further provide that
no shares will be registered on such separate stock record if the
amount so registered would exceed United States foreign ownership
restrictions. United States law currently requires that no more
than 25% of the voting stock of the Company (or any other domestic
airline) may be owned directly or indirectly by persons who are not
citizens of the United States.<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The table on the following page sets forth certain consolidated
financial data of the Company at December 31, 1998, 1997, 1996,
1995 and 1994 and for each of the five years in the period ended
December 31, 1998.
<PAGE>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA (Continued)
<CAPTION>
December 31, (1)(2)
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Operating revenue. . . . . . $7,951 $7,213 $6,360 $5,825 $5,670
Operating income (loss). . . 701 716 525 385 (11)
Income (loss) before
extraordinary charge . . . 387 389 325 224 (613)
Net income (loss). . . . . . 383 385 319 224 (613)
Earnings (loss) per
common share:
Income (loss) before
extraordinary charge . 6.40 6.72 5.87 4.07 (11.88)
Net income (loss). . . . 6.34 6.65 5.75 4.07 (11.88)
Earnings (loss) per common
share assuming dilution:
Income (loss) before
extraordinary charge . 5.06 5.03 4.25 3.37 (11.88)
Net income (loss). . . . 5.02 4.99 4.17 3.37 (11.88)
</TABLE>
<PAGE>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA (Continued)
<CAPTION>
December 31, (1)
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Total assets . . . . . . . . . . . $7,086 $5,830 $5,206 $4,821 $4,601
Debt and capital lease obligations
in default (3) . . . . . . . . . - - - - 490
Long-term debt and capital lease
obligations. . . . . . . . . . . 2,480 1,568 1,624 1,658 1,202
Minority interest (4). . . . . . . - - 15 27 26
Continental-Obligated Mandatorily
Redeemable Preferred Securities
of Subsidiary Trust holding
solely Convertible Subordinated
Debentures (5) . . . . . . . . . 111 242 242 242 -
Redeemable preferred stock (6) . . - - 46 41 53
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(1) See Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Results of Operations" for a discussion of significant transactions in
1998, 1997, 1996 and 1995. 1998 results include a $122 million fleet disposition/
impairment charge resulting from the Company's decision to accelerate the retirement of
certain jet and turboprop aircraft. 1996 results include a $128 million fleet
disposition charge associated with the Company's decision to accelerate the replacement
of its DC-9-30, DC-10-10, 727-200, 737-100 and 737-200 aircraft. 1995 results include
a $108 million gain ($30 million after taxes) from the System One transactions. 1994
results include a provision of $447 million associated with the planned early retirement
of certain aircraft and closed or underutilized airport and maintenance facilities and
other assets.
(2) No cash dividends were paid on common stock during the periods shown.
(3) The Company's failure to make certain required payments in 1994 to certain lenders and
aircraft lessors constituted events of default under the respective agreements with such
parties. These events of default were cured in 1995.
(4) Continental purchased UMDA's 9% interest in Air Micronesia, Inc. in 1997.
(5) The sole assets of the Continental-Obligated Mandatorily Redeemable Preferred Securities
of Subsidiary Trust ("Trust") are Convertible Subordinated Debentures. In 1998,
approximately $134 million principal amount of such Preferred Securities converted into
shares of Class B common stock, and in January 1999, the remainder of such Preferred
Securities converted into shares of Class B common stock.
(6) Continental redeemed for cash all of the outstanding shares of its Series A 12%
Cumulative Preferred Stock in 1997.
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion may contain forward-looking statements.
In connection therewith, please see the cautionary statements
contained in Item 1. "Business - Risk Factors Relating to the
Company" and "Business - Risk Factors Relating to the Airline
Industry" which identify important factors that could cause actual
results to differ materially from those in the forward-looking
statements. Hereinafter, the terms "Continental" and the "Company"
refer to Continental Airlines, Inc. and its subsidiaries, unless
the context indicates otherwise.
Continental's results of operations are impacted by seasonality
(the second and third quarters are generally stronger than the
first and fourth quarters) as well as numerous other factors that
are not necessarily seasonal, including the extent and nature of
competition from other airlines, fare sale activities, excise and
similar taxes, changing levels of operations, fuel prices, foreign
currency exchange rates and general economic conditions. To date,
the recent turmoil in the world's financial markets has not had a
material adverse impact on the Company's results of operations,
although the Company has experienced yield degradations in domestic
and certain international markets. Although the results in Asia of
Continental Micronesia, Inc. ("CMI"), a wholly owned subsidiary of
the Company, have declined in recent years, the Company
successfully redeployed CMI capacity into stronger domestic markets
and CMI's recent results have improved. In addition, the Company
believes it is well positioned to respond to market conditions in
the event of a sustained economic downturn for the following
reasons: underdeveloped hubs with strong local traffic; a flexible
fleet plan; a strong cash balance, a $225 million unused revolving
credit facility and a well developed alliance network.
Results of Operations
The following discussion provides an analysis of the Company's
results of operations and reasons for material changes therein for
the three years ended December 31, 1998.
Comparison of 1998 to 1997. The Company recorded consolidated net
income of $383 million and $385 million for the years ended
December 31, 1998 and 1997 (including special charges),
respectively. Net income in 1998 was significantly impacted by a
$77 million ($122 million before taxes) fleet
disposition/impairment loss resulting from the Company's decision
to accelerate the retirement of certain jet and turboprop aircraft.
Management believes that the Company benefitted in the first
quarter of 1997 from the expiration of the aviation trust fund tax
(the "ticket tax"). The ticket tax was reinstated on March 7,
1997. Management believes that the ticket tax has a negative
impact on the Company, although neither the amount of such negative
impact directly resulting from the reimposition of the ticket tax,
nor the benefit realized by its previous expiration, can be
precisely determined.
Passenger revenue increased 10.6%, $706 million, during 1998 as
compared to 1997. The increase was due to a 12.5% increase in
revenue passenger miles, partially offset by a 2.6% decrease in
yield. The decrease in yield was due to lower industry-wide fare
levels and an 8% increase in average stage length.
Cargo and mail increased 6.6%, $17 million, due to an increase in
freight revenue resulting from strong international volumes and
strong growth in Continental's express delivery service.
Other operating revenue increased 5.1%, $15 million, due to an
increase in revenue related to the Company's frequent flyer program
("OnePass").
Wages, salaries and related costs increased 22.3%, $404 million,
during 1998 as compared to 1997, primarily due to an 11.2% increase
in average full-time equivalent employees to support increased
flying and higher wage rates resulting from the Company's decision
to increase employee wages to industry standards by the year 2000.
Aircraft fuel expense decreased 17.9%, $158 million, in 1998 as
compared to the prior year. The average price per gallon decreased
25.6% from 62.91 cents in 1997 to 46.83 cents in 1998. This
reduction was partially offset by a 9.6% increase in the quantity
of jet fuel used principally reflecting increased capacity.
Aircraft rentals increased 19.6%, $108 million, during 1998 as
compared to 1997, due primarily to the delivery of new leased
aircraft.
Maintenance, materials and repairs increased 8.4%, $45 million,
during 1998 as compared to 1997. Aircraft maintenance expense in
the second quarter of 1997 was reduced by $16 million due to the
reversal of reserves that were no longer required as a result of
the acquisition of 10 aircraft previously leased by the Company.
In addition, maintenance expense increased due to the overall
increase in flight operations offset by newer aircraft and the
volume and timing of engine overhauls as part of the Company's
ongoing maintenance program.
Depreciation and amortization expense increased 15.7%, $40 million,
in 1998 compared to 1997 primarily due to the addition of new
aircraft and related spare parts. These increases were partially
offset by an approximate $18 million reduction in the amortization
of reorganization value in excess of amounts allocable to
identifiable assets and routes, gates and slots resulting from the
recognition of previously unbenefitted net operating losses
("NOLs").
On August 11, 1998, Continental announced that CMI plans to
accelerate the retirement of its four Boeing 747 aircraft by April
1999 and its remaining thirteen Boeing 727 aircraft by December
2000. The Boeing 747s will be replaced by DC-10-30 aircraft and
the Boeing 727 aircraft will be replaced with a reduced number of
Boeing 737 aircraft. In addition, Continental Express, Inc.
("Express"), a wholly owned subsidiary of the Company, will
accelerate the retirement of certain turboprop aircraft by December
2000, including its fleet of 32 Embraer 120 ("EMB-120") turboprop
aircraft, as regional jets are acquired to replace turboprops. As
a result of its decision to accelerate the retirement of these
aircraft, Continental recorded a fleet disposition/impairment loss
of $77 million ($122 million before taxes) in the third quarter of
1998.
Other operating expense increased 10.5%, $157 million, in 1998 as
compared to the prior year, primarily as a result of increases in
passenger and aircraft servicing expense, reservations and sales
expense and other miscellaneous expense, primarily due to the 10.6%
increase in available seat miles.
Interest expense increased 7.2%, $12 million, due to an increase in
long-term debt resulting from the purchase of new aircraft.
Interest capitalized increased 57.1%, $20 million, due to increased
capital spending and a higher average balance of purchase deposits
for flight equipment.
The Company's other nonoperating income (expense) in 1998 included
a $6 million gain on the sale of America West Holdings Corporation
("America West Holdings") stock.
Comparison of 1997 to 1996. The Company recorded consolidated net
income of $385 million and $319 million for the years ended
December 31, 1997 and 1996, respectively, including a $77 million
fleet disposition loss ($128 million before taxes) in 1996 and
after-tax extraordinary charges relating to the early
extinguishment of debt of $4 million and $6 million in 1997 and
1996, respectively. Management believes that the Company
benefitted in the first three quarters of 1996 and in the first
quarter of 1997 from the expiration of the ticket tax on December
31, 1995 and December 31, 1996, respectively. The ticket tax was
reinstated on August 27, 1996 and again on March 7, 1997.
Management believes that the ticket tax has a negative impact on
the Company, although neither the amount of such negative impact
directly resulting from the reimposition of the ticket tax, nor the
benefit realized by its expiration, can be precisely determined.
Additionally, the Company benefitted in the first six months of
1996 from the recognition of previously unbenefitted post-
reorganization NOLs.
Passenger revenue increased 13.4%, $789 million, during 1997
compared to 1996. The increase was due to a 14.3% increase in
revenue passenger miles on capacity growth of 9.9% offset by a 1.1%
decrease in yield.
Cargo and mail revenue increased 11.2%, $26 million, during 1997
compared to 1996 due to an increase in cargo capacity and mail
volumes, primarily in international markets.
<PAGE>
Other operating revenue increased 14.8%, $38 million, from 1996 to
1997 primarily as a result of an increase in revenue related to
frequent flyer mileage credits sold to participating partners in
the OnePass program.
Wages, salaries and related costs increased 17.1%, $265 million,
during 1997 as compared to 1996 due in part to a 9.6% increase in
the average number of full-time equivalent employees from
approximately 34,300 for the year ended December 31, 1996 to 37,600
for the year ended December 31, 1997. Wages and salaries also
increased in 1997 due to a $29 million accrual for the impact of
the tentative collective bargaining agreement with the pilots and
an increase in employee incentives of $29 million.
Aircraft fuel expense increased 14.3%, $111 million, from 1996 to
1997 primarily due to a 10.5% increase in the quantity of jet fuel
used from 1.228 billion gallons during 1996 to 1.357 billion
gallons during 1997, resulting from increased flying. In addition,
the average price per gallon, net of fuel hedging gains of $65
million in 1996, increased 3.3% from 60.9 cents in 1996 to
62.9 cents in 1997.
Aircraft rentals increased 8.3%, $42 million, from 1996 to 1997,
primarily as a result of the delivery of new aircraft throughout
1997, net of retirements.
Commissions expense increased 11.2%, $57 million, in 1997 compared
to 1996, primarily due to increased passenger revenue.
Maintenance, materials and repairs increased 16.5%, $76 million,
during 1997 as compared to 1996, principally due to the volume and
timing of engine overhauls, increase in component costs and routine
maintenance as part of the Company's ongoing maintenance program.
Aircraft maintenance expense was reduced by $16 million in 1997 due
to the reversal of reserves that are no longer required as a result
of the acquisition of 10 aircraft previously leased by the Company.
Other rentals and landing fees increased 12.9%, $45 million, during
1997 compared to 1996 due to higher facilities rentals and landing
fees resulting from increased operations.
During the third quarter of 1996, the Company recorded a fleet
disposition loss of $77 million ($128 million before taxes),
related primarily to (i) the writedown of Stage 2 aircraft
inventory to its estimated fair value; and (ii) a provision for
costs associated with the return of leased aircraft at the end of
their respective lease terms.
Other operating expense increased 14.9%, $194 million, in 1997 as
compared to 1996, primarily as a result of increases in passenger
services, advertising and publicity, reservations and sales expense
and other miscellaneous expense.
<PAGE>
Interest income increased 30.2%, $13 million, in 1997 compared to
the prior year principally due to an increase in the average
invested balance of cash and cash equivalents.
Interest capitalized increased $30 million in 1997 compared to 1996
as a result of higher average purchase deposits for flight
equipment resulting from the pending acquisition of new aircraft.
Other nonoperating income (expense) for the year ended December 31,
1996 included an $18 million gain related to the sale of America
West Holdings common stock and warrants.
The income tax provision for the year ended December 31, 1997 and
1996 of $237 million and $86 million, respectively, consists of
federal, state and foreign income taxes. During the second quarter
of 1996, the Company had fully utilized previously unbenefitted
post-reorganization NOLs, and began accruing income tax expense.
<PAGE>
Certain Statistical Information
An analysis of statistical information for Continental's jet
operations, excluding regional jets operated by Express, for each
of the three years in the period ended December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
Net Increase/ Net Increase/
(Decrease) (Decrease)
1998 1998-1997 1997 1997-1996 1996
<S> <C> <C> <C> <C> <C>
Revenue pas-
senger miles
(millions) (1) . 53,910 12.5 % 47,906 14.3 % 41,914
Available seat
miles
(millions) (2) . 74,727 10.6 % 67,576 9.9 % 61,515
Passenger load
factor (3) . . . 72.1% 1.2 pts. 70.9% 2.8 pts. 68.1%
Breakeven pas-
senger load
factor (4), (5). 61.4% 1.4 pts. 60.0% (0.7)pts. 60.7%
Passenger revenue
per available
seat mile
(cents). . . . . 9.10 (1.0)% 9.19 2.9 % 8.93
Total revenue per
available seat
mile (cents) . . 9.98 (1.1)% 10.09 3.0 % 9.80
Operating cost
per available
seat mile
(cents) (5). . . 8.93 (1.5)% 9.07 3.4 % 8.77
Average yield
per revenue
passenger mile
(cents) (6). . . 12.62 (2.6)% 12.96 (1.1)% 13.10
Average fare per
revenue
passenger. . . . $155.95 3.53% $150.63 5.1 % $143.27
Revenue passengers
(thousands). . . 43,625 5.9 % 41,210 7.5 % 38,332
Average length of
aircraft flight
(miles). . . . . 1,044 8.0 % 967 7.9 % 896
Average daily
utilization of
each aircraft
(hours) (7). . . 10:13 0.0 % 10:13 2.3 % 9:59
Actual aircraft
in fleet at end
of period (8). . 363 7.7 % 337 6.3 % 317
</TABLE>
<PAGE>
_______________
Continental has entered into block space arrangements with certain
other carriers whereby one or both of the carriers is obligated to
purchase capacity on the other. The table above excludes 1.9
billion and 738 million available seat miles, together with related
revenue passenger miles and enplanements, operated by Continental
but purchased and marketed by the other carrier in 1998 and 1997,
respectively, and includes 358 million available seat miles,
together with related revenue passenger miles and enplanements,
operated by other carriers but purchased and marketed by
Continental in 1998.
(1) The number of scheduled miles flown by revenue passengers.
(2) The number of seats available for passengers multiplied by
the number of scheduled miles those seats are flown.
(3) Revenue passenger miles divided by available seat miles.
(4) 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.
(5) 1998 excludes a fleet disposition/impairment loss totaling
$122 million and 1996 excludes a fleet disposition loss
totaling $128 million.
(6) The average revenue received for each mile a revenue
passenger is carried.
(7) The average number of hours per day that an aircraft flown in
revenue service is operated (from gate departure to gate
arrival).
(8) Excludes all-cargo 727 aircraft (six in 1998 and 1997 and
four in 1996) at CMI.
Liquidity and Capital Resources
During 1998 and early 1999, the Company completed a number of
transactions intended to strengthen its long-term financial
position and enhance earnings:
- - In February 1998, the Company completed an offering of $773
million of pass-through certificates used to finance (through
either leveraged leases or secured debt financings) the debt
portion of the acquisition cost of 24 aircraft delivered from
February 1998 through December 1998.
- - During the first quarter of 1998, Continental completed several
offerings totaling approximately $98 million aggregate principal
amount of tax-exempt special facilities revenue bonds to finance
or refinance certain airport facility projects. These bonds are
payable solely from rentals paid by Continental under long-term
lease agreements with the respective governing bodies.
- - In April 1998, the Company completed an offering of $187 million
of pass-through certificates used to refinance the debt related
to 14 aircraft currently owned by Continental.
- - During the fourth quarter of 1998, the Company completed an
offering of $524 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 up to 14
aircraft scheduled to be delivered from December 1998 through May
1999.
- - In November 1998, the Company exercised its right and called for
redemption approximately half of its outstanding 8-1/2%
Convertible Trust Originated Preferred Securities ("TOPrS"). The
TOPrS were convertible into shares of Class B common stock at a
conversion price of $24.18 per share of Class B common stock. As
a result of the call for redemption, 2,688,173 TOPrS were
converted into 5,558,649 shares of Class B common stock. In
December 1998, the Company called for redemption the remaining
outstanding TOPrS. As a result of the second call, the remaining
2,298,327 TOPrS were converted into 4,752,522 shares of Class B
common stock during January 1999.
- - In December 1998, the Company sold $200 million principal amount
of 8% unsecured senior notes due in December 2005. The proceeds
will be used for general corporate purposes.
- - In February 1999, the Company completed an offering of $806
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 up to 22 aircraft
scheduled to be delivered from March 1999 through September 1999.
At the direction of an independent trustee, the cash proceeds from
the pass-through certificate transactions are deposited with an
escrow agent and enable the Company to finance (through either
leveraged leases or secured debt financings) the debt portion of
the acquisition cost of new aircraft. As of February 8, 1999,
approximately $1.1 billion of the proceeds remain on deposit. If
any funds remain as deposits at the end of the specified delivery
periods, such funds will be distributed back to the certificate
holders.
As of December 31, 1998, Continental had approximately $2.7 billion
(including current maturities) of long-term debt and capital lease
obligations, and had approximately $1.3 billion of Continental-
obligated mandatorily redeemable preferred securities of subsidiary
trust and common stockholders' equity, a ratio of 2.1 to 1,
compared to 1.6 to 1 at December 31, 1997.
As of December 31, 1998, the Company had $1.4 billion in cash and
cash equivalents (excluding restricted cash), compared to $1.0
billion as of December 31, 1997. Net cash provided by operating
activities decreased $80 million during the year ended December 31,
1998 compared to the same period in the prior year primarily due to
an increase in accounts receivable due to increased operations.
Net cash used by investing activities for the year ended December
31, 1998 compared to the same period in the prior year increased
$41 million, primarily as a result of higher capital and fleet-
related expenditures in 1998 offset by higher purchase deposits
refunded in connection with aircraft delivered in 1998. Net cash
provided by financing activities increased $474 million primarily
due to a decrease in payments on long-term debt and capital lease
obligations and an increase in proceeds received from the issuance
of long-term debt.
Continental has lines of credit totaling $225 million, and
significant encumbered assets.
Deferred Tax Assets. During the first quarter of 1998, the Company
consummated several transactions, the benefit of which resulted in
the elimination of reorganization value in excess of amounts
allocable to identifiable assets of $164 million. During the third
and fourth quarters of 1998, the Company determined that additional
NOLs of the Company's predecessor could be benefited and
accordingly reduced both the valuation allowance and routes, gates
and slots by $190 million. 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 further reduce routes,
gates and slots. As of December 31, 1998, the Company had deferred
tax assets aggregating $803 million, including $372 million of
NOLs, and a valuation allowance of $263 million.
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 $1.1 billion of taxable income
following December 31, 1998. Section 382 of the Internal Revenue
Code ("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. 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 at the time of the ownership change by the
applicable long-term tax exempt rate (which was 4.71% for February
1999). Any 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 annual NOL
utilization would be limited to approximately $102 million per year
other than through the recognition of future built-in gain
transactions.
On November 20, 1998, an affiliate of Northwest Airlines, Inc.
("Northwest") completed its acquisition of certain equity of the
Company previously held by Air Partners, L.P. ("Air Partners") and
its affiliates, together with certain Class A common stock of the
Company held by certain other investors, totaling 8,661,224 shares
of the Class A common stock (the "Air Partners Transaction").
Based on information currently available, the Company does not
believe that the Air Partners transaction resulted in an ownership
change for purposes of Section 382.
Purchase Commitments. Continental has substantial commitments for
capital expenditures, including for the acquisition of new
aircraft. As of February 8, 1999, Continental had agreed to
acquire a total of 109 Boeing jet aircraft through 2005. The
Company anticipates taking delivery of 57 Boeing jet aircraft in
1999. Continental also has options for an additional 114 aircraft
(exercisable subject to certain conditions). The estimated
aggregate cost of the Company's firm commitments for Boeing
aircraft is approximately $5.4 billion. Continental currently
plans to finance its new Boeing aircraft with a combination of
enhanced pass through trust certificates, lease equity and other
third party financing, subject to availability and market
conditions. As of February 8, 1999, Continental had approximately
$1.1 billion in financing arranged for such future Boeing
deliveries. In addition, Continental has commitments or letters of
intent for backstop financing for approximately one-third of the
anticipated remaining acquisition cost of such Boeing deliveries.
In addition, at February 8, 1999, Continental has firm commitments
to purchase 32 spare engines related to the new Boeing aircraft for
approximately $167 million which will be deliverable through
December 2004. Additional financing will be needed to satisfy the
Company's capital commitments for other aircraft and aircraft-
related expenditures such as engines, spare parts, simulators and
related items. There can be no assurance that sufficient financing
will be available for all aircraft and other capital expenditures
not covered by firm financing commitments. Deliveries of new
Boeing aircraft are expected to increase aircraft rental,
depreciation and interest costs while generating cost savings in
the areas of maintenance, fuel and pilot training.
As of February 8, 1999, Express had firm commitments for 37 Embraer
ERJ-145 ("ERJ-145") regional jets and 25 Embraer ERJ-135 ("ERJ-
135") regional jets, with options for an additional 125 ERJ-145 and
50 ERJ-135 aircraft exercisable through 2008. Express anticipates
taking delivery of 19 ERJ-145 and six ERJ-135 regional jets in
1999. Neither Express nor Continental will have any obligation to
take any of the firm ERJ-145 aircraft that are not financed by a
third party and leased to Continental.
Continental expects its cash outlays for 1999 capital expenditures,
exclusive of fleet plan requirements, to aggregate $254 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 1998
aggregated $179 million, exclusive of fleet plan requirements.
The Company expects to fund its 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.
Year 2000 and Euro. The Year 2000 issue arises as a result of
computer programs having been written using two digits (rather than
four) to define the applicable year, among other problems. Any
information technology ("IT") systems that have time-sensitive
software might recognize a date using "00" as the year 1900 rather
than the year 2000, which could result in miscalculations and
system failures. The problem also extends to many "non-IT"
systems; that is, operating and control systems that rely on
embedded chip systems. In addition, the Company is at risk from
Year 2000 failures on the part of third party-suppliers and
governmental agencies with which the Company interacts.
The Company uses a significant number of computer software programs
and embedded operating systems that are essential to its
operations. For this reason, the Company implemented a Year 2000
project in late 1996 so that the Company's computer systems would
function properly in the year 2000 and thereafter. The Company's
Year 2000 project involves the review of a number of internal and
third-party systems. Each system is subjected to the project's
five phases which consist of systems inventory, evaluation and
analysis, modification implementation, user testing and integration
compliance. The systems are currently in various stages of
completion. The Company anticipates completing its review of
systems in the second quarter of 1999 and believes that, with
modifications to its existing software and systems and/or
conversions to new software, the Year 2000 issue will not pose
significant operational problems for its computer systems.
The Company has also initiated communications and on-site visits
with its significant suppliers, vendors and governmental agencies
with which its systems interface and exchange data or upon which
its business depends. The Company is coordinating efforts with
these parties to minimize the extent to which its business may be
vulnerable to their failure to remediate their own Year 2000
problems. The Company's business is dependent upon certain
domestic and foreign governmental organizations or entities such as
the Federal Aviation Administration ("FAA") that provide essential
aviation industry infrastructure. There can be no assurance that
the systems of such third parties on which the Company's business
relies (including those of the FAA) will be modified on a timely
basis. The Company's business, financial condition or results of
operations could be materially adversely affected by the failure of
its equipment or systems or those operated by other parties to
operate properly beyond 1999. Although the Company currently has
day-to-day operational contingency plans, management is in the
process of updating these plans for possible Year 2000-specific
operational requirements. The Company anticipates completing the
revision of current contingency plans and the creation of
additional contingency plans by September 1999. In addition, the
Company will continue to monitor third-party (including
governmental) readiness and will modify its contingency plans
accordingly. While the Company does not currently expect any
significant modification of its operations in response to the Year
2000 issue, in a worst-case scenario the Company could be required
to alter its operations significantly.
The total cost of the Company's Year 2000 project (excluding
internal payroll) is currently estimated at $16-18 million and has
been and will be funded through cash from operations. As of
December 31, 1998, the Company had incurred and expensed
approximately $15 million relating to its Year 2000 project. The
cost of the Year 2000 project is limited by the substantial
outsourcing of the Company's systems and the significant
implementation of new systems following the Company's emergence
from bankruptcy. The costs of the Company's Year 2000 project and
the date on which the Company believes it will be completed are
based on management's best estimates and include assumptions
regarding third-party modification plans. However, in particular
due to the potential impact of third-party modification plans,
there can be no assurance that these estimates will be achieved and
actual results could differ materially from those anticipated.
Effective January 1, 1999, eleven of the fifteen countries
comprising the European Union began a transition to a single
monetary unit, the "euro", which is scheduled to be completed by
July 1, 2002. The Company has developed processes designed to
allow it to effectively operate in euros. Management does not
anticipate that the implementation of this single currency plan
will have a material effect on the Company's operations or
financial condition.
Bond Financings. In July 1996, the Company announced plans to
expand its gates and related facilities into Terminal B at Bush
Intercontinental Airport, as well as planned improvements at
Terminal C and the construction of a new automated people mover
system linking Terminal B and Terminal C. In April 1997 and
January 1999, the City of Houston completed the offering of $190
million and $46 million, respectively, aggregate principal amount
of tax-exempt special facilities revenue bonds (the "IAH Bonds").
The IAH Bonds are unconditionally guaranteed by Continental. In
connection therewith, the Company has entered into long-term leases
(or amendments to existing leases) with the City of Houston
providing for the Company to make rental payments sufficient to
service the related tax-exempt bonds, which have a term no longer
than 30 years. The majority of the Company's expansion project is
expected to be completed during the summer of 1999.
In 1998, Continental completed construction of a new hangar and
improvements to a cargo facility at Continental's hub at Newark
International Airport ("Newark"). Continental completed the
financing of these projects in April 1998 with $23 million of tax-
exempt bonds issued by the New Jersey Economic Development
Authority. Continental is also planning a major facility expansion
at Newark which would require, among other matters, agreements to
be reached with the applicable airport authority and significant
tax-exempt bond financing for the project.
In 1998, the Company built a wide-body aircraft maintenance hangar
in Honolulu, Hawaii at an approximate cost of $25 million.
Construction of the hangar was financed by tax-exempt special
facilities revenue bonds issued by the State of Hawaii. In
connection therewith, the Company has entered into long-term leases
providing for the Company to make rental payments sufficient to
service the related tax-exempt bonds.
Continental has commenced the expansion of its facilities at its
Hopkins International Airport hub in Cleveland, which expansion is
expected to be completed in the third quarter of 1999. The
expansion, which will include a new jet concourse for the regional
jet service offered by Express, as well as other facility
improvements, is expected to cost approximately $156 million and is
being funded principally by a combination of tax-exempt special
facilities revenue bonds (issued in March 1998) and general airport
revenue bonds (issued in December 1997) by the City of Cleveland.
In connection therewith, Continental has entered into a long-term
lease with the City of Cleveland under which rental payments will
be sufficient to service the related bonds.
Employees. In September 1997, the Company announced a plan to
bring all employees to industry standard wages no later than the
end of the year 2000. Wage increases began in 1997, and will
continue to be phased in through 2000 as revenue, interest rates
and rental rates reach industry standards.
<PAGE>
The following is a table of the Company's, Express's and CMI's
principal collective bargaining agreements, and their respective
amendable dates:
<TABLE>
<CAPTION>
Approximate Contract
Employee Number of Representing Amendable
Group Employees Union Date
<S> <C> <C> <C>
Continental Pilots 5,050 Independent October 2002
Association
of Continental
Pilots
Express Pilots 1,100 Independent October 2002
Association
of Continental
Pilots
Dispatchers 150 Transport Workers October 2003
Union of America
Continental 3,220 International January 2002
Mechanics Brotherhood of
Teamsters
Express 280 International (Negotiations
Mechanics Brotherhood of for initial
Teamsters contract
ongoing)
CMI Mechanics 150 International March 2001
Brotherhood of
Teamsters
Continental 6,925 International December 1999
Flight Attendants Association of
Machinists and
Aerospace Workers
Express 375 International November 1999
Flight Attendants Association of
Machinists and
Aerospace Workers
CMI 450 International June 2000
Flight Attendants Association of
Machinists and
Aerospace Workers
CMI Fleet and 300 International March 2001
Passenger Service Brotherhood of
Employees Teamsters
</TABLE>
The other employees of Continental, Express and CMI are not covered
by collective bargaining agreements.
Other. As a result of the decline of the yen against the dollar,
a weak Japanese economy and increased fuel costs, CMI's operating
earnings declined during 1996 and 1997. Although CMI's results in
Asia have declined significantly in recent years, the Company
successfully redeployed CMI capacity into the stronger domestic
markets and CMI's most recent results have improved.
In addition, the Company has entered into petroleum call option
contracts, petroleum swap contracts and jet fuel purchase
commitments to provide some short-term protection (generally three
to six months) against a sharp increase in jet fuel prices, and has
entered into forward contracts and purchased foreign currency
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.
During 1998, Continental began block-space arrangements whereby it
is committed to purchase capacity on other carriers at an aggregate
cost of approximately $ 150 million per year. These arrangements
are for 10 years. Pursuant to other block-space arrangements,
other carriers are committed to purchase capacity at a cost of
approximately $100 million on Continental.
Management believes that the Company's costs are likely to be
affected in the future by (i) higher aircraft rental expense as new
aircraft are delivered, (ii) higher wages, salaries and related
costs as the Company compensates its employees comparable to
industry average, (iii) changes in the costs of materials and
services (in particular, the cost of fuel, which can fluctuate
significantly in response to global market conditions),
(iv) changes in governmental regulations and taxes affecting air
transportation and the costs charged for airport access, including
new security requirements, (v) changes in the Company's fleet and
related capacity and (vi) the Company's continuing efforts to
reduce costs throughout its operations, including reduced
maintenance costs for new aircraft, reduced distribution expense
from using Continental's electronic ticket product, E-Ticket and
the Internet for bookings, and reduced interest expense.
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Market Risk Sensitive Instruments and Positions
The Company is subject to certain market risks, including commodity
price risk (i.e., aircraft fuel prices), interest rate risk,
foreign currency risk and price changes related to investments in
equity securities. The adverse effects of potential changes in
these market risks are discussed below. The sensitivity analyses
presented do not consider the effects that such adverse changes may
have on overall economic activity nor do they consider additional
actions management may take to mitigate the Company's exposure to
such changes. Actual results may differ. See the notes to the
consolidated financial statements for a description of the
Company's accounting policies and other information related to
these financial instruments.
Aircraft Fuel. The Company's results of operations are
significantly impacted by changes in the price of aircraft fuel.
During 1998, aircraft fuel accounted for 10.2% of the Company's
operating expenses (excluding fleet disposition/impairment loss).
Based on the Company's 1999 projected fuel consumption, a one cent
change in the average annual price per gallon of aircraft fuel
would impact the Company's annual aircraft fuel expense by
approximately $12 million, after the effect of hedging instruments
and jet fuel purchase commitments in place as of December 31, 1998.
In order to provide short-term protection (generally three to six
months), the Company has entered into petroleum call options,
petroleum swap contracts and jet fuel purchase commitments. The
Company's fuel hedging strategy could result in the Company not
fully benefiting from certain fuel price declines. As of December
31, 1998, the Company had hedged approximately 25% of its projected
1999 fuel requirements, including 93% related to the first quarter
and 9% related to the second quarter using petroleum swap
contracts. The Company estimates that at December 31, 1998, a ten
percent change in the price per gallon of aircraft fuel would have
changed the fair value of the existing petroleum swap contracts by
$8 million.
Foreign Currency. The Company is exposed to the effect of exchange
rate fluctuations on the U.S. dollar value of foreign currency
denominated operating revenue and expenses. The Company's largest
exposure comes from the Japanese yen. The result of a uniform 25%
strengthening in the value of the U.S. dollar from December 31,
1998 levels relative to the yen would result in an estimated
decrease in operating income of approximately $13 million for 1999,
after the effect of hedging instruments in place. However, the
Company is attempting to mitigate the effect of certain potential
foreign currency losses by purchasing foreign currency average rate
option contracts and entering into forward contracts that
effectively enable it to sell Japanese yen expected to be received
from yen-denominated ticket sales over the next nine to twelve
months at specified dollar amounts. As of December 31, 1998, the
Company had purchased average rate options and entered into forward
contracts to hedge approximately 100% of its first and second
quarter 1999 projected net yen-denominated cash flows and 75% of
its third quarter 1999 projected net yen-denominated cash flows.
The Company estimates that at December 31, 1998, a 25%
strengthening in the value of the U.S. dollar relative to the yen
would have increased the fair value of the existing average rate
options and forward contracts by $22 million.
Interest Rates. The Company's results of operations are affected
by fluctuations in interest rates (e.g., interest expense on debt
and interest income earned on short-term investments).
The Company had approximately $599 million of variable-rate debt as
of December 31, 1998. The Company has mitigated its exposure on
certain variable-rate debt by entering into an interest rate cap
(notional amount of $125 million as of December 31, 1998) which
expires in July 2001. The interest rate cap limits the amount of
potential increase in the LIBOR rate component of the floating rate
to a maximum of 9% over the term of the contract. If average
interest rates increased by 1.0% during 1999 as compared to 1998,
the Company's projected 1999 interest expense would increase by
approximately $5 million. The interest rate cap does not mitigate
this increase in interest expense materially.
As of December 31, 1998, the fair value of $1.52 billion (carrying
value) of the Company's fixed-rate debt was estimated to be $1.47
billion, based upon discounted future cash flows using current
incremental borrowing rates for similar types of instruments or
market prices. Market risk, estimated as the potential increase in
fair value resulting from a hypothetical 1.0% decrease in interest
rates, was approximately $70 million as of December 31, 1998. The
fair value of the remaining fixed-rate debt (with a carrying value
of $287 million and primarily relating to aircraft modification
notes and various loans with immaterial balances) was not
practicable to estimate due to the large number and small dollar
amounts of these notes.
If 1999 average short-term interest rates decreased by 1.0% over
1998 average rates, the Company's projected interest income from
short-term investments would decrease by approximately $13 million
during 1999.
Investments in Equity Securities. Continental's investment in
America West Holdings at December 31, 1998, which was recorded at
its fair value of $3 million and includes unrealized gains of $1
million, has exposure to price risk. This risk is estimated as the
potential loss in fair value resulting from a hypothetical 10%
adverse change in prices quoted by stock exchanges and amounts to
less than $1 million.
The Company also has a 12.4% investment in AMADEUS Global Travel
Distribution S.A. ("AMADEUS") and a 49% equity investment in
Compania Panamena de Aviacion, S.A. ("COPA") which are also subject
to price risk. However, since a readily determinable market value
does not exist for either AMADEUS or COPA (each is privately held),
the Company is unable to quantify the amount of price risk
sensitivity inherent in these investments. At December 31, 1998,
the carrying value of these investments was $95 million and $53
million, respectively. At December 31, 1997, the carrying value of
AMADEUS was $95 million.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
Index to Consolidated Financial Statements
<CAPTION>
Page No.
<S> <C>
Report of Independent Auditors F-2
Consolidated Statements of Operations for each of the
Three Years in the Period Ended December 31, 1998 F-3
Consolidated Balance Sheets as of December 31, 1998
and 1997 F-5
Consolidated Statements of Cash Flows for each of the
Three Years in the Period Ended December 31, 1998 F-7
Consolidated Statements of Redeemable Preferred Stock
and Common Stockholders' Equity for each of the
Three Years in the Period Ended December 31, 1998 F-10
Notes to Consolidated Financial Statements F-15
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Continental Airlines, Inc.
We have audited the accompanying consolidated balance sheets of
Continental Airlines, Inc. (the "Company") as of December 31, 1998
and 1997, and the related consolidated statements of operations,
redeemable preferred stock and common stockholders' equity and cash
flows for each of the three years in the period ended December 31,
1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of the Company at December 31, 1998 and 1997,
and the consolidated results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998,
in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
January 20, 1999
<PAGE>
<TABLE>
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Operating Revenue:
Passenger. . . . . . . . . . . . . . . . $7,366 $6,660 $5,871
Cargo and mail . . . . . . . . . . . . . 275 258 232
Other. . . . . . . . . . . . . . . . . . 310 295 257
7,951 7,213 6,360
Operating Expenses:
Wages, salaries and related costs. . . . 2,218 1,814 1,549
Aircraft fuel. . . . . . . . . . . . . . 727 885 774
Aircraft rentals . . . . . . . . . . . . 659 551 509
Commissions. . . . . . . . . . . . . . . 583 567 510
Maintenance, materials and repairs . . . 582 537 461
Other rentals and landing fees . . . . . 414 395 350
Depreciation and amortization. . . . . . 294 254 254
Fleet disposition/impairment losses:
Jet . . . . . . . . . . . . . . . . . . 65 - 128
Turboprop . . . . . . . . . . . . . . . 57 - -
Other. . . . . . . . . . . . . . . . . . 1,651 1,494 1,300
7,250 6,497 5,835
Operating Income 701 716 525
Nonoperating Income (Expense):
Interest expense . . . . . . . . . . . . (178) (166) (165)
Interest income. . . . . . . . . . . . . 59 56 43
Interest capitalized . . . . . . . . . . 55 35 5
Other, net . . . . . . . . . . . . . . . 11 (1) 20
(53) (76) (97)
Income before Income Taxes, Minority
Interest and Extraordinary Charge. . . . 648 640 428
Income Tax Provision. . . . . . . . . . . (248) (237) (86)
</TABLE>
(continued on next page)
<PAGE>
<TABLE>
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Income before Minority Interest
and Extraordinary Charge . . . . . . . . $ 400 $ 403 $ 342
Minority Interest . . . . . . . . . . . . - - (3)
Distributions on Preferred Securities
of Trust, net of applicable income taxes
of $7, $8 and $8, respectively . . . . . (13) (14) (14)
Income before Extraordinary Charge. . . . 387 389 325
Extraordinary Charge, net of applicable
income taxes of $2, $2 and $4,
respectively . . . . . . . . . . . . . . (4) (4) (6)
Net Income. . . . . . . . . . . . . . . . 383 385 319
Preferred Dividend Requirements and
Accretion to Liquidation Value . . . . . - (2) (5)
Income Applicable to Common Shares. . . . $ 383 $ 383 $ 314
Earnings per Common Share:
Income before Extraordinary Charge. . . $ 6.40 $ 6.72 $ 5.87
Extraordinary Charge. . . . . . . . . . (0.06) (0.07) (0.12)
Net Income. . . . . . . . . . . . . . . $ 6.34 $ 6.65 $ 5.75
Earnings per Common Share Assuming
Dilution:
Income before Extraordinary Charge. . . $ 5.06 $ 5.03 $ 4.25
Extraordinary Charge. . . . . . . . . . (0.04) (0.04) (0.08)
Net Income. . . . . . . . . . . . . . . $ 5.02 $ 4.99 $ 4.17
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
<PAGE>
<TABLE>
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for share data)
<CAPTION>
December 31, December 31,
ASSETS 1998 1997
<S> <C> <C>
Current Assets:
Cash and cash equivalents, including
restricted cash and cash equivalents
of $11 and $15, respectively. . . . . . $1,399 $1,025
Accounts receivable, net of allowance
for doubtful receivables of $22 and
$23, respectively . . . . . . . . . . . 449 361
Spare parts and supplies, net of
allowance for obsolescence of $46 and
$51, respectively . . . . . . . . . . . 166 128
Deferred income taxes. . . . . . . . . . 234 111
Prepayments and other assets . . . . . . 106 103
Total current assets . . . . . . . . . 2,354 1,728
Property and Equipment:
Owned property and equipment:
Flight equipment. . . . . . . . . . . . 2,459 1,636
Other . . . . . . . . . . . . . . . . . 582 456
3,041 2,092
Less: Accumulated depreciation . . . . 625 473
2,416 1,619
Purchase deposits for flight equipment . 410 437
Capital leases:
Flight equipment. . . . . . . . . . . . 361 274
Other . . . . . . . . . . . . . . . . . 56 40
417 314
Less: Accumulated amortization . . . . 178 145
239 169
Total property and equipment . . . . . 3,065 2,225
Other Assets:
Routes, gates and slots, net of
accumulated amortization
of $283 and $270, respectively. . . . . 1,181 1,425
Reorganization value in excess of
amounts allocable to identifiable
assets, net of accumulated amortization
of $71 in 1997. . . . . . . . . . . . . - 164
Investments. . . . . . . . . . . . . . . 151 104
Other assets, net. . . . . . . . . . . . 335 184
Total other assets . . . . . . . . . . 1,667 1,877
Total Assets . . . . . . . . . . . . $7,086 $5,830
</TABLE>
(continued on next page)
<PAGE>
<TABLE>
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for share data)
<CAPTION>
December 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt . . $ 184 $ 243
Current maturities of capital leases . . 47 40
Accounts payable . . . . . . . . . . . . 843 781
Air traffic liability. . . . . . . . . . 854 746
Accrued payroll and pensions . . . . . . 265158
Accrued other liabilities. . . . . . . . 249 317
Total current liabilities . . . . . . . 2,442 2,285
Long-Term Debt. . . . . . . . . . . . . . 2,267 1,426
Capital Leases. . . . . . . . . . . . . . 213 142
Deferred Credits and Other Long-Term
Liabilities:
Deferred income taxes. . . . . . . . . . 372 435
Accruals for aircraft retirements and
excess facilities . . . . . . . . . . . 95 123
Other. . . . . . . . . . . . . . . . . . 393 261
Total deferred credits and other
long-term liabilities. . . . . . . . . 860 819
Commitments and Contingencies
Continental-Obligated Mandatorily
Redeemable Preferred Securities
of Subsidiary Trust Holding Solely
Convertible Subordinated
Debentures (1) . . . . . . . . . . . . . 111 242
Common Stockholders' Equity:
Class A common stock - $.01 par,
50,000,000 shares authorized;
11,406,732 shares issued and out-
standing in 1998 and 8,379,464
shares issued and outstanding
in 1997 . . . . . . . . . . . . . . . . - -
Class B common stock - $.01 par,
200,000,000 shares authorized;
53,370,741 shares issued in 1998
and 50,512,010 shares issued and
outstanding in 1997 . . . . . . . . . . 1 1
Additional paid-in capital . . . . . . . 634 641
Retained earnings. . . . . . . . . . . . 659 276
Accumulated other comprehensive income . (88) (2)
Treasury Stock - 399,524 Class B
shares in 1998, at cost . . . . . . . . (13) -
Total common stockholders' equity . . . 1,193 916
Total Liabilities and Stockholders'
Equity . . . . . . . . . . . . . . . $7,086 $5,830
</TABLE>
(1) The sole assets of the Trust were convertible subordinated
debentures. At December 31, 1998 and 1997, the debentures had an
aggregate principal amount of $115 and $249 million, respectively,
bore interest at the rate of 8-1/2% per annum and were to mature on
December 1, 2020. In November and December 1998, approximately
$134 million of such securities converted into 5,558,649 shares of
Class B common stock, and in January 1999, the remainder of such
securities were converted into 4,752,522 shares of Class B common
stock.
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
<PAGE>
<TABLE>
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Cash Flows From Operating
Activities:
Net income . . . . . . . . . . . . . . . $ 383 $ 385 $ 319
Adjustments to reconcile net income
to net cash provided by operating
activities:
Deferred income taxes. . . . . . . . . 241 212 72
Depreciation . . . . . . . . . . . . . 211 162 153
Fleet disposition/impairment losses. . 122 - 128
Amortization . . . . . . . . . . . . . 83 92 101
Other, net . . . . . . . . . . . . . . (4) 34 11
Changes in operating assets and
liabilities:
Increase in air traffic liability. . 108 85 82
Increase in accounts receivable. . . (102) (1) (42)
Increase in spare parts and
supplies. . . . . . . . . . . . . . (71) (38) (43)
Increase in accounts payable . . . . 59 71 103
Other. . . . . . . . . . . . . . . . (150) (42) (53)
Net cash provided by operating
activities. . . . . . . . . . . . . . . 880 960 831
Cash Flows from Investing Activities:
Purchase deposits paid in connection
with future aircraft deliveries . . . . (818) (409) (116)
Purchase deposits refunded in
connection with aircraft delivered. . . 758 141 20
Capital expenditures, net of returned
purchase deposits in 1996 . . . . . . . (610) (417) (198)
Investment in partner airline. . . . . . (53) - -
Proceeds from disposition of property
and equipment . . . . . . . . . . . . . 46 29 11
Other. . . . . . . . . . . . . . . . . . (21) (1) 32
Net cash used by investing activities . (698) (657) (251)
</TABLE>
(continued on next page)
<PAGE>
<TABLE>
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Cash Flows From Financing Activities:
Proceeds from issuance of
long-term debt, net . . . . . . . . . . $ 737 $ 517 $ 797
Payments on long-term debt and
capital lease obligations . . . . . . . (423) (676) (975)
Purchase of Class B treasury stock . . . (223) - -
Proceeds from sale-leaseback
transactions. . . . . . . . . . . . . . 71 39 47
Proceeds from issuance of common stock . 56 24 18
Dividends paid on preferred securities
of trust. . . . . . . . . . . . . . . . (22) (22) (22)
Purchase of warrants to purchase
Class B common stock. . . . . . . . . . - (94) (50)
Redemption of preferred stock. . . . . . - (48) -
Other. . . . . . . . . . . . . . . . . . - (18) (13)
Net cash provided (used) by financing
activities . . . . . . . . . . . . . . 196 (278) (198)
</TABLE>
(continued on next page)
<PAGE>
<TABLE>
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Net Increase in Cash and
Cash Equivalents . . . . . . . . . . . . $ 378 $ 25 $ 382
Cash and Cash Equivalents
Beginning of Period (1). . . . . . . . . 1,010 985 603
Cash and Cash Equivalents
End of Period (1). . . . . . . . . . . . $1,388 $1,010 $ 985
Supplemental Cash Flows Information:
Interest paid. . . . . . . . . . . . . . $ 157 $ 156 $ 161
Income taxes paid. . . . . . . . . . . . $ 25 $ 12 $ 4
Financing and Investing Activities
Not Affecting Cash:
Property and equipment acquired
through the issuance of debt . . . . . $ 425 $ 207 $ 119
Conversion of trust originated
preferred securities . . . . . . . . . $ 134 $ - $ -
Capital lease obligations incurred. . . $ 124 $ 22 $ 32
Reduction of capital lease
obligations in connection with
refinanced aircraft. . . . . . . . . . $ - $ 97 $ -
Financed purchase deposits for flight
equipment, net . . . . . . . . . . . . $ - $ 14 $ 19
</TABLE>
(1) Excludes restricted cash of $11 million, $15 million, $76 million
and $144 million at December 31, 1998, 1997, 1996 and 1995,
respectively.
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
<PAGE>
<TABLE>
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED
STOCK AND COMMON STOCKHOLDERS' EQUITY
(In millions)
<CAPTION>
Retained Accumulated
Redeemable Additional Earnings Other Treasury
Preferred Paid-In (Accumulated Comprehensive Comprehensive Stock,
Stock Capital Deficit) Income Income at Cost
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 . . $ 41 $ 723 $ (428) $ 10 $ - $ -
Net Income . . . . . . . . . . - - 319 - 319 -
Purchase of Warrants . . . . . - (50) - - - -
Accumulated Dividends:
Series A 12% Cumulative
Preferred Stock. . . . . . . 5 (5) - - - -
Additional Minimum Pension
Liability, net of applicable
income taxes of $2. . . . . . - - - 6 6 -
Unrealized Gain on Marketable
Equity Securities, net of
applicable income taxes
of $1 . . . . . . . . . . . . - - - 4 4 -
Reclassification to realized
gains . . . . . . . . . . . . - - - (18) - -
Other. . . . . . . . . . . . . - 20 - - - -
Balance, December 31, 1996 . . 46 688 (109) 2 329 -
(continued on next page)
</TABLE>
<PAGE>
<TABLE>
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED
STOCK AND COMMON STOCKHOLDERS' EQUITY
(In millions)
<CAPTION>
Retained Accumulated
Redeemable Additional Earnings Other Treasury
Preferred Paid-In (Accumulated Comprehensive Comprehensive Stock,
Stock Capital Deficit) Income Income at Cost
<S> <C> <C> <C> <C> <C> <C>
Net Income . . . . . . . . . . $ - $ - $ 385 - $385 $ -
Purchase of Warrants . . . . . - (94) - - - -
Accumulated Dividends on
Series A 12% Cumulative
Preferred Stock . . . . . . . 2 (2) - - - -
Redemption of Series A
12% Cumulative Preferred
Stock . . . . . . . . . . . . (48) - - - - -
Additional Minimum Pension
Liability, net of applicable
income taxes of $2. . . . . . - - - (4) (4) -
Other. . . . . . . . . . . . . - 49 - - - -
Balance, December 31, 1997 . . - 641 276 (2) 381 -
(continued on next page)
</TABLE>
<PAGE>
<TABLE>
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED
STOCK AND COMMON STOCKHOLDERS' EQUITY
(In millions)
<CAPTION>
Retained Accumulated
Redeemable Additional Earnings Other Treasury
Preferred Paid-In (Accumulated Comprehensive Comprehensive Stock,
Stock Capital Deficit) Income Income at Cost
<S> <C> <C> <C> <C> <C> <C>
Net Income . . . . . . . . . . $ - $ - $ 383 $ - $383 $ -
Cumulative Effect of
Adopting SFAS 133 (see Note 5)
as of October 1, 1998, net of
applicable income taxes
of $1 . . . . . . . . . . . . - - - 1 1 -
Net loss on derivative
instruments designated and
qualifying as cash flow
hedging instruments, net of
applicable income taxes
of $4 . . . . . . . . . . . . - - - (7) (7) -
Additional Minimum Pension
Liability, net of applicable
income taxes of $41 . . . . . - - - (76) (76) -
Unrealized Gain on Marketable
Equity Securities, net of
applicable income taxes
of $1 . . . . . . . . . . . . - - - (4) (4) -
Purchase of Common Stock . . . - - - - - (223)
Reissuance of Treasury Stock
pursuant to Stock Plans . . . - - - - - 50
Issuance of Common Stock
pursuant to Stock Plans . . . - 9 - - - -
Conversion of Trust Originated
Preferred Securities into
Common Stock. . . . . . . . . - (32) - - - 160
Other. . . . . . . . . . . . . - 16 - - - -
Balance, December 31, 1998 . . - $ 634 $ 659 $ (88) $297 $(13)
</TABLE>
<PAGE>
<TABLE>
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED
STOCK AND COMMON STOCKHOLDERS' EQUITY
NUMBER OF SHARES
<CAPTION>
Redeemable Class A Class B
Preferred Common Common Treasury
Stock Stock Stock Stock
<S> <C> <C> <C> <C>
Balance, December 31, 1995 . . . . . . . 397,948 12,602,112 42,856,548 -
Conversion of Class A to Class B
Common Stock by Air Canada. . . . . . . - (3,322,112) 3,322,112 -
Forfeiture of Restricted Class B
Common Stock. . . . . . . . . . . . . . - - (60,000) 60,000
Purchase of Common Stock . . . . . . . . - - (133,826) 133,826
Reissuance of Treasury Stock . . . . . . - - 193,826 (193,826)
Preferred Stock In-kind Dividend . . . . 49,134 - - -
Issuance of Common Stock pursuant to
Stock Plans and Awards. . . . . . . . . - - 1,764,683 -
Balance, December 31, 1996 . . . . . . . 447,082 9,280,000 47,943,343 -
Conversion of Class A to Class B
Common Stock. . . . . . . . . . . . . . - (900,536) 900,536 -
Purchase of Common Stock . . . . . . . . - - (154,882) 154,882
Reissuance of Treasury Stock pursuant
to Stock Plans. . . . . . . . . . . . . - - 154,882 (154,882)
Issuance of Preferred Stock Dividends
on Series A 12% Cumulative Preferred
Stock . . . . . . . . . . . . . . . . . 13,165 - - -
Redemption of Series A 12% Cumulative
Preferred Stock . . . . . . . . . . . . (460,247) - - -
Issuance of Common Stock pursuant to
Stock Plans . . . . . . . . . . . . . . - - 1,646,419 -
Conversion of Trust Originated
Preferred Securities into
Common Stock. . . . . . . . . . . . . . - - 21,712 -
Balance, December 31, 1997 . . . . . . . - 8,379,464 50,512,010 -
(continued on next page)
</TABLE>
<PAGE>
<TABLE>
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED
STOCK AND COMMON STOCKHOLDERS' EQUITY
NUMBER OF SHARES
<CAPTION>
Redeemable Class A Class B
Preferred Common Common Treasury
Stock Stock Stock Stock
<S> <C> <C> <C> <C>
Purchase of Common Stock . . . . . . . . - - (4,452,700) 4,452,700
Reissuance of Treasury Stock pursuant
to Stock Plans. . . . . . . . . . . . . - - 859,080 (859,080)
Reissuance of Treasury Stock pursuant
to Conversion of Trust Originated
Preferred Securities. . . . . . . . . . - - 3,181,896 (3,181,896)
Conversion of Class A to Class B
Common Stock. . . . . . . . . . . . . . - (12,200) 12,200 (12,200)
Issuance of Common Stock pursuant to
Stock Plans . . . . . . . . . . . . . . - - 235,290 -
Conversion of Trust Originated
Preferred Securities into
Common Stock. . . . . . . . . . . . . . - - 2,376,753 -
Exercise of warrants . . . . . . . . . . - 3,039,468 246,688 -
Balance, December 31, 1998 . . . . . . . - 11,406,732 52,971,217 399,524
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<PAGE>
CONTINENTAL AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continental Airlines, Inc. (the "Company" or "Continental") is a
major United States air carrier engaged in the business of
transporting passengers, cargo and mail. Continental is the fifth
largest United States airline (as measured by 1998 revenue
passenger miles) and, together with its wholly owned subsidiaries,
Continental Express, Inc. ("Express"), and Continental Micronesia,
Inc. ("CMI"), each a Delaware corporation, serves 206 airports
worldwide on December 31, 1998. As of December 31, 1998,
Continental flies to 127 domestic and 79 international destinations
and offers additional connecting service through alliances with
domestic and foreign carriers. Continental directly serves 13
European cities, eight South American cities and is one of the
leading airlines providing service to Mexico and Central America,
serving more destinations there than any other United States
airline. Through its Guam hub, CMI provides extensive service in
the western Pacific, including service to more Japanese cities than
any other United States carrier.
As used in these Notes to Consolidated Financial Statements, the
terms "Continental" and "Company" refer to Continental Airlines,
Inc. and, unless the context indicates otherwise, its subsidiaries.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation -
The consolidated financial statements of the Company include
the accounts of Continental and its operating subsidiaries,
Express and CMI. All significant intercompany transactions
have been eliminated in consolidation.
(b) Use of Estimates -
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
(c) Cash and Cash Equivalents -
Cash and cash equivalents consist of cash and short-term,
highly liquid investments which are readily convertible into
cash and have a maturity of three months or less when
purchased. Approximately $11 million and $15 million of cash
and cash equivalents at December 31, 1998 and 1997,
respectively, were held in restricted arrangements relating
primarily to payments for workers' compensation claims and in
accordance with the terms of certain other agreements.
<PAGE>
(d) Spare Parts and Supplies -
Flight equipment expendable parts and supplies are valued at
average cost. An allowance for obsolescence for flight
equipment expendable parts and supplies is accrued to allocate
the costs of these assets, less an estimated residual value,
over the estimated useful lives of the related aircraft and
engines.
(e) Property and Equipment -
Property and equipment were recorded at fair market values as
of April 27, 1993. Subsequent purchases were recorded at cost
and are depreciated to estimated residual values over their
estimated useful lives using the straight-line method.
Effective January 1, 1998, the Company increased the
depreciable life on certain new generation Boeing aircraft
from 25 to 30 years. The Company also increased the estimated
residual values on certain Stage 3 and new generation Boeing
aircraft from 10% to 15%. All owned turboprop aircraft are
depreciated over an 18-year useful life with an estimated
residual value of 10%. Flight and ground equipment under
capital leases are depreciated on a straight-line method over
the respective original lease terms. Ground property and
equipment, including airport facility improvements, are
depreciated on a straight-line method from 2 to 25 years.
(f) Intangible Assets -
During 1998, the Company determined that it would be able to
recognize additional net operating losses ("NOLs")
attributable to the Company's predecessor as a result of the
completion of several transactions resulting in recognition of
built-in gains for federal income tax purposes. This benefit
was used to reduce to zero reorganization value in excess of
amounts allocable to identifiable assets in the first quarter
of 1998. During the third and fourth quarters of 1998, the
Company determined that additional NOLs of the Company's
predecessor could be benefitted and accordingly reduced the
deferred tax valuation allowance and routes, gates and slots
by $190 million.
<PAGE>
Routes, Gates and Slots
Routes are amortized on a straight-line basis over 40 years,
gates over the stated term of the related lease and slots over
20 years. Routes, gates and slots are comprised of the
following (in millions):
<TABLE>
<CAPTION>
Balance at Accumulated Amortization
December 31, 1998 at December 31, 1998
<S> <C> <C>
Routes. . . . $ 754 $123
Gates . . . . 327 120
Slots . . . . 100 40
$1,181 $283
Reorganization Value In Excess of Amounts Allocable to
Identifiable Assets
Reorganization value in excess of amounts allocable to
identifiable assets, arising from Continental's emergence from
bankruptcy reorganization in 1993, was amortized on a
straight-line basis over 20 years.
(g) Air Traffic Liability -
Passenger revenue is recognized when transportation is
provided rather than when a ticket is sold. The amount of
passenger ticket sales not yet recognized as revenue is
reflected in the accompanying Consolidated Balance Sheets as
air traffic liability. The Company performs periodic
evaluations of this estimated liability, and any adjustments
resulting therefrom, which can be significant, are included in
results of operations for the periods in which the evaluations
are completed.
Continental sponsors a frequent flyer program ("OnePass") and
records an estimated liability for the incremental cost
associated with providing the related free transportation at
the time a free travel award is earned. The liability is
adjusted periodically based on awards earned, awards redeemed
and changes in the OnePass program.
The Company also sells mileage credits in the OnePass program
to participating partners, such as hotels, car rental agencies
and credit card companies. The resulting revenue, net of the
estimated incremental cost of the credits sold, is recorded in
the accompanying Consolidated Statements of Operations during
the period in which the credits are sold as other operating
revenue.
<PAGE>
(h) Passenger Traffic Commissions -
Passenger traffic commissions are recognized as expense when
the transportation is provided and the related revenue is
recognized. The amount of passenger traffic commissions not
yet recognized as expense is included in Prepayments and other
assets in the accompanying Consolidated Balance Sheets.
(i) Deferred Income Taxes -
Deferred income taxes are provided under the liability method
and reflect the net tax effects of temporary differences
between the tax basis of assets and liabilities and their
reported amounts in the financial statements.
(j) Maintenance and Repair Costs -
Maintenance and repair costs for owned and leased flight
equipment, including the overhaul of aircraft components, are
charged to operating expense as incurred.
(k) Advertising Costs -
The Company expenses the costs of advertising as incurred.
Advertising expense was $102 million, $98 million and $76
million for the years ended December 31, 1998, 1997 and 1996,
respectively.
(l) Stock Plans and Awards -
Continental has elected to follow Accounting Principles Board
Opinion No. 25 - "Accounting for Stock Issued to Employees"
("APB 25") in accounting for its employee stock options and
its stock purchase plans because the alternative fair value
accounting provided for under Statement of Financial
Accounting Standards No. 123 - "Accounting for Stock-Based
Compensation" ("SFAS 123") requires use of option valuation
models that were not developed for use in valuing employee
stock options or purchase rights. Under APB 25, since the
exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant,
generally no compensation expense is recognized. Furthermore,
under APB 25, since the stock purchase plans are considered
noncompensatory plans, no compensation expense is recognized.
(m) Measurement of Impairment -
In accordance with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), the
Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the
assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the
carrying amount of those assets.
(n) Recently Issued Accounting Standards -
Statement of Position 98-5, "Reporting on the Costs of Start-
Up Activities" ("SOP 98-5"), requires start-up costs to be
expensed as incurred. Continental will adopt SOP 98-5 in the
first quarter of 1999. This statement requires all
unamortized start up costs (e.g., pilot training costs related
to induction of new aircraft) to be expensed upon adoption,
resulting in approximately a $5 million cumulative effect of
change in accounting, net of tax, in the first quarter of
1999.
(o) Reclassifications -
Certain reclassifications have been made in the prior years'
financial statements to conform to the current year
presentation.
<PAGE>
NOTE 2 - EARNINGS PER SHARE
Basic earnings per common share ("EPS") excludes dilution and is
computed by dividing net income available to common stockholders by
the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could
occur if securities or other obligations to issue common stock were
exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the
Company. The following table sets forth the computation of basic
and diluted earnings per share (in millions):
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Numerator:
Income before extraordinary charge. $387 $389 $325
Extraordinary charge, net of
applicable income taxes. . . . . . (4) (4) (6)
Net income. . . . . . . . . . . . . 383 385 319
Preferred stock dividends . . . . . - (2) (5)
Numerator for basic earnings per
share - income available to
common stockholders. . . . . . . . 383 383 314
Effect of dilutive securities:
Preferred Securities of Trust. . . 11 14 15
6-3/4% convertible subordinated
notes . . . . . . . . . . . . . . 9 11 8
Series A convertible debentures - - 1
20 25 24
Other . . . . . . . . . . . . . . . - (4) (3)
Numerator for diluted earnings
per share - income available to
common stockholders after
assumed conversions . . . . . . . $403 $404 $335
Denominator:
Denominator for basic earnings per
share - weighted-average shares. . 60.3 57.6 54.6
Effect of dilutive securities:
Employee stock options . . . . . . 1.7 1.6 2.2
Warrants . . . . . . . . . . . . . 0.9 3.5 5.9
Preferred Securities of Trust. . . 9.8 10.3 10.3
6-3/4% convertible subordinated
notes . . . . . . . . . . . . . . 7.6 7.6 5.8
Restricted Class B common stock. . - 0.4 0.8
Series A convertible debentures. . - - 0.7
Dilutive potential common shares. . 20.0 23.4 25.7
Denominator for diluted earnings
per share - adjusted weighted-
average and assumed conversions . 80.3 81.0 80.3
</TABLE>
Options to purchase 2,909,130 and 2,643,426 shares of the Company's
Class B common stock, par value $.01 per share ("Class B common
stock"), during the third and fourth quarters of 1998,
respectively, were not included in the computation of diluted
earnings per share in 1998 because the options' exercise price was
greater than the average market price of the common shares and,
therefore, the effect would have been antidilutive.
<PAGE>
NOTE 3 - LONG-TERM DEBT
Long-term debt as of December 31 is summarized as follows (in
millions):
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Secured
Notes payable, interest rates of 5.00% to
7.52%, payable through 2019 . . . . . . . . $ 886 $ 201
Floating rate notes, interest rates of
LIBOR plus 0.75% to 1.25%, Eurodollar
plus 1.0%, or Commercial Paper,
payable through 2009. . . . . . . . . . . . 223 174
Notes payable, interest rates of 7.13% to
7.15%, payable through 1999 and floating
rates thereafter of LIBOR plus 2%,
payable through 2011. . . . . . . . . . . . 86 91
Notes payable, interest rates of 8.0% to
9.97%, payable through 2019 . . . . . . . . 66 124
Revolving credit facility totaling $160
million, floating interest rates of
LIBOR or Eurodollar plus 1.125%, payable
through 1999. . . . . . . . . . . . . . . . 57 160
Credit facility, floating interest rate of
LIBOR or Eurodollar plus 1.125%, payable
through 2002. . . . . . . . . . . . . . . . - 275
Floating rate note, interest rate of LIBOR
or Eurodollar plus 1.375%, payable
through 2004. . . . . . . . . . . . . . . . - 75
Notes payable, interest rates of 10.0% to
14.0%, payable through 2005 . . . . . . . . - 54
Floating rate notes, interest rates of
LIBOR plus 2.50% to 3.75%, payable
through 2005. . . . . . . . . . . . . . . . - 30
Other. . . . . . . . . . . . . . . . . . . . - 2
Unsecured
Senior notes payable, 9.5%, payable
through 2001. . . . . . . . . . . . . . . . 250 250
Credit facility, floating interest rate
of LIBOR or Eurodollar plus 1.125%,
payable through 2002. . . . . . . . . . . . 245 -
Convertible subordinated notes, interest
rate of 6.75%, payable through 2006 . . . . 230 230
Senior notes payable, interest rate of
8.0%, payable through 2005. . . . . . . . . 200 -
Notes payable, interest rate of 8.125%,
payable through 2008. . . . . . . . . . . . 110 -
Floating rate note, interest rate of LIBOR
or Eurodollar plus 1.375%, payable
through 2004. . . . . . . . . . . . . . . . 74 -
Other. . . . . . . . . . . . . . . . . . . . 24 3
2,451 1,669
Less: current maturities. . . . . . . . . . 184 243
Total. . . . . . . . . . . . . . . . . . . . $2,267 $1,426
</TABLE>
At December 31, 1998 and 1997, the LIBOR and Eurodollar rates
associated with Continental's indebtedness approximated 5.1% and
5.8% and 5.1% and 5.8%, respectively. The Commercial Paper rate
was 5.5% as of December 31, 1998.
A majority of Continental's property and equipment is subject to
agreements securing indebtedness of Continental.
In July 1997, Continental entered into a $575 million credit
facility (the "Credit Facility"), including a $275 million term
loan, the proceeds of which were loaned to CMI to repay its
existing $320 million secured term loan. In connection with this
prepayment, Continental recorded a $4 million after tax
extraordinary charge relating to early extinguishment of debt. The
Credit Facility also includes a $225 million revolving credit
facility with a commitment fee of 0.25% per annum on the unused
portion, and a $75 million term loan commitment with a current
floating interest rate of Libor or Eurodollar plus 1.375%. At
December 31, 1998 and 1997, no borrowings were outstanding under
the $225 million revolving credit facility. During 1998, the
Credit Facility became unsecured due to an upgrade of Continental's
credit rating by Standard and Poor's Corporation.
The Credit Facility does not contain any financial covenants
relating to CMI other than covenants restricting CMI's incurrence
of certain indebtedness and pledge or sale of assets. In addition,
the Credit Facility contains certain financial covenants applicable
to Continental and prohibits Continental from granting a security
interest on certain of its international route authorities.
In April 1998, the Company completed an offering of $187 million of
pass-through certificates to be used to refinance the debt related
to 14 aircraft currently owned by Continental. In connection with
this refinancing, Continental recorded a $4 million after tax
extraordinary charge to consolidated earnings in the second quarter
of 1998 related to the early extinguishment of such debt.
At December 31, 1998, under the most restrictive provisions of the
Company's debt and credit facility agreements, the Company had a
minimum cash balance requirement of $600 million, a minimum net
worth requirement of $758 million and was restricted from paying
cash dividends in excess of $533 million.
In March 1996, the Company issued $230 million of 6-3/4%
Convertible Subordinated Notes (the "Notes"). The Notes are
convertible into shares of Class B common stock prior to their
maturity date, April 15, 2006, at a conversion price of $30.195 per
share. The Notes are redeemable at the option of the Company on or
after April 15, 1999, at specified redemption prices.
<PAGE>
Maturities of long-term debt due over the next five years are as
follows (in millions):
Year ending December 31,
1999. . . . . . . . . . . . . . . . . . $184
2000. . . . . . . . . . . . . . . . . . 182
2001. . . . . . . . . . . . . . . . . . 419
2002. . . . . . . . . . . . . . . . . . 236
2003. . . . . . . . . . . . . . . . . . 122
NOTE 4 - LEASES
Continental leases certain aircraft and other assets under long-
term lease arrangements. Other leased assets include real
property, airport and terminal facilities, sales offices,
maintenance facilities, training centers and general offices. Most
leases also include renewal options, and some aircraft leases
include purchase options.
At December 31, 1998, the scheduled future minimum lease payments
under capital leases and the scheduled future minimum lease rental
payments required under aircraft and engine operating leases, that
have initial or remaining noncancellable lease terms in excess of
one year, are as follows (in millions):
Capital Operating
Leases Leases
Year ending December 31,
1999. . . . . . . . . . . . . . . . . . $ 66 $ 738
2000. . . . . . . . . . . . . . . . . . 55 729
2001. . . . . . . . . . . . . . . . . . 56 711
2002. . . . . . . . . . . . . . . . . . 30 637
2003. . . . . . . . . . . . . . . . . . 24 575
Later years . . . . . . . . . . . . . . 98 4,818
Total minimum lease payments . . . . . . . . 329 $8,208
Less: amount representing interest. . . . . 69
Present value of capital leases. . . . . . . 260
Less: current maturities of capital
leases. . . . . . . . . . . . . . . . . . . 47
Long-term capital leases . . . . . . . . . . $213
Not included in the above operating lease table is approximately
$404 million of annual average minimum lease payments for each of
the next five years relating to non-aircraft leases, principally
airport and terminal facilities and related equipment.
Continental is the guarantor of $422 million aggregate principal
amount of tax-exempt special facilities revenue bonds. These
bonds, issued by various airport municipalities, are payable solely
from rentals paid by Continental under long-term agreements with
the respective governing bodies.
At December 31, 1998, the Company, including Express, had 350 and
31 aircraft under operating and capital leases, respectively.
These leases have remaining lease terms ranging from one month to
21 years.
The Company's total rental expense for all operating leases, net of
sublease rentals, was $922 million, $787 million and $719 million
in 1998, 1997 and 1996, respectively.
During 1997, the Company acquired 10 aircraft previously leased by
it. Aircraft maintenance expense in the second quarter of 1997 was
reduced by approximately $16 million due to the reversal of
reserves that were no longer required as a result of the
transaction.
NOTE 5 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
As part of the Company's risk management program, Continental uses
or used a variety of financial instruments, including petroleum
call options, petroleum swaps, jet fuel purchase commitments,
foreign currency average rate options, foreign currency forward
contracts and interest rate cap agreements. The Company does not
hold or issue derivative financial instruments for trading
purposes.
Effective October 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 133 - "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133
requires the Company to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair
value of derivatives are either offset against the change in fair
value of assets, liabilities, or firm commitments through earnings
or recognized in other comprehensive income until the hedged item
is recognized in earnings. The ineffective portion of a
derivative's change in fair value is immediately recognized in
earnings. The adoption of SFAS 133 on October 1, 1998 did not have
a material impact on results of operations but resulted in the
cumulative effect of an accounting change of $2 million pre-tax
being recognized as income in other comprehensive income.
Notional Amounts and Credit Exposure of Derivatives
The notional amounts of derivative financial instruments summarized
below do not represent amounts exchanged between parties and,
therefore, are not a measure of the Company's exposure resulting
from its use of derivatives. The amounts exchanged are calculated
based upon the notional amounts as well as other terms of the
instruments, which relate to interest rates, exchange rates or
other indices.
<PAGE>
The Company is exposed to credit losses in the event of non-
performance by counterparties to these financial instruments, but
it does not expect any of the counterparties to fail to meet their
obligations. To manage credit risks, the Company selects
counterparties based on credit ratings, limits its exposure to a
single counterparty under defined Company guidelines, and monitors
the market position with each counterparty.
Fuel Price Risk Management
The Company uses a combination of petroleum call options, petroleum
swap contracts, and jet fuel purchase commitments to provide some
short-term protection against a sharp increase in jet fuel prices.
These instruments generally cover the Company's forecasted jet fuel
needs for three to six months.
The Company accounts for the call options and swap contracts as
cash flow hedges. In accordance with SFAS 133, such financial
instruments are marked-to-market with the offset to other
comprehensive income and then subsequently recognized as a
component of fuel expense when the underlying fuel being hedged is
used. The ineffective portion of these call and swap agreements is
determined based on the correlation between West Texas Intermediate
Crude Oil prices and jet fuel prices, which was not material for
the quarter ended December 31, 1998.
At December 31, 1998, the Company had petroleum swap contracts
outstanding with an aggregate notional amount of approximately $82
million and a fair value of approximately $6 million (loss), which
has been recorded in other current liabilities with the offset to
other comprehensive income, net of applicable income taxes. The
loss will be recognized in earnings within the next six months.
The Company recognized gains of approximately $65 million under
this risk reduction strategy in 1996. Such gains were classified
as a reduction in aircraft fuel expense in the accompanying
consolidated statements of operations.
Additionally, as of December 31, 1998, the Company had entered into
jet fuel purchase commitments of approximately $53 million that
relate to jet fuel to be delivered and used during the first
quarter of 1999.
Foreign Currency Exchange Risk Management
The Company uses a combination of foreign currency average rate
option and forward contracts to hedge against the currency risk
associated with Japanese yen denominated ticket sales for the next
nine to twelve months. The average rate option and forward
contracts have only nominal intrinsic value at the time of
purchase.
<PAGE>
The Company accounts for these instruments as cash flow hedges. In
accordance with SFAS 133, such financial instruments are marked-to-
market with the offset to other comprehensive income and then
subsequently recognized as a component of passenger revenue when
the underlying sales transaction is recognized as revenue. The
Company measures hedge effectiveness of average rate options and
forward contracts based on the forward price of the underlying
commodity. Hedge ineffectiveness was not material during the
quarter ended December 31, 1998.
At December 31, 1998, the Company had average rate option and
forward contracts outstanding with an aggregate notional amount of
approximately $78 million and $76 million, respectively. The fair
value of these instruments was $3 million (loss) as of December 31,
1998 which has been recorded in other current liabilities with the
offset to other comprehensive income, net of applicable income
taxes. The loss will be recognized in earnings within the next
twelve months.
Interest Rate Risk Management
The Company entered into an interest rate cap agreement to reduce
the impact of potential increases on floating rate debt. The
interest rate cap has a notional amount of $125 million as of
December 31, 1998 and is effective through July 31, 2001. The
Company accounts for the interest rate cap as a cash flow hedge
whereby the fair value of the interest rate cap is reflected as an
asset in the accompanying consolidated balance sheet with the
offset, net of any hedge ineffectiveness (which is not material)
recorded as interest expense, to other comprehensive income. The
fair value of the interest rate cap was not material as of December
31, 1998. As interest expense on the underlying hedged debt is
recognized, corresponding amounts are removed from other
comprehensive income and charged to interest expense. Such amounts
were not material during 1998.
<PAGE>
Accumulated Derivative Gains or Losses
The following table summarizes activity in other comprehensive
income related to derivatives classified as cash flow hedges held
by the Company during the period October 1 (the date of the
Company's adoption of SFAS 133) through December 31, 1998 (in
millions):
Cumulative effect of adopting SFAS 133 as
of October 1, 1998, net . . . . . . . . . . . . $ 1
(Gains)/losses reclassified into earnings from
other comprehensive income, net . . . . . . . . -
Change in fair value of derivatives, net . . . . (7)
Accumulated derivative loss included in other
comprehensive income as of December 31, 1998,
net . . . . . . . . . . . . . . . . . . . . . . $ (6)
Fair Value of Other Financial Instruments
(a) Cash equivalents -
Cash equivalents consist primarily of commercial paper with
original maturities of three months or less and approximate
fair value due to their short maturity.
(b) Investment in Equity Securities -
Continental's investment in America West Holdings Corporation
("America West Holdings") is classified as available-for-sale
and carried at an aggregate market value of $3 million and
$9 million at December 31, 1998 and 1997, respectively.
Included in stockholders' equity at December 31, 1998 and 1997
are net unrealized gains of $1 million and $4 million,
respectively.
In June 1998, the Company sold its remaining 317,140 shares of
America West Holdings Class B common stock realizing net
proceeds of approximately $8.9 million and recognizing a gain
of $6 million. The gain is included in Other, net in the
accompanying Consolidated Statements of Operations.
In February 1996, Continental sold approximately 1.4 million
of the 1.8 million shares it owned in America West Holdings,
realizing net proceeds of $25 million and recognizing a gain
of $13 million. In May 1996, the Company sold all of its
802,860 America West Holdings warrants, realizing net proceeds
of $7 million and recognizing a gain of $5 million. The gains
are included in Other, net in the accompanying Consolidated
Statements of Operations.
In May 1998, the Company acquired a 49% interest in Compania
Panamena de Aviacion, S.A. ("COPA") for $53 million. The
investment is accounted for under the equity method of
accounting. As of December 31, 1998, the excess of the amount
at which the investment is carried and the amount of
underlying equity in the net assets was $43 million. This
difference is being amortized over the investment's estimated
useful life of 40 years.
As of December 31, 1998, Continental had a 12.4% interest in
AMADEUS Global Travel Distribution S.A. ("AMADEUS") with a
carrying value of $95 million. Since a readily determinable
market value does not exist for the Company's investment in
AMADEUS, the investment is carried at cost.
(c) Debt -
The fair value of the Company's debt with a carrying value of
$1.98 billion and $1.49 billion at December 31, 1998 and 1997,
respectively, estimated based on the discounted amount of
future cash flows using the current incremental rate of
borrowing for a similar liability or market prices,
approximate $1.88 billion and $1.47 billion, respectively.
The fair value of the remaining debt (with a carrying value of
$473 million and $179 million, respectively, and primarily
relating to aircraft modification notes and various loans with
immaterial balances) was not practicable to estimate due to
the large number and small dollar amounts of these notes.
(d) Preferred Securities of Trust -
As of December 31, 1998, the fair value of Continental's 8-
1/2% Convertible Trust Originated Preferred Securities
("TOPrS") (with a carrying value of $111 million), estimated
based on market prices, approximated $159 million. The
carrying value of the TOPrS was $242 million and the fair
value approximated $514 as of December 31, 1997. See Note 6.
NOTE 6 - PREFERRED SECURITIES OF TRUST
Continental Airlines Finance Trust, a Delaware statutory business
trust (the "Trust") with respect to which the Company owned all of
the common trust securities, had 2,298,327 and 4,986,500 TOPrS
outstanding at December 31, 1998 and 1997, respectively. In
November 1998, the Company exercised its right and called for
redemption approximately half of its outstanding TOPrS. The TOPrS
were convertible into shares of Class B common stock at a
conversion price of $24.18 per share of Class B common stock. As
a result of the call for redemption, 2,688,173 TOPrS were converted
into 5,558,649 shares of Class B common stock. In December 1998,
the Company called for redemption the remaining outstanding TOPrS.
As a result of the second call, the remaining 2,298,327 TOPrS were
converted into 4,752,522 shares of Class B common stock during
January 1999.
<PAGE>
Distributions on the preferred securities were payable by the Trust
at the annual rate of 8-1/2% of the liquidation value of $50 per
preferred security and are included in Distributions on Preferred
Securities of Trust in the accompanying Consolidated Statements of
Operations. At December 31, 1998, outstanding TOPrS totaling $111
million are included in Continental-Obligated Mandatorily
Redeemable Preferred Securities of Subsidiary Trust Holding Solely
Convertible Subordinated Debentures in the accompanying
Consolidated Balance Sheets.
The sole assets of the trust were 8-1/2% Convertible Subordinated
Deferrable Interest Debentures ("Convertible Subordinated
Debentures") with an aggregate principal amount of $115 million at
December 31, 1998.
The Convertible Subordinated Debentures and related income
statement effects are eliminated in the Company's consolidated
financial statements.
NOTE 7 - REDEEMABLE PREFERRED, PREFERRED, TREASURY AND COMMON STOCK
Redeemable Preferred and Preferred Stock
During the year ended December 31, 1997, the Company's board of
directors declared and issued 13,165 additional shares of Series A
12% Cumulative Preferred Stock ("Series A 12% Preferred") in lieu
of cash dividends. In April 1997, Continental redeemed for cash
all of the 460,247 shares of its Series A 12% Preferred then
outstanding for $100 per share plus accrued dividends thereon. The
redemption price, including accrued dividends, totaled $48 million.
Continental has 10 million shares of authorized preferred stock,
none of which was outstanding as of December 31, 1998 or 1997.
Common Stock
Continental has two classes of common stock issued and outstanding,
Class A common stock, par value $.01 per share ("Class A common
stock"), and Class B common stock. Holders of shares of Class A
common stock and Class B common stock are entitled to receive
dividends when and if declared by the Company's board of directors.
Each share of Class A common stock is entitled to 10 votes per
share and each share of Class B common stock is entitled to one
vote per share. In addition, Continental has authorized 50 million
shares of Class D common stock, par value $.01 per share, none of
which is outstanding.
The Company's Certificate of Incorporation permits shares of the
Company's Class A common stock to be converted into an equal number
of shares of Class B common stock. During 1998 and 1997, 12,200
and 900,536 shares of the Company's Class A common stock,
respectively, were so converted.
Treasury Stock
During 1998, the Company's Board of Directors authorized the
expenditure of up to $300 million to repurchase shares of the
Company's Class A and Class B common stock or securities
convertible into Class B common stock. No time limit was placed on
the duration of the repurchase program. Subject to applicable
securities law, such purchases occur at times and in amounts that
the Company deems appropriate. As of December 31, 1998, the
Company had repurchased 4,452,700 shares of Class B common stock
for $223 million.
Stockholder Rights Plan
Effective November 20, 1998, the Company adopted a stockholder
rights plan (the "Rights Plan") in connection with the disposition
by Air Partners, L.P. ("Air Partners") of its interest in the
Company to an affiliate of Northwest Airlines, Inc. (together with
such affiliate, "Northwest").
The rights become exercisable upon the earlier of (i) the tenth day
following a public announcement or public disclosure of facts
indicating that a person or group of affiliated or associated
persons has acquired beneficial ownership of 15% or more of the
total number of votes entitled to be cast generally by the holders
of the common stock of the Company then outstanding, voting
together as a single class (such person or group being an
"Acquiring Person"), or (ii) the tenth business day (or such later
date as may be determined by action of the Board of Directors prior
to such time as any person becomes an Acquiring Person) following
the commencement of, or announcement of an intention to make, a
tender offer or exchange offer the consummation of which would
result in any person becoming an Acquiring Person. Certain persons
and entities related to the Company, Air Partners or Northwest at
the time the Rights Plan was adopted are exempt from the definition
of "Acquiring Person."
The rights will expire on November 20, 2008 unless extended or
unless the rights are earlier redeemed or exchanged by the Company.
Subject to certain adjustments, if any person becomes an Acquiring
Person, each holder of a right, other than rights beneficially
owned by the Acquiring Person and its affiliates and associates
(which rights will thereafter be void), will thereafter have the
right to receive, upon exercise thereof, that number of Class B
Common Shares having a market value of two times the exercise price
($200, subject to adjustment) of the right.
If at any time after a person becomes an Acquiring Person, (i) the
Company merges into any other person, (ii) any person merges into
the Company and all of the outstanding common stock does not remain
outstanding after such merger, or (iii) the Company sells 50% or
more of its consolidated assets or earning power, each holder of a
right (other than the Acquiring Person and its affiliates and
associates) will have the right to receive, upon the exercise
thereof, that number of shares of common stock of the acquiring
corporation (including the Company as successor thereto or as the
surviving corporation) which at the time of such transaction will
have a market value of two times the exercise price of the right.
At any time after any person becomes an Acquiring Person, and prior
to the acquisition by any person or group of a majority of the
Company's voting power, the Board of Directors may exchange the
rights (other than rights owned by such Acquiring Person which have
become void), in whole or in part, at an exchange ratio of one
share of Class B common stock per right (subject to adjustment).
At any time prior to any person becoming an Acquiring Person, the
Board of Directors may redeem the rights at a price of $.001 per
right. The Rights Plan may be amended by the Board of Directors
without the consent of the holders of the rights, except that from
and after such time as any person becomes an Acquiring Person no
such amendment may adversely affect the interests of the holders of
the rights (other than the Acquiring Person and its affiliates and
associates). Until a right is exercised, the holder thereof, as
such, will have no rights as a stockholder of the Company,
including, without limitation, the right to vote or to receive
dividends.
Warrants
As of December 31, 1997, the Company had outstanding 3,039,468
Class A Warrants and 308,343 Class B Warrants. The warrants
entitled the holder to purchase one share of Class A common stock
or Class B common stock as follows: (i) 2,298,134 Class A Warrants
and 186,134 Class B Warrants with an exercise price $7.50 per
share, and (ii) 741,334 Class A Warrants and 122,209 Class B
Warrants with an exercise price of $15.00 per share. During 1998,
all remaining Class A and Class B Warrants outstanding were
exercised.
On June 2, 1997, the Company purchased from Air Partners warrants
to purchase 3,842,542 shares of Class B common stock for $94
million, the intrinsic value of the warrants (the difference
between the closing market price of the Class B common stock on May
28, 1997 ($34.25) and the applicable exercise price).
On November 21, 1996, Air Partners exercised its right to sell to
the Company, and the Company subsequently purchased, for $50
million, Warrants to purchase 2,614,379 shares of Class B common
stock pursuant to an agreement with the Company entered into
earlier in 1996.
<PAGE>
NOTE 8 - STOCK PLANS AND AWARDS
Stock Options
On May 21, 1998, the stockholders of the Company approved the
Continental Airlines, Inc. 1998 Stock Incentive Plan (the "98
Incentive Plan") under which the Company may issue shares of
restricted Class B common stock or grant options to purchase shares
of Class B common stock to non-employee directors and employees of
the Company or its subsidiaries. Subject to adjustment as provided
in the 98 Incentive Plan, the aggregate number of shares of Class
B common stock that may be issued under the 98 Incentive Plan may
not exceed 5,500,000 shares, which may be originally issued or
treasury shares or a combination thereof. The maximum number of
shares of Class B common stock that may be subject to options
granted to any one individual during any calendar year may not
exceed 750,000 shares. In early December 1998, the Company offered
certain employees who were granted options during the period from
May 21, 1998 to November 20, 1998 (excluding the Company's
executive officers, certain other officers and members of its
Board) the opportunity to exchange such options for a lesser number
of new options bearing an exercise price equal to the closing price
of the Class B common stock on the date of grant, which was lower
than that of the exchanged options. Employees who exchanged their
options forfeited the vesting on their old options and received 65
new options for every 100 old options exchanged. As a result,
1,874,000 old options were exchanged for 1,218,100 new options.
The new options are subject to a new four-year vesting schedule
commencing on the date of grant. The exchange did not result in
recognition of compensation expense. The total shares remaining
available for grant under the 98 Incentive Plan at December 31,
1998 was 990,000. Stock options granted under the 98 Incentive
Plan generally vest over a period of four years and have a term of
five years.
On May 16, 1997, the stockholders of the Company approved the
Continental Airlines, Inc. 1997 Stock Incentive Plan, as amended
(the "97 Incentive Plan"), under which the Company may award
restricted stock or grant options to purchase shares of Class B
common stock to non-employee directors of the Company and employees
of the Company or its subsidiaries. Subject to adjustment as
provided in the 97 Incentive Plan, the aggregate number of shares
of Class B common stock that may be issued under the 97 Incentive
Plan may not exceed 2,000,000 shares, which may be originally
issued or treasury shares or a combination thereof. The maximum
number of shares of Class B common stock that may be subject to
options granted to any one individual during any calendar year may
not exceed 200,000 shares (subject to adjustment as provided in the
97 Incentive Plan). The total shares remaining available for grant
under the 97 Incentive Plan at December 31, 1998 was 563,988.
Stock options granted under the 97 Incentive Plan generally vest
over a period of three years and have a term of five years.
Under the Continental Airlines, Inc. 1994 Incentive Equity Plan, as
amended (the "94 Incentive Plan" and, together with the 97
Incentive Plan and the 98 Incentive Plan, the "Incentive Plans"),
key officers and employees of the Company and its subsidiaries
received stock options and/or restricted stock. The 94 Incentive
Plan also provided for each outside director to receive on the day
following the annual stockholders' meeting options to purchase
5,000 shares of Class B common stock. The maximum number of shares
of Class B common stock that may be issued under the 94 Incentive
Plan may not in the aggregate exceed 9,000,000. The total
remaining shares available for grant under the 94 Incentive Plan at
December 31, 1998 was 201,754.
Under the terms of the Incentive Plans, a change of control would
result in all outstanding options under these plans becoming
exercisable in full and restrictions on restricted shares being
terminated. On November 20, 1998, Air Partners disposed of its
interest in the Company to Northwest, resulting in a change of
control under the terms of the 97 Incentive Plan and the 94
Incentive Plan. As a result, all outstanding options and
restricted stock under these plans became exercisable and fully
vested, respectively.
The table on the following page summarizes stock option
transactions pursuant to the Company's Incentive Plans (share data
in thousands):
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
Beginning of
Year. . . . . . 5,998 $22.62 5,809 $17.37 4,769 $ 8.41
Granted* . . . . 6,504 $43.75 1,968 $29.34 3,307 $25.07
Exercised . . . (807) $19.53 (1,582) $11.72 (1,747) $ 8.23
Cancelled. . . . (2,012) $55.18 (197) $22.49 (520) $14.83
Outstanding at
End of Year . . 9,683 $30.31 5,998 $22.62 5,809 $17.37
Options
exercisable
at end of
year. . . . . . 5,174 $23.56 1,229 $20.61 656 $11.18
*The option price for all stock options is equal to 100% of the fair market value at the date
of grant.
</TABLE>
<PAGE>
The following tables summarize the range of exercise prices and the
weighted average remaining contractual life of the options
outstanding and the range of exercise prices for the options
exercisable at December 31, 1998 (share data in thousands):
<TABLE>
Options Outstanding
<CAPTION>
Weighted
Average
Remaining
Range of Contractual Weighted Average
Exercise Prices Outstanding Life Exercise Price
<S> <C> <C> <C>
$3.88-$8.00 915 2.25 $7.46
$8.19-$28.19 1,881 2.44 $22.68
$28.25-$34.75 3,443 3.75 $29.23
$34.88-$35.00 2,306 4.90 $35.00
$35.31-$56.81 1,138 4.62 $55.05
$3.88-$56.81 9,683 3.73 $30.31
Options Exercisable
Range of Weighted Average
Exercise Prices Exercisable Exercise Price
$3.88-$8.00 915 $ 7.46
$8.19-$28.19 1,881 $22.68
$28.25-$34.75 2,222 $29.25
$34.88-$35.00 2 $35.00
$35.31-$56.81 154 $47.72
$3.88-$56.81 5,174 $23.56
</TABLE>
Restricted Stock
The Incentive Plans permit awards of restricted stock to
participants, subject to one or more restrictions, including a
restriction period, and a purchase price, if any, to be paid by the
participant. Under the 98 Incentive Plan, the 97 Incentive Plan
and the 94 Incentive Plan, 250,000, 100,000 and 600,000 shares,
respectively, have been authorized for issuance, of which 250,000,
100,000 and 35,000 shares were available for grant at December 31,
1998.
Additionally, on March 4, 1994, the Board approved a one-time grant
of 2,014,000 shares of restricted Class B common stock to
substantially all employees at or below the manager level. These
shares were issued at no cost to the employees and vested in 25
percent increments on each of January 2, 1995, 1996, 1997 and 1998.
<PAGE>
Employee Stock Purchase Plans
On May 16, 1997, the stockholders of the Company approved the
Continental Airlines, Inc. 1997 Employee Stock Purchase Plan (the
"97 Stock Purchase Plan"). Under the 97 Stock Purchase Plan, all
employees of the Company may purchase shares of Class B common
stock of the Company at 85% of the lower of the fair market value
on the first day of the option period or the last day of the option
period. Subject to adjustment, a maximum of 1,750,000 shares of
Class B common stock are authorized for issuance under the 97 Stock
Purchase Plan. In January 1999, 132,928 shares of Class B common
stock were issued for $28.47 per share relating to contributions
made in fourth quarter of 1998. During 1998 and 1997, 305,978 and
148,186 shares of Class B common stock were issued at prices
ranging from $29.33 to $49.41 in 1998 and $23.38 to $29.33 in 1997.
Under the Continental Airlines, Inc. 1994 Employee Stock Purchase
Plan, as amended (the "94 Stock Purchase Plan"), which terminated
on December 31, 1996, substantially all employees of the Company
could purchase shares of Class B common stock at 85% of the lower
of the fair market value on the first or last business day of a
calendar quarter. Subject to adjustment, a maximum of
8,000,000 shares of Class B common stock were authorized for
purchase under the 94 Stock Purchase Plan. During 1997, 1996 and
1995, 70,706, 191,809 and 518,428 shares, respectively, of Class B
common stock were issued at a price of $19.55 in 1997 and at prices
ranging from $15.81 to $23.96 in 1996 and $4.31 to $10.63 in 1995
in connection with the 94 Stock Purchase Plan.
Pro Forma SFAS 123 Results
Pro forma information regarding net income and earnings per share
has been determined as if the Company had accounted for its
employee stock options and purchase rights under the fair value
method of SFAS 123. The fair value for these options was estimated
at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions for 1998, 1997 and
1996, respectively: risk-free interest rates of 4.9%, 6.1% and
5.8%; dividend yields of 0%; volatility factors of the expected
market price of the Company's common stock of 40% for 1998, 34% for
1997 and 39% for 1996; and a weighted-average expected life of the
option of 3.0 years, 2.5 years and 2.6 years. The weighted average
grant date fair value of the stock options granted in 1998, 1997
and 1996 was $13.84, $7.87 and $7.55 per option, respectively.
<PAGE>
The fair value of the purchase rights under the Stock Purchase
Plans was also estimated using the Black-Scholes model with the
following weighted-average assumptions for 1998, 1997 and 1996,
respectively: risk free interest rates of 4.7%, 5.2% and 5.2%;
dividend yields of 0%; expected volatility of 40% for 1998, 34% for
1997 and 39% for 1996; and an expected life of .25 years for 1998,
.33 years for 1997 and .25 years for 1996. The weighted-average
fair value of the purchase rights granted in 1998, 1997 and 1996
was $9.10, $7.38 and $5.75, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferrable. In addition, option
valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the
Company's employee stock options and purchase rights have
characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options and
purchase rights.
Assuming that the Company had accounted for its employee stock
options and purchase rights using the fair value method and
amortized the resulting amount to expense over the options' vesting
period net income would have been reduced by $18 million, $11
million and $9 million for the years ended December 31, 1998, 1997
and 1996, respectively. Basic EPS would have been reduced by 30
cents, 18 cents and 17 cents for the years ended December 31, 1998,
1997 and 1996, respectively, and diluted EPS would have been
reduced by 23 cents, 14 cents and 11 cents for the same periods,
respectively. The pro forma effect on net income is not
representative of the pro forma effects on net income in future
years because it did not take into consideration pro forma
compensation expense related to grants made prior to 1995.
<PAGE>
NOTE 9 - ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of accumulated other comprehensive income are as
follows (in millions):
<TABLE>
<CAPTION>
Minimum Unrealized Loss on
Pension Gain/(Loss) Derivative
Liability on Investments Instruments Total
<S> <C> <C> <C> <C>
Balance at
December 31, 1995 . $ (8) $ 18 $ - $ 10
Current year change
in other compre-
hensive income. . . 6 (14) - (8)
Balance at
December 31, 1996 . (2) 4 - 2
Current year change
in other compre-
hensive income. . . (4) - - (4)
Balance at
December 31, 1997 . (6) 4 - (2)
Current year change
in other compre-
hensive income. . . (76) (4) (6) (86)
Balance at
December 31, 1998 . $(82) $ - $ (6) $ (88)
</TABLE>
NOTE 10 - EMPLOYEE BENEFIT PLANS
The Company has noncontributory defined benefit pension and defined
contribution (including 401(k) savings) plans. Substantially all
domestic employees of the Company are covered by one or more of
these plans. The benefits under the active defined benefit pension
plan are based on years of service and an employee's final average
compensation. For the years ended December 31, 1998, 1997 and
1996, total expense for the defined contribution plan was $8
million, $6 million and $7 million, respectively.
The following table sets forth the defined benefit pension plans'
change in projected benefit obligation for 1998 and 1997:
1998 1997
(in millions)
Projected benefit obligation at
beginning of year . . . . . . . . $ 846 $ 604
Service cost . . . . . . . . . . . 55 38
Interest cost. . . . . . . . . . . 69 51
Plan amendments. . . . . . . . . . 110 -
Actuarial gains, net . . . . . . . 178 176
Benefits paid. . . . . . . . . . . (28) (23)
Projected benefit obligation at
end of year . . . . . . . . . . . $1,230 $ 846
<PAGE>
The following table sets forth the defined benefit pension plans'
change in the fair value of plan assets for 1998 and 1997:
1998 1997
(in millions)
Fair value of plan assets at
beginning of year . . . . . . . . $ 633 $ 508
Actual return on plan assets . . . 75 83
Employer contributions . . . . . . 101 65
Benefits paid. . . . . . . . . . . (28) (23)
Fair value of plan assets at
end of year . . . . . . . . . . . $ 781 $ 633
Pension cost recognized in the accompanying Consolidated Balance
Sheets is computed as follows:
1998 1997
(in millions)
Funded status of the plans -
net underfunded . . . . . . . . . $ (449) $ (213)
Unrecognized net actuarial loss. . 256 93
Unrecognized prior service cost. . 113 9
Net amount recognized. . . . . . . (80) (111)
Prepaid benefit cost . . . . . . . 2 16
Accrued benefit liability. . . . . (320) (136)
Intangible asset . . . . . . . . . 113 -
Accumulated other comprehensive
income. . . . . . . . . . . . . . 125 9
Net amount recognized. . . . . . . $ (80) $ (111)
Net periodic defined benefit pension cost for 1998, 1997 and 1996
included the following components:
1998 1997 1996
(in millions)
Service cost . . . . . . . . . . . $ 55 $ 38 $ 38
Interest cost. . . . . . . . . . . 69 51 45
Expected return on plan assets . . (64) (49) (38)
Amortization of prior service
cost . . . . . . . . . . . . . . 6 1 1
Amortization of unrecognized
net actuarial loss . . . . . . . 4 - -
Settlement gain. . . . . . . . . . - - (1)
Net periodic benefit cost. . . . . $ 70 $ 41 $ 45
The projected benefit obligation, accumulated benefit obligation
and the fair value of plan assets for the pension plans with
projected benefit obligations and accumulated benefit obligations
in excess of plan assets were $1.2 billion, $1.1 billion and $771
million, respectively, as of December 31, 1998, and $762 million,
$620 million and $529 million, respectively, as of December 31,
1997.
During 1998, the Company amended its benefit plan as a result of
changes in benefits pursuant to new collective bargaining
agreements.
Plan assets consist primarily of equity securities (including
32,500 and 50,000 shares of Class B common stock with a fair market
value of $1.1 million and $2.4 million as of December 31, 1998 and
1997, respectively), long-term debt securities and short-term
investments.
The weighted average discount rate used in determining the
actuarial present value of the projected benefit obligation was
7.00% to 7.25%, 7.25% and 7.75% for 1998, 1997 and 1996,
respectively. The expected long-term rate of return on assets
(which is used to calculate the Company's return on pension assets
for the current year) was 9.25% to 9.50% for 1998, and 9.25% for
each of 1997 and 1996. The weighted average rate of salary
increases was 5.30% for 1998, and 4.90% for each of 1997 and 1996.
The 1983 Group Annuity Mortality Table (GAM 83) was used to develop
the 1997 and 1998 end-of-year disclosure amounts and 1998 pension
cost. The 1984 Unisex Pensioners Mortality Table (UP 84) was used
to develop 1996 end-of-year disclosure and 1996 and 1997 pension
cost. The unrecognized net gain (loss) is amortized on a straight-
line basis over the average remaining service period of employees
expected to receive a plan benefit.
Continental's policy is to fund the noncontributory defined benefit
pension plans in accordance with Internal Revenue Service ("IRS")
requirements as modified, to the extent applicable, by agreements
with the IRS.
The Company also has a profit sharing program under which an award
pool consisting of 15.0% of the Company's annual pre-tax earnings,
subject to certain adjustments, is distributed each year to
substantially all employees (other than employees whose collective
bargaining agreement provides otherwise or who otherwise receive
profit sharing payments as required by local law) on a pro rata
basis according to base salary. The profit sharing expense
included in the accompanying Consolidated Statements of Operations
for the years ended December 31, 1998, 1997 and 1996 was $86
million, $105 million and $68 million, respectively.
<PAGE>
NOTE 11 - INCOME TAXES
The reconciliations of income tax computed at the United States
federal statutory tax rates to income tax provision for the years
ended December 31, 1998, 1997 and 1996 are as follows (in
millions):
<TABLE>
<CAPTION>
Amount Percent
1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Income tax pro-
vision at
United States
statutory rates . . $227 $224 $150 35.0 % 35.0 % 35.0 %
State income tax
provision . . . . . 10 9 6 1.5 1.4 1.4
Reorganization value
in excess of
amounts allocable
to identifiable
assets. . . . . . . - 4 5 - 0.6 1.2
Meals and
entertainment
disallowance. . . . 10 9 7 1.5 1.4 1.6
Net operating loss
not previously
benefitted. . . . . - (15) (88) - (2.3) (20.5)
Other. . . . . . . . 1 6 6 0.3 1.0 1.4
Income tax
provision, net. . . $248 $237 $ 86 38.3 % 37.1 % 20.1 %
</TABLE>
The significant component of the provision for income taxes for the
year ended December 31, 1998, 1997 and 1996 was a deferred tax
provision of $231 million, $220 million and $80 million,
respectively. The provision for income taxes for the period ended
December 31, 1998, 1997 and 1996 also reflects a current tax
provision in the amount of $17 million, $17 million and $6 million,
respectively, as the Company is in an alternative minimum tax
position for federal income tax purposes and pays current state
income tax.
<PAGE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the related amounts used for
income tax purposes. Significant components of the Company's
deferred tax liabilities and assets as of December 31, 1998 and
1997 are as follows (in millions):
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Spare parts and supplies, fixed assets
and intangibles . . . . . . . . . . . . . $ 536 $ 639
Deferred gain. . . . . . . . . . . . . . . 57 63
Capital and safe harbor lease activity . . 46 49
Other, net . . . . . . . . . . . . . . . . 39 39
Gross deferred tax liabilities . . . . . . 678 790
Accrued liabilities. . . . . . . . . . . . (347) (370)
Revaluation of leases. . . . . . . . . . . (2) (16)
Net operating loss carryforwards . . . . . (372) (631)
Investment tax credit carryforwards. . . . (45) (45)
Minimum tax credit carryforward. . . . . . (37) (21)
Gross deferred tax assets. . . . . . . . . (803) (1,083)
Deferred tax assets valuation allowance. . 263 617
Net deferred tax liability . . . . . . . . 138 324
Less: current deferred tax (asset)
liability . . . . . . . . . . . . . . . . (234) (111)
Non-current deferred tax liability . . . . $ 372 $ 435
</TABLE>
At December 31, 1998, the Company had estimated 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 the
change in ownership of the Company on April 27, 1993, the ultimate
utilization of the Company's net operating losses and investment
tax credits could be limited. Reflecting this possible limitation,
the Company has recorded a valuation allowance of $263 million at
December 31, 1998.
Continental had, as of December 31, 1998, deferred tax assets
aggregating $803 million, including $372 million of NOLs and a
valuation allowance of $263 million. During the first quarter of
1998, the Company consummated several transactions, the benefit of
which resulted in the elimination of reorganization value in excess
of amounts allocable to identifiable assets of $164 million.
During the third and fourth quarters of 1998, the Company
determined that additional NOLs of the Company's predecessor could
be benefited and accordingly reduced both the valuation allowance
and routes, gates and slots by $190 million. 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 further
reduce routes, gates and slots.
NOTE 12 - ACCRUALS FOR AIRCRAFT RETIREMENTS AND EXCESS FACILITIES
In August 1998, the Company announced that CMI plans to accelerate
the retirement of its four Boeing 747 aircraft by April 1999 and
its remaining thirteen Boeing 727 aircraft by December 2000. The
Boeing 747s will be replaced by DC-10-30 aircraft and the Boeing
727 aircraft will be replaced with a reduced number of Boeing 737
aircraft. In addition, Express will accelerate the retirement of
certain turboprop aircraft by December 2000, including its fleet of
32 EMB-120 turboprop aircraft, as regional jets are acquired to
replace turboprops.
In connection with its decision to accelerate the replacement of
these aircraft, the Company performed an evaluation to determine,
in accordance with SFAS 121, whether future cash flows
(undiscounted and without interest charges) expected to result from
the use and eventual disposition of these aircraft would be less
than the aggregate carrying amount of these aircraft and the
related assets. As a result of the evaluation, management
determined that the estimated future cash flows expected to be
generated by these aircraft would be less than their carrying
amount, and therefore these aircraft are impaired as defined by
SFAS 121. Consequently, the original cost basis of these aircraft
and related items was reduced to reflect the fair market value at
the date the decision was made, resulting in a $59 million fleet
disposition/impairment loss. In determining the fair market value
of these assets, the Company considered recent transactions
involving sales of similar aircraft and market trends in aircraft
dispositions. The remaining $63 million of the fleet
disposition/impairment loss includes cash and non-cash costs
related primarily to future commitments on leased aircraft past the
dates they will be removed from service and the write-down of
related inventory to its estimated fair market value. The combined
charge of $122 million was recorded in the third quarter of 1998.
<PAGE>
During 1996, the Company made the decision to accelerate the
replacement of certain aircraft between August 1997 and December
1999. As a result of its decision to accelerate the replacement of
these aircraft, the Company recorded a fleet disposition charge of
$128 million. The fleet disposition charge related primarily to
(i) the writedown of Stage 2 aircraft inventory, which is not
expected to be consumed through operations, to its estimated fair
value; and (ii) a provision for costs associated with the return of
leased aircraft at the end of their respective lease terms. The
majority of the aircraft are being accounted for as operating
leases and therefore the Company will continue to recognize rent
and amortization expenses on these aircraft until they are removed
from service.
During 1994, the Company recorded a $447 million provision
associated with (i) the planned early retirement of certain
aircraft ($278 million) and (ii) closed or underutilized airport
and maintenance facilities and other assets ($169 million).
<PAGE>
The following represents the activity within these accruals during
the three years ended December 31, 1998 (in millions):
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Total accruals at beginning of year. . $151 $205 $220
Net cash payments:
Aircraft related. . . . . . . . . . . (34) (27) (52)
Underutilized facilities and other. . (30) (13) (17)
Increase/(decrease) in accrual for
grounded aircraft . . . . . . . . . . - (16) -
Fleet disposition charge for cost of
return of leased aircraft . . . . . . - 54
Fleet disposition/impairment loss
for the retirement of aircraft. . . . 63 - -
Other. . . . . . . . . . . . . . . . . 5 2 -
Total accruals at end of year. . . . . 155 151 205
Portion included in accrued other
liabilities . . . . . . . . . . . . . (60) (28) (17)
Accrual for aircraft retirements and
excess facilities . . . . . . . . . . $ 95 $123 $188
</TABLE>
The remaining accruals relate primarily to anticipated cash outlays
associated with (i) underutilized airport facilities (primarily
associated with Denver International Airport), (ii) the return of
leased aircraft and (iii) the remaining liability associated with
the grounded aircraft. The Company has assumed certain sublease
rental income for these closed and underutilized facilities and
grounded aircraft in determining the accrual at each balance sheet
date. However, should actual sublease rental income be different
from the Company's estimates, the actual charge could be different
from the amount estimated. The remaining accrual represents cash
outlays to be incurred over the remaining lease terms (from one to
12 years).
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Continental has substantial commitments for capital expenditures,
including for the acquisition of new aircraft. As of January 20,
1999, Continental had agreed to acquire a total of 113 Boeing jet
aircraft through 2005, approximately 57 of which are expected to be
delivered in 1999. Continental also has options for an additional
114 aircraft (exercisable subject to certain conditions). The
estimated aggregate cost of the Company's firm commitments for
Boeing aircraft is approximately $5.5 billion. Continental
currently plans to finance its new Boeing aircraft with a
combination of enhanced pass through trust certificates, lease
equity and other third-party financing, subject to availability and
market conditions. As of January 20, 1999, Continental had
approximately $354 million in financing arranged for such future
Boeing deliveries. In addition, Continental had commitments or
letters of intent for backstop financing for approximately one-
third of the anticipated remaining acquisition cost of such Boeing
deliveries. In addition, at January 20, 1999, Continental has firm
commitments to purchase 32 spare engines related to the new Boeing
aircraft for approximately $167 million, which will be deliverable
through December 2004. However, further financing will be needed
to satisfy the Company's capital commitments for other aircraft and
aircraft-related expenditures such as engines, spare parts,
simulators and related items. There can be no assurance that
sufficient financing will be available for all aircraft and other
capital expenditures not covered by firm financing commitments.
Deliveries of new Boeing aircraft are expected to increase aircraft
rental, depreciation and interest costs while generating cost
savings in the areas of maintenance, fuel and pilot training.
As of January 20, 1999, Express had firm commitments for 38 Embraer
ERJ-145 ("ERJ-145") 50-seat regional jets and 25 Embraer ERJ-135
("ERJ-135") 37-seat regional jets, with options for an additional
125 ERJ-145 and 50 ERJ-135 aircraft exercisable through 2008.
Express anticipates taking delivery of 19 ERJ-145 and six ERJ-135
regional jets in 1999. Neither Express nor Continental will have
any obligation to take any ERJ-145 firm aircraft that are not
financed by a third party and leased to Continental.
Continental expects its cash outlays for 1999 capital expenditures,
exclusive of fleet plan requirements, to aggregate $254 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 remains contingently liable until December 1, 2015, on
$202 million of long-term lease obligations of US Airways, Inc.
("US Airways") related to the East End Terminal at LaGuardia
Airport in New York. If US Airways defaulted on these obligations,
Continental could be required to cure the default, at which time it
would have the right to reoccupy the terminal.
During 1998, Continental began block space arrangements whereby it
is committed to purchase capacity on other carriers at an aggregate
cost of approximately $150 million per year. These arrangements
are for 10 years. Pursuant to other block-space arrangements,
other carriers are committed to purchase capacity at a cost of
approximately $100 million on Continental.
Approximately 40% of the Company's employees are covered by
collective bargaining agreements. The Company's collective
bargaining agreements with its Express flight attendants and
Continental Airlines flight attendants (representing approximately
17% of the Company's employees) become amendable in November and
December 1999. Negotiations are expected to begin in the third
quarter of 1999 to amend these contracts. The Company believes
that mutually acceptable agreements can be reached with such
employees, although the ultimate outcome of the Company's
negotiations is unknown at this time.
Legal Proceedings
United Statement of America v. Northwest Airlines Corp. &
Continental Airlines, Inc.: The Antitrust Division of the
Department of Justice is challenging under Section 7 of the Clayton
Act and Section 1 of the Sherman Act the acquisition by Northwest
of Shares of Continental's Class A common stock bearing, together
with certain shares for which Northwest has a limited proxy, more
than 50% of the fully diluted voting power of all Continental
stock. The government's position is that, notwithstanding various
agreements that severely restrict Northwest's ability to exercise
voting control over Continental and are designed to assure
Continental's competitive independence, Northwest's control of the
Class A common stock will reduce actual and potential competition
in various ways and in a variety of markets. Continental believes
that because of agreements restricting Northwest's right to
exercise control over Continental, the companies remain independent
competitors; Northwest's stock acquisition was made solely for
investment purposes and thus is expressly exempt under Section 7 of
the Clayton Act; and Northwest's stock acquisition was necessary in
order for Northwest and Continental to enter into an alliance
agreement that is highly pro-competitive. The government seeks an
order requiring Northwest to divest all voting stock in Continental
on terms and conditions as may be agreed to by the government and
the Court. No specific relief is sought against Continental.
The Company and/or certain of its subsidiaries are defendants in
various lawsuits, including suits relating to certain environmental
claims, the Company's consolidated Plan of Reorganization under
Chapter 11 of the federal bankruptcy code which became effective on
April 27, 1993, the Company's long-term global alliance agreement
with Northwest entered into in connection with Air Partners'
disposition of its interest in Continental to Northwest (see Note
14) and proceedings arising in the normal course of business.
While the outcome of these lawsuits and proceedings cannot be
predicted with certainty and could have a material adverse effect
on the Company's financial position, results of operations and cash
flows, it is the opinion of management, after consulting with
counsel, that the ultimate disposition of such suits will not have
a material adverse effect on the Company's financial position,
results of operations or cash flows.
NOTE 14 - RELATED PARTY TRANSACTIONS
The following is a summary of significant related party
transactions that occurred during 1998, 1997 and 1996, other than
those discussed elsewhere in the Notes to Consolidated Financial
Statements.
<PAGE>
In connection with certain synergies agreements, Continental paid
Air Canada, a former significant stockholder of the Company, $30
million and $16 million for the years ended December 31, 1997 and
1996, respectively, and Air Canada paid Continental $16 million and
$17 million in 1997 and 1996, respectively, primarily relating to
aircraft maintenance.
The Company and America West Airlines, Inc. ("America West"), a
subsidiary of America West Holdings, in which David Bonderman holds
a significant interest, entered into a series of agreements during
1994 related to code-sharing and ground handling that have created
substantial benefits for both airlines. Mr. Bonderman is a
director of the Company and holds a significant interest in the
Company. The services provided are considered normal to the daily
operations of both airlines. As a result of these agreements,
Continental paid America West $15 million, $16 million and $15
million in 1998, 1997 and 1996, respectively, and America West paid
Continental $27 million, $23 million and $22 million in 1998, 1997
and 1996, respectively.
In May 1996, Air Canada converted all of its 3,322,112 shares of
Class A common stock into Class B common stock (pursuant to certain
rights granted to it under the Company's Certificate of
Incorporation) and sold, on the open market, 4,400,000 shares of
the Company's common stock pursuant to the Secondary Offering.
On November 21, 1996, Air Partners, a significant stockholder of
the Company, exercised its right to sell to the Company, and the
Company subsequently purchased, for $50 million, warrants to
purchase 2,614,379 shares of Class B common stock (representing a
portion of the total warrants held by Air Partners) pursuant to an
agreement entered into earlier in 1996 with the Company.
In April 1997, Continental redeemed for cash all of the 460,247
outstanding shares of its Series A 12% Preferred held by an
affiliate of Air Canada for $100 per share plus accrued dividends
thereon. The redemption price, including accrued dividends,
totaled $48 million.
On June 2, 1997, the Company purchased for $94 million from Air
Partners warrants to purchase 3,842,542 shares of Class B common
stock (representing a portion of the total warrants held by Air
Partners). The purchase price represented the intrinsic value of
the warrants (the difference between the closing market price of
the Class B common stock on May 28, 1997 ($34.25) and the
applicable exercise price).
In July 1997, the Company purchased the rights of United Micronesia
Development Association, Inc. ("UMDA") to receive future payments
under a services agreement between UMDA and CMI (pursuant to which
CMI was to pay UMDA approximately 1% of the gross revenues of CMI,
as defined, through January 1, 2012, which payment by CMI to UMDA
totaled $1 million, $6 million and $6 million in 1997, 1996 and
1995, respectively) and UMDA's 9% interest in AMI, terminated the
Company's obligations to UMDA under a settlement agreement entered
into in 1987, and terminated substantially all of the other
contractual arrangements between the Company, AMI and CMI, on the
one hand, and UMDA on the other hand, for an aggregate
consideration of $73 million.
In connection with the Company's $320 million secured term loan
financing, entered into in 1996, CMI paid UMDA a dividend of
approximately $13 million in 1996.
In November 1998, the Company and Northwest, a significant
stockholder of the Company, began implementing a long-term global
alliance involving extensive code-sharing, frequent flyer
reciprocity and other cooperative activities.
<PAGE>
NOTE 15 - SEGMENT REPORTING
Continental adopted Statement of Financial Accounting Standards No.
131 - "Disclosure About Segments of an Enterprise and Related
Information" ("SFAS 131") during the first quarter of 1998. SFAS
131 established standards for reporting information about operating
segments in annual financial statements as well as related
disclosures about products and services, geographic areas and major
customers. Operating segments are defined as components of an
enterprise about which separate financial information is available
that is evaluated regularly by the chief operating decision maker,
or decision making group, in deciding how to allocate resources and
in assessing performance. Continental has one reportable operating
segment (air transportation).
Information concerning principal geographic areas is as follows (in
millions):
<TABLE>
<CAPTION>
1998 1997 1996
Operating Operating Operating
Revenue Revenue Revenue
<S> <C> <C> <C>
Domestic (U.S.) $5,620 $5,215 $4,761
Atlantic 995 778 494
Latin America 769 572 406
Pacific 567 648 699
$7,951 $7,213 $6,360
</TABLE>
The Company attributes revenue among the geographical areas based
upon the origin and destination of each flight segment. The
Company's tangible assets consist primarily of flight equipment
which is mobile across geographic markets and, therefore, has not
been allocated.
<PAGE>
<TABLE>
NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited summarized financial data by quarter for 1998 and 1997 is as follows (in millions,
except per share data):
<CAPTION>
Three Months Ended
March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
1998
Operating revenue . . . . . . . . . . . . . $1,854 $2,036 $2,116 $1,945
Operating income. . . . . . . . . . . . . . 150 280 143 128
Nonoperating income (expense), net. . . . . (13) (5) (18) (17)
Net income. . . . . . . . . . . . . . . . . 81 163 73 66
Earnings per common share:
Income before extraordinary charge. . . . $ 1.38 $ 2.74 $ 1.21 $ 1.08
Extraordinary charge, net of tax. . . . . - (0.06) - -
Net income (a). . . . . . . . . . . . . . $ 1.38 $ 2.68 $ 1.21 $ 1.08
Earnings per common share assuming
dilution:
Income before extraordinary charge. . . . $ 1.06 $ 2.11 $ 0.97 $ 0.91
Extraordinary charge, net of tax. . . . . - (0.05) - -
Net income (a). . . . . . . . . . . . . . $ 1.06 $ 2.06 $ 0.97 $ 0.91
(continued on next page)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
1997
Operating revenue . . . . . . . . . . . . . $1,698 $1,786 $1,890 $1,839
Operating income. . . . . . . . . . . . . . 146 231 207 132
Nonoperating income (expense), net. . . . . (22) (23) (21) (10)
Net income. . . . . . . . . . . . . . . . . 74 128 110 73
Earnings per common share:
Income before extraordinary charge (a). . $ 1.28 $ 2.22 $ 1.97 $ 1.26
Extraordinary charge, net of tax. . . . . - - (0.07) -
Net income (a). . . . . . . . . . . . . . $ 1.28 $ 2.22 $ 1.90 $ 1.26
Earnings per common share assuming
dilution:
Income before extraordinary charge (a). . $ 0.96 $ 1.63 $ 1.48 $ 0.97
Extraordinary charge, net of tax. . . . . - - (0.04) -
Net income (a). . . . . . . . . . . . . . $ 0.96 $ 1.63 $ 1.44 $ 0.97
(a) The sum of the four quarterly earnings per share amounts does not agree with the
earnings per share as calculated for the full year due to the fact that the full year
calculation uses a weighted average number of shares based on the sum of the four
quarterly weighted average shares divided by four quarters.
</TABLE>
<PAGE>
During the second quarter of 1998, Continental recorded a $4
million after tax extraordinary charge relating to prepayment of
debt.
During the third quarter of 1998, Continental recorded a fleet
disposition/impairment loss of $122 million ($77 million after tax)
relating to its decision to accelerate the retirement of certain
jet and turboprop aircraft.
During the third quarter of 1997, in connection with the prepayment
of certain indebtedness, Continental recorded a $4 million after
tax extraordinary charge relating to early extinguishment of debt.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
There were no changes in or disagreements on any matters of
accounting principles or financial statement disclosure between the
Company and its independent public auditors during the registrant's
two most recent fiscal years or any subsequent interim period.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be held
on May 18, 1999.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be held
on May 18, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be held
on May 18, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be held
on May 18, 1999.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) The following financial statements are included in Item 8.
"Financial Statements and Supplementary Data":
Report of Independent Auditors
Consolidated Statements of Operations for each of the Three
Years in the Period Ended December 31, 1998
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Cash Flows for each of the Three
Years in the Period Ended December 31, 1998
Consolidated Statements of Redeemable Preferred Stock and
Common Stockholders' Equity for each of the Three Years
in the Period Ended December 31, 1998
Notes to Consolidated Financial Statements
(b) Financial Statement Schedules:
Report of Independent Auditors
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because they are
inapplicable, not required, or the information is included
elsewhere in the consolidated financial statements or notes
thereto.
(c) Reports on Form 8-K:
(i) Report dated November 3, 1998 with respect to Item 7.
Financial Statements and Exhibits, related to the
offering of Continental Airlines, Inc.'s Pass Through
Certificates Series 1998-3.
(ii) Report dated November 20, 1998 with respect to Item 5.
Other Events, related to the Northwest Transaction.
(iii) Report dated December 8, 1998 with respect to Item 7.
Financial Statements and Exhibits, related to the
offering of Continental Airlines, Inc.'s 8% Notes due
December 15, 2005.
(d) See accompanying Index to Exhibits.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of
Continental Airlines, Inc. as of December 31, 1998 and 1997, and
for each of the three years in the period ended December 31, 1998,
and have issued our report thereon dated January 20, 1999 (included
elsewhere in this Form 10-K). Our audits also included the
financial statement schedule for these related periods listed in
Item 14(b) of this Form 10-K. This schedule is the responsibility
of the Company's management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Houston, Texas
January 20, 1999
<PAGE>
<TABLE>
CONTINENTAL AIRLINES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1998, 1997, and 1996
(In millions)
<CAPTION>
Allowance
for Doubtful Allowance for
Receivables Obsolescence
<S> <C> <C>
Balance, December 31, 1995 . . . $ 44 $ 36
Additions charged to expense . 16 18
Deductions from reserve. . . . (31) (8)
Other. . . . . . . . . . . . . (2) 1
Balance, December 31, 1996 . . . 27 47
Additions charged to expense . 12 12
Deductions from reserve. . . . (21) (4)
Other. . . . . . . . . . . . . 5 (4)
Balance, December 31, 1997 . . . 23 51
Additions charged to expense . 18 17
Deductions from reserve. . . . (18) (16)
Other. . . . . . . . . . . . . (1) (6)
Balance, December 31, 1998 . . . $ 22 $ 46
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CONTINENTAL AIRLINES, INC.
By /s/ LAWRENCE W. KELLNER
Lawrence W. Kellner
Executive Vice President and
Chief Financial Officer
(On behalf of Registrant)
Date: February 25, 1999
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons in the
capacities indicated on February 25, 1999.
Signature Capacity
/s/ GORDON M. BETHUNE Chairman and Chief Executive Officer
Gordon M. Bethune (Principal Executive Officer)
/s/ LAWRENCE W. KELLNER Executive Vice President and
Lawrence W. Kellner Chief Financial Officer
(Principal Financial Officer)
/s/ MICHAEL P. BONDS Vice President and Controller
Michael P. Bonds (Principal Accounting Officer)
THOMAS J. BARRACK, JR.* Director
Thomas J. Barrack, Jr.
LLOYD M. BENTSEN, JR.* Director
Lloyd M. Bentsen, Jr.
DAVID BONDERMAN* Director
David Bonderman
/s/GREGORY D. BRENNEMAN Director
Gregory D. Brenneman
PATRICK FOLEY* Director
Patrick Foley
DOUGLAS McCORKINDALE* Director
Douglas McCorkindale
<PAGE>
GEORGE G. C. PARKER* Director
George G. C. Parker
RICHARD W. POGUE* Director
Richard W. Pogue
WILLIAM S. PRICE III* Director
William Price III
DONALD L. STURM* Director
Donald L. Sturm
KAREN HASTIE WILLIAMS* Director
Karen Hastie Williams
CHARLES A. YAMARONE* Director
Charles A. Yamarone
*By /s/ LAWRENCE W. KELLNER
Lawrence W. Kellner
Attorney in-fact
February 25, 1999<PAGE>
INDEX TO EXHIBITS
OF
CONTINENTAL AIRLINES, INC.
2.1 Revised Third Amended Disclosure Statement Pursuant to
Section 1125 of the Bankruptcy Code with Respect to
Debtors' Revised Second Amended Joint Plan of
Reorganization Under Chapter 11 of the United States
Bankruptcy Code, as filed with the Bankruptcy Court on
January 13, 1993 -- incorporated by reference from
Exhibit 2.1 to Continental's Annual Report on Form 10-K
for the year ended December 31, 1992 (File no. 0-9781).
2.2 Modification of Debtors' Revised Second Amended Joint
Plan of Reorganization dated March 12, 1993 --
incorporated by reference to Exhibit 2.2 to Continental's
Current Report on Form 8-K, dated April 16, 1993 (File
no. 0-9781) (the "4/93 8-K").
2.3 Second Modification of Debtors' Revised Second Amended
Joint Plan of Reorganization, dated April 8, 1993 --
incorporated by reference to Exhibit 2.3 to the 4/93 8-K.
2.4 Third Modification of Debtors' Revised Second Amended
Joint Plan of Reorganization, dated April 15, 1993 --
incorporated by reference to Exhibit 2.4 to the 4/93 8-K.
2.5 Confirmation Order, dated April 16, 1993 -- incorporated
by reference to Exhibit 2.5 to the 4/93 8-K.
3.1 Amended and Restated Certificate of Incorporation of
Continental -- 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 Continental, as amended to date --
incorporated by reference to Exhibit 99.3 to
Continental's Current Report on Form 8-K dated November
20, 1998 (the "11/98 8-K").
4.1 Specimen Class A Common Stock Certificate of the Company
-- incorporated by reference to Exhibit 4.1 to
Continental's Annual Report on Form 10-K for the year
ended December 31, 1995 (File no. 0-9781) (the "1995 10-
K").
4.2 Specimen Class B Common Stock Certificate of the Company
-- incorporated by reference to Exhibit 4.1 to
Continental's Form S-1 Registration Statement (No. 33-
68870) (the "1993 S-1").
4.3 Rights Agreement, dated as of November 20, 1998, between
Continental and Harris Trust and Savings Bank --
incorporated by reference to Exhibit 4.1 to the 11/98 8-
K.
4.4 Certificate of Designation of Series A Junior
Participating Preferred Stock, included as Exhibit A to
Exhibit 4.3 -- incorporated by reference to Exhibit 4.2
to the 11/98 8-K.
4.5 Form of Right Certificate, included as Exhibit B to
Exhibit 4.3 -- incorporated by reference to Exhibit 4.3
to the 11/98 8-K.
4.6 Summary of Rights to Purchase Preferred Shares, included
as Exhibit C to Exhibit 4.3 -- incorporated by reference
to Exhibit 4.4 to the 11/98 8-K.
4.7 Governance Agreement dated January 25, 1998 among the
Company, Newbridge Parent Corporation ("Newbridge") and
Northwest Airlines Corporation ("Northwest") --
incorporated by reference to Exhibit 99.1 to
Continental's Current Report on Form 8-K dated January
25, 1998 (File no. 0-9781).
4.7(a) First Amendment to the Governance Agreement dated March
2, 1998. (3)
4.7(b) Second Amendment to the Governance Agreement dated
November 20, 1998 -- incorporated by reference to Exhibit
99.6 to the 11/98 8-K.
4.8 Supplemental Agreement dated November 20, 1998 among the
Company, Newbridge and Northwest -- incorporated by
reference to Exhibit 99.7 to the 11/98 8-K.
4.9 Amended and Restated Registration Rights Agreement dated
April 19, 1996 among the Company, Air Partners, L.P. and
Air Canada -- incorporated by reference to Exhibit 10.2
to Continental's Form S-3 Registration Statement (No.
333-02701).
4.9(a) Amendment dated November 20, 1998 to the Amended and
Restated Registration Rights Agreement among the Company,
Air Partners and Northwest -- incorporated by reference
to Exhibit 99.5 to the November 8-K.
4.10 Warrant Agreement dated as of April 27, 1993, between
Continental and Continental as warrant agent --
incorporated by reference to Exhibit 4.7 to the 4/93 8-K.
4.11 Continental hereby agrees to furnish to the Commission,
upon request, copies of certain instruments defining the
rights of holders of long-term debt of the kind described
in Item 601(b)(4)(iii)(A) of Regulation S-K.
<PAGE>
9.1 Northwest Airlines/Air Partners Voting Trust Agreement
dated as of November 20, 1998 among the Company,
Northwest, Northwest Airlines Holdings Corporation, Air
Partners and Wilmington Trust Company, as Trustee --
incorporated by reference to Exhibit 99.4 to the 11/98 8-
K.
10.1 Agreement of Lease dated as of January 11, 1985, between
the Port Authority of New York and New Jersey and People
Express Airlines, Inc., regarding Terminal C (the
"Terminal C Lease") -- incorporated by reference to
Exhibit 10.61 to the Annual Report on Form 10-K (File No.
0-9781) of People Express Airlines, Inc. for the year
ended December 31, 1984.
10.1(a) Supplemental Agreements Nos. 1 through 6 to the Terminal
C Lease -- incorporated by reference to Exhibit 10.3 to
Continental's Annual Report on Form 10-K (File No. 1-
8475) for the year ended December 31, 1987 (the "1987 10-
K").
10.1(b) Supplemental Agreement No. 7 to the Terminal C Lease --
incorporated by reference to Exhibit 10.4 to
Continental's Annual Report on Form 10-K (File No. 1-
8475) for the year ended December 31, 1988.
10.1(c) Supplemental Agreements No. 8 through 11 to the Terminal
C Lease -- incorporated by reference to Exhibit 10.10 to
the 1993 S-1.
10.1(d) Supplemental Agreements No. 12 through 15 to the Terminal
C Lease -- incorporated by reference to Exhibit 10.2(d)
to the 1995 10-K.
10.1(e) Supplemental Agreement No. 16 to the Terminal C Lease --
incorporated by reference to Exhibit 10.1(e) to
Continental's Annual Report on Form 10-K for the year
ended December 31, 1997 (File no. 0-9781) (the "1997 10-
K").
10.2 Assignment of Lease with Assumption and Consent dated as
of August 15, 1987, among the Port Authority of New York
and New Jersey, People Express Airlines, Inc. and
Continental -- incorporated by reference to Exhibit
10.2 to the 1987 10-K.
10.3* Amended and restated employment agreement between the
Company and Gordon Bethune, dated as of November 20,
1998. (3)
10.4* Amended and restated employment agreement between the
Company and Gregory Brenneman, dated as of November 20,
1998. (3)
<PAGE>
10.5* Amended and restated employment agreement dated as of
November 15, 1995 between the Company and Lawrence
Kellner -- incorporated by reference to Exhibit 10.3 to
Continental's Quarterly Report on Form 10-Q for the
quarter ended June 30,1996 (File no. 0-9781) (the "1996
Q2 10-Q").
10.5(a)* Amendment dated as of November 20, 1998 to Mr. Kellner's
employment agreement. (3)
10.6* Amended and restated employment agreement dated as of
November 15, 1995 between the Company and C.D. McLean --
incorporated by reference to Exhibit 10.8 to the 1995 10-
K.
10.6(a)* Amendment dated as of November 20, 1998 to Mr. McLean's
employment agreement. (3)
10.7* Form of amendment to employment agreements, dated as of
April 19, 1996, between the Company and, respectively,
Lawrence Kellner and C.D. McLean -- incorporated by
reference to Exhibit 10.4 to the 1996 Q2 10-Q.
10.8* Form of amendment to employment agreements, dated as of
September 30, 1996, between the Company and,
respectively, Lawrence Kellner and C.D. McLean --
incorporated by reference to Exhibit 10.3 to
Continental's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 (File no. 0-9781) (the
"1996 Q3 10-Q").
10.9* Amended and restated employment agreement, as amended,
between the Company and Jeffery Smisek -- incorporated by
reference to Exhibit 10.2 to Continental's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997
(File no. 0-9781) (the "1997 Q1 10-Q").
10.9(a)* Amendment dated as of November 20, 1998 to Mr. Smisek's
employment agreement. (3)
10.10* Stay Bonus Agreement between the Company and Gordon
Bethune -- incorporated by reference to Exhibit 10.3 to
Continental's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 (File no. 0-9781) (the "1998
Q2 10-Q").
10.11* Stay Bonus Agreement between the Company and Gregory
Brenneman -- incorporated by reference to Exhibit 10.4 to
the 1998 Q2 10-Q.
10.12* Stay Bonus Agreement between the Company and Lawrence
Kellner -- incorporated by reference to Exhibit 10.5 to
the 1998 Q2 10-Q.
<PAGE>
10.13* Stay Bonus Agreement between the Company and C.D. McLean
-- incorporated by reference to Exhibit 10.6 to the 1998
Q2 10-Q.
10.14* Stay Bonus Agreement between the Company and Jeffery
Smisek -- incorporated by reference to Exhibit 10.7 to
the 1998 Q2 10-Q.
10.15* Forms of Stay Bonus Agreements for other executive
officers -- incorporated by reference to Exhibit 10.8 to
the 1998 Q2 10-Q.
10.16* Executive Bonus Program -- incorporated by reference to
Appendix B to the Company's proxy statement relating its
annual meeting of stockholders held on June 26, 1996.
10.17* Continental Airlines, Inc. 1994 Incentive Equity Plan
("1994 Equity Plan") -- incorporated by reference to
Exhibit 4.3 to the Company's Form S-8 Registration
Statement (No. 33-81324).
10.17(a)* First Amendment to 1994 Equity Plan -- incorporated by
reference to Exhibit 10.1 to Continental's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1995 (File no. 0-9781).
10.17(b)* Second Amendment to 1994 Equity Plan -- incorporated by
reference to Exhibit 4.3(c) to the 1996 S-8.
10.17(c)* Third Amendment to 1994 Equity Plan -- incorporated by
reference to Exhibit 10.4 to the 1996 Q3 10-Q.
10.17(d)* Fourth Amendment to 1994 Equity Plan -- incorporated by
reference to Exhibit 10.10(d) to the 1997 10-K.
10.17(e)* Form of Employee Stock Option Grant pursuant to the 1994
Equity Plan -- incorporated by reference to Exhibit
10.10(e) to the 1997 10-K.
10.17(f)* Form of Outside Director Stock Option Grant pursuant to
the 1994 Equity Plan -- incorporated by reference to
Exhibit 10.10(f) to the 1997 10-K.
10.17(g)* Form of Restricted Stock Grant pursuant to the 1994
Equity Plan -- incorporated by reference to Exhibit
10.10(g) to the 1997 10-K.
10.18* Continental Airlines, Inc. 1997 Stock Incentive Plan
("1997 Incentive Plan") -- incorporated by reference to
Exhibit 4.3 to Continental's Form S-8 Registration
Statement (No. 333-23165).
10.18(a)* First Amendment to 1997 Incentive Plan -- incorporated by
reference to Exhibit 10.11(a) to the 1997 10-K.
<PAGE>
10.18(b)*Form of Employee Stock Option Grant pursuant to the 1997
Incentive Plan -- incorporated by reference to Exhibit
10.11(b) to the 1997 10-K.
10.18(c)* Form of Outside Director Stock Option Grant pursuant to
the 1997 Incentive Plan -- incorporated by reference to
Exhibit 10.11(c) to the 1997 10-K.
10.19* Amendment and Restatement of the 1994 Equity Plan and the
1997 Incentive Plan. (3)
10.20* Continental Airlines, Inc. 1998 Stock Incentive Plan
("1998 Incentive Plan") -- incorporated by reference to
Exhibit 4.3 to Continental's Form S-8 Registration
Statement (No. 333-57297) (the "1998 S-8").
10.20(a)* Form of Employee Stock Option Grant pursuant to the 1998
Incentive Plan -- incorporated by reference to Exhibit
4.4 to the 1998 S-8.
10.21* Continental Airlines, Inc. Deferred Compensation Plan --
incorporated by reference to Exhibit 4.3 to Continental's
Form S-8 Registration Statement (No. 333-68233).
10.22* Form of Letter Agreement relating to certain flight
benefits between the Company and each of its nonemployee
directors -- incorporated by reference to Exhibit 10.19
to the 1995 10-K.
10.23 Purchase Agreement No. 1783, including exhibits and side
letters, between the Company and Boeing, effective
April 27, 1993, relating to the purchase of Boeing 757
aircraft ("P.A. 1783") -- incorporated by reference to
Exhibit 10.2 to Continental's Quarterly Report on Form
10-Q for the quarter ended June 30, 1993 (File no. 0-
9781). (1)
10.23(a) Supplemental Agreement No. 4 to P.A. 1783, dated March
31, 1995 -- incorporated by reference to Exhibit
10.12(a) to Continental's Annual Report on Form 10-K for
the year ended December 31, 1994 (File no. 0-9781). (1)
10.23(b) Supplemental Agreement No. 6 to P.A. 1783, dated June 13,
1996 -- incorporated by reference to Exhibit 10.6 to the
1996 Q2 10-Q. (1)
10.23(c) Supplemental Agreement No. 7 to P.A. 1783, dated July 23,
1996 -- incorporated by reference to Exhibit 10.6(a) to
the 1996 Q2 10-Q. (1)
10.23(d) Supplemental Agreement No. 8 to P.A. 1783, dated October
27, 1996 -- incorporated by reference to Exhibit 10.11(d)
to Continental's Annual Report on Form 10-K for the year
ended December 31, 1996 (File no. 0-9781) (the "1996 10-
K"). (1)
10.23(e) Letter Agreement No. 6-1162-GOC-044 to P.A. 1783, dated
March 21, 1997 -- incorporated by reference to Exhibit
10.4 to the 1997 Q1 10-Q. (1)
10.23(f) Supplemental Agreement No. 9 to P.A. 1783, dated August
13, 1997 -- incorporated by reference to Exhibit 10.1 to
Continental's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997 (File no. 0-9781). (1)
10.23(g) Supplemental Agreement No. 10, including side letters, to
P.A. 1783, dated October 10, 1997 -- incorporated by
reference to Exhibit 10.13(g) to the 1997 10-K. (1)
10.23(h) Supplemental Agreement No. 11, including exhibits and
side letters, to P.A. 1783, dated July 30, 1998 --
incorporated by reference to Exhibit 10.2 to
Continental's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 (File no. 0-9781) (the
"1998 Q3 10-Q"). (1)
10.23(i) Supplemental Agreement No. 12, including side letter, to
P.A. 1783, dated September 29, 1998. (2)(3)
10.23(j) Supplemental Agreement No. 13 to P.A. 1783, dated
November 16, 1998. (2)(3)
10.23(k) Supplemental Agreement No. 14, including side letter, to
P.A. 1783, dated December 17, 1998. (2)(3)
10.24 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
aircraft ("P.A. 1951") -- incorporated by reference to
Exhibit 10.8 to the 1996 Q2 10-Q. (1)
10.24(a) Supplemental Agreement No. 1 to P.A. 1951, dated October
10, 1996 -- incorporated by reference to Exhibit 10.14(a)
to the 1996 10-K. (1)
10.24(b) Supplemental Agreement No. 2 to P.A. 1951, dated March 5,
1997 -- incorporated by reference to Exhibit 10.3 to the
1997 Q1 10-Q. (1)
10.24(c) Supplemental Agreement No. 3, including exhibit and side
letter, to P.A. 1951, dated July 17, 1997 -- incorporated
by reference to Exhibit 10.14(c) to the 1997 10-K. (1)
10.24(d) Supplemental Agreement No. 4, including exhibits and side
letters, to P.A. 1951, dated October 10, 1997 --
incorporated by reference to Exhibit 10.14(d) to the 1997
10-K. (1)
10.24(e) Supplemental Agreement No. 5, including exhibits and side
letters, to P.A. 1951 dated October 10, 1997 --
incorporated by reference to Exhibit 10.1 to the 1998 Q2
10-Q. (1)
10.24(f) Supplemental Agreememt No. 6, including exhibits and side
letters, to P.A. 1951, dated July 30, 1998 -- incor-
porated by reference to Exhibit 10.1 to the 1998 Q3 10-Q.
(1)
10.24(g) Supplemental Agreement No. 7, including side letters, to
P.A. 1951, dated November 12, 1998. (2)(3)
10.24(h) Supplemental Agreement No. 8, including side letters, to
P.A. 1951, dated December 7, 1998. (2)(3)
10.24(i) Letter Agreement No. 6-1162-GOC-131R1 to P.A. 1951, dated
March 26, 1998 -- incorporated by reference to Exhibit
10.1 to Continental's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998 (File no. 0-9781). (1)
10.25 Aircraft General Terms Agreement between the Company and
Boeing, dated October 10, 1997 -- incorporated by
reference to Exhibit 10.15 to the 1997 10-K. (1)
10.25(a) Letter Agreement No. 6-1162-GOC-136 between the Company
and Boeing, dated October 10, 1997, relating to certain
long-term aircraft purchase commitments of the Company --
incorporated by reference to Exhibit 10.15(a) to the 1997
10-K. (1)
10.26 Purchase Agreement No. 2060, including exhibits and side
letters, between the Company and Boeing, dated October
10, 1997, relating to the purchase of Boeing 767 aircraft
("P.A. 2060") -- incorporated by reference to Exhibit
10.16 to the 1997 10-K. (1)
10.26(a) Supplemental Agreement No. 1 to P.A. 2060 dated December
18, 1997 -- incorporated by reference to Exhibit 10.16(a)
to the 1997 10-K. (1)
10.27 Purchase Agreement No. 2061, including exhibits and side
letters, between the Company and Boeing, dated October
10, 1997, relating to the purchase of Boeing 777 aircraft
("P.A. 2061") -- incorporated by reference to Exhibit
10.17 to the 1997 10-K. (1)
10.27(a) Supplemental Agreement No. 1 to P.A. 2061 dated December
18, 1997 -- incorporated by reference to Exhibit 10.17(a)
as to the 1997 10-K. (1)
10.27(b) Supplemental Agreement No. 2, including side letter, to
P.A. 2061, dated July 30, 1998. (2) (3)
10.27(c) Supplemental Agreement No. 3, including side letter, to
P.A. 2061, dated September 25, 1998. (2)(3)
10.28 Purchase Agreement No. 2211, including exhibits and side
letters thereto, between the Company and Boeing, dated
November 16, 1998, relating to the purchase of Boeing 767
aircraft. (2)(3)
10.29 Lease Agreement dated as of May 1992 between the City and
County of Denver, Colorado and Continental regarding
Denver International Airport -- incorporated by reference
to Exhibit 10.17 to the 1993 S-1.
10.29(a) Supplemental Lease Agreement, including an exhibit
thereto, dated as of April 3, 1995 between the City and
County of Denver, Colorado and Continental and United Air
Lines, Inc. regarding Denver International Airport --
incorporated by reference to Exhibit 10.15(a) to
Continental's Annual Report on Form 10-K for the year
ended December 31, 1994 (File No. 0-9781).
10.30 Airport Use and Lease Agreement dated as of January 1,
1998 between the Company and the City of Houston, Texas
regarding Bush Intercontinental. (3)
10.30(a) Special Facilities Lease Agreement dated as of March 1,
1997 by and between the Company and the City of Houston,
Texas regarding an automated people mover project at Bush
Intercontinental. (3)
10.30(b) Amended and Restated Special Facilities Lease Agreement
dated as of December 1, 1998 by and between the Company
and the City of Houston, Texas regarding certain terminal
improvement projects at Bush Intercontinental. (3)
10.30(c) Amended and Restated Special Facilities Lease Agreement
dated December 1, 1998 by and between the Company and the
City of Houston, Texas regarding certain airport
improvement projects at Bush Intercontinental. (3)
10.31 Agreement and Lease dated as of May 1987, as
supplemented, between the City of Cleveland, Ohio and
Continental regarding Hopkins International --
incorporated by reference to Exhibit 10.6 to
Continental's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1993 (File no. 0-9781).
10.31(a) Special Facilities Lease Agreement dated as of October
24, 1997 by and between the Company and the City of
Cleveland, Ohio regarding certain concourse expansion
projects at Hopkins International. (3)
10.32 Third Revised Investment Agreement, dated April 21, 1994,
between America West Airlines, Inc. and AmWest Partners,
L.P. -- incorporated by reference to Exhibit 1 to
Continental's Schedule 13D relating to America West
Airlines, Inc. filed on August 25, 1994.
10.33 Letter Agreement No. 11 between the Company and General
Electric Company, dated December 22, 1997, relating to
certain long-term engine purchase commitments of the
Company -- incorporated by reference to Exhibit 10.23 to
the 1997 10-K. (1)
21.1 List of Subsidiaries of Continental. (3)
23.1 Consent of Ernst & Young LLP. (3)
24.1 Powers of attorney executed by certain directors and
officers of Continental. (3)
27.1 Financial Data Schedule. (3)
99.1 Deferred Compensation Plan Trust Agreement, effective as
of January 1, 1999, between Continental Airlines, Inc.
and Chase Bank of Texas, N.A. (3)
__________
* These exhibits relate to management contracts or compensatory
plans or arrangements.
(1) The Commission has granted confidential treatment for a
portion of this exhibit.
(2) The Company has applied to the Commission for confidential
treatment of a portion of this exhibit.
(3) Filed herewith.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4
<SEQUENCE>2
<TEXT>
EXHIBIT 4.7(a)
FIRST AMENDMENT
TO THE
GOVERNANCE AGREEMENT
This First Amendment to the Governance Agreement dated as
of March 2, 1998, is by and among Continental Airlines, Inc., a
Delaware corporation (the "Company"), Newbridge Parent Corporation,
a Delaware corporation (the "Stockholder"), and Northwest Airlines
Corporation, a Delaware corporation that is the holder of all of
the outstanding stock of the Stockholder ("Parent").
WHEREAS, the Company, the Stockholder and the Parent have
entered into that certain Governance Agreement dated as of January
25, 1998 (the "Governance Agreement"), pursuant to which the Parent
and the Stockholder have agreed, among other things, that they and
their respective Affiliates will not, subject to certain exceptions
set forth in the Governance Agreement, Beneficially Own any Voting
Securities in excess of the Permitted Percentage; and
WHEREAS, the Parent and the Stockholder have proposed to
enter into a Purchase Agreement (the "Barlow Agreement") with
Barlow Investors III, LLC, a California limited partnership
("Barlow"), and the guarantors signatory thereto, pursuant to which
the Parent and the Stockholder would acquire Beneficial Ownership
of 979,000 shares of Class A Common Stock Beneficially Owned by
Barlow;
WHEREAS, the Parent and the Stockholder entering into the
Barlow Agreement would cause them to Beneficially Own Voting
Securities in excess of the Permitted Percentage as in effect on
the date hereof; and
WHEREAS, the Parent and the Stockholder have requested
that the Company consent to their entering into the Barlow
Agreement, and the Company is willing to agree thereto subject to
the terms and conditions of this First Amendment; and
WHEREAS, the Company, the Parent and the Stockholder desire to
clarify the effect of the conversion of shares of Class A Common
Stock to Class B Common Stock by the holders thereof under Section
1.01 of the Governance Agreement.
NOW THEREFORE, the Company, the Stockholder and the
Parent, intending to be legally bound, hereby agree as follows:
1. Capitalized terms not otherwise defined herein shall
have their respective meanings set forth in the Governance
Agreement.
2. Section 1.01(d) of the Governance Agreement is
amended and restated to read in its entirety as set forth below:
(d) (i) Except as otherwise set forth in
this subsection (d), if at any time the Parent
or the Stockholder becomes aware that it and
its Affiliates Beneficially Own more than the
Permitted Percentage, then the Parent shall
promptly notify the Company, and the Parent
and the Stockholder, as appropriate, shall
promptly take all action necessary to reduce
the amount of Voting Securities Beneficially
Owned by such Persons to an amount not greater
than the Permitted Percentage.
(ii) If the Voting Securities
Beneficially Owned by the Stockholder and its
Affiliates exceed the Permitted Percentage (A)
solely by reason of repurchases of Voting
Securities by the Company or (B) as a result
of the transactions otherwise permitted by the
terms of this Agreement, then the Stockholder
shall not be required to reduce the amount of
Voting Securities Beneficially Owned by such
Persons and the percentage of the Fully
Diluted Voting Power represented by the Voting
Securities Beneficially Owned by such Persons
shall become the Permitted Percentage.
(iii) Notwithstanding the provisions of
Section 1.01(a), if the Voting Securities
Beneficially Owned by the Stockholder and its
Affiliates exceed the Permitted Percentage
solely by reason of the Parent's and the
Stockholder's entering into (A) the Purchase
Agreement dated as of March 2, 1998 (the
"Barlow Agreement") among the Parent, the
Stockholder, Barlow Investors III, LLC, a
California limited liability company
("Barlow"), and the guarantors signatory
thereto, respecting the sale by Barlow of
979,000 shares of Class A Common Stock to the
Stockholder, and (B) the Investment Agreement,
and the purchase of (C) the 979,000 shares of
Class A Common Stock pursuant to the Barlow
Agreement, and (D) Voting Securities pursuant
to the Investment Agreement, the Stockholder
and its Affiliates shall not be required to
reduce the amount of Voting Securities
Beneficially Owned by such Persons; provided
that the Permitted Percentage shall not be
changed as a result thereof, and, if the Fully
Diluted Voting Power of the Voting Securities
Beneficially Owned by the Stockholder and its
Affiliates is subsequently reduced to or below
the Permitted Percentage, neither the
Stockholder, the Parent, nor any of their
respective Affiliates shall Beneficially Own
any Voting Securities in excess of the
Permitted Percentage after such reduction.
(iv) Notwithstanding the provisions of
Section 1.01(a), if the Voting Securities
Beneficially Owned by the Stockholders and its
Affiliates exceed the Permitted Percentage
solely by reason of the conversion of shares
of Class A Common Stock into shares of Class B
Common Stock by the holders thereof, the
Stockholder and its Affiliates shall not be
required to reduce the amount of Voting
Securities Beneficially Owned by such Persons;
provided that, the Permitted Percentage shall
not be changed as a result of any such
conversion, and if the Fully Diluted Voting
Power of the Voting Securities Beneficially
Owned by the Stockholder and its Affiliates is
subsequently reduced to or below the Permitted
Percentage, neither the Stockholder, the
Parent, nor any of their respective Affiliates
shall Beneficially Own any Voting Securities
in excess of the Permitted Percentage after
such reduction.
3. The Company hereby represents and warrants to the
Parent and the Stockholder that this First Amendment to the
Governance Agreement has been approved by a Majority Vote.
4. This First Amendment may be signed in any number of
counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same
instrument.
5. Except as expressly modified by this First Amendment
to the Governance Agreement, all of the terms, conditions and
provisions of the Governance Agreement shall remain unchanged and
in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this
First Amendment to the Governance Agreement to be executed as of
the date first referred to above.
Northwest Airlines Corporation
By:
Douglas M Steenland
Senior Vice President,
General Counsel
and Secretary
Newbridge Parent Corporation
By:
Douglas M Steenland
Vice President, Secretary
and Assistant Treasurer
By:
Continental Airlines, Inc.
By:
Jeffery A. Smisek
Executive Vice President,
General Counsel
and Secretary
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>3
<TEXT>
EXHIBIT 10.3
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Agreement")
is made by and between CONTINENTAL AIRLINES, INC., a Delaware
corporation ("Company"), and GORDON M. BETHUNE ("Executive").
W I T N E S S E T H:
WHEREAS, Company and Executive are parties to that certain
Amended and Restated Employment Agreement dated as of November 15,
1995, as amended by Amendment to Employment Agreement dated as of
April 19, 1996 and Amendment to Employment Agreement dated as of
September 30, 1996 (as so amended, the "Existing Agreement"); and
WHEREAS, Air Partners, L.P., its partners and certain
affiliates have entered into an Investment Agreement dated as of
January 25, 1998, as amended, with Northwest Airlines Corporation
and its affiliate (the "Investment Agreement"), which investment
agreement provides for the acquisition by an affiliate of Northwest
Airlines Corporation of beneficial ownership of the Class A common
stock and warrants held by Air Partners, L.P., subject to certain
conditions; and
WHEREAS, the acquisition by an affiliate of Northwest Airlines
Corporation of beneficial ownership of the Class A common stock
held by Air Partners, L.P. contemplated by the Investment Agreement
(the "Acquisition") will, upon the closing thereof, constitute a
Change in Control for purposes of the Company's 1994 Incentive
Equity Plan, as amended, the Company's 1997 Stock Incentive Plan,
as amended, the Company's Executive Bonus Program and the Existing
Agreement; and
WHEREAS, the Human Resources Committee and the Board of
Directors of the Company have deemed it advisable and in the best
interests of the Company and its stockholders to assure management
continuity for the Company and, consistent therewith, have
authorized the execution, delivery and performance by the Company
of this Agreement;
WHEREAS, in connection therewith, the parties desire to amend
the Existing Agreement and restate it, as so amended, in its
entirety as this Agreement, effective as of the Effective Date (as
defined below);
NOW, THEREFORE, for and in consideration of the mutual
promises, covenants and obligations contained herein, Company and
Executive agree as follows:
ARTICLE 1: EMPLOYMENT AND DUTIES
1.1 Employment; Effective Date. Company agrees to employ
Executive and Executive agrees to be employed by Company, beginning
as of the Effective Date (as hereinafter defined) and continuing
for the period of time set forth in Article 2 of this Agreement,
subject to the terms and conditions of this Agreement. For
purposes of this Agreement, the "Effective Date" shall be the date
of the closing of the Acquisition contemplated by the Investment
Agreement.
1.2 Positions. From and after the Effective Date, Company
shall employ Executive in the positions of Chairman of the Board
and Chief Executive Officer of Company, or in such other positions
as the parties mutually may agree, and shall, for the full term of
Executive's employment hereunder, cause Executive to be nominated
for election as a director of Company and use its best efforts to
secure such election.
1.3 Duties and Services. Executive agrees to serve in the
positions referred to in paragraph 1.2 and, if elected, as a
director of Company and to perform diligently and to the best of
his abilities the duties and services appertaining to such offices
as set forth in the Bylaws of Company in effect on the Effective
Date, as well as such additional duties and services appropriate to
such offices which the parties mutually may agree upon from time to
time.
ARTICLE 2: TERM AND TERMINATION OF EMPLOYMENT
2.1 Term. Unless sooner terminated pursuant to other
provisions hereof, Company agrees to employ Executive for a five-
year period beginning on the Effective Date. Said term of
employment shall be extended automatically for an additional
successive five-year period as of the fifth anniversary of the
Effective Date and as of the last day of each successive five-year
period of time thereafter that this Agreement is in effect;
provided, however, that if, prior to the date which is six months
before the last day of any such five-year term of employment,
either party shall give written notice to the other that no such
automatic extension shall occur, then Executive's employment shall
terminate on the last day of the five-year term of employment
during which such notice is given.
2.2 Company's Right to Terminate. Notwithstanding the
provisions of paragraph 2.1, Company, acting pursuant to an express
resolution of the Board of Directors of Company (the "Board of
Directors"), shall have the right to terminate Executive's employ-
ment under this Agreement at any time for any of the following
reasons:
(i) upon Executive's death;
(ii) upon Executive's becoming incapacitated for a
period of at least 180 days by accident, sickness or other
circumstance which renders him mentally or physically
incapable of performing the material duties and services
required of him hereunder on a full-time basis during such
period;
(iii) if, in carrying out his duties hereunder,
Executive engages in conduct that constitutes willful gross
neglect or willful gross misconduct resulting in material
economic harm to Company;
(iv) upon the conviction of Executive for a felony or
any crime involving moral turpitude; or
(v) for any other reason whatsoever, in the sole
discretion of the Board of Directors.
2.3 Executive's Right to Terminate. Notwithstanding the
provisions of paragraph 2.1, Executive shall have the right to
terminate his employment under this Agreement at any time for any
of the following reasons:
(i) the assignment to Executive by the Board of
Directors or other officers or representatives of Company of
duties materially inconsistent with the duties associated with
the positions described in paragraph 1.2 as such duties are
constituted as of the Effective Date, or the failure to elect
or reelect Executive to any of the positions described in
paragraph 1.2 or the removal of him from any such positions;
(ii) a material diminution in the nature or scope of
Executive's authority, responsibilities, or titles from those
applicable to him as of the Effective Date, including a
change in the reporting structure so that Executive reports to
someone other than the Board of Directors;
(iii) the occurrence of acts or conduct on the part of
Company, its Board of Directors, or its officers,
representatives or stockholders which prevent Executive from,
or substantively hinder Executive in, performing his duties or
responsibilities pursuant to this Agreement;
(iv) Company requiring Executive to be permanently
based anywhere outside a major urban center in Texas;
(v) the taking of any action by Company that would
materially adversely affect the corporate amenities enjoyed by
Executive on the Effective Date;
(vi) a material breach by Company of any provision of
this Agreement which, if correctable, remains uncorrected for
30 days following written notice of such breach by Executive
to Company, it being agreed that any reduction in Executive's
then current annual base salary, or any reduction in
Executive's annual cash bonus opportunity as a percentage of
such base salary from that percentage in effect on the
Effective Date (i.e, 0% to 125% of base salary) or any
material change in the frequency of payment thereof or the
performance factors on which such bonus is based, shall
constitute a material breach by Company of this Agreement; or
(vii) for any other reason whatsoever, in the sole
discretion of Executive.
2.4 Notice of Termination. If Company or Executive desires
to terminate Executive's employment hereunder at any time prior to
expiration of the term of employment as provided in paragraph 2.1,
it or he shall do so by giving written notice to the other party
that it or he has elected to terminate Executive's employment
hereunder and stating the effective date and reason for such
termination, provided that no such action shall alter or amend any
other provisions hereof or rights arising hereunder.
ARTICLE 3: COMPENSATION AND BENEFITS
3.1 Base Salary. During the period of this Agreement,
Executive shall receive a minimum annual base salary equal to the
greater of (i) $750,000.00 or (ii) such amount as the parties
mutually may agree upon from time to time. Executive's annual base
salary shall be paid in equal installments in accordance with
Company's standard policy regarding payment of compensation to
executives but no less frequently than semimonthly.
3.2 Bonus Programs. Executive shall participate in each
cash bonus program maintained by Company on and after the Effective
Date (including, without limitation, any such program maintained
for the year during which the Effective Date occurs) at a level
which is not less than the maximum participation level made
available to any Company executive (determined without regard to
period of service or other criteria that might otherwise be
necessary to entitle Executive to such level of participation);
provided that Company shall at all times maintain Executive's
annual cash bonus opportunity as a percentage of his base salary in
an amount which is at least as great as that in effect on the
Effective Date (i.e, 0% to 125% of base salary) and shall not
change in any material respect the payment frequency thereof or the
performance factors on which such bonus is based.
3.3 Life Insurance. During the period of this Agreement,
Company shall maintain one or more policies of life insurance on
the life of Executive providing an aggregate death benefit in an
amount not less than the Termination Payment (as such term is
defined in paragraph 4.7). Executive shall have the right to
designate the beneficiary or beneficiaries of the death benefit
payable pursuant to such policy or policies up to an aggregate
death benefit in an amount equal to the Termination Payment. To
the extent that Company's purchase of, or payment of premiums with
respect to, such policy or policies results in compensation income
to Executive, Company shall pay to Executive an additional payment
(the "Policy Payment") in an amount such that after payment by
Executive of all taxes imposed on Executive with respect to the
Policy Payment, Executive retains an amount of the Policy Payment
equal to the taxes imposed upon Executive with respect to such
purchase or the payment of such premiums. If for any reason
Company fails to maintain the full amount of life insurance
coverage required pursuant to the preceding provisions of this
paragraph 3.3, Company shall, in the event of the death of
Executive while employed by Company, pay Executive's designated
beneficiary or beneficiaries an amount equal to the sum of (1) the
difference between the Termination Payment and any death benefit
payable to Executive's designated beneficiary or beneficiaries
under the policy or policies maintained by Company and (2) such
additional amount as shall be required to hold Executive's estate,
heirs, and such beneficiary or beneficiaries harmless from any
additional tax liability resulting from the failure by Company to
maintain the full amount of such required coverage.
3.4 Vacation and Sick Leave. During each year of his
employment, Executive shall be entitled to vacation and sick leave
benefits equal to the maximum available to any Company executive,
determined without regard to the period of service that might
otherwise be necessary to entitle Executive to such vacation or
sick leave under standard Company policy.
3.5 Supplemental Executive Retirement Plan.
(i) Company agrees to pay Executive the deferred
compensation benefits set forth in this paragraph 3.5 as a
supplemental retirement plan (the "Plan"). The base retirement
benefit under the Plan (the "Base Benefit") shall be in the form of
an annual straight life annuity in an amount equal to the product
of (a) 1.6% times (b) the number of Executive's credited years of
service (as defined below) under the Plan times (c) the Executive's
final average compensation (as defined below). For purposes
hereof, Executive's credited years of service under the Plan shall
be equal to the number of Executive's years of benefit service with
Company, calculated as set forth in the Continental Airlines
Retirement Plan beginning at January 1, 1995; provided, however,
that if Executive is paid the Termination Payment under this
Agreement, Executive shall be further credited with three (3)
additional years of service under the Plan. For purposes hereof,
Executive's final average compensation shall be equal to the
greater of (1) $750,000 or (2) the average of the five highest
annual cash compensation amounts (or, if Executive has been
employed less than five years by Company, the average over the full
years employed by Company) paid to Executive by Company during the
consecutive ten calendar years immediately preceding his
termination of employment at retirement or otherwise. For purposes
hereof, cash compensation shall include base salary plus cash
bonuses (including any amounts deferred (other than Stay Bonus
amounts described below) pursuant to any deferred compensation plan
of the Company), but shall exclude (i) any cash bonus paid on or
prior to March 31, 1995, and (ii) any Stay Bonus paid to Executive
pursuant to that certain Stay Bonus Agreement between Company and
Executive dated as of April 14, 1998. All benefits under the Plan
shall be payable in equal monthly installments beginning on the
first day of the month following the Retirement Date. For purposes
hereof, "Retirement Date" is defined as the later of (A) the date
on which Executive attains (or in the event of his earlier death,
would have attained) age 65 or (B) the date of his retirement from
employment with Company. If Executive is not married on the
Retirement Date, benefits under the Plan will be paid to Executive
during his lifetime in the form of the Base Benefit. If Executive
is married on the Retirement Date, benefits under the Plan will be
paid in the form of a joint and survivor annuity that is
actuarially equivalent (as defined below) to the Base Benefit, with
Executive's spouse as of the Retirement Date being entitled during
her lifetime after Executive's death to a benefit (the "Survivor's
Benefit") equal to 50% of the benefit payable to Executive during
their joint lifetimes. In the event of Executive's death prior to
the Retirement Date, his surviving spouse, if he is married on the
date of his death, will receive beginning on the Retirement Date an
amount equal to the Survivor's Benefit calculated as if Executive
had retired with a joint and survivor annuity on the date before
his date of death. The amount of any benefits payable to Executive
and/or his spouse under the Continental Airlines Retirement Plan
shall be offset against benefits due under the Plan. Executive
shall be vested immediately with respect to benefits due under the
Plan. If Executive's employment with Company terminates for any
reason prior to February 14, 1999, Company shall provide further
benefits under the Plan to ensure that Executive is treated for all
purposes as if he were fully vested under the Continental Airlines
Retirement Plan.
(ii) Executive understands that he must rely upon the
general credit of Company for payment of benefits under the Plan.
Company has not and will not in the future set aside assets for
security or enter into any other arrangement which will cause the
obligation created to be other than a general corporate obligation
of Company or will cause Executive to be more than a general
creditor of Company.
(iii) For purposes of the Plan, the terms "actuarial
equivalent," or "actuarially equivalent" when used with respect to
a specified benefit shall mean the amount of benefit of a different
type or payable at a different age that can be provided at the same
cost as such specified benefit, as computed by the Actuary. The
actuarial assumptions used to determine equivalencies between
different forms of annuities under the Plan shall be the 1984
Unisex Pensioners Mortality 50% male, 50% female calculation (with
males set back one year and females set back five years), with
interest at an annual rate of 7%. The term "Actuary" shall mean
the individual actuary or actuarial firm selected by Company to
service its pension plans generally or if no such individual or
firm has been selected, an individual actuary or actuarial firm
appointed by Company and reasonably satisfactory to Executive
and/or his spouse.
(iv) Company shall indemnify Executive on a fully
grossed-up, after-tax basis for any Medicare payroll taxes (plus
any income taxes on such indemnity payments) incurred by Executive
in connection with the accrual and/or payment of benefits under the
Plan.
3.6 Additional Disability Benefit. If Executive shall
begin to receive long-term disability insurance benefits pursuant
to a plan maintained by Company and if such benefits cease prior to
Executive's attainment of age 65 and while Executive remains
disabled, then Company shall immediately pay Executive upon the
cessation of such benefits a lump-sum, cash payment in an amount
equal to the Termination Payment. If Executive receives payment of
a Termination Payment pursuant to the provisions of Article 4, then
the provisions of this paragraph 3.6 shall terminate. If Executive
shall be disabled at the time his employment with Company
terminates and if Executive shall not be entitled to the payment of
a Termination Payment pursuant to the provisions of Article 4 upon
such termination, then Executive's right to receive the payment
upon the occurrence of the circumstances described in this
paragraph 3.6 shall be deemed to have accrued as of the date of
such termination and shall survive the termination of this
Agreement.
3.7 Other Perquisites. During his employment hereunder,
Executive shall be afforded the following benefits as incidences of
his employment:
(i) Automobile - Company will continue to lease an
automobile (including replacements therefor) of Executive's
choice for Executive's use in accordance with its current
practices with respect thereto during the term of this
Agreement. Company agrees to take such actions as may be
necessary to permit Executive, at his option, to acquire title
to any automobile subject to such a lease at the completion of
the lease term by Executive paying the residual payment then
owing under the lease.
(ii) Business and Entertainment Expenses - Subject to
Company's standard policies and procedures with respect to
expense reimbursement as applied to its executive employees
generally, Company shall reimburse Executive for, or pay on
behalf of Executive, reasonable and appropriate expenses
incurred by Executive for business related purposes, including
dues and fees to industry and professional organizations,
costs of entertainment and business development, and costs
reasonably incurred as a result of Executive's spouse
accompanying Executive on business travel. Company shall also
pay on behalf of Executive the expenses of one athletic club
selected by Executive.
(iii) Parking - Company shall provide at no expense to
Executive a reserved parking place convenient to Executive's
headquarters office and a reserved parking place at George
Bush Intercontinental Airport in Houston, Texas consistent
with past practice.
(iv) Other Company Benefits - Executive and, to the
extent applicable, Executive's family, dependents and
beneficiaries, shall be allowed to participate in all
benefits, plans and programs, including improvements or
modifications of the same, which are now, or may hereafter be,
available to similarly-situated Company employees. Such
benefits, plans and programs may include, without limitation,
profit sharing plan, thrift plan, annual physical
examinations, health insurance or health care plan, life
insurance, disability insurance, pension plan, pass privileges
on Continental Airlines, Flight Benefits and the like.
Company shall not, however, by reason of this paragraph be
obligated to institute, maintain, or refrain from changing,
amending or discontinuing, any such benefit plan or program,
so long as such changes are similarly applicable to executive
employees generally; provided, however, that Company shall not
change, amend or discontinue Executive's Flight Benefits
without his consent.
ARTICLE 4: EFFECT OF TERMINATION ON COMPENSATION
4.1 By Expiration. If Executive's employment hereunder
shall terminate upon expiration of the term provided in paragraph
2.1 hereof, then all compensation and all benefits to Executive
hereunder shall terminate contemporaneously with termination of his
employment, except that the Company shall pay Executive on or
before the effective date of such termination a lump sum, cash
payment in an amount equal to the Existing Severance, the benefits
described in paragraph 3.5 shall continue to be payable, Executive
shall be provided Flight Benefits (as such term is defined in
paragraph 4.7) for the remainder of Executive's lifetime, and, if
such termination shall result from Company's delivery of the
written notice described in paragraph 2.1, then Company shall (i)
cause all options and shares of restricted stock awarded to
Executive, including, without limitation, any such awards under
Company's 1998 Stock Incentive Plan (the "1998 Plan"), and other
Awards (as defined in the 1998 Plan) made to Executive under the
1998 Plan, to vest immediately upon such termination and, with
respect to options, be exercisable in full for 30 days after such
termination, (ii) pay Executive on or before the effective date of
such termination a lump-sum, cash payment in an amount equal to the
Termination Payment, (iii) provide Executive with Outplacement,
Office and Related Services (as such term is defined in paragraph
4.7 and for the time periods described therein), and (iv) provide
Executive and his eligible dependents with Continuation Coverage
(as such term is defined in paragraph 4.7) for a period of three
years beginning on the effective date of such termination.
4.2 By Company. If Executive's employment hereunder shall
be terminated by Company prior to expiration of the term provided
in paragraph 2.1 hereof then, upon such termination, regardless of
the reason therefor, all compensation and all benefits to Executive
hereunder shall terminate contemporaneously with the termination of
such employment, except that the Company shall pay Executive on or
before the effective date of such termination a lump sum, cash
payment in an amount equal to the Existing Severance, the benefits
described in paragraph 3.5 shall continue to be payable, Executive
shall be provided Flight Benefits for the remainder of Executive's
lifetime, and:
(i) if such termination shall be for any reason
other than those encompassed by paragraphs 2.2(i), (ii), (iii)
or (iv), then Company shall provide Executive with the
payments and benefits described in clauses (i) through (iv) of
paragraph 4.1; and
(ii) if such termination shall be for a reason
encompassed by paragraphs 2.2(i) or (ii), then Company shall
(1) cause all options and shares of restricted stock awarded
to Executive, including, without limitation, any such awards
under Company's 1998 Plan, and other Awards (as defined in
the 1998 Plan) made to Executive under the 1998 Plan, to vest
immediately upon such termination and, with respect to
options, be exercisable in full for 30 days after such
termination, and (2) provide Executive (or his designated
beneficiary or beneficiaries) with the benefits contemplated
under paragraph 3.3 or paragraph 3.6, as applicable.
4.3 By Executive. If Executive's employment hereunder
shall be terminated by Executive prior to expiration of the term
provided in paragraph 2.1 hereof then, upon such termination,
regardless of the reason therefor, all compensation and benefits to
Executive hereunder shall terminate contemporaneously with the
termination of such employment, except that the Company shall pay
Executive on or before the effective date of such termination a
lump sum, cash payment in an amount equal to the Existing
Severance, the benefits described in paragraph 3.5 shall continue
to be payable, Executive shall be provided Flight Benefits for the
remainder of Executive's lifetime and, if such termination shall be
pursuant to paragraphs 2.3(i), (ii), (iii), (iv), (v), or (vi),
then Company shall provide Executive with the payments and benefits
described in clauses (i) through (iv) of paragraph 4.1.
4.4 Certain Additional Payments by Company.
Notwithstanding anything to the contrary in this Agreement, if any
payment, distribution or provision of a benefit by Company to or
for the benefit of Executive, whether paid or payable, distributed
or distributable or provided or to be provided pursuant to the
terms of this Agreement or otherwise (a "Payment"), would be
subject to an excise or other special additional tax that would not
have been imposed absent such Payment (including, without
limitation, any excise tax imposed by Section 4999 of the Internal
Revenue Code of 1986, as amended), or any interest or penalties
with respect to such excise or other additional tax (such excise or
other additional tax, together with any such interest or penalties,
are hereinafter collectively referred to as the "Excise Tax"),
Company shall pay to Executive an additional payment (a "Gross-up
Payment") in an amount such that after payment by Executive of all
taxes (including any interest or penalties imposed with respect to
such taxes), including any income taxes and Excise Taxes imposed on
any Gross-up Payment, Executive retains an amount of the Gross-up
Payment (taking into account any similar gross-up payments to
Executive under the Incentive Plan) equal to the Excise Tax imposed
upon the Payments. Company and Executive shall make an initial
determination as to whether a Gross-up Payment is required and the
amount of any such Gross-up Payment. Executive shall notify
Company in writing of any claim by the Internal Revenue Service
which, if successful, would require Company to make a Gross-up
Payment (or a Gross-up Payment in excess of that, if any, initially
determined by Company and Executive) within ten business days after
the receipt of such claim. Company shall notify Executive in
writing at least ten business days prior to the due date of any
response required with respect to such claim if it plans to contest
the claim. If Company decides to contest such claim, Executive
shall cooperate fully with Company in such action; provided,
however, Company shall bear and pay directly or indirectly all
costs and expenses (including additional interest and penalties)
incurred in connection with such action and shall indemnify and
hold Executive harmless, on an after-tax basis, for any Excise Tax
or income tax, including interest and penalties with respect
thereto, imposed as a result of Company's action. If, as a result
of Company's action with respect to a claim, Executive receives a
refund of any amount paid by Company with respect to such claim,
Executive shall promptly pay such refund to Company. If Company
fails to timely notify Executive whether it will contest such claim
or Company determines not to contest such claim, then Company shall
immediately pay to Executive the portion of such claim, if any,
which it has not previously paid to Executive.
4.5 Payment Obligations Absolute. Company's obligation to
pay Executive the amounts and to make the arrangements provided in
this Article 4 shall be absolute and unconditional and shall not be
affected by any circumstances, including, without limitation, any
set-off, counterclaim, recoupment, defense or other right which
Company (including its subsidiaries and affiliates) may have
against him or anyone else. All amounts payable by Company shall
be paid without notice or demand. Executive shall not be obligated
to seek other employment in mitigation of the amounts payable or
arrangements made under any provision of this Article 4, and,
except as provided in paragraph 4.7 with respect to Continuation
Coverage, the obtaining of any such other employment (or the
engagement in any endeavor as an independent contractor, sole
proprietor, partner, or joint venturer) shall in no event effect
any reduction of Company's obligations to make (or cause to be
made) the payments and arrangements required to be made under this
Article 4.
4.6 Liquidated Damages. In light of the difficulties in
estimating the damages upon termination of this Agreement, Company
and Executive hereby agree that the payments and benefits, if any,
to be received by Executive pursuant to this Article 4 shall be
received by Executive as liquidated damages. Payment of the
Termination Payment and the Existing Severance pursuant to
paragraphs 4.1, 4.2 or 4.3 shall be in lieu of any severance
benefit Executive may be entitled to under any severance plan or
policy maintained by Company.
4.7 Certain Definitions and Additional Terms. As used
herein, the following capitalized terms shall have the meanings
assigned below:
(i) "Continuation Coverage" shall mean the continued
coverage of Executive and his eligible dependents under
Company's welfare benefit plans available to executives of
Company who have not terminated employment (or the provision
of equivalent benefits), including, without limitation,
medical, health, dental, life insurance, disability, vision
care, accidental death and dismemberment, and prescription
drug, at no greater cost to Executive than that applicable to
a similarly situated Company executive who has not terminated
employment; provided, however, that (1) subject to clause (2)
below, the coverage under a particular welfare benefit plan
(or the receipt of equivalent benefits) shall terminate upon
Executive's receipt of comparable benefits from a subsequent
employer and (2) if Executive (and/or his eligible dependents)
would have been entitled to retiree coverage under a
particular welfare benefit plan had he voluntarily retired on
the date of his termination of employment, then such coverage
shall be continued as provided in such plan upon the
expiration of the period Continuation Coverage is to be
provided pursuant to this Article 4. Notwithstanding any
provision in this Article 4 to the contrary, Executive's
entitlement to any benefit continuation pursuant to Section
601 et. seq. of the Employee Retirement Income Security Act of
1974, as amended, shall commence at the end of the period of,
and shall not be reduced by the provision of, any applicable
Continuation Coverage;
(ii) "Existing Severance" shall mean the sum of five
million sixty two thousand five hundred dollars ($5,062,500),
which sum represents the severance payable to Executive upon
termination of employment by him after a Change in Control (as
defined in the Existing Agreement) caused by the Acquisition
under the Existing Agreement;
(iii) "Flight Benefits" shall mean flight benefits on
each airline operated by the Company or any of its affiliates
or any successor or successors thereto (the "CO system"),
consisting of the highest priority space available flight
passes for Executive and his eligible family members (as such
eligibility is in effect on the date hereof), a UATP card (or,
in the event of discontinuance of the UATP program, a similar
charge card permitting the purchase of air travel through
direct billing to the Company or any of its affiliates or any
successor or successors thereto (a "Similar Card")) in
Executive's name for charging flights (in any fare class) on
the CO system for Executive, Executive's spouse, Executive's
family and significant others as determined by Executive, a
Gold Elite OnePass Card (or similar highest category successor
frequent flyer card) in Executive's name for use on the CO
system, a membership for Executive and Executive's spouse in
the Company's President's Club (or any successor program
maintained in the CO system) and reimbursement (while an
officer of the Company) of up to $10,000 annually for U.S.
federal, state or local income taxes on imputed income
resulting from such flights (such imputed income to be
calculated during the term of such Flight Benefits at the
lowest published fare (i.e., 21 day advance purchase coach
fare or other lowest available fare) for the applicable flight
on the date of such flight, regardless of the actual fare
class booked or flown, or as otherwise required by law);
(iv) "Outplacement, Office and Related Services"
shall mean (1) outplacement services, at Company's cost and
for a period of twelve months beginning on the date of
Executive's termination of employment, to be rendered by an
agency selected by Executive and approved by the Board of
Directors (with such approval not to be unreasonably
withheld), (2) appropriate and suitable office space at the
Company's headquarters (although not on its executive office
floor) or at a comparable location in downtown Houston for
use by Executive, together with appropriate and suitable
secretarial assistance, at Company's cost and for a period of
ten years beginning on the date of Executive's termination of
employment, (3) a reserved parking place convenient to the
office so provided and a reserved parking place at George Bush
Intercontinental Airport in Houston, Texas consistent with
past practice, at Company's cost and for as long as Executive
retains a residence in Houston, Texas, and (4) other
incidental perquisites (such as free or discount air travel,
car rental, phone or similar service cards) currently enjoyed
by Executive as a result of his position, to the extent then
available for use by Executive, for Executive's lifetime or a
shorter period if such perquisites become unavailable to the
Company for use by Executive; and
(v) "Termination Payment" shall mean an amount equal
to three times the sum of (1) Executive's annual base salary
pursuant to paragraph 3.1 in effect immediately prior to
Executive's termination of employment and (2) a deemed annual
bonus which shall be equal to the Bonus Percentage of the
amount described in clause (1) of this paragraph 4.7(v). The
"Bonus Percentage" shall be a percentage equal to the annual
percentage of base salary (i.e., 0% to 125%) paid or payable
to a participant under the Company's Executive Bonus Program
(or any successor plan or program) with respect to the most
recent fiscal year ended prior to Executive's termination of
employment.
Executive agrees that, after receipt of an invoice or other
accounting statement therefor, he will promptly (and in any event
within 45 days after receipt of such invoice or other accounting
statement) reimburse the Company for all charges on Executive's
UATP card (or Similar Card) which are not for flights on the CO
system and which are not otherwise reimbursable to Executive under
the provisions of paragraph 3.7(ii) hereof. Executive agrees that
the credit availability under Executive's UATP card (or Similar
Card) may be suspended if Executive does not timely reimburse the
Company as described in the foregoing sentence; provided, that,
immediately upon the Company's receipt of Executive's reimbursement
in full, the credit availability under Executive's UATP card (or
Similar Card) will be restored. The sole cost to Executive of
flights on the CO system pursuant to use of Executive's Flight
Benefits will be the imputed income with respect to flights on the
CO system charged on Executive's UATP card (or Similar Card),
calculated throughout the term of Executive's Flight Benefits at
the lowest published fare (i.e., 21 day advance purchase coach fare
or other lowest available fare) for the applicable flight on the
date of such flight, regardless of the actual fare class booked or
flown, or as otherwise required by law, and reported to Executive
as required by applicable law. With respect to any period with
respect to which the Company is obligated to provide up to $10,000
of reimbursement for income taxes as described in paragraph
4.7(iii) above, Executive will provide to the Company, upon
request, a calculation or other evidence of Executive's marginal
tax rate sufficient to permit the Company to calculate accurately
the amount to be so reimbursed to Executive, and Executive
understands that the Company will not make any gross-up payment to
Executive with respect to the income attributable to such
reimbursement. Executive agrees that he will not resell or permit
to be resold any tickets issued on the CO system in connection with
the Flight Benefits. Executive shall be issued a UATP card (or
Similar Card), a Gold Elite OnePass Card (or similar highest
category successor frequent flyer card), a membership card in the
Company's Presidents Club (or any successor program maintained in
the CO system) for Executive and Executive's spouse, an appropriate
flight pass identification card and an Employee Travel Card, each
valid at all times during the term of Executive's Flight
Benefits.
ARTICLE 5: MISCELLANEOUS
5.1 Interest and Indemnification. If any payment to
Executive provided for in this Agreement is not made by Company
when due, Company shall pay to Executive interest on the amount
payable from the date that such payment should have been made until
such payment is made, which interest shall be calculated at 3% plus
the prime or base rate of interest announced by Chase Bank of Texas
N.A. (or any successor thereto) at its principal office in Houston,
Texas (but not in excess of the highest lawful rate), and such
interest rate shall change when and as any such change in such
prime or base rate shall be announced by such bank. If Executive
shall obtain any money judgment or otherwise prevail with respect
to any litigation brought by Executive or Company to enforce or
interpret any provision contained herein, Company, to the fullest
extent permitted by applicable law, hereby indemnifies Executive
for his reasonable attorneys' fees and disbursements incurred in
such litigation and hereby agrees (i) to pay in full all such fees
and disbursements and (ii) to pay prejudgment interest on any money
judgment obtained by Executive from the earliest date that payment
to him should have been made under this Agreement until such
judgment shall have been paid in full, which interest shall be
calculated at the rate set forth in the preceding sentence.
5.2 Notices. For purposes of this Agreement, notices and
all other communications provided for herein shall be in writing
and shall be deemed to have been duly given when personally
delivered or when mailed by United States registered or certified
mail, return receipt requested, postage prepaid, addressed as
follows:
If to Company to : Continental Airlines, Inc.
2929 Allen Parkway, Suite 2010
Houston, Texas 77019
Attention: General Counsel
If to Executive to : Mr. Gordon M. Bethune
3340 Del Monte
Houston, Texas 77019
or to such other address as either party may furnish to the other
in writing in accordance herewith, except that notices of changes
of address shall be effective only upon receipt.
5.3 Applicable Law. This contract is entered into under,
and shall be governed for all purposes by, the laws of the State of
Texas.
5.4 No Waiver. No failure by either party hereto at any
time to give notice of any breach by the other party of, or to
require compliance with, any condition or provision of this
Agreement shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent
time.
5.5 Severability. If a court of competent jurisdiction
determines that any provision of this Agreement is invalid or
unenforceable, then the invalidity or unenforceability of that
provision shall not affect the validity or enforceability of any
other provision of this Agreement, and all other provisions shall
remain in full force and effect.
5.6 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original,
but all of which together will constitute one and the same
Agreement.
5.7 Withholding of Taxes and Other Employee Deductions.
Company may withhold from any benefits and payments made pursuant
to this Agreement all federal, state, city and other taxes as may
be required pursuant to any law or governmental regulation or
ruling and all other normal employee deductions made with respect
to Company's employees generally.
5.8 Headings. The paragraph headings have been inserted
for purposes of convenience and shall not be used for interpretive
purposes.
5.9 Gender and Plurals. Wherever the context so requires,
the masculine gender includes the feminine or neuter, and the
singular number includes the plural and conversely.
5.10 Successors. This Agreement shall be binding upon and
inure to the benefit of Company and any successor of the Company,
including without limitation any person, association, or entity
which may hereafter acquire or succeed to all or substantially all
of the business or assets of Company by any means whether direct or
indirect, by purchase, merger, consolidation, or otherwise. Except
as provided in the preceding sentence, this Agreement, and the
rights and obligations of the parties hereunder, are personal and
neither this Agreement, nor any right, benefit or obligation of
either party hereto, shall be subject to voluntary or involuntary
assignment, alienation or transfer, whether by operation of law or
otherwise, without the prior written consent of the other party.
5.11 Term. This Agreement has a term co-extensive with the
term of employment as set forth in paragraph 2.1. Termination
shall not affect any right or obligation of any party which is
accrued or vested prior to or upon such termination.
5.12 Entire Agreement. Except as provided in (i) the
benefits, plans, and programs referenced in paragraph 3.7(iv) and
any awards under the Company's stock incentive or similar plans,
and (ii) that certain Stay Bonus Agreement dated as of April 14,
1998 between Company and Executive, this Agreement, as of the
Effective Date, will constitute the entire agreement of the parties
with regard to the subject matter hereof, and will contain all the
covenants, promises, representations, warranties and agreements
between the parties with respect to employment of Executive by
Company. Without limiting the scope of the preceding sentence, all
prior understandings and agreements among the parties hereto
relating to the subject matter hereof (including, without
limitation, the Existing Agreement, but only from and after the
Effective Date) are, as of the Effective Date, null and void and of
no further force and effect. Any modification of this Agreement
shall be effective only if it is in writing and signed by the party
to be charged.
5.13 Deemed Resignations. Any termination of Executive's
employment shall constitute an automatic resignation of Executive
as an officer of Company and each affiliate of Company, and an
automatic resignation of Executive from the Board of Directors and
from the board of directors of any affiliate of Company.
5.14 Executive Bonus Program. Executive agrees that the
payment to Executive of the Existing Severance hereunder will not
be deemed to be "in connection with circumstances which would
permit such Participant to receive severance benefits pursuant to
any contract of employment between such Participant and the Company
or any of its subsidiaries" within the meaning of clause (d) of the
last sentence of Section 5 of the Company's Executive Bonus
Program, as in effect on the date hereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the 20th day of November, 1998, but to be effective
as of the Effective Date.
CONTINENTAL AIRLINES, INC.
By: __________________________
Name: Jeffery A. Smisek
Title: Executive Vice President
"EXECUTIVE"
________________________________
GORDON M. BETHUNE
APPROVED:
_______________________________
Thomas J. Barrack, Jr.
Chair, Human Resources Committee
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>4
<TEXT>
EXHIBIT 10.4
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Agreement")
is made by and between CONTINENTAL AIRLINES, INC., a Delaware
corporation ("Company"), and GREGORY D. BRENNEMAN ("Executive").
W I T N E S S E T H:
WHEREAS, Company and Executive are parties to that certain
Amended and Restated Employment Agreement dated as of November 15,
1995, as amended by Amendment to Employment Agreement dated as of
April 19, 1996 and Amendment to Employment Agreement dated as of
September 30, 1996 (as so amended, the "Existing Agreement"); and
WHEREAS, Air Partners, L.P., its partners and certain
affiliates have entered into an Investment Agreement dated as of
January 25, 1998, as amended, with Northwest Airlines Corporation
and its affiliate (the "Investment Agreement"), which investment
agreement provides for the acquisition by an affiliate of Northwest
Airlines Corporation of beneficial ownership of the Class A common
stock and warrants held by Air Partners, L.P., subject to certain
conditions; and
WHEREAS, the acquisition by an affiliate of Northwest Airlines
Corporation of beneficial ownership of the Class A common stock
held by Air Partners, L.P. contemplated by the Investment Agreement
(the "Acquisition") will, upon the closing thereof, constitute a
Change in Control for purposes of the Company's 1994 Incentive
Equity Plan, as amended, the Company's 1997 Stock Incentive Plan,
as amended, the Company's Executive Bonus Program and the Existing
Agreement; and
WHEREAS, the Human Resources Committee and the Board of
Directors of the Company have deemed it advisable and in the best
interests of the Company and its stockholders to assure management
continuity for the Company and, consistent therewith, have
authorized the execution, delivery and performance by the Company
of this Agreement;
WHEREAS, in connection therewith, the parties desire to amend
the Existing Agreement and restate it, as so amended, in its
entirety as this Agreement, effective as of the Effective Date (as
defined below);
NOW, THEREFORE, for and in consideration of the mutual
promises, covenants and obligations contained herein, Company and
Executive agree as follows:
ARTICLE 1: EMPLOYMENT AND DUTIES
1.1 Employment; Effective Date. Company agrees to employ
Executive and Executive agrees to be employed by Company, beginning
as of the Effective Date (as hereinafter defined) and continuing
for the period of time set forth in Article 2 of this Agreement,
subject to the terms and conditions of this Agreement. For
purposes of this Agreement, the "Effective Date" shall be the date
of the closing of the Acquisition contemplated by the Investment
Agreement.
1.2 Positions. From and after the Effective Date, Company
shall employ Executive in the positions of President and Chief
Operating Officer of Company, or in such other positions as the
parties mutually may agree, and shall, for the full term of
Executive's employment hereunder, cause Executive to be nominated
for election as a director of Company and use its best efforts to
secure such election.
1.3 Duties and Services. Executive agrees to serve in the
positions referred to in paragraph 1.2 and, if elected, as a
director of Company and to perform diligently and to the best of
his abilities the duties and services appertaining to such offices
as set forth in the Bylaws of Company in effect on the Effective
Date, as well as such additional duties and services appropriate to
such offices which the parties mutually may agree upon from time to
time.
ARTICLE 2: TERM AND TERMINATION OF EMPLOYMENT
2.1 Term. Unless sooner terminated pursuant to other
provisions hereof, Company agrees to employ Executive for a five-
year period beginning on the Effective Date. Said term of
employment shall be extended automatically for an additional
successive five-year period as of the fifth anniversary of the
Effective Date and as of the last day of each successive five-year
period of time thereafter that this Agreement is in effect;
provided, however, that if, prior to the date which is six months
before the last day of any such five-year term of employment,
either party shall give written notice to the other that no such
automatic extension shall occur, then Executive's employment shall
terminate on the last day of the five-year term of employment
during which such notice is given.
2.2 Company's Right to Terminate. Notwithstanding the
provisions of paragraph 2.1, Company, acting pursuant to an express
resolution of the Board of Directors of Company (the "Board of
Directors"), shall have the right to terminate Executive's
employment under this Agreement at any time for any of the
following reasons:
(i) upon Executive's death;
(ii) upon Executive's becoming incapacitated for a
period of at least 180 days by accident, sickness or other
circumstance which renders him mentally or physically
incapable of performing the material duties and services
required of him hereunder on a full-time basis during such
period;
(iii) if, in carrying out his duties hereunder,
Executive engages in conduct that constitutes willful gross
neglect or willful gross misconduct resulting in material
economic harm to Company;
(iv) upon the conviction of Executive for a felony or
any crime involving moral turpitude; or
(v) for any other reason whatsoever, in the sole
discretion of the Board of Directors.
2.3 Executive's Right to Terminate. Notwithstanding the
provisions of paragraph 2.1, Executive shall have the right to
terminate his employment under this Agreement at any time for any
of the following reasons:
(i) the assignment to Executive by the Board of
Directors or other officers or representatives of Company of
duties materially inconsistent with the duties associated with
the positions described in paragraph 1.2 as such duties are
constituted as of the Effective Date, or the failure to elect
or reelect Executive to any of the positions described in
paragraph 1.2 or the removal of him from any such positions;
(ii) a material diminution in the nature or scope of
Executive's authority, responsibilities, or titles from those
applicable to him as of the Effective Date, including a
change in the reporting structure so that Executive reports to
someone other than the Chief Executive Officer or the Board of
Directors;
(iii) the occurrence of acts or conduct on the part of
Company, its Board of Directors, or its officers,
representatives or stockholders which prevent Executive from,
or substantively hinder Executive in, performing his duties or
responsibilities pursuant to this Agreement;
(iv) Company requiring Executive to be permanently
based anywhere outside a major urban center in Texas;
(v) the taking of any action by Company that would
materially adversely affect the corporate amenities enjoyed by
Executive on the Effective Date;
(vi) a material breach by Company of any provision of
this Agreement which, if correctable, remains uncorrected for
30 days following written notice of such breach by Executive
to Company, it being agreed that any reduction in Executive's
then current annual base salary, or any reduction in
Executive's annual cash bonus opportunity as a percentage of
such base salary from that percentage in effect on the
Effective Date (i.e, 0% to 125% of base salary) or any
material change in the frequency of payment thereof or the
performance factors on which such bonus is based, shall
constitute a material breach by Company of this Agreement; or
(vii) for any other reason whatsoever, in the sole
discretion of Executive.
2.4 Notice of Termination. If Company or Executive desires
to terminate Executive's employment hereunder at any time prior to
expiration of the term of employment as provided in paragraph 2.1,
it or he shall do so by giving written notice to the other party
that it or he has elected to terminate Executive's employment
hereunder and stating the effective date and reason for such
termination, provided that no such action shall alter or amend any
other provisions hereof or rights arising hereunder.
ARTICLE 3: COMPENSATION AND BENEFITS
3.1 Base Salary. During the period of this Agreement,
Executive shall receive a minimum annual base salary equal to the
greater of (i) $575,000.00 or (ii) such amount as the parties
mutually may agree upon from time to time. Executive's annual base
salary shall be paid in equal installments in accordance with
Company's standard policy regarding payment of compensation to
executives but no less frequently than semimonthly.
3.2 Bonus Programs. Executive shall participate in each
cash bonus program maintained by Company on and after the Effective
Date (including, without limitation, any such program maintained
for the year during which the Effective Date occurs) at a level
which is not less than the maximum participation level made
available to any Company executive (determined without regard to
period of service or other criteria that might otherwise be
necessary to entitle Executive to such level of participation);
provided that Company shall at all times maintain Executive's
annual cash bonus opportunity as a percentage of his base salary in
an amount which is at least as great as that in effect on the
Effective Date (i.e, 0% to 125% of base salary) and shall not
change in any material respect the payment frequency thereof or the
performance factors on which such bonus is based.
3.3 Life Insurance. During the period of this Agreement,
Company shall maintain one or more policies of life insurance on
the life of Executive providing an aggregate death benefit in an
amount not less than the Termination Payment (as such term is
defined in paragraph 4.7). Executive shall have the right to
designate the beneficiary or beneficiaries of the death benefit
payable pursuant to such policy or policies up to an aggregate
death benefit in an amount equal to the Termination Payment. To
the extent that Company's purchase of, or payment of premiums with
respect to, such policy or policies results in compensation income
to Executive, Company shall pay to Executive an additional payment
(the "Policy Payment") in an amount such that after payment by
Executive of all taxes imposed on Executive with respect to the
Policy Payment, Executive retains an amount of the Policy Payment
equal to the taxes imposed upon Executive with respect to such
purchase or the payment of such premiums. If for any reason
Company fails to maintain the full amount of life insurance
coverage required pursuant to the preceding provisions of this
paragraph 3.3, Company shall, in the event of the death of
Executive while employed by Company, pay Executive's designated
beneficiary or beneficiaries an amount equal to the sum of (1) the
difference between the Termination Payment and any death benefit
payable to Executive's designated beneficiary or beneficiaries
under the policy or policies maintained by Company and (2) such
additional amount as shall be required to hold Executive's estate,
heirs, and such beneficiary or beneficiaries harmless from any
additional tax liability resulting from the failure by Company to
maintain the full amount of such required coverage.
3.4 Vacation and Sick Leave. During each year of his
employment, Executive shall be entitled to vacation and sick leave
benefits equal to the maximum available to any Company executive,
determined without regard to the period of service that might
otherwise be necessary to entitle Executive to such vacation or
sick leave under standard Company policy.
3.5 Supplemental Executive Retirement Plan.
(i) Company agrees to pay Executive the deferred
compensation benefits set forth in this paragraph 3.5 as a
supplemental retirement plan (the "Plan"). The base retirement
benefit under the Plan (the "Base Benefit") shall be in the form of
an annual straight life annuity in an amount equal to the product
of (a) 1.6% times (b) the number of Executive's credited years of
service (as defined below) under the Plan times (c) the Executive's
final average compensation (as defined below). For purposes
hereof, Executive's credited years of service under the Plan shall
be equal to the number of Executive's years of benefit service with
Company, calculated as set forth in the Continental Airlines
Retirement Plan beginning at January 1, 1995; provided, however,
that if Executive is paid the Termination Payment under this
Agreement, Executive shall be further credited with three (3)
additional years of service under the Plan. For purposes hereof,
Executive's final average compensation shall be equal to the
greater of (1) $575,000 or (2) the average of the five highest
annual cash compensation amounts (or, if Executive has been
employed less than five years by Company, the average over the full
years employed by Company) paid to Executive by Company during the
consecutive ten calendar years immediately preceding his
termination of employment at retirement or otherwise. For purposes
hereof, cash compensation shall include base salary plus cash
bonuses (including any amounts deferred (other than Stay Bonus
amounts described below) pursuant to any deferred compensation plan
of the Company), but shall exclude (i) any cash bonus paid on or
prior to March 31, 1995, and (ii) any Stay Bonus paid to Executive
pursuant to that certain Stay Bonus Agreement between Company and
Executive dated as of April 14, 1998. All benefits under the Plan
shall be payable in equal monthly installments beginning on the
first day of the month following the Retirement Date. For purposes
hereof, "Retirement Date" is defined as the later of (A) the date
on which Executive attains (or in the event of his earlier death,
would have attained) age 65 or (B) the date of his retirement from
employment with Company. If Executive is not married on the
Retirement Date, benefits under the Plan will be paid to Executive
during his lifetime in the form of the Base Benefit. If Executive
is married on the Retirement Date, benefits under the Plan will be
paid in the form of a joint and survivor annuity that is
actuarially equivalent (as defined below) to the Base Benefit, with
Executive's spouse as of the Retirement Date being entitled during
her lifetime after Executive's death to a benefit (the "Survivor's
Benefit") equal to 50% of the benefit payable to Executive during
their joint lifetimes. In the event of Executive's death prior to
the Retirement Date, his surviving spouse, if he is married on the
date of his death, will receive beginning on the Retirement Date an
amount equal to the Survivor's Benefit calculated as if Executive
had retired with a joint and survivor annuity on the date before
his date of death. The amount of any benefits payable to Executive
and/or his spouse under the Continental Airlines Retirement Plan
shall be offset against benefits due under the Plan. Executive
shall be vested immediately with respect to benefits due under the
Plan. If Executive's employment with Company terminates for any
reason prior to the date which is the fifth anniversary of
Executive's first date of employment by the Company , Company shall
provide further benefits under the Plan to ensure that Executive is
treated for all purposes as if he were fully vested under the
Continental Airlines Retirement Plan.
(ii) Executive understands that he must rely upon the
general credit of Company for payment of benefits under the Plan.
Company has not and will not in the future set aside assets for
security or enter into any other arrangement which will cause the
obligation created to be other than a general corporate obligation
of Company or will cause Executive to be more than a general
creditor of Company.
(iii) For purposes of the Plan, the terms "actuarial
equivalent," or "actuarially equivalent" when used with respect to
a specified benefit shall mean the amount of benefit of a different
type or payable at a different age that can be provided at the same
cost as such specified benefit, as computed by the Actuary. The
actuarial assumptions used to determine equivalencies between
different forms of annuities under the Plan shall be the 1984
Unisex Pensioners Mortality 50% male, 50% female calculation (with
males set back one year and females set back five years), with
interest at an annual rate of 7%. The term "Actuary" shall mean
the individual actuary or actuarial firm selected by Company to
service its pension plans generally or if no such individual or
firm has been selected, an individual actuary or actuarial firm
appointed by Company and reasonably satisfactory to Executive
and/or his spouse.
(iv) Company shall indemnify Executive on a fully
grossed-up, after-tax basis for any Medicare payroll taxes (plus
any income taxes on such indemnity payments) incurred by Executive
in connection with the accrual and/or payment of benefits under the
Plan.
3.6 Additional Disability Benefit. If Executive shall
begin to receive long-term disability insurance benefits pursuant
to a plan maintained by Company and if such benefits cease prior to
Executive's attainment of age 65 and while Executive remains
disabled, then Company shall immediately pay Executive upon the
cessation of such benefits a lump-sum, cash payment in an amount
equal to the Termination Payment. If Executive receives payment of
a Termination Payment pursuant to the provisions of Article 4, then
the provisions of this paragraph 3.6 shall terminate. If Executive
shall be disabled at the time his employment with Company
terminates and if Executive shall not be entitled to the payment of
a Termination Payment pursuant to the provisions of Article 4 upon
such termination, then Executive's right to receive the payment
upon the occurrence of the circumstances described in this
paragraph 3.6 shall be deemed to have accrued as of the date of
such termination and shall survive the termination of this
Agreement.
3.7 Other Perquisites. During his employment hereunder,
Executive shall be afforded the following benefits as incidences of
his employment:
(i) Automobile - Company will continue to lease an
automobile (including replacements therefor) of Executive's
choice for Executive's use in accordance with its current
practices with respect thereto during the term of this
Agreement. Company agrees to take such actions as may be
necessary to permit Executive, at his option, to acquire title
to any automobile subject to such a lease at the completion of
the lease term by Executive paying the residual payment then
owing under the lease.
(ii) Business and Entertainment Expenses - Subject to
Company's standard policies and procedures with respect to
expense reimbursement as applied to its executive employees
generally, Company shall reimburse Executive for, or pay on
behalf of Executive, reasonable and appropriate expenses
incurred by Executive for business related purposes, including
dues and fees to industry and professional organizations,
costs of entertainment and business development, and costs
reasonably incurred as a result of Executive's spouse
accompanying Executive on business travel. Company shall also
pay on behalf of Executive the expenses of one athletic club
selected by Executive.
(iii) Parking - Company shall provide at no expense to
Executive a reserved parking place convenient to Executive's
headquarters office and a reserved parking place at George
Bush Intercontinental Airport in Houston, Texas consistent
with past practice.
(iv) Other Company Benefits - Executive and, to the
extent applicable, Executive's family, dependents and
beneficiaries, shall be allowed to participate in all
benefits, plans and programs, including improvements or
modifications of the same, which are now, or may hereafter be,
available to similarly-situated Company employees. Such
benefits, plans and programs may include, without limitation,
profit sharing plan, thrift plan, annual physical
examinations, health insurance or health care plan, life
insurance, disability insurance, pension plan, pass privileges
on Continental Airlines, Flight Benefits and the like.
Company shall not, however, by reason of this paragraph be
obligated to institute, maintain, or refrain from changing,
amending or discontinuing, any such benefit plan or program,
so long as such changes are similarly applicable to executive
employees generally; provided, however, that Company shall not
change, amend or discontinue Executive's Flight Benefits
without his consent.
ARTICLE 4: EFFECT OF TERMINATION ON COMPENSATION
4.1 By Expiration. If Executive's employment hereunder
shall terminate upon expiration of the term provided in paragraph
2.1 hereof, then all compensation and all benefits to Executive
hereunder shall terminate contemporaneously with termination of his
employment, except that the Company shall pay Executive on or
before the effective date of such termination a lump sum, cash
payment in an amount equal to the Existing Severance, the benefits
described in paragraph 3.5 shall continue to be payable, Executive
shall be provided Flight Benefits (as such term is defined in
paragraph 4.7) for the remainder of Executive's lifetime, and, if
such termination shall result from Company's delivery of the
written notice described in paragraph 2.1, then Company shall (i)
cause all options and shares of restricted stock awarded to
Executive, including, without limitation, any such awards under
Company's 1998 Stock Incentive Plan (the "1998 Plan"), and other
Awards (as defined in the 1998 Plan) made to Executive under the
1998 Plan, to vest immediately upon such termination and, with
respect to options, be exercisable in full for 30 days after such
termination, (ii) pay Executive on or before the effective date of
such termination a lump-sum, cash payment in an amount equal to the
Termination Payment, (iii) provide Executive with Outplacement,
Office and Related Services (as such term is defined in paragraph
4.7 and for the time periods described therein), and (iv) provide
Executive and his eligible dependents with Continuation Coverage
(as such term is defined in paragraph 4.7) for a period of three
years beginning on the effective date of such termination.
4.2 By Company. If Executive's employment hereunder shall
be terminated by Company prior to expiration of the term provided
in paragraph 2.1 hereof then, upon such termination, regardless of
the reason therefor, all compensation and all benefits to Executive
hereunder shall terminate contemporaneously with the termination of
such employment, except that the Company shall pay Executive on or
before the effective date of such termination a lump sum, cash
payment in an amount equal to the Existing Severance, the benefits
described in paragraph 3.5 shall continue to be payable, Executive
shall be provided Flight Benefits for the remainder of Executive's
lifetime, and:
(i) if such termination shall be for any reason
other than those encompassed by paragraphs 2.2(i), (ii), (iii)
or (iv), then Company shall provide Executive with the
payments and benefits described in clauses (i) through (iv) of
paragraph 4.1; and
(ii) if such termination shall be for a reason
encompassed by paragraphs 2.2(i) or (ii), then Company shall
(1) cause all options and shares of restricted stock awarded
to Executive, including, without limitation, any such awards
under Company's 1998 Plan, and other Awards (as defined in
the 1998 Plan) made to Executive under the 1998 Plan, to vest
immediately upon such termination and, with respect to
options, be exercisable in full for 30 days after such
termination, and (2) provide Executive (or his designated
beneficiary or beneficiaries) with the benefits contemplated
under paragraph 3.3 or paragraph 3.6, as applicable.
4.3 By Executive. If Executive's employment hereunder
shall be terminated by Executive prior to expiration of the term
provided in paragraph 2.1 hereof then, upon such termination,
regardless of the reason therefor, all compensation and benefits to
Executive hereunder shall terminate contemporaneously with the
termination of such employment, except that the Company shall pay
Executive on or before the effective date of such termination a
lump sum, cash payment in an amount equal to the Existing
Severance, the benefits described in paragraph 3.5 shall continue
to be payable, Executive shall be provided Flight Benefits for the
remainder of Executive's lifetime and, if such termination shall be
pursuant to paragraphs 2.3(i), (ii), (iii), (iv), (v), or (vi),
then Company shall provide Executive with the payments and benefits
described in clauses (i) through (iv) of paragraph 4.1.
4.4 Certain Additional Payments by Company.
Notwithstanding anything to the contrary in this Agreement, if any
payment, distribution or provision of a benefit by Company to or
for the benefit of Executive, whether paid or payable, distributed
or distributable or provided or to be provided pursuant to the
terms of this Agreement or otherwise (a "Payment"), would be
subject to an excise or other special additional tax that would not
have been imposed absent such Payment (including, without
limitation, any excise tax imposed by Section 4999 of the Internal
Revenue Code of 1986, as amended), or any interest or penalties
with respect to such excise or other additional tax (such excise or
other additional tax, together with any such interest or penalties,
are hereinafter collectively referred to as the "Excise Tax"),
Company shall pay to Executive an additional payment (a "Gross-up
Payment") in an amount such that after payment by Executive of all
taxes (including any interest or penalties imposed with respect to
such taxes), including any income taxes and Excise Taxes imposed on
any Gross-up Payment, Executive retains an amount of the Gross-up
Payment (taking into account any similar gross-up payments to
Executive under the Incentive Plan) equal to the Excise Tax imposed
upon the Payments. Company and Executive shall make an initial
determination as to whether a Gross-up Payment is required and the
amount of any such Gross-up Payment. Executive shall notify
Company in writing of any claim by the Internal Revenue Service
which, if successful, would require Company to make a Gross-up
Payment (or a Gross-up Payment in excess of that, if any, initially
determined by Company and Executive) within ten business days after
the receipt of such claim. Company shall notify Executive in
writing at least ten business days prior to the due date of any
response required with respect to such claim if it plans to contest
the claim. If Company decides to contest such claim, Executive
shall cooperate fully with Company in such action; provided,
however, Company shall bear and pay directly or indirectly all
costs and expenses (including additional interest and penalties)
incurred in connection with such action and shall indemnify and
hold Executive harmless, on an after-tax basis, for any Excise Tax
or income tax, including interest and penalties with respect
thereto, imposed as a result of Company's action. If, as a result
of Company's action with respect to a claim, Executive receives a
refund of any amount paid by Company with respect to such claim,
Executive shall promptly pay such refund to Company. If Company
fails to timely notify Executive whether it will contest such claim
or Company determines not to contest such claim, then Company shall
immediately pay to Executive the portion of such claim, if any,
which it has not previously paid to Executive.
4.5 Payment Obligations Absolute. Company's obligation to
pay Executive the amounts and to make the arrangements provided in
this Article 4 shall be absolute and unconditional and shall not be
affected by any circumstances, including, without limitation, any
set-off, counterclaim, recoupment, defense or other right which
Company (including its subsidiaries and affiliates) may have
against him or anyone else. All amounts payable by Company shall
be paid without notice or demand. Executive shall not be obligated
to seek other employment in mitigation of the amounts payable or
arrangements made under any provision of this Article 4, and,
except as provided in paragraph 4.7 with respect to Continuation
Coverage, the obtaining of any such other employment (or the
engagement in any endeavor as an independent contractor, sole
proprietor, partner, or joint venturer) shall in no event effect
any reduction of Company's obligations to make (or cause to be
made) the payments and arrangements required to be made under this
Article 4.
4.6 Liquidated Damages. In light of the difficulties in
estimating the damages upon termination of this Agreement, Company
and Executive hereby agree that the payments and benefits, if any,
to be received by Executive pursuant to this Article 4 shall be
received by Executive as liquidated damages. Payment of the
Termination Payment and the Existing Severance pursuant to
paragraphs 4.1, 4.2 or 4.3 shall be in lieu of any severance
benefit Executive may be entitled to under any severance plan or
policy maintained by Company.
4.7 Certain Definitions and Additional Terms. As used
herein, the following capitalized terms shall have the meanings
assigned below:
(i) "Continuation Coverage" shall mean the continued
coverage of Executive and his eligible dependents under
Company's welfare benefit plans available to executives of
Company who have not terminated employment (or the provision
of equivalent benefits), including, without limitation,
medical, health, dental, life insurance, disability, vision
care, accidental death and dismemberment, and prescription
drug, at no greater cost to Executive than that applicable to
a similarly situated Company executive who has not terminated
employment; provided, however, that (1) subject to clause (2)
below, the coverage under a particular welfare benefit plan
(or the receipt of equivalent benefits) shall terminate upon
Executive's receipt of comparable benefits from a subsequent
employer and (2) if Executive (and/or his eligible dependents)
would have been entitled to retiree coverage under a
particular welfare benefit plan had he voluntarily retired on
the date of his termination of employment, then such coverage
shall be continued as provided in such plan upon the
expiration of the period Continuation Coverage is to be
provided pursuant to this Article 4. Notwithstanding any
provision in this Article 4 to the contrary, Executive's
entitlement to any benefit continuation pursuant to Section
601 et. seq. of the Employee Retirement Income Security Act of
1974, as amended, shall commence at the end of the period of,
and shall not be reduced by the provision of, any applicable
Continuation Coverage;
(ii) "Existing Severance" shall mean the sum of three
million eight hundred eighty-one thousand two hundred fifty
dollars ($3,881,250), which sum represents the severance
payable to Executive upon termination of employment by him
after a Change in Control (as defined in the Existing
Agreement) caused by the Acquisition under the Existing
Agreement;
(iii) "Flight Benefits" shall mean flight benefits on
each airline operated by the Company or any of its affiliates
or any successor or successors thereto (the "CO system"),
consisting of the highest priority space available flight
passes for Executive and his eligible family members (as such
eligibility is in effect on the date hereof), a UATP card (or,
in the event of discontinuance of the UATP program, a similar
charge card permitting the purchase of air travel through
direct billing to the Company or any of its affiliates or any
successor or successors thereto (a "Similar Card")) in
Executive's name for charging flights (in any fare class) on
the CO system for Executive, Executive's spouse, Executive's
family and significant others as determined by Executive, a
Gold Elite OnePass Card (or similar highest category successor
frequent flyer card) in Executive's name for use on the CO
system, a membership for Executive and Executive's spouse in
the Company's President's Club (or any successor program
maintained in the CO system) and reimbursement (while an
officer of the Company) of up to $10,000 annually for U.S.
federal, state or local income taxes on imputed income
resulting from such flights (such imputed income to be
calculated during the term of such Flight Benefits at the
lowest published fare (i.e., 21 day advance purchase coach
fare or other lowest available fare) for the applicable flight
on the date of such flight, regardless of the actual fare
class booked or flown, or as otherwise required by law);
(iv) "Outplacement, Office and Related Services"
shall mean (1) outplacement services, at Company's cost and
for a period of twelve months beginning on the date of
Executive's termination of employment, to be rendered by an
agency selected by Executive and approved by the Board of
Directors (with such approval not to be unreasonably
withheld), (2) appropriate and suitable office space at the
Company's headquarters (although not on its executive office
floor) or at a comparable location in downtown Houston for use
by Executive, together with appropriate and suitable
secretarial assistance, at Company's cost and for a period of
three years beginning on the date of Executive's termination
of employment, (3) a reserved parking place convenient to the
office so provided and a reserved parking place at George Bush
Intercontinental Airport in Houston, Texas consistent with
past practice, at Company's cost and for as long as Executive
retains a residence in Houston, Texas, and (4) other
incidental perquisites (such as free or discount air travel,
car rental, phone or similar service cards) currently enjoyed
by Executive as a result of his position, to the extent then
available for use by Executive, for a period of three years
beginning on the date of Executive's termination of employment
or a shorter period if such perquisites become unavailable to
the Company for use by Executive; and
(v) "Termination Payment" shall mean an amount equal
to three times the sum of (1) Executive's annual base salary
pursuant to paragraph 3.1 in effect immediately prior to
Executive's termination of employment and (2) a deemed annual
bonus which shall be equal to the Bonus Percentage of the
amount described in clause (1) of this paragraph 4.7(v). The
"Bonus Percentage" shall be a percentage equal to the annual
percentage of base salary (i.e., 0% to 125%) paid or payable
to a participant under the Company's Executive Bonus Program
(or any successor plan or program) with respect to the most
recent fiscal year ended prior to Executive's termination of
employment.
Executive agrees that, after receipt of an invoice or other
accounting statement therefor, he will promptly (and in any event
within 45 days after receipt of such invoice or other accounting
statement) reimburse the Company for all charges on Executive's
UATP card (or Similar Card) which are not for flights on the CO
system and which are not otherwise reimbursable to Executive under
the provisions of paragraph 3.7(ii) hereof. Executive agrees that
the credit availability under Executive's UATP card (or Similar
Card) may be suspended if Executive does not timely reimburse the
Company as described in the foregoing sentence; provided, that,
immediately upon the Company's receipt of Executive's reimbursement
in full, the credit availability under Executive's UATP card (or
Similar Card) will be restored. The sole cost to Executive of
flights on the CO system pursuant to use of Executive's Flight
Benefits will be the imputed income with respect to flights on the
CO system charged on Executive's UATP card (or Similar Card),
calculated throughout the term of Executive's Flight Benefits at
the lowest published fare (i.e., 21 day advance purchase coach fare
or other lowest available fare) for the applicable flight on the
date of such flight, regardless of the actual fare class booked or
flown, or as otherwise required by law, and reported to Executive
as required by applicable law. With respect to any period with
respect to which the Company is obligated to provide up to $10,000
of reimbursement for income taxes as described in paragraph
4.7(iii) above, Executive will provide to the Company, upon
request, a calculation or other evidence of Executive's marginal
tax rate sufficient to permit the Company to calculate accurately
the amount to be so reimbursed to Executive, and Executive
understands that the Company will not make any gross-up payment to
Executive with respect to the income attributable to such
reimbursement. Executive agrees that he will not resell or permit
to be resold any tickets issued on the CO system in connection with
the Flight Benefits. Executive shall be issued a UATP card (or
Similar Card), a Gold Elite OnePass Card (or similar highest
category successor frequent flyer card), a membership card in the
Company's Presidents Club (or any successor program maintained in
the CO system) for Executive and Executive's spouse, an appropriate
flight pass identification card and an Employee Travel Card, each
valid at all times during the term of Executive's Flight
Benefits.
ARTICLE 5: MISCELLANEOUS
5.1 Interest and Indemnification. If any payment to
Executive provided for in this Agreement is not made by Company
when due, Company shall pay to Executive interest on the amount
payable from the date that such payment should have been made until
such payment is made, which interest shall be calculated at 3% plus
the prime or base rate of interest announced by Chase Bank of Texas
N.A. (or any successor thereto) at its principal office in Houston,
Texas (but not in excess of the highest lawful rate), and such
interest rate shall change when and as any such change in such
prime or base rate shall be announced by such bank. If Executive
shall obtain any money judgment or otherwise prevail with respect
to any litigation brought by Executive or Company to enforce or
interpret any provision contained herein, Company, to the fullest
extent permitted by applicable law, hereby indemnifies Executive
for his reasonable attorneys' fees and disbursements incurred in
such litigation and hereby agrees (i) to pay in full all such fees
and disbursements and (ii) to pay prejudgment interest on any money
judgment obtained by Executive from the earliest date that payment
to him should have been made under this Agreement until such
judgment shall have been paid in full, which interest shall be
calculated at the rate set forth in the preceding sentence.
5.2 Notices. For purposes of this Agreement, notices and
all other communications provided for herein shall be in writing
and shall be deemed to have been duly given when personally
delivered or when mailed by United States registered or certified
mail, return receipt requested, postage prepaid, addressed as
follows:
If to Company to : Continental Airlines, Inc.
2929 Allen Parkway, Suite 2010
Houston, Texas 77019
Attention: General Counsel
If to Executive to : Mr. Gregory D. Brenneman
31 Hollymead
The Woodlands, Texas 77381
or to such other address as either party may furnish to the other
in writing in accordance herewith, except that notices of changes
of address shall be effective only upon receipt.
5.3 Applicable Law. This contract is entered into under,
and shall be governed for all purposes by, the laws of the State of
Texas.
5.4 No Waiver. No failure by either party hereto at any
time to give notice of any breach by the other party of, or to
require compliance with, any condition or provision of this
Agreement shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent
time.
5.5 Severability. If a court of competent jurisdiction
determines that any provision of this Agreement is invalid or
unenforceable, then the invalidity or unenforceability of that
provision shall not affect the validity or enforceability of any
other provision of this Agreement, and all other provisions shall
remain in full force and effect.
5.6 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original,
but all of which together will constitute one and the same
Agreement.
5.7 Withholding of Taxes and Other Employee Deductions.
Company may withhold from any benefits and payments made pursuant
to this Agreement all federal, state, city and other taxes as may
be required pursuant to any law or governmental regulation or
ruling and all other normal employee deductions made with respect
to Company's employees generally.
5.8 Headings. The paragraph headings have been inserted
for purposes of convenience and shall not be used for interpretive
purposes.
5.9 Gender and Plurals. Wherever the context so requires,
the masculine gender includes the feminine or neuter, and the
singular number includes the plural and conversely.
5.10 Successors. This Agreement shall be binding upon and
inure to the benefit of Company and any successor of the Company,
including without limitation any person, association, or entity
which may hereafter acquire or succeed to all or substantially all
of the business or assets of Company by any means whether direct or
indirect, by purchase, merger, consolidation, or otherwise. Except
as provided in the preceding sentence, this Agreement, and the
rights and obligations of the parties hereunder, are personal and
neither this Agreement, nor any right, benefit or obligation of
either party hereto, shall be subject to voluntary or involuntary
assignment, alienation or transfer, whether by operation of law or
otherwise, without the prior written consent of the other party.
5.11 Term. This Agreement has a term co-extensive with the
term of employment as set forth in paragraph 2.1. Termination
shall not affect any right or obligation of any party which is
accrued or vested prior to or upon such termination.
5.12 Entire Agreement. Except as provided in (i) the
benefits, plans, and programs referenced in paragraph 3.7(iv) and
any awards under the Company's stock incentive or similar plans,
and (ii) that certain Stay Bonus Agreement dated as of April 14,
1998 between Company and Executive, this Agreement, as of the
Effective Date, will constitute the entire agreement of the parties
with regard to the subject matter hereof, and will contain all the
covenants, promises, representations, warranties and agreements
between the parties with respect to employment of Executive by
Company. Without limiting the scope of the preceding sentence, all
prior understandings and agreements among the parties hereto
relating to the subject matter hereof (including, without
limitation, the Existing Agreement, but only from and after the
Effective Date) are, as of the Effective Date, null and void and of
no further force and effect. Any modification of this Agreement
shall be effective only if it is in writing and signed by the party
to be charged.
5.13 Deemed Resignations. Any termination of Executive's
employment shall constitute an automatic resignation of Executive
as an officer of Company and each affiliate of Company, and an
automatic resignation of Executive from the Board of Directors and
from the board of directors of any affiliate of Company.
5.14 Executive Bonus Program. Executive agrees that the
payment to Executive of the Existing Severance hereunder will not
be deemed to be "in connection with circumstances which would
permit such Participant to receive severance benefits pursuant to
any contract of employment between such Participant and the Company
or any of its subsidiaries" within the meaning of clause (d) of the
last sentence of Section 5 of the Company's Executive Bonus
Program, as in effect on the date hereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the 20th day of November, 1998, but to be effective
as of the Effective Date.
CONTINENTAL AIRLINES, INC.
By: ___________________________
Name: Jeffery A. Smisek
Title: Executive Vice President
"EXECUTIVE"
_______________________________
GREGORY D. BRENNEMAN
APPROVED:
_______________________________
Thomas J. Barrack, Jr.
Chair, Human Resources Committee
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>5
<TEXT>
EXHIBIT 10.5(a)
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (this "Amendment") is
made by and between Continental Airlines, Inc., This Amendment to
Employment Agreement (this "Amendment") is made by and between
Continental Airlines, Inc., a Delaware corporation ("Company"), and
Lawrence W. Kellner ("Executive").
Recitals:
WHEREAS, Company and Executive are parties to that certain
Amended and Restated Employment Agreement dated as of November 15,
1995, as amended by Amendment to Employment Agreement dated as of
April 19, 1996 and Amendment to Employment Agreement dated as of
September 30, 1996 (as so amended, the "Existing Agreement"); and
WHEREAS, Air Partners, L.P., its partners and certain
affiliates have entered into an Investment Agreement dated as of
January 25, 1998, as amended, with Northwest Airlines Corporation
and its affiliate (the "Investment Agreement"), which investment
agreement provides for the acquisition by an affiliate of Northwest
Airlines Corporation of beneficial ownership of the Class A common
stock and warrants held by Air Partners, L.P., subject to certain
conditions; and
WHEREAS, the acquisition by an affiliate of Northwest Airlines
Corporation of beneficial ownership of the Class A common stock
held by Air Partners, L.P. contemplated by the Investment Agreement
(the "Acquisition") will, upon the closing thereof, constitute a
Change in Control for purposes of the Company's 1994 Incentive
Equity Plan, as amended, the Company's 1997 Stock Incentive Plan,
as amended, the Company's Executive Bonus Program and the Existing
Agreement; and
WHEREAS, the Human Resources Committee and the Board of
Directors of the Company have deemed it advisable and in the best
interests of the Company and its stockholders to assure management
continuity for the Company and, consistent therewith, have
authorized the execution, delivery and performance by the Company
of this Amendment;
NOW THEREFORE, in consideration of the premises, the mutual
agreements herein contained and other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. Paragraph 1.2 of the Existing Agreement is hereby amended to
read in its entirety as follows:
"1.2 Position. Company shall employ Executive in the
position of Executive Vice President and Chief Financial
Officer, or in such other position or positions as the parties
may mutually agree."
2. Paragraph 2.1 of the Existing Agreement is hereby amended to
read in its entirety as follows:
"2.1 Term. Unless sooner terminated pursuant to other
provisions hereof, Company agrees to employ Executive through
the date which is two years and a day after the date of
closing of the acquisition by an affiliate of Northwest
Airlines Corporation of beneficial ownership of the Class A
common stock held by Air Partners, L.P. (the "Acquisition")
contemplated by the Investment Agreement dated as of January
25, 1998, as amended, among Air Partners, L.P., its partners
and certain affiliates and Northwest Airlines Corporation and
its affiliate (the "Investment Agreement")."
3. For purposes of Paragraph 2.3 of the Existing Agreement only,
the term "Effective Date" shall be construed to mean the date of
this Amendment.
4. A new Paragraph 3.5 is hereby added to the Existing Agreement
to read in its entirety as follows:
"3.5 Supplemental Executive Retirement Plan.
(i) Company agrees to pay Executive the deferred
compensation benefits set forth in this paragraph 3.5 as a
supplemental retirement plan (the "Plan"). The base
retirement benefit under the Plan (the "Base Benefit") shall
be in the form of an annual straight life annuity in an amount
equal to the product of (a) 1.6% times (b) the number of
Executive's credited years of service (as defined below) under
the Plan times (c) the Executive's final average compensation
(as defined below). For purposes hereof, Executive's credited
years of service under the Plan shall be equal to the number
of Executive's years of benefit service with Company,
calculated as set forth in the Continental Airlines Retirement
Plan beginning at January 1, 1995; provided, however, that if
Executive is paid the Termination Payment under this
Agreement, Executive shall be further credited with three (3)
additional years of service under the Plan. For purposes
hereof, Executive's final average compensation shall be equal
to the greater of (1) $420,000.00 or (2) the average of the
five highest annual cash compensation amounts (or, if
Executive has been employed less than five years by Company,
the average over the full years employed by the Company) paid
to Executive by Company during the consecutive ten calendar
years immediately preceding his termination of employment at
retirement or otherwise. For purposes hereof, cash
compensation shall include base salary plus cash bonuses
(including any amounts deferred (other than Stay Bonus amounts
described below) pursuant to any deferred compensation plan of
the Company), but shall exclude (i) any cash bonus paid on or
prior to March 31, 1995, and (ii) any Stay Bonus paid to
Executive pursuant to that certain Stay Bonus Agreement
between Company and Executive dated as of April 14, 1998. All
benefits under the Plan shall be payable in equal monthly
installments beginning on the first day of the month following
the Retirement Date. For purposes hereof, "Retirement Date"
is defined as the later of (A) the date on which Executive
attains (or in the event of his earlier death, would have
attained) age 65 or (B) the date of his retirement from
employment with Company. If Executive is not married on the
Retirement Date, benefits under the Plan will be paid to
Executive during his lifetime in the form of the Base Benefit.
If Executive is married on the Retirement Date, benefits under
the Plan will be paid in the form of a joint and survivor
annuity that is actuarially equivalent (as defined below) to
the Base Benefit, with Executive's spouse as of the Retirement
Date being entitled during her lifetime after Executive's
death to a benefit (the "Survivor's Benefit") equal to 50% of
the benefit payable to Executive during their joint lifetimes.
In the event of Executive's death prior to the Retirement
Date, his surviving spouse, if he is married on the date of
his death, will receive beginning on the Retirement Date an
amount equal to the Survivor's Benefit calculated as if
Executive had retired with a joint and survivor annuity on the
date before his date of death. The amount of any benefits
payable to Executive and/or his spouse under the Continental
Airlines Retirement Plan shall be offset against benefits due
under the Plan. Executive shall be vested immediately with
respect to benefits due under the Plan. If Executive's
employment with Company terminates for any reason prior to the
date which is the fifth anniversary of Executive's first date
of employment by the Company, Company shall provide further
benefits under the Plan to ensure that Executive is treated
for all purposes as if he were fully vested under the
Continental Airlines Retirement Plan.
(ii) Executive understands that he must rely upon the
general credit of Company for payment of benefits under the
Plan. Company has not and will not in the future set aside
assets for security or enter into any other arrangement which
will cause the obligation created to be other than a general
corporate obligation of Company or will cause Executive to be
more than a general creditor of Company.
(iii) For purposes of the Plan, the terms "actuarial
equivalent," or "actuarially equivalent" when used with
respect to a specified benefit shall mean the amount of
benefit of a different type or payable at a different age that
can be provided at the same cost as such specified benefit, as
computed by the Actuary. The actuarial assumptions used to
determine equivalencies between different forms of annuities
under the Plan shall be the 1984 Unisex Pensioners Mortality
50% male, 50% female calculation (with males set back one year
and females set back five years), with interest at an annual
rate of 7%. The term "Actuary" shall mean the individual
actuary or actuarial firm selected by Company to service its
pension plans generally or if no such individual or firm has
been selected, an individual actuary or actuarial firm
appointed by Company and reasonably satisfactory to Executive
and/or his spouse.
(iv) Company shall indemnify Executive on a fully grossed-
up, after-tax basis for any Medicare payroll taxes (plus any
income taxes on such indemnity payments) incurred by Executive
in connection with the accrual and/or payment of benefits
under the Plan."
5. Paragraph 4.1 of the Existing Agreement is hereby amended to
read in its entirety as follows:
"4.1 By Expiration. If Executive's employment hereunder
shall terminate upon expiration of the term provided in
paragraph 2.1 hereof, then all compensation and all benefits
to Executive hereunder shall terminate contemporaneously with
termination of his employment; provided, however, that
Executive shall be provided with Flight Benefits for the
remainder of Executive's lifetime, the benefits described in
paragraph 3.5 shall continue to be payable, the benefits
described in clauses (2) through (4) of paragraph 4.7(vi)
shall be provided for the time periods specified therein and
Company shall cause all options and shares of restricted stock
awarded to Executive, including, without limitation, any such
awards under Company's 1998 Stock Incentive Plan (the "1998
Plan"), and other Awards (as defined in the 1998 Plan) made to
Executive under the 1998 Plan, to vest immediately upon such
termination and, with respect to options, be exercisable in
full for 30 days after such termination."
6. Paragraph 4.2 of the Existing Agreement is hereby amended to
read in its entirety as follows:
"4.2 By Company. If Executive's employment hereunder shall
be terminated by Company prior to expiration of the term
provided in paragraph 2.1 hereof then, upon such termination,
regardless of the reason therefor, all compensation and all
benefits to Executive hereunder shall terminate
contemporaneously with the termination of such employment,
except the benefits described in paragraph 3.5 shall continue
to be payable, and if such termination shall be for any reason
other than those encompassed by paragraphs 2.2(i), (ii), (iii)
or (iv), then Company shall (a) pay Executive on or before the
effective date of such termination a lump-sum, cash payment in
an amount equal to the Termination Payment (as such term is
defined in paragraph 4.7) and cause all options and shares of
restricted stock awarded to Executive, including, without
limitation, any such awards under Company's 1998 Plan, and
other Awards (as defined in the 1998 Plan) made to Executive
under the 1998 Plan, to vest immediately upon such termination
and, with respect to options, be exercisable in full for 30
days after such termination, (b) provide Executive with Flight
Benefits (as such term is defined in paragraph 4.7) for the
remainder of Executive's lifetime, (c) provide Executive with
Outplacement Services (as such term is defined in
paragraph 4.7), and (d) provide Executive and his eligible
dependents with Continuation Coverage (as such term is defined
in paragraph 4.7) for the Severance Period."
7. Paragraph 4.3 of the Existing Agreement is hereby amended to
read in its entirety as follows:
"4.3 By Executive. If Executive's employment hereunder
shall be terminated by Executive prior to expiration of the
term provided in paragraph 2.1 hereof then, upon such
termination, regardless of the reason therefor, all
compensation and benefits to Executive hereunder shall
terminate contemporaneously with the termination of
employment, except Executive shall be provided Flight Benefits
(as such term is defined in paragraph 4.7) for the remainder
of Executive's lifetime, the benefits described in paragraph
3.5 shall continue to be payable, and if such termination
shall be pursuant to paragraphs 2.3(i), (ii), (iii), (iv),
(v), or (vi), then Company shall provide Executive with the
payments and benefits described in clauses (a), (c) and (d) of
paragraph 4.2."
8. Paragraph 4.7(ii) of the Existing Agreement is hereby amended
to read in its entirety as follows:
"(ii) "Change in Control" shall have the meaning assigned to
such term in the 1998 Plan (as adopted by the Board of
Directors on April 14, 1998 and in effect on such date, it
being understood that such term shall be the new Change in
Control term contained in the 1998 Plan, and not the alternate
Change in Control term (identical to that contained in the
1997 Stock Incentive Plan) also set forth in the 1998 Plan for
the eventuality that the Acquisition does not close);
provided, however, that Company and Executive agree that the
Acquisition will, upon the closing thereof, constitute a
Change in Control (as defined in this Agreement prior to the
amendment to this Agreement dated as of November 20, 1998) and
will be considered to be, and to have the effect of, a Change
in Control under this Agreement."
9. Paragraph 4.7(vi) of the Existing Agreement is hereby amended
to read in its entirety as follows:
"(vi) "Outplacement Services" shall mean (1) outplacement
services, at Company's cost and for a period of twelve months
beginning on the date of Executive's termination of
employment, to be rendered by an agency selected by Executive
and approved by the Board of Directors or HR Committee (with
such approval not to be unreasonably withheld), (2)
appropriate and suitable office space at the Company's
headquarters (although not on its executive office floor) or
at a comparable location in downtown Houston for use by
Executive, together with appropriate and suitable secretarial
assistance, at Company's cost and for a period of three years
beginning on the date of Executive's termination of
employment, (3) a reserved parking place convenient to the
office so provided and a reserved parking place at George Bush
Intercontinental Airport in Houston, Texas consistent with
past practice, at Company's cost and for as long as Executive
retains a residence in Houston, Texas, and (4) other
incidental perquisites (such as free or discount air travel,
car rental, phone or similar service cards) currently enjoyed
by Executive as a result of his position, to the extent then
available for use by Executive, for a period of three years
beginning on the date of Executive's termination of employment
or a shorter period if such perquisites become unavailable to
the Company for use by Executive;"
10. This Amendment shall be dated as of the date set forth below,
but shall be effective as of the date of closing of the Acquisition
as contemplated by the Investment Agreement.
11. The Existing Agreement, as amended by this Amendment, is
hereby ratified and confirmed and shall continue in full force and
effect in accordance with its terms.
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment as of the 20th day of November, 1998.
CONTINENTAL AIRLINES, INC.
By:____________________________
Name:
Title:
EXECUTIVE
________________________________
Lawrence W. Kellner
APPROVED:
_______________________________
Thomas J. Barrack, Jr.
Chair, Human Resources Committee
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>6
<TEXT>
EXHIBIT 10.6(a)
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (this "Amendment") is
made by and between Continental Airlines, Inc., a Delaware
corporation ("Company"), and C.D. McLean ("Executive").
Recitals:
WHEREAS, Company and Executive are parties to that certain
Amended and Restated Employment Agreement dated as of November 15,
1995, as amended by Amendment to Employment Agreement dated as of
April 19, 1996 and Amendment to Employment Agreement dated as of
September 30, 1996 (as so amended, the "Existing Agreement"); and
WHEREAS, Air Partners, L.P., its partners and certain
affiliates have entered into an Investment Agreement dated as of
January 25, 1998, as amended, with Northwest Airlines Corporation
and its affiliate (the "Investment Agreement"), which investment
agreement provides for the acquisition by an affiliate of Northwest
Airlines Corporation of beneficial ownership of the Class A common
stock and warrants held by Air Partners, L.P., subject to certain
conditions; and
WHEREAS, the acquisition by an affiliate of Northwest Airlines
Corporation of beneficial ownership of the Class A common stock
held by Air Partners, L.P. contemplated by the Investment Agreement
(the "Acquisition") will, upon the closing thereof, constitute a
Change in Control for purposes of the Company's 1994 Incentive
Equity Plan, as amended, the Company's 1997 Stock Incentive Plan,
as amended, the Company's Executive Bonus Program and the Existing
Agreement; and
WHEREAS, the Human Resources Committee and the Board of
Directors of the Company have deemed it advisable and in the best
interests of the Company and its stockholders to assure management
continuity for the Company and, consistent therewith, have
authorized the execution, delivery and performance by the Company
of this Amendment;
NOW THEREFORE, in consideration of the premises, the mutual
agreements herein contained and other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. Paragraph 1.2 of the Existing Agreement is hereby amended to
read in its entirety as follows:
"1.2 Position. Company shall employ Executive in the
position of Executive Vice President - Operations, or in such
other position or positions as the parties may mutually
agree."
2. Paragraph 2.1 of the Existing Agreement is hereby amended to
read in its entirety as follows:
"2.1 Term. Unless sooner terminated pursuant to other
provisions hereof, Company agrees to employ Executive through
the date which is two years and a day after the date of
closing of the acquisition by an affiliate of Northwest
Airlines Corporation of beneficial ownership of the Class A
common stock held by Air Partners, L.P. (the "Acquisition")
contemplated by the Investment Agreement dated as of January
25, 1998, as amended, among Air Partners, L.P., its partners
and certain affiliates and Northwest Airlines Corporation and
its affiliate (the Investment Agreement")."
3. For purposes of Paragraph 2.3 of the Existing Agreement only,
the term "Effective Date" shall be construed to mean the date of
this Amendment.
4. A new Paragraph 3.5 is hereby added to the Existing Agreement
to read in its entirety as follows:
"3.5 Supplemental Executive Retirement Plan.
(i) Company agrees to pay Executive the deferred
compensation benefits set forth in this paragraph 3.5 as a
supplemental retirement plan (the "Plan"). The base
retirement benefit under the Plan (the "Base Benefit") shall
be in the form of an annual straight life annuity in an amount
equal to the product of (a) 1.6% times (b) the number of
Executive's credited years of service (as defined below) under
the Plan times (c) the Executive's final average compensation
(as defined below). For purposes hereof, Executive's credited
years of service under the Plan shall be equal to the number
of Executive's years of benefit service with Company,
calculated as set forth in the Continental Airlines Retirement
Plan beginning at January 1, 1995; provided, however, that if
Executive is paid the Termination Payment under this
Agreement, Executive shall be further credited with three (3)
additional years of service under the Plan. For purposes
hereof, Executive's final average compensation shall be equal
to the greater of (1) $375,000.00 or (2) the average of the
five highest annual cash compensation amounts (or, if
Executive has been employed less than five years by Company,
the average over the full years employed by the Company) paid
to Executive by Company during the consecutive ten calendar
years immediately preceding his termination of employment at
retirement or otherwise. For purposes hereof, cash
compensation shall include base salary plus cash bonuses
(including any amounts deferred (other than Stay Bonus amounts
described below) pursuant to any deferred compensation plan of
the Company), but shall exclude (i) any cash bonus paid on or
prior to March 31, 1995, and (ii) any Stay Bonus paid to
Executive pursuant to that certain Stay Bonus Agreement
between Company and Executive dated as of April 14, 1998. All
benefits under the Plan shall be payable in equal monthly
installments beginning on the first day of the month following
the Retirement Date. For purposes hereof, "Retirement Date"
is defined as the later of (A) the date on which Executive
attains (or in the event of his earlier death, would have
attained) age 65 or (B) the date of his retirement from
employment with Company. If Executive is not married on the
Retirement Date, benefits under the Plan will be paid to
Executive during his lifetime in the form of the Base Benefit.
If Executive is married on the Retirement Date, benefits under
the Plan will be paid in the form of a joint and survivor
annuity that is actuarially equivalent (as defined below) to
the Base Benefit, with Executive's spouse as of the Retirement
Date being entitled during her lifetime after Executive's
death to a benefit (the "Survivor's Benefit") equal to 50% of
the benefit payable to Executive during their joint lifetimes.
In the event of Executive's death prior to the Retirement
Date, his surviving spouse, if he is married on the date of
his death, will receive beginning on the Retirement Date an
amount equal to the Survivor's Benefit calculated as if
Executive had retired with a joint and survivor annuity on the
date before his date of death. The amount of any benefits
payable to Executive and/or his spouse under the Continental
Airlines Retirement Plan shall be offset against benefits due
under the Plan. Executive shall be vested immediately with
respect to benefits due under the Plan. If Executive's
employment with Company terminates for any reason prior to the
date which is the fifth anniversary of Executive's first date
of employment by the Company, Company shall provide further
benefits under the Plan to ensure that Executive is treated
for all purposes as if he were fully vested under the
Continental Airlines Retirement Plan.
(ii) Executive understands that he must rely upon the
general credit of Company for payment of benefits under the
Plan. Company has not and will not in the future set aside
assets for security or enter into any other arrangement which
will cause the obligation created to be other than a general
corporate obligation of Company or will cause Executive to be
more than a general creditor of Company.
(iii) For purposes of the Plan, the terms "actuarial
equivalent," or "actuarially equivalent" when used with
respect to a specified benefit shall mean the amount of
benefit of a different type or payable at a different age that
can be provided at the same cost as such specified benefit, as
computed by the Actuary. The actuarial assumptions used to
determine equivalencies between different forms of annuities
under the Plan shall be the 1984 Unisex Pensioners Mortality
50% male, 50% female calculation (with males set back one year
and females set back five years), with interest at an annual
rate of 7%. The term "Actuary" shall mean the individual
actuary or actuarial firm selected by Company to service its
pension plans generally or if no such individual or firm has
been selected, an individual actuary or actuarial firm
appointed by Company and reasonably satisfactory to Executive
and/or his spouse.
(iv) Company shall indemnify Executive on a fully grossed-
up, after-tax basis for any Medicare payroll taxes (plus any
income taxes on such indemnity payments) incurred by Executive
in connection with the accrual and/or payment of benefits
under the Plan."
5. Paragraph 4.1 of the Existing Agreement is hereby amended to
read in its entirety as follows:
"4.1 By Expiration. If Executive's employment hereunder
shall terminate upon expiration of the term provided in
paragraph 2.1 hereof, then all compensation and all benefits
to Executive hereunder shall terminate contemporaneously with
termination of his employment; provided, however, that
Executive shall be provided with Flight Benefits for the
remainder of Executive's lifetime, the benefits described in
paragraph 3.5 shall continue to be payable, the benefits
described in clauses (2) through (4) of paragraph 4.7(vi)
shall be provided for the time periods specified therein and
Company shall cause all options and shares of restricted stock
awarded to Executive, including, without limitation, any such
awards under Company's 1998 Stock Incentive Plan (the "1998
Plan"), and other Awards (as defined in the 1998 Plan) made to
Executive under the 1998 Plan, to vest immediately upon such
termination and, with respect to options, be exercisable in
full for 30 days after such termination."
6. Paragraph 4.2 of the Existing Agreement is hereby amended to
read in its entirety as follows:
"4.2 By Company. If Executive's employment hereunder shall
be terminated by Company prior to expiration of the term
provided in paragraph 2.1 hereof then, upon such termination,
regardless of the reason therefor, all compensation and all
benefits to Executive hereunder shall terminate
contemporaneously with the termination of such employment,
except the benefits described in paragraph 3.5 shall continue
to be payable, and if such termination shall be for any reason
other than those encompassed by paragraphs 2.2(i), (ii), (iii)
or (iv), then Company shall (a) pay Executive on or before the
effective date of such termination a lump-sum, cash payment in
an amount equal to the Termination Payment (as such term is
defined in paragraph 4.7) and cause all options and shares of
restricted stock awarded to Executive, including, without
limitation, any such awards under Company's 1998 Plan, and
other Awards (as defined in the 1998 Plan) made to Executive
under the 1998 Plan, to vest immediately upon such termination
and, with respect to options, be exercisable in full for 30
days after such termination, (b) provide Executive with Flight
Benefits (as such term is defined in paragraph 4.7) for the
remainder of Executive's lifetime, (c) provide Executive with
Outplacement Services (as such term is defined in para-
graph 4.7), and (d) provide Executive and his eligible
dependents with Continuation Coverage (as such term is defined
in paragraph 4.7) for the Severance Period."
7. Paragraph 4.3 of the Existing Agreement is hereby amended to
read in its entirety as follows:
"4.3 By Executive. If Executive's employment hereunder
shall be terminated by Executive prior to expiration of the
term provided in paragraph 2.1 hereof then, upon such
termination, regardless of the reason therefor, all
compensation and benefits to Executive hereunder shall
terminate contemporaneously with the termination of
employment, except Executive shall be provided Flight Benefits
(as such term is defined in paragraph 4.7) for the remainder
of Executive's lifetime, the benefits described in paragraph
3.5 shall continue to be payable, and if such termination
shall be pursuant to paragraphs 2.3(i), (ii), (iii), (iv),
(v), or (vi), then Company shall provide Executive with the
payments and benefits described in clauses (a), (c) and (d) of
paragraph 4.2."
8. Paragraph 4.7(ii) of the Existing Agreement is hereby amended
to read in its entirety as follows:
"(ii) "Change in Control" shall have the meaning assigned to
such term in the 1998 Plan (as adopted by the Board of
Directors on April 14, 1998 and in effect on such date, it
being understood that such term shall be the new Change in
Control term contained in the 1998 Plan, and not the alternate
Change in Control term (identical to that contained in the
1997 Stock Incentive Plan) also set forth in the 1998 Plan for
the eventuality that the Acquisition does not close);
provided, however, that Company and Executive agree that the
Acquisition will, upon the closing thereof, constitute a
Change in Control (as defined in this Agreement prior to the
amendment to this Agreement dated as of November 20, 1998) and
will be considered to be, and to have the effect of, a Change
in Control under this Agreement."
9. Paragraph 4.7(vi) of the Existing Agreement is hereby amended
to read in its entirety as follows:
"(vi) "Outplacement Services" shall mean (1) outplacement
services, at Company's cost and for a period of twelve months
beginning on the date of Executive's termination of
employment, to be rendered by an agency selected by Executive
and approved by the Board of Directors or HR Committee (with
such approval not to be unreasonably withheld), (2)
appropriate and suitable office space at the Company's
headquarters (although not on its executive office floor) or
at a comparable location in downtown Houston for use by
Executive, together with appropriate and suitable secretarial
assistance, at Company's cost and for a period of three years
beginning on the date of Executive's termination of
employment, (3) a reserved parking place convenient to the
office so provided and a reserved parking place at George Bush
Intercontinental Airport in Houston, Texas consistent with
past practice, at Company's cost and for as long as Executive
retains a residence in Houston, Texas, and (4) other
incidental perquisites (such as free or discount air travel,
car rental, phone or similar service cards) currently enjoyed
by Executive as a result of his position, to the extent then
available for use by Executive, for a period of three years
beginning on the date of Executive's termination of employment
or a shorter period if such perquisites become unavailable to
the Company for use by Executive;"
10. This Amendment shall be dated as of the date set forth below,
but shall be effective as of the date of closing of the Acquisition
as contemplated by the Investment Agreement.
11. The Existing Agreement, as amended by this Amendment, is
hereby ratified and confirmed and shall continue in full force and
effect in accordance with its terms.
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment as of the 20th day of November, 1998.
CONTINENTAL AIRLINES, INC.
By:____________________________
Name:
Title:
EXECUTIVE
________________________________
C.D. McLean
APPROVED:
_______________________________
Thomas J. Barrack, Jr.
Chair, Human Resources Committee
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>7
<TEXT>
EXHIBIT 10.9(a)
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (this "Amendment") is
made by and between Continental Airlines, Inc., a Delaware
corporation ("Company"), and Jeffery A. Smisek ("Executive").
Recitals:
WHEREAS, Company and Executive are parties to that certain
Amended and Restated Employment Agreement dated as of November 15,
1995, as amended by Amendment to Employment Agreement dated as of
April 19, 1996 and Amendment to Employment Agreement dated as of
September 30, 1996 (as so amended, the "Existing Agreement"); and
WHEREAS, Air Partners, L.P., its partners and certain
affiliates have entered into an Investment Agreement dated as of
January 25, 1998, as amended, with Northwest Airlines Corporation
and its affiliate (the "Investment Agreement"), which investment
agreement provides for the acquisition by an affiliate of Northwest
Airlines Corporation of beneficial ownership of the Class A common
stock and warrants held by Air Partners, L.P., subject to certain
conditions; and
WHEREAS, the acquisition by an affiliate of Northwest Airlines
Corporation of beneficial ownership of the Class A common stock
held by Air Partners, L.P. contemplated by the Investment Agreement
(the "Acquisition") will, upon the closing thereof, constitute a
Change in Control for purposes of the Company's 1994 Incentive
Equity Plan, as amended, the Company's 1997 Stock Incentive Plan,
as amended, the Company's Executive Bonus Program and the Existing
Agreement; and
WHEREAS, the Human Resources Committee and the Board of
Directors of the Company have deemed it advisable and in the best
interests of the Company and its stockholders to assure management
continuity for the Company and, consistent therewith, have
authorized the execution, delivery and performance by the Company
of this Amendment;
NOW THEREFORE, in consideration of the premises, the mutual
agreements herein contained and other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. Paragraph 1.2 of the Existing Agreement is hereby amended to
read in its entirety as follows:
"1.2 Position. Company shall employ Executive in the
position of Executive Vice President, General Counsel and
Secretary, or in such other position or positions as the
parties may mutually agree."
2. Paragraph 2.1 of the Existing Agreement is hereby amended to
read in its entirety as follows:
"2.1 Term. Unless sooner terminated pursuant to other
provisions hereof, Company agrees to employ Executive through
the date which is two years and a day after the date of
closing of the acquisition by an affiliate of Northwest
Airlines Corporation of beneficial ownership of the Class A
common stock held by Air Partners, L.P. (the "Acquisition")
contemplated by the Investment Agreement dated as of January
25, 1998, as amended, among Air Partners, L.P., its partners
and certain affiliates and Northwest Airlines Corporation and
its affiliate (the "Investment Agreement")."
3. For purposes of Paragraph 2.3 of the Existing Agreement only,
the term "Effective Date" shall be construed to mean the date of
this Amendment.
4. A new Paragraph 3.5 is hereby added to the Existing Agreement
to read in its entirety as follows:
"3.5 Supplemental Executive Retirement Plan.
(i) Company agrees to pay Executive the deferred
compensation benefits set forth in this paragraph 3.5 as a
supplemental retirement plan (the "Plan"). The base
retirement benefit under the Plan (the "Base Benefit") shall
be in the form of an annual straight life annuity in an amount
equal to the product of (a) 1.6% times (b) the number of
Executive's credited years of service (as defined below) under
the Plan times (c) the Executive's final average compensation
(as defined below). For purposes hereof, Executive's credited
years of service under the Plan shall be equal to the number
of Executive's years of benefit service with Company,
calculated as set forth in the Continental Airlines Retirement
Plan beginning at January 1, 1995; provided, however, that if
Executive is paid the Termination Payment under this
Agreement, Executive shall be further credited with three (3)
additional years of service under the Plan. For purposes
hereof, Executive's final average compensation shall be equal
to the greater of (1) $350,000.00 or (2) the average of the
five highest annual cash compensation amounts (or, if
Executive has been employed less than five years by Company,
the average over the full years employed by the Company) paid
to Executive by Company during the consecutive ten calendar
years immediately preceding his termination of employment at
retirement or otherwise. For purposes hereof, cash
compensation shall include base salary plus cash bonuses
(including any amounts deferred (other than Stay Bonus amounts
described below) pursuant to any deferred compensation plan of
the Company), but shall exclude (i) any cash bonus paid on or
prior to March 31, 1995, and (ii) any Stay Bonus paid to
Executive pursuant to that certain Stay Bonus Agreement
between Company and Executive dated as of April 14, 1998. All
benefits under the Plan shall be payable in equal monthly
installments beginning on the first day of the month following
the Retirement Date. For purposes hereof, "Retirement Date"
is defined as the later of (A) the date on which Executive
attains (or in the event of his earlier death, would have
attained) age 65 or (B) the date of his retirement from
employment with Company. If Executive is not married on the
Retirement Date, benefits under the Plan will be paid to
Executive during his lifetime in the form of the Base Benefit.
If Executive is married on the Retirement Date, benefits under
the Plan will be paid in the form of a joint and survivor
annuity that is actuarially equivalent (as defined below) to
the Base Benefit, with Executive's spouse as of the Retirement
Date being entitled during her lifetime after Executive's
death to a benefit (the "Survivor's Benefit") equal to 50% of
the benefit payable to Executive during their joint lifetimes.
In the event of Executive's death prior to the Retirement
Date, his surviving spouse, if he is married on the date of
his death, will receive beginning on the Retirement Date an
amount equal to the Survivor's Benefit calculated as if
Executive had retired with a joint and survivor annuity on the
date before his date of death. The amount of any benefits
payable to Executive and/or his spouse under the Continental
Airlines Retirement Plan shall be offset against benefits due
under the Plan. Executive shall be vested immediately with
respect to benefits due under the Plan. If Executive's
employment with Company terminates for any reason prior to the
date which is the fifth anniversary of Executive's first date
of employment by the Company, Company shall provide further
benefits under the Plan to ensure that Executive is treated
for all purposes as if he were fully vested under the
Continental Airlines Retirement Plan.
(ii) Executive understands that he must rely upon the
general credit of Company for payment of benefits under the
Plan. Company has not and will not in the future set aside
assets for security or enter into any other arrangement which
will cause the obligation created to be other than a general
corporate obligation of Company or will cause Executive to be
more than a general creditor of Company.
(iii) For purposes of the Plan, the terms "actuarial
equivalent," or "actuarially equivalent" when used with
respect to a specified benefit shall mean the amount of
benefit of a different type or payable at a different age that
can be provided at the same cost as such specified benefit, as
computed by the Actuary. The actuarial assumptions used to
determine equivalencies between different forms of annuities
under the Plan shall be the 1984 Unisex Pensioners Mortality
50% male, 50% female calculation (with males set back one year
and females set back five years), with interest at an annual
rate of 7%. The term "Actuary" shall mean the individual
actuary or actuarial firm selected by Company to service its
pension plans generally or if no such individual or firm has
been selected, an individual actuary or actuarial firm
appointed by Company and reasonably satisfactory to Executive
and/or his spouse.
(iv) Company shall indemnify Executive on a fully grossed-
up, after-tax basis for any Medicare payroll taxes (plus any
income taxes on such indemnity payments) incurred by Executive
in connection with the accrual and/or payment of benefits
under the Plan."
5. Paragraph 4.1 of the Existing Agreement is hereby amended to
read in its entirety as follows:
"4.1 By Expiration. If Executive's employment hereunder
shall terminate upon expiration of the term provided in
paragraph 2.1 hereof, then all compensation and all benefits
to Executive hereunder shall terminate contemporaneously with
termination of his employment; provided, however, that
Executive shall be provided with Flight Benefits for the
remainder of Executive's lifetime, the benefits described in
paragraph 3.5 shall continue to be payable, the benefits
described in clauses (2) through (4) of paragraph 4.7(vi)
shall be provided for the time periods specified therein and
Company shall cause all options and shares of restricted stock
awarded to Executive, including, without limitation, any such
awards under Company's 1998 Stock Incentive Plan (the "1998
Plan"), and other Awards (as defined in the 1998 Plan) made to
Executive under the 1998 Plan, to vest immediately upon such
termination and, with respect to options, be exercisable in
full for 30 days after such termination."
6. Paragraph 4.2 of the Existing Agreement is hereby amended to
read in its entirety as follows:
"4.2 By Company. If Executive's employment hereunder shall
be terminated by Company prior to expiration of the term
provided in paragraph 2.1 hereof then, upon such termination,
regardless of the reason therefor, all compensation and all
benefits to Executive hereunder shall terminate
contemporaneously with the termination of such employment,
except the benefits described in paragraph 3.5 shall continue
to be payable, and if such termination shall be for any reason
other than those encompassed by paragraphs 2.2(i), (ii), (iii)
or (iv), then Company shall (a) pay Executive on or before the
effective date of such termination a lump-sum, cash payment in
an amount equal to the Termination Payment (as such term is
defined in paragraph 4.7) and cause all options and shares of
restricted stock awarded to Executive, including, without
limitation, any such awards under Company's 1998 Plan, and
other Awards (as defined in the 1998 Plan) made to Executive
under the 1998 Plan, to vest immediately upon such termination
and, with respect to options, be exercisable in full for 30
days after such termination, (b) provide Executive with Flight
Benefits (as such term is defined in paragraph 4.7) for the
remainder of Executive's lifetime, (c) provide Executive with
Outplacement Services (as such term is defined in para-
graph 4.7), and (d) provide Executive and his eligible
dependents with Continuation Coverage (as such term is defined
in paragraph 4.7) for the Severance Period."
7. Paragraph 4.3 of the Existing Agreement is hereby amended to
read in its entirety as follows:
"4.3 By Executive. If Executive's employment hereunder
shall be terminated by Executive prior to expiration of the
term provided in paragraph 2.1 hereof then, upon such
termination, regardless of the reason therefor, all
compensation and benefits to Executive hereunder shall
terminate contemporaneously with the termination of
employment, except Executive shall be provided Flight Benefits
(as such term is defined in paragraph 4.7) for the remainder
of Executive's lifetime, the benefits described in paragraph
3.5 shall continue to be payable, and if such termination
shall be pursuant to paragraphs 2.3(i), (ii), (iii), (iv),
(v), or (vi), then Company shall provide Executive with the
payments and benefits described in clauses (a), (c) and (d) of
paragraph 4.2."
8. Paragraph 4.7(ii) of the Existing Agreement is hereby amended
to read in its entirety as follows:
"(ii) "Change in Control" shall have the meaning assigned to
such term in the 1998 Plan (as adopted by the Board of
Directors on April 14, 1998 and in effect on such date, it
being understood that such term shall be the new Change in
Control term contained in the 1998 Plan, and not the alternate
Change in Control term (identical to that contained in the
1997 Stock Incentive Plan) also set forth in the 1998 Plan for
the eventuality that the Acquisition does not close);
provided, however, that Company and Executive agree that the
Acquisition will, upon the closing thereof, constitute a
Change in Control (as defined in this Agreement prior to the
amendment to this Agreement dated as of November 20, 1998) and
will be considered to be, and to have the effect of, a Change
in Control under this Agreement."
9. Paragraph 4.7(vi) of the Existing Agreement is hereby amended
to read in its entirety as follows:
"(vi) "Outplacement Services" shall mean (1) outplacement
services, at Company's cost and for a period of twelve months
beginning on the date of Executive's termination of
employment, to be rendered by an agency selected by Executive
and approved by the Board of Directors or HR Committee (with
such approval not to be unreasonably withheld), (2)
appropriate and suitable office space at the Company's
headquarters (although not on its executive office floor) or
at a comparable location in downtown Houston for use by
Executive, together with appropriate and suitable secretarial
assistance, at Company's cost and for a period of three years
beginning on the date of Executive's termination of
employment, (3) a reserved parking place convenient to the
office so provided and a reserved parking place at George Bush
Intercontinental Airport in Houston, Texas consistent with
past practice, at Company's cost and for as long as Executive
retains a residence in Houston, Texas, and (4) other
incidental perquisites (such as free or discount air travel,
car rental, phone or similar service cards) currently enjoyed
by Executive as a result of his position, to the extent then
available for use by Executive, for a period of three years
beginning on the date of Executive's termination of employment
or a shorter period if such perquisites become unavailable to
the Company for use by Executive;"
10. This Amendment shall be dated as of the date set forth below,
but shall be effective as of the date of closing of the Acquisition
as contemplated by the Investment Agreement.
11. The Existing Agreement, as amended by this Amendment, is
hereby ratified and confirmed and shall continue in full force and
effect in accordance with its terms.
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment as of the 20th day of November, 1998.
CONTINENTAL AIRLINES, INC.
By:____________________________
Name:
Title:
EXECUTIVE
________________________________
Jeffery A. Smisek
APPROVED:
_______________________________
Thomas J. Barrack, Jr.
Chair, Human Resources Committee
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>8
<TEXT>
EXHIBIT 10.19
AMENDMENT AND RESTATEMENT OF 1994 PLAN AND 1997 PLAN
WHEREAS, both the Company's 1994 Incentive Equity Plan, as
amended (the "1994 Plan") and the Company's 1997 Stock Incentive
Plan, as amended (the "1997 Plan") contain provisions different
from those contained in the Company's 1998 Stock Incentive Plan;
and
WHEREAS, the Company desires to utilize the unused shares
authorized under the 1994 Plan and the 1997 Plan for future Awards
(as defined therein) thereunder, and wishes to have consistent
terms and conditions of its stock incentive plans with respect to
all Awards made thereunder from and after the date of closing of
the acquisition of Air Partners' interest in the Company
contemplated by the Investment Agreement dated as of January 25,
1998 among Northwest Airlines Corporation, Newbridge Parent
Corporation, Air Partners, L.P., the partners of Air Partners, L.P.
signatory thereto, Bonderman Family Limited Partnership, 1992 Air,
Inc. and Air Saipan, Inc., as amended by Amendment No. 1 thereto
dated as of February 27, 1998 (such date of closing being referred
to herein as the "Closing");
NOW THEREFORE, BE IT RESOLVED, that the terms and provisions
of each of the 1994 Plan and the 1997 Plan be amended and restated
in their entirety, with respect to grants of Awards thereunder from
and after the date of Closing (but not with respect to Awards
outstanding prior to the date of Closing), to be identical to the
terms and provisions of the Company's 1998 Stock Incentive Plan,
and that the form of Option Agreements and Restricted Stock
Agreements approved or to be approved in connection with the
Company's 1998 Stock Incentive Plan be approved for usage in
connection with the Company's 1998 Stock Incentive Plan be approved
for usage in connection with Awards made under the 1994 Plan and
the 1997 Plan from and after the date of Closing, and that the
Company is authorized to perform its obligations thereunder;
provided, however, that no such amendment and restatement shall
affect the share amounts set forth in the 1994 Plan or the 1997
Plan, or shall affect Awards outstanding thereunder prior to the
date of Closing.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>9
<TEXT>
EXHIBIT 10.23(i)
Supplemental Agreement No. 12
to
Purchase Agreement No. 1783
between
The Boeing Company
and
Continental Airlines, Inc.
Relating to Boeing Model 757-224 Aircraft
THIS SUPPLEMENTAL AGREEMENT, entered into as of
September 29,1998 by and between THE BOEING COMPANY, a Delaware
corporation with its principal office in Seattle, Washington,
(Boeing) and CONTINENTAL AIRLINES, INC., a Delaware corporation
with its principal office in Houston, Texas (Buyer);
WHEREAS, the parties hereto entered into Purchase Agreement
No. 1783 dated March 18, 1993, as amended and supplemented,
relating to Boeing Model 757-224 aircraft (the Agreement); and
WHEREAS, Buyer wishes to [CONFIDENTIAL MATERIAL OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]
WHEREAS, Boeing and Buyer have agreed to amend the Agreement
to incorporate certain other changes as set forth herein;
NOW THEREFORE, in consideration of the mutual covenants herein
contained, the parties agree to amend the Agreement as follows:
<PAGE>
1. Table of Contents and Articles:
1.1 Remove and replace, in its entirety, the Table of
Contents with a new Table of Contents (attached hereto) to reflect
amendment of the Agreement as of the date of this Supplemental
Agreement.
1.2 Remove and replace, in its entirety, Article 1, Subject
Matter of Sale, with new Article 1 (attached hereto) to incorporate
a revised number of Block C Aircraft.
1.3 Remove and replace, in its entirety, Article 2,
Delivery, Title and Risk of Loss, with new Article 2 (attached
hereto) to incorporate a revised delivery schedule for the
[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT] Block C Aircraft.
1.4 Remove and replace, in its entirety, Article 3, Price
of Aircraft, with new Article 3 (attached hereto) to incorporate
revised Advance Payment Base Prices for the [CONFIDENTIAL MATERIAL
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Block
C Aircraft.
1.5 Remove and replace, in its entirety, the Delivery
Schedule for Model 757-224 Aircraft, following Article 15, with a
revised delivery schedule (attached hereto) to incorporate current
Aircraft delivery data.
2. Letter Agreements:
2.1 Remove and replace, in its entirety, Letter Agreement
1783-10R3, Option Aircraft, with a new revision 1783-10R4 to
reflect [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT]
2. Payment of Additional Advance Payments.
Within three (3) business days after execution of this
Supplemental Agreement, Buyer shall transfer to Boeing's account at
Chase Manhattan Bank, New York, N.Y., the sum of [CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT] which sum represents advance payments then due with
respect to the [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT] Option Aircraft being exercised as of
the effective date of the Supplemental Agreement.
The Agreement will be deemed to be supplemented to the extent
herein provided and as so supplemented will continue in full force
and effect.
<PAGE>
EXECUTED IN DUPLICATE as of the day and year first above written.
THE BOEING COMPANY CONTINENTAL AIRLINES, INC.
By: /s/ John A. McGarvey By: /s/ Brian Davis
Its: Attorney-In-Fact Its: Vice President
<PAGE>
TABLE OF CONTENTS
ARTICLES Page Revised
By
ARTICLE 1. Subject Matter of Sale.............. 1-1 SA#12
ARTICLE 2. Delivery, Title and Risk of Loss.... 2-1 SA#12
ARTICLE 3. Price of Aircraft................... 3-1 SA#12
ARTICLE 4. Taxes............................... 4-1
ARTICLE 5. Payment............................. 5-1
ARTICLE 6. Excusable Delay..................... 6-1
ARTICLE 7. Changes to the Detail Specification. 7-1 SA#4
ARTICLE 8. Federal Aviation Requirements and
Certificates ....................... 8-1
ARTICLE 9. Representatives, Inspection,
Flights and Test Data............... 9-1
ARTICLE 10. Assignment, Resale or Lease......... 10-1
ARTICLE 11. Termination for Certain Events...... 11-1
ARTICLE 12. Product Assurance; Disclaimer and
Release; Exclusion of Liabilities;
Customer Support; Indemnification
and Insurance....................... 12-1
ARTICLE 13. Buyer Furnished Equipment and
Spare Parts......................... 13-1 SA#2
ARTICLE 14. Contractual Notices and Requests.... 14-1
ARTICLE 15. Miscellaneous....................... 15-1
Schedule for Delivery of Model 757-224 Aircraft SA#12
<PAGE>
TABLE OF CONTENTS (Continued)
EXHIBITS
EXHIBIT A Aircraft Configuration ............. A-1 SA#8
EXHIBIT B Product Assurance Document ......... B-1 SA#2
EXHIBIT C Customer Support Document .......... C-1 SA#2
EXHIBIT D Price Adjustments Due to Economic
Fluctuations - Airframe and Engines D-1 SA#11
EXHIBIT E Buyer Furnished Equipment Provisions
Document ........................... E-1 SA#4
EXHIBIT F Defined Terms Document ........... F-1 SA#2
LETTER AGREEMENTS
1783-1 Spare Parts Support SA#2
1783-2 Seller Purchased Equipment SA#2
1783-4 Waiver of Aircraft Demonstration SA#2
Flights
1783-5 Promotional Support SA#2
1783-6 Configuration Matters SA#2
1783-7 Price Adjustment on Rolls-Royce Engines SA#2
1783-8 Spare Parts Provisioning SA#2
1783-9R1 Escalation Sharing SA#10
1783-10R4 Option Aircraft SA#12
6-1162-WLJ-359 Aircraft Performance Guarantees SA#2
6-1162-WLJ-367R5 Disclosure of Confidential Info SA#9
6-1162-WLJ-369 Additional Considerations SA#2
6-1162-WLJ-372 Conditions Relating to SA#2
Purchase Agreement
<PAGE>
TABLE OF CONTENTS (Continued)
6-1162-WLJ-380 Performance Guarantees, Demonstrated SA#2
Compliance
6-1162-WLJ-384 [CONFIDENTIAL MATERIAL OMITTED AND SA#2
FILED SEPARATELY WITH THE SECURITIES
EXCHANGE AND COMMISSION PURSUANT TO
A REQUEST FOR CONFIDENTIAL TREATMENT]
6-1162-WLJ-391R1 Special Purchase Agreement Provisions SA#4
6-1162-WLJ-393 [CONFIDENTIAL MATERIAL OMITTED AND SA#2
FILED SEPARATELY WITH THE SECURITIES
EXCHANGE AND COMMISSION PURSUANT TO
A REQUEST FOR CONFIDENTIAL TREATMENT]
6-1162-WLJ-405 Certain Additional ContractuaL SA#2
Matters
6-1162-WLJ-409 Satisfaction of Conditions Relating SA#2
to the Purchase Agreement
6-1162-WLJ-497 [CONFIDENTIAL MATERIAL OMITTED AND SA#3
FILED SEPARATELY WITH THE SECURITIES
EXCHANGE AND COMMISSION PURSUANT TO
A REQUEST FOR CONFIDENTIAL TREATMENT]
6-1162-RGP-946R1 Special Provisions Relating to SA#5
the Rescheduled Aircraft
6-1162-MMF-289R1 [CONFIDENTIAL MATERIAL OMITTED AND SA#10
FILED SEPARATELY WITH THE SECURITIES
EXCHANGE AND COMMISSION PURSUANT TO
A REQUEST FOR CONFIDENTIAL TREATMENT]
6-1162-MMF-319 Special Provisions Relating to SA#7
the Rescheduled Aircraft
6-1162-GOC-132 Special Matters SA#10
<PAGE>
TABLE OF CONTENTS (Continued)
SUPPLEMENTAL AGREEMENTS Dated as of:
Supplemental Agreement No. 1 April 29, 1993
Supplemental Agreement No. 2 November 4, 1993
Supplemental Agreement No. 3 November 19, 1993
Supplemental Agreement No. 4 March 31, 1995
Supplemental Agreement No. 5 November 30, 1995
Supplemental Agreement No. 6 June 13, 1996
Supplemental Agreement No. 7 July 23, 1996
Supplemental Agreement No. 8 October 27, 1996
Supplemental Agreement No. 9 August 13, 1997
Supplemental Agreement No.10 October 10, 1997
Supplemental Agreement No. 11 July 30, 1998
Supplemental Agreement No. 12 September 29, 1998
<PAGE>
ARTICLE 1. Subject Matter of Sale.
1.1 The Aircraft. Boeing will manufacture and deliver
to Buyer and Buyer will purchase and accept delivery from Boeing of
the following Boeing Model 757-224 aircraft (the Aircraft).
1.1.1 Block A, A-1 and B Aircraft. [CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT] manufactured in accordance with Boeing detail
specification D924N104-3, dated as of even date herewith, as
described in Exhibit A, and as modified from time to time in
accordance with this Agreement (Detail Specification).
1.2 Additional Goods and Services. In connection with
the sale of the Aircraft, Boeing will also provide to Buyer certain
other things under this Agreement, including data, documents,
training and services, all as described in this Agreement.
1.3 Performance Guarantees. Any performance guarantees
applicable to the Aircraft will be expressly included in this
Agreement. Where performance guarantees are included in this
Agreement other than within the Detail Specification, such
guarantees will be treated as being incorporated in the Detail
Specification by this reference.
1.4 Defined Terms. For ease of use, certain terms are
treated as defined terms in this Agreement. Such terms are
identified with a capital letter and set forth and/or defined in
Exhibit F.
<PAGE>
ARTICLE 2. Delivery, Title and Risk of Loss.
2.1 Time of Delivery. The Aircraft will be delivered
to Buyer by Boeing, and Buyer will accept delivery of the Aircraft,
in accordance with the following schedule:
Month and Year
of Delivery Quantity of Aircraft
[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT]
2.2 Notice of Target Delivery Date. Boeing will give
Buyer notice of the Target Delivery Date of the Aircraft
approximately 30 days prior to the scheduled month of delivery.
2.3 Notice of Delivery Date. Boeing will give Buyer at
least 7 days' notice of the delivery date of the Aircraft. If an
Aircraft delivery is delayed beyond such delivery date due to the
responsibility of Buyer, Buyer will reimburse Boeing for all costs
incurred by Boeing as a result of such delay, including amounts for
storage, insurance, Taxes, preservation or protection of the
Aircraft and interest on payments due.
2.4 Place of Delivery. The Aircraft will be delivered at
a facility selected by Boeing in the State of Washington, unless
mutually agreed otherwise.
2.5 Title and Risk of Loss. Title to and risk of loss of
an Aircraft will pass from Boeing to Buyer upon delivery of such
Aircraft, but not prior thereto.
2.6 Documents of Title. Upon delivery of and payment for
each Aircraft, Boeing shall deliver to Buyer a bill of sale duly
conveying to Buyer good title to such Aircraft free and clear of
all liens, claims, charges and encumbrances of every kind
whatsoever, and such other appropriate documents of title as Buyer
may reasonably request.
<PAGE>
ARTICLE 3. Price of Aircraft.
3.1 Definitions.
3.1.1 Special Features are the features listed in
Exhibit A which have been selected by Buyer.
3.1.2 Base Airframe Price is the Aircraft Basic
Price excluding the price of Special Features and Engines.
3.1.3 Engine Price is the price established by the
Engine manufacturer for the Engines installed on the Aircraft
including all accessories, equipment and parts set forth in Exhibit
D.
3.1.4 Aircraft Basic Price is comprised of the Base
Airframe Price, the Engine Price and the price of the Special
Features.
3.1.5 Economic Price Adjustment is the adjustment to
the Aircraft Basic Price (Base Airframe, Engine and Special
Features) as calculated pursuant to Exhibit D.
3.1.6 Aircraft Price is the total amount Buyer is to
pay for the Aircraft at the time of delivery.
3.1.7 Price First Published is the first price
published by Boeing for the same model of aircraft to be delivered
in the same general time period as the affected Aircraft and is
used to establish the Base Airframe Price when the Base Airframe
Price was not established at the time of execution of this
Agreement.
3.2 Aircraft Basic Price.
3.2.1 Block A Aircraft. The Aircraft Basic Price of
the Block A Aircraft, expressed in July 1992 dollars, is set forth
below:
Base Airframe Price: [CONFIDENTIAL MATERIAL
Special Features OMITTED AND FILED
Engine Price SEPARATELY WITH THE
SECURITIES AND EXCHANGE
Block A Aircraft COMMISSION PURSUANT TO
Basic Price A REQUEST FOR
CONFIDENTIAL TREATMENT]
<PAGE>
3.2.2 Block A-1 and Block B Aircraft. The Aircraft
Basic Price of the Block A-1 and Block B Aircraft with delivery,
expressed in July 1992 dollars, is set forth below:
Base Airframe Price: [CONFIDENTIAL MATERIAL
Special Features OMITTED AND FILED
Engine Price SEPARATELY WITH THE
SECURITIES AND EXCHANGE
Block A-1/B Aircraft COMMISSION PURSUANT TO
Basic Price A REQUEST FOR
CONFIDENTIAL TREATMENT]
The special features value above for the Block A-1 and Block B
Aircraft incorporates the special features reprice activity noted
in Exhibit A-1 which includes Exhibit A, Change Orders 1,2, and 3
plus accepted Master Changes as of June 1, 1996.
3.2.2 Block C Aircraft. The Aircraft Basic Price of
the Block C Aircraft with delivery, expressed in July 1997 dollars,
is set forth below:
Base Airframe Price: [CONFIDENTIAL MATERIAL
Special Features OMITTED AND FILED
Engine Price SEPARATELY WITH THE
SECURITIES AND EXCHANGE
Block C Aircraft COMMISSION PURSUANT TO
Basic Price A REQUEST FOR
CONFIDENTIAL TREATMENT]
The special features value above for the Block C Aircraft
incorporates the special features reprice activity noted in Exhibit
A-1 which includes Exhibit A, Change Orders 1,2, and 3 plus
accepted Master Changes as of June 1, 1996.
3.3 Aircraft Price.
3.3.1 Block A Aircraft, Block A-1 Aircraft and Block
B Aircraft. The Aircraft Price of the Block A Aircraft, Block A-1
Aircraft and Block B Aircraft will be established at the time of
delivery of such Aircraft to Buyer and will be the sum of:
3.3.1.1 the Block A Aircraft Basic
Price, which is [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT] and the Block A-1 Aircraft and Block B
Aircraft which is [CONFIDENTIAL MATERIAL OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
A REQUEST FOR CONFIDENTIAL TREATMENT] ; plus
<PAGE>
3.3.1.2 the Economic Price Adjustments
for the Aircraft Basic Price, as calculated pursuant to the
formulas set forth in Exhibit D (Price Adjustments Due to Economic
Fluctuations - Airframe and Engine - Block A, Block A-1 and Block
B Aircraft) plus
3.3.1.3 other price adjustments made
pursuant to this Agreement or other written agreements executed by
Boeing and Buyer.
3.3.1 Block C Aircraft. The Aircraft Price of the
Block C Aircraft will be established at the time of delivery of
such Aircraft to Buyer and will be the sum of:
3.3.1.1 the Block C Aircraft Basic
Price, which is [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT]; plus
3.3.1.2 the Economic Price Adjustments
for the Aircraft Basic Price, as calculated pursuant to the
formulas set forth in Exhibit D (Price Adjustments Due to Economic
Fluctuations - Airframe and Engine - Block C Aircraft) plus
3.3.1.3 other price adjustments made
pursuant to this Agreement or other written agreements executed by
Boeing and Buyer.
3.4 Advance Payment Base Price.
3.4.1 Advance Payment Base Price. For advance
payment purposes, the following estimated delivery prices of the
Aircraft have been established, using currently available forecasts
of the escalation factors used by Boeing as of the date of signing
this Agreement. The Advance Payment Base Price of each Aircraft is
set forth below:
Month and Year of Advance Payment Base
Scheduled Delivery Price per Aircraft
[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT]
<PAGE>
3.4.2 Adjustment of Advance Payment Base Prices - Long-Lead
Aircraft. For Aircraft scheduled for delivery 36 months or more
after the date of this Agreement, the Advance Payment Base Prices
appearing in Article 3.4.1 will be used to determine the amount of
the first advance payment to be made by Buyer on the Aircraft. No
later than 25 months before the scheduled month of delivery of the
first Aircraft scheduled for delivery in a calendar year (First
Aircraft), Boeing will increase or decrease the Advance Payment
Base Price of the First Aircraft and all Aircraft scheduled for
delivery after the First Aircraft as required to reflect the
effects of (i) any adjustments in the Aircraft Price pursuant to
this Agreement and (ii) the then-current forecasted escalation
factors used by Boeing. Boeing will provide the adjusted Advance
Payment Base Prices for each affected Aircraft to Buyer, and the
advance payment schedule will be considered amended to substitute
such adjusted Advance Payment Base Prices.
<PAGE>
Continental Airlines, Inc.
Delivery Schedule for Model 757-224 Aircraft
[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT]
<PAGE>
September 29, 1998
1783-10R4
Continental Airlines, Inc.
2929 Allen Parkway
Houston, Texas 77019
Subject: Letter Agreement No. 1783-10R4 to
Purchase Agreement No. 1783 - Option Aircraft
Ladies and Gentlemen:
This Letter Agreement amends Purchase Agreement No. 1783 dated
March 18, 1993 (the Purchase Agreement) between THE BOEING COMPANY
(Boeing) and CONTINENTAL AIRLINES, INC. (Buyer) relating to Model
757-224 aircraft (Aircraft). This Letter Agreement supersedes and
replaces in its entirety Letter Agreement 1783-10R3.
All terms used and not defined herein shall have the same meaning
as in the Purchase Agreement.
In consideration of Buyer's purchase of the Aircraft, Boeing hereby
agrees to manufacture and sell up to [CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] additional Model
757-224 Aircraft (the Option Aircraft) to Buyer, on the same terms
and conditions set forth in the Purchase Agreement, except as
otherwise described in Attachment A hereto, and subject to the
terms and conditions set forth below.
1. Delivery.
The Option Aircraft will be delivered to Buyer during or
before the months set forth in the following schedule:
<PAGE>
Month and Year Number of
of Delivery Option Aircraft
[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT]
2. Price. [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT]
3. Option Aircraft Deposit.
In consideration of Boeing's grant to Buyer of options to
purchase the Option Aircraft as set forth herein, and concurrent
with Buyer's payment to Boeing of initial advance payments required
under Supplemental Agreement No. 6 to the Purchase Agreement for
the Aircraft, Buyer will pay a deposit to Boeing of [CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT] for each Option Aircraft (the Option Deposit). In the
event Buyer exercises an option herein for an Option Aircraft, the
amount of the Option Deposit for such Option Aircraft will be
credited against the first advance payment due for such Option
Aircraft pursuant to the advance payment schedule set forth in
Article 5 of the Purchase Agreement.
In the event that Buyer does not exercise its option to purchase a
particular Option Aircraft pursuant to the terms and conditions set
forth herein, Boeing shall be entitled to retain the Option Deposit
for such Option Aircraft.
4. Option Exercise.
To exercise its option to purchase the Option Aircraft,
Buyer shall give written notice thereof to Boeing on or before the
first business day of the month in each Option Exercise Date shown
below:
Option Aircraft Option Exercise Date
[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT]
5. Contract Terms.
Within thirty (30) days after Buyer exercises an option to
purchase Option Aircraft pursuant to paragraph 4 above, Boeing and
Buyer will use their best reasonable efforts to enter into a
supplemental agreement amending the Purchase Agreement to add the
applicable Option Aircraft to the Purchase Agreement as a firm
Aircraft (the Option Aircraft Supplemental Agreement).
In the event the parties have not entered into such an Option
Aircraft Supplemental Agreement within the time period contemplated
herein, either party shall have the right, exercisable by written
or telegraphic notice given to the other within ten (10) days after
such period, to cancel the purchase of such Option Aircraft.
6. Cancellation of Option to Purchase.
Either Boeing or Buyer may cancel the option to purchase an
Option Aircraft if any of the following events are not accomplished
by the respective dates contemplated in this letter agreement, or
in the Purchase Agreement, as the case may be:
(i) purchase of an Aircraft under the Purchase Agreement
for any reason not attributable to the canceling party;
(ii) payment by Buyer of the Option Deposit with respect
to such Option Aircraft pursuant to paragraph 3 herein; or
(iii) exercise of the option to purchase such Option
Aircraft pursuant to the terms hereof.
Any cancellation of an option to purchase by Boeing which is based
on the termination of the purchase of an Aircraft under the
Purchase Agreement shall be on a one-for-one basis, for each
Aircraft so terminated.
Cancellation of an option to purchase provided by this letter
agreement shall be caused by either party giving written notice to
the other within ten (10) days after the respective date in
question. Upon receipt of such notice, all rights and obligations
of the parties with respect to an Option Aircraft for which the
option to purchase has been canceled shall thereupon terminate.
Boeing shall promptly refund to Buyer, without interest, any
payments received from Buyer with respect to the affected Option
Aircraft. Boeing shall be entitled to retain the Option Deposit
unless cancellation is attributable to Boeing's fault, in which
case the Option Deposit shall also be returned to Buyer without
interest.
7. Applicability.
Except as otherwise specifically provided, limited or
excluded herein, all Option Aircraft that are added to the Purchase
Agreement by an Option Aircraft Supplemental Agreement as firm
Aircraft shall benefit from all the applicable terms, conditions
and provisions of the Purchase Agreement.
If the foregoing accurately reflects your understanding of the
matters treated herein, please so indicate by signature below.
Very truly yours,
THE BOEING COMPANY
By /s/ John A. McGarvey
Its Attorney-in-Fact
ACCEPTED AND AGREED TO this
Date: September 29, 1998
CONTINENTAL AIRLINES, INC.,
By /s/ Brian Davis
Its Vice President
Attachment
<PAGE>
Model 757-224 Aircraft
1. Option Aircraft Description and Changes.
1.1 Aircraft Description. The Option Aircraft are
described by Boeing Detail Specification D924N104-3, dated March
18, 1993, as amended and revised pursuant to the Purchase
Agreement.
1.2 Changes. The Option Aircraft Detail Specification
shall be revised to include:
(1) Changes applicable to the basic
Model 757-200 aircraft which are developed by Boeing between the
date of the Detail Specification and the signing of an Option
Aircraft Supplemental Agreement.
(2) Changes mutually agreed upon.
(3) Changes required to obtain a
Standard Certificate of Airworthiness.
1.3 Effect of Changes. Changes to the Detail
Specification pursuant to the provisions of the clauses above shall
include the effects of such changes upon Option Aircraft weight,
balance, design and performance.
2. Price Description.
2.1 Price Adjustments.
2.1.1 Base Price Adjustments. The base airframe
and base engine price (pursuant to Article 3 of the Purchase
Agreement) of the Option Aircraft will be adjusted to Boeing's and
the engine manufacturer's then-current prices as of the date of
execution of the Option Aircraft Supplemental Agreement.
2.1.2 Special Features. The price for special
features incorporated in the Option Aircraft Detail Specification
will be adjusted to Boeing's then-current prices for such features
as of the date of execution of the Option Aircraft Supplemental
Agreement [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT]
2.1.3 Escalation Adjustments. The base airframe
and special features price will be escalated according to the
applicable airframe and engine manufacturer escalation provisions
contained in Exhibit D of the Purchase Agreement.
Buyer agrees that the engine escalation provisions will be adjusted
if they are changed by the engine manufacturer prior to the signing
the Option Aircraft Supplemental Agreement. In such case, the
then-current engine escalation provisions in effect at the time of
execution of the Option Aircraft Supplemental Agreement will be
incorporated into such agreement.
2.1.4 Price Adjustments for Changes. Boeing may
adjust the basic price and the advance payment base prices for any
changes mutually agreed upon by Buyer and Boeing subsequent to the
date that Buyer and Boeing enter into the Option Aircraft
Supplemental Agreement.
2.1.5 BFE to SPE. An estimate of the total price
for items of Buyer Furnished Equipment (BFE) changed to Seller
Purchased Equipment (SPE) pursuant to the Detail Specification is
included in the Option Aircraft price build-up. The purchase price
of the Option Aircraft will be adjusted by the price charged to
Boeing for such items plus 10% of such price.
2.1.6 Certification of Rolls-Royce Engines. It is
understood by the parties that the price offered hereunder of the
Rolls-Royce Engines may be adjusted by Rolls-Royce to reflect
changes required to be incorporated to satisfy any new or amended
United States Federal Aviation Administration (FAA) regulations.
Therefore, in the event that after May 31, 1990, the FAA or other
applicable U.S. Federal Agency issues new rules or regulations or
changes or amends then-existing rules or regulations, and such new,
changed or amended rules or regulations require changes to or
modification of the Engines (Engine Modifications), then: (i)
Boeing shall adjust the purchase price of the Option Aircraft in
the amount by which Rolls-Royce revises its price of the Engines to
Boeing as a result of such Engine Modifications; (ii) if the
Engine Modifications require any change, modification or alteration
to the Option Aircraft (Option Aircraft Modifications), the charge
for making the Option Aircraft Modifications shall be added to the
purchase price of the Option Aircraft; (iii) notwithstanding the
provisions of paragraph 1 of this Letter Agreement, the time of
delivery of the Option Aircraft shall be extended to the extent of
any delay attributable to the Engine or Option Aircraft
Modifications and said delay shall be deemed excusable; and (iv)
Boeing shall, if necessary, revise the Option Aircraft Detail
Specification as required to reflect the effects of the Engine
Modifications or Option Aircraft Modifications.
3. Advance Payments.
3.1 Buyer shall pay to Boeing advance payments for the
Option Aircraft pursuant to the schedule for payment of advance
payments provided in the Purchase Agreement.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>10
<TEXT>
EXHIBIT 10.23(j)
Supplemental Agreement No. 13
to
Purchase Agreement No. 1783
between
The Boeing Company
and
Continental Airlines, Inc.
Relating to Boeing Model 757-224 Aircraft
THIS SUPPLEMENTAL AGREEMENT, entered into as of
November 16,1998 by and between THE BOEING COMPANY, a Delaware
corporation with its principal office in Seattle, Washington,
(Boeing) and CONTINENTAL AIRLINES, INC., a Delaware corporation
with its principal office in Houston, Texas (Buyer);
WHEREAS, the parties hereto entered into Purchase Agreement
No. 1783 dated March 18, 1993, as amended and supplemented,
relating to Boeing Model 757-224 aircraft (the Agreement); and
WHEREAS, Buyer wishes to remove the remaining [CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT]
WHEREAS, Buyer wishes to remove the remaining [CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT]
WHEREAS, Buyer wishes to [CONFIDENTIAL MATERIAL OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]
WHEREAS, Boeing and Buyer have agreed to amend the Agreement
to incorporate certain other changes as set forth herein;
NOW THEREFORE, in consideration of the mutual covenants
herein contained, the parties agree to amend the Agreement as
follows:
1. Table of Contents and Articles:
1.1 Remove and replace, in its entirety, the Table of
Contents with a new Table of Contents (attached hereto) to reflect
amendment of the Agreement as of the date of this Supplemental
Agreement.
2. Letter Agreements:
2.1 Remove in its entirety, Letter Agreement 1783-10R4,
Option Aircraft, to reflect the removal of [CONFIDENTIAL MATERIAL
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].
[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT]
The Agreement will be deemed to be supplemented to the extent
herein provided and as so supplemented will continue in full force
and effect.
EXECUTED IN DUPLICATE as of the day and year first above written.
THE BOEING COMPANY CONTINENTAL AIRLINES, INC.
By: /s/ J. A. McGarvey By: /s/ Brian Davis
Its: Attorney-In-Fact Its: Vice President
<PAGE>
TABLE OF CONTENTS
ARTICLES Page Revised
By
ARTICLE 1. Subject Matter of Sale.............. 1-1 SA#12
ARTICLE 2. Delivery, Title and Risk of Loss.... 2-1 SA#12
ARTICLE 3. Price of Aircraft................... 3-1 SA#12
ARTICLE 4. Taxes............................... 4-1
ARTICLE 5. Payment............................. 5-1
ARTICLE 6. Excusable Delay..................... 6-1
ARTICLE 7. Changes to the Detail Specification. 7-1 SA#4
ARTICLE 8. Federal Aviation Requirements and
Certificates ....................... 8-1
ARTICLE 9. Representatives, Inspection,
Flights and Test Data............... 9-1
ARTICLE 10. Assignment, Resale or Lease......... 10-1
ARTICLE 11. Termination for Certain Events...... 11-1
ARTICLE 12. Product Assurance; Disclaimer and
Release; Exclusion of Liabilities;
Customer Support; Indemnification
and Insurance....................... 12-1
ARTICLE 13. Buyer Furnished Equipment and
Spare Parts......................... 13-1 SA#2
ARTICLE 14. Contractual Notices and Requests.... 14-1
ARTICLE 15. Miscellaneous....................... 15-1
Schedule for Delivery of Model 757-224 Aircraft SA#12
<PAGE>
TABLE OF CONTENTS (Continued)
EXHIBITS
EXHIBIT A Aircraft Configuration ............. A-1 SA#8
EXHIBIT B Product Assurance Document ......... B-1 SA#2
EXHIBIT C Customer Support Document .......... C-1 SA#2
EXHIBIT D Price Adjustments Due to Economic
Fluctuations - Airframe and Engines D-1 SA#11
EXHIBIT E Buyer Furnished Equipment Provisions
Document ........................... E-1 SA#4
EXHIBIT F Defined Terms Document ........... F-1 SA#2
LETTER AGREEMENTS
1783-1 Spare Parts Support SA#2
1783-2 Seller Purchased Equipment SA#2
1783-4 Waiver of Aircraft Demonstration SA#2
Flights
1783-5 Promotional Support SA#2
1783-6 Configuration Matters SA#2
1783-7 Price Adjustment on Rolls-Royce Engines SA#2
1783-8 Spare Parts Provisioning SA#2
1783-9R1 Escalation Sharing SA#10
6-1162-WLJ-359 Aircraft Performance Guarantees SA#2
6-1162-WLJ-367R5 Disclosure of Confidential Info SA#9
6-1162-WLJ-369 Additional Considerations SA#2
6-1162-WLJ-372 Conditions Relating to
Purchase Agreement<PAGE>
TABLE OF CONTENTS (Continued)
6-1162-WLJ-380 Performance Guarantees, Demonstrated SA#2
Compliance
6-1162-WLJ-384 [CONFIDENTIAL MATERIAL OMITTED AND SA#2
FILED SEPARATE WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO
A REQUEST FOR CONFIDENTIAL TREATMENT]
6-1162-WLJ-391R1 Special Purchase Agreement Provisions SA#4
6-1162-WLJ-393 [CONFIDENTIAL MATERIAL OMITTED AND SA#2
FILED SEPARATE WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO
A REQUEST FOR CONFIDENTIAL TREATMENT]
6-1162-WLJ-405 Certain Additional Contractual SA#2
Matters
6-1162-WLJ-409 Satisfaction of Conditions Relating SA#2
to the Purchase Agreement
6-1162-WLJ-497 [CONFIDENTIAL MATERIAL OMITTED AND SA#3
FILED SEPARATE WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO
A REQUEST FOR CONFIDENTIAL TREATMENT]
6-1162-RGP-946R1 Special Provisions Relating to SA#5
the Rescheduled Aircraft
6-1162-MMF-289R1 [CONFIDENTIAL MATERIAL OMITTED AND SA#10
FILED SEPARATE WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO
A REQUEST FOR CONFIDENTIAL TREATMENT]
6-1162-MMF-319 Special Provisions Relating to SA#7
the Rescheduled Aircraft
6-1162-GOC-132 Special Matters SA#10
<PAGE>
TABLE OF CONTENTS (Continued)
SUPPLEMENTAL AGREEMENTS Dated as of:
Supplemental Agreement No. 1 April 29, 1993
Supplemental Agreement No. 2 November 4, 1993
Supplemental Agreement No. 3 November 19, 1993
Supplemental Agreement No. 4 March 31, 1995
Supplemental Agreement No. 5 November 30, 1995
Supplemental Agreement No. 6 June 13, 1996
Supplemental Agreement No. 7 July 23, 1996
Supplemental Agreement No. 8 October 27, 1996
Supplemental Agreement No. 9 August 13, 1997
Supplemental Agreement No.10 October 10, 1997
Supplemental Agreement No. 11 July 30, 1998
Supplemental Agreement No. 12 September 29,1998
Supplemental Agreement No. 13 November 16, 1998
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>11
<TEXT>
EXHIBIT 10.23(k)
Supplemental Agreement No. 14
to
Purchase Agreement No. 1783
between
The Boeing Company
and
Continental Airlines, Inc.
Relating to Boeing Model 757-224 Aircraft
THIS SUPPLEMENTAL AGREEMENT, entered into as of December_17,
1998 by and between THE BOEING COMPANY, a Delaware corporation
with its principal office in Seattle, Washington, (Boeing) and
CONTINENTAL AIRLINES, INC., a Delaware corporation with its
principal office in Houston, Texas (Buyer);
WHEREAS, the parties hereto entered into Purchase Agreement
No. 1783 dated as of March 18, 1993, as amended and supplemented,
relating to Boeing Model 757-224 aircraft (the Agreement); and
WHEREAS, Buyer has requested and Boeing has agreed to revise
the terms of the business offer applicable to the Aircraft with
respect to [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT] and
Whereas, Buyer and Boeing have mutually agreed to amend the
Agreement to incorporate the effects of these and certain other
changes;
NOW THEREFORE, in consideration of the mutual covenants herein
contained, the parties agree to amend the Agreement as follows:
<PAGE>
1. Table of Contents and Articles:
Remove and replace, in its entirety, the Table of Contents
with a new Table of Contents (attached hereto) to reflect amendment
of the Agreement as of the date of this Supplemental Agreement No.
14.
2. Letter Agreements:
Remove and replace, in its entirety, Letter Agreement No. 6-
1162-GOC-132, "Special Matters" with new Letter Agreement No. 6-
1162-GOC-132R1, "Special Matters" (attached hereto) to incorporate
the effect of a revised business offer.
The Agreement will be deemed to be supplemented to the extent
herein provided and as so supplemented will continue in full force
and effect.
EXECUTED IN DUPLICATE as of the day and year first above written.
THE BOEING COMPANY CONTINENTAL AIRLINES, INC.
By:_/s/ J. A. McGarvey____ By: /s/ Brian Davis
Its: Attorney-In-Fact Its: Vice President
<PAGE>
TABLE OF CONTENTS
ARTICLES Page Revised
By
ARTICLE 1. Subject Matter of Sale.............. 1-1 SA#12
ARTICLE 2. Delivery, Title and Risk of Loss.... 2-1 SA#12
ARTICLE 3. Price of Aircraft................... 3-1 SA#12
ARTICLE 4. Taxes............................... 4-1
ARTICLE 5. Payment............................. 5-1
ARTICLE 6. Excusable Delay..................... 6-1
ARTICLE 7. Changes to the Detail Specification. 7-1 SA#4
ARTICLE 8. Federal Aviation Requirements and
Certificates ....................... 8-1
ARTICLE 9. Representatives, Inspection,
Flights and Test Data............... 9-1
ARTICLE 10. Assignment, Resale or Lease......... 10-1
ARTICLE 11. Termination for Certain Events...... 11-1
ARTICLE 12. Product Assurance; Disclaimer and
Release; Exclusion of Liabilities;
Customer Support; Indemnification
and Insurance....................... 12-1
ARTICLE 13. Buyer Furnished Equipment and
Spare Parts......................... 13-1 SA#2
ARTICLE 14. Contractual Notices and Requests.... 14-1
ARTICLE 15. Miscellaneous....................... 15-1
Schedule for Delivery of Model 757-224 Aircraft SA#12
<PAGE>
TABLE OF CONTENTS (Continued)
EXHIBITS
EXHIBIT A Aircraft Configuration ............. A-1 SA#8
EXHIBIT B Product Assurance Document ......... B-1 SA#2
EXHIBIT C Customer Support Document .......... C-1 SA#2
EXHIBIT D Price Adjustments Due to Economic
Fluctuations - Airframe and
Engines D-1 SA#11
EXHIBIT E Buyer Furnished Equipment Provisions
Document ........................... E-1 SA#4
EXHIBIT F Defined Terms Document ........... F-1 SA#2
LETTER AGREEMENTS
1783-1 Spare Parts Support SA#2
1783-2 Seller Purchased Equipment SA#2
1783-4 Waiver of Aircraft Demonstration SA#2
Flights
1783-5 Promotional Support SA#2
1783-6 Configuration Matters SA#2
1783-7 Price Adjustment on Rolls-Royce
Engines SA#2
1783-8 Spare Parts Provisioning SA#2
1783-9R1 Escalation Sharing SA#10
6-1162-WLJ-359 Aircraft Performance Guarantees SA#2
6-1162-WLJ-367R5 Disclosure of Confidential Info SA#9
6-1162-WLJ-369 Additional Considerations SA#2
6-1162-WLJ-372 Conditions Relating to SA#2
Purchase Agreement<PAGE>
TABLE OF CONTENTS (Continued)
6-1162-WLJ-380 Performance Guarantees, Demonstrated SA#2
Compliance
6-1162-WLJ-384 [CONFIDENTIAL MATERIAL OMITTED AND SA#2
FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO
A REQUEST FOR CONFIDENTIAL TREATMENT]
6-1162-WLJ-391R1 Special Purchase Agreement Provisions SA#4
6-1162-WLJ-393 [CONFIDENTIAL MATERIAL OMITTED AND SA#2
FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO
A REQUEST FOR CONFIDENTIAL TREATMENT]
6-1162-WLJ-405 Certain Additional Contractual SA#2
Matters
6-1162-WLJ-409 Satisfaction of Conditions Relating SA#2
to the Purchase Agreement
6-1162-WLJ-497 [CONFIDENTIAL MATERIAL OMITTED AND SA#3
FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO
A REQUEST FOR CONFIDENTIAL TREATMENT]
6-1162-RGP-946R1 Special Provisions Relating to SA#5
the Rescheduled Aircraft
6-1162-MMF-289R1 [CONFIDENTIAL MATERIAL OMITTED AND SA#10
FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO
A REQUEST FOR CONFIDENTIAL TREATMENT]
6-1162-MMF-319 Special Provisions Relating to SA#7
the Rescheduled Aircraft
6-1162-GOC-132R1 Special Matters SA#14
<PAGE>
TABLE OF CONTENTS (Continued)
SUPPLEMENTAL AGREEMENTS Dated as of:
Supplemental Agreement No. 1 April 29, 1993
Supplemental Agreement No. 2 November 4, 1993
Supplemental Agreement No. 3 November 19, 1993
Supplemental Agreement No. 4 March 31, 1995
Supplemental Agreement No. 5 November 30, 1995
Supplemental Agreement No. 6 June 13, 1996
Supplemental Agreement No. 7 July 23, 1996
Supplemental Agreement No. 8 October 27, 1996
Supplemental Agreement No. 9 August 13, 1997
Supplemental Agreement No.10 October 10, 1997
Supplemental Agreement No. 11 July 30, 1998
Supplemental Agreement No. 12 September 29,1998
Supplemental Agreement No. 13 November 16, 1998
Supplemental Agreement No. 14 December 17,1998
<PAGE>
December 17, 1998
6-1162-GOC-132R1
CONTINENTAL AIRLINES, INC.
1600 Smith
Houston, Texas 77002
Subject: Letter Agreement No. 6-1162-GOC-132R1 to
Purchase Agreement No. 1783 - Special Matters
Ladies and Gentlemen:
This Letter Agreement amends and supplements Purchase Agreement No.
1783 dated as of March 18, 1993 (the Purchase Agreement) between
The Boeing Company (Boeing) and Continental Airlines, Inc. (Buyer)
relating to Model 757-224 aircraft (the Aircraft). This Letter
Agreement supersedes and replaces in its entirety Letter Agreement
6-1162-GOC-132, dated October 10, 1997.
All terms used herein and in the Purchase Agreement, and not
defined herein, will have the same meaning as in the Purchase
Agreement.
1. Credit Memoranda.
In consideration of Buyer's purchase of Model 757-224
Aircraft, Boeing shall issue at the time of delivery of each
Aircraft and Option Aircraft, a credit memorandum in an amount
equal to [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT] The 757-224 Credit Memorandum Amount is
subject to the same airframe escalation as is used to calculate the
Aircraft price at the time of delivery.
[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT]
2. [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT]
3. [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT]
4. Option Aircraft.
[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT]
5. Increased Gross Weight.
[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT]
6. Assignment of Credits.
Buyer may not assign the credit memoranda described in this
Letter Agreement without Boeing's prior written consent
[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT]
7. [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT]
8. Confidential Treatment.
Boeing and Buyer understand that certain information
contained in this Letter Agreement, including any attachments
hereto, are considered by both parties to be confidential.
Notwithstanding the provisions of Letter Agreement 6-1162-WLJ-
367R4, Boeing and Buyer agree that each party will treat this
Letter Agreement and the information contained herein as
confidential and will not, without the other party's prior written
consent, disclose this Letter Agreement or any information
contained herein to any other person or entity except as may be
required by applicable law or governmental regulations.
Very truly yours,
THE BOEING COMPANY
By /s/ J. A. McGarvey
Its Attorney-In-Fact
ACCEPTED AND AGREED TO this
Date: December 17, 1998
CONTINENTAL AIRLINES, INC.
By /s/ Brian Davis
Its Vice President
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>12
<TEXT>
EXHIBIT 10.24(g)
Supplemental Agreement No. 7
to
Purchase Agreement No. 1951
between
The Boeing Company
and
Continental Airlines, Inc.
Relating to Boeing Model 737 Aircraft
THIS SUPPLEMENTAL AGREEMENT, entered into as of November 12,
1998, by and between THE BOEING COMPANY, a Delaware corporation
with its principal office in Seattle, Washington, (Boeing) and
CONTINENTAL AIRLINES, INC., a Delaware corporation with its
principal office in Houston, Texas (Buyer);
WHEREAS, the parties hereto entered into Purchase Agreement
No. 1951 dated July 23, 1996 (the Agreement), as amended and
supplemented, relating to Boeing Model 737-500, 737-600, 737-700,
737-800, and 737-900 aircraft (the Aircraft); and
WHEREAS, Buyer has requested to exercise [CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT]; and
WHEREAS, Buyer has requested to exercise [CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT]; and
WHEREAS, Boeing and Buyer have mutually agreed to amend the
Purchase Agreement to incorporate the effect of these and certain
other changes;
NOW THEREFORE, in consideration of the mutual covenants herein
contained, the parties agree to amend the Purchase Agreement as
follows:
1. Table of Contents and Articles:
1.1 Remove and replace, in its entirety, the "Table of
Contents", with the Table of Contents attached hereto, to reflect
the changes made by this Supplemental Agreement No. 7.
1.2 Remove and replace, in its entirely, Table T-2
entitled "Aircraft Deliveries and Descriptions, Model 737-700
Aircraft" with new Table T-2 attached hereto for the Model 737-700
Aircraft reflecting the addition of [CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]
1.3 Remove and replace, in its entirely, Table T-3
entitled "Aircraft Deliveries and Descriptions, Model 737-800
Aircraft" with new Table T-3 attached hereto for the Model 737-800
Aircraft reflecting the addition of [CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]
2. Letter Agreements:
2.1 Remove and replace, in its entirety, Letter Agreement
1951-3R3, "Option Aircraft - Model 737-824 Aircraft" with Letter
Agreement 1951-3R4, "Option Aircraft - Model 737-824 Aircraft",
attached hereto, to reflect the deletion of the [CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT] and a clarification of the wording of Paragraph 3,
"Option Aircraft Deposit".
2.2 Remove and replace, in its entirety, Letter Agreement
1951-9R2, "Option Aircraft - Model 737-724 Aircraft" with Letter
Agreement 1951-9R3, "Option Aircraft - Model 737-724 Aircraft",
attached hereto, to reflect the deletion of the [CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT], and a clarification of the wording of Paragraph 3,
"Option Aircraft Deposit".
The Purchase Agreement will be deemed to be supplemented to the
extent herein provided as of the date hereof and as so supplemented
will continue in full force and effect.
EXECUTED IN DUPLICATE as of the day and year first written above.
THE BOEING COMPANY CONTINENTAL AIRLINES, INC.
By: /s/ D. M. Hurt By: /s/ Brian Davis
Its: Attorney-In-Fact Its: Vice President
<PAGE>
TABLE OF CONTENTS
Page SA
Number Number
ARTICLES
1. Subject Matter of Sale. . . . . . . . . 1-1 SA 5
2. Delivery, Title and Risk
of Loss . . . . . . . . . . . . . . . . 2-1
3. Price of Aircraft . . . . . . . . . . . 3-1 SA 5
4. Taxes . . . . . . . . . . . . . . . . . 4-1
5. Payment . . . . . . . . . . . . . . . . 5-1
6. Excusable Delay . . . . . . . . . . . . 6-1
7. Changes to the Detail
Specification . . . . . . . . . . . . . 7-1 SA 5
8. Federal Aviation Requirements and
Certificates and Export License . . . . 8-1 SA 5
9. Representatives, Inspection,
Flights and Test Data . . . . . . . . . 9-1
10. Assignment, Resale or Lease . . . . . .10-1
11. Termination for Certain Events. . . . .11-1
12. Product Assurance; Disclaimer and
Release; Exclusion of Liabilities;
Customer Support; Indemnification
and Insurance . . . . . . . . . . . . .12-1
13. Buyer Furnished Equipment and
Spare Parts . . . . . . . . . . . . . .13-1
14. Contractual Notices and Requests. . . .14-1
15. Miscellaneous . . . . . . . . . . . . .15-1
<PAGE>
TABLE OF CONTENTS
Page SA
Number Number
TABLES
1. Aircraft Deliveries and
Descriptions - 737-500. . . . . . . . . T-1 SA 3
Aircraft Deliveries and
Descriptions - 737-700. . . . . . . . . T-2 SA 7
Aircraft Deliveries and
Descriptions - 737-800. . . . . . . . . T-3 SA 7
Aircraft Deliveries and
Descriptions - 737-600. . . . . . . . . T-4 SA 4
Aircraft Deliveries and
Descriptions - 737-900. . . . . . . . . T-5 SA 5
EXHIBITS
A-1 Aircraft Configuration - Model 737-724 SA 2
A-2 Aircraft Configuration - Model 737-824 SA 2
A-3 Aircraft Configuration - Model 737-624 SA 1
A-4 Aircraft Configuration - Model 737-524 SA 3
A-5 Aircraft Configuration - Model 737-924 SA 5
B Product Assurance Document . . . . . . SA 1
C Customer Support Document - Code Two -
Major Model Differences. . . . . . . . SA 1
C1 Customer Support Document - Code Three -
Minor Model Differences. . . . . . . . SA 1
D Aircraft Price Adjustments - New
Generation Aircraft (1995 Base Price). SA 1
D1 Airframe and Engine Price Adjustments - Current
Generation Aircraft. . . . . . . . . . SA 1
D2 Aircraft Price Adjustments - New
Generation Aircraft (1997 Base Price). SA 5
E Buyer Furnished Equipment
Provisions Document. . . . . . . . . . SA 5
F Defined Terms Document . . . . . . . . SA 5
<PAGE>
TABLE OF CONTENTS
SA
Number
LETTER AGREEMENTS
1951-1 Not Used . . . . . . . . . . . . . . .
1951-2R3 Seller Purchased Equipment . . . . . . SA 5
1951-3R4 Option Aircraft-Model 737-824 Aircraft SA 7
1951-4R1 Waiver of Aircraft Demonstration . . . SA 1
1951-5R2 Promotional Support - New Generation . SA 5
Aircraft
1951-6 Configuration Matters. . . . . . . . .
1951-7R1 Spares Initial Provisioning. . . . . . SA 1
1951-8R2 Escalation Sharing - New Generation
Aircraft . . . . . . . . . . . . . . . SA 4
1951-9R3 Option Aircraft-Model 737-724 Aircraft SA 7
1951-11R1 Escalation Sharing-Current Generation
Aircraft . . . . . . . . . . . . . . . SA 4
1951-12 Option Aircraft - Model 737-924 Aircraft SA 5
1951-13 Configuration Matters - Model 737-924. SA 5
<PAGE>
TABLE OF CONTENTS
SA
Number
RESTRICTED LETTER AGREEMENTS
6-1162-MMF-295 Performance Guarantees - Model
737-724 Aircraft . . . . . . . .
6-1162-MMF-296 Performance Guarantees - Model
737-824 Aircraft . . . . . . . .
6-1162-MMF-308R3 Disclosure of Confidential . . . SA 5
Information
6-1162-MMF-309R1 [CONFIDENTIAL MATERIAL OMITTED. . SA 1
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT]
6-1162-MMF-311R3 [CONFIDENTIAL MATERIAL OMITTED. . SA 5
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT]
6-1162-MMF-312R1 Special Purchase Agreement
Provisions . . . . . . . . . . . SA 1
6-1162-MMF-319 Special Provisions Relating to
the Rescheduled Aircraft . . . .
6-1162-MMF-378R1 Performance Guarantees - Model
737-524 Aircraft . . . . . . . . SA 3
6-1162-GOC-015 [CONFIDENTIAL MATERIAL OMITTED. . SA 2
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT]
6-1162-GOC-131R2 Special Matters . . . . . . . . . SA 5
6-1162-DMH-365 Performance Guarantees - Model
737-924 Aircraft. . . . . . . . . SA 5
<PAGE>
TABLE OF CONTENTS
SUPPLEMENTAL AGREEMENTS DATED AS OF:
Supplemental Agreement No. 1 . . . . . . . . October 10,1996
Supplemental Agreement No. 2 . . . . . . . . March 5, 1997
Supplemental Agreement No. 3 . . . . . . . . July 17, 1997
Supplemental Agreement No. 4 . . . . . . . . October 10,1997
Supplemental Agreement No. 5 . . . . . . . . May 21,1998
Supplemental Agreement No. 6 . . . . . . . . July 30,1998
Supplemental Agreement No. 7 . . . . . . . . November 12,1998
<PAGE>
1951-3R4
November 12, 1998
Continental Airlines, Inc.
2929 Allen Parkway
Houston, Texas 77019
Subject: Letter Agreement No. 1951-3R4 to
Purchase Agreement No. 1951 -
Option Aircraft - Model 737-824 Aircraft
Ladies and Gentlemen:
This Letter Agreement amends Purchase Agreement No. 1951 dated
July 23, 1996(the Agreement) between The Boeing Company (Boeing)
and Continental Airlines, Inc. (Buyer) relating to Model 737-824
aircraft (the Aircraft). This Letter Agreement supersedes and
replaces in its entirety Letter Agreement 1951-3R3 dated July 30,
1998.
All terms used and not defined herein shall have the same meaning
as in the Agreement.
In consideration of Buyer's purchase of the Aircraft, Boeing
hereby agrees to manufacture and sell up to [CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT] additional Model 737-824 Aircraft (the Option
Aircraft) to Buyer, on the same terms and conditions set forth in
the Agreement, except as otherwise described in Attachment A
hereto, and subject to the terms and conditions set forth below.
1. Delivery.
The Option Aircraft will be delivered to Buyer during or
before the months set forth in the following schedule:
Month and Year Number of
of Delivery Option Aircraft
[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT]
2. Price. [CONFIDENTIAL MATERIAL OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT
TO A REQUEST FOR CONFIDENTIAL TREATMENT]
3. Option Aircraft Deposit.
In consideration of Boeing's grant to Buyer of options to
purchase the Option Aircraft as set forth herein, Buyer will pay
a deposit to Boeing of $200,000 for each Option Aircraft (the
Option Deposit) on the date of this Letter Agreement. In the
event Buyer exercises an option herein for an Option Aircraft,
the amount of the Option Deposit for such Option Aircraft will be
credited against the first advance payment due for such Option
Aircraft pursuant to the advance payment schedule set forth in
Article 5 of the Agreement.
In the event that Buyer does not exercise its option to purchase
a particular Option Aircraft pursuant to the terms and conditions
set forth herein, Boeing shall be entitled to retain the Option
Deposit for such Option Aircraft.
4. Option Exercise.
To exercise its option to purchase the Option Aircraft,
Buyer shall give written notice thereof to Boeing on or before
the first business day of the month in each Option Exercise Date
shown below:
Option Aircraft Option Exercise Date
[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT]
5. Contract Terms.
Within thirty (30) days after Buyer exercises an option to
purchase Option Aircraft pursuant to paragraph 4 above, Boeing
and Buyer will use their best reasonable efforts to enter into a
supplemental agreement amending the Agreement to add the
applicable Option Aircraft to the Agreement as a firm Aircraft
(the Option Aircraft Supplemental Agreement).
In the event the parties have not entered into such an Option
Aircraft Supplemental Agreement within the time period
contemplated herein, either party shall have the right,
exercisable by written or telegraphic notice given to the other
within ten (10) days after such period, to cancel the purchase of
such Option Aircraft.
6. Cancellation of Option to Purchase.
Either Boeing or Buyer may cancel the option to purchase
an Option Aircraft if any of the following events are not
accomplished by the respective dates contemplated in this Letter
Agreement, or in the Agreement, as the case may be:
(i) purchase of the Aircraft under the Agreement for
any reason not attributable to the cancelling party;
(ii) payment by Buyer of the Option Deposit with
respect to such Option Aircraft pursuant to paragraph 3 herein;
or
(iii) exercise of the option to purchase such Option
Aircraft pursuant to the terms hereof.
Any cancellation of an option to purchase by Boeing which is
based on the termination of the purchase of an Aircraft under the
Agreement shall be on a one-for-one basis, for each Aircraft so
terminated.
Cancellation of an option to purchase provided by this letter
agreement shall be caused by either party giving written notice
to the other within ten (10) days after the respective date in
question. Upon receipt of such notice, all rights and
obligations of the parties with respect to an Option Aircraft for
which the option to purchase has been cancelled shall thereupon
terminate.
Boeing shall promptly refund to Buyer, without interest, any
payments received from Buyer with respect to the affected Option
Aircraft. Boeing shall be entitled to retain the Option Deposit
unless cancellation is attributable to Boeing's fault, in which
case the Option Deposit shall also be returned to Buyer without
interest.
7. Applicability.
Except as otherwise specifically provided, limited or
excluded herein, all Option Aircraft that are added to the
Agreement by an Option Aircraft Supplemental Agreement as firm
Aircraft shall benefit from all the applicable terms, conditions
and provisions of the Agreement.
If the foregoing accurately reflects your understanding of the
matters treated herein, please so indicate by signature below.
Very truly yours,
THE BOEING COMPANY
By /s/ D. M. Hurt
Its Attorney-in-Fact
ACCEPTED AND AGREED TO this
Date: November 12, 1998
CONTINENTAL AIRLINES, INC.,
By /s/ Brian Davis
Its Vice President
Attachment
<PAGE>
Model 737-824 Aircraft
1. Option Aircraft Description and Changes.
1.1 Aircraft Description. The Option Aircraft are
described by Boeing Detail Specification D6-38808, Revision E,
dated September 15, 1995, as amended and revised pursuant to the
Agreement.
1.2 Changes. The Option Aircraft Detail Specification
shall be revised to include:
(1) Changes applicable to the basic Model 737-
800 aircraft which are developed by Boeing between the date of
the Detail Specification and the signing of an Option Aircraft
Supplemental Agreement.
(2) Changes mutually agreed upon.
(3) Changes required to obtain a Standard
Certificate of Airworthiness.