UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
Commission File Number 0-9781
CONTINENTAL AIRLINES, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2099724
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2929 Allen Parkway, Suite 2010
Houston, Texas 77019
(Address of principal executive offices)
(Zip Code)
713-834-2950
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No _____
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes X No _____
_______________
As of April 12, 1996, 6,301,056 shares of Class A common stock and
21,490,124 shares of Class B common stock were outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions of dollars, except per share data)
Three Months
Ended March 31,
1996 1995
(Unaudited)
Operating Revenue:
Passenger . . . . . . . . . . . . . . . $1,375 $1,240
Cargo, mail and other . . . . . . . . . 114 169
1,489 1,409
Operating Expenses:
Wages, salaries and related costs . . . 364 366
Aircraft fuel . . . . . . . . . . . . . 177 169
Aircraft rentals. . . . . . . . . . . . 124 123
Commissions . . . . . . . . . . . . . . 126 119
Maintenance, materials and repairs. . . 112 97
Other rentals and landing fees. . . . . 84 92
Depreciation and amortization . . . . . 65 64
Other . . . . . . . . . . . . . . . . . 317 351
1,369 1,381
Operating Income . . . . . . . . . . . . 120 28
Nonoperating Income (Expense):
Interest expense. . . . . . . . . . . . (47) (53)
Interest capitalized. . . . . . . . . . 1 1
Interest income . . . . . . . . . . . . 9 6
Other, net. . . . . . . . . . . . . . . 12 (10)
(25) (56)
Income (Loss) before Income Taxes and
Minority Interest . . . . . . . . . . . 95 (28)
Income Tax Provision . . . . . . . . . . (1) -
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions of dollars, except per share data)
Three Months
Ended March 31,
1996 1995
(Unaudited)
Income (Loss) before Minority Interest.. $ 94 $ (28)
Minority Interest. . . . . . . . . . . . (1) (2)
Distributions on Preferred
Securities of Trust . . . . . . . . . . (5) -
Net Income (Loss). . . . . . . . . . . . 88 (30)
Preferred Dividend Requirements and
Accretion to Liquidation Value. . . . . (1) (2)
Income (Loss) Applicable to
Common Shares . . . . . . . . . . . . . $ 87 $ (32)
Earnings (Loss) per Common and Common
Equivalent Share. . . . . . . . . . . . $ 2.70 $(1.21)
Earnings (Loss) per Common Share
Assuming Full Dilution. . . . . . . . . $ 2.36 $(1.21)
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions of dollars, except for share data)
March 31, December 31,
ASSETS 1996 1995
(Unaudited)
Current Assets:
Cash and cash equivalents, including
restricted cash and cash equivalents
of $124 and $144, respectively . . . . . $ 657 $ 747
Accounts receivable, net. . . . . . . . . 430 351
Spare parts and supplies, net . . . . . . 152 127
Prepayments and other . . . . . . . . . . 73 90
Total current assets . . . . . . . . . . 1,312 1,315
Property and Equipment:
Owned property and equipment:
Flight equipment . . . . . . . . . . . . 1,092 1,107
Other. . . . . . . . . . . . . . . . . . 293 288
1,385 1,395
Less: Accumulated depreciation. . . . . 309 285
1,076 1,110
Purchase deposits for flight equipment 43 48
Capital leases:
Flight equipment. . . . . . . . . . . . . 394 394
Other . . . . . . . . . . . . . . . . . . 29 28
423 422
Less: Accumulated amortization . . . . . 132 119
291 303
Total property and equipment . . . . . . 1,410 1,461
Other Assets:
Routes, gates and slots, net. . . . . . . 1,517 1,531
Reorganization value in excess of
amounts allocable to identifiable
assets, net. . . . . . . . . . . . . . . 248 251
Investments . . . . . . . . . . . . . . . 144 163
Other assets, net . . . . . . . . . . . . 115 100
Total other assets . . . . . . . . . . . 2,024 2,045
Total Assets. . . . . . . . . . . . . . $4,746 $4,821
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions of dollars, except for share data)
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
(Unaudited)
Current Liabilities:
Current maturities of long-term debt. . . $ 165 $ 163
Current maturities of capital leases. . . 60 58
Accounts payable. . . . . . . . . . . . . 579 617
Air traffic liability . . . . . . . . . . 727 579
Accrued payroll and pensions. . . . . . . 197 181
Accrued other liabilities . . . . . . . . 312 386
Total current liabilities. . . . . . . . 2,040 1,984
Long-Term Debt . . . . . . . . . . . . . . 1,169 1,352
Capital Leases . . . . . . . . . . . . . . 293 306
Deferred Credits and Other Long-Term
Liabilities:
Deferred income taxes . . . . . . . . . . 46 46
Deferred credit - aircraft operating
leases . . . . . . . . . . . . . . . . . 89 97
Accruals for aircraft retirements and
excess facilities. . . . . . . . . . . . 165 175
Other . . . . . . . . . . . . . . . . . . 242 246
Total deferred credits and other
long-term liabilities . . . . . . . . . 542 564
Commitments and Contingencies
Minority Interest. . . . . . . . . . . . . 28 27
Continental-Obligated Mandatorily
Redeemable Preferred Securities of
Trust (1) . . . . . . . . . . . . . . . . 242 242
Redeemable Preferred Stock (aggregate
redemption value - $42 and $41,
respectively) . . . . . . . . . . . . . . 42 41
(1) The sole assets of the Trust are convertible subordinated
debentures which are expected to be repaid by 2020. Upon
repayment, the Continental-Obligated Mandatorily Redeemable
Preferred Securities of Trust will be mandatorily redeemed.
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions of dollars, except for share data)
March 31, December 31,
1996 1995
(Unaudited)
Common Stockholders' Equity:
Class A common stock - $.01 par,
50,000,000 shares authorized;
6,301,056 shares issued and out-
standing . . . . . . . . . . . . . . . . $ - $ -
Class B common stock - $.01 par,
100,000,000 shares authorized;
21,489,074 and 21,428,274 shares
issued and outstanding, respectively . . - -
Additional paid-in capital . . . . . . . 733 733
Accumulated deficit . . . . . . . . . . . (340) (428)
Unvested portion of restricted stock. . . (8) (10)
Additional minimum pension liability. . . (8) (8)
Unrealized gain on marketable
equity securities. . . . . . . . . . . . 13 18
Total common stockholders' equity. . . . 390 305
Total Liabilities and Stockholders'
Equity . . . . . . . . . . . . . . . . $4,746 $4,821
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
CONTINENTAL AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
Three Months
Ended March 31,
1996 1995
(Unaudited)
Net Cash Provided by Operating
Activities. . . . . . . . . . . . . . . $125 $ 51
Cash Flows from Investing Activities:
Proceeds from sale of America West
stock. . . . . . . . . . . . . . . . . 25 -
Proceeds from disposition of property,
equipment and other assets . . . . . . 14 3
Capital expenditures, net of returned
purchase deposits. . . . . . . . . . . (20) 7
Purchase deposits refunded in
connection with aircraft delivered . . 6 6
Net cash provided by investing
activities. . . . . . . . . . . . . . 25 16
Cash Flows from Financing Activities:
Proceeds from issuance of long-term
debt, net. . . . . . . . . . . . . . . 223 6
Payments on long-term debt and
capital lease obligations. . . . . . . (458) (53)
Proceeds from issuance of common
stock. . . . . . . . . . . . . . . . . 1 1
Dividends paid on preferred securities
of trust . . . . . . . . . . . . . . . (6) -
Net cash used by financing activities. (240) (46)
Net Increase (Decrease) in Cash and
Cash Equivalents. . . . . . . . . . . . (90) 21
Cash and Cash Equivalents - Beginning
of Period . . . . . . . . . . . . . . . 747 396
Cash and Cash Equivalents - End of
Period. . . . . . . . . . . . . . . . . $657 $417
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
Three Months
Ended March 31,
1996 1995
(Unaudited)
Supplemental Cash Flow Information:
Interest paid . . . . . . . . . . . . . $ 46 $ 30
Income taxes paid . . . . . . . . . . . $ - $ -
Investing and Financing Activities
Not Affecting Cash:
Property and equipment acquired
through the issuance of debt . . . . . $ 28 $ -
Return of financed purchase deposits. . $ - $ 10
Reclassification of accrued
management fees to long-term debt. . . $ - $ 21
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
CONTINENTAL AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In the opinion of management, the unaudited consolidated financial
statements included herein contain all adjustments necessary to
present fairly the financial position, results of operations and
cash flows for the periods indicated. Such adjustments are of a
normal recurring nature. The accompanying consolidated financial
statements should be read in conjunction with the consolidated
financial statements and the notes thereto contained in the Annual
Report of Continental Airlines, Inc. (the "Company" or
"Continental") on Form 10-K for the year ended December 31, 1995.
NOTE 1 - EARNINGS (LOSS) PER SHARE
The earnings (loss) per common share computations are based upon
earnings (loss) applicable to common shares and the average number
of shares of common stock, common stock equivalents (stock options,
warrants and restricted stock) and potentially dilutive securities
(e.g., convertible securities) outstanding. The number of shares
used in the primary earnings per share computations for the three
months ended March 31, 1996 and 1995 was 32,034,576 and 26,330,102,
respectively. The number of shares used in the fully diluted
earnings per share computations for the three months ended
March 31, 1996 and 1995 was 39,313,536 and 26,330,102,
respectively. Preferred stock dividend requirements, including
additional dividends on unpaid dividends and accretion to
redemption value, decreased net income for this computation by
approximately $1 million for the three months ended March 31, 1996
and increased the net loss for this computation by approximately
$2 million for the three months ended March 31, 1995.
NOTE 2 - INCOME TAXES
The income tax provision for the three months ended March 31, 1996
consists of foreign income taxes. No provision for federal income
taxes was recorded for the three months ended March 31, 1996 or
1995 since the Company had previously incurred net operating losses
for which a tax benefit had not previously been recorded.
At December 31, 1995, the Company has net operating loss
carryforwards ("NOLs") of $2.5 billion for income tax purposes that
will expire from 1995 through 2009 and investment tax credit
carryforwards of $45 million that will expire through 2001. As a
result of the change in ownership of the Company on April 27, 1993,
the ultimate utilization of the Company's net operating losses and
investment tax credits could be limited.
For financial reporting purposes, a valuation allowance of
$782 million has been recognized to offset the deferred tax assets
related to a portion of the NOLs. The Company has considered
prudent and feasible tax planning strategies in assessing the need
for the valuation allowance. The Company has assumed $116 million
of benefit attributable to such tax planning strategies. The
Company has consummated one such transaction, which had the effect
of realizing approximately 40% of the built-in gains required to be
realized, and currently intends to consummate one or more
additional transactions. In the event the Company were to
determine in the future that any such tax planning strategies would
not be implemented, an adjustment to the net deferred tax liability
of up to $116 million would be charged to income in the period such
determination was made. In the event the Company recognizes
additional tax benefits related to NOLs and investment tax credit
carryforwards attributable to the Company's predecessor, which
include the accounts of Continental Airlines Holdings, Inc. and the
pre-reorganized Company, those benefits would be applied to reduce
reorganization value in excess of amounts allocable to identifiable
assets and other intangibles to zero, and thereafter as an addition
to paid-in capital.
NOTE 3 - OTHER
On January 31, 1996, the Company consummated the offering of
$489 million of enhanced pass-through certificates that refinanced
the underlying debt associated with 18 leased aircraft and will
reduce Continental's annual operating lease expense by more than
$15 million for the affected aircraft.
During January and February 1996, the Company repurchased or
redeemed without prepayment penalty the remaining amount of the
Series A convertible secured debentures for $125 million (including
payment-in-kind interest of $7 million).
On February 21, 1996, the Company sold approximately 1.4 million
shares of its 1.8 million shares of America West Airlines, Inc.
("America West") common stock for net proceeds of approximately $25
million in an underwritten public offering. Subsequent to the
sale, the Company owns approximately 1.0% of the equity interest
and 7.9% of the voting power of America West (excluding warrants to
purchase an additional 802,860 shares of common stock). A $12.5
million gain, included in other nonoperating income, was realized
on the transaction.
On March 26, 1996, Continental issued $230 million of 6 3/4%
convertible subordinated notes due April 15, 2006. The notes are
convertible into Class B common stock of Continental at an initial
conversion price of $60.39 per share. The notes are redeemable at
the option of the Company on or after April 15, 1999, at specified
redemption prices.
In March 1996, Continental Express, Inc. ("Express") entered into
an agreement to acquire eight new ATR aircraft that are expected to
be placed into service during 1996. These aircraft will be
accounted for as operating leases when delivered. In conjunction
with the acquisition, in 1996, the Company will return eight older
ATR aircraft accounted for as capital leases.
On March 29, 1996, Continental repaid $257 million of secured
indebtedness to General Electric Company and affiliates
(collectively, "GE") (of which $47 million was required as a result
of the convertible debt financing and the America West stock sale
and $210 million was an optional prepayment), obtaining the
elimination of certain restrictive covenants.
NOTE 4 - RELATED PARTY TRANSACTIONS
Subject to certain conditions, the Company expects to enter into an
agreement with Air Partners, L.P. ("Air Partners") for the sale by
Air Partners to the Company of up to $50 million in intrinsic value
(then-current Class B common stock price minus exercise price) of
Air Partners' Class B warrants. Upon execution of the agreement,
the Company will reclassify $50 million from common equity to a
classification similar to redeemable preferred stock.
NOTE 5 - NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued
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"), which requires impairment losses
to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the
related assets' carrying amount. SFAS 121 also addresses the
accounting for long-lived assets that are expected to be disposed
of. The Company's adoption of SFAS 121 in the first quarter of
1996 did not have an impact on the Company's results of operations
or financial position.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 - "Accounting
for Stock-Based Compensation" ("SFAS 123"). Under the provisions
of SFAS 123, companies can elect to account for stock-based
compensation plans using a fair value based method or continue
measuring compensation expense for those plans using the intrinsic
value method prescribed by Accounting Principles Board Opinion No.
25 - "Accounting for Stock Issued to Employees" ("APB 25"). The
Company adopted SFAS 123 January 1, 1996 and will continue to
account for stock-based compensation using APB 25; therefore, the
adoption of SFAS 123 had no impact on the Company's results of
operations or financial position.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The following discussion provides an analysis of the Company's
results of operations and reasons for material changes therein for
the three months ended March 31, 1996 as compared to the
corresponding period ended March 31, 1995.
Comparison of Three Months Ended March 31, 1996 to Three Months
Ended March 31, 1995
Continental's financial and operating performance improved
dramatically in the first quarter of 1996 compared to the first
quarter of 1995, reflecting, among other things, continued
implementation of the Company's strategic program to enhance the
fundamentals of its operations, rationalize capacity (including the
elimination of "Continental Lite" operations -- a network of short-
haul, no-frills, low-fare flights), improve customer service and
employee relations and strengthen Continental's balance sheet and
liquidity. In addition, management believes that the Company
benefitted from the expiration of the aviation trust fund tax (the
"ticket tax") on December 31, 1995, although the amount of any such
benefit directly resulting from the expiration of the ticket tax
cannot be determined. The Company recorded consolidated net income
of $88 million for the three months ended March 31, 1996 as
compared to a consolidated net loss of $30 million for the three
months ended March 31, 1995. The Company's net income in the first
quarter of 1996 included a $12.5 million gain related to the sale
of approximately 1.4 million shares of America West common stock.
Implementation of the Company's route realignment and capacity
rationalization initiatives reduced capacity by 9.1% in the first
quarter of 1996 as compared to the first quarter of 1995. This
decrease in capacity, combined with a 2.0% increase in traffic,
produced a 7.3 percentage point increase in load factor to 67.0%.
This higher load factor, combined with a 7.6% increase in the
average yield per revenue passenger mile, contributed to a 10.9%
increase in passenger revenue to $1.4 billion despite the decreased
capacity.
Cargo, mail and other revenue decreased 32.5%, $55 million, in the
three months ended March 31, 1996 as compared to the same period in
the prior year, principally as a result of transactions involving
the Company's System One Information Management, Inc. ("System
One") subsidiary, which were effective April 27, 1995.
Wages, salaries and related costs decreased 0.6%, $2 million,
during the quarter ended March 31, 1996 as compared to the same
period in 1995, primarily due to a reduction in the number of full-
time equivalent employees from approximately 35,000 as of March 31,
1995 to approximately 32,900 as of March 31, 1996. Such decrease
was substantially offset by accruals totaling $15 million for
employee profit sharing and other incentive programs, including the
payment of bonuses for on-time airline performance. In addition,
wage rates were impacted by a longevity pay increase for
substantially all employee groups, effective July 1, 1995.
Aircraft fuel expense increased 4.7%, $8 million, in the three
months ended March 31, 1996 as compared to the same period in the
prior year. The average price per gallon increased 12.7% from
52.61 cents in the first quarter of 1995 to 59.31 cents in the
first quarter of 1996. Such increase was partially offset by a
7.1% decrease in the quantity of jet fuel used from 312 million
gallons in the first quarter of 1995 to 290 million gallons in the
first quarter of 1996, principally reflecting capacity reductions
and increased stage lengths.
Commission expense increased 5.9%, $7 million, in the quarter ended
March 31, 1996 as compared to the same period in the prior year,
primarily due to increased passenger revenue.
Maintenance, materials and repairs increased 15.5%, $15 million,
during the quarter ended March 31, 1996 as compared to the same
period in 1995, due principally to the volume and timing of engine
overhauls as part of the Company's ongoing maintenance program.
Other rentals and landing fees decreased 8.7%, $8 million, for the
three months ended March 31, 1996 compared to the same period in
1995, principally due to reduced facility rentals and landing fees
resulting from capacity reductions.
Other operating expense decreased 9.7%, $34 million, in the three
months ended March 31, 1996 as compared to the same period in the
prior year, primarily as a result of the System One transactions
(which were effective April 27, 1995) coupled with decreases in
advertising expense and other miscellaneous expense.
Interest expense decreased 11.3%, $6 million, during the three
months ended March 31, 1996 as compared to the same period in 1995,
primarily due to principal reductions of long-term debt and capital
lease obligations.
Interest income increased 50.0%, $3 million, in the first quarter
of 1996 compared to the same period in the prior year, principally
due to an increase in the average interest rate earned on
investments coupled with an increase in the average invested
balance of cash and cash equivalents.
The Company's other nonoperating income (expense) in the quarter
ended March 31, 1996 included a $12.5 million gain related to the
sale of approximately 1.4 million shares of America West common
stock (39 cents and 32 cents per primary and fully diluted share,
respectively). (See Note 3.) Other nonoperating income (expense)
in the first quarter of 1995 consisted primarily of foreign
exchange and other losses of $9.6 million (related to the Japanese
yen and Mexican peso).
The income tax provision for the three months ended March 31, 1996
consists of foreign income taxes. No provision for federal income
taxes was recorded for the three months ended March 31, 1996 or
1995 since the Company had previously incurred net operating losses
for which a tax benefit had not previously been recorded.
An analysis of statistical information for Continental's jet
operations for the periods indicated is as follows:
Three Months Ended Net
March 31, Increase/
1996 1995 (Decrease)
Revenue passenger miles
(millions) (a). . . . . . . . . . 9,752 9,561 2.0 %
Available seat miles
(millions) (b). . . . . . . . . .14,551 16,003 (9.1)%
Block hours (thousands) (c). . . . 270 281 (3.9)%
Passenger load factor (d). . . . . 67.0% 59.7% 7.3 pts.
Breakeven passenger load
factor (e). . . . . . . . . . . . 61.0% 58.2% 2.8 pts.
Passenger revenue per available
seat mile (cents) (f). . . . . . 8.90 7.37 20.8 %
Total revenue per available
seat mile (cents) (g) . . . . . . 9.77 8.15 19.9 %
Operating cost per available
seat mile (cents) (h). . . . . . 8.92 7.90 12.9 %
Operating cost per block hour . .$4,806 $4,496 6.9 %
Average yield per revenue
passenger mile (cents) (i) . . . 13.28 12.34 7.6 %
Average fare per revenue
passenger . . . . . . . . . . . .$142.54 $129.10 10.4 %
Revenue passengers (thousands) . . 9,087 9,141 (0.6)%
Average length of aircraft
flight (miles) . . . . . . . . . 876 803 9.1 %
Average daily utilization of
each aircraft (hours) (j). . . . 9:29 9:34 (0.5)%
Actual aircraft in fleet at
end of period . . . . . . . . . . 314 324 (3.1)%
(a) The number of scheduled miles flown by revenue passengers.
(b) The number of seats available for passengers multiplied by the
number of scheduled miles those seats are flown.
(c) The number of hours an aircraft is operated in revenue service
from gate-to-gate.
(d) Revenue passenger miles divided by available seat miles.
(e) The percentage of seats that must be occupied by revenue
passengers in order for the airline to break even on an income
before income taxes basis, excluding nonrecurring charges,
nonoperating items and other special items.
(f) Passenger revenue divided by available seat miles.
(g) Total revenue divided by available seat miles.
(h) Operating expenses divided by available seat miles.
(i) The average revenue received for each mile a revenue passenger
is carried.
(j) The average block hours flown per day in revenue service per
aircraft.
LIQUIDITY AND CAPITAL COMMITMENTS
In the first quarter of 1996, the Company completed a number of
transactions intended to strengthen its long-term financial
position and enhance earnings. On January 31, the Company
consummated the offering of $489 million of enhanced pass-through
certificates that refinanced the underlying debt associated with 18
leased aircraft and will reduce Continental's annual operating
lease expense by more than $15 million for the affected aircraft.
During January and February, Continental repurchased or redeemed
without prepayment penalty the remaining amount of the Series A
convertible secured debentures for $125 million (including payment-
in-kind interest of $7 million). In February, Continental sold
approximately 1.4 million of the shares it owned in America West,
realizing net proceeds of approximately $25 million and recognizing
a gain of $12.5 million. On March 26, Continental sold $230
million of 6 3/4% convertible subordinated notes. The net proceeds
from this offering and from the America West stock sale, as well as
cash on hand, were used for the repayment of certain outstanding GE
indebtedness totaling $257 million (of which $47 million was
required as a result of the convertible debt financing and the
America West stock sale and $210 million was an optional
prepayment).
As a result of NOLs, the Company will not pay United States federal
income taxes (other than alternative minimum tax) until it has
recorded approximately an additional $1.2 billion of taxable income
following December 31, 1995. For financial reporting purposes,
however, Continental will be required to begin accruing tax expense
on its income statement once it has realized an additional $122
million of taxable income following March 31, 1996. Section 382 of
the Internal Revenue Code 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. However, no assurance can be given that future
transactions, whether within or outside the control of the Company,
will not cause a change in ownership, thereby substantially
limiting the potential utilization of the NOLs in a given future
year. In the event that an ownership change should occur,
utilization of Continental's NOLs would be subject to an annual
limitation under Section 382. The Section 382 limitation for any
post-change year would be determined by multiplying the value of
the Company's stock (including both common and preferred stock) at
the time of the ownership change by the applicable long-term tax
exempt rate (which is 5.31% for April 1996). Unused annual
limitation may be carried over to later years, and the limitation
may under certain circumstances be increased by the built-in gains
in assets held by the Company at the time of the change that are
recognized in the five-year period after the change. Under current
conditions, if an ownership change were to occur, Continental's NOL
utilization would be limited to a minimum of approximately
$90 million.
Continental has firm commitments with The Boeing Company ("Boeing")
to take delivery of one new 757 aircraft in April 1996 and 43 new
jet aircraft during the years 1998 through 2002. The estimated
aggregate cost of these aircraft is $2.6 billion. In addition, six
Beech 1900-D turboprop aircraft are scheduled to be delivered later
in 1996. The Company currently anticipates that the firm financing
commitments available to it with respect to its acquisition of new
aircraft from Boeing and Beech Acceptance Corporation will be
sufficient to fund all deliveries scheduled during 1996, and that
it will have remaining financing commitments from aircraft
manufacturers of $676 million for jet aircraft deliveries beyond
1996.
In addition, in March 1996, Express entered into an agreement to
acquire eight new ATR aircraft that are expected to be placed into
service during 1996. These aircraft will be accounted for as
operating leases. In conjunction with the acquisition, in 1996,
the Company will return eight older ATR aircraft accounted for as
capital leases.
Continental expects its cash outlays for 1996 capital expenditures,
exclusive of aircraft acquisitions, to aggregate $120 million
primarily relating to mainframe, software application and
automation infrastructure projects, aircraft modifications and
mandatory maintenance projects, passenger terminal facility
improvements and office, maintenance, telecommunications and ground
equipment. Continental's capital expenditures during the three
months ended March 31, 1996, aggregated $14 million, exclusive of
aircraft acquisitions.
The Company expects to fund its 1996 and future capital commitments
through internally generated funds, together with general Company
financings and aircraft financing transactions. However, there can
be no assurance that sufficient financing will be available for all
aircraft and other capital expenditures not covered by firm
financing commitments.
As of March 31, 1996, the Company had $657 million in cash and cash
equivalents, compared to $747 million as of December 31, 1995. Net
cash provided by operating activities increased $74 million during
the three months ended March 31, 1996 compared to the same period
in the prior year principally due to earnings improvement. In
addition, net cash provided by investing activities increased
$9 million, primarily as a result of proceeds received from the
sale of approximately 1.4 million shares of Continental's America
West stock slightly offset by higher net capital expenditures in
1996. Net cash used by financing activities for the three months
ended March 31, 1996 compared to the same period in the prior year
increased $194 million primarily due to the repayment of long-term
debt, using in part, proceeds received from the issuance of the 6
3/4% convertible subordinated notes.
Continental does not have general lines of credit, and
substantially all of its assets, including the stock of its
subsidiaries, are encumbered.
Approximately $124 million and $144 million of cash and cash
equivalents at March 31, 1996 and December 31, 1995, respectively,
were held in restricted arrangements relating primarily to workers'
compensation claims and in accordance with the terms of certain
other agreements. Continental and Continental Micronesia, Inc.
("CMI"), a 91% owned subsidiary, have secured borrowings from GE
which as of March 31, 1996 and December 31, 1995 aggregated $373
million and $634 million, respectively. CMI's secured loans
contain significant financial covenants, including requirements to
maintain a minimum cash balance and consolidated net worth,
restrictions on unsecured borrowings and mandatory prepayments on
the sale of most assets. These financial covenants limit the
ability of CMI to pay dividends to Continental. As of March 31,
1996, CMI had a minimum cash balance requirement of $30 million.
In addition, certain of Continental's secured loans require the
Company to, among other things, maintain a minimum cumulative
operating cash flow, a minimum monthly cash balance and a minimum
ratio of operating cash flow to fixed charges. Continental also is
prohibited generally from paying cash dividends on its capital
stock, from purchasing or prepaying indebtedness and from incurring
certain additional secured indebtedness.
The Company has entered into petroleum option contracts to provide
some short-term protection (currently approximately seven months)
against a sharp increase in jet fuel prices, and CMI has entered
into average rate option contracts to hedge a portion of its
Japanese yen-denominated ticket sales against a significant
depreciation in the value of the yen versus the United States
dollar. The petroleum option contracts generally cover the
Company's forecasted jet fuel needs for the next three to nine
months, and the average rate option contracts cover a portion of
CMI's yen-denominated ticket sales for the next three to nine
months. At March 31, 1996, the Company had petroleum option
contracts outstanding with an aggregate notional value of
$252 million and CMI had an average rate option contract
outstanding with a contract value of $158 million. At March 31,
1996, the carrying value of the option contracts was immaterial.
The Company and CMI are exposed to credit loss in the event of
nonperformance by the counterparties on the option contracts;
however, management does not anticipate nonperformance by these
counterparties. The amount of such exposure is generally the
unrealized gains, if any, on such option contracts.
Management believes that the Company's costs are likely to be
affected in 1996 by, among other factors, (i) increased wages,
salaries and benefits, (ii) higher aircraft rental expense as new
aircraft are delivered, (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,
(v) changes in the Company's fleet and related capacity and
(vi) the Company's continuing efforts to reduce costs throughout
its operations.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On December 3, 1990, the Company owned 77 aircraft and 81 spare
engines (in four collateral pools) securing debt evidenced by
equipment trust certificates. The trustees for the four
collateral pools moved in the United States Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court") for "adequate
protection" payments under Sections 361 and 363 of the federal
bankruptcy code for the Company's retention and use of the
aircraft and engines after December 3, 1990, including
postpetition claims for the alleged decline in market value of
the aircraft and engines after December 3, 1990 and claims for
deterioration in the condition of the aircraft and engines in
the same period. The Bankruptcy Court rejected the adequate
protection claims that alleged market value decline. Prior to
April 16, 1993, the Company settled all of the adequate
protection claims of the trustees, except for a claim of
approximately $117 million for alleged market value decline of
29 aircraft and 81 spare engines in the fourth collateral pool.
On April 16, 1993, the Bankruptcy Court rejected the market
value decline claims of the trustees for the fourth collateral
pool in their entirety and incorporated those findings into its
order confirming the Plan of Reorganization. The trustees for
the fourth collateral pool appealed from these orders, but
failed to obtain a stay pending appeal. The Company opposed
these appeals on the merits and sought dismissal of the appeals
on the grounds they were made moot by the substantial
consummation of the Plan of Reorganization. The United States
District Court for the District of Delaware (the "District
Court") dismissed the appeals as moot, and the trustees appealed
to the Third Circuit Court of Appeals (the "Third Circuit")
seeking review of the District Court's mootness determination
and the Bankruptcy Court's finding on the merits. The Third
Circuit affirmed the District Court's dismissal in February
1996, but subsequently granted a rehearing en banc, currently
scheduled for May 14, 1996. The Company does not believe that
the foregoing matter will have a material adverse effect on the
Company.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
On April 19, the Company's Board of Directors approved
agreements (the "Agreements") with its two major stockholders,
Air Canada and Air Partners. The Agreements contain a variety
of arrangements intended generally to reflect the intention that
Air Canada has expressed to the Company of divesting its
investment in Continental by early 1997, subject to market
conditions. Air Canada has indicated to the Company that its
original investment in Continental has become less central to
Air Canada in light of other initiatives it has undertaken
(particularly expansion within Canada and exploitation of the
1995 Open Skies agreement to expand Air Canada's own flights
into the U.S.), and that given such initiatives Air Canada has
determined it appropriate to redeploy the funds invested in the
Company into other uses in Air Canada's business. The
Agreements also reflect Air Partners' recent distribution to the
various investors in Air Partners (the "AP Investors") of the
Class B common stock that it owned and the desire of some of
those investors to realize upon portions of their investment in
Class B common stock. The Agreements call for the Company to
undertake a secondary offering and upon the closing of the
secondary offering:
in light of its then-reduced equity stake, Air Canada will no
longer be entitled to designate directors of Continental, will
cause the four present or former members of Air Canada's Board
of Directors currently serving as Continental directors to
decline nomination for reelection as directors, and will
convert all of its Class A common stock to Class B common
stock;
Air Canada and Air Partners will enter into a number of
agreements restricting, prior to December 16, 1996, further
disposition of stock held by either of them; and
the existing stockholders' agreement and registration rights
agreement among the parties will be modified in a number of
respects to reflect the changing composition of the respective
equity interests, as well as other factors.
Reflecting the reduction of Air Canada's interest and its
directors' decision not to stand for reelection if the secondary
offering is consummated, along with the expiration of various
provisions specifically included at the time of the Company's
reorganization, Continental's Board of Directors has also
approved changes to the Company's Certificate of Incorporation
and Bylaws (the "Proposed Amendments") generally eliminating
special classes of directors (except for Air Partners' right to
elect directors in certain circumstances) and supermajority
provisions, and making a variety of other modifications aimed at
streamlining the Company's corporate governance structure.
The Proposed Amendments also provide that, effective January 1,
1997, Class A common stock would become freely convertible into
Class B common stock. Under agreements put in place at the time
of the Company's reorganization in 1993, and designed in part to
ensure compliance with the foreign ownership limitations
applicable to United States air carriers in light of the
substantial stake in the Company then held by Air Canada,
holders of Class A common stock (other than Air Canada) are not
currently permitted under the Company's Certificate of
Incorporation to convert their shares to Class B common stock.
In recent periods, the market price of Class A common stock has
generally been below the price of Class B common stock, which
the Company believes is attributable in part to the reduced
liquidity present in the trading market for Class A common
stock. A number of Class A stockholders have requested that the
Company provide for free convertibility of Class A common stock
into Class B common stock, and in light of the reduction of Air
Canada's equity stake, the Company has determined that the
restriction is no longer necessary.
The Company and Air Canada also expect to enter into discussions
regarding modifications to the Company's existing "synergy"
agreements with Air Canada, covering items such as maintenance
and ground facilities, with a view to resolving certain
outstanding commercial issues under the agreements and otherwise
modifying the agreements to reflect Continental's and Air
Canada's current needs. Subject to certain conditions, the
Company also expects to enter into an agreement with Air
Partners for the sale by Air Partners to the Company of up to
$50 million in intrinsic value (then-current Class B common
stock price minus exercise price) of Air Partners' Class B
warrants. Upon execution of the agreement, the Company will
reclassify $50 million from common equity to a classification
similar to redeemable preferred stock.
Because certain aspects of the Agreements raised issues under
the change in control provisions of certain of the Company's
employment agreements and employee benefit plans, these
agreements and plans are being modified to provide a revised
change of control definition that the Company believes is
appropriate in light of the prospective changes to its equity
ownership structure. In connection with the modifications,
payments are being made to certain employees, benefits are being
granted to certain employees and options equal to 10% of the
amount of the options previously granted to each optionee are
being granted (subject to certain conditions) to substantially
all employees holding outstanding options.
Certain of the Proposed Amendments and employee benefit actions
are subject to stockholder approval at the annual meeting of
stockholders scheduled for June 26, 1996. Air Canada and Air
Partners (who will, as of the record date, April 30, 1996, own
shares constituting approximately 56% of the overall voting
power of the Company) have agreed to vote their shares in favor
of these proposals. A majority vote of stockholders is required
to approve the employee benefit matters; a two-thirds vote is
required to approve the Proposed Amendments.
Following the anticipated sale of Air Canada's Class B common
stock in the secondary offering (and exercise of the
underwriters' overallotment option) and the conversion of all
its Class A common stock to Class B common stock, Air Canada is
expected to own approximately 4.0% of the voting power and 10.1%
of the equity of the Company and Air Partners to own
approximately 39.4% of the voting power and 9.9% of the equity
of the Company (assuming no exercise of the warrants held by Air
Partners).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
(i) Report dated January 31, 1996 reporting an Item 5.
"Other Event". No financial statements were filed
with the report, which announced the completion of a
private placement of $489 million of pass through
certificates.
(ii) Report dated March 26, 1996 reporting an Item 5.
"Other Event". No financial statements were filed
with the report, which announced the closing of an
offering of $230 million of 6 3/4% convertible
subordinated notes due April 15, 2006.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CONTINENTAL AIRLINES, INC.
(Registrant)
Date: April 22, 1996 by: /s/ Lawrence W. Kellner
Lawrence W. Kellner
Senior Vice President and
Chief Financial Officer
(On behalf of Registrant)
Date: April 22, 1996 /s/ Michael P. Bonds
Michael P. Bonds
Staff Vice President and Controller
(Principal Accounting Officer)
Exhibit 11.1
Page 1 of 2
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(In thousands of dollars, except per share data)
Three Months
Ended March 31,
1996 1995
Primary:
Weighted average shares outstanding. 26,486,919 26,330,102
Dilutive effect of outstanding
stock options, warrants and
restricted stock grants (as
determined by the application
of the treasury stock method) . . . 5,547,657 -
Weighted average number of common
shares outstanding, as adjusted . . 32,034,576 26,330,102
Income (loss). . . . . . . . . . . . $ 86,622 $ (31,670)
Per share amount . . . . . . . . . . $ 2.70 $ (1.21)
Exhibit 11.1
Page 2 of 2
CONTINENTAL AIRLINES, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(In thousands of dollars, except per share data)
Three Months
Ended March 31,
1996 1995
Fully diluted:
Weighted average shares outstanding. 26,486,919 26,330,102
Dilutive effect of outstanding
stock options, warrants and
restricted stock grants (as
determined by the application
of the treasury stock method) . . . 6,121,377 -
Dilutive effect of convertible
debentures. . . . . . . . . . . . . 1,287,665 -
Dilutive effect of 8 1/2%
convertible trust originated
preferred securities. . . . . . . . 5,166,460 -
Dilutive effect of 6 3/4%
convertible subordinated notes. . . 251,115 -
Weighted average number of common
shares outstanding, as adjusted . . 39,313,536 26,330,102
Income (loss) applicable to
common shares . . . . . . . . . . . $ 86,622 $ (31,670)
Add interest expense associated
with the assumed conversion of
convertible debentures. . . . . . . 442 -
Add interest expense associated
with the assumed conversion of
8 1/2% convertible trust
originated preferred securities . . 5,295 -
Add interest expense associated
with the assumed conversion of
6 3/4% convertible subordinated
notes . . . . . . . . . . . . . . . 255 -
Income (loss), as adjusted . . . . . $ 92,614 $ (31,670)
Per share amount . . . . . . . . . . $ 2.36 $ (1.21)
5
1,000,000
3-MOS
DEC-31-1996
MAR-31-1996
657
0
430
29
152
1,312
1,410
441
4,746
2,040
0
42
0
0
390
4,746
1,489
1,489
0
0
1,369
0
47
95
1
88
0
0
0
88
2.70
2.36
