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14. |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant þ
Filed by a Party other than the Registrant o
Check the appropriate box:
þ Preliminary Proxy Statement
o Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
o Definitive Proxy Statement
o Definitive Additional Materials
o Soliciting Material Pursuant to §240.14a-12
Continental Airlines, Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
þ No fee required.
o Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act
Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was
determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
o Fee paid previously with preliminary materials.
o Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2)
and identify the filing for which the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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SEC 1913 (04-05)
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Persons who are to respond to the collection of
information contained in this form are not required to
respond unless the form displays a currently valid OMB
control number. |
April 10, 2006
To Our Stockholders:
On behalf of the Board of Directors, we are pleased to invite
you to attend the Continental Airlines, Inc. 2006 Annual Meeting
of Stockholders. As indicated in the attached notice, the
meeting will be held at The Hyatt Regency, 1200 Louisiana
Street, Houston, Texas on Tuesday, June 6, 2006, at
10:00 a.m., local time. At the meeting, we will act on the
matters described in the attached proxy statement and there will
be an opportunity to discuss other matters of interest to you as
a stockholder.
Please authorize your proxy or direct your vote by internet or
telephone as described in the enclosed proxy statement, even if
you plan to attend the meeting in person. Alternatively, you can
date, sign and mail the enclosed proxy card in the envelope
provided. We look forward to seeing you in Houston.
Cordially,
Larry Kellner
Chairman of the Board and Chief
Executive Officer
Jeff Smisek
President
CONTINENTAL
AIRLINES, INC.
1600 Smith Street, Dept. HQSEO
Houston, Texas 77002
NOTICE OF 2006 ANNUAL MEETING
OF STOCKHOLDERS
To Be Held June 6,
2006
The 2006 annual meeting of stockholders of Continental Airlines,
Inc. will be held at The Hyatt Regency, 1200 Louisiana Street,
Houston, Texas on Tuesday, June 6, 2006, at
10:00 a.m., local time, for the following purposes:
1. To elect eleven directors to serve until the next annual
meeting of stockholders;
2. To consider and act upon a proposal to amend the
companys Amended and Restated Certificate of Incorporation
to increase the authorized Class B common stock from
200 million shares to 400 million shares;
3. To consider and act upon a proposal to amend the
companys Incentive Plan 2000 to increase the number of
shares of common stock issuable under the plan from
3 million shares to 4.5 million shares. The Human
Resources Committee has determined that none of the additional
1.5 million shares will be issued to any of the
companys current officers;
4. To consider and act upon a proposal to ratify the
appointment of Ernst & Young LLP as independent
auditors of the company and its subsidiaries for 2006;
5. To consider and act upon a proposal submitted by a
stockholder related to political activities; and
6. To consider and act upon any other matters that may
properly come before the annual meeting or any postponement or
adjournment thereof.
The holders of record of the companys common stock at the
close of business on April 7, 2006 are entitled to notice
of and to vote at the meeting. A list of the stockholders
entitled to vote at the meeting will be available for
examination, during ordinary business hours, for ten days before
the meeting at our principal place of business, 1600 Smith
Street, Houston, Texas.
Jennifer L. Vogel
Secretary
Houston, Texas
April 10, 2006
Please authorize your proxy or direct your vote by internet
or telephone as described in the enclosed proxy statement, even
if you plan to attend the meeting in person. Alternatively, you
may date and sign the enclosed proxy and return it promptly by
mail in the envelope provided. If you mail the proxy card, no
postage is required if mailed in the United States. If you do
attend the meeting in person and want to withdraw your proxy,
you may do so as described in the enclosed proxy statement and
vote in person on all matters properly brought before the
meeting.
TABLE OF
CONTENTS
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Appendix A: Consolidated
Financial Statements
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A-1
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Appendix B: Audit Committee
Charter (as amended and restated through February 11, 2005)
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B-1
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Appendix C: Amendment to
Amended and Restated Certificate of Incorporation
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Appendix D: Amendment to
Amended and Restated Incentive Plan 2000
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D-1
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Appendix E: Incentive Plan
2000 (as amended through March 12, 2004)
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E-1
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ii
CONTINENTAL
AIRLINES, INC.
1600 Smith Street, Dept. HQSEO
Houston, Texas 77002
PROXY STATEMENT
2006 ANNUAL MEETING OF
STOCKHOLDERS
To Be Held June 6,
2006
THE
MEETING
Purpose,
Place, Date and Time
We are providing this proxy statement to you in connection with
the solicitation on behalf of Continentals board of
directors, which we refer to as the board, of
proxies to be voted at the companys 2006 annual
stockholders meeting or any postponement or adjournment of that
meeting. The meeting will be held at The Hyatt Regency, 1200
Louisiana Street, Houston, Texas on Tuesday, June 6, 2006,
at 10:00 a.m., local time, for the purposes set forth in
the accompanying Notice of 2006 Annual Meeting of Stockholders.
This proxy statement and the accompanying proxy, which are
accompanied by a copy of our 2005 Annual Report, are being first
mailed or otherwise delivered to stockholders on or about
April 13, 2006.
Record
Date; Stockholders Entitled to Vote
Stockholders of record at the close of business on April 7,
2006, the record date, are entitled to notice of and
to vote at the meeting and at any postponement or adjournment of
the meeting. At the close of business on the record date,
Continental had outstanding [XXX,XXX,XXX] shares of
Class B common stock, which we refer to as common
stock, and one share of Series B Preferred Stock,
held by Northwest Airlines, Inc., which we refer to as
Northwest. Subject to certain limitations on voting
by
non-U.S. citizens,
as described below, each share of our common stock is entitled
to one vote. The share of Series B Preferred Stock held by
Northwest is not entitled to vote with respect to the matters
set forth in the accompanying Notice.
Under U.S. law, no more than 25% of the voting stock of a
U.S. air carrier such as Continental may be owned or
controlled, directly or indirectly, by persons who are not
U.S. citizens, and Continental itself must be a
U.S. citizen. For these purposes, a
U.S. citizen means:
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an individual who is a citizen of the United States;
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a partnership, each of whose partners is an individual who is a
citizen of the United States; or
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a corporation or association organized under the laws of the
United States or a state, the District of Columbia, or a
territory or possession of the United States, of which the
president and at least two-thirds of the board of directors and
other managing officers are citizens of the United States, which
is under the actual control of citizens of the United States,
and in which at least 75% of the voting interest is owned or
controlled by persons who are citizens of the United States.
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The U.S. Department of Transportation determines, on a
case-by-case
basis, whether an air carrier is effectively owned and
controlled by citizens of the United States.
In order to comply with these rules, our Amended and Restated
Certificate of Incorporation provides that persons who are not
U.S. citizens may not vote shares of our capital stock
unless the shares are registered on a separate stock record
maintained by us. A foreign holder wishing to register on this
separate stock record should send us a written request for
registration identifying the full name and address of the
holder, the holders citizenship, the total number of
shares held and the nature of such ownership (i.e.,
record or beneficial). Such requests should be addressed to our
Secretary at Continental Airlines, Inc., P.O. Box 4607,
1
Houston, Texas
77210-4607.
We will not register shares on this record if the amount
registered would cause us to violate the foreign ownership rules
or adversely affect our operating certificates or authorities.
Registration on this record is made in chronological order based
on the date we receive a written request for registration. As of
the record date, shares registered on this record comprised less
than 25% of our voting stock.
Quorum
A quorum of stockholders is necessary for a valid meeting. The
required quorum for the transaction of business at the annual
meeting is a majority of the total outstanding shares of stock
entitled to vote at the meeting, either present in person or
represented by proxy.
Abstentions will be included in determining the number of shares
present at the meeting for the purpose of determining the
presence of a quorum, as will broker non-votes. A broker
non-vote occurs under stock exchange rules when a broker
is not permitted to vote on a matter without instructions from
the beneficial owner of the shares and no instruction is given.
The rules of the New York Stock Exchange, or NYSE,
prohibit brokers from voting on the amendment of the Incentive
Plan 2000 (Proposal 3), and the proposal of stockholder
(Proposal 5), unless instructions have been received from
the beneficial owner of the voting shares. However, brokers may
vote in their discretion in the absence of timely instructions
from beneficial owners with respect to the election of directors
(Proposal 1), the amendment of the Amended and Restated
Certificate of Incorporation (Proposal 2), and the proposal
to ratify the appointment of the independent auditors
(Proposal 4).
Vote
Required for Proposal 1: Election of Directors
Directors will be elected by a plurality of the votes cast for
directors by the holders of common stock entitled to vote
thereon.
In the vote to elect directors, stockholders may:
(a) vote in favor of all nominees;
(b) withhold votes as to all nominees; or
(c) withhold votes as to specific nominees.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE
FOR EACH OF THE NOMINEES.
Vote
Required for Proposal 2: Amendment of the Amended and
Restated Certificate of Incorporation
The proposal to amend the companys Amended and Restated
Certificate of Incorporation, which we refer to as our
Certificate of Incorporation, will require approval
by the affirmative votes of the holders of a majority of the
outstanding shares of common stock entitled to vote thereon.
Abstentions will have the same effect as votes against the
proposal.
In the vote on the proposal to amend our Certificate of
Incorporation, stockholders may:
(a) vote in favor of the proposal;
(b) vote against the proposal; or
(c) abstain from voting on the proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE
FOR THE PROPOSAL TO AMEND OUR
CERTIFICATE OF INCORPORATION.
Vote
Required for Proposal 3: Amendment of the Incentive Plan
2000
The proposal to amend the companys Incentive Plan 2000
will require approval by a majority of the votes cast at the
meeting on Proposal 3 by the holders of common stock
entitled to vote thereon. Neither
2
abstentions nor broker non-votes are treated as votes cast and
thus neither will affect the outcome of the proposal.
In the vote on the proposal to amend the Incentive Plan 2000,
stockholders may:
(a) vote in favor of the proposal;
(b) vote against the proposal; or
(c) abstain from voting on the proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE
FOR THE PROPOSAL TO AMEND THE
COMPANYS INCENTIVE PLAN 2000.
Vote
Required for Proposal 4: Ratification of Appointment of
Independent Auditors
The proposal to ratify the appointment of Ernst & Young
LLP as our independent auditors will require approval by a
majority of the votes cast at the meeting on Proposal 4 by
the holders of common stock entitled to vote thereon.
Abstentions are not treated as votes cast and thus will not
affect the outcome of the proposal.
In the vote on the ratification of the appointment of
Ernst & Young LLP as our independent auditors,
stockholders may:
(a) vote in favor of the ratification;
(b) vote against the ratification; or
(c) abstain from voting on the ratification.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE
FOR THE RATIFICATION OF THE APPOINTMENT OF
OUR INDEPENDENT AUDITORS.
Vote
Required for Proposal 5: Proposal of Stockholder
The proposal of stockholder scheduled to be presented at the
meeting will require approval by a majority of the votes cast at
the meeting on Proposal 5 by the holders of common stock
entitled to vote thereon. Neither abstentions nor broker
non-votes are treated as votes cast and thus neither will affect
the outcome of the proposal.
In the vote on the proposal of stockholder, stockholders may:
(a) vote in favor of the proposal;
(b) vote against the proposal; or
(c) abstain from voting on the proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE
AGAINST THE PROPOSAL OF STOCKHOLDER.
Voting of
Proxies
Although you may vote by properly signing and returning the
proxy card or voting form that accompanies this proxy statement
in the enclosed postage-paid envelope, we ask that you vote
instead by internet or telephone, which saves us money. Please
note that the telephonic voting procedures described below are
not available for shares held by
non-U.S. citizens.
Shares Held of Record. Stockholders with
shares registered in their names with Mellon Investor Services
LLC, Continentals transfer agent and registrar, may
authorize a proxy by internet at the following internet address:
www.proxyvote.com or telephonically by calling Automatic
Data Processing, Inc., which we refer to as ADP, at
1-800-690-6903.
Proxies submitted through ADP by internet or telephone must be
received by
3
11:59 p.m. eastern time on June 5, 2006. The giving of
such proxy will not affect your right to vote in person if you
decide to attend the meeting.
Shares Held in a Bank or Brokerage
Account. A number of banks and brokerage firms
participate in a program, separate from that offered by ADP,
that also permits stockholders to direct their vote by internet
or telephone. If your shares are held in an account at such a
bank or brokerage firm, you may direct the voting of those
shares by internet or telephone by following the instructions on
their enclosed voting form. Votes directed by internet or
telephone through such a program must be received by
11:59 p.m. eastern time on June 5, 2006. Directing the
voting of your shares will not affect your right to vote in
person if you decide to attend the meeting; however, you must
first request a valid proxy either on the internet or the voting
form that accompanies this proxy statement. Requesting a valid
proxy prior to the deadlines described above will automatically
cancel any voting directions you have previously given by
internet or by telephone with respect to your shares.
The internet and telephone proxy procedures are designed to
authenticate stockholders identities, to allow
stockholders to give their proxy instructions and to confirm
that those instructions have been properly recorded.
Stockholders authorizing proxies or directing the voting of
shares by internet should understand that there may be costs
associated with electronic access, such as usage charges from
internet access providers and telephone companies, that must be
borne by the stockholder.
Revocation
of Proxies
You can revoke your proxy before it is exercised at the meeting
in any of three ways:
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by submitting written notice to our Secretary before the meeting
that you have revoked your proxy;
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by timely submitting another proxy via the internet, by
telephone or by mail that is later dated and, if by mail, that
is properly signed; or
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by voting in person at the meeting, provided you have a valid
proxy to do so if you are not the record holder of the shares.
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Expenses
of Solicitation
Continental will bear the costs of the solicitation of proxies.
In addition to the solicitation of proxies by mail, proxies may
also be solicited by internet, telephone, telegram, fax or in
person by regular employees and directors of Continental, none
of whom will receive additional compensation for that
solicitation. In addition, we have retained Mellon Investor
Services LLC to assist in the solicitation of proxies for a fee
estimated not to exceed $8,500 plus reasonable
out-of-pocket
expenses. Arrangements will be made with brokerage houses and
with other custodians, nominees and fiduciaries to forward proxy
soliciting materials to beneficial owners, and we will reimburse
them for their reasonable
out-of-pocket
expenses incurred in doing so.
Stockholders
Sharing the Same Last Name and Address
We are sending only one copy of our proxy statement to
stockholders who share the same last name and address, unless
they have notified us that they want to continue receiving
multiple copies. This practice, known as
householding, is designed to reduce duplicate
mailings and save significant printing and postage costs.
If you received a householded mailing this year and you would
like to have additional copies of our proxy statement mailed to
you or you would like to opt out of this practice for future
mailings, please submit your request to our Secretary in writing
at Continental Airlines, Inc., P.O. Box 4607, Houston,
Texas
77210-4607.
You may also contact us if you received multiple copies of the
annual meeting materials and would prefer to receive a single
copy in the future.
Other
Matters To Be Acted on at the Annual Meeting
We will not act on any matters at the meeting other than those
indicated on the accompanying Notice and procedural matters
related to the meeting.
4
VOTING
RIGHTS AND PRINCIPAL STOCKHOLDERS
We have one class of securities outstanding that is entitled to
vote on the matters to be considered at the meeting,
Class B common stock, which is entitled to one vote per
share, subject to the limitations on voting by
non-U.S. citizens
described above. The following table sets forth, as of
March 31, 2006 (unless otherwise indicated below),
information with respect to persons owning beneficially (to our
knowledge) more than five percent of any class of our voting
securities.
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Beneficial
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Ownership
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of Class B
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Percent
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Name and Address of Beneficial
Holder
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Common Stock
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of Class
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OppenheimerFunds, Inc.
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9,839,350
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(1)
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11.5%
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Two World Financial Center
225 Liberty Street, 11th Floor
New York, NY 10018
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Wellington Management Company, LLP
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9,298,080
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(2)
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10.9%
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75 State Street
Boston, MA 02109
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Vanguard Windsor Funds-Vanguard
Windsor Fund
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7,731,500
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(3)
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9.1%
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100 Vanguard Blvd.
Malvern, PA 19355
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Mellon Financial Corporation
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4,533,178
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(4)
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5.3%
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One Mellon Center
Pittsburgh, PA 15258
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(1) |
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According to an amendment to Schedule 13G filed with the
SEC on February 7, 2006, OppenheimerFunds, Inc.
(OFI), an investment adviser, may be deemed to
beneficially own all of the shares reflected in the table. The
aggregate number of shares reported in the table includes
8,105,700 shares (or 9.53% of the class), which may be
deemed to be beneficially owned by Oppenheimer Global
Opportunities Fund, a registered investment company managed by
OFI. The shares reported reflect the conversion of debentures
into shares of common stock. Each entity has shared voting and
dispositive power with respect to all shares beneficially owned,
and OFI has disclaimed beneficial ownership as described in the
Schedule 13G/A. |
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(2) |
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According to an amendment to Schedule 13G filed with the
SEC on February 14, 2006, Wellington Management Company,
LLP, an investment adviser, may be deemed to beneficially own
all of the shares reflected in the table. It reported that it
has shared voting power with respect to 907,320 of those shares
and shared dispositive power with respect to 9,298,080 of those
shares, and that no shares are subject to sole voting or
dispositive power. It also reported that all of the shares of
common stock are owned of record by its clients and that none of
its clients, other than Vanguard Windsor Funds-Vanguard Windsor
Fund (VWF), was known by it to own more than five
percent of the common stock. The shares reported in the table as
held by Wellington Management Company, LLP include the shares
reported in the table as held by VWF. |
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(3) |
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According to an amendment to Schedule 13G filed with the
SEC on February 13, 2006, VWF, an investment company, may
be deemed to beneficially own all of the shares reflected in the
table. It reported that it has sole power to vote all of those
shares and that no shares are subject to shared voting power or
sole or shared dispositive power. The shares reported in the
table as held by Wellington Management Company, LLP include the
shares reported in the table as held by VWF. |
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(4) |
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According to an amendment to Schedule 13G filed with the
SEC on February 15, 2006, Mellon Financial Corporation
(Mellon) may be deemed to beneficially own, through
its direct and indirect subsidiaries, up to
4,533,178 shares of our common stock. Of such shares,
Mellon reported sole voting power with respect to
2,996,679 shares, sole dispositive power with respect to
2,999,813 shares, and shared voting and dispositive power
with respect to 1,410,000 shares. |
5
Beneficial
Ownership of Common Stock by Directors and Executive
Officers
The following table shows, as of March 31, 2006 (unless
otherwise indicated below), the number of shares of common stock
beneficially owned by our current directors, the executive
officers named below in the Summary Compensation Table, and all
executive officers and directors as a group.
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Amount and
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Nature of
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Beneficial
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Percent
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Name of Beneficial
Owners
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Ownership(1)
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of Class
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Thomas J. Barrack, Jr.
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45,000
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(2)
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*
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Kirbyjon H. Caldwell
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30,288
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(3)
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*
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James Compton
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40,465
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(4)
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*
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Lawrence W. Kellner
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399,712
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(5)
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*
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Douglas H. McCorkindale
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60,000
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(6)
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*
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Henry L. Meyer III
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15,000
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(7)
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*
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Jeffrey J. Misner
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62,262
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(8)
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*
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Mark J. Moran
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46,525
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(9)
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*
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Oscar Munoz
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5,000
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(2)
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*
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George G. C. Parker
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46,400
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(6)
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*
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Jeffery A. Smisek
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328,265
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(10)
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*
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Karen Hastie Williams
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46,000
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(6)
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*
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Ronald B. Woodard
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10,000
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(2)
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*
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Charles A. Yamarone
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53,000
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(6)
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*
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All executive officers and
directors as a group (15 persons)
|
|
|
1,248,949
|
(11)
|
|
|
1.4
|
%
|
|
|
|
* |
|
Less than 1% |
|
(1) |
|
The persons listed have the sole power to vote and dispose of
the shares beneficially owned by them except as otherwise
indicated. |
|
(2) |
|
Represents shares subject to stock options that are exercisable
within sixty days of March 31, 2006 (Exercisable
Options). |
|
(3) |
|
Includes 30,000 Exercisable Options. |
|
(4) |
|
Includes 921 restricted shares which vest on April 9, 2006
and 36,258 Exercisable Options. |
|
(5) |
|
Includes 9,375 restricted shares which vest on April 9,
2006 and 329,687 Exercisable Options. Also includes
200 shares owned by a relative of Mr. Kellner, as to
which shares Mr. Kellner shares dispositive power but
disclaims beneficial ownership. |
|
(6) |
|
Includes 45,000 Exercisable Options. |
|
(7) |
|
Includes 10,000 Exercisable Options. |
|
(8) |
|
Includes 2,000 restricted shares which vest on April 9,
2006 and 53,062 Exercisable Options. |
|
(9) |
|
Includes 700 restricted shares which vest on April 9, 2006
and 43,375 Exercisable Options. |
|
(10) |
|
Includes 8,000 restricted shares which vest on April 9,
2006 and 266,500 Exercisable Options. |
|
(11) |
|
Includes 21,871 restricted shares which vest on April 9,
2006 and 1,062,632 Exercisable Options. |
6
INFORMATION
ABOUT OUR BOARD
Corporate
Governance
Our board has adopted Corporate Governance Guidelines developed
and recommended by the Corporate Governance Committee of the
board. The Corporate Governance Guidelines, together with the
charters of each of our board committees, the companys
Principles of Conduct for employees and directors and the
Directors Code of Ethics, provide the framework for the
governance of Continental. A complete copy of these documents
can be found under Corporate Governance at
www.continental.com/company/investor, and we will furnish
print copies of these documents to interested security holders
without charge, upon request. Written requests for such copies
should be addressed to our Secretary at Continental Airlines,
Inc., P.O. Box 4607, Houston, Texas
77210-4607.
In February 2006, upon the recommendation of the Corporate
Governance Committee, our board adopted amendments to our
Corporate Governance Guidelines to enhance our corporate
governance practices as described below.
The first governance enhancement limits the total number of
boards of directors on which any of our directors may serve.
Following the transition period which expires in February 2008,
none of our directors will be permitted under our Corporate
Governance Guidelines to serve on the board of directors of more
than two other public companies if the director is employed on a
full-time basis, or four other public companies if the director
is employed on less than a full-time basis. For determining the
number of boards of directors on which a director serves, the
guidelines exclude service on the board of directors of a
charitable, philanthropic or non-profit organization, as well as
service on the board of the directors principal employer.
Further, if a director serves on the board of directors of two
or more affiliated companies that hold joint or concurrent board
meetings, that will be considered service on only one other
board.
The second governance enhancement requires that our directors
offer to resign upon a qualifying job change. If a director
experiences either a termination of his or her principal
employment or position, or a material decrease in
responsibilities with respect to that employment or position,
the director is required to submit his or her offer to resign to
the chair of the Corporate Governance Committee. The committee
will then review the circumstances surrounding the employment
change and such other matters as it deems appropriate and make a
recommendation to our board concerning acceptance or rejection
of the directors offer to resign. Our board will then make
the final determination concerning whether to accept or reject
the directors offer to resign.
The third governance enhancement establishes minimum stock
ownership requirements for our directors, chief executive
officer, or CEO, president and executive vice
presidents. Subject to a one year transition period for
newly-elected directors, each of our directors is required by
our Corporate Governance Guidelines to beneficially own at least
1,000 shares of our common stock, our CEO and our president
are each required to beneficially own at least
5,000 shares, and our executive vice presidents are each
required to beneficially own at least 2,000 shares. A
directors or officers holdings of restricted stock
or stock options exercisable within 60 days are included
when determining whether the individual beneficially owns a
sufficient number of shares.
The board has the authority to amend
and/or
restate the Corporate Governance Guidelines, including any or
all of these governance enhancements, from time to time in its
sole discretion without stockholder approval.
Board of
Directors Meetings
Regular meetings of our board are generally held four times per
year, and special meetings are scheduled when required. The
board held five meetings in 2005. During 2005, each director
attended at least 75% of the sum of the total number of meetings
of the board and each committee of which he or she was a member.
Last year, all eleven of our directors attended the annual
meeting of stockholders.
7
The following table lists our five board committees, the
directors who currently serve on them and the number of
committee meetings held in 2005.
Membership
on Board Committees
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Human
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Corporate
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Name
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Audit
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Resources
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Governance
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Finance
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Executive
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Mr. Barrack
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X
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C
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C
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Mr. Caldwell
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X
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X
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Mr. Kellner
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X
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X
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Mr. McCorkindale
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X
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Mr. Meyer
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X
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X
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Mr. Munoz
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X
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Mr. Parker
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C
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X
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Mr. Smisek
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X
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Ms. Williams
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C
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Mr. Woodard
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X
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X
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X
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Mr. Yamarone
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C
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X
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2005 Meetings
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11
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7
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3
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1
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0
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Under our Corporate Governance Guidelines, directors are
expected to diligently fulfill their fiduciary duties to
stockholders, including by preparing for, attending and
participating in meetings of the board and the committees of
which the directors are a member. We do not have a formal policy
regarding director attendance at annual meetings. However, when
considering a directors renomination to the board, the
Corporate Governance Committee must consider the directors
history of attendance at annual meetings and at board and
committee meetings as well as the directors preparation
for and participation in such meetings.
Our non-management directors regularly meet separately in
executive session without any members of management present.
During 2005, our non-management directors met in such executive
sessions on three occasions. Our Corporate Governance Guidelines
provide that the presiding director at each such session rotates
among the non-management members, in order of seniority of board
service. Currently, all of our non-management directors are
independent within the meaning of the NYSEs criteria for
independence. See Proposal 1: Election of
Directors NYSE Independence
Determinations below. If any of our non-management
directors were to fail to meet the NYSEs criteria for
independence, then our independent directors would meet
separately at least once a year in accordance with the rules of
the NYSE.
Standing
Committees of the Board
Our board has established the committees described below, each
of which operates under a written charter adopted by the board
and available on our website as indicated above under
Corporate Governance. The charter of the Audit
Committee, as amended through February 11, 2005, is
attached as Appendix B to this proxy statement.
Audit Committee. The Audit Committee has the
authority and power to act on behalf of the board of directors
with respect to the appointment of our independent auditors and
with respect to authorizing all audit and other activities
performed for us by our internal and independent auditors. The
committee, among other matters, reviews with management and the
companys independent auditors the effectiveness of the
accounting and financial controls of the company and its
subsidiaries, and reviews and discusses the companys
audited financial statements with management and the independent
auditors. It is the responsibility of the committee to evaluate
the qualifications, performance and independence of the
independent auditors and to maintain free
8
and open communication among the committee, the independent
auditors, the internal auditors and management of the company.
See Report of the Audit Committee below. All members
of the Audit Committee are independent directors as required by
the applicable rules of the NYSE, and Mr. Parker and
Mr. Munoz each qualifies as an audit committee financial
expert under the applicable rules promulgated pursuant to the
Securities Exchange Act of 1934, as amended, which we refer to
as the Exchange Act.
Corporate Governance Committee. The Corporate
Governance Committee identifies individuals qualified to become
members of the board of directors, consistent with criteria
approved by the board, and recommends to the board the slate of
directors to be nominated by the board at the annual
stockholders meeting and any director to fill a vacancy on the
board. The committee will consider recommendations for nominees
for directorships submitted by stockholders. Stockholders
desiring the committee to consider their recommendations for
nominees should submit their recommendations, together with
appropriate biographical information and qualifications, in
writing to the committee, care of the Secretary of the company
at our principal executive offices. The committee also
recommends directors to be appointed to committees of the board,
including in the event of vacancies, recommends to the board the
compensation and benefits of non-employee members of the board
and its committees and oversees the evaluation of the board and
management. The committee developed and recommended to the board
the companys Corporate Governance Guidelines and is
responsible for overseeing the companys Directors Code of
Ethics, including determining the appropriate course of action
with respect to any potential or actual conflicts of interest
involving a director brought to the attention of the chair of
the committee. All members of the Corporate Governance Committee
are independent directors as required under the applicable rules
of the NYSE.
Executive Committee. The Executive Committee
has the authority to exercise certain powers of the board of
directors between board meetings. The committee currently
consists of our chairman and CEO and three non-management
directors.
Finance Committee. The Finance Committee
reviews our annual financial budget, including the capital
expenditure plan, and makes recommendations to the board of
directors regarding adoption of the budget as the committee
deems appropriate. The committee currently consists of our
chairman and CEO, our president and three non-management
directors.
Human Resources Committee. The Human Resources
Committee reviews and approves corporate goals and objectives
relevant to the compensation of our CEO, evaluates our
CEOs performance in light of those goals and objectives,
and determines and approves our CEOs compensation level
based on its evaluation. The committee also reviews and approves
compensation of our Section 16 Officers (as defined in
Rule 16a-1(f)
of the Exchange Act) and incentive compensation plans and
programs applicable to them. See Executive Compensation
Report of the Human Resources Committee below. The
committee also administers our equity-based plans, executive
bonus program and other incentive programs. All members of the
Human Resources Committee are independent directors as required
by the applicable rules of the NYSE.
Communications
with the Board
Stockholders or other interested parties can contact any
director or committee of the board, or our non-management
directors as a group, by writing to them c/o Secretary,
Continental Airlines, Inc., P. O. Box 4607, Houston, Texas
77210-4607.
Comments or complaints relating to the companys
accounting, internal accounting controls or auditing matters
will also be referred to members of the Audit Committee. All
such communications will be forwarded to the appropriate
member(s) of the board, except that the board has instructed the
company to direct communications that do not relate to the
companys accounting, internal accounting controls or
auditing matters, to the chair of the Corporate Governance
Committee and not to forward to the board or the chair of the
Corporate Governance Committee certain categories of
communications.
9
Qualifications
of Directors
When identifying director nominees, the Corporate Governance
Committee will consider the following:
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The persons reputation, integrity and, for non-management
director nominees, such persons independence from
management and the company;
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The persons skills and business, government or other
professional experience and acumen, bearing in mind the
composition of the board and the current state of the company
and the airline industry generally at the time of determination;
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The number of other public companies for which the person serves
as a director (subject to the specific limitations described
under Corporate Governance above) and the
availability of the persons time and commitment to the
company;
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Diversity;
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The persons knowledge of a major geographical area in
which the company operates (such as a hub) or another area of
the companys operational environment;
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The persons age; and
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Whether the person has a material, non-ordinary course (direct
or indirect) investment in a direct competitor of the company.
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In the case of current directors being considered for
renomination, the Committee will also take into account the
directors tenure as a member of the board, the
directors responses to the annual director performance
self-assessment, the directors history of attendance at
annual stockholder meetings and at board and committee meetings
and the directors preparation for and participation in
such meetings.
Director
Nomination Process
Our director nomination process for new board members is as
follows:
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The Corporate Governance Committee, the Chairman of the Board
and Chief Executive Officer, or other board member identifies a
need to add a new board member who meets specific criteria or to
fill a vacancy on the board.
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The Corporate Governance Committee initiates a search by working
with staff support, seeking input from board members and senior
management and hiring a search firm, if necessary.
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The Corporate Governance Committee also considers
recommendations for nominees for directorships submitted by
stockholders.
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The initial slate of candidates that will satisfy specific
criteria, and otherwise qualify for membership on the board, are
identified and presented to the Corporate Governance Committee,
which ranks the candidates.
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The Chairman of the Board and Chief Executive Officer and at
least one member of the Corporate Governance Committee
interviews prospective candidate(s).
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The full board is kept informed of progress.
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The Corporate Governance Committee offers other board members
the opportunity to interview the candidate(s) and then meets to
consider and approve the final candidate(s).
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The Corporate Governance Committee seeks full board endorsement
of the final candidate(s).
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The final candidate(s) are nominated by the board or elected to
fill a vacancy.
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10
Compensation
of Directors
As previously reported, effective February 28, 2005, the
non-employee members of our board of directors joined our
officers in taking the lead in the $500 million annual pay
and benefit cost reduction initiative, voluntarily electing to
reduce by 30% their annual cash retainer and board and committee
meeting attendance fees, which reductions are reflected in the
description below. The board also elected to forego their annual
grant of 5,000 stock options that would otherwise have been
awarded in connection with their re-election to the board at the
2005 annual meeting. Due to the increased oversight
responsibilities caused by compliance with the Sarbanes-Oxley
Act of 2002, the board determined not to decrease the audit
committees meeting fees or that portion of the audit
committees retainer that exceeds the base retainer for all
board members.
Members of our board of directors who are not our full-time
employees receive:
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$24,500 per year, plus an additional $25,000 for members of
the Audit Committee ($40,000 for the chairperson of the Audit
Committee);
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$1,400 ($2,100 for the chairperson) for each board and committee
meeting physically attended (other than an Audit Committee
meeting);
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$2,000 ($3,000 for the chairperson) for each Audit Committee
meeting physically attended;
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$700 for each board meeting attended by telephone;
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$350 for each committee meeting attended by telephone ($500 for
each Audit Committee meeting attended by telephone);
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stock options to purchase 5,000 shares of common stock at
the grant date fair market value, which are fully vested upon
grant and have a
10-year
term. Such options are granted following each annual
stockholders meeting and upon election to the board if they are
first elected to the board other than at an annual stockholders
meeting; and
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lifetime flight benefits, comprised of space-available personal
and family flight passes, a travel card permitting positive
space travel by the director, the directors family and
certain other individuals (which is taxable to the director,
subject to the reimbursement of certain of such taxes by the
company), frequent flyer cards and airport lounge cards
(Flight Benefits).
|
In addition, non-employee directors who conduct Continental
business in their capacities as directors on Continentals
behalf at the request of the board or the Chairman of the Board
are paid (1) for telephone participation in board and
committee meetings as if they were physically present, if their
conducting that business makes it impractical for them to attend
the meeting in person, and (2) $3,000 per day spent
outside the United States while conducting that business.
Directors may also participate in director education programs
and director institutes offered by third parties and the company
will reimburse them for expenses incurred in connection with
their participation.
During 2005, the value we imputed to the use of the Flight
Benefits described above, including our reimbursement of related
taxes, varied by director, but did not exceed approximately
$41,000 for any of the non-employee directors. As is common in
the airline industry, directors also receive travel privileges
on some other airlines through arrangements entered into between
Continental and such airlines.
All directors, including those who are full-time employees who
serve as directors, receive reimbursement of expenses incurred
in attending meetings.
Certain
Transactions
In 2005, Karen Hastie Williams, one of our directors, retired as
a partner of Crowell & Moring LLP, a law firm that has
provided services to us and our subsidiaries for many years.
Ms. Williams continues to work on a part-time basis for
Crowell & Moring LLP as Senior Counsel.
Ms. Williams does not personally provide any legal services
to Continental or its subsidiaries. Our fee arrangement with
Crowell & Moring LLP is negotiated on the same basis as
our arrangements with other outside legal counsel and is subject
to the same
11
terms and conditions. The fees we pay to Crowell &
Moring LLP are comparable to those we pay to other law firms for
similar services. Our board of directors has reviewed this
arrangement and determined that it is not material to
Ms. Williams.
Compensation
Committee Interlocks and Insider Participation
Our executive compensation programs are administered by the
Human Resources Committee of the board of directors. The
committee is currently composed of four independent,
non-employee directors, and no member of the committee has ever
been an officer or employee of Continental or any of its
subsidiaries.
Report of
the Audit Committee
The Audit Committee is comprised of four non-employee members of
the board of directors (listed below). After reviewing the
qualifications of the current members of the committee, and any
relationships they may have with the company that might affect
their independence from the company, the board has determined
that (1) all current committee members are
independent as that concept is defined in
Section 10A of the Exchange Act, (2) all current
committee members are independent as that concept is
defined in the applicable rules of the NYSE, (3) all
current committee members are financially literate, and
(4) Mr. Parker and Mr. Munoz each qualifies as an
audit committee financial expert under the applicable rules
promulgated pursuant to the Exchange Act.
The board of directors appointed the undersigned directors as
members of the committee and adopted a written charter setting
forth the procedures and responsibilities of the committee. Each
year, the committee reviews the charter and reports to the board
on its adequacy in light of applicable NYSE rules. In addition,
the company will furnish an annual written affirmation to the
NYSE relating to, among other things,
clauses (2)-(4)
of the first paragraph of this report and the adequacy of the
committee charter.
During the last year, and earlier this year in preparation for
the filing with the SEC of the companys annual report on
Form 10-K
for the year ended December 31, 2005 (the
10-K),
the committee:
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reviewed and discussed the audited financial statements included
as Appendix A to this proxy statement with
management and the companys independent auditors;
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reviewed the overall scope and plans for the audit and the
results of the independent auditors examinations;
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met with management periodically during the year to consider the
adequacy of the companys internal controls and the quality
of its financial reporting and discussed these matters with the
companys independent auditors and with appropriate company
financial personnel and internal auditors;
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discussed with the companys senior management, independent
auditors and internal auditors the process used for the
companys chief executive officer and chief financial
officer to make the certifications required by the SEC and the
Sarbanes-Oxley Act of 2002 in connection with the
10-K and
other periodic filings with the SEC;
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reviewed and discussed with the independent auditors
(1) their judgments as to the quality (and not just the
acceptability) of the companys accounting policies,
(2) the written communication required by Independence
Standards Board Standard No. 1, Independence
Discussions with Audit Committees and the independence of
the independent auditors, and (3) the matters required to
be discussed with the committee under auditing standards
generally accepted in the United States, including Statement on
Auditing Standards No. 61, Communication with Audit
Committees;
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based on these reviews and discussions, as well as private
discussions with the independent auditors and the companys
internal auditors, recommended to the board of directors the
inclusion of the audited financial statements of the company and
its subsidiaries in the
10-K; and
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12
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determined that the non-audit services provided to the company
by the independent auditors (discussed below under
Proposal 4) are compatible with maintaining the
independence of the independent auditors. The committees
pre-approval policies and procedures are discussed below under
Proposal 4.
|
Notwithstanding the foregoing actions and the responsibilities
set forth in the committee charter, the charter clarifies that
it is not the duty of the committee to plan or conduct audits or
to determine that the companys financial statements are
complete and accurate and in accordance with generally accepted
accounting principles. Management is responsible for the
companys financial reporting process including its system
of internal controls, and for the preparation of consolidated
financial statements in accordance with accounting principles
generally accepted in the United States. The independent
auditors are responsible for expressing an opinion on those
financial statements. Committee members are not employees of the
company or accountants or auditors by profession or experts in
the fields of accounting or auditing. Therefore, the committee
has relied, without independent verification, on
managements representation that the financial statements
have been prepared with integrity and objectivity and in
conformity with accounting principles generally accepted in the
United States and on the representations of the independent
auditors included in their report on the companys
financial statements.
The committee meets regularly with management and the
independent and internal auditors, including private discussions
with the independent auditors and the companys internal
auditors and receives the communications described above. The
committee has also established procedures for (a) the
receipt, retention and treatment of complaints received by the
company regarding accounting, internal accounting controls or
auditing matters, and (b) the confidential, anonymous
submission by the companys employees of concerns regarding
questionable accounting or auditing matters. However, this
oversight does not provide us with an independent basis to
determine that management has maintained (1) appropriate
accounting and financial reporting principles or policies, or
(2) appropriate internal controls and procedures designed
to assure compliance with accounting standards and applicable
laws and regulations. Furthermore, our considerations and
discussions with management and the independent auditors do not
assure that the companys financial statements are
presented in accordance with generally accepted accounting
principles or that the audit of the companys financial
statements has been carried out in accordance with generally
accepted auditing standards.
The information contained in this report shall not be deemed to
be soliciting material or to be filed
with the Securities and Exchange Commission, nor shall such
information be incorporated by reference into any future filings
with the Securities and Exchange Commission, or subject to the
liabilities of Section 18 of the Exchange Act, except to
the extent that the company specifically incorporates it by
reference into a document filed under the Securities Act of
1933, as amended, or the Exchange Act.
Respectfully submitted,
Audit Committee
George G. C. Parker, Chairman
Henry L. Meyer III
Oscar Munoz
Ronald B. Woodard
13
INFORMATION
ABOUT OUR EXECUTIVE OFFICERS AND COMPENSATION MATTERS
Executive
Officers
The following table sets forth information with respect to our
current executive officers:
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Name, Age And
Position:
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Term of Office And Business
Experience:
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LAWRENCE W. KELLNER, age 47
Chairman of the Board and
Chief Executive Officer
|
|
Chairman of the Board and Chief
Executive Officer since December 2004. President and Chief
Operating Officer (March 2003 December 2004);
President (May 2001 March 2003); Executive Vice
President and Chief Financial Officer (November
1996 May 2001). Mr. Kellner joined the
company in 1995. Director since 2001. Director of Marriott
International, Inc.
|
JEFFERY A. SMISEK, age 51
President
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President since December 2004.
Executive Vice President (March 2003 December
2004); Executive Vice President Corporate and
Secretary (May 2001 March 2003); Executive Vice
President, General Counsel and Secretary (November
1996 May 2001). Mr. Smisek joined the
company in 1995. Director since 2004. Director of National
Oilwell Varco, Inc.
|
JAMES COMPTON, age 50
Executive Vice President
Marketing
|
|
Executive Vice
President Marketing since August 2004. Senior
Vice President Marketing (March
2003 August 2004); Senior Vice
President Pricing and Revenue Management
(February 2001 March 2003); Vice
President Pricing and Revenue Management
(August 1999 February 2001). Mr. Compton
joined the company in 1995.
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JEFFREY J. MISNER, age 52
Executive Vice President and
Chief Financial Officer
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Executive Vice President and Chief
Financial Officer since August 2004. Senior Vice President and
Chief Financial Officer (November 2001 August
2004); Senior Vice President Finance (May
2001 November 2001); Vice
President Finance and Treasurer (November
1999 May 2001). Mr. Misner joined the
company in 1995.
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MARK J. MORAN, age 50
Executive Vice President
Operations
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Executive Vice
President Operations since August 2004. Senior
Vice President Technical Operations and
Purchasing (September 2003 August 2004); Vice
President Technical Operations and Purchasing
(March 2003 September 2003); Vice
President Aircraft Maintenance (February
1998 March 2003). Mr. Moran joined the
company in 1994.
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JENNIFER L. VOGEL, age 44
Senior Vice President, General
Counsel, Secretary and
Corporate Compliance Officer
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Senior Vice President, General
Counsel, Secretary and Corporate Compliance Officer since
September 2003. Vice President, General Counsel, Secretary and
Corporate Compliance Officer (March 2003
September 2003); Vice President, General Counsel, Corporate
Compliance Officer and Assistant Secretary (February
2003 March 2003); Vice President, General
Counsel and Assistant Secretary (May
2001 February 2003); Vice
President Legal and Assistant Secretary
(September 1995 May 2001). Ms. Vogel
joined the company in 1995.
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There is no family relationship between any of our executive
officers. All officers are appointed by the board of directors
to serve until their resignation, death or removal.
Executive
Compensation Report of the Human Resources Committee
The Human Resources Committee (the committee) of the
companys Board of Directors (the board) is
comprised of four non-employee members (listed below) of the
board who are independent, as defined by the applicable rules of
the NYSE. The board appoints the members of the committee and
has adopted a written charter setting forth the procedures,
authority and responsibilities of the committee, which include
reviewing and approving corporate goals and objectives relevant
to the compensation of our Chief Executive
14
Officer (CEO), evaluating the CEOs performance
and setting the CEOs compensation based on that
evaluation, setting the compensation of the companys
Section 16 Officers (as defined in
Rule 16a-1(f)
of the Securities Exchange Act of 1934), reviewing and approving
incentive compensation plans and programs applicable to the
Section 16 Officers, making recommendations to the board
with respect to equity based incentive compensation plans or
other equity based programs such as employee stock purchase
programs and producing this report on executive compensation.
General
Compensation Strategy
The current U.S. domestic network carrier financial
environment continues to be extremely challenging. Faced with a
weak domestic yield environment, significant growth by low cost
competitors and record fuel prices, Continental has aggressively
sought to reduce its cost structure to remain competitive. Many
of Continentals network competitors, such as Delta Air
Lines, Northwest Airlines, United Airlines and US Airways, have
used or are using bankruptcy to reduce their costs
significantly. In 2005, Continental secured nearly
$500 million of annual pay and benefit reductions and work
rule changes, all without the disruption that occurred or is
occurring at many of its network competitors. Upon the
recommendation of management and with approval of the committee,
the company implemented a number of programs applicable to the
broad employee group in connection with the pay and benefit
reductions. The company enhanced its profit sharing plan to
provide an incentive to participating employees (which excludes
officers and certain other management employees) to help the
company return to profitability and sustain that profitability.
In addition, as described in more detail below, the company
issued stock options to certain employees (other than officers
and certain international employees). Taken together, the
enhanced profit sharing plan and stock option grants align our
employees interests with one another, as well as with the
companys stockholders.
The companys officers felt it was important to take the
lead in the $500 million annual cost reduction initiative.
Pursuant to compensation reduction agreements effective
February 28, 2005, each of the companys officers
voluntarily agreed to reduce their base salary by up to 25%
(and, as a result, the potential payment amounts with respect to
their annual incentive bonus and long-term incentive (NLTIP)
awards which derive from base salary) and to surrender their
entire RSU award (as defined below) for the performance period
ended June 30, 2005. Further, Messrs. Kellner, Smisek,
Compton, Misner and Moran also voluntarily reduced their
unvested stock options, restricted stock and PARs awards (as
defined below) and Messrs. Kellner and Smisek voluntarily
waived their entire annual incentive bonus payments for 2004.
In February 2006, in recognition of the sacrifices of their
co-workers, the companys officers voluntarily agreed to
surrender their entire RSU award for the performance period
ended March 31, 2006, which had vested and would have
otherwise paid out at the end of March 2006. The total value of
those RSU awards was $18.3 million on the date of
surrender, and those RSU awards would have paid out a total of
$22.7 million on March 31, 2006. These recent
compensation reductions come on the heels of other compensation
reductions arising from changes affecting the airline industry
since the September 11 terrorist attacks, including the waiver
by Mr. Kellner of his salary and any cash bonus otherwise
earned by him with respect to the period between
September 26, 2001 and December 31, 2001 and of
approximately $3.3 million in other compensation payable to
him so that the company would be eligible to receive a
reimbursement of approximately $176 million under the
Emergency Wartime Supplemental Appropriations Act of 2003, as
described below. Although the committee agreed to these
voluntary compensation reductions based on the recommendation of
management, the committee is aware of the challenge it faces
going forward in retaining and attracting experienced executives
in light of these significant reductions.
Faced with the industrys difficult operating and financial
environment and wanting to ensure that the management incentives
were aligned with the incentives provided to employees, the
committee retained Mercer Human Resource Consulting
(Mercer) to perform an independent evaluation of
peer group and competitive executive compensation practices and
to assist the committee in developing recommendations for
restructuring the companys executive compensation
programs. In 2004, the committee worked with Mercer to structure
performance-based annual and long-term incentive programs
designed to retain the companys highly experienced
executive management team, to keep management focused during
this period of unprecedented challenges in the airline industry
and to motivate them to achieve goals that maximize the chances
of recovery
15
and increase stockholder value. In 2005 and early 2006, the
committee worked with Mercer to review compensation levels and
the programs implemented in 2004, and to ensure that these
programs properly align management incentive compensation
targets with the performance targets relevant to the broader
employee group and to stockholders.
While aware that industry challenges have significantly
diminished stockholder value since the September 11 terrorist
attacks, the committee also recognizes that Continental has
markedly outperformed its peer network competitors during this
difficult period on the basis of a number of operational and
financial performance measures that the committee recognizes are
important. The committee also noted that, despite these
challenges, the companys stock price has increased 92.3%
for the period January 1, 2005 through March 30, 2006.
The committee also believes that the companys experienced
and well-regarded management team is key to Continentals
return to profitability and the ultimate preservation and growth
of stockholder value. To that end, the committee reexamined and
reaffirmed its compensation strategy to:
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appropriately link compensation levels with the creation of
stockholder value;
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provide total compensation capable of attracting, motivating and
retaining executives of outstanding talent;
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achieve competitiveness of total compensation; and
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emphasize at risk pay tied to performance as the
vast majority of total compensation potential.
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In considering appropriate executive compensation levels, the
committee applies these factors to available marketplace
compensation data for U.S. airlines of comparable size and
certain non-airline companies with revenue and other
characteristics deemed by the committee and Mercer to be
comparable to Continentals. The committee also considered
recent trends in executive compensation and the concerns
expressed by institutional investors on the topic of executive
compensation. The committee recognized the restructuring of the
industry by expanding the peer group for both pay and
performance comparisons (which has traditionally included major
network carriers such as American Airlines, United Airlines,
Delta Air Lines, Northwest Airlines and US Airways) to include
America West, which merged with US Airways in 2005, Alaska
Airlines and Southwest Airlines. This expanded peer group offers
a broader comparison for determining appropriate financial
performance goals relative to the broader industry. The
committee also introduced a return on capital performance
measure to recognize the capital-intensive nature of the
industry. The elements of compensation included in the
competitive analysis generally are base salaries, annual
incentives and long-term incentives. Continental competes for
executive talent principally with companies other than airlines;
consequently, the committee emphasizes compensation data from
non-airline companies of similar size and complexity in its
analysis of competitive compensation packages. Based on this
analysis and the relative performance of the companys
management compared to that of its competitors, the committee
determined that it is appropriate to design programs that
deliver total compensation for executives targeted at the
75th percentile of the survey range among the airline
industry and at the 50th percentile among general industry.
However, because of the significance of the reduction in
managements compensation as described above, the analysis
reviewed by the committee showed that the compensation of the
companys named executive officers (as defined below) falls
within the lowest quartile of the survey range. This, and the
retention concerns that it implies, are significant issues faced
by the committee as it seeks to make compensation decisions
going forward.
Principal
Elements of Executive Compensation
Base Salaries. The committee believes it is
crucial for the company to provide executive salaries within a
competitive market range in order to attract and retain highly
talented executives. The specific competitive markets considered
depend on the nature and level of the positions in question, the
labor markets from which qualified individuals are recruited,
and the companies and industries competing for the services of
our executives. Base salary levels are also dependent on the
performance of each individual executive over time. Thus,
executives who sustain higher levels of performance over time
will have correspondingly higher salaries. Salary adjustments
are based on competitive market salaries and general levels of
market increases in salaries, individual performance, overall
financial results and changes in job duties and
responsibilities. As described
16
above, each of the named executive officers voluntarily agreed
to reduce his base salary effective February 28, 2005 by up
to 25% pursuant to compensation reduction agreements. Further,
as described below, Mr. Kellners base salary was
limited during the
12-month
period ending March 31, 2004 pursuant to his compensation
cap agreement.
Annual and Long-Term Incentive
Compensation. The committee developed and
implemented new annual and long-term incentive compensation
programs for executives of the company effective April 1,
2004. The goal in implementing the new programs described below
was to establish an appropriate balance between absolute and
relative performance and to develop new performance measures
that drive stockholder value.
The committee established a new annual executive bonus program,
which for 2005 offered bonus opportunities of between 50%
(entry) and 150% (stretch) of base salary, with a target of 125%
of base salary, depending on achievement of an absolute level of
Continentals cash flow, capital efficiency and financial
results reflecting positive net income. The performance measure
is Continentals return on base invested capital
(ROBIC), which is defined as earnings before
interest, income taxes, depreciation, amortization, and aircraft
rent (EBITDAR) divided by the total of property and
equipment (less accumulated depreciation and amortization
thereon and less purchase deposits on flight equipment) and 7.5
times aircraft rentals. The ROBIC goals are reviewed and new
goals established annually by the committee. The program also
permits the committee to establish different levels of target
and stretch bonus opportunity, on an annual basis. The program
for 2005 also required an unrestricted cash, cash equivalent and
short-term investment minimum balance of $1 billion at the
end of the fiscal year, which required cash balance amount is
also reset by the committee each year. Further, in 2005, the
program required that the company report positive net income for
the fiscal year before any payments were made at target level or
above, and the committee adjusted the ROBIC goals by raising the
level of return required before any incentives are paid to
eliminate the effect of employee pay and benefit reductions. No
bonuses were earned in 2005 under this program. The program was
subsequently amended to include, for fiscal year 2006 and
beyond, a financial performance hurdle that may be set by the
committee annually. No bonuses are paid regardless of ROBIC
performance, unless the minimum cash balance and financial
performance hurdles are achieved. No payments were made under
this program for 2005 because the company did not achieve the
entry ROBIC margin.
In 2004, the committee also established a new long-term
incentive compensation program, which has two
components a new long-term incentive plan
(NLTIP) based on relative performance, and a
restricted stock unit (RSU) program based on
absolute performance (together, the NLTIP/ RSU
Program).
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The NLTIP compares Continentals EBITDAR margin for a
three-year performance period against the average EBITDAR margin
represented by the expanded peer group. For the first
performance period under the NLTIP plan (April 1, 2004
through December 31, 2006), and for performance periods
commencing January 1, 2005 and January 1, 2006,
performance targets were set by the committee so that executives
will earn (i) nothing for EBITDAR margin performance below
peer group average performance, (ii) below market
incentives for EBITDAR margin performance equal to peer group
average performance, (iii) graduated payments up to market
average incentives for above average EBITDAR margin performance
and (iv) graduated payments up to above market average
incentives for superior EBITDAR margin performance. The 2004 and
2005 NLTIP awards also require an unrestricted cash, cash
equivalent and short-term investment minimum balance of
$1 billion at the end of the performance period, which
required cash balance amount is reset by the committee for each
performance period. This target was increased to
$1.125 billion for the 2006 NLTIP award. If this required
cash balance amount is not achieved, no NLTIP payments will be
made, regardless of relative EBITDAR margin performance.
Performance targets are reviewed and new targets established
annually by the committee with respect to each subsequent
three-year performance period.
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The RSU program as originally adopted in 2004 measured the
absolute performance of Continentals stock during the
relevant performance period. RSUs are denominated in share-based
units (equal in value to one share of common stock at the time
of payout if the performance requirements are achieved). Three
awards were made in 2004 under the RSU program. No RSU awards
were made in 2005. The performance periods for the three RSU
grants were April 1, 2004 to June 30, 2005 (the
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2005 RSUs), to March 31, 2006 (the 2006
RSUs), and to December 31, 2007 (the 2007
RSUs), respectively. These RSUs vest during the
performance period only if Continentals stock achieves the
target price (based on a
20-day
average price), and pay out only at the end of the performance
period, in an amount in cash based on the
20-day
average price at the end of the performance period. As described
above, all of the companys officers who received 2005 RSUs
and 2006 RSUs voluntarily surrendered those awards in light of
the sacrifices made by their co-workers in connection with the
companys $500 million pay and benefit cost reduction
initiative. The performance target applicable to the 2007 RSUs
required that the companys stock price appreciate at least
80% from the grant date price of $12.4775 (i.e., to at
least $22.4775), which performance target has been achieved. The
2007 RSUs will be settled after December 31, 2007, the last
day of the performance period, based on the
20-day
average closing price of the companys common stock
immediately prior to such date, if a participant remains
continuously employed during the performance period, with
limited exceptions in the case of death, disability, retirement
or certain involuntary termination events.
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The committee amended the RSU program in March 2006 to align
managements performance objectives with the enhanced
profit sharing plan available to the companys broad
employee group. Any future RSU awards vest upon the achievement
of a profit-based performance target. The performance target
requires that the company reach target levels of cumulative
profit sharing pools that are the basis for calculating
distributions to participants under the companys enhanced
profit sharing plan and that the company achieves a financial
performance hurdle based on the companys net income for a
given fiscal year. To enhance retention, payments upon
achievement of a performance target will be made to participants
who remain continuously employed through the payment date in
one-third increments, with one year elapsing between the first
and second and the second and third payments, with limited
exceptions in the case of death, disability, retirement or
certain involuntary termination events. An additional
requirement will be that, at the end of the fiscal year
preceding the date that any payment is made, the company must
have a minimum unrestricted cash, cash equivalent and short term
investment balance specified by the committee. If the company
does not achieve the cash hurdle applicable to a payment date,
the payment will be deferred to the next payment date
(March 31 of the next year), subject to a limit on the
number of years payments may be carried forward. Payment amounts
will be calculated based on the number of RSUs subject to the
award, the companys stock price (based on the
20-day
average price) on the payment date and the payment percentage
set by the committee for achieving the applicable profit-based
performance target. No awards under the amended RSU program have
been granted for 2006 as of the date hereof.
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The following existing long-term executive compensation programs
remain in effect:
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Stock Options. No stock options have been
awarded to the named executive officers since 2003.
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Restricted Stock. From time to time, grants of
restricted shares of our common stock are made pursuant to the
companys Incentive Plan 2000. No restricted stock grants
have been made to the named executive officers since 2002.
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The following existing long-term executive compensation program
was terminated in 2005 but remains in effect with respect to one
outstanding award:
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Officer Retention and Incentive Award Program (PARs
Award Program). The committee terminated the program
in November 2005 except with respect to one outstanding award,
related to a small investment made by the company in 2003 in a
travel distribution company, which the company is prohibited
from terminating under the terms of the program. In 2005 there
were no new PARs awards; however there were payouts as the
awards related to the companys 2003 and 2004 sales of its
investments in Orbitz and Hotwire vested.
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Perquisites. Executive perquisites are
discussed in the footnotes to the Summary Compensation Table
beginning on page 24. In addition to the described perquisites,
executives receive the same perquisites that are offered to the
broader employee group. We believe these perquisites are
consistent in form and amount as
18
those offered to executives at similar levels at companies
within the airline industry and general industry groups.
The committee believes that it has significantly improved the
programs adopted in 2004 and revised for 2006 and beyond to
appropriately balance absolute and relative performance, and to
align executives incentives with those of the broad group
of employees, in an effort to drive long-term stockholder value
by doing the following:
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Alignment with Restructuring of the
Industry The committee has expanded the
peer group used for performance to include America West (now
merged into US Airways), Alaska Airlines, and Southwest
Airlines. The inclusion of these peers sends a strong message
that Continental is aware that it must successfully compete with
the low-cost carriers.
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Financial Performance and Stability In
2006 and beyond, payments under the annual executive bonus
program will require the company to achieve an additional
financial performance hurdle set by the committee annually. For
RSU awards made in 2006 and beyond, the RSU program will require
the achievement of cumulative profit sharing targets and
financial performance hurdles. These requirements align
managements long-term incentives with incentives provided
to the broader pool of co-workers through the companys
enhanced profit sharing plan. In addition, the annual executive
bonus program, NLTIP awards and any RSU awards made in 2006 and
beyond all require the company to achieve a minimum unrestricted
cash hurdle, an important measure of the companys
financial stability and liquidity.
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Longer Vesting Schedules and Performance
Vesting The four-year performance period
for RSUs awarded in 2004 is longer than is common. Any payments
with respect to future grants of RSUs under the program as
amended in 2006 will be made in one-third increments with one
year between payments to enhance their retention feature.
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Introduction of Return on Capital Performance
Measure In prior years, EBITDAR margin was
the main performance measure used in both the annual and
long-term incentive compensation programs at Continental. For
2004 and going forward, the committee has introduced ROBIC into
the annual program. The rationale for using this measure is to
recognize the capital- intensive nature of the airline industry,
and to ensure that Continental is achieving a sufficient return
on its capital, thereby better aligning this program with
stockholders long-term interests.
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Improved Performance Goal
Setting Beginning in 2004 and beyond, the
committee sets entry, target, and stretch performance goals that
require not only that Continental beat the average of its
competitors in order for management to receive market levels of
compensation, but also that require strong absolute performance.
These goals are reestablished each year based on
Continentals business objectives and the competitive
environment. This, in turn, is designed to align management
compensation with drivers of stockholder return.
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Share Price Appreciation The 2007 RSUs,
and the surrendered 2005 RSUs and 2006 RSUs, required
significant share price appreciation before the executives could
earn anything under the program. The 2007 RSUs, as well as any
future awards made under the amended RSU program, place the
executives compensation reward at risk for any
share price decline that occurs before the end of the relevant
performance period or the relevant payment dates because the
value of the RSU is determined based on a
20-day
average share price at the end of the performance period or
payment date (even though stockholders can benefit from the
share price appreciation before the executives are permitted to
do so).
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Significant at risk Pay The
CEOs at risk compensation, and that of our
other top officers, constitute the vast majority of their total
compensation potential.
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Compensation
of the Chief Executive Officer
The committee applies the criteria and strategy described in
this report in establishing compensation for the companys
CEO. The committee has established a procedure and criteria for
the annual evaluation of the
19
CEO and the setting of CEO compensation based on this
evaluation. The CEO is evaluated based on his performance in
various areas including leadership, strategic planning,
financial results, human resources and diversity, communications
and external relations, board interface, ethics and conduct.
In 2005 Mr. Kellner successfully transitioned into his
position as Chairman and CEO following the retirement of our
former CEO on December 30, 2004 while undertaking numerous
initiatives to position the company for future growth and
stability. In connection with his promotion to Chairman and CEO,
Mr. Kellner received a compensation package in recognition
of his increased responsibilities that includes base salary,
annual and long-term incentive opportunities and customary
perquisites, each determined in accordance with the
committees compensation strategy described above. In
addition, Mr. Kellner participates in a supplemental
executive retirement plan that provides an annual retirement
benefit expressed as a percentage (that could range up to 75%)
of Mr. Kellners final average compensation as defined
in his employment agreement. Mr. Kellner demonstrated his
leadership and commitment to the company by voluntarily reducing
his compensation for the 12 months ended March 31,
2004 pursuant to his compensation cap agreement described below
and again, effective February 28, 2005, pursuant to his
compensation reduction agreement in connection with the
companys initiative to achieve $500 million in annual
pay and benefit cost reductions. Mr. Kellner also
voluntarily waived his right to receive his 2004 annual
performance bonus and surrendered for cancellation 25% of his
outstanding unvested stock options, restricted stock and PARs
awards and, as described above, also voluntarily surrendered all
of his 2005 RSUs and 2006 RSUs.
Compensation Cap Agreements. Continental
received reimbursement of approximately $176 million from
the Transportation Security Administration (the TSA)
under the Emergency Wartime Supplemental Appropriations Act of
2003 (the Act) for passenger security and air
carrier security fees paid to or collected for the TSA through
the date of enactment of the Act. As required by the Act as a
condition of our obtaining and retaining such reimbursement, the
company entered into an agreement with the United States of
America, acting through the TSA, pursuant to which we agreed not
to provide total cash compensation to either of our then two
most highly-compensated named executive officers (which included
Mr. Kellner) during the
12-month
period ending March 31, 2004 (the Restricted
Period) in an amount equal to or more than the annual base
salary paid to such executive officers with respect to fiscal
year 2002. In order to permit us to comply with our agreement
with the TSA, Mr. Kellner voluntarily entered into a
compensation cap agreement with the company to amend certain of
his then existing contractual rights relating to compensation
and to waive approximately $3.3 million in compensation
otherwise payable to him. Under the compensation cap agreements,
Mr. Kellner agreed to reduce his base salary during the
Restricted Period, agreed to defer the vesting of his restricted
stock and PARs awards under the Incentive Award Program that
would otherwise vest during the Restricted Period, agreed not to
redeem his vested PARs during the Restricted Period, agreed to
surrender without value his bonus awards with respect to 2003
and his LTIP award with respect to the
3-year
performance period ending December 31, 2003, agreed that he
would not receive any PARs awards during the Restricted Period,
and agreed to take such other action with respect to his
compensation provided to him by the company during the
Restricted Period as he and the company reasonably agreed to be
necessary in order to permit the company to comply with the
terms of its agreement with the TSA. Mr. Kellners
willingness to enter voluntarily into the compensation cap
agreement resulted in a material reduction to the compensation
that otherwise would have been payable to him, and benefited
Continental by permitting it to obtain and retain approximately
$176 million of passenger and air carrier security fee
reimbursements from the TSA. The compensation cap agreement
terminated on March 31, 2004.
Broad
Based Incentive Compensation
To recognize the contributions made by the companys
employees in connection with the recent pay and benefit cost
reduction efforts, the committee recommended and the board
approved the issuance of stock options for up to 10 million
shares of Continentals common stock to all non-officer
employees that participated in the cost reduction efforts. On
March 30, 2005, the company issued stock options for
approximately 8.6 million shares of its Class B common
stock with an exercise price of $11.89 per share, the
closing price of the companys common stock on the date of
grant, to all employees, except flight attendants, officers,
employees of CMI and certain international employees. On
February 1, 2006, the company issued to
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its flight attendants stock options for approximately
1.1 million shares of the companys common stock with
an exercise price of $20.31 per share. In addition, the
company maintains its long-standing on-time arrival bonus
program and implemented an enhanced profit sharing plan to
incentivize all employees who participate in the pay and benefit
reductions (except officers and certain other management
employees) to have a continued focus on operational and
financial performance. With the changes to the annual executive
bonus program and the RSU program described above,
managements annual and long-term incentives are aligned
with incentives provided to co-workers. The committee believes
that these incentives play a significant part in
Continentals performance and success.
Section 162(m)
of the Internal Revenue Code
In conducting the programs applicable to executives, the
committee considers the effects of section 162(m) of the
Internal Revenue Code. Section 162(m) denies publicly held
companies a tax deduction for annual compensation in excess of
one million dollars paid to their chief executive officer or any
of their four other most highly compensated executive officers
employed on the last day of a given year, unless their
compensation is based on qualified performance criteria. To
qualify for deductibility, these criteria must be established by
a committee of outside directors and approved, as to their
material terms, by that companys stockholders. Most of
Continentals compensation plans applicable to the
companys executive officers, including its stock option
plans, the annual executive bonus program, the NLTIP/RSU Program
and the PARs Award Program were designed to qualify as
performance-based compensation under section 162(m). The
committee may approve compensation or changes to plans, programs
or awards that may cause the compensation or awards not to
comply with section 162(m) if it determines that such
action is appropriate and in the companys best interests.
Although some amounts recorded as compensation by the company to
certain executives may be limited by section 162(m), that
limitation does result in the current payment of increased
federal income taxes by the company due to its significant net
operating loss carry forwards.
Respectfully submitted,
Human Resources Committee
Charles A. Yamarone, Chairman
Thomas J. Barrack, Jr.
Kirbyjon H. Caldwell
Ronald B. Woodard
21
Compensation
of Executive Officers
The company continues to operate in an extremely challenging
U.S. domestic network carrier environment. Faced with a
weak domestic yield environment, significant growth by low cost
competitors and record fuel prices, Continental has aggressively
sought to reduce its cost structure to remain competitive. The
companys management team has taken the lead in these cost
reductions by repeatedly voluntarily reducing their compensation.
The company entered into compensation reduction agreements,
effective February 28, 2005, with all of its officers to
reduce contractually provided compensation as an element of the
companys $500 million annual pay and benefit cost
reduction initiative. Pursuant to such agreements, each of
Messrs. Kellner, Smisek, Compton, Misner and Moran (the
executive officers named in the Summary Compensation Table
below, collectively referred to in this proxy as the named
executive officers) voluntarily agreed to reduce his
annual base salary by 25%, 20%, 20%, 20% and 20%, respectively.
The following table shows, for each named executive officer, the
salary reductions that became effective on February 28,
2005.
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Name
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Former Annual Salary
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Current Annual Salary
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Larry Kellner
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$
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950,000
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|
|
$
|
712,500
|
|
Jeff Smisek
|
|
$
|
720,000
|
|
|
$
|
576,000
|
|
Jim Compton
|
|
$
|
450,000
|
|
|
$
|
360,000
|
|
Jeff Misner
|
|
$
|
450,000
|
|
|
$
|
360,000
|
|
Mark Moran
|
|
$
|
450,000
|
|
|
$
|
360,000
|
|
Each of the named executive officers also agreed to surrender
for cancellation the same percentage of their respective
outstanding unvested stock options, unvested restricted stock
and unvested PARs (as defined in the PARs Award Program) and
agreed to surrender all of their respective awards of RSUs (as
defined in the NLTIP/ RSU Program) for the performance period
ending in June 2005. In addition, Messrs. Kellner and
Smisek each voluntarily waived in its entirety his right to
receive his annual incentive bonus payment for 2004 and no
annual bonuses were paid to any of the named executive officers
with respect to 2005.
In February 2006, the companys officers again voluntarily
agreed to surrender their entire RSU award for the performance
period ended March 31, 2006, which had vested and would
have otherwise paid out at the end of March 2006. The total
value of those RSU awards was $18.3 million on the date of
surrender, and those RSU awards would have paid out a total of
$22.7 million on March 31, 2006. In addition, payouts
to these officers under the annual executive bonus program and
the NLTIP, if and when earned, as well as benefits under
supplemental executive retirement plans (the SERPs),
will be reduced as a result of the base salary reductions
described above.
In 2003, Continental received reimbursement of $176 million
from the Transportation Security Administration
(TSA) under the Emergency Wartime Supplemental
Appropriations Act of 2003 (the Act) for passenger
security and air carrier security fees paid to or collected for
the TSA through the date of enactment of the Act. As required by
the Act as a condition of our obtaining and retaining such
reimbursement, the company entered into an agreement with the
United States of America, acting through the TSA, pursuant to
which we agreed not to provide total cash compensation to either
of our then two most highly-compensated named executive officers
(which included Mr. Kellner) during the
12-month
period ending March 31, 2004 in an amount equal to or more
than the annual salary paid to such executive officers with
respect to fiscal year 2002. In order to permit us to comply
with our agreement with the TSA, Mr. Kellner voluntarily
entered into a compensation cap agreement with us to amend
certain of his then existing contractual rights relating to
compensation and to waive approximately $3.3 million in
compensation otherwise payable to him. In addition, in 2001,
following the September 11 terrorist attacks and the
companys resulting reduction in force, Mr. Kellner
voluntarily waived his salary and any cash bonus otherwise
earned by him with respect to the period between
September 26, 2001 and December 31, 2001.
22
The following table sets forth certain of the reductions to
contractually provided compensation voluntarily agreed to by
each of the named executive officers during the period from
September 2001 through March 2006.
Total
Compensation Reductions of Named Executive Officers 2001-
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reductions in
|
|
|
|
|
|
|
Reductions in
|
|
|
Reductions in
|
|
|
Long Term
|
|
|
Total Waived
|
|
Name
|
|
Base Salary
|
|
|
Annual Bonus
|
|
|
Incentive Payout
|
|
|
Cash Compensation
|
|
|
Larry Kellner
|
|
$
|
531,144
|
|
|
$
|
1,696,305
|
|
|
$
|
6,321,760
|
|
|
$
|
8,549,209
|
|
Jeff Smisek
|
|
|
156,000
|
|
|
|
594,042
|
|
|
|
2,670,452
|
|
|
|
3,420,494
|
|
Jim Compton
|
|
|
97,500
|
|
|
|
|
|
|
|
1,057,859
|
|
|
|
1,155,359
|
|
Jeff Misner
|
|
|
97,500
|
|
|
|
|
|
|
|
1,061,789
|
|
|
|
1,159,289
|
|
Mark Moran
|
|
|
97,500
|
|
|
|
|
|
|
|
794,433
|
|
|
|
891,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
979,644
|
|
|
$
|
2,290,347
|
|
|
$
|
11,906,293
|
|
|
$
|
15,176,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Since the September 11, 2001 terrorist attacks and their
aftermath, we have focused on taking action to increase
productivity and reduce costs, without compromising our product
or culture. These efforts have resulted in payroll and headcount
cost reductions in many areas of the company, including
executive salaries and officer headcount. The following table
shows compensation reductions for our five most highly
compensated officers and headcount reductions for the officer
group since 2001.
Officer
Salary and Headcount Reductions
2001-2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
|
|
|
April 15,
|
|
|
March 31,
|
|
|
|
|
|
|
2001
|
|
|
2006
|
|
|
% Change
|
|
|
Average Annual Base
Salary Five Most Highly Compensated Officers
|
|
$
|
755,200
|
|
|
$
|
473,700
|
|
|
|
(37
|
)%
|
Number of Officers
|
|
|
59
|
|
|
|
47
|
|
|
|
(20
|
)%
|
23
The following tables set forth (i) the aggregate amount of
compensation with respect to 2005, 2004 and 2003 for the chief
executive officer and our four other most highly compensated
executive officers in 2005, (ii) year-end option values of
exercisable and unexercisable options held by them, and
(iii) information regarding long-term incentive awards made
to them during 2005. None of the named executive officers
received any option grants during 2005.
Summary
Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Compensation
|
|
|
|
|
|
|
Annual Compensation
|
|
|
Awards
|
|
|
Payouts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Restricted
|
|
|
Securities
|
|
|
|
|
|
|
|
Name and
|
|
|
|
|
|
|
|
|
|
|
Annual
|
|
|
Stock
|
|
|
Underlying
|
|
|
LTIP
|
|
|
All Other
|
|
Principal Position
|
|
Year
|
|
|
Salary
|
|
|
Bonus
|
|
|
Compensation(4)
|
|
|
Awards(5)
|
|
|
Options
|
|
|
Payouts(6)
|
|
|
Compensation(8)
|
|
|
Lawrence W. Kellner
|
|
|
2005
|
|
|
$
|
752,083
|
(1)
|
|
$
|
0
|
|
|
$
|
73,526
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
191,894
|
|
|
$
|
8,354
|
|
Chairman of the Board
|
|
|
2004
|
|
|
|
865,508
|
(2)
|
|
|
0
|
(3)
|
|
|
68,262
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,937,139
|
(7)
|
|
|
2,856,539
|
(9)
|
and Chief Executive
|
|
|
2003
|
|
|
|
662,704
|
(2)
|
|
|
0
|
(2)
|
|
|
20,948
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
(7)
|
|
|
6,489
|
|
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffery A. Smisek
|
|
|
2005
|
|
|
$
|
600,000
|
(1)
|
|
$
|
0
|
|
|
$
|
13,814
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
130,568
|
|
|
$
|
9,034
|
|
President
|
|
|
2004
|
|
|
|
645,923
|
|
|
|
0
|
(3)
|
|
|
21,750
|
|
|
|
0
|
|
|
|
0
|
|
|
|
941,584
|
|
|
|
7,958
|
|
|
|
|
2003
|
|
|
|
600,000
|
|
|
|
750,000
|
|
|
|
74,430
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,134,443
|
|
|
|
7,908
|
|
James Compton
|
|
|
2005
|
|
|
$
|
375,000
|
(1)
|
|
$
|
0
|
|
|
$
|
58,182
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
51,792
|
|
|
$
|
7,704
|
|
Executive Vice
|
|
|
2004
|
|
|
|
419,135
|
|
|
|
371,276
|
|
|
|
20,896
|
|
|
|
0
|
|
|
|
0
|
|
|
|
325,983
|
|
|
|
2,050
|
|
President Marketing
|
|
|
2003
|
|
|
|
350,686
|
|
|
|
438,358
|
|
|
|
14,479
|
|
|
|
0
|
|
|
|
0
|
|
|
|
832,218
|
|
|
|
2,000
|
|
Jeffrey J. Misner
|
|
|
2005
|
|
|
$
|
375,000
|
(1)
|
|
$
|
0
|
|
|
$
|
48,309
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
47,457
|
|
|
$
|
4,601
|
|
Executive Vice
|
|
|
2004
|
|
|
|
419,135
|
|
|
|
371,276
|
|
|
|
11,962
|
|
|
|
0
|
|
|
|
0
|
|
|
|
292,830
|
|
|
|
2,050
|
|
President & Chief
|
|
|
2003
|
|
|
|
350,686
|
|
|
|
438,358
|
|
|
|
13,211
|
|
|
|
0
|
|
|
|
0
|
|
|
|
832,218
|
|
|
|
2,000
|
|
Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark J. Moran
|
|
|
2005
|
|
|
$
|
375,000
|
(1)
|
|
$
|
0
|
|
|
$
|
77,252
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
28,326
|
|
|
$
|
7,216
|
|
Executive Vice
|
|
|
2004
|
|
|
|
357,404
|
|
|
|
371,276
|
|
|
|
17,381
|
|
|
|
0
|
|
|
|
0
|
|
|
|
218,609
|
|
|
|
4,100
|
|
President Operations
|
|
|
2003
|
|
|
|
259,175
|
|
|
|
323,969
|
|
|
|
18,839
|
|
|
|
0
|
|
|
|
0
|
|
|
|
666,814
|
|
|
|
2,000
|
|
|
|
|
(1) |
|
The compensation reduction agreements discussed above became
effective February 28, 2005 and, therefore, the 2005 salary
amount for each named executive officer is higher than his
current annual salary rate. |
|
(2) |
|
As discussed above, in order to permit us to comply with our
agreement with the TSA, Mr. Kellner voluntarily entered
into a compensation cap agreement that limited the compensation
to him during the twelve month period ending March 31,
2004. No 2003 annual performance bonus was paid to
Mr. Kellner because of the compensation cap agreement. To
further ensure compliance with the Act, the company withheld
additional amounts of salary from Mr. Kellner. At the end
of the compensation cap period, these additional salary
withholdings were audited by the company for compliance with the
Act. The company paid the excess withholdings to
Mr. Kellner in April 2005 and the amounts are included in
his 2003 and 2004 salary amounts. See also footnotes 6 and
7. |
|
(3) |
|
Pursuant to compensation reduction agreements entered into in
December 2004, each of Mr. Kellner and Mr. Smisek
voluntarily waived receipt of his 2004 annual performance bonus
in the amount of $783,806 and $594,042, respectively, to which
they were contractually entitled. These bonus amounts were not
paid to Messrs. Kellner and Smisek and are not included in
the table. |
|
(4) |
|
Includes cash amounts received pursuant to a credit under the
companys flexible benefits program (which credit was
eliminated for officers and most other employees in
2005) and tax reimbursements relating to Flight Benefits
and term life insurance benefits. The value of perquisites and
other personal benefit amounts also are included in the table
only if they exceed the lesser of $50,000 or 10% of the named
executive officers total annual salary and bonus. We have
calculated the incremental cost to the company of the
executives allocated percentage of personal use of a
company car based on the companys actual purchase or lease
payments, insurance, tax, registration and other miscellaneous
costs related to the automobile. Tax reimbursements associated
with Flight Benefits have been included as part of the
incremental cost of providing such Flight Benefits and for
determining the officers total annual perquisites.
Mr. Kellners 2005 compensation includes Flight
Benefits (including tax reimbursements) in the amount of $37,290 |
24
|
|
|
|
|
and a car benefit in the amount of $22,768, and his 2004
compensation includes Flight Benefits (including tax
reimbursements) in the amount of $34,416. Mr. Smiseks
2003 compensation includes Flight Benefits (including tax
reimbursements) in the amount of $20,804, a car benefit in the
amount of $21,677, and tax planning services in the amount of
$15,044. Mr. Comptons 2005 compensation includes
Flight Benefits (including tax reimbursements) in the amount of
$27,094 and a car benefit in the amount of $23,050.
Mr. Misners 2005 compensation includes Flight
Benefits (including tax reimbursements) in the amount of $16,531
and a car benefit in the amount of $25,476.
Mr. Morans 2005 compensation includes Flight Benefits
(including tax reimbursements) in the amount of $41,432 and a
car benefit in the amount of $27,045. |
|
(5) |
|
No restricted stock awards have been made by the company since
April 2002. At the end of 2005, the aggregate number of
restricted shares held by the named executive offices was as
follows: Mr. Kellner 9,375 shares,
Mr. Smisek 8,000 shares,
Mr. Compton 921 shares,
Mr. Misner 2,000 shares, and
Mr. Moran 700 shares. Based on the
December 30, 2005 closing price of the common stock of
$21.30, the year-end values of such holdings were as follows:
Mr. Kellner $199,688,
Mr. Smisek $170,400,
Mr. Compton $19,617,
Mr. Misner $42,600, and
Mr. Moran $14,910. All of these restricted
shares vest on April 9, 2006. Although we have paid no
dividends on our common stock, any dividends would be payable
upon both vested and non-vested shares. The restricted stock
holdings of each of the named executive officers were reduced
effective February 28, 2005 pursuant to their compensation
reduction agreements discussed above. |
|
(6) |
|
Amounts include payouts under our prior Long Term Incentive
Performance Award Program (LTIP) and our PARs Award Program
(which was terminated in November 2005), each of which was
implemented under our Incentive Plan 2000. LTIP payments are
with respect to
3-year
performance periods ending on December 31 of the year
shown. These payments were made in the first quarter following
the end of the performance period, following certification by
the Human Resources Committee of achievement of performance
goals. No LTIP payment was earned with respect to the
performance periods ended December 31, 2004 or 2005. PARs
Award Program payouts relate to the companys realization
of gain in connection with the disposition of all or a part of
its equity investment in
e-commerce
businesses and are paid out to the named executive upon
redemption and, if unvested, upon vesting. Mr. Kellner
received PARs Award Program payments in 2004 that included
payments relating to awards that were not eligible for
redemption in 2003 due to the terms contained in the
compensation cap agreements. See footnotes 2 and 7. |
|
(7) |
|
Pursuant to his compensation cap agreement with the company
described above and in footnote 2, Mr. Kellner waived
his right to receive the payout under his LTIP award for the
performance period ending December 31, 2003. In addition,
his award under the PARs Award Program was not eligible for
redemption during the
12-month
period ending March 31, 2004. The 2004 amounts include
payouts of awards that Mr. Kellner would have been eligible
to redeem in 2003 but for the compensation cap agreement, and
which he became eligible to redeem, and did redeem, after
April 1, 2004. |
|
(8) |
|
Amounts shown for 2005 include matching contributions pursuant
to the companys 401(k) savings plan (which matching
contributions ceased for officers effective April 30,
2005) as follows: Mr. Kellner $4,200,
Mr. Smisek $4,200,
Mr. Compton $3,075,
Mr. Misner $1,538, and
Mr. Moran $3,075. The 2005 amounts also
include the dollar value of insurance premiums paid by the
company with respect to term life insurance for such executives
pursuant to each executives employment agreements as
follows: Mr. Kellner $4,154,
Mr. Smisek $4,834,
Mr. Compton $4,629,
Mr. Misner $3,063 and
Mr. Moran $4,141. |
|
(9) |
|
Includes a cash payment of $2,850,000 in consideration of his
covenant not to compete with the company for a period of two
years following the termination of his employment for any reason
other than a termination by the company without cause or a
termination by Mr. Kellner for good cause. This covenant
not to compete, and corresponding payment, was made in
connection with a new employment agreement executed
April 14, 2004 between the company and Mr. Kellner in
connection with his election as chairman and CEO effective at
the end of 2004. See Employment Agreements below. |
25
Aggregated
Option Exercises in 2005 and Year-End Option Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
Value of Unexercised
|
|
|
|
Shares
|
|
|
|
|
|
Underlying Unexercised
|
|
|
In-the-Money
|
|
|
|
Acquired on
|
|
|
Value
|
|
|
Options at Fiscal
Year-End
|
|
|
Options at Fiscal
Year-End
|
|
Name
|
|
Exercise
|
|
|
Realized
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Lawrence W. Kellner
|
|
|
0
|
|
|
$
|
0
|
|
|
|
329,687
|
|
|
|
0
|
|
|
$
|
1,819,872
|
|
|
$
|
0
|
|
Jeffery A. Smisek
|
|
|
0
|
|
|
|
0
|
|
|
|
266,500
|
|
|
|
0
|
|
|
|
1,471,080
|
|
|
|
0
|
|
James Compton
|
|
|
0
|
|
|
|
0
|
|
|
|
36,258
|
|
|
|
0
|
|
|
|
200,144
|
|
|
|
0
|
|
Jeffrey J. Misner
|
|
|
0
|
|
|
|
0
|
|
|
|
53,062
|
|
|
|
0
|
|
|
|
292,902
|
|
|
|
0
|
|
Mark J. Moran
|
|
|
0
|
|
|
|
0
|
|
|
|
53,375
|
|
|
|
3,000
|
|
|
|
294,630
|
|
|
|
10,260
|
|
None of the named executive officers exercised options during
2005 and no options were granted to them in 2005. Effective
February 28, 2005, the then unexercisable option holdings
of each of the named executive officers were reduced pursuant to
the compensation reduction agreements discussed above.
Long Term
Incentive Plans Awards in 2005
The following table sets forth information regarding NLTIP
awards granted in 2005 under our Long Term Incentive and RSU
Program (the NLTIP/ RSU Program) which has been
implemented under our Incentive Plan 2000. No RSU awards were
made in 2005. The NLTIP/ RSU Program was adopted by the Human
Resources Committee in April 2004 in connection with the
committees review and restructuring of the companys
long-term performance incentive compensation programs. The
committee did not make any PARs awards under the PARs Award
Program during 2005 and the program was terminated in November
2005.
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Performance or
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Number of Shares,
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Other Period
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Estimated Future Payouts
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Units or
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Until Maturation
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Under Non-Stock Price-Based
Plans
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Name
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Other Rights(1)
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or Payout
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Threshold
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Target
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Maximum
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Lawrence W. Kellner
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NLTIP Award
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3 years
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$
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1,202,344
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$
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1,603,125
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|
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$
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2,404,688
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Jeffery A. Smisek
|
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NLTIP Award
|
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3 years
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$
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907,200
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$
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1,166,400
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$
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1,749,600
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James Compton
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NLTIP Award
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3 years
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$
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405,000
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$
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607,500
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$
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810,000
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Jeffrey J. Misner
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NLTIP Award
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3 years
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$
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405,000
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$
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607,500
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|
|
$
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810,000
|
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Mark J. Moran
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NLTIP Award
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|
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3 years
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|
$
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405,000
|
|
|
$
|
607,500
|
|
|
$
|
810,000
|
|
|
|
|
(1) |
|
Amounts set forth in the table represent potential payout of
awards under the NLTIP based on awards made in 2005 for the
performance period commencing on January 1, 2005 and ending
on December 31, 2007. Payouts are based on
Continentals achievement of entry (threshold), target or
stretch (maximum) EBITDAR margin performance goals as determined
by the committee. Payout of the 2005 awards is also contingent
upon our having an unrestricted cash balance of at least
$1 billion at the end of the performance period. See
Executive Compensation Report of the Human Resources
Committee above. |
Employment
Agreements
Agreement with Mr. Kellner. We entered
into an employment agreement with Mr. Kellner effective
April 14, 2004, relating to his service as an officer and
director of the company and providing for a minimum annual base
salary of $950,000. As previously discussed, Mr. Kellner
and the company subsequently entered into a compensation
reduction agreement whereby, effective February 28, 2005,
Mr. Kellner agreed to accept a reduction in annual base
salary of 25%, reducing his minimum base salary to $712,500. His
employment agreement also entitles him to an annual performance
bonus and long-term incentive payment opportunities at a level
which is not less than the highest participation level made
available to other company executives (but not less than between
0% and 150% of the applicable base amount) if performance goals
under the applicable program are met. In addition,
Mr. Kellner participates in a supplemental executive
retirement plan (SERP) that provides an annual
retirement benefit expressed as a percentage (that could range
up to 75%) of Mr. Kellners final average compensation
as defined in his employment agreement. He is also entitled to
26
participate in the compensation and benefit plans available to
all management employees, receive company-provided disability
benefits and life insurance, Flight Benefits, certain tax
indemnity payments (some of which may not be deductible by the
company), use of a company provided automobile, and certain
other fringe benefits. In addition, Mr. Kellners
compensation will be grossed up for any excise or
other special additional tax imposed as a result of any payment
or benefit provided to Mr. Kellner under the employment
agreement, including, without limitation, any excise tax imposed
under Section 4999 of the Internal Revenue Code. The
agreement is in effect until April 14, 2009, subject to
automatic successive five-year extensions, but may be terminated
at any time by either party, with or without cause.
If Mr. Kellners employment is terminated by the
company for cause (as described in the agreement) or by
Mr. Kellner without good cause (as described in the
agreement), he will receive his SERP benefit, Flight Benefits,
and continued coverage for himself and his eligible dependents
under the companys medical and health plans for the
remainder of his lifetime (at no greater cost to
Mr. Kellner than a similarly situated company executive who
has not terminated employment), (together with the SERP and the
Flight Benefits, the Base Benefits). If we terminate
his employment for reasons other than death, disability or cause
or if he terminates his employment for good cause, then we must,
in addition to providing the Base Benefits: (i) cause all
options, shares of restricted stock, and awards under the PARs
Award Program to vest; (ii) pay to him, at the same time as
payments are made to other participants under the NLTIP/ RSU
program, all amounts with respect to any outstanding awards made
to him under the NLTIP/ RSU program as if he had remained our
employee; (iii) make a lump sum cash severance payment to
him in an amount equal to three times the sum of (a) his
then current annual base salary plus (b) a deemed bonus
equal to the amount of such salary times 150% (such payment
referred to herein as the Termination Payment);
(iv) provide him with out-placement, office and other
perquisites for certain specified periods and (v) transfer
to him title to his company car without cost to Mr. Kellner
(which benefit Mr. Kellner receives in all termination
events except termination by the company for cause). If his
employment is terminated due to his death or disability, then he
or his estate will receive the above benefits (but not the
Termination Payment, out-placement services, office space or
certain other perquisites) and he or his estate will be entitled
to certain disability or life insurance payments, as the case
may be. Mr. Kellners employment agreement also
includes a two-year non-compete with the company following
termination of his employment, except if such termination is by
the company without cause or upon his disability or by
Mr. Kellner for good cause, for which he received a cash
payment in 2004.
Agreements with Other Named Executive
Officers. We have also entered into employment
agreements with Messrs. Smisek, Misner, Compton and Moran,
effective August 12, 2004, relating to their services as
officers of the company and providing for minimum annual base
salaries of $720,000, $450,000, $450,000 and $450,000,
respectively. Each of these officers subsequently agreed to
accept a reduction in annual base salary of 20%, effective
February 28, 2005, reducing his base salary to $576,000,
$360,000, $360,000 and $360,000, respectively. Each agreement is
similar to that of Mr. Kellners, except as follows:
the agreements do not include non-compete provisions; the
automatic extension after the base term of each contract is for
successive one year periods; the SERP for Messrs. Misner,
Compton and Moran provides a maximum annual retirement benefit
that could range up to 65%; and Termination Payments under the
agreements with Messrs. Misner, Compton and Moran are
limited to two times the sum of (a) the executives
then current annual base salary and (b) a deemed bonus
equal to the amount of such salary times 125%, unless their
termination occurs within two years following a change in
control (in which case it is three times that sum).
Retirement
Plans
The Continental Retirement Plan (the Retirement
Plan) is a noncontributory, defined benefit pension plan.
Substantially all of our non-pilot domestic employees, including
the named executive officers, are entitled to participate in the
Retirement Plan. The Retirement Plan currently limits the annual
compensation it considers for benefit determination purposes to
$170,000 for the named executive officers. The named executive
officers are also eligible to receive retirement benefits
pursuant to a SERP provided for in their employment agreements.
Benefits payable under the SERP are not protected from a
bankruptcy by the company and will be offset by amounts paid or
payable under the Retirement Plan. The combined annual
27
benefit amounts payable under the Retirement Plan and the SERPs
are not subject to a reduction for any social security benefits
which may be paid or payable to the named executive officers.
The following table represents the estimated combined annual
benefits payable under the Retirement Plan and the SERPs as of
January 1, 2006 in the form of a single life annuity to the
named executive officers at age 60 in specified years of
service and compensation categories.
Pension
Plan Table
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Final Average
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Years of Service(1)
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Compensation
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5
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10
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15
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20
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25
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30
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$500,000
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$
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62,500
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$
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125,000
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$
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187,500
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$
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250,000
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$
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312,500
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$
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375,000
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$600,000
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75,000
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|
|
150,000
|
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225,000
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|
300,000
|
|
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375,000
|
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450,000
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$800,000
|
|
|
100,000
|
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|
|
200,000
|
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|
300,000
|
|
|
|
400,000
|
|
|
|
500,000
|
|
|
|
600,000
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|
$1,000,000
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|
|
125,000
|
|
|
|
250,000
|
|
|
|
375,000
|
|
|
|
500,000
|
|
|
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625,000
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|
|
|
750,000
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|
$1,500,000
|
|
|
187,500
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|
|
|
375,000
|
|
|
|
562,500
|
|
|
|
750,000
|
|
|
|
937,500
|
|
|
|
1,125,000
|
|
$2,000,000
|
|
|
250,000
|
|
|
|
500,000
|
|
|
|
750,000
|
|
|
|
1,000,000
|
|
|
|
1,250,000
|
|
|
|
1,500,000
|
|
|
|
|
(1) |
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As calculated under the SERP. |
Payouts under the SERPs are based on final average compensation
and credited years of service (up to a maximum of 30 years
for Messrs. Kellner and Smisek and 26 years for
Messrs. Compton, Misner and Moran). Under the SERP, final
average compensation means the average of the participants
highest five years of compensation during their last ten
calendar years with Continental. For purposes of such
calculation, compensation includes annual salary and cash
bonuses (but excludes other annual compensation, certain stay
bonuses and all long-term compensation and other incentive
compensation). At December 31, 2005, the final average
compensation for purposes of calculating SERP benefits for the
named executive officers was as follows: Mr. Kellner,
$1,176,771, Mr. Smisek, $1,110,014, Mr. Compton,
$603,177, Mr. Misner, $590,948, and Mr. Moran,
$538,707.
Credited years of service under the SERP began in 1995 for
Messrs. Kellner and Smisek, in 2001 for
Messrs. Compton and Misner, and in 2004 for Mr. Moran.
In addition, to induce our named executive officers to remain in
our employ, each of them receive additional credited years of
service under the SERP for each actual year of service as
follows: from 2000 2004, two additional years
for each of Messrs. Kellner and Smisek; from
2001 2006, one additional year for each of
Messrs. Compton and Misner; and from
2004 2006, one additional year for
Mr. Moran. Their total credited years of service as of
December 31, 2005 was as follows:
Mr. Kellner 21 years,
Mr. Smisek 21 years,
Mr. Compton 10 years,
Mr. Misner 10 years, and
Mr. Moran 4 years. In lieu of a
monthly annuity, Mr. Kellner may, upon meeting specified
age and/or
service requirements, elect to receive a lump sum benefit.
Messrs. Smisek, Compton, Misner and Moran are not eligible
to receive the monthly annuity option and may only receive a
lump sum benefit. The lump sum benefit will be the actuarial
equivalent of a single life annuity and will vary over time
based on actuarial assumptions and other factors such as
interest rates, years of service, age and compensation.
28
Performance
Graph
The following graph compares the cumulative total return on our
common stock with the cumulative total returns (assuming
reinvestment of dividends) on the Amex Airline Index and the
Standard & Poors 500 Stock Index as if $100 were
invested in the common stock and each of those indices on
December 31, 2000.
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12/31/00
|
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12/31/01
|
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12/31/02
|
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12/31/03
|
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12/31/04
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12/31/05
|
Continental
Airlines
|
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$
|
100.00
|
|
|
|
$
|
50.77
|
|
|
|
$
|
14.04
|
|
|
|
$
|
31.52
|
|
|
|
$
|
26.23
|
|
|
|
$
|
41.26
|
|
Amex Airline Index
|
|
|
$
|
100.00
|
|
|
|
$
|
52.53
|
|
|
|
$
|
23.26
|
|
|
|
$
|
36.86
|
|
|
|
$
|
36.11
|
|
|
|
$
|
32.73
|
|
S&P 500 Index
|
|
|
$
|
100.00
|
|
|
|
$
|
88.15
|
|
|
|
$
|
68.79
|
|
|
|
$
|
88.29
|
|
|
|
$
|
97.77
|
|
|
|
$
|
102.50
|
|
|
|
|
|
|
|
|
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29
Equity
Compensation Plan Information
The table below provides information relating to our equity
compensation plans as of December 31, 2005.
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
Number of Securities
|
|
|
|
|
|
Remaining Available
|
|
|
|
to be Issued
|
|
|
Weighted-Average
|
|
|
for Future Issuance
|
|
|
|
Upon Exercise
|
|
|
Exercise Price
|
|
|
Under Compensation Plans
|
|
|
|
of Outstanding Options,
|
|
|
of Outstanding Options,
|
|
|
(Excluding Securities
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Reflected in First
Column)
|
|
|
Equity compensation plans approved
by security holders
|
|
|
4,550,788
|
|
|
$
|
16.56
|
|
|
|
3,441,853
|
(1)
|
Equity compensation plans not
approved by security holders(2)
|
|
|
8,159,269
|
|
|
|
11.90
|
|
|
|
1,840,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12,710,057
|
|
|
$
|
13.57
|
|
|
|
5,250,299
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The number of securities remaining available for future issuance
under equity compensation plans includes 32,287 shares
under restricted stock provisions and 1,996,960 shares
under the employee stock purchase plan. |
|
(2) |
|
During the first quarter of 2005, we adopted the 2005 Broad
Based Employee Stock Option Plan and the 2005 Pilot Supplemental
Option Plan, as a commitment to our employees that their wage
and benefits cost reduction contributions represent an
investment in their future. We did not seek stockholder approval
to adopt these plans because the audit committee of our board of
directors determined that the delay necessary in obtaining such
approval would seriously jeopardize our financial viability. On
March 4, 2005, the NYSE accepted our reliance on this
exception to its shareholder approval policy. A total of
10 million shares of common stock may be issued under these
plans. As of February 28, 2006, approximately
9.1 million options with a weighted average exercise price
of $12.86 per share had been issued to eligible employees
under these plans in connection with pay and benefit reductions
and work rule changes with respect to those employees. The
options are exercisable in three equal installments and have
terms ranging from six to eight years. |
30
PROPOSAL 1:
ELECTION
OF DIRECTORS
Introduction
It is the intention of the persons named in the enclosed form of
proxy, unless otherwise instructed, to vote duly executed
proxies for the election of each nominee for director listed
below. Pursuant to our bylaws, directors will be elected by a
plurality of the votes duly cast at the stockholders meeting. If
elected, each nominee will hold office until the next annual
meeting of stockholders and until his or her respective
successor has been duly elected and has qualified, except as
discussed below. We do not expect any of the nominees to be
unavailable to serve for any reason, but if that should occur
before the meeting, we anticipate that proxies will be voted for
another nominee or nominees to be selected by the board of
directors.
Our board of directors currently consists of eleven persons. The
Corporate Governance Committee of the board of directors has
recommended to our board, and our board has unanimously
nominated, eleven individuals for election as directors at our
annual meeting. Each of the director nominees is presently one
of our directors. Stockholder nominations will not be accepted
for filling board seats at the meeting because our bylaws
require advance notice for such a nomination, the time for which
has passed. Your proxy cannot be voted for a greater number of
persons than the number of nominees named herein. There is no
family relationship between any of the nominees for director or
between any nominee and any executive officer.
NYSE
Independence Determinations
Our board has determined that all non-employee nominees for our
board (9 of the 11 nominees) are independent as that
term is defined by NYSE rules. In making this determination, the
board considered transactions and relationships between each
director or his or her immediate family and the company and its
subsidiaries, including those relationships reported under
Certain Transactions above and described below:
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|
|
Mr. McCorkindale. Mr. McCorkindale
is the Chairman of Gannett Co., Inc., a nationwide diversified
communications company and the parent company of USA Today. We
purchase newspapers from USA Today for our flights and
Presidents Clubs and retain USA Todays services as our
agent for procuring newspapers from other publishers. We have
also advertised in various newspapers owned by Gannett from time
to time. Our aggregate payments to Gannett and its subsidiaries
in connection with these arrangements, during each of the past
three years, represented less than 1/100th of 1% of our
total operating expenses and less than 1/10th of 1% of
Gannetts disclosed consolidated gross revenues.
|
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|
|
Mr. Meyer. Mr. Meyer is the Chairman,
President and CEO of KeyCorp, a financial services company and
the parent company of KeyBank, the 11th largest bank in the
United States. We are the preferred air carrier of KeyCorp, and
receive payments from KeyCorp in exchange for providing routine
air transportation services to its employees. We also receive
payments from KeyBank in connection with its debit card program,
launched in 2003, which is co-branded with us. Further, we lease
certain ground equipment from KeyBanks leasing division.
During each of the past three years, our aggregate payments to
KeyCorp and KeyBank, as well as their aggregate payments to us,
in each case represented less than 1/4th of 1% of the
consolidated gross revenues of the payee, and less than
1/4th of 1% of the total expenses of the payor.
|
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|
|
Mr. Woodard. Mr. Woodard serves on
the board of directors of AAR Corp., a leading supplier of
products and services to the global aviation/aerospace industry.
AAR Corp. is a supplier of parts and repair services to us and
is the owner participant on certain aircraft and spare engines
leased by us. During each of the past three years, our lease
payments relating to such aircraft and equipment, together with
amounts paid in consideration of parts and repairs, amounted to
less than 1/10th of 1% of our total operating expenses and
less
than 1/2
of 1% of AAR Corp.s consolidated gross revenues.
|
The purpose of this review was to determine whether any such
relationships or transactions were material and, therefore,
inconsistent with a determination that the director is
independent. In addition, the board considered additional
criteria set forth under NYSE rules in determining director
independence. As a result of
31
this review, the board affirmatively determined, based on its
understanding of such transactions and relationships, that, with
the exception of Messrs. Kellner and Smisek, none of the
directors nominated for election at the annual meeting has any
material relationships with the company or its subsidiaries, and
that all such directors are independent of the company under the
standards set forth by the NYSE. Messrs. Kellner and Smisek
are not independent because of their employment as executives of
the company.
Director
Biographical Summaries
The following table shows, with respect to each nominee,
(i) the nominees name and age, (ii) the period
for which the nominee has served as a director, (iii) all
positions and offices with the company currently held by the
nominee and his or her principal occupation and business
experience during the last five years, (iv) other
directorships held by the nominee and (v) the standing
committees of the board of directors of which he or she is a
member.
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|
|
Name, Age, Position
|
|
|
and Committee
Memberships
|
|
Term of Office and Business
Experience
|
|
THOMAS J. BARRACK, JR.,
age 58
(Human Resources Committee, Corporate Governance Committee,
Executive Committee)
|
|
Director since 1994. Chairman and
Chief Executive Officer of Colony Capital, LLC and Colony
Advisors, LLC (real estate investments) for more than five
years. Director of First Republic Bank.
|
KIRBYJON H. CALDWELL,
age 52
(Human Resources Committee, Corporate Governance Committee)
|
|
Director since 1999. Senior Pastor
of The Windsor Village-United Methodist Church, Houston, Texas
for more than twenty years. Director of Amegy Bancorporation,
Inc., Baylor College of Medicine, Bridgeway Mutual Funds and
Reliant Energy Inc.
|
LAWRENCE W. KELLNER,
age 47
Chairman of the Board and Chief Executive Officer (Finance
Committee, Executive Committee)
|
|
Director since 2001. Chairman of
the Board and Chief Executive Officer since December 2004.
President and Chief Operating Officer (March
2003-December
2004); President (May 2001-March 2003); Executive Vice President
and Chief Financial Officer (November 1996-May 2001).
Mr. Kellner joined the company in 1995. Director of
Marriott International, Inc.
|
DOUGLAS H. McCORKINDALE,
age 66
(Executive Committee)
|
|
Director since 1993. Chairman of
Gannett Co., Inc. (Gannett) (a nationwide
diversified communications company) since February 2001;
President and CEO of Gannett (June 2000-July 2005); Vice
Chairman, President and CEO of Gannett (June 2000-February
2001). Director of a group of Prudential Mutual Funds, Gannett
and Lockheed Martin Corporation.
|
HENRY L. MEYER III,
age 56
(Audit Committee, Executive Committee)
|
|
Director since 2003. Chairman of
the Board, President and Chief Executive Officer of KeyCorp
(banking) since May 2001. President and Chief Executive Officer
of KeyCorp (January 2001-May 2001). Director of KeyCorp.
|
OSCAR MUNOZ, age 47
(Audit Committee)
|
|
Director since 2004. Executive
Vice President and CFO of CSX Corporation (freight
transportation) since May 2003. Vice
President Consumer Services and CFO of AT&T
Consumer Services, a division of AT&T Corporation (January
2001-March 2003). Senior Vice President Finance
and Administration of Qwest Communications (June
2000-December
2000).
|
32
|
|
|
Name, Age, Position
|
|
|
and Committee
Memberships
|
|
Term of Office and Business
Experience
|
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GEORGE G. C. PARKER,
age 67
(Audit Committee, Finance Committee)
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Director since 1996. Dean Witter
Distinguished Professor of Finance and Management and previously
Senior Associate Dean for Academic Affairs and Director of the
MBA Program, Graduate School of Business, Stanford University
for more than five years. Director of BGI Mutual Funds, First
Republic Bank, Tejon Ranch Company and Threshold
Pharmaceuticals, Inc.
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JEFFERY A. SMISEK, age 51
President (Finance Committee)
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Director since December 2004.
President since December 2004. Executive Vice President (March
2003-December
2004); Executive Vice President Corporate and
Secretary (May 2001-March 2003); Executive Vice President,
General Counsel and Secretary (November 1996-May 2001).
Mr. Smisek joined the company in 1995. Director of National
Oilwell Varco, Inc.
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KAREN HASTIE WILLIAMS,
age 61
(Finance Committee)
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Director since 1993. Senior
Counsel of Crowell & Moring LLP (law firm) since
retirement as partner in January 2005. Partner
Crowell & Moring for more than five years prior to
retirement. Director of Gannett, SunTrust Bank, Inc., The Chubb
Corporation and Washington Gas Light Company.
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RONALD B. WOODARD, age 63
(Audit Committee, Finance Committee, Human Resources Committee)
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Director since 2003. Chairman of
the Board of MagnaDrive Corporation (a supplier of new engine
power transfer technology applications for industrial equipment)
since 2002; President and Chief Executive Officer
(1999-2002).
Various positions with The Boeing Company for more than
32 years, including President of Boeing Commercial Airplane
Group, Senior Vice President of Boeing, Executive Vice President
of Boeing Commercial Airplane Group, and Vice President and
General Manager of the Renton Division, Boeing Commercial
Airplane Group. Director of AAR Corp., Coinstar, Inc. and
MagnaDrive Corporation.
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CHARLES A. YAMARONE,
age 47
(Human Resources Committee, Corporate Governance Committee)
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Director since 1995. Executive
Vice President of Libra Securities, LLC (institutional
broker-dealer) since January 2002. Executive Vice President of
U.S. Bancorp Libra, a division of U.S. Bancorp
Investments, Inc.
(1999-2001).
Director of El Paso Electric Company.
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THE BOARD OF DIRECTORS RECOMMENDS A VOTE
FOR THE ELECTION OF THE NOMINEES NAMED ABOVE,
WHICH IS DESIGNATED AS PROPOSAL NO. 1 ON THE ENCLOSED
PROXY.
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PROPOSAL 2:
Introduction
On February 22, 2006, upon the recommendation of our
Corporate Governance Committee, our board unanimously approved,
subject to stockholder approval, an amendment to the
companys Certificate of Incorporation to increase the
maximum number of shares of common stock authorized for issuance
from 200 million shares to 400 million shares. This
increase would be accomplished by restating Article Four of
the companys Certificate of Incorporation to read as
follows:
FOUR: The total number of shares of all classes of capital
stock which the Corporation shall have the authority to issue is
410 million shares, par value $.01 per share, of which
10 million shall be Preferred Stock (Preferred
Stock) and 400 million shall be Class B Common
Stock (Class B Common Stock).
The proposed amendment to the companys Certificate of
Incorporation is attached hereto as
Appendix C.
Reasons
for the Proposed Amendment
Currently, the authorized capital stock of the company consists
of 200 million shares of common stock and 10 million
shares of preferred stock. Of the 200 million shares of
common stock authorized, as of February 28, 2006, there
were 112.4 million shares issued and outstanding,
25.5 million treasury shares, 17.9 million shares
reserved for issuance upon the conversion of outstanding
convertible debt securities, and 17.4 million shares
reserved for issuance under the companys incentive and
option plans and the 2004 Employee Stock Purchase Plan.
Consequently, the company has approximately 77.8 million
shares of common stock available for future issuance.
Our board believes that it is desirable and in the best
interests of the company and its stockholders to increase the
number of authorized shares of common stock from
200 million shares to 400 million shares to provide
the company with greater flexibility, without the delay and
expense of a special stockholders meeting, to issue common
stock for a variety of future corporate purposes, which may
include, among other things:
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stock splits;
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equity and equity-based financings;
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stock dividends;
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future acquisitions; and
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other general corporate purposes.
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The company has no present plans, arrangements or understandings
to issue additional shares of common stock (other than those
currently reserved for issuance), although it reserves the right
to do so in the future. If approved by the stockholders, the
additional authorized shares of common stock would be available
for issuance, at the discretion of our board, in such amounts
and upon such terms as our board may determine, without further
stockholder approval (subject to applicable Delaware law and New
York Stock Exchange rules).
Additionally, the holders of common stock do not have preemptive
rights with respect to future issuances of common stock, which
means that those holders do not have a prior right to purchase
shares of common stock in connection with any offering to
maintain their proportionate ownership interest. As a result,
our issuance of a significant amount of additional authorized
common stock (other than as the result of a stock split, stock
dividend or other pro rata distribution to stockholders) would
result in a significant dilution of the beneficial ownership
interests
and/or
voting power of each stockholder who does not purchase
additional shares to maintain his or her pro rata interest. As
additional shares are issued, the shares owned by existing
stockholders would represent a smaller percentage ownership
interest in the company. The issuance of such
34
additional shares of common stock may also, depending upon the
circumstances, have a dilutive effect on the companys
earnings per share.
Although an increase in the companys authorized shares of
common stock could, under certain circumstances, be construed as
having an anti-takeover effect (for example, by diluting the
stock ownership of a person seeking to effect a change in the
composition of our board or contemplating a tender offer or
other consolidation transaction), this proposal was not prompted
by any takeover or acquisition effort or threat. The company is
not aware of any threat of takeover or change in control, nor is
the company proposing to stockholders any anti-takeover measures.
If approved by the stockholders, the amendment will become
effective upon its filing with the Secretary of State of the
State of Delaware.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE
FOR THE AMENDMENT TO THE AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION, AS DESCRIBED ABOVE AND AS SET
FORTH IN APPENDIX C, WHICH IS DESIGNATED AS
PROPOSAL NO. 2 ON THE ENCLOSED PROXY.
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PROPOSAL 3:
Introduction
The Continental Airlines, Inc. Incentive Plan 2000, as amended
and restated and which we refer to as the Incentive
Plan, was adopted by our board in March 2000 and approved
by our stockholders in May 2000, and the material terms of the
performance goals under the performance award provisions of the
Incentive Plan were re-approved by our stockholders in June 2005.
On February 22, 2006, upon the recommendation of our Human
Resources Committee, our board unanimously approved, subject to
stockholder approval, an amendment to the Incentive Plan to
increase the number of shares of common stock issuable under the
plan from 3 million to 4.5 million.
The Human Resources Committee has determined that none of the
additional 1.5 million shares to be authorized by the
proposed amendment will be issued to any of the companys
current officers.
If our stockholders approve this proposal, we intend to file,
pursuant to the Securities Act of 1933, as amended, a
registration statement on
Form S-8
to register the additional shares available for issuance under
the Incentive Plan.
The proposed amendment to the Incentive Plan is attached hereto
as Appendix D, and the amended and restated
Incentive Plan, prior to giving effect to the proposed
amendment, is attached hereto as
Appendix E.
Reasons
for Proposed Amendment
The Incentive Plan is designed to enable the company and its
subsidiaries to attract and retain capable persons to serve as
directors and employees of the company and to provide a means
whereby those individuals upon whom the responsibilities of the
successful administration and management of the company and its
subsidiaries rest, and whose present and potential contributions
to the welfare of the company and its subsidiaries are of
importance, can acquire and maintain stock ownership, thereby
strengthening their concern for the welfare of the company and
its subsidiaries. A further purpose of the Incentive Plan is to
provide such individuals with additional incentive and reward
opportunities designed to enhance the profitable growth of the
company and its subsidiaries.
Our board believes that the Incentive Plan has achieved these
purposes and enabled the company to retain and reward its key
employees. However, as of February 28, 2006, of the
original three million authorized shares of common stock under
the Incentive Plan, only 932,869 shares remained available
for issuance under the plan. In order for the Incentive Plan to
continue to serve these purposes over the next few years, the
plan must be amended to increase the number of shares available
for issuance. We estimate that the proposed increases will
provide the company with sufficient authorized shares to cover
awards under the plan through at least the end of 2008.
Summary
of the Incentive Plan
The following summary provides a general description of certain
features of the Incentive Plan, giving effect to the proposed
amendment, and is qualified in its entirety by the complete text
of the Incentive Plan. Copies of the programs adopted under the
Incentive Plan are on file and publicly available at the SEC. In
addition, please read Executive Compensation Report of the
Human Resources Committee above for additional information
regarding the programs adopted under the Incentive Plan.
Capitalized terms not otherwise defined herein have the meanings
ascribed to them in the Incentive Plan or in the programs
adopted thereunder.
The Incentive Plan provides that the company may grant Options
to purchase shares of Class B common stock, Restricted
Stock Awards, Performance Awards, Incentive Awards and Retention
Awards to eligible employees or directors. The terms applicable
to these various types of Awards, including those terms that may
be established by the Administrator when making or administering
particular Awards, are set forth in detail in the Incentive
Plan. The Administrator may make Awards under the Incentive Plan
until October 3, 2009. The Incentive Plan will remain in
effect (at least for the purpose of governing outstanding
Awards) until all Option
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Awards granted under the Incentive Plan have been exercised or
expired, all restrictions imposed upon Restricted Stock Awards
granted under the Incentive Plan have been eliminated or the
Restricted Stock Awards have been forfeited, and all Performance
Awards, Incentive Awards and Retention Awards granted under the
Incentive Plan have been satisfied or have terminated.
Administration. The Incentive Plan provides
that a committee comprised solely of two or more outside
directors (as defined by Section 162(m) of the Code
and within the meaning of the term Non-Employee
Director as defined by
Rule 16b-3
under the Exchange Act) serves as the Administrator of Awards
under the Incentive Plan with respect to persons subject to
Section 16 of the Exchange Act. Until otherwise determined
by the board, the Human Resources Committee serves as such
committee under the Incentive Plan. The CEO of the company, so
long as he or she is also a director of the company, serves as
Administrator with respect to any person not subject to
Section 16 of the Exchange Act, unless the Incentive Plan
specifies that the Committee must take specific action (in which
case such action may only be taken by the Committee) or the
Committee specifies that it will serve as Administrator.
Eligibility. Awards may be granted only to
persons who, at the time of grant, are directors of the company
or employees of the company or one of its subsidiaries. Awards
may be granted on more than one occasion to the same person,
and, subject to limitations set forth in the Incentive Plan,
Awards may consist of any combination of Options, Restricted
Stock Awards, Performance Awards, Incentive Awards and Retention
Awards, as is best suited to the circumstances of the particular
person. As of February 28, 2006, nine non-employee
directors were eligible to receive Awards under the Incentive
Plan, and it is anticipated that management-level employees at
or above specified grade levels (currently comprised of
approximately 400 employees) selected by the CEO will receive
future awards under the Incentive Plan. Non-employee directors
have not received Awards under the Incentive Plan or programs
adopted thereunder, other than normal stock option grants as
described under Information About Our
Board Compensation of Directors above.
The Human Resources Committee has determined that the additional
1.5 million shares to be authorized by the proposed
amendment will not be available for issuance to the
companys current officers.
Stock Options. The Administrator may grant
options that entitle the recipient to purchase shares of
Class B common stock at a price equal to or greater than
the Market Value per Share on the date of grant. An Option will
be exercisable in whole or in such installments and at such
times as determined by the Administrator. The option price is
payable in full in the manner specified by the Administrator.
The holder of an Option is entitled to privileges and rights of
a stockholder only with respect to shares of Class B common
stock purchased under the Option and for which certificates
representing such shares are registered in the Holders
name. Options granted under the Incentive Plan may be Options
that are intended to qualify as incentive stock
options within the meaning of Section 422 of the Code
or Options that are not intended to so qualify. An Incentive
Stock Option will be treated as a Non Qualified Option to the
extent that the aggregate Market Value per Share (determined at
the time of grant) of Class B common stock with respect to
which Incentive Stock Options are first exercisable by an
individual during any calendar year under all incentive stock
option plans of the company (and its parent and subsidiary
corporations) exceeds $100,000. An Incentive Stock Option may
only be granted to an individual who is an employee at the time
the Option is granted. No Incentive Stock Option may be granted
to an individual if, at the time the Option is granted, such
individual owns stock possessing more than 10% of the total
combined voting power of all classes of stock of the company (or
of its parent or subsidiary corporation, within the meaning of
Section 422(b)(6) of the Code), unless (i) at the time
such Option is granted the option price is at least 110% of the
Market Value per Share of the Class B common stock subject
to the Option and (ii) such Option by its terms is not
exercisable after the expiration of five years from the date of
grant.
An Option Grant Document may provide for the payment of the
option price, in whole or in part, by delivery of a number of
shares of Class B common stock (plus cash if necessary)
having a Market Value per Share equal to such option price.
Moreover, an Option Grant Document may provide for a
cashless exercise of the Option by establishing
procedures satisfactory to the Administrator with respect
thereto. The terms and conditions of the respective Option Grant
Documents need not be identical.
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SARs. The Administrator (concurrently with the
grant of an Option or subsequent to such grant) may, in its sole
discretion, grant stock appreciation rights, which we refer to
as SARs, to any Holder of an Option. SARs may give
the Holder of an Option the right to surrender any exercisable
Option or portion thereof in exchange for cash, whole shares of
Class B common stock, or a combination thereof, as
determined by the Committee, with a value equal to the excess of
the Market Value per Share, as of the date of such request, of
one share of Class B common stock over the Option price for
such share multiplied by the number of shares covered by the
Option or portion thereof to be surrendered. Any SAR granted in
connection with an Incentive Stock Option is exercisable only
when the Market Value per Share of the Class B common stock
exceeds the price specified therefore in the Option (or the
portion of the Option to be surrendered). Upon exercise of any
SAR granted under the Incentive Plan, the number of shares
reserved for issuance under the Incentive Plan will be reduced
only to the extent that shares of Class B common stock are
actually issued in connection with the SAR exercise. The
Administrator may prescribe additional terms and conditions
governing any SARs.
Options and SARs may be granted under the Incentive Plan in
substitution for stock options held by individuals employed by
corporations who become employees as a result of a merger or
consolidation or other business combination of the employing
corporation with the company or any subsidiary.
Restricted Stock. A grant of Restricted Stock
pursuant to a Restricted Stock Award constitutes an immediate
transfer to the recipient of record and beneficial ownership of
the shares of Restricted Stock in consideration of the
performance of services by the recipient (or other consideration
determined by the Administrator). The recipient is entitled
immediately to voting and other ownership rights in the shares,
subject to restrictions referred to in the Incentive Plan or
contained in the related Grant Document. The transfer may be
made without additional consideration or in consideration of a
payment by the recipient that is less than the market value of
the shares on the date of grant. Each grant may, in the
discretion of the Administrator, limit the recipients
dividend rights during the period in which the shares are
subject to a substantial risk of forfeiture and restrictions on
transfer. The terms and conditions of the respective Restricted
Stock Grant Documents need not be identical.
Restricted Stock must be subject, for a period or periods
determined by the Administrator at the date of grant, to one or
more restrictions, including, without limitation, a restriction
that constitutes a substantial risk of forfeiture
within the meaning of Section 83 of the Code and applicable
interpretive authority thereunder. For example, an Award could
provide that the Restricted Stock would be forfeited if the
Holder ceased to serve the company as an employee during a
specified period. In order to enforce these forfeiture
provisions, the transfer of Restricted Stock during the period
or periods during which such restrictions are to continue will
be prohibited or restricted in a manner and to the extent
prescribed by the Administrator at the date of grant. The
Incentive Plan provides for a shorter period during which the
forfeiture provisions are to apply in the event of a Change in
Control of the company.
The Committee has resolved that all Restricted Stock Awards
under the companys stock incentive plans (including the
Incentive Plan) shall vest over at least a three-year period, or
over at least a one-year period if vesting is performance-based
(or as otherwise provided in the applicable plan or award
agreement, such as upon a Change in Control).
Performance Awards. The Administrator will
establish, with respect to and at the time of each Performance
Award, a performance period over which the performance
applicable to the Performance Award will be measured. A
Performance Award will be awarded to a Holder contingent upon
future performance of the company or any subsidiary, division,
or department thereof. The Administrator will establish the
performance measures applicable to such performance within the
applicable time period permitted by Section 162(m) of the
Code, with such adjustments thereto as may be determined by the
Administrator. The performance measures may be absolute,
relative to one or more other companies, relative to one or more
indexes, or measured by reference to the company alone or the
company together with its consolidated subsidiaries. The
performance measures established by the Administrator may be
based upon (i) the price of a share of Class B common
stock, (ii) operating income or operating income margin,
(iii) EBITDAR or EBITDAR margin, (iv) net income or
net income margin, (v) cash flow, (vi) total
stockholder return, or (vii) a combination of any of the
foregoing, including any average, weighted average, minimum,
hurdle, rate of
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increase or other measure of any or any combination thereof. The
Administrator, in its sole discretion, may provide for an
adjustable Performance Award value based upon the level of
achievement of performance measures.
In determining the value of Performance Awards, the
Administrator shall take into account a Holders
responsibility level, performance, potential, other Awards, and
such other considerations as it deems appropriate. The
Administrator, in its sole discretion, may provide for a
reduction in the value of a Holders Performance Award
during the performance period, if permitted by the applicable
Grant Document.
Following the end of the performance period, the Holder of a
Performance Award will be entitled to receive payment of an
amount not exceeding the maximum value of the Performance Award,
based on the achievement of the performance measures for such
performance period, as determined by the Administrator and
certified by the Committee as required by Section 162(m) of
the Code. Payment of a Performance Award may be made in cash,
shares of Class B common stock (valued at the Market Value
per Share), or a combination thereof, as determined by the
Administrator. Payment will be made in a lump sum, except as
otherwise set forth in the applicable Grant Document.
A Performance Award will terminate if the Holder does not remain
continuously employed or in service as a director of the company
or a subsidiary at all times during the applicable performance
period, except as otherwise set forth in the applicable Grant
Document. The Company does not anticipate that non-employee
directors will receive Performance Awards.
Incentive Awards. Incentive Awards are rights
to receive shares of Class B common stock (or the Market
Value per Share thereof), or rights to receive an amount equal
to any appreciation or increase in the Market Value per Share of
Class B common stock over a specified period of time, which
vest over a period of time as established by the Administrator,
without satisfaction of any performance criteria or objectives.
The Administrator may, in its discretion, require payment or
other conditions of the Holder respecting any Incentive Award.
Following the end of the vesting period for an Incentive Award
(or at such other time as the applicable Grant Document may
provide), the Holder of an Incentive Award will be entitled to
receive payment of an amount, not exceeding the maximum value of
the Incentive Award, based on the then vested value of the
Award. Payment of an Incentive Award may be made in cash, shares
of Class B common stock (valued at the Market Value per
Share), or a combination thereof as determined by the
Administrator. Payment will be made in a lump sum, except as
otherwise set forth in the applicable Grant Document.
An Incentive Award will terminate if the Holder does not remain
continuously employed or in service as a director of the company
or a subsidiary at all times during the applicable vesting
period, except as otherwise set forth in the applicable Grant
Document. The Company does not anticipate that non-employee
directors will receive Incentive Awards.
Retention Awards. A Retention Award is a
right, which vests over a period of time as established by the
Committee, to receive a cash payment measured by a portion of
the gain and profits associated with an equity holding of the
company or a subsidiary in an
e-commerce
or internet-based business. The portion of any gain and profit
is measured to the date the Retention Award (or portion thereof,
as applicable) is deemed surrendered for payment in accordance
with its terms. The Committee will designate each such equity
holding and establish, within the applicable time period
permitted by Section 162(m) of the Code, the portion of the
gain and profits (not exceeding 3.75% for any individual holder
nor 25% in the aggregate for all holders) in such equity holding
used to measure cash payments to the Holder of such Retention
Award. The terms and conditions of the respective Retention
Award Grant Documents need not be identical.
In determining the Retention Awards to be granted under the
Incentive Plan, the Committee shall take into account a
Holders responsibility level, performance, potential,
other Awards, and such other considerations as it deems
appropriate. The Committee, in its sole discretion, may provide
for a reduction in the value of a Holders Retention Award
during the period such Award is outstanding if permitted by the
applicable Grant Document.
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Following the vesting of a Retention Award in whole or in part
(or at such other times and subject to such other restrictions
as the applicable Grant Document may provide), the Holder of a
Retention Award will be entitled to receive payment of an
amount, not exceeding the maximum value of the Retention Award,
based on such Holders vested interest in such Retention
Award and the gain and profit in the underlying equity holding,
as certified by the Committee as required by Section 162(m)
of the Code. Payment will be made in cash and in a lump sum,
except as otherwise set forth in the applicable Grant Document.
In no event will a Retention Award grant a Holder an interest in
the equity holding, the gain and profit in which is used to
measure cash payments under such Award.
A Retention Award will terminate if the Holder does not remain
continuously employed or in service as a director of the company
or a subsidiary at all times during the applicable vesting
period, except as otherwise set forth in the applicable Grant
Document. The Company does not anticipate that non-employee
directors will receive Retention Awards.
Shares Subject to the Incentive
Plan. Subject to adjustment as provided in the
Incentive Plan, the aggregate number of shares of Class B
common stock that may be issued under the Incentive Plan shall
not exceed 4,500,000 shares. As of February 28, 2006,
without giving effect to the proposed amendment, only
932,869 shares remained available for additional Awards
under the plan, including 11,975 shares available for
Awards of Restricted Stock. If our stockholders approve the
proposed amendment, an additional 1.5 million shares will
be available for Awards under the plan, although the number of
shares that may be granted as Restricted Stock Awards will not
be increased. As of March 30, 2006, the fair market value
of a share of our common stock was $26.03.
Award Limitations. The maximum (i) number
of shares of Class B common stock that may be subject to
Awards granted to any one individual during any calendar year
may not exceed 750,000 shares, (ii) number of shares
of Class B common stock that may be granted as Restricted
Stock Awards may not exceed 250,000 shares (of which only
11,975 shares remain available for Restricted Stock
Awards), (iii) amount of compensation that may be paid
under all Performance Awards denominated in cash (including the
Market Value of any shares of Class B common stock paid in
satisfaction of such Performance Awards) granted to any one
individual during any calendar year may not exceed
$10 million, and any payment due with respect to a
Performance Award shall be paid no later than 10 years
after the date of grant of such Performance Award, and
(iv) amount of compensation that may be paid under all
Retention Awards granted to any one individual during any
calendar year may not exceed 1% of the aggregate gross revenues
of the company and its consolidated subsidiaries for the fiscal
year of the company that ended on December 31, 2000, and
any payment due with respect to a Retention Award shall be paid
no later than 11 years after the date of grant of such
Retention Award (in the case of clauses (i) and (ii),
subject to adjustment as provided in the Incentive Plan). The
limitations set forth in clauses (i), (iii) and
(iv) of the preceding sentence will be applied in a manner
which will permit compensation generated under the Incentive
Plan which is intended to constitute
performance-based compensation for purposes of
Section 162(m) of the Code to be treated as such
performance-based compensation.
Change in Control. In the event of a
Change in Control, (i) all outstanding Options
shall immediately vest and become exercisable in full, whether
or not otherwise exercisable (but subject, in the case of
Incentive Stock Options, to certain limitations) and, except as
required by law, all restrictions on the transfer of shares
acquired pursuant to such Options shall terminate, (ii) all
restrictions applicable to outstanding Restricted Stock and
Incentive Awards shall be deemed to have been satisfied and such
Restricted Stock and Incentive Awards shall immediately vest in
full, and (iii) all outstanding Retention Awards shall
immediately vest in full.
Provision is made under the Incentive Plan (except as otherwise
provided in the applicable Grant Document) for the payment to an
Award recipient of a Gross-Up Payment intended to cover
(i) any excise taxes due under Section 4999 of the
Code (or any similar tax) with respect to amounts that are
vested
and/or
payable due to a Change in Control plus (ii) any taxes
(including excise taxes) due on the payment of any such Gross-Up
Payment.
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A Change in Control is generally defined to mean
(a) any person is or becomes the beneficial owner of
securities representing 25% or more of the combined voting power
of the companys outstanding securities,
(b) individuals who constituted the board as of
March 12, 2004 cease for any reason to constitute at least
a majority of the board (unless such individuals election
is approved by a vote of a majority of the incumbent board or
such individual was nominated by an Excluded Person),
(c) any merger, consolidation or other reorganization or
similar transaction in which the company is not the Controlling
Corporation, or (d) any sale of all or substantially all of
the companys assets, other than to Excluded Persons.
Transferability. No Awards (other than
Incentive Stock Options) are transferable by the recipient
except (i) by will or the laws of descent and distribution,
(ii) pursuant to a qualified domestic relations order or
(iii) with respect to Awards of Non Qualified Options, with
the consent of the Administrator. An Incentive Stock Option is
not transferable other than by will or the laws of descent and
distribution and may be exercised during the Holders
lifetime only by the Holder or the Holders guardian or
Personal Representative.
In the discretion of the Administrator as set forth in an
applicable Grant Document, a percentage of the aggregate shares
of Class B common stock obtained from exercise of an Option
shall not be transferable prior to the earliest to occur of
(x) termination of the relevant Option term, (y) the
Holders retirement, death or disability or
(z) termination of the Holders employment with the
company and its subsidiaries.
Adjustments. The maximum number of shares that
may be issued under the Incentive Plan, as well as the number or
type of shares or other property subject to outstanding Awards
and the applicable option or purchase prices per share, shall be
adjusted appropriately in the event of stock dividends, spin
offs of assets or other extraordinary dividends, stock splits,
combinations of shares, recapitalizations, mergers,
consolidations, reorganizations, liquidations, issuances of
rights or warrants, and similar transactions or events.
Amendment and Termination. Subject to
limitations described above regarding outstanding Awards, the
board in its discretion may terminate the Incentive Plan at any
time. The board has the right to amend the Incentive Plan or any
part thereof from time to time, and the Administrator may amend
any Award (and its related Grant Document) at any time, except
as otherwise specifically provided in such Grant Document.
Notwithstanding the foregoing, no change in any outstanding
Award may be made which would impair the rights of the Holder of
such Award without such Holders consent. In addition,
without stockholder approval, the board may not amend the
Incentive Plan to (i) increase the maximum aggregate number
of shares that may be issued under the Incentive Plan or
(ii) change the class of individuals eligible to receive
Awards under the Incentive Plan.
New Plan Benefits. Because future awards under
the Incentive Plan are based on the companys performance
in future years, amounts payable under the Incentive Plan are
not determinable for future years.
United
States Federal Income Tax Consequences
The following is a brief summary of certain of the
U.S. federal income tax consequences of certain
transactions under the Incentive Plan based on federal income
tax laws in effect on January 1, 2006. This summary applies
to the Incentive Plan as normally operated and is not intended
to provide or supplement tax advice to eligible employees or
directors. The summary contains general statements based on
current U.S. federal income tax statutes, regulations and
currently available interpretations thereof. This summary is not
intended to be exhaustive and does not describe state, local or
foreign tax consequences or the effect, if any, of gift, estate
and inheritance taxes.
Tax
Consequences to Recipients
Non-qualified Stock Options. In general:
(i) no income will be recognized by an optionee at the time
a non-qualified stock option is granted; (ii) at the time
of exercise of a non-qualified stock option, ordinary income
will be recognized by the optionee in an amount equal to the
difference between the option price paid for the shares and the
fair market value of the shares if they are nonrestricted on the
date of exercise; and (iii) at the time of sale of shares
acquired pursuant to the exercise of a non-qualified stock
option, any
41
appreciation (or depreciation) in the value of the shares after
the date of exercise will be treated as a capital gain (or loss).
The total number of shares of Class B common stock subject
to Awards granted to any one recipient during any calendar year
is limited under the Incentive Plan for the purpose of
qualifying any compensation realized upon exercise of options
that are granted by the Human Resources Committee as
performance-based compensation as defined in
Section 162(m) of the Code in order to preserve tax
deductions by the company with respect to any such compensation
in excess of one million dollars paid to Covered
Employees (i.e., the individuals who, on the last day of
the year in question, are the companys CEO and the four
highest compensated officers of the company (other than the
CEO)). Options granted by the CEO will not qualify as
performance-based compensation and will be subject
to the limitation on deductibility under Section 162(m) of
the Code; however, it is not anticipated that the CEO would have
the authority to make grants to Covered Employees.
Incentive Stock Options. No income generally
will be recognized by an optionee upon the grant or exercise of
an Incentive Stock Option. However, upon exercise, the
difference between the fair market value and the exercise price
may be subject to the alternative minimum tax. If shares of
Class B common stock are issued to an optionee pursuant to
the exercise of an Incentive Stock Option and no disqualifying
disposition of the shares is made by the optionee within two
years after the date of grant or within one year after the
transfer of the shares to the optionee, then upon the sale of
the shares any amount realized in excess of the option price
will be taxed to the optionee as a capital gain and any loss
sustained will be a capital loss.
If shares of Class B common stock acquired upon the
exercise of Incentive Stock Options are disposed of prior to the
expiration of either holding period described above, the
optionee generally will recognize ordinary income in the year of
disposition in an amount equal to any excess of the fair market
value of the shares at the time of exercise (or, if less, the
amount realized on the disposition of the shares in a sale or
exchange) over the option price paid for the shares. Any further
gain (or loss) realized by the optionee generally will be taxed
as a capital gain (or loss).
As described above with respect to non-qualified stock options,
the Incentive Plan has been designed to qualify any ordinary
compensation income recognized by optionees with respect to
Incentive Stock Options granted by the Human Resources Committee
as performance-based compensation as defined in
Section 162(m) of the Code.
Restricted Stock. A recipient of Restricted
Stock generally will be subject to tax at ordinary income tax
rates on the fair market value of the Restricted Stock reduced
by any amount paid by the recipient at such time as the shares
are no longer subject either to a risk of forfeiture or
restrictions on transfer for purposes of Section 83 of the
Code. However, a recipient who so elects under
Section 83(b) of the Code within 30 days of the date
of transfer of the shares will have taxable ordinary income on
the date of transfer of the shares equal to the excess of the
fair market value of the shares (determined without regard to
the risk of forfeiture or restrictions on transfer) over any
purchase price paid for the shares. If a Section 83(b)
election is made and the shares are subsequently forfeited, the
recipient will not be allowed to take a deduction for the value
of the forfeited shares. If a Section 83(b) election has
not been made, any dividends received with respect to Restricted
Stock that are subject at that time to a risk of forfeiture or
restrictions on transfer generally will be treated as
compensation that is taxable as ordinary income to the
recipient; otherwise the dividends will be treated as dividends.
Awards of Restricted Stock to Covered Employees will not qualify
as performance-based compensation and the company
will be subject to the limitation on deductibility under
Section 162(m) of the Code.
Performance and Incentive Awards. An
individual who has been granted a Performance Award or an
Incentive Award generally will not realize taxable income at the
time of grant. Whether a Performance Award or an Incentive Award
is paid in cash or shares of Class B common stock, the
recipient will have ordinary compensation income in the amount
of (i) any cash paid at the time of such payment and
(ii) the fair market value of any shares of Class B
common stock either at the time the Performance or Incentive
Award is paid in such shares or at the time any restrictions on
the shares (including restrictions under Section 16(b) of
the Exchange Act) subsequently lapse, depending on the nature,
if any, of the restrictions imposed and whether
42
the recipient elects under Section 83(b) of the Code to be
taxed without regard to any such restrictions. Any dividend
equivalents paid with respect to an Incentive Award prior to the
actual issuance of shares under the award will be compensation
income to the recipient. Incentive Awards will not qualify as
performance-based compensation and the company will
be subject to the limitation on deductibility under
Section 162(m) of the Code. The Incentive Plan has been
designed to qualify any ordinary compensation income recognized
by Covered Employees with respect to Performance Awards granted
by the Human Resources Committee as performance-based
compensation as defined in Section 162(m) of the
Code. Performance Awards granted by the CEO will not qualify as
performance-based compensation and will be subject
to the limitation on deductibility under Section 162(m) of
the Code; however, it is not anticipated that the CEO would have
the authority to make grants to Covered Employees.
Retention Awards. An individual who has been
granted a Retention Award generally will not realize taxable
income at the time of grant. The recipient of a Retention Award
will have ordinary compensation income in the amount of any cash
paid with respect to such award at the time of such payment. All
Retention Awards under the Retention Award Program must be
granted by the Human Resources Committee, and the Incentive Plan
has been designed to qualify any ordinary compensation income
recognized by Covered Employees with respect to Retention Awards
as performance-based compensation as defined in
Section 162(m) of the Code.
Section 409A of the
Code. Section 409A of the Code provides that
deferred compensation, as defined therein, will be subject to an
additional 20% tax unless it meets certain restrictions set
forth in Section 409A of the Code and the guidance
promulgated thereunder. The company intends for Awards issued
under the Incentive Plan to either be exempt from the
application of, or to comply with, Section 409A of the Code.
Tax
Consequences to the Company or Subsidiary.
Section 162(m) of the Code limits the ability of the
company to deduct compensation paid during a fiscal year to a
Covered Employee in excess of one million dollars, unless such
compensation is based on performance criteria established by the
Human Resources Committee or meets another exception specified
in Section 162(m) of the Code. Certain Awards described
above will not qualify as performance-based
compensation or meet any other exception under
Section 162(m) of the Code and, therefore, the
companys deductions with respect to such Awards will be
subject to the limitations imposed by such section. To the
extent a recipient recognizes ordinary income in the
circumstances described above, the company or subsidiary for
which the recipient performs services will be entitled to a
corresponding deduction provided that, among other things,
(i) the income meets the test of reasonableness, is an
ordinary and necessary business expense and is not an
excess parachute payment within the meaning of
Section 280G of the Code and (ii) either the
compensation is performance-based within the meaning
of Section 162(m) of the Code or the one million dollar
limitation of Section 162(m) of the Code is not exceeded.
No deduction will be available to the company or any subsidiary
for any amount paid under the Incentive Plan with respect to
(i) any excise taxes due under Section 4999 of the
Code with respect to amounts that are vested
and/or
payable due to a Change in Control and (ii) any taxes due
on the payment of such excise taxes described in clause (i).
THE BOARD OF DIRECTORS RECOMMENDS A VOTE
FOR THE AMENDMENT TO THE INCENTIVE PLAN 2000,
AS DESCRIBED ABOVE AND AS SET FORTH IN APPENDIX D,
WHICH IS DESIGNATED AS PROPOSAL NO. 3 ON THE ENCLOSED
PROXY.
43
PROPOSAL 4:
RATIFICATION
OF APPOINTMENT OF INDEPENDENT AUDITORS
The firm of Ernst & Young LLP has been our independent
auditors since 1993, and the board of directors desires to
continue to engage the services of this firm for the fiscal year
ending December 31, 2006. Accordingly, the board of
directors, upon the recommendation of the Audit Committee, has
reappointed Ernst & Young LLP to audit the financial
statements of Continental and its subsidiaries for fiscal year
2006 and report on those financial statements. Stockholders are
being asked to vote upon the ratification of the appointment. If
stockholders do not ratify the appointment of Ernst &
Young LLP, the Audit Committee will reconsider their appointment.
The following table shows the fees paid for audit services and
fees paid for audit related, tax and all other services rendered
by Ernst & Young LLP for each of the last three fiscal
years (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Audit Fees(1)
|
|
$
|
2.47
|
|
|
$
|
2.62
|
|
|
$
|
2.48
|
|
Audit Related Fees(2)
|
|
$
|
0.08
|
|
|
$
|
0.09
|
|
|
$
|
0.30
|
|
Tax Fees(3)
|
|
$
|
0.52
|
|
|
$
|
1.17
|
|
|
$
|
1.63
|
|
All Other Fees(4)
|
|
$
|
0.01
|
|
|
$
|
0.17
|
|
|
$
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fees
|
|
$
|
3.07
|
|
|
$
|
4.05
|
|
|
$
|
4.81
|
|
|
|
|
(1) |
|
Audit fees consist primarily of the audit and quarterly reviews
of the consolidated financial statements (including an audit of
managements assessment and the effectiveness of the
companys internal control over financial reporting),
statutory audits of subsidiaries required by governmental or
regulatory bodies, attestation services required by statute or
regulation, comfort letters, consents, assistance with and
review of documents filed with the SEC, work performed by tax
professionals in connection with the audit and quarterly
reviews, and accounting and financial reporting consultations
and research work necessary to comply with generally accepted
auditing standards. |
|
(2) |
|
Audit-related fees consist primarily of the audits of
subsidiaries that are not required to be audited by governmental
or regulatory bodies. |
|
(3) |
|
Tax fees include professional services provided for preparation
of federal and state tax returns, review of tax returns prepared
by the company, assistance in assembling data to respond to
governmental reviews of past tax filings, and tax advice,
exclusive of tax services rendered in connection with the audit. |
|
(4) |
|
Other fees consist primarily of attestation services associated
with third-party contract compliance. |
The charter of the Audit Committee provides that the committee
is responsible for the pre-approval of all auditing services and
permitted non-audit services to be performed for the company by
the independent auditors, subject to the requirements of
applicable law. In accordance with such law, the committee has
delegated the authority to grant such pre-approvals to the
committee chair, which approvals are then reviewed by the full
committee at its next regular meeting. Typically, however, the
committee itself reviews the matters to be approved. The
procedures for pre-approving all audit and non-audit services
provided by the independent auditors include the committee
reviewing a budget for audit services, audit-related services,
tax services and other services. The budget includes a
description of, and a budgeted amount for, particular categories
of audit and non-audit services that are anticipated at the time
the budget is submitted. Committee approval would be required to
exceed the budgeted amount for a particular category of
non-audit services or to engage the independent auditors for any
services not included in the budget. The committee periodically
monitors the services rendered by and actual fees paid to the
independent auditors to ensure that such services are within the
parameters approved by the committee.
Representatives of Ernst & Young LLP will be present at
the stockholders meeting and will be available to respond to
appropriate questions and make a statement should they so desire.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE
FOR THE RATIFICATION OF THE APPOINTMENT OF
THE INDEPENDENT AUDITORS, WHICH IS DESIGNATED AS
PROPOSAL NO. 4 ON THE ENCLOSED PROXY.
44
PROPOSAL 5:
PROPOSAL OF
STOCKHOLDER
We have been advised that Mrs. Evelyn Y. Davis, located at
Watergate Office Building, 2600 Virginia Avenue, N.W.,
Suite 215, Washington, D.C. 20037, is the beneficial
owner of 500 shares of the companys common stock and
intends to submit the following proposal at the meeting:
RESOLVED: That the stockholders of Continental Airlines
assembled in Annual Meeting in person and by proxy, hereby
recommend that the Corporation affirm its political
non-partisanship. To this end the following practices are to be
avoided:
(a) The handing of contribution cards of a single
political party to an employee by a supervisor.
(b) Requesting an employee to send a political
contribution to an individual in the Corporation for a
subsequent delivery as part of a group of contributions to a
political party or fund raising committee.
(c) Requesting an employee to issue personal checks
blank as to payee for subsequent forwarding to a political
party, committee or candidate.
(d) Using supervisory meetings to announce that
contribution cards of one party are available and that anyone
desiring cards of a different party will be supplied one on
request to his supervisor.
(e) Placing a preponderance of contribution cards of
one party at mail station locations.
REASONS: The Corporation must deal with a great number of
governmental units, commissions and agencies. It should maintain
scrupulous political neutrality to avoid embarrassing
entanglements detrimental to its business. Above all, it must
avoid the appearance of coercion in encouraging its employees to
make political contributions against their personal inclination.
The Troy (Ohio) News has condemned partisan solicitation for
political purposes by managers in a local company (not
Continental Airlines). And if the Company did not
engage in any of the above practices, to disclose this to ALL
shareholders in each quarterly report.
If you AGREE, please mark your proxy FOR this
resolution.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE
AGAINST THIS PROPOSAL.
The Board of Directors recommends a vote against this proposal.
The Board of Directors strongly believes that federal and state
regulations, along with the companys own policies and
procedures, adequately address the issues raised by the
proposal. Adoption of the proposal is unnecessary and
administratively burdensome and not in the best interests of the
company or its stockholders.
The company, like all U.S. corporations, is subject to
federal and state laws and regulations that govern corporate
participation in partisan political activity. These laws and
regulations prohibit most of the practices identified in the
stockholder proposal, and the company does not engage in or
endorse any such prohibited practices.
As permitted by federal law, the company sponsors a political
action committee, or PAC, which is supported solely by voluntary
contributions from employees and which is not affiliated with
any party or candidate. In addition, the companys
employees periodically assist federal candidates or political
committees by raising voluntary personal contributions from
among their fellow employees. These activities provide our
employees with an opportunity to support candidates for public
office whose views are consistent with the companys
long-term legislative and regulatory goals. To the extent the
stockholder proposal would (i) restrict the companys
ability to sponsor and administer its PAC or (ii) prohibit
employees from acting collectively to support a particular
candidate or political committee, the proposal would be contrary
to the best interests of the company and its stockholders.
45
Finally, the proposals requirement that the company state
on a quarterly basis that it doesnt engage in the listed
practices would be administratively burdensome and unnecessary,
and would also impose additional expense at a time when the
company is striving to reduce its costs.
The companys policies, together with federal and state
laws and regulations, are more than adequate to address the
concerns raised by this stockholder proposal, without unduly
restricting the companys legitimate participation in the
political process.
FOR THESE REASONS, THE BOARD OF DIRECTORS RECOMMENDS A VOTE
AGAINST THE STOCKHOLDER PROPOSAL, WHICH IS
DESIGNATED AS PROPOSAL NO. 5 ON THE ENCLOSED PROXY.
46
OTHER
MATTERS
We have not received notice as required under our bylaws of any
other matters to be proposed at the meeting. Consequently, the
only matters to be acted on at the meeting are those described
in this proxy statement, along with any necessary procedural
matters related to the meeting. As to procedural matters, or any
other matters that were determined to be properly brought before
the meeting calling for a vote of the stockholders, it is the
intention of the persons named in the accompanying proxy, unless
otherwise directed in that proxy, to vote on those matters in
accordance with their best judgment.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors
and Section 16 Officers, and persons who own more than ten
percent of a registered class of our equity securities, to file
with the SEC initial reports of ownership and reports of changes
in ownership of our common stock and other equity securities.
Such persons are required by SEC regulation to furnish us with
copies of all Section 16(a) forms they file.
To our knowledge, based solely on a review of the copies of such
reports furnished to us and written representations that no
other reports were required, during the fiscal year ended
December 31, 2005, all of our directors, Section 16
Officers and greater than ten percent beneficial stockholders
were in compliance with applicable Section 16(a) filing
requirements.
2007
Annual Meeting
Any stockholder who wants to present a proposal at the 2007
annual meeting of stockholders and to have that proposal set
forth in the proxy statement and form of proxy mailed in
conjunction with that annual meeting must submit that proposal
in writing to the Secretary of the company no later than
December 14, 2006. Our bylaws require that for nominations
of persons for election to the board of directors or the
proposal of business not included in our notice of the meeting
to be considered by the stockholders at an annual meeting, a
stockholder must give timely written notice thereof. To be
timely for the 2007 annual meeting of stockholders, that notice
must be delivered to the Secretary of the company at our
principal executive offices not less than 70 days and not
more than 90 days prior to June 6, 2007. However, if
the 2007 annual meeting of stockholders is advanced by more than
20 days, or delayed by more than 70 days, from
June 6, 2007, then the notice must be delivered not earlier
than the ninetieth day prior to the 2007 annual meeting and not
later than the close of business on the later of (a) the
seventieth day prior to the 2007 annual meeting or (b) the
tenth day following the day on which public announcement of the
date of the 2007 annual meeting is first made. The
stockholders notice must contain and be accompanied by
certain information as specified in the bylaws. We recommend
that any stockholder desiring to make a nomination or submit a
proposal for consideration obtain a copy of our bylaws, which
may be obtained on the companys website under Corporate
Governance at www.continental.com/company/investor or
without charge from the Secretary of the company upon written
request addressed to the Secretary at Continental Airlines,
Inc., P.O. Box 4607, Houston, Texas
77210-4607.
EVEN IF YOU PLAN TO ATTEND THE MEETING, PLEASE VOTE BY
INTERNET OR TELEPHONE AS DESCRIBED ABOVE IN THE PROXY STATEMENT,
OR SIGN, DATE AND MAIL PROMPTLY THE ENCLOSED PROXY.
Continentals annual report on
Form 10-K
for the year ended December 31, 2005, including amendments
and exhibits, is available on the companys website under
Annual and Periodic Reports at
www.continental.com/company/investor. We will furnish a
copy of the
10-K and any
amendments to interested stockholders without charge, upon
written request. We will also furnish any
10-K exhibit
if requested in writing and accompanied by payment of reasonable
fees relating to our furnishing the exhibit. Requests for copies
should be addressed to our Secretary at Continental Airlines,
Inc., P.O. Box 4607, Houston, Texas
77210-4607.
The financial statements of the company filed with the
10-K,
together with certain other financial data and analysis, are
included in this proxy statement as
Appendix A.
47
APPENDIX A
INDEX
|
|
|
|
|
Item
|
|
Page No.
|
|
|
|
|
A-2
|
|
|
|
|
A-5
|
|
|
|
|
A-29
|
|
|
|
|
A-31
|
|
|
|
|
A-37
|
|
|
|
|
A-38
|
|
|
|
|
A-39
|
|
|
|
|
A-40
|
|
|
|
|
A-41
|
|
|
|
|
A-42
|
|
|
|
|
A-43
|
|
|
|
|
A-82
|
|
|
|
|
A-84
|
|
A-1
SELECTED
FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
Statement of Operations Data
(in millions except per share data)(1)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
11,208
|
|
|
$
|
9,899
|
|
|
$
|
9,001
|
|
|
$
|
8,511
|
|
|
$
|
9,049
|
|
Operating expenses
|
|
|
11,247
|
|
|
|
10,137
|
|
|
|
8,813
|
|
|
|
8,841
|
|
|
|
8,921
|
|
Operating income (loss)
|
|
|
(39
|
)
|
|
|
(238
|
)
|
|
|
188
|
|
|
|
(330
|
)
|
|
|
128
|
|
Net income (loss)
|
|
|
(68
|
)
|
|
|
(409
|
)
|
|
|
28
|
|
|
|
(462
|
)
|
|
|
(105
|
)
|
Basic earnings (loss) per share
|
|
|
(0.96
|
)
|
|
|
(6.19
|
)
|
|
|
0.43
|
|
|
|
(7.19
|
)
|
|
|
(1.89
|
)
|
Diluted earnings (loss) per share
|
|
|
(0.97
|
)
|
|
|
(6.25
|
)
|
|
|
0.41
|
|
|
|
(7.19
|
)
|
|
|
(1.89
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
Balance Sheet Data (in
millions)(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and
short-term investments
|
|
$
|
2,198
|
|
|
$
|
1,669
|
|
|
$
|
1,600
|
|
|
$
|
1,342
|
|
|
$
|
1,132
|
|
Total assets
|
|
|
10,529
|
|
|
|
10,511
|
|
|
|
10,620
|
|
|
|
10,615
|
|
|
|
9,778
|
|
Long-term debt and capital lease
obligations
|
|
|
5,057
|
|
|
|
5,167
|
|
|
|
5,558
|
|
|
|
5,471
|
|
|
|
4,448
|
|
Stockholders equity
|
|
|
226
|
|
|
|
155
|
|
|
|
727
|
|
|
|
712
|
|
|
|
1,117
|
|
A-2
Selected
Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
Mainline Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passengers (thousands)(3)
|
|
|
44,939
|
|
|
|
42,743
|
|
|
|
40,613
|
|
|
|
41,777
|
|
|
|
45,064
|
|
Revenue passenger miles
(millions)(4)
|
|
|
71,261
|
|
|
|
65,734
|
|
|
|
59,165
|
|
|
|
59,349
|
|
|
|
61,140
|
|
Available seat miles (millions)(5)
|
|
|
89,647
|
|
|
|
84,672
|
|
|
|
78,385
|
|
|
|
80,122
|
|
|
|
84,485
|
|
Cargo ton miles (millions)
|
|
|
1,018
|
|
|
|
1,026
|
|
|
|
917
|
|
|
|
908
|
|
|
|
917
|
|
Passenger load factor(6)
|
|
|
79.5
|
%
|
|
|
77.6
|
%
|
|
|
75.5
|
%
|
|
|
74.1
|
%
|
|
|
72.4
|
%
|
Passenger revenue per available
seat mile (cents)
|
|
|
9.32
|
|
|
|
8.82
|
|
|
|
8.79
|
|
|
|
8.67
|
|
|
|
9.03
|
|
Total revenue per available seat
mile (cents)
|
|
|
10.46
|
|
|
|
9.83
|
|
|
|
9.81
|
|
|
|
9.41
|
|
|
|
9.68
|
|
Average yield per revenue
passenger mile (cents)(7)
|
|
|
11.73
|
|
|
|
11.37
|
|
|
|
11.64
|
|
|
|
11.71
|
|
|
|
12.48
|
|
Average segment fare per revenue
passenger
|
|
$
|
188.67
|
|
|
$
|
177.90
|
|
|
$
|
172.83
|
|
|
$
|
169.37
|
|
|
$
|
172.50
|
|
Operating cost per available seat
mile, including special charges (cents)(8)
|
|
|
10.22
|
|
|
|
9.84
|
|
|
|
9.53
|
|
|
|
9.63
|
|
|
|
9.34
|
|
Average price per gallon of fuel,
including fuel taxes (cents)
|
|
|
177.55
|
|
|
|
119.01
|
|
|
|
91.40
|
|
|
|
74.01
|
|
|
|
82.48
|
|
Fuel gallons consumed (millions)
|
|
|
1,376
|
|
|
|
1,333
|
|
|
|
1,257
|
|
|
|
1,296
|
|
|
|
1,426
|
|
Actual aircraft in fleet at end of
period(9)
|
|
|
356
|
|
|
|
349
|
|
|
|
355
|
|
|
|
366
|
|
|
|
352
|
|
Average length of aircraft flight
(miles)
|
|
|
1,388
|
|
|
|
1,325
|
|
|
|
1,270
|
|
|
|
1,225
|
|
|
|
1,185
|
|
Average daily utilization of each
aircraft (hours)(10)
|
|
|
10:31
|
|
|
|
9:55
|
|
|
|
9:19
|
|
|
|
9:29
|
|
|
|
10:19
|
|
Regional Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passengers (thousands)(3)
|
|
|
16,076
|
|
|
|
13,739
|
|
|
|
11,445
|
|
|
|
9,264
|
|
|
|
8,354
|
|
Revenue passenger miles
(millions)(4)
|
|
|
8,938
|
|
|
|
7,417
|
|
|
|
5,769
|
|
|
|
3,952
|
|
|
|
3,388
|
|
Available seat miles (millions)(5)
|
|
|
11,973
|
|
|
|
10,410
|
|
|
|
8,425
|
|
|
|
6,219
|
|
|
|
5,437
|
|
Passenger load factor(6)
|
|
|
74.7
|
%
|
|
|
71.3
|
%
|
|
|
68.5
|
%
|
|
|
63.5
|
%
|
|
|
62.3
|
%
|
Passenger revenue per available
seat mile (cents)
|
|
|
15.67
|
|
|
|
15.09
|
|
|
|
15.31
|
|
|
|
15.45
|
|
|
|
15.93
|
|
Actual aircraft in fleet at end of
period(9)
|
|
|
266
|
|
|
|
245
|
|
|
|
224
|
|
|
|
188
|
|
|
|
170
|
|
Consolidated Operations
(Mainline and Regional):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passengers (thousands)(3)
|
|
|
61,015
|
|
|
|
56,482
|
|
|
|
52,058
|
|
|
|
51,041
|
|
|
|
53,418
|
|
Revenue passenger miles
(millions)(4)
|
|
|
80,199
|
|
|
|
73,151
|
|
|
|
64,934
|
|
|
|
63,301
|
|
|
|
64,528
|
|
Available seat miles (millions)(5)
|
|
|
101,620
|
|
|
|
95,082
|
|
|
|
86,810
|
|
|
|
86,341
|
|
|
|
89,922
|
|
Passenger load factor(6)
|
|
|
78.9
|
%
|
|
|
76.9
|
%
|
|
|
74.8
|
%
|
|
|
73.3
|
%
|
|
|
71.8
|
%
|
Passenger revenue per available
seat mile (cents)
|
|
|
10.07
|
|
|
|
9.51
|
|
|
|
9.42
|
|
|
|
9.16
|
|
|
|
9.45
|
|
Average yield per revenue
passenger mile (cents)(7)
|
|
|
12.76
|
|
|
|
12.36
|
|
|
|
12.60
|
|
|
|
12.49
|
|
|
|
13.17
|
|
|
|
|
(1) |
|
Amounts include ExpressJet through November 12, 2003. |
A-3
|
|
|
(2) |
|
Includes the following special income (expense) items (in
millions) for year ended December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
Operating revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in expected redemption of
frequent flyer mileage credits sold
|
|
$
|
|
|
|
$
|
|
|
|
$
|
24
|
|
|
$
|
|
|
|
$
|
|
|
Operating (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fleet retirement and impairment
charges
|
|
|
16
|
|
|
|
(87
|
)
|
|
|
(86
|
)
|
|
|
(242
|
)
|
|
|
(61
|
)
|
Pension curtailment/settlement
charges
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination of 1993 service
agreement with United Micronesia Development Association
|
|
|
|
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Frequent flyer reward redemption
cost adjustment
|
|
|
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Security fee reimbursement
|
|
|
|
|
|
|
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
Air Transportation Safety and
System Stabilization Act grant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
417
|
|
Severance and other special charges
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
(63
|
)
|
Nonoperating (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains on investments
|
|
|
204
|
|
|
|
|
|
|
|
305
|
|
|
|
|
|
|
|
|
|
Impairment of investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22
|
)
|
|
|
|
(3) |
|
Revenue passengers measured by each flight segment flown. |
|
(4) |
|
The number of scheduled miles flown by revenue passengers. |
|
(5) |
|
The number of seats available for passengers multiplied by the
number of scheduled miles those seats are flown. |
|
(6) |
|
Revenue passenger miles divided by available seat miles. |
|
(7) |
|
The average passenger revenue received for each revenue
passenger mile flown. |
|
(8) |
|
Includes operating expense special items noted in
(2) above. These special items increased (decreased)
operating cost per available seat mile by 0.07, 0.16, (0.11),
0.25 and (0.36) in each of the five years, respectively. |
|
(9) |
|
Excludes aircraft that were removed from service. |
|
(10) |
|
The average number of hours per day that an aircraft flown in
revenue service is operated (from gate departure to gate
arrival). |
A-4
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements
that are not limited to historical facts, but reflect our
current beliefs, expectations or intentions regarding future
events. All forward-looking statements involve risks and
uncertainties that could cause actual results to differ
materially from those in the forward-looking statements. For
examples of those risks and uncertainties, see the cautionary
statements contained in Item 1A of our annual report on
Form 10-K.
Risk Factors Risk Factors Relating to the
Company and Risk Factors Risk
Factors Relating to the Airline Industry. We undertake no
obligation to publicly update or revise any forward-looking
statements to reflect events or circumstances that may arise
after the date of this report. Hereinafter, the term
Continental, we, us,
our and similar terms refer to Continental Airlines,
Inc. and, unless the context indicates otherwise, its
consolidated subsidiaries.
Overview
We recorded a net loss of $68 million for the year ended
December 31, 2005, as compared to a net loss of
$409 million and a net income of $28 million for the
years ended December 31, 2004 and 2003, respectively. Our
results for each of the last three years have been affected by a
number of special items which are not necessarily indicative of
our core operations or our future prospects, and impact
comparability between years. These special items are discussed
in Consolidated Results of Operations below. We
would have incurred significant losses in 2005 and 2003 without
the special items.
Primarily due to record-high fuel prices and the continued
competitive domestic fare environment, the current
U.S. domestic network carrier financial environment
continues to be poor and could deteriorate further. During the
third quarter of 2005, Hurricane Katrina and Hurricane Rita
caused widespread disruption to oil production, refinery
operations and pipeline capacity along certain portions of the
U.S. Gulf Coast. As a result of these disruptions, the
price of jet fuel increased significantly and the availability
of jet fuel supplies was diminished. Additionally, Hurricane
Rita forced us to suspend service for 36 hours at our
largest hub, Houstons Bush Intercontinental Airport,
costing us an estimated $25 million. Further increases in
jet fuel prices or disruptions in fuel supplies, whether as a
result of natural disasters or otherwise, could have a material
adverse effect on our results of operations, financial condition
or liquidity.
Among the many factors that threaten us are the continued rapid
growth of low-cost carriers and resulting downward pressure on
domestic fares, high fuel costs, excessive taxation and
significant pension liabilities. In addition to competition from
low-cost carriers, we may face stronger competition from
carriers that have filed for bankruptcy protection, such as
Delta Air Lines and Northwest Airlines (both of which filed for
bankruptcy in September 2005), and from carriers recently
emerging from bankruptcy, including US Airways (which emerged
from bankruptcy in September 2005, for the second time since
2002) and United Airlines (which emerged from over three
years of bankruptcy protection in February 2006). Carriers in
bankruptcy are able to achieve substantial cost reductions
through, among other things, reduction or discharge of debt,
lease and pension obligations and wage and benefit reductions.
We have suffered substantial losses since September 11,
2001, the magnitude of which is not sustainable. Our ability to
return to sustained profitability depends, among other factors,
on implementing and maintaining a more competitive cost
structure, retaining our revenue premium to the industry and our
ability to respond effectively to the factors that threaten the
airline industry as a whole. We have attempted to return to
profitability by implementing the majority of $1.1 billion
of annual cost-cutting and revenue-generating measures since
2002, and we have also made significant progress toward our goal
of achieving an additional $500 million reduction in annual
pay and benefits costs. On January 29, 2006, our flight
attendants ratified a new contract which, along with previously
announced pay and benefit reductions for other work groups,
concludes the negotiation process to change wages, work rules
and benefits for our domestic employees. We began implementing
these pay and benefit reductions and work rule changes in early
April 2005, which, when fully implemented, are expected to
result in approximately $490 million of annual pay and
benefits cost savings on a run-rate basis. We expect to complete
the process of obtaining the final $10 million of our
A-5
targeted $500 million in annual pay and benefit reductions
and work rule changes, principally with our unionized workgroups
at CMI, in the near future.
Although revenue trends have been improving, our passenger
revenue per available seat mile for our mainline operations was
5.8% lower in 2005 compared to 2000, the last full year before
the September 11, 2001 terrorist attacks. We have been able
to implement some fare increases on certain domestic and
international routes in recent months, but these increases have
not fully offset the substantial increase in fuel prices.
We expect to incur a significant loss for the first quarter of
2006 due to the continued low domestic fare environment and high
fuel costs. However, we believe that under current conditions,
absent adverse factors outside of our control, such as
additional terrorist attacks, hostilities involving the United
States, or further significant increases in jet fuel prices, our
existing liquidity and projected 2006 cash flows will be
sufficient to fund current operations and other financial
obligations through 2006.
Although we have significant financial obligations due in 2007,
we also believe that under current conditions and absent adverse
factors outside of our control, such as those described above,
our projected 2007 cash flows from operations and access to
capital markets will provide us with sufficient liquidity to
fund our operations and meet our other obligations through the
end of 2007.
Summary
of Principal Risk Factors
Among the many factors that threaten us and the airline industry
generally are the following:
|
|
|
|
|
Competition. The continued growth of
low-cost carriers is increasing the competitive pressures within
the airline industry. For example, a low-cost carrier began to
directly compete with us on flights between Liberty
International and destinations in Florida in 2005. We are
responding vigorously to this challenge, but have experienced
decreased yields on affected flights. In addition, carriers in
or emerging from bankruptcy have or will have significantly
reduced cost structures and operational flexibility that will
allow them to compete more effectively, and other carriers have
used the threat of bankruptcy to achieve substantial cost
savings. Moreover, several of our domestic competitors have also
announced aggressive plans to expand into international markets,
including some destinations that we currently serve. We have
initiated three sets of revenue-generating and cost-savings
initiatives since 2002 designed to improve our annual pre-tax
results by over $1.1 billion, and have achieved agreements
relating to the vast majority of our targeted $500 million
in annual pay and benefit reductions and work rule changes.
While we are on track to meet these goals, our cost structure
remains higher than that of the low-cost carriers and several of
our network competitors.
|
|
|
|
Low Fare Environment. As many low-cost
carriers have introduced lower and simplified fare structures
(such as shortening advance purchase requirements and reducing
the number of fare classes), we have had to match those fare
levels on a majority of our domestic routes to remain
competitive. In January 2005, Delta announced a new nationwide
pricing structure on most of its flights that significantly
reduced many ticket prices, including those for first class
seats and last minute purchases. Delta also eliminated
Saturday-night stay requirements. We have matched the Delta fare
reductions and structure in competitive markets and further fare
reductions or further simplification of fare structures may
occur in the future.
|
|
|
|
Fuel Costs. Fuel costs, which have
recently reached unprecedented high levels, constitute a
significant portion of our operating expense. Mainline fuel
costs and related taxes represented approximately 26.7% of our
mainline operating expenses for the year ended December 31,
2005. The price of crude has recently been trading at historic
levels. Based on gallons expected to be consumed in 2006, for
every one dollar increase in the price of crude oil, our annual
fuel expense would increase by approximately $42 million.
As of December 31, 2005, we did not have any fuel price
hedges in place. In February 2006, we entered into petroleum
swap contracts to hedge a minimal portion of our projected 2006
fuel usage.
|
A-6
|
|
|
|
|
Labor Costs. As discussed above, we
have reached agreements with the vast majority of our work
groups to reduce pay and benefit costs and enhance work rule
productivity. Even assuming the full run-rate benefits of the
$500 million reduction in annual pay and benefit costs, we
estimate that our labor CASM will continue to be higher than
that of many of our competitors.
|
|
|
|
Excessive Taxation. The
U.S. airline industry is one of the most heavily taxed of
all industries. These fees and taxes have grown significantly in
the past decade and currently include (a) a federal excise
tax of 7.5% of the value of the ticket; (b) a federal
segment tax of $3.30 per domestic flight segment of a
passengers itinerary; (c) local airport charges of up
to $18 per round trip; and (d) airport security fees
of up to $10 per round trip. Various U.S. fees and
taxes are also assessed on international flights that can result
in additional fees and taxes of up to $46 per international
round trip, not counting fees and taxes imposed by foreign
governments. Certain of these assessments must be included in
the fares we advertise or quote to our customers. Due to
competition, many increases in these fees and taxes that are not
required to be included in fares have been absorbed by the
airline industry rather than being passed on to the passenger.
These fees and taxes, which are not included in our reported
passenger revenue, increased to $1.2 billion for us for the
year ended December 31, 2005, compared to $1.0 billion
for the year ended December 31, 2004.
|
|
|
|
Pension Liability. We have significant
commitments to our defined benefit pension plans. In 2005, we
contributed $224 million in cash and 12.1 million
shares of Holdings common stock valued at approximately
$130 million to our defined benefit pension plans. Based on
current assumptions and applicable law, we will be required to
contribute in excess of $1.5 billion to our defined benefit
pension plans over the next ten years, including
$258 million in 2006, to meet our minimum funding
obligations.
|
A-7
Results
of Operations
Special Items. The comparability of our
financial results between years is affected by a number of
special items. Our results for each of the last three years
included the following special items (in millions):
|
|
|
|
|
|
|
Pre Tax
|
|
|
|
Income (Expense)
|
|
|
Year Ended December 31, 2005
|
|
|
|
|
Gain on sale of Copa Holdings,
S.A. shares(1)
|
|
$
|
106
|
|
Gain on dispositions of ExpressJet
stock(2)
|
|
|
98
|
|
Pension curtailment/settlement
charges(3)
|
|
|
(83
|
)
|
Reserve reduction on grounded
aircraft(4)
|
|
|
16
|
|
|
|
|
|
|
|
|
$
|
137
|
|
|
|
|
|
|
Year Ended December 31, 2004
|
|
|
|
|
MD-80 aircraft retirement charges
and other(4)
|
|
$
|
(87
|
)
|
Termination of United Micronesia
Development Association Service Agreement(4)
|
|
|
(34
|
)
|
Frequent flyer reward redemption
cost adjustment(5)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
$
|
(139
|
)
|
|
|
|
|
|
Year Ended December 31, 2003
|
|
|
|
|
Security fee reimbursement(6)
|
|
$
|
176
|
|
Gain on dispositions of ExpressJet
stock(2)
|
|
|
173
|
|
Gain on Hotwire and Orbitz
investments (after related compensation expense and including an
adjustment to fair value of remaining investment in Orbitz)(7)
|
|
|
132
|
|
MD-80 aircraft retirement and
impairment charges(4)
|
|
|
(86
|
)
|
Revenue adjustment for change in
expected redemption of frequent flyer mileage credits sold(5)
|
|
|
24
|
|
Boeing 737 aircraft delivery
deferral(4)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
$
|
405
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 14 to our consolidated financial statements. |
|
(2) |
|
See Note 16 to our consolidated financial statements. |
|
(3) |
|
See Note 10 to our consolidated financial statements. |
|
(4) |
|
See Note 12 to our consolidated financial statements. |
|
(5) |
|
See Note 1(k) to our consolidated financial statements. |
|
(6) |
|
See Note 13 to our consolidated financial statements. |
|
(7) |
|
See Note 14 to our consolidated financial statements. |
A-8
The following discussion provides an analysis of our results of
operations and reasons for material changes therein for the
three years ended December 31, 2005. Significant components
of our operating results are as follows (in millions, except
percentage changes):
Comparison
of Year Ended December 31, 2005 to December 31,
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2005
|
|
|
2004
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Operating Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
|
|
$
|
10,235
|
|
|
$
|
9,042
|
|
|
$
|
1,193
|
|
|
|
13.2
|
%
|
Cargo, mail and other
|
|
|
973
|
|
|
|
857
|
|
|
|
116
|
|
|
|
13.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,208
|
|
|
|
9,899
|
|
|
|
1,309
|
|
|
|
13.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages, salaries and related costs
|
|
|
2,649
|
|
|
|
2,819
|
|
|
|
(170
|
)
|
|
|
(6.0
|
)%
|
Aircraft fuel and related taxes
|
|
|
2,443
|
|
|
|
1,587
|
|
|
|
856
|
|
|
|
53.9
|
%
|
ExpressJet capacity purchase, net
|
|
|
1,572
|
|
|
|
1,351
|
|
|
|
221
|
|
|
|
16.4
|
%
|
Aircraft rentals
|
|
|
928
|
|
|
|
891
|
|
|
|
37
|
|
|
|
4.2
|
%
|
Landing fees and other rentals
|
|
|
708
|
|
|
|
654
|
|
|
|
54
|
|
|
|
8.3
|
%
|
Distribution costs
|
|
|
588
|
|
|
|
552
|
|
|
|
36
|
|
|
|
6.5
|
%
|
Maintenance, materials and repairs
|
|
|
455
|
|
|
|
414
|
|
|
|
41
|
|
|
|
9.9
|
%
|
Depreciation and amortization
|
|
|
389
|
|
|
|
415
|
|
|
|
(26
|
)
|
|
|
(6.3
|
)%
|
Passenger servicing
|
|
|
332
|
|
|
|
306
|
|
|
|
26
|
|
|
|
8.5
|
%
|
Special charges
|
|
|
67
|
|
|
|
121
|
|
|
|
(54
|
)
|
|
|
NM
|
|
Other
|
|
|
1,116
|
|
|
|
1,027
|
|
|
|
89
|
|
|
|
8.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,247
|
|
|
|
10,137
|
|
|
|
1,110
|
|
|
|
10.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
|
(39
|
)
|
|
|
(238
|
)
|
|
|
(199
|
)
|
|
|
(83.6
|
)%
|
Nonoperating Income (Expense)
|
|
|
(29
|
)
|
|
|
(211
|
)
|
|
|
(182
|
)
|
|
|
(86.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before Income Taxes and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority Interest
|
|
|
(68
|
)
|
|
|
(449
|
)
|
|
|
(381
|
)
|
|
|
(84.9
|
)%
|
Income Tax Benefit
|
|
|
|
|
|
|
40
|
|
|
|
(40
|
)
|
|
|
(100.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(68
|
)
|
|
$
|
(409
|
)
|
|
$
|
(341
|
)
|
|
|
(83.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenue. Passenger revenue
increased 13.2%, primarily due to higher traffic and capacity in
all geographic regions, higher fares on international flights
and more regional flying. Consolidated revenue passenger miles
for 2005 increased 9.6%
year-over-year
on a capacity increase of 6.9%, which produced a consolidated
load factor for 2005 of 78.9%, up 2.0 points over 2004.
Consolidated yield increased 3.2%
year-over-year.
Consolidated revenue per available seat mile (RASM)
for 2005 increased 5.9% over 2004 due to higher load factor and
yield. The improved RASM reflects recent fuel-driven fare
increases and our efforts to manage the revenue associated with
the emerging trend of customers booking closer to flight dates,
an improved mix of local versus flow traffic and our efforts to
reduce discounting.
A-9
The table below shows passenger revenue for the year ended
December 31, 2005 and period to period comparisons for
passenger revenue, RASM and available seat miles
(ASMs) by geographic region for our mainline and
regional operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Increase
|
|
|
|
2005
|
|
|
2005 vs. 2004
|
|
|
|
Passenger
|
|
|
Passenger
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
Revenue
|
|
|
RASM
|
|
|
ASMs
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
4,772
|
|
|
|
5.8
|
%
|
|
|
5.3
|
%
|
|
|
0.5
|
%
|
Transatlantic
|
|
|
1,733
|
|
|
|
26.9
|
%
|
|
|
8.8
|
%
|
|
|
16.6
|
%
|
Latin America
|
|
|
1,085
|
|
|
|
11.1
|
%
|
|
|
7.2
|
%
|
|
|
3.7
|
%
|
Pacific
|
|
|
768
|
|
|
|
24.3
|
%
|
|
|
3.1
|
%
|
|
|
20.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mainline
|
|
|
8,358
|
|
|
|
11.9
|
%
|
|
|
5.7
|
%
|
|
|
5.9
|
%
|
Regional
|
|
|
1,877
|
|
|
|
19.4
|
%
|
|
|
3.8
|
%
|
|
|
15.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total System
|
|
$
|
10,235
|
|
|
|
13.2
|
%
|
|
|
5.9
|
%
|
|
|
6.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cargo, mail and other revenue increased 13.5% in 2005 compared
to 2004 primarily due to increases in revenue associated with
sales of mileage credits in our OnePass frequent flyer program,
passenger change fees and increases in freight fuel surcharges.
Operating Expenses. Wages, salaries and
related costs decreased 6.0% primarily due to pay and benefit
reductions and work rule changes, partially offset by a slight
increase in the average number of employees. Aircraft fuel and
related taxes increased 53.9% due to a significant rise in fuel
prices, combined with an increase in flight activity. The
average jet fuel price per gallon including related taxes
increased 49.2% from $1.19 in 2004 to $1.78 in 2005. The impact
of jet fuel prices in 2004 was partially offset by
$74 million of gains from our fuel hedging activities. We
had no fuel hedges in place during 2005.
Payments made under our capacity purchase agreement are reported
in ExpressJet capacity purchase, net. ExpressJet capacity
purchase, net includes all of ExpressJets fuel expense
plus a margin on ExpressJets fuel expense up to a cap
provided in the capacity purchase agreement and a related fuel
purchase agreement (which margin applies only to the first 71.2
cents per gallon, including fuel taxes) and is net of our rental
income on aircraft we lease to ExpressJet. The net expense was
higher in 2005 than 2004 due to increased flight activity at
ExpressJet, a larger fleet and increased fuel prices, offset in
part by lower rates effective January 1, 2005 under the
capacity purchase agreement.
Aircraft rentals increased due to new mainline and regional
aircraft delivered in 2005. Landing fees and other rentals were
higher primarily due to the completion of our new international
Terminal E and related facilities at Bush Intercontinental.
Distribution costs increased primarily due to higher credit card
fees and reservation costs related to the increase in revenue.
Maintenance, materials and repairs increased primarily due to
higher contractual repair rates associated with a maturing
fleet. The lower depreciation and amortization in 2005 resulted
from discontinued depreciation related to the permanent
grounding of MD-80 aircraft in 2003 and 2004. Other operating
expenses increased primarily due to higher number of
international flights which resulted in increased air
navigation, ground handling, security and related expenses.
In 2005, we recorded special charges of $67 million which
consisted primarily of a curtailment charge of $43 million
related to the freezing of the portion of our defined benefit
pension plan attributable to pilots, a $40 million
settlement charge related to lump-sum distributions from the
pilot pension plans, and a $16 million reversal of a
portion of our reserve for exit costs related to permanently
grounded aircraft.
In 2004, we recorded special charges of $121 million.
Included in these charges were $87 million associated with
future obligations for rent and return conditions related to 16
leased MD-80 aircraft which were permanently grounded and a
non-cash charge of $34 million related to the termination
of a 1993 service agreement with United Micronesia Development
Association. In the fourth quarter of 2004, we recorded a change
in expected future costs for frequent flyer reward redemptions
on alliance carriers, resulting in a one-time increase to other
operating expenses of $18 million.
A-10
Nonoperating Income
(Expense). Nonoperating income (expense)
includes net interest expense, income from affiliates, and gains
from dispositions of investments. Total nonoperating income
(expense) was a net expense in both 2005 and 2004. The net
expense decreased $182 million in 2005 compared to 2004
primarily due to gains of $98 million in 2005 related to
the contribution of 12.1 million shares of Holdings common
stock to our primary defined benefit pension plan and a
$106 million gain related to the sale of a portion of our
investment in Copa Holdings, S.A. (Copa), the parent
of Copa Airlines. Net interest expense (interest expense less
interest income and capitalized interest) decreased
$20 million in 2005 as a result of interest income on our
higher cash balances, partially offset by interest expense on
new debt issued in 2005. Income from affiliates, which includes
income related to our tax sharing agreement with Holdings and
our equity in the earnings of Holdings and Copa, was
$28 million lower in 2005 as compared to 2004 as a result
of our reduced ownership interest in Holdings and less income
from our tax sharing agreement with Holdings.
Income Tax Benefit (Expense). Beginning
in the first quarter of 2004, due to our continued losses, we
concluded that we were required to provide a valuation allowance
for deferred tax assets because we had determined that it was
more likely than not that such deferred tax assets would
ultimately not be realized. As a result, our 2005 losses and the
majority of our 2004 losses were not reduced by any tax benefit.
Our effective tax rate for the first three months of 2004 also
differs from the federal statutory rate of 35% primarily due to
increases in the valuation allowance, certain expenses that are
not deductible for federal income tax purposes and state income
taxes.
Segment
Results of Operations
We have two reportable segments: mainline and regional. The
mainline segment consists of flights to cities using jets with a
capacity of greater than 100 seats while the regional
segment consists of flights using jets with a capacity of 50 or
fewer seats. The regional segment is operated by ExpressJet
through a capacity purchase agreement. Under that agreement, we
handle all of the scheduling and are responsible for setting
prices and selling all of the seat inventory. In exchange for
ExpressJets operation of the flights, we pay ExpressJet
for each scheduled block hour based on an agreed formula. Under
the agreement, we recognize all passenger, cargo and other
revenue associated with each flight, and are responsible for all
revenue-related expenses, including commissions, reservations,
catering and terminal rent at hub airports.
We evaluate segment performance based on several factors, of
which the primary financial measure is operating income (loss).
However, we do not manage our business or allocate resources
based on segment operating profit or loss because (1) our
flight schedules are designed to maximize revenue from
passengers flying, (2) many operations of the two segments
are substantially integrated (for example, airport operations,
sales and marketing, scheduling and ticketing), and
(3) management decisions are based on their anticipated
impact on the overall network, not on one individual segment.
A-11
Mainline. Significant components of our
mainline segments operating results are as follows
(in millions, except percentage changes):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2005
|
|
|
2004
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Operating Revenue
|
|
$
|
9,377
|
|
|
$
|
8,327
|
|
|
$
|
1,050
|
|
|
|
12.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages, salaries and related costs
|
|
|
2,605
|
|
|
|
2,773
|
|
|
|
(168
|
)
|
|
|
(6.1
|
)%
|
Aircraft fuel and related taxes
|
|
|
2,443
|
|
|
|
1,587
|
|
|
|
856
|
|
|
|
53.9
|
%
|
Aircraft rentals
|
|
|
640
|
|
|
|
632
|
|
|
|
8
|
|
|
|
1.3
|
%
|
Landing fees and other rentals
|
|
|
667
|
|
|
|
622
|
|
|
|
45
|
|
|
|
7.2
|
%
|
Distribution costs
|
|
|
494
|
|
|
|
472
|
|
|
|
22
|
|
|
|
4.7
|
%
|
Maintenance, materials and repairs
|
|
|
455
|
|
|
|
414
|
|
|
|
41
|
|
|
|
9.9
|
%
|
Depreciation and amortization
|
|
|
378
|
|
|
|
404
|
|
|
|
(26
|
)
|
|
|
(6.4
|
)%
|
Passenger servicing
|
|
|
318
|
|
|
|
295
|
|
|
|
23
|
|
|
|
7.8
|
%
|
Special charges
|
|
|
67
|
|
|
|
121
|
|
|
|
(54
|
)
|
|
|
NM
|
|
Other
|
|
|
1,095
|
|
|
|
1,014
|
|
|
|
81
|
|
|
|
8.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,162
|
|
|
|
8,334
|
|
|
|
828
|
|
|
|
9.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
$
|
215
|
|
|
$
|
(7
|
)
|
|
$
|
222
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The variances in specific line items for the mainline segment
are due to the same factors discussed under consolidated results
of operations.
Regional. Significant components of our
regional segments operating results are as follows (in
millions, except percentage changes):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2005
|
|
|
2004
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Operating Revenue
|
|
$
|
1,831
|
|
|
$
|
1,572
|
|
|
$
|
259
|
|
|
|
16.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages, salaries and related costs
|
|
|
44
|
|
|
|
46
|
|
|
|
(2
|
)
|
|
|
(4.3
|
)%
|
ExpressJet capacity purchase, net
|
|
|
1,572
|
|
|
|
1,351
|
|
|
|
221
|
|
|
|
16.4
|
%
|
Aircraft rentals
|
|
|
288
|
|
|
|
259
|
|
|
|
29
|
|
|
|
11.2
|
%
|
Landing fees and other rentals
|
|
|
41
|
|
|
|
32
|
|
|
|
9
|
|
|
|
28.1
|
%
|
Distribution costs
|
|
|
94
|
|
|
|
80
|
|
|
|
14
|
|
|
|
17.5
|
%
|
Depreciation and amortization
|
|
|
11
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
Passenger servicing
|
|
|
14
|
|
|
|
11
|
|
|
|
3
|
|
|
|
27.3
|
%
|
Other
|
|
|
21
|
|
|
|
13
|
|
|
|
8
|
|
|
|
61.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,085
|
|
|
|
1,803
|
|
|
|
282
|
|
|
|
15.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
$
|
(254
|
)
|
|
$
|
(231
|
)
|
|
$
|
23
|
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reported results of our regional segment do not reflect the
total contribution of the regional segment to our system-wide
operations. The regional segment generates revenue for the
mainline segment as it feeds passengers from smaller cities into
our hubs.
The variances in specific line items for the regional segment
are due to the growth in our regional operations and reflect
generally the same factors discussed under consolidated results
of operations. ASMs for our regional operations increased by 15%
in 2005 compared to 2004.
A-12
ExpressJet capacity purchase, net increased due to increased
flight activity at ExpressJet and the higher number of regional
jets leased from us by ExpressJet. The net amounts consist of
the following (in millions, except percentage changes):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Increase
|
|
|
% Increase
|
|
|
Capacity purchase expenses
|
|
$
|
1,560
|
|
|
$
|
1,507
|
|
|
$
|
53
|
|
|
|
3.5
|
%
|
Fuel and fuel taxes in excess of
71.2 cents per gallon cap
|
|
|
322
|
|
|
|
126
|
|
|
|
196
|
|
|
|
155.6
|
%
|
Aircraft sublease income
|
|
|
(310
|
)
|
|
|
(282
|
)
|
|
|
28
|
|
|
|
9.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ExpressJet capacity purchase, net
|
|
$
|
1,572
|
|
|
$
|
1,351
|
|
|
$
|
221
|
|
|
|
16.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A-13
Comparison
of Year Ended December 31, 2004 to December 31,
2003
The deconsolidation of Holdings from our financial statements
effective November 12, 2003, more fully described in
Note 16 to our consolidated financial statements, also
impacts the comparability of our results to those of prior years
with the exception of passenger revenue. Accordingly, the
expense variance explanations discussed below exclude the effect
of ExpressJet in 2003 unless indicated otherwise. Significant
components of our operating results attributable to the
deconsolidation of ExpressJet and attributable to our business
generally are set forth in the table below (in millions, except
percentage changes):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Increase
(Decrease)
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
% Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
|
|
|
(Decrease)
|
|
|
|
Year Ended
|
|
|
Related to
|
|
|
All Other
|
|
|
Excluding
|
|
|
|
December 31,
|
|
|
ExpressJet
|
|
|
Increase
|
|
|
ExpressJet
|
|
|
|
2004
|
|
|
2003
|
|
|
Deconsolidation(A)
|
|
|
(Decrease)
|
|
|
Deconsolidation
|
|
|
Operating Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
|
|
$
|
9,042
|
|
|
$
|
8,179
|
|
|
$
|
|
|
|
$
|
863
|
|
|
|
10.6
|
%
|
Cargo, mail and other
|
|
|
857
|
|
|
|
822
|
|
|
|
(4
|
)
|
|
|
39
|
|
|
|
4.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,899
|
|
|
|
9,001
|
|
|
|
(4
|
)
|
|
|
902
|
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages, salaries and related costs
|
|
|
2,819
|
|
|
|
3,056
|
|
|
|
(304
|
)
|
|
|
67
|
|
|
|
2.4
|
%
|
Aircraft fuel and related taxes
|
|
|
1,587
|
|
|
|
1,319
|
|
|
|
(170
|
)
|
|
|
438
|
|
|
|
38.1
|
%
|
ExpressJet capacity purchase, net
|
|
|
1,351
|
|
|
|
153
|
|
|
|
953
|
|
|
|
245
|
|
|
|
22.2
|
%
|
Aircraft rentals
|
|
|
891
|
|
|
|
896
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
(0.6
|
)%
|
Landing fees and other rentals
|
|
|
654
|
|
|
|
632
|
|
|
|
(87
|
)
|
|
|
109
|
|
|
|
20.0
|
%
|
Distribution costs
|
|
|
552
|
|
|
|
525
|
|
|
|
|
|
|
|
27
|
|
|
|
5.1
|
%
|
Maintenance, materials and repairs
|
|
|
414
|
|
|
|
509
|
|
|
|
(111
|
)
|
|
|
16
|
|
|
|
4.0
|
%
|
Depreciation and amortization
|
|
|
415
|
|
|
|
447
|
|
|
|
(17
|
)
|
|
|
(15
|
)
|
|
|
(3.5
|
)%
|
Passenger servicing
|
|
|
306
|
|
|
|
297
|
|
|
|
(11
|
)
|
|
|
20
|
|
|
|
7.0
|
%
|
Security fee reimbursement
|
|
|
|
|
|
|
(176
|
)
|
|
|
3
|
|
|
|
173
|
|
|
|
NM
|
|
Special charges
|
|
|
121
|
|
|
|
100
|
|
|
|
|
|
|
|
21
|
|
|
|
NM
|
|
Other
|
|
|
1,027
|
|
|
|
1,055
|
|
|
|
(103
|
)
|
|
|
75
|
|
|
|
7.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,137
|
|
|
|
8,813
|
|
|
|
153
|
|
|
|
1,171
|
|
|
|
13.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
(238
|
)
|
|
|
188
|
|
|
|
(157
|
)
|
|
|
(269
|
)
|
|
|
NM
|
|
Nonoperating Income (Expense)
|
|
|
(211
|
)
|
|
|
(2
|
)
|
|
|
50
|
|
|
|
(259
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before Income Taxes
and Minority Interest
|
|
|
(449
|
)
|
|
|
186
|
|
|
|
(107
|
)
|
|
|
(528
|
)
|
|
|
NM
|
|
Income Tax Benefit (Expense)
|
|
|
40
|
|
|
|
(109
|
)
|
|
|
58
|
|
|
|
91
|
|
|
|
NM
|
|
Minority Interest
|
|
|
|
|
|
|
(49
|
)
|
|
|
49
|
|
|
|
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(409
|
)
|
|
$
|
28
|
|
|
$
|
|
|
|
$
|
(437
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Represents increase (decrease) in amounts had ExpressJet been
deconsolidated for all of 2003 and reported using the equity
method of accounting at 53.1% ownership interest. |
Explanations for significant variances, after taking into
account changes associated with the ExpressJet deconsolidation,
are as follows:
Operating Revenue. Total passenger
revenue increased during 2004 as compared to 2003, due to higher
traffic and capacity in all geographic regions combined with the
negative impact of the hostilities in Iraq and SARS on the prior
year results. However, in spite of the increase in load factors,
the continuing erosion of fares in the domestic and Caribbean
markets resulted in a decrease in yields for 2004 compared to
2003.
A-14
The table below shows passenger revenue for the year ended
December 31, 2004 and
period-to-period
comparisons for passenger revenue, revenue per available seat
mile (RASM) and available seat miles (ASMs) by geographic region
for our mainline and regional operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
Percentage Increase
(Decrease)
|
|
|
|
Passenger
|
|
|
2004 vs. 2003
|
|
|
|
Revenue
|
|
|
Passenger Revenue
|
|
|
RASM
|
|
|
ASMs
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
4,510
|
|
|
|
2.3
|
%
|
|
|
(0.8
|
)%
|
|
|
3.1
|
%
|
Transatlantic
|
|
|
1,366
|
|
|
|
26.1
|
%
|
|
|
4.0
|
%
|
|
|
21.2
|
%
|
Latin America
|
|
|
977
|
|
|
|
8.3
|
%
|
|
|
(2.9
|
)%
|
|
|
11.5
|
%
|
Pacific
|
|
|
618
|
|
|
|
25.0
|
%
|
|
|
13.2
|
%
|
|
|
10.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mainline
|
|
|
7,471
|
|
|
|
8.4
|
%
|
|
|
0.2
|
%
|
|
|
8.0
|
%
|
Regional
|
|
|
1,571
|
|
|
|
21.8
|
%
|
|
|
(1.4
|
)%
|
|
|
23.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total System
|
|
$
|
9,042
|
|
|
|
10.6
|
%
|
|
|
0.9
|
%
|
|
|
9.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cargo, mail and other revenue increased in 2004 compared to
2003, primarily due to higher freight and mail volumes and
revenue-generating initiatives, partially offset by decreased
military charter flights. Our results for 2003 also included
$24 million of additional revenue resulting from a change
in the expected redemption of frequent flyer mileage credits
sold.
Operating Expenses. Wages, salaries and
related costs increased in 2004 compared to 2003 primarily due
to increased flight activity which resulted in a slight increase
in the average number of employees and higher wage rates.
Aircraft fuel and related taxes increased due to a significant
rise in fuel prices, combined with an increase in flight
activity. The average jet fuel price per gallon including
related taxes increased 30.2% from $0.91 in 2003 to $1.19 in
2004. The impact of higher jet fuel prices in 2004 was partially
offset by $74 million of gains from our fuel hedging
activities. Such gains were immaterial in 2003.
In 2004, obligations under our capacity purchase agreement are
reported as ExpressJet capacity purchase, net. ExpressJet
capacity purchase, net includes all of ExpressJets fuel
expense plus a margin on ExpressJets fuel expense up to a
cap provided in the capacity purchase agreement and a related
fuel purchase agreement (which margin applies only to the first
71.2 cents per gallon, including fuel taxes) and is net of our
rental income on aircraft we lease to ExpressJet. In 2003,
intercompany transactions between us and Holdings or ExpressJet
under the capacity purchase agreement were eliminated in the
consolidated financial statements. The actual obligations under
the capacity purchase agreement were higher in 2004 than in 2003
due to ExpressJets larger fleet and a 23.6% increase in
regional ASMs.
Landing fees and other rentals were higher due to increased
flights at certain airports and fixed rent increases combined
with our no longer charging ExpressJet rent at certain airports.
The most significant increases were at Liberty International
Airport in Newark and Bush Intercontinental Airport in Houston,
where Terminal E was completed. Commissions, booking fees,
credit card fees and other distribution costs increased due to
higher credit card and booking fees as a result of increased
revenue.
In May 2003, we received and recognized in earnings a security
fee reimbursement of $176 million in cash from the United
States government pursuant to a supplemental appropriations bill
enacted in April 2003. This amount was reimbursement for our
proportional share of passenger security and air carrier
security fees paid or collected by U.S. air carriers as of
the date of enactment of the law, together with other items.
In 2004, we recorded special charges of $121 million.
Included in these charges were $87 million associated with
future obligations for rent and return conditions related to 16
leased MD-80 aircraft which were permanently grounded and a
non-cash charge of $34 million related to the termination
of a 1993 service agreement with United Micronesia Development
Association. Special charges in 2003 consisted of
$86 million of retirement and impairment charges for our
MD-80 fleet and spare parts associated with the grounded
aircraft and a $14 million charge in the second quarter for
expenses associated with the deferral of Boeing 737 aircraft
deliveries.
A-15
In the fourth quarter of 2004, we recorded a change in expected
future costs for frequent flyer reward redemptions on alliance
carriers, resulting in a one-time increase to other operating
expenses of $18 million.
Nonoperating Income
(Expense). Nonoperating income (expense)
includes net interest expense, income from affiliates, and gains
from dispositions of investments. Total nonoperating income
(expense) was a net expense in both 2004 and 2003. The net
expense increased $259 million in 2004 compared to 2003
primarily due to gains in 2003 of $173 million on the
dispositions of Holdings shares and $132 million related to
the sale of our investments in Hotwire and Orbitz. Interest
expense, net of capitalized interest and interest income, for
2004 was relatively flat compared to 2003. Income from
affiliates, which includes income related to our tax sharing
agreement with Holdings and our equity in the earnings of
Holdings and Copa, was $34 million higher in 2004 as
compared to 2003 primarily as a result of higher tax sharing
payments in 2004.
Income Tax Benefit (Expense). Our
effective tax rates differ from the federal statutory rate of
35% primarily due to increases in the valuation allowance,
certain expenses that are not deductible for federal income tax
purposes, state income taxes and the accrual in 2003 of income
tax expense on our share of Holdings net income.
Additionally, due to our continued losses, we were required to
provide a valuation allowance on the deferred tax assets
beginning in the first quarter of 2004. As a result, the
majority of our 2004 losses were not reduced by any tax benefit.
The impact of the non-deductibility of certain expenses and
state income taxes on our effective tax rate is generally
greater in periods for which we report lower income (loss)
before income taxes. During 2003, we contributed
7.4 million shares of Holdings common stock valued at
approximately $100 million to our defined benefit pension
plan. For tax purposes, our deduction was limited to the market
value of the shares contributed. Since our tax basis in the
shares was higher than the market value at the time of the
contribution, the nondeductible portion increased our tax
expense by $9 million.
Minority Interest. Minority interest of
$49 million in 2003 represents the portion of
Holdings net income attributable to the equity of Holdings
that we did not own prior to November 12, 2003, the date we
deconsolidated Holdings. Transactions between us and Holdings or
ExpressJet prior to deconsolidation were otherwise eliminated in
the consolidated financial statements.
Segment
Results of Operations
Mainline. Significant components of our
mainline segments operating results are as follows
(in millions, except percentage changes):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2004
|
|
|
2003
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Operating Revenue
|
|
$
|
8,327
|
|
|
$
|
7,690
|
|
|
$
|
637
|
|
|
|
8.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages, salaries and related costs
|
|
|
2,773
|
|
|
|
2,713
|
|
|
|
60
|
|
|
|
2.2
|
%
|
Aircraft fuel and related taxes
|
|
|
1,587
|
|
|
|
1,149
|
|
|
|
438
|
|
|
|
38.1
|
%
|
Aircraft rentals
|
|
|
632
|
|
|
|
670
|
|
|
|
(38
|
)
|
|
|
(5.7
|
)%
|
Landing fees and other rentals
|
|
|
622
|
|
|
|
540
|
|
|
|
82
|
|
|
|
15.2
|
%
|
Distribution costs
|
|
|
472
|
|
|
|
456
|
|
|
|
16
|
|
|
|
3.5
|
%
|
Maintenance, materials and repairs
|
|
|
414
|
|
|
|
398
|
|
|
|
16
|
|
|
|
4.0
|
%
|
Depreciation and amortization
|
|
|
404
|
|
|
|
419
|
|
|
|
(15
|
)
|
|
|
(3.6
|
)%
|
Passenger servicing
|
|
|
295
|
|
|
|
278
|
|
|
|
17
|
|
|
|
6.1
|
%
|
Security fee reimbursement
|
|
|
|
|
|
|
(173
|
)
|
|
|
173
|
|
|
|
NM
|
|
Special charges
|
|
|
121
|
|
|
|
91
|
|
|
|
30
|
|
|
|
NM
|
|
Other
|
|
|
1,014
|
|
|
|
930
|
|
|
|
84
|
|
|
|
9.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,334
|
|
|
|
7,471
|
|
|
|
863
|
|
|
|
11.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
$
|
(7
|
)
|
|
$
|
219
|
|
|
$
|
(226
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A-16
The variances in specific line items for the mainline segment
are due to the same factors discussed under consolidated results
of operations. Aircraft rental expense decreased primarily due
to lease expirations and aircraft retirements and lower rates on
renewal leases partially offset by new aircraft deliveries.
Regional. The deconsolidation of
ExpressJet in 2003 affected the comparability of our regional
segments financial results. Significant components of our
regional segments operating results attributable to the
deconsolidation of ExpressJet and attributable to the
segments business generally are as follows (in millions,
except percentage changes):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Increase
(Decrease)
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
% Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
|
|
|
(Decrease)
|
|
|
|
Year Ended
|
|
|
Related to
|
|
|
All Other
|
|
|
Excluding
|
|
|
|
December 31,
|
|
|
ExpressJet
|
|
|
Increase
|
|
|
ExpressJet
|
|
|
|
2004
|
|
|
2003
|
|
|
Deconsolidation(A)
|
|
|
(Decrease)
|
|
|
Deconsolidation
|
|
|
Operating Revenue
|
|
$
|
1,572
|
|
|
$
|
1,311
|
|
|
$
|
(4
|
)
|
|
|
265
|
|
|
|
20.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages, salaries and related costs
|
|
|
46
|
|
|
|
343
|
|
|
|
(304
|
)
|
|
|
7
|
|
|
|
17.9
|
%
|
Aircraft fuel and related taxes
|
|
|
|
|
|
|
170
|
|
|
|
(170
|
)
|
|
|
|
|
|
|
|
|
ExpressJet capacity purchase, net
|
|
|
1,351
|
|
|
|
153
|
|
|
|
953
|
|
|
|
245
|
|
|
|
22.2
|
%
|
Aircraft rentals
|
|
|
259
|
|
|
|
226
|
|
|
|
|
|
|
|
33
|
|
|
|
14.6
|
%
|
Landing fees and other rentals
|
|
|
32
|
|
|
|
92
|
|
|
|
(87
|
)
|
|
|
27
|
|
|
|
540.0
|
%
|
Distribution costs
|
|
|
80
|
|
|
|
69
|
|
|
|
|
|
|
|
11
|
|
|
|
15.9
|
%
|
Maintenance, materials and repairs
|
|
|
|
|
|
|
111
|
|
|
|
(111
|
)
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
11
|
|
|
|
28
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
Passenger servicing
|
|
|
11
|
|
|
|
19
|
|
|
|
(11
|
)
|
|
|
3
|
|
|
|
37.5
|
%
|
Security fee reimbursement
|
|
|
|
|
|
|
(3
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
Special charges
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
NM
|
|
Other
|
|
|
13
|
|
|
|
125
|
|
|
|
(103
|
)
|
|
|
(9
|
)
|
|
|
(40.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,803
|
|
|
|
1,342
|
|
|
|
153
|
|
|
|
308
|
|
|
|
20.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
$
|
(231
|
)
|
|
$
|
(31
|
)
|
|
$
|
(157
|
)
|
|
$
|
(43
|
)
|
|
|
22.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Represents increase (decrease) in amounts had ExpressJet been
deconsolidated for all of 2003 and reported using the equity
method of accounting at 53.1% ownership interest. |
The reported results of our regional segment do not reflect the
total contribution of the regional segment to our system-wide
operations. The regional segment generates revenue for the
mainline segment as it feeds passengers from smaller cities into
our hubs.
The variances in specific line items for the regional segment
are due to the same factors discussed under consolidated results
of operations, with the exception of aircraft rentals. Regional
aircraft rental expense increased due to the higher number of
regional jets in ExpressJets fleet. ExpressJet took
delivery of 21 new regional jets in 2004.
A-17
ExpressJet capacity purchase, net increased due to increased
flight activity at ExpressJet and the higher number of regional
jets leased from us by ExpressJet. The net amounts consist of
the following (in millions, except percentage changes):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003(A)
|
|
|
Increase
|
|
|
% Increase
|
|
|
Capacity purchase expenses
|
|
$
|
1,507
|
|
|
$
|
1,311
|
|
|
$
|
196
|
|
|
|
15.0
|
%
|
Fuel and fuel taxes in excess of
71.2 cents per gallon cap
|
|
|
126
|
|
|
|
45
|
|
|
|
81
|
|
|
|
180.0
|
%
|
Aircraft sublease income
|
|
|
(282
|
)
|
|
|
(250
|
)
|
|
|
32
|
|
|
|
12.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ExpressJet capacity purchase, net
|
|
$
|
1,351
|
|
|
$
|
1,106
|
|
|
$
|
245
|
|
|
|
22.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Represents amounts had ExpressJet been deconsolidated for all of
2003 and reported using the equity method of accounting at 53.1%
ownership interest. |
Liquidity
and Capital Resources
As of December 31, 2005, we had $2.2 billion in
consolidated cash, cash equivalents and short-term investments,
which is $529 million more than at December 31, 2004.
At December 31, 2005, we had $241 million of
restricted cash, which is primarily collateral for estimated
future workers compensation claims, credit card processing
contracts, letters of credit and performance bonds. Restricted
cash at December 31, 2004 totaled $211 million.
For a discussion of a number of factors that may impact our
liquidity and the sufficiency of our capital resources, see
Overview above.
Operating Activities. Cash flows
provided by operations for 2005 were $457 million, compared
to cash flows provided by operations of $373 million for
2004. The increase in cash flows provided by operations in 2005
compared to 2004 is primarily the result of advance ticket sales
associated with increased international flight activity and the
impact of our cost-savings initiatives, partially offset by
higher fuel costs. Cash flows provided by operations in 2004
benefited from our election with respect to 2004 to defer
contributions to our primary defined benefit pension plan. Cash
contributions to our defined benefit pension plans totaled
$224 million in 2005.
Investing Activities. Cash flows
provided by investing activities were $51 million for 2005,
compared to cash flows provided by investing activities of
$53 million for 2004. In 2005, we received
$172 million from the sale of approximately nine million
shares of Copa common stock. In 2004, we received
$98 million related to the disposition of our remaining
investment in Orbitz.
Our capital expenditures during 2005 totaled $185 million
and net purchase deposits paid totaled $3 million, while
our capital expenditures during 2004 totaled $162 million
and net purchase deposits refunded totaled $111 million.
Capital expenditures for 2006 are expected to be approximately
$300 million, or $325 million after considering
purchase deposits to be paid, net of purchase deposits to be
refunded. Projected capital expenditures for 2006 consist of
$155 million of fleet expenditures, $100 million of
non-fleet expenditures and $45 million for rotable parts
and capitalized interest.
As of December 31, 2005, we had firm commitments for 52 new
aircraft from Boeing, with an estimated cost of
$2.5 billion, and options to purchase 30 additional Boeing
aircraft. We are scheduled to take delivery of six new 737-800
aircraft in 2006, with delivery of the remaining 46 new Boeing
aircraft occurring from 2007 through 2011. In addition, we are
scheduled to take delivery of two used 757-300 aircraft in 2006
under operating leases.
We have backstop financing for six 737-800 aircraft to be
delivered in 2006 and two 777-200ER aircraft to be delivered in
2007. By virtue of these agreements, we have financing available
for all Boeing aircraft scheduled to be delivered through 2007.
However, we do not have backstop financing or any other
financing
A-18
currently in place for the remainder of the aircraft. Further
financing will be needed to satisfy our capital commitments for
our firm aircraft and other related capital expenditures. We can
provide no assurance that sufficient financing will be available
for the aircraft on order or other related capital expenditures,
or for our capital expenditures in general.
As of December 31, 2005, ExpressJet had firm commitments
for the final eight regional jets currently on order from
Embraer with an estimated cost of approximately
$0.2 billion. ExpressJet currently anticipates taking
delivery of these regional jets in 2006. ExpressJet does not
have an obligation to take any of these firm Embraer aircraft
that are not financed by a third party and leased to either
ExpressJet or us. Under the capacity purchase agreement between
us and ExpressJet, we have agreed to lease as lessee and
sublease to ExpressJet the regional jets that are subject to
ExpressJets firm purchase commitments. In addition, under
the capacity purchase agreement with ExpressJet, we generally
are obligated to purchase all of the capacity provided by these
new aircraft as they are delivered to ExpressJet.
We also have significant operating lease and facility rental
obligations. Aircraft and facility rental expense under
operating leases were approximately $1.4 billion in 2005.
Financing Activities. Cash flows
provided by financing activities, primarily the issuance of new
long-term debt offset by the payment of long-term debt and
capital lease obligations, were $37 million for 2005,
compared to cash flows used in financing activities of
$364 million in 2004. We issued $436 million of new
debt and raised $203 million through the public offering of
18 million shares of our common stock in 2005. Debt and
capital lease payments were $215 million higher in 2005
than in 2004 primarily as a result of the maturity of our 8%
unsecured notes in December 2005.
At December 31, 2005, we had approximately
$5.6 billion (including current maturities) of long-term
debt and capital lease obligations. We currently do not have any
undrawn lines of credit or revolving credit facilities, and
substantially all of our otherwise readily financeable assets
are encumbered. However, our remaining interests in Holdings and
Copa are unencumbered. We were in compliance with all debt
covenants at December 31, 2005.
In June 2005, we and our two wholly-owned subsidiaries, Air
Micronesia, Inc. (AMI) and Continental Micronesia,
Inc. (CMI), closed on a $350 million secured
loan facility. AMI and CMI have unconditionally guaranteed the
loan made to us, and we and AMI have unconditionally guaranteed
the loan made to CMI.
The facility consists of two loans, both of which have a term of
six years and are
non-amortizing,
except for certain mandatory prepayments described below. The
loans accrue interest at a floating rate determined by reference
to the three-month London Interbank Offered Rate, known as
LIBOR, plus 5.375% per annum. The loans and guarantees are
secured by certain of our
U.S.-Asia
routes and related assets, all of the outstanding common stock
of AMI and CMI and substantially all of the other assets of AMI
and CMI, including route authorities and related assets.
The loan documents require us to maintain a minimum balance of
unrestricted cash and short-term investments of
$1.0 billion dollars at the end of each month. The loans
may become due and payable immediately if we fail to maintain
the monthly minimum cash balance and upon the occurrence of
other customary events of default under the loan documents. If
we fail to maintain a minimum balance of unrestricted cash and
short-term investments of $1.125 billion, we and CMI will
be required to make a mandatory aggregate $50 million
prepayment of the loans. In addition, if the ratio of the
outstanding loan balance to the value of the collateral securing
the loans, as determined by periodic appraisals, is greater than
48%, we and CMI will be required to post additional collateral
or prepay the loans to reestablish a
loan-to-collateral
value ratio of not greater than 48%. We are currently in
compliance with these covenants.
In March 2005, we extended our current agreement with Chase to
jointly market credit cards. In addition to reaching an
agreement on advertising and other marketing commitments, Chase
agreed to increase the rate it pays for mileage credits under
our frequent flyer program. In April 2005, Chase purchased
$75 million of mileage credits under the program, which
will be redeemed for mileage purchases in 2007 and 2008 and
recognized as other revenue consistent with other mileage sales
in 2007 and 2008. In consideration for the advance purchase of
mileage credits, we have provided a security interest to Chase
in certain transatlantic
A-19
routes. The $75 million purchase of mileage credits has
been treated as a loan from Chase and will be reduced ratably in
2007 and 2008 as the mileage credits are redeemed. The new
agreement expires at the end of 2009.
In October 2004, we issued two floating rate classes of
Series 2004-1
Pass Through Trust Certificates in the aggregate amount of
$77 million that amortize through November 2011. The
certificates are secured by a lien on 21 spare engines.
During the first half of 2004, we incurred $86 million of
floating rate indebtedness and $128 million of fixed rate
indebtedness. These loans are secured by five 757-300 aircraft
that were delivered in the first half of 2004.
At December 31, 2005, our senior unsecured debt was rated
Caa2 by Moodys and CCC+ by Standard and Poors.
Reductions in our credit ratings have increased the interest we
pay on new issuances of debt and may increase the cost and
reduce the availability of financing to us in the future. We do
not have any debt obligations that would be accelerated as a
result of a credit rating downgrade. However, we would have to
post additional collateral of approximately $45 million
under our bank-issued credit card processing agreement if our
debt rating falls below Caa3 as rated by Moodys or CCC- as
rated by Standard and Poors. We would also be required to
post additional collateral of up to $27 million under our
workers compensation program if our debt rating falls
below Caa2 as rated by Moodys or CCC+ as rated by
Standard & Poors.
Our bank-issued credit card processing agreement also contains
financial covenants which require, among other things, that we
maintain a minimum EBITDAR (generally, earnings before interest,
taxes, depreciation, amortization, aircraft rentals and income
from affiliates, adjusted for special items) to fixed charges
(interest and aircraft rentals) ratio of 0.9 to 1.0 through
June 30, 2006 and 1.1 to 1.0 thereafter. The liquidity
covenant requires us to maintain a minimum level of
$1.0 billion of unrestricted cash and short-term
investments and a minimum ratio of unrestricted cash and
short-term investments to current liabilities of .27 to 1.0
through June 30, 2006 and .29 to 1.0 thereafter. Although
we are currently in compliance with all of the covenants,
failure to maintain compliance would result in our being
required to post up to an additional $330 million of cash
collateral, which would adversely affect our liquidity.
Depending on our unrestricted cash and short-term investments
balance at the time, the posting of a significant amount of cash
collateral could cause our unrestricted cash and short-term
investments balance to fall below the $1.0 billion minimum
balance requirement under our $350 million secured loan
facility, resulting in a default under such facility.
On September 23, 2005, the SEC declared effective our
universal shelf registration statement covering the sale from
time to time of up to $1 billion of our securities in one
or more public offerings. The securities offered might include
debt securities, including pass-through certificates, shares of
common stock, shares of preferred stock, and securities
exercisable for, or convertible into, shares of common stock,
such as stock purchase contracts, warrants or subscription
rights, among others. Proceeds from any sale of securities under
this registration statement other than pass-through certificates
would likely be used for general corporate purposes, including
the repayment of debt, the funding of pension obligations and
working capital requirements, whereas proceeds from the issuance
of pass-through certificates would be used to finance or
refinance aircraft and related equipment. On October 24,
2005, we completed a public offering of 18 million shares
of common stock under this registration statement, raising
$203 million in cash.
We have utilized proceeds from the issuance of pass-through
certificates to finance the acquisition of 251 leased and owned
mainline jet aircraft. Typically, these pass-through
certificates, as well as separate financings secured by aircraft
spare parts and spare engines, contain liquidity facilities
whereby a third party agrees to make payments sufficient to pay
at least 18 months of interest on the applicable
certificates if a payment default occurs. The liquidity
providers for these certificates include the following: CALYON
New York Branch, Landesbank Hessen-Thuringen Girozentrale,
Morgan Stanley Capital Services, Westdeutsche Landesbank
Girozentrale, AIG Matched Funding Corp., ABN AMRO Bank N.V.,
Credit Suisse First Boston, Caisse des Depots et Consignations,
Bayerische Landesbank Girozentrale, ING Bank N.V. and De
Nationale Investeringsbank N.V.
We are also the issuer of pass-through certificates secured by
127 leased regional jet aircraft currently operated by
ExpressJet and three regional jet aircraft that are scheduled to
be delivered through February
A-20
2006. The liquidity providers for these certificates include the
following: ABN AMRO Bank N.V., Chicago Branch, Citibank N.A.,
Citicorp North America, Inc., Landesbank Baden-Wurttemberg, RZB
Finance LLC and WestLB AG, New York Branch.
We currently utilize policy providers to provide credit support
on three separate financings with an outstanding principal
balance of $523 million at December 31, 2005. The
policy providers have unconditionally guaranteed the payment of
interest on the notes when due and the payment of principal on
the notes no later than 24 months after the final scheduled
payment date. Policy providers on these notes are MBIA Insurance
Corporation (a subsidiary of MBIA, Inc.), Ambac Assurance
Corporation (a subsidiary of Ambac Financial Group, Inc.) and
Financial Guaranty Insurance Company (a subsidiary of FGIC).
Financial information for FGIC is available over the internet at
http://www.fgic.com and financial information for the
parent companies of our other policy providers is available over
the internet at the SECs website at
http:// www.sec.gov or at the SECs public
reference room in Washington, D.C. A policy provider is
also used as credit support for the financing of certain
facilities at Bush Intercontinental, currently subject to a
sublease by us to the City of Houston, with an outstanding
balance of $57 million at December 31, 2005.
Contractual Obligations. The following
table summarizes the effect that minimum debt, lease and other
material noncancelable commitments listed below are expected to
have on our cash flow in the future periods set forth below (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due
|
|
|
Later
|
|
Contractual
Obligations
|
|
Total
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Years
|
|
|
Debt and leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt(1)
|
|
$
|
7,846
|
|
|
$
|
916
|
|
|
$
|
1,240
|
|
|
$
|
866
|
|
|
$
|
698
|
|
|
$
|
802
|
|
|
$
|
3,324
|
|
Capital lease obligations(1)
|
|
|
614
|
|
|
|
39
|
|
|
|
40
|
|
|
|
46
|
|
|
|
16
|
|
|
|
16
|
|
|
|
457
|
|
Aircraft operating leases(2)
|
|
|
11,068
|
|
|
|
1,003
|
|
|
|
966
|
|
|
|
955
|
|
|
|
910
|
|
|
|
924
|
|
|
|
6,310
|
|
Nonaircraft operating leases(3)
|
|
|
6,931
|
|
|
|
429
|
|
|
|
400
|
|
|
|
377
|
|
|
|
374
|
|
|
|
364
|
|
|
|
4,987
|
|
Future operating leases(4)
|
|
|
194
|
|
|
|
9
|
|
|
|
11
|
|
|
|
11
|
|
|
|
11
|
|
|
|
11
|
|
|
|
141
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capacity Purchase Agreement(5)
|
|
|
2,368
|
|
|
|
1,339
|
|
|
|
922
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft and other purchase
commitments(6)
|
|
|
2,709
|
|
|
|
252
|
|
|
|
274
|
|
|
|
630
|
|
|
|
855
|
|
|
|
378
|
|
|
|
320
|
|
Projected pension contributions(7)
|
|
|
1,554
|
|
|
|
258
|
|
|
|
318
|
|
|
|
376
|
|
|
|
262
|
|
|
|
98
|
|
|
|
242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(8)
|
|
$
|
33,284
|
|
|
$
|
4,245
|
|
|
$
|
4,171
|
|
|
$
|
3,368
|
|
|
$
|
3,126
|
|
|
$
|
2,593
|
|
|
$
|
15,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts represent contractual amounts due, including interest.
Interest on floating rate debt was estimated using rates in
effect at December 31, 2005. |
|
(2) |
|
Amounts represent contractual amounts due and exclude
$3.0 billion of projected sublease income to be received
from ExpressJet. |
|
(3) |
|
Amounts represent minimum contractual amounts. |
|
(4) |
|
Amounts represent payments for firm regional jets to be financed
by third parties and leased by us. We will sublease the regional
jets to ExpressJet. Neither we nor ExpressJet has an obligation
to take any firm aircraft that are not financed by a third
party. Amounts are net of previously paid purchase deposits and
exclude sublease income we will receive from ExpressJet. See
Note 19 to our consolidated financial statements for a
discussion of these purchase commitments. |
|
(5) |
|
Amounts represent our estimates of future minimum noncancelable
commitments under our agreement with ExpressJet and do not
include the portion of the underlying obligations for aircraft
and facility rent that are disclosed as part of aircraft and
nonaircraft operating leases. See Note 16 to our
consolidated financial statements for the assumptions used to
estimate the payments. |
A-21
|
|
|
(6) |
|
Amounts represent contractual commitments for firm-order
aircraft only, net of previously paid purchase deposits, and
noncancelable commitments to purchase goods and services,
primarily information technology support. See Note 19 to
our consolidated financial statements for a discussion of these
purchase commitments. |
|
(7) |
|
Amounts represent our estimate of the minimum funding
requirements as determined by government regulations. Amounts
are subject to change based on numerous assumptions, including
the performance of the assets in the plan and bond rates. See
Critical Accounting Policies and Estimates for a
discussion of our assumptions regarding our pension plans. |
|
(8) |
|
Total contractual obligations do not include long-term contracts
where the commitment is variable in nature, such as credit card
processing agreements, or where short-term cancellation
provisions exist, such as
power-by-the-hour
engine maintenance agreements. |
We expect to fund our future capital and purchase commitments
through internally generated funds, 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 or that, if necessary,
we will be able to defer or otherwise renegotiate our capital
commitments.
Operating Leases. At December 31,
2005, we had 482 aircraft under operating leases, including 227
in-service mainline aircraft, 248 in-service regional jets and
seven aircraft that were not in service. These leases have
remaining lease terms ranging up to 19 years. In addition,
we have non-aircraft operating leases, principally related to
airport and terminal facilities and related equipment. The
obligations for these operating leases are not included in our
consolidated balance sheets. Our total rental expense for
aircraft and non-aircraft operating leases was $928 million
and $466 million, respectively, in 2005.
Capacity Purchase Agreement. Our
capacity purchase agreement with ExpressJet provides that we
purchase, in advance, all of its available seat miles for a
negotiated price, and we are at risk for reselling the available
seat miles at market prices. Under the agreement, ExpressJet has
the right through December 31, 2006 to be our sole provider
of regional jet service from our hubs. In December 2005, we gave
notice to ExpressJet that we would withdraw 69 of the 274
regional jet aircraft (including 2006 deliveries) from the
capacity purchase agreement because we believe the rates charged
by ExpressJet for regional capacity are above the current
market. While our discussions with ExpressJet continue, we have
requested proposals from numerous regional jet operators to
provide regional jet service to replace the withdrawn capacity.
Any transition of service of the withdrawn capacity from
ExpressJet to a new operator would begin in January 2007 and be
completed during the summer of 2007. See Note 16 for
details of our capacity purchase agreement with ExpressJet.
Guarantees and Indemnifications. We are
the guarantor of approximately $1.7 billion aggregate
principal amount of tax-exempt special facilities revenue bonds
and interest thereon, excluding the US Airways contingent
liability discussed below. These bonds, issued by various
municipalities and other governmental entities, are payable
solely from our rentals paid under long-term agreements with the
respective governing bodies. The leasing arrangements associated
with approximately $1.5 billion of these obligations are
accounted for as operating leases, and the leasing arrangements
associated with approximately $200 million of these
obligations are accounted for as capital leases in our financial
statements.
We are contingently liable for US Airways obligations
under a lease agreement between US Airways and the Port
Authority of New York and New Jersey related to the East End
Terminal at LaGuardia airport. These obligations include the
payment of ground rentals to the Port Authority and the payment
of other rentals in respect of the full amounts owed on special
facilities revenue bonds issued by the Port Authority having an
outstanding par amount of $156 million at December 31,
2005 and having a final scheduled maturity in 2015. If US
Airways defaults on these obligations, we would be obligated to
cure the default and we would have the right to occupy the
terminal after US Airways interest in the lease had been
terminated.
We are the lessee under many real estate leases. It is common in
such commercial lease transactions for us as the lessee to agree
to indemnify the lessor and other related third parties for tort
liabilities that arise out of or relate to our use or occupancy
of the leased premises. In some cases, this indemnity extends to
related
A-22
liabilities arising from the negligence of the indemnified
parties, but usually excludes any liabilities caused by their
gross negligence or willful misconduct. Additionally, we
typically indemnify such parties for any environmental liability
that arises out of or relates to our use of the leased premises.
In our aircraft financing agreements, we typically indemnify the
financing parties, trustees acting on their behalf and other
related parties against liabilities that arise from the
manufacture, design, ownership, financing, use, operation and
maintenance of the aircraft and for tort liability, whether or
not these liabilities arise out of or relate to the negligence
of these indemnified parties, except for their gross negligence
or willful misconduct.
We expect that we would be covered by insurance (subject to
deductibles) for most tort liabilities and related indemnities
described above with respect to real estate we lease and
aircraft we operate.
In our financing transactions that include loans, we typically
agree to reimburse lenders for any reduced returns with respect
to loans due to any change in capital requirements and, in the
case of loans in which the interest rate is based on LIBOR, for
certain other increased costs that the lenders incur in carrying
these loans as a result of any change in law, subject in most
cases to certain mitigation obligations of the lenders. At
December 31, 2005, we had $1.0 billion of floating
rate debt and $0.3 billion of fixed rate debt, with
remaining terms of up to 10 years, that is subject to these
increased cost provisions. In several financing transactions
involving loans or leases from
non-U.S. entities,
with remaining terms of up to 10 years and an aggregate
carrying value of $1.1 billion, we bear the risk of any
change in tax laws that would subject loan or lease payments
thereunder to
non-U.S. entities
to withholding taxes, subject to customary exclusions. In
addition, in cross-border aircraft lease agreements for two 757
aircraft, we bear the risk of any change in U.S. tax laws
that would subject lease payments made by us to a resident of
Japan to withholding taxes, subject to customary exclusions.
These capital leases for two 757 aircraft expire in 2008 and
have a carrying value of $49 million at December 31,
2005.
We cannot estimate the potential amount of future payments under
the foregoing indemnities and agreements due to unknown
variables related to potential government changes in capital
adequacy requirements or tax laws.
Deferred Tax Assets. We have not paid
federal income taxes in the last five years. As of
December 31, 2005, we had gross deferred tax assets
aggregating $2.3 billion, including $1.5 billion
related to net operating losses (NOLs). We also had
a valuation allowance of $495 million, which completely
offset our net deferred tax assets.
Income tax benefits recorded on losses result in deferred tax
assets for financial reporting purposes. We are required to
provide a valuation allowance for deferred tax assets to the
extent management determines that it is more likely than not
that such deferred tax assets will ultimately not be realized.
Due to our continued losses, we were required to provide a
valuation allowance on deferred tax assets beginning in the
first quarter of 2004. As a result, all of our 2005 losses and
the majority of our 2004 losses were not reduced by any tax
benefit. Furthermore, we expect to be required to provide
additional valuation allowance in conjunction with deferred tax
assets recorded on losses in the future.
Section 382 of the Internal Revenue Code
(Section 382) imposes limitations on a
corporations 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
of an ownership change, utilization of our NOLs would be subject
to an annual limitation under Section 382 determined by
multiplying the value of our stock at the time of the ownership
change by the applicable long-term tax exempt rate (which was
4.40% for December 2005). Any unused annual limitation may be
carried over to later years. The amount of the limitation may,
under certain circumstances, be increased by built-in gains held
by us 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, our annual NOL utilization
would be limited to approximately $81 million per year,
before consideration of any built-in gains.
A-23
During 2005, we entered into a final settlement agreement with
the Internal Revenue Service (IRS) resolving all
matters raised by the IRS during its examination of our federal
income tax returns through the year ended December 31,
1999. As a result of the settlement with the IRS and the
associated deferred tax account reconciliation, deferred tax
liabilities and long-term assets (primarily routes and airport
operating rights, which values were established upon our
emergence from bankruptcy in April 1993) were reduced by
$215 million to reflect the ultimate resolution of tax
uncertainties existing at the point we emerged from bankruptcy.
The composition of the individual elements of deferred taxes
recorded on the balance sheet was also adjusted; however, the
net effect of these changes was entirely offset by an increase
in the deferred tax valuation allowance due to our prior
determination that it is more likely than not that our net
deferred tax assets will ultimately not be realized. The
settlement did not have a material impact on our results of
operations, financial condition or liquidity.
Environmental Matters. We could be
responsible for environmental remediation costs primarily
related to jet fuel and solvent contamination surrounding our
aircraft maintenance hangar in Los Angeles. In 2001, the
California Regional Water Quality Control Board
(CRWQCB) mandated a field study of the site and it
was completed in September 2001. In April 2005, under the threat
of a CRWQCB enforcement action, we began environment remediation
of jet fuel contamination surrounding our aircraft maintenance
hangar pursuant to a work plan submitted to (and approved by)
the CRWQCB and our landlord, the Los Angeles World Airports.
We have established a reserve for estimated costs of
environmental remediation at Los Angeles and elsewhere in our
system, based primarily on third party environmental studies and
estimates as to the extent of the contamination and nature of
the required remedial actions. We expect our total losses from
environmental matters to be approximately $45 million, for
which we were fully accrued at December 31, 2005. We have
evaluated and recorded this accrual for environmental
remediation costs separately from any related insurance
recovery. We have not recognized any material receivables
related to insurance recoveries at December 31, 2005.
Based on currently available information, we believe that our
reserves for potential environmental remediation costs are
adequate, although reserves could be adjusted as further
information develops or circumstances change. However, we do not
expect these items to materially impact our results of
operations, financial condition or liquidity.
Off-Balance
Sheet Arrangements
An off-balance sheet arrangement is any transaction, agreement
or other contractual arrangement involving an unconsolidated
entity under which a company has (1) made guarantees,
(2) a retained or a contingent interest in transferred
assets, (3) an obligation under derivative instruments
classified as equity or (4) any obligation arising out of a
material variable interest in an unconsolidated entity that
provides financing, liquidity, market risk or credit risk
support to the company, or that engages in leasing, hedging or
research and development arrangements with the company.
We have no arrangements of the types described in the first
three categories that we believe may have a material current or
future effect on our results of operations, financial condition
or liquidity. Certain guarantees that we do not expect to have a
material current or future effect on our results of operations,
financial condition or liquidity are disclosed in Note 19
to our consolidated financial statements.
We do have obligations arising out of variable interests in
unconsolidated entities. See Note 15 to our consolidated
financial statements for a discussion of our off-balance sheet
aircraft leases, airport leases (which includes the US Airways
contingent liability), subsidiary trust and our capacity
purchase agreement with ExpressJet.
Critical
Accounting Policies and Estimates
The discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to
make
A-24
estimates and judgments that affect the reported amount of
assets and liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities at the date of
our financial statements. Actual results may differ from these
estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are
reflective of significant judgments and uncertainties, and
potentially result in materially different results under
different assumptions and conditions. We believe that our
critical accounting policies are limited to those described
below. For a detailed discussion on the application of these and
other accounting policies, see Note 1 to our consolidated
financial statements.
Pension Plans. We account for our
defined benefit pension plans using Statement of Financial
Accounting Standards No. 87, Employers
Accounting for Pensions (SFAS 87). Under
SFAS 87, pension expense is recognized on an accrual basis
over employees approximate service periods. Pension
expense calculated under SFAS 87 is generally independent
of funding decisions or requirements. We recognized expense for
our defined benefit pension plans totaling $280 million,
$293 million and $328 million in 2005, 2004 and 2003,
respectively. We currently expect our expense related to our
defined benefit pension plans to be approximately
$165 million in 2006, excluding any non-cash settlement
charges.
Under the new collective bargaining agreement with our pilots
ratified on March 30, 2005, which we refer to as the
pilot agreement, future defined benefit accruals for
pilots ceased and retirement benefits accruing in the future are
provided through two new pilot-only defined contribution plans.
See Note 10 to our consolidated financial statements for a
discussion of these new defined contribution plans. As required
by the pilot agreement, defined benefit pension assets and
obligations related to pilots in our primary defined benefit
pension plan (covering substantially all U.S. employees
other than Chelsea Food Services (Chelsea) and CMI
employees) were spun out into a separate pilot-only defined
benefit pension plan, which we refer to as the pilot
defined benefit pension plan. Subsequently, on
May 31, 2005, future benefit accruals for pilots ceased and
the pilot defined benefit pension plan was frozen.
As of that freeze date, all existing accrued benefits for pilots
(including the right to receive a lump sum payment upon
retirement) were preserved in the pilot defined benefit pension
plan. Accruals for non-pilot employees under our primary defined
benefit pension plan continue.
Our plans under-funded status decreased from
$1.6 billion at December 31, 2004 to $1.2 billion
at December 31, 2005. The fair value of our plans
assets increased from $1.3 billion at December 31,
2004 to $1.4 billion at December 31, 2005. In 2005, we
contributed $224 million in cash and 12.1 million
shares of Holdings common stock valued at $130 million to
our defined benefit pension plans. Due to high fuel prices, the
weak revenue environment and our desire to maintain adequate
liquidity, we elected in 2004 and 2005 to use deficit
contribution relief under the Pension Funding Equity Act of
2004. As a result, we were not required to make any
contributions to our primary defined benefit pension plan in
2004 and did not do so. The elections also allowed us to make
smaller contributions to our defined benefit pension plans in
2005, and will allow smaller contributions in 2006, than would
have been otherwise required. Funding requirements for defined
benefit pension plans are determined by government regulations,
not SFAS 87.
Based on current assumptions and applicable law, we will be
required to contribute in excess of $1.5 billion to our
defined benefit pension plans over the next ten years, including
$258 million in 2006, to meet our minimum funding
obligations. Our primary assumptions relate to the rate of
return on plan assets, the discount rate and no legislative
changes in pension funding requirements. If actual experience is
different from our current assumptions, our estimates may
change. The U.S. Senate approved a pension reform bill in
November 2005 that would give airlines the option of amortizing
pension liabilities over a twenty-year period. The pension
reform bill passed by the U.S. House of Representatives in
December 2005 does not include a similar provision. The bills
are expected to go to conference committee in early 2006 and it
is not possible to predict the outcome.
When calculating pension expense for 2005, we assumed that our
plans assets would generate a long-term rate of return of
9.0%. This rate is consistent with the rate used to calculate
the 2004 and 2003 expense. We develop our expected long-term
rate of return assumption based on historical experience and by
evaluating input from the trustee managing the plans
assets. Our expected long-term rate of return on plan assets is
based on a target allocation of assets, which is based on our
goal of earning the highest rate of return while maintaining
risk at acceptable levels. The plans strive to have assets
sufficiently diversified so that adverse or unexpected results
A-25
from one security class will not have an unduly detrimental
impact on the entire portfolio. We regularly review our actual
asset allocation and periodically rebalance the pension
plans investments to our targeted allocation when
considered appropriate. Our allocation of assets was as follows
at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Long-Term
|
|
|
Percent of Total
|
|
Rate of Return
|
|
U.S. equities
|
|
|
49
|
%
|
|
|
9.4
|
%
|
International equities
|
|
|
21
|
|
|
|
9.4
|
|
Fixed income
|
|
|
22
|
|
|
|
6.8
|
|
Other
|
|
|
8
|
|
|
|
12.4
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension expense increases as the expected rate of return on plan
assets decreases. When calculating pension expense for 2006, we
will assume that our plans assets will generate a
long-term rate of return of 8.5%, a decrease of 50 basis
points compared to the rate of return we assumed in calculating
pension expense for 2005, 2004 and 2003. We have changed our
assumed long-term rate of return to reflect the impact that
lower returns in recent years has had on our long-term
expectations. Lowering the expected long-term rate of return on
our plan assets by an additional 50 basis points (from 8.5%
to 8.0%) would increase our estimated 2006 pension expense by
approximately $7 million.
We discounted our future pension obligations using a weighted
average rate of 5.68% at December 31, 2005, compared to
5.75% at December 31, 2004 and 6.25% at December 31,
2003. We determine the appropriate discount rate for each of our
plans based on current rates on high quality corporate bonds
that would generate the cash flow necessary to pay plan benefits
when due. This approach can result in different discount rates
for different plans, depending on each plans projected
benefit payments. The discount rates for our plans ranged from
5.62% to 5.74% at December 31, 2005. The pension liability
and future pension expense both increase as the discount rate is
reduced. Lowering the discount rate by 50 basis points
(from 5.68% to 5.18%) would increase our pension liability at
December 31, 2005 by approximately $246 million and
increase our estimated 2006 pension expense by approximately
$29 million.
At December 31, 2005, we have unrecognized actuarial losses
of $1.1 billion. These losses will be recognized as a
component of pension expense in future years. Our estimated 2006
expense related to our defined benefit pension plans of
$165 million includes the recognition of approximately
$74 million of these losses.
Future changes in plan asset returns, plan provisions, assumed
discount rates, pension funding law and various other factors
related to the participants in our pension plans will impact our
future pension expense and liabilities. We cannot predict with
certainty what these factors will be in the future.
Revenue Recognition. We recognize
passenger revenue when transportation is provided or when the
ticket expires unused rather than when a ticket is sold.
Nonrefundable tickets expire on the date of intended flight,
unless the date is extended by notification from the customer in
advance of the intended flight.
We are required to charge certain taxes and fees on our
passenger tickets. These taxes and fees include
U.S. federal transportation taxes, federal security
charges, airport passenger facility charges and foreign arrival
and departure taxes. These taxes and fees are legal assessments
on the customer. We have a legal obligation to act as a
collection agent. As we are not entitled to retain these taxes
and fees, we do not include such amounts in passenger revenue.
We record a liability when the amounts are collected and relieve
the liability when payments are made to the applicable
government agency or operating carrier.
The amount of passenger ticket sales and sales of frequent flyer
mileage credits not yet recognized as revenue is included in our
consolidated balance sheets as air traffic liability. We perform
periodic evaluations of the estimated liability for passenger
ticket sales and any adjustments, which can be significant, are
included in results of operations for the periods in which the
evaluations are completed. These adjustments relate primarily to
differences between our statistical estimation of certain
revenue transactions and the related sales price, as well as
refunds, exchanges, interline transactions and other items for
which final settlement occurs in periods subsequent to the sale
of the related tickets at amounts other than the original sales
price.
A-26
Impairments of Long-Lived Assets. We
record impairment losses on long-lived assets used in
operations, primarily property and equipment and airport
operating rights, 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 items. Our cash flow estimates are
based on historical results adjusted to reflect our best
estimate of future market and operating conditions. The net
carrying value of assets not recoverable is reduced to fair
value. Our estimates of fair value represent our best estimate
based on industry trends and reference to market rates and
transactions.
We recognized fleet impairment losses in 2003 which were
partially the result of the September 11, 2001 terrorist
attacks and the related aftermath. These events resulted in a
reevaluation of our operating and fleet plans, resulting in the
grounding of certain older aircraft types or acceleration of the
dates on which the related aircraft were to be removed from
service. The grounding or acceleration of aircraft retirement
dates resulted in reduced estimates of future cash flows. We
recorded an impairment charge of $65 million to reflect
decreases in the fair value of our owned MD-80s and spare parts
inventory for permanently grounded fleets. We estimated the fair
value of these aircraft and related inventory based on industry
trends and, where available, reference to market rates and
transactions. All other long-lived assets, principally our other
fleet types and airport operating rights, were determined to be
recoverable based on our estimates of future cash flows. There
were no impairment losses recorded during 2004 or 2005.
We also perform annual impairment tests on our routes, which are
indefinite life intangible assets. These tests are based on
estimates of discounted future cash flows, using assumptions
consistent with those used for aircraft and airport operating
rights impairment tests. We determined that we did not have any
impairment of our routes at December 31, 2005.
We provide an allowance for spare parts inventory obsolescence
over the remaining useful life of the related aircraft, plus
allowances for spare parts currently identified as excess. These
allowances are based on our estimates and industry trends, which
are subject to change and, where available, reference to market
rates and transactions. The estimates are more sensitive when we
near the end of a fleet life or when we remove entire fleets
from service sooner than originally planned.
We regularly review the estimated useful lives and salvage
values for our aircraft and spare parts.
Frequent Flyer Accounting. We utilize a
number of estimates in accounting for our OnePass frequent flyer
program which are consistent with industry practices.
For those OnePass accounts that have sufficient mileage credits
to claim the lowest level of free travel, we record a liability
for either the estimated incremental cost of providing travel
awards that are expected to be redeemed or the contractual rate
of expected redemption on alliance carriers. Incremental cost
includes the cost of fuel, meals, insurance and miscellaneous
supplies and does not include any costs for aircraft ownership,
maintenance, labor or overhead allocation. A change to these
cost estimates, the actual redemption activity, the amount of
redemptions on alliance carriers or the minimum award level
could have a significant impact on our liability in the period
of change as well as future years. The liability is adjusted
periodically based on awards earned, awards redeemed, changes in
the incremental costs and changes in the OnePass program, and is
included in the accompanying consolidated balance sheets as air
traffic liability. In the fourth quarter of 2004, we recorded a
change in expected future costs for frequent flyer reward
redemptions on alliance carriers, resulting in a one-time
increase in other operating expenses of $18 million.
We also sell mileage credits in our frequent flyer program to
participating entities, such as credit/debit card companies,
phone companies, alliance carriers, hotels, car rental agencies,
utilities and various shopping and gift merchants. Revenue from
the sale of mileage credits is deferred and recognized as
passenger revenue over the period when transportation is
expected to be provided, based on estimates of its fair value.
Amounts received in excess of the expected transportations
fair value are recognized in income currently and classified as
other revenue. A change to the time period over which the
mileage credits are used (currently
six to 32 months), the actual redemption activity
or our estimate of the amount or fair value of expected
transportation could have a significant impact on our revenue in
the year of change as well as future years. In
A-27
the fourth quarter of 2003, we adjusted our estimates of the
mileage credits we expect to be redeemed for travel, resulting
in a one-time increase in other revenue of $24 million.
During the year ended December 31, 2005, OnePass
participants claimed approximately 1.4 million awards.
Frequent flyer awards accounted for an estimated 7.0% of our
total RPMs. We believe displacement of revenue passengers is
minimal given our ability to manage frequent flyer inventory and
the low ratio of OnePass award usage to revenue passenger miles.
At December 31, 2005, we estimated that approximately
2.5 million free travel awards outstanding were expected to
be redeemed for free travel on Continental, ExpressJet, CMI or
alliance airlines. Our total liability for future OnePass award
redemptions for free travel and unrecognized revenue from sales
of OnePass miles to other companies was approximately
$236 million at December 31, 2005. This liability is
recognized as a component of air traffic liability in our
consolidated balance sheets.
Pending Accounting Pronouncement. In
December 2004, the FASB issued a revision of SFAS 123,
Share Based Payment (SFAS 123R),
which requires companies to measure the cost of employee
services received in exchange for an award of equity instruments
(typically stock options) based on the grant-date fair value of
the award. The fair value is to be estimated using
option-pricing models. The resulting cost will be recognized
over the period during which an employee is required to provide
service in exchange for the award, usually the vesting period.
Under the original SFAS 123, this accounting treatment was
optional with pro forma disclosures required.
We will adopt SFAS 123R effective January 1, 2006. It
will be effective for all awards granted after that date. For
those stock option awards granted prior to January 1, 2006
but for which the vesting period is not complete, we will use
the modified prospective transition method permitted by
SFAS 123R. Under this method, we will account for such
awards on a prospective basis, with expense being recognized in
our statement of operations beginning in the first quarter of
2006 using the grant-date fair values previously calculated for
our SFAS 123 pro forma disclosures presented in
Note 1(o). We will recognize the related compensation cost
not previously recognized in the SFAS 123 pro forma
disclosures over the remaining vesting period.
In addition to changing the accounting for our stock options and
employee stock purchase plan, SFAS 123R will impact the
accounting for our Long-Term Incentive and Restricted Stock Unit
(RSU) program. As discussed in Note 8 to our
consolidated financial statements, awards made pursuant to this
program can result in cash payments to our officers if there are
specified increases in our stock price over multi-year
performance periods. Under our current accounting, we have
recognized no liability or expense as of December 31, 2005
because the targets set forth in the program had not been met as
of that date. Under SFAS 123R, these awards will be
measured at fair value at each reporting date and the related
expense will be recognized over the remaining required service
periods. The fair value will be determined using a pricing model.
We will recognize a cumulative effect of change in accounting
principle related to the adoption of SFAS 123R on
January 1, 2006, reducing earnings approximately
$26 million. On February 1, 2006, our officers
surrendered their RSU awards with a performance period ending
March 31, 2006. Approximately $15 million of the
cumulative effect of change in accounting principle at
January 1, 2006 relates to these surrendered awards.
Accordingly, we will record this amount as a reduction of
operating expense in the first quarter of 2006.
We anticipate that the impact on our statement of operations of
adopting SFAS 123R for our stock options outstanding at
December 31, 2005 will be similar to the pro forma impact
of SFAS 123 presented in Note 1(o) to our consolidated
financial statements. The incremental expense related to future
stock option and employee stock purchase plan grants is
difficult to predict because the expense will depend on the
number of awards granted, the grant date stock price, volatility
of our stock price and other factors. Likewise, the incremental
expense related to the existing RSU awards is difficult to
predict because it will vary with changes in our stock price.
Related
Party Transactions
See Note 17 to our consolidated financial statements for a
discussion of related party transactions.
A-28
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market
Risk Sensitive Instruments and Positions
We are 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 certain
investments in debt and 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 we may take to mitigate
our exposure to such changes. Actual results may differ. See the
notes to the consolidated financial statements for a description
of our accounting policies and other information related to
these financial instruments. We do not hold or issue derivative
financial instruments for trading purposes.
Aircraft Fuel. Our results of
operations are significantly impacted by changes in the price of
aircraft fuel. During 2005 and 2004, mainline aircraft fuel and
related taxes accounted for 26.7% and 19.0%, respectively, of
our mainline operating expenses. Based on our expected fuel
consumption in 2006, a hypothetical one dollar increase in the
price of crude oil will increase our annual fuel expense by
approximately $42 million. Periodically, we enter into
petroleum swap contracts, petroleum call option contracts
and/or jet
fuel purchase commitments to provide us with short-term hedge
protection (generally three to six months) against sudden
and significant increases in jet fuel prices, while
simultaneously ensuring that we are not competitively
disadvantaged in the event of a substantial decrease in the
price of jet fuel. We had no fuel hedges outstanding at
December 31, 2005 or at any time during 2005, although we
did have fuel hedges in place prior to December 31, 2004.
In February 2006, we entered into petroleum swap contracts to
hedge a minimal portion of our projected 2006 fuel usage.
Foreign Currency. We are exposed to the
effect of exchange rate fluctuations on the U.S. dollar
value of foreign currency denominated operating revenue and
expenses. We attempt to mitigate the effect of certain potential
foreign currency losses by entering into forward and option
contracts that effectively enable us to sell Japanese yen,
British pounds, Canadian dollars and euros expected to be
received from the respective denominated cash inflows over the
next 12 months at specified exchange rates.
At December 31, 2005, we had forward contracts outstanding
to hedge approximately 56% of our projected Canadian
dollar-denominated cash inflows for 2006. We estimate that at
December 31, 2005, a uniform 10% strengthening in the value
of the U.S. dollar relative to the Canadian dollar would
have increased the fair value of the existing forward contracts
by $5 million offset by a corresponding loss on the
underlying 2006 exposure of $8 million, resulting in a net
loss of $3 million.
We had the following foreign currency hedges outstanding at
December 31, 2004 (for 2005 projected cash flows):
|
|
|
|
|
Forward and option contracts to hedge approximately 61% of our
projected Japanese yen-denominated cash flows for 2005.
|
|
|
|
Forward and option contracts to hedge approximately 45% of our
British pound-denominated cash flows for 2005.
|
|
|
|
Forward contracts to hedge approximately 42% of our projected
Canadian dollar-denominated cash flows for 2005.
|
|
|
|
Forward and option contracts to hedge approximately 39% of our
projected euro-denominated cash flows for 2005.
|
At December 31, 2004, a uniform 10% strengthening in the
value of the U.S. dollar relative to the Japanese yen, British
pound, Canadian dollar, and euro would have increased the fair
value of the existing option
and/or
forward contracts by $15 million, $9 million,
$3 million and $4 million, respectively, offset by a
corresponding loss on the underlying 2005 exposure of
$28 million, $36 million, $7 million and
$11 million, respectively, resulting in net losses of
$13 million, $27 million, $4 million and
$7 million, respectively.
A-29
Interest Rates. Our results of
operations are affected by fluctuations in interest rates (e.g.,
interest expense on variable-rate debt and interest income
earned on short-term investments).
We had approximately $1.7 billion and $1.4 billion of
variable-rate debt as of December 31, 2005 and
December 31, 2004, respectively. We had mitigated our
exposure on certain variable-rate debt by entering into an
interest rate swap agreement. This swap expired in November
2005. The notional amount of the outstanding interest rate swap
at December 31, 2004 was $143 million. The interest
rate swap effectively locked us into paying a fixed rate of
interest on a portion of our floating rate debt securities
through the expiration of the swap in November 2005. If average
interest rates increased by 100 basis points during 2006 as
compared to 2005, our projected 2006 interest expense would
increase by approximately $16 million. At December 31,
2004, an interest rate increase by 100 basis points during
2005 as compared to 2004 was projected to increase interest
expense by approximately $12 million, net of the interest
rate swap.
As of December 31, 2005 and 2004, we estimated the fair
value of $3.0 billion and $3.4 billion (carrying
value) of our fixed-rate debt to be $2.8 billion and
$2.9 billion, respectively, based upon discounted future
cash flows using our 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 100 basis points decrease in interest rates,
was approximately $66 million and $83 million as of
December 31, 2005 and 2004, respectively. The fair value of
the remaining fixed-rate debt at December 31, 2005 and
2004, with a carrying value of $655 million and
$745 million, respectively, was not practicable to estimate
due to the large number of remaining debt instruments with
relatively small carrying amounts.
If 2006 average short-term interest rates decreased by
100 basis points over 2005 average rates, our projected
interest income from cash, cash equivalents and short-term
investments would decrease by approximately $19 million
during 2006, compared to an estimated $15 million decrease
during 2005 measured at December 31, 2004.
A-30
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company is responsible for establishing and
maintaining effective internal control over financial reporting,
as such term is defined in
Rule 13a-15(f)
under the Securities Exchange Act of 1934. The Companys
internal control over financial reporting is a process designed
to provide reasonable assurance to the Companys management
and Board of Directors regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with accounting principles
generally accepted in the United States.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial
reporting and financial statement preparation and presentation.
Under the supervision and with the participation of the
Companys management, including our Chief Executive Officer
and Chief Financial Officer, an assessment of the effectiveness
of the Companys internal control over financial reporting
as of December 31, 2005 was conducted. In making this
assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control Integrated
Framework. Based on their assessment, management concluded
that, as of December 31, 2005, the Companys internal
control over financial reporting was effective based on those
criteria.
Managements assessment of the effectiveness of internal
control over financial reporting as of December 31, 2005,
has been audited by Ernst & Young LLP, the independent
registered public accounting firm who also has audited the
Companys consolidated financial statements included in
this Annual Report on
Form 10-K.
Ernst & Youngs attestation report on
managements assessment of the Companys internal
control over financial reporting appears below.
A-31
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL FINANCIAL REPORTING
The Board of Directors and Stockholders
Continental Airlines, Inc.
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control over
Financial Reporting, that Continental Airlines, Inc. (the
Company) maintained effective internal control over
financial reporting as of December 31, 2005, based on
criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). The Companys management
is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on managements assessment and an
opinion on the effectiveness of the Companys internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that the Company
maintained effective internal control over financial reporting
as of December 31, 2005, is fairly stated, in all material
respects, based on the COSO criteria. Also in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2005,
based on the COSO criteria.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of the Company as of
December 31, 2005 and 2004, and the related consolidated
statements of operations, common stockholders equity and
cash flows for each of the three years in the period ended
December 31, 2005, and our report dated February 24,
2006, expressed an unqualified opinion thereon.
ERNST & YOUNG LLP
Houston, Texas
February 24, 2006
A-37
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2005 and 2004, and the related consolidated
statements of operations, common stockholders equity and
cash flows for each of the three years in the period ended
December 31, 2005. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). 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 as of
December 31, 2005 and 2004, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2005, in conformity with
accounting principles generally accepted in the United States.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2005, based on
criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated February 24, 2006
expressed an unqualified opinion thereon.
ERNST & YOUNG LLP
Houston, Texas
February 24, 2006
A-38
CONTINENTAL
AIRLINES, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions, except per
|
|
|
|
share data)
|
|
|
Operating Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger (excluding fees and taxes
of $1,176, $1,046 and $904)
|
|
$
|
10,235
|
|
|
$
|
9,042
|
|
|
$
|
8,179
|
|
Cargo, mail and other
|
|
|
973
|
|
|
|
857
|
|
|
|
822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,208
|
|
|
|
9,899
|
|
|
|
9,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages, salaries and related costs
|
|
|
2,649
|
|
|
|
2,819
|
|
|
|
3,056
|
|
Aircraft fuel and related taxes
|
|
|
2,443
|
|
|
|
1,587
|
|
|
|
1,319
|
|
ExpressJet capacity purchase, net
|
|
|
1,572
|
|
|
|
1,351
|
|
|
|
153
|
|
Aircraft rentals
|
|
|
928
|
|
|
|
891
|
|
|
|
896
|
|
Landing fees and other rentals
|
|
|
708
|
|
|
|
654
|
|
|
|
632
|
|
Distribution costs
|
|
|
588
|
|
|
|
552
|
|
|
|
525
|
|
Maintenance, materials and repairs
|
|
|
455
|
|
|
|
414
|
|
|
|
509
|
|
Depreciation and amortization
|
|
|
389
|
|
|
|
415
|
|
|
|
447
|
|
Passenger servicing
|
|
|
332
|
|
|
|
306
|
|
|
|
297
|
|
Security fee reimbursement
|
|
|
|
|
|
|
|
|
|
|
(176
|
)
|
Special charges
|
|
|
67
|
|
|
|
121
|
|
|
|
100
|
|
Other
|
|
|
1,116
|
|
|
|
1,027
|
|
|
|
1,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,247
|
|
|
|
10,137
|
|
|
|
8,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
(39
|
)
|
|
|
(238
|
)
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonoperating Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(410
|
)
|
|
|
(389
|
)
|
|
|
(393
|
)
|
Interest capitalized
|
|
|
12
|
|
|
|
14
|
|
|
|
24
|
|
Interest income
|
|
|
72
|
|
|
|
29
|
|
|
|
19
|
|
Income from affiliates
|
|
|
90
|
|
|
|
118
|
|
|
|
40
|
|
Gain on sale of Copa Holdings, S.A.
shares
|
|
|
106
|
|
|
|
|
|
|
|
|
|
Gain on dispositions of ExpressJet
Holdings shares
|
|
|
98
|
|
|
|
|
|
|
|
173
|
|
Other, net
|
|
|
3
|
|
|
|
17
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29
|
)
|
|
|
(211
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before Income Taxes
and Minority Interest
|
|
|
(68
|
)
|
|
|
(449
|
)
|
|
|
186
|
|
Income Tax Benefit (Expense)
|
|
|
|
|
|
|
40
|
|
|
|
(109
|
)
|
Minority Interest
|
|
|
|
|
|
|
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(68
|
)
|
|
$
|
(409
|
)
|
|
$
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.96
|
)
|
|
$
|
(6.19
|
)
|
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.97
|
)
|
|
$
|
(6.25
|
)
|
|
$
|
0.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Used for Computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
70.3
|
|
|
|
66.1
|
|
|
|
65.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
70.3
|
|
|
|
66.1
|
|
|
|
65.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
A-39
CONTINENTAL
AIRLINES, INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions, except for share
data)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,723
|
|
|
$
|
1,178
|
|
Restricted cash
|
|
|
241
|
|
|
|
211
|
|
Short-term investments
|
|
|
234
|
|
|
|
280
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and
short-term investments
|
|
|
2,198
|
|
|
|
1,669
|
|
Accounts receivable, net of
allowance for doubtful receivables of $15 and $22
|
|
|
515
|
|
|
|
472
|
|
Spare parts and supplies, net of
allowance for obsolescence of $95 and $93
|
|
|
201
|
|
|
|
214
|
|
Deferred income taxes
|
|
|
154
|
|
|
|
166
|
|
Note receivable from ExpressJet
Holdings, Inc.
|
|
|
18
|
|
|
|
81
|
|
Prepayments and other
|
|
|
341
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
3,427
|
|
|
|
2,824
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment:
|
|
|
|
|
|
|
|
|
Owned property and equipment:
|
|
|
|
|
|
|
|
|
Flight equipment
|
|
|
6,706
|
|
|
|
6,744
|
|
Other
|
|
|
1,372
|
|
|
|
1,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,078
|
|
|
|
8,006
|
|
Less: Accumulated depreciation
|
|
|
2,328
|
|
|
|
2,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,750
|
|
|
|
5,953
|
|
|
|
|
|
|
|
|
|
|
Purchase deposits for flight
equipment
|
|
|
101
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
Capital leases
|
|
|
344
|
|
|
|
396
|
|
Less: Accumulated amortization
|
|
|
109
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
235
|
|
|
|
256
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
6,086
|
|
|
|
6,314
|
|
|
|
|
|
|
|
|
|
|
Routes
|
|
|
484
|
|
|
|
615
|
|
Airport operating rights, net of
accumulated amortization of $335 and $316
|
|
|
133
|
|
|
|
236
|
|
Intangible pension asset
|
|
|
60
|
|
|
|
108
|
|
Investment in affiliates
|
|
|
112
|
|
|
|
156
|
|
Note receivable from ExpressJet
Holdings, Inc.
|
|
|
|
|
|
|
18
|
|
Other assets, net
|
|
|
227
|
|
|
|
240
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
10,529
|
|
|
$
|
10,511
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Current maturities of long-term
debt and capital leases
|
|
$
|
546
|
|
|
$
|
670
|
|
Accounts payable
|
|
|
846
|
|
|
|
766
|
|
Air traffic and frequent flyer
liability
|
|
|
1,475
|
|
|
|
1,157
|
|
Accrued payroll
|
|
|
234
|
|
|
|
281
|
|
Accrued other liabilities
|
|
|
298
|
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,399
|
|
|
|
3,125
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt and Capital Leases
|
|
|
5,057
|
|
|
|
5,167
|
|
|
|
|
|
|
|
|
|
|
Deferred Income Taxes
|
|
|
154
|
|
|
|
378
|
|
|
|
|
|
|
|
|
|
|
Accrued Pension Liability
|
|
|
1,078
|
|
|
|
1,132
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
615
|
|
|
|
554
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Preferred
stock $.01 par, 10,000,000 shares
authorized; one share of Series B issued and outstanding,
stated at par value
|
|
|
|
|
|
|
|
|
Class B common
stock $.01 par, 200,000,000 shares
authorized; 111,690,943 and 91,938,816 shares issued
|
|
|
1
|
|
|
|
1
|
|
Additional paid-in capital
|
|
|
1,635
|
|
|
|
1,408
|
|
Retained earnings
|
|
|
406
|
|
|
|
474
|
|
Accumulated other comprehensive loss
|
|
|
(675
|
)
|
|
|
(587
|
)
|
Treasury
stock 25,489,291 and 25,476,881 shares, at
cost
|
|
|
(1,141
|
)
|
|
|
(1,141
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
226
|
|
|
|
155
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Stockholders Equity
|
|
$
|
10,529
|
|
|
$
|
10,511
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
A-40
CONTINENTAL
AIRLINES, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Cash Flows from Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(68
|
)
|
|
$
|
(409
|
)
|
|
$
|
28
|
|
Adjustments to reconcile net income
(loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
|
|
|
|
(40
|
)
|
|
|
96
|
|
Depreciation and amortization
|
|
|
389
|
|
|
|
415
|
|
|
|
447
|
|
Special charges
|
|
|
67
|
|
|
|
121
|
|
|
|
100
|
|
Gains on dispositions of investments
|
|
|
(204
|
)
|
|
|
|
|
|
|
(305
|
)
|
Undistributed equity in the income
of affiliates
|
|
|
(62
|
)
|
|
|
(66
|
)
|
|
|
(23
|
)
|
Other, net
|
|
|
(18
|
)
|
|
|
(73
|
)
|
|
|
(36
|
)
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in accounts receivable
|
|
|
(56
|
)
|
|
|
(76
|
)
|
|
|
(25
|
)
|
(Increase) decrease in spare parts
and supplies
|
|
|
(7
|
)
|
|
|
(37
|
)
|
|
|
4
|
|
(Increase) decrease in prepayments
and other assets
|
|
|
(59
|
)
|
|
|
(135
|
)
|
|
|
(27
|
)
|
Increase (decrease) in accounts
payable
|
|
|
80
|
|
|
|
(74
|
)
|
|
|
(19
|
)
|
Increase in air traffic and
frequent flyer liability
|
|
|
318
|
|
|
|
200
|
|
|
|
75
|
|
Increase in accrued pension
liability and other
|
|
|
77
|
|
|
|
547
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
457
|
|
|
|
373
|
|
|
|
342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(185
|
)
|
|
|
(162
|
)
|
|
|
(205
|
)
|
Purchase deposits (paid) refunded
in connection with aircraft deliveries, net
|
|
|
(3
|
)
|
|
|
111
|
|
|
|
52
|
|
Sale of short-term investments, net
|
|
|
46
|
|
|
|
34
|
|
|
|
35
|
|
Proceeds from sale of Copa
Holdings, S.A, net
|
|
|
172
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of ExpressJet
Holdings, net
|
|
|
|
|
|
|
|
|
|
|
134
|
|
Proceeds from sales of
Internet-related investments
|
|
|
|
|
|
|
98
|
|
|
|
76
|
|
Proceeds from sales of property and
equipment
|
|
|
53
|
|
|
|
16
|
|
|
|
16
|
|
Increase in restricted cash, net
|
|
|
(30
|
)
|
|
|
(41
|
)
|
|
|
(108
|
)
|
Other
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing
activities
|
|
|
51
|
|
|
|
53
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term
debt, net
|
|
|
436
|
|
|
|
67
|
|
|
|
559
|
|
Payments on long-term debt and
capital lease obligations
|
|
|
(662
|
)
|
|
|
(447
|
)
|
|
|
(549
|
)
|
Proceeds from issuance of common
stock, net
|
|
|
227
|
|
|
|
5
|
|
|
|
5
|
|
Other
|
|
|
36
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
financing activities
|
|
|
37
|
|
|
|
(364
|
)
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on cash of ExpressJet
deconsolidation
|
|
|
|
|
|
|
|
|
|
|
(225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase in Cash and Cash
Equivalents
|
|
|
545
|
|
|
|
62
|
|
|
|
185
|
|
Cash and Cash
Equivalents Beginning of Period
|
|
|
1,178
|
|
|
|
1,116
|
|
|
|
931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash
Equivalents End of Period
|
|
$
|
1,723
|
|
|
$
|
1,178
|
|
|
$
|
1,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flows Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
385
|
|
|
$
|
372
|
|
|
$
|
374
|
|
Income taxes paid (refunded)
|
|
$
|
2
|
|
|
$
|
(4
|
)
|
|
$
|
13
|
|
Investing and Financing Activities
Not Affecting Cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment acquired
through the issuance of debt
|
|
$
|
|
|
|
$
|
226
|
|
|
$
|
120
|
|
Capital lease obligations incurred
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
22
|
|
Contribution of ExpressJet Holdings
stock to pension plan
|
|
$
|
130
|
|
|
$
|
|
|
|
$
|
100
|
|
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
A-41
CONTINENTAL
AIRLINES, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Class B
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Treasury
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Stock,
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
at Cost
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
December 31, 2002
|
|
|
65.8
|
|
|
$
|
1
|
|
|
$
|
1,391
|
|
|
$
|
855
|
|
|
$
|
(395
|
)
|
|
$
|
(1,140
|
)
|
|
$
|
712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
Other Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in additional minimum
pension liability, net of income taxes of $11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
(20
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
Issuance of common stock pursuant
to stock plans
|
|
|
0.3
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2003
|
|
|
66.1
|
|
|
|
1
|
|
|
|
1,401
|
|
|
|
883
|
|
|
|
(417
|
)
|
|
|
(1,141
|
)
|
|
|
727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(409
|
)
|
|
|
|
|
|
|
|
|
|
|
(409
|
)
|
Other Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in additional minimum
pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(176
|
)
|
|
|
|
|
|
|
(176
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(579
|
)
|
Issuance of common stock pursuant
to stock plans
|
|
|
0.4
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
66.5
|
|
|
|
1
|
|
|
|
1,408
|
|
|
|
474
|
|
|
|
(587
|
)
|
|
|
(1,141
|
)
|
|
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
(68
|
)
|
Other Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in additional minimum
pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(96
|
)
|
|
|
|
|
|
|
(96
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(156
|
)
|
Issuance of common stock pursuant
to stock offering
|
|
|
18.0
|
|
|
|
|
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
203
|
|
Issuance of common stock pursuant
to stock plans
|
|
|
1.7
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
86.2
|
|
|
$
|
1
|
|
|
$
|
1,635
|
|
|
$
|
406
|
|
|
$
|
(675
|
)
|
|
$
|
(1,141
|
)
|
|
$
|
226
|
|
|
|
|
|
|
|
|
|
|
|
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The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
A-42
CONTINENTAL
AIRLINES, INC.
Continental Airlines, Inc., a Delaware corporation, is a major
United States air carrier engaged in the business of
transporting passengers, cargo and mail. Together with
ExpressJet Airlines, Inc. (ExpressJet), a
wholly-owned subsidiary of ExpressJet Holdings, Inc.
(Holdings) from which we purchase seat capacity, and
our wholly-owned subsidiary, Continental Micronesia, Inc.
(CMI), each a Delaware corporation, we are the
worlds sixth largest airline (as measured by the number of
scheduled miles flown by revenue passengers, known as revenue
passenger miles, in 2005) and operate more than 2,500 daily
departures. As of December 31, 2005, we flew to 132
domestic and 126 international destinations and offered
additional connecting service through alliances with domestic
and foreign carriers. We directly served 23 European cities,
nine South American cities, Tel Aviv, Delhi, Hong Kong, Beijing
and Tokyo. In addition, we provide service to more destinations
in Mexico and Central America than any other U.S. airline,
serving 41 cities. Through our 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, we, us,
our and similar terms refer to Continental Airlines,
Inc. and, unless the context indicates otherwise, its
consolidated subsidiaries.
NOTE 1 SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of
Consolidation. Our consolidated financial
statements include the accounts of Continental and all
wholly-owned domestic and foreign subsidiaries. Through
November 12, 2003, we also consolidated Holdings. See
Note 16 for a discussion of the changes in our ownership of
Holdings and the resulting impact on our consolidated financial
statements. All intercompany accounts, transactions and profits
arising from consolidated entities have been eliminated in
consolidation.
(b) Investments in
Affiliates. Investments in unconsolidated
affiliates that are not variable interest entities (see
Note 14) are accounted for by the equity method when
we have significant influence over the operations of the
companies.
(c) Use of Estimates. The
preparation of financial statements in conformity with
accounting principles generally accepted in the United States
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.
(d) Cash and Cash Equivalents. We
classify short-term, highly liquid investments which are readily
convertible into cash and have a maturity of three months or
less when purchased as cash and cash equivalents. Restricted
cash is primarily collateral for estimated future workers
compensation claims, credit card processing contracts, letters
of credit and performance bonds.
(e) Short-Term Investments. We
invest in commercial paper, asset-backed securities and
U.S. government agency securities with original maturities
in excess of three months but less than one year. These
investments are classified as short-term investments in the
accompanying consolidated balance sheets. Short-term investments
are stated at cost, which approximates market value.
(f) Spare Parts and Supplies.
Inventories, expendable parts and supplies related to flight
equipment are carried at average acquisition cost and are
expensed when consumed in operations. An allowance for
obsolescence is provided over the remaining estimated useful
life of the related aircraft, plus allowances for spare parts
currently identified as excess to reduce the carrying costs to
the lower of amortized cost or net realizable value. Spare parts
and supplies are assumed to have an estimated residual value of
10% of original cost. These allowances are based on management
estimates, which are subject to change.
(g) Property and Equipment.
Property and equipment are recorded at cost and are depreciated
to estimated residual values over their estimated useful lives
using the straight-line method. Jet aircraft and rotable spare
parts are assumed to have estimated residual values of 15% and
10%, respectively, of original
A-43
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
cost; other categories of property and equipment are assumed to
have no residual value. The estimated useful lives for our
property and equipment are as follows:
|
|
|
|
|
|
|
Estimated Useful Life
|
|
Jet aircraft and simulators
|
|
|
25 to 30 years
|
|
Rotable spare parts
|
|
|
25 to 30 years
|
|
Buildings and improvements
|
|
|
10 to 30 years
|
|
Food service equipment
|
|
|
6 to 10 years
|
|
Maintenance and engineering
equipment
|
|
|
8 years
|
|
Surface transportation and ground
equipment
|
|
|
6 years
|
|
Communication and meteorological
equipment
|
|
|
5 years
|
|
Computer software
|
|
|
3 to 10 years
|
|
Capital
lease flight and ground equipment
|
|
|
Shorter of Lease Term or Useful Life
|
|
Leasehold improvements
|
|
|
Shorter of Lease Term or Useful Life
|
|
Amortization of assets recorded under capital leases is included
in depreciation expense in our consolidated statement of
operations.
The carrying amount of computer software was $70 million
and $72 million at December 31, 2005 and 2004,
respectively. Depreciation expense related to computer software
was $28 million, $28 million and $25 million for
the years ended December 31, 2005, 2004 and 2003,
respectively.
(h) Routes and Airport Operating
Rights. Routes represent the right to fly
between cities in different countries. Routes are
indefinite-lived intangible assets and are not amortized. We
perform a test for impairment of our routes in the fourth
quarter of each year.
Airport operating rights represent gate space and slots (the
right to schedule an arrival or departure within designated
hours at a particular airport). Airport operating rights are
amortized over the stated term of the related lease or
20 years. Amortization expense related to airport operating
rights was $19 million, $22 million and
$25 million for the years ended December 31, 2005,
2004 and 2003, respectively. We expect annual amortization
expense related to airport operating rights to be approximately
$14 million in each of the next five years.
(i) Measurement of Impairment of Long-Lived
Assets. We record impairment losses on
long-lived assets, consisting principally of property and
equipment and airport operating rights, when events or changes
in circumstances indicate, in managements judgement, 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. The net carrying value of
assets not recoverable is reduced to fair value if lower than
carrying value. In determining the fair market value of the
assets, we consider market trends, recent transactions involving
sales of similar assets and, if necessary, estimates of future
discounted cash flows.
(j) Revenue/Air Traffic
Liability. Passenger revenue is recognized
either when transportation is provided or when the ticket
expires unused rather than when a ticket is sold. Nonrefundable
tickets expire on the date of intended flight, unless the date
is extended by notification from the customer in advance of the
intended flight.
We are required to charge certain taxes and fees on our
passenger tickets. These taxes and fees include
U.S. federal transportation taxes, federal security
charges, airport passenger facility charges and foreign arrival
and departure taxes. These taxes and fees are legal assessments
on the customer. We have a legal obligation to act as a
collection agent. As we are not entitled to retain these taxes
and fees, we do not include such amounts in passenger revenue.
We record a liability when the amounts are collected and relieve
the liability when payments are made to the applicable
government agency or operating carrier.
A-44
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Under our capacity purchase agreement with Holdings and
ExpressJet, we purchase all of ExpressJets capacity and
are responsible for selling all of the seat inventory. We record
the related passenger revenue and related expenses, with
payments under the capacity purchase agreement reflected as a
separate operating expense.
Revenue from the shipment of cargo and mail is recognized when
transportation is provided. Other revenue includes revenue from
the sale of frequent flyer miles (see (k) below), ticket
change fees, charter services and other incidental services.
The amount of passenger ticket sales and sales of frequent flyer
mileage credits not yet recognized as revenue is included in our
consolidated balance sheets as air traffic liability. We perform
periodic evaluations of the estimated liability for passenger
ticket sales and any adjustments, which can be significant, are
included in results of operations for the periods in which the
evaluations are completed. These adjustments relate primarily to
differences between our statistical estimation of certain
revenue transactions and the related sales price, as well as
refunds, exchanges, transactions with other airlines and other
items for which final settlement occurs in periods subsequent to
the sale of the related tickets at amounts other than the
original sales price.
(k) Frequent Flyer Program. For
those OnePass accounts that have sufficient mileage credits to
claim the lowest level of free travel, we record a liability for
either the estimated incremental cost of providing travel awards
that are expected to be redeemed on us or the contractual rate
of expected redemption on alliance carriers. Incremental cost
includes the cost of fuel, meals, insurance and miscellaneous
supplies and does not include any costs for aircraft ownership,
maintenance, labor or overhead allocation. A change to these
cost estimates, the actual redemption activity, the amount of
redemptions on alliance carriers or the minimum award level
could have a significant impact on our liability in the period
of change as well as future years. The liability is adjusted
periodically based on awards earned, awards redeemed, changes in
the incremental costs and changes in the OnePass program, and is
included in the accompanying consolidated balance sheets as air
traffic liability. In the fourth quarter of 2004, we recorded a
change in expected future costs for frequent flyer reward
redemptions on alliance carriers, resulting in a one-time
increase in other operating expenses of $18 million.
We also sell mileage credits in our frequent flyer program to
participating entities, such as credit/debit card companies,
phone companies, alliance carriers, hotels, car rental agencies
and various shopping and gift merchants. Revenue from the sale
of mileage credits is deferred and recognized as passenger
revenue over the period when transportation is expected to be
provided, based on estimates of its fair value. Amounts received
in excess of the expected transportations fair value are
recognized in income currently and classified as other revenue.
A change to the time period over which the mileage credits are
used (currently six to 32 months), the actual redemption
activity or our estimate of the amount or fair value of expected
transportation could have a significant impact on our revenue in
the year of change as well as future years. In the fourth
quarter of 2003, we adjusted our estimates of the mileage
credits we expect to be redeemed for travel, resulting in a
one-time increase in other revenue of $24 million.
At December 31, 2005, we estimated that approximately
2.5 million free travel awards outstanding were expected to
be redeemed for free travel on Continental, ExpressJet, CMI or
alliance airlines. Our total liability for future OnePass award
redemptions for free travel and unrecognized revenue from sales
of OnePass miles to other companies was approximately
$236 million at December 31, 2005. This liability is
recognized as a component of air traffic liability in our
consolidated balance sheets.
(l) 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. Due to our continued losses, we were required to
provide a valuation allowance on the deferred tax assets
recorded on losses beginning in the first quarter of 2004. As a
result, all of our 2005 losses and the majority of our 2004
losses were not reduced by any tax benefit.
A-45
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(m) 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.
Maintenance and repair costs also include engine overhaul costs
covered by
power-by-the-hour
agreements, which are expensed on the basis of hours flown.
(n) Advertising Costs. We expense
the costs of advertising as incurred. Advertising expense was
$91 million, $84 million and $87 million for the
years ended December 31, 2005, 2004 and 2003, respectively.
(o) Stock Plans and Awards. We
account for our stock-based compensation plans under the
intrinsic value method in accordance with Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25). No stock-based
employee compensation cost is reflected in net income (loss) for
our stock option plans, as all options granted under our plans
have an exercise price equal to the market value of the
underlying common stock on the date of grant.
The following table illustrates the pro forma effect on net
income (loss) and earnings (loss) per share if we had applied
the fair value recognition provisions of Statement of Financial
Accounting Standards (SFAS) No. 123,
Accounting for Stock-based Compensation
(SFAS 123), for the years ended
December 31, 2005, 2004 and 2003. See Note 8 for the
assumptions we used to compute the pro forma amounts (in
millions, except for share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Net income (loss), as reported
|
|
$
|
(68
|
)
|
|
$
|
(409
|
)
|
|
$
|
28
|
|
Deduct: total stock-based employee
compensation expense determined under SFAS 123, net of tax
|
|
|
(29
|
)
|
|
|
(6
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss), pro forma
|
|
$
|
(97
|
)
|
|
$
|
(415
|
)
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
(0.96
|
)
|
|
$
|
(6.19
|
)
|
|
$
|
0.43
|
|
Pro forma
|
|
$
|
(1.38
|
)
|
|
$
|
(6.28
|
)
|
|
$
|
0.33
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
(0.97
|
)
|
|
$
|
(6.25
|
)
|
|
$
|
0.41
|
|
Pro forma
|
|
$
|
(1.39
|
)
|
|
$
|
(6.33
|
)
|
|
$
|
0.32
|
|
(p) ExpressJet Capacity Purchase,
Net. Payments made to ExpressJet under our
capacity purchase agreement are reported as ExpressJet capacity
purchase, net. ExpressJet capacity purchase, net, includes all
of ExpressJets fuel expense plus a margin on
ExpressJets fuel expense up to a cap provided in the
capacity purchase agreement and a related fuel purchase
agreement (which margin applies only to the first 71.2 cents per
gallon, including fuel taxes) and is net of our sublease income
on aircraft we lease to ExpressJet. Prior to November 12,
2003, the date we deconsolidated Holdings, all of these items
were eliminated in our consolidated financial statements.
(q) Reclassifications. Certain
reclassifications have been made in the prior years
consolidated financial statement amounts and related note
disclosures to conform with the current years presentation.
NOTE 2 PENDING
ACCOUNTING PRONOUNCEMENT
In December 2004, the FASB issued a revision of SFAS 123,
Share Based Payment (SFAS 123R),
which requires companies to measure the cost of employee
services received in exchange for an award of equity instruments
(typically stock options) based on the grant-date fair value of
the award. The fair value is to be estimated using
option-pricing models. The resulting cost will be recognized
over the period during which an employee is required to provide
service in exchange for the award, usually the vesting period.
Under the original SFAS 123, this accounting treatment was
optional with pro forma disclosures required.
A-46
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We will adopt SFAS 123R effective January 1, 2006. It
will be effective for all awards granted after that date. For
those stock option awards granted prior to January 1, 2006
but for which the vesting period is not complete, we will use
the modified prospective transition method permitted by
SFAS 123R. Under this method, we will account for such
awards on a prospective basis, with expense being recognized in
our statement of operations beginning in the first quarter of
2006 using the grant-date fair values previously calculated for
our SFAS 123 pro forma disclosures presented in
Note 1(o). We will recognize the related compensation cost
not previously recognized in the SFAS 123 pro forma
disclosures over the remaining vesting period.
In addition to changing the accounting for our stock options and
employee stock purchase plan, SFAS 123R will impact the
accounting for our Long Term Incentive and Restricted Stock Unit
(RSU) program. As discussed in Note 8, awards
made pursuant to this program can result in cash payments to our
officers if there are specified increases in our stock price
over multi-year performance periods. Under our current
accounting, we have recognized no liability or expense as of
December 31, 2005 because the targets set forth in the
program had not been met as of that date. Under SFAS 123R,
these awards will be measured at fair value at each reporting
date and the related expense will be recognized over the
remaining required service periods. The fair value will be
determined using a pricing model.
We will recognize a cumulative effect of change in accounting
principle related to the adoption of SFAS 123R on
January 1, 2006, reducing earnings approximately
$26 million. On February 1, 2006, our officers
surrendered their RSU awards with a performance period ending
March 31, 2006. Approximately $15 million of the
cumulative effect of change in accounting principle at
January 1, 2006 relates to these surrendered awards.
Accordingly, we will record this amount as a reduction of
operating expense in the first quarter of 2006.
We anticipate that the impact on our statement of operations of
adopting SFAS 123R for our stock options outstanding at
December 31, 2005 will be similar to the pro forma impact
of SFAS 123 presented in Note 1(o). The incremental
expense related to future stock option and employee stock
purchase plan grants is difficult to predict because the expense
will depend on the number of awards granted, the grant date
stock price, volatility of our stock price and other factors.
Likewise, the incremental expense related to the existing RSU
awards is difficult to predict because it will vary with changes
in our stock price.
NOTE 3 EARNINGS
PER SHARE
Basic earnings (loss) per common share (EPS)
excludes dilution and is computed by dividing net income (loss)
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
A-47
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of common stock that then shared in our earnings (losses). The
following table sets forth the components of basic and diluted
earnings (loss) per share (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic earnings per
share net income (loss)
|
|
$
|
(68
|
)
|
|
$
|
(409
|
)
|
|
$
|
28
|
|
Effect of dilutive securities
issued by equity investee
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted earnings per
share net income (loss) after effect of
dilutive securities of equity investee
|
|
$
|
(69
|
)
|
|
$
|
(413
|
)
|
|
$
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings
(loss) per share weighted-average shares
|
|
|
70.3
|
|
|
|
66.1
|
|
|
|
65.4
|
|
Effect of dilutive
securities employee stock options
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings
(loss) per share adjusted weighted-average and
assumed conversions
|
|
|
70.3
|
|
|
|
66.1
|
|
|
|
65.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our convertible debt securities consist of our
6% Convertible Junior Subordinated Debentures Held by
Subsidiary Trust, 5.0% Convertible Notes and
4.5% Convertible Notes. Approximately 17.9 million,
17.9 million and 14.0 million potential common shares
related to convertible debt securities were excluded from the
computation of diluted earnings per share in 2005, 2004 and
2003, respectively, because they were antidilutive. In addition,
approximately 12.1 million in 2005, 6.2 million in
2004 and 5.3 million in 2003 of weighted average options to
purchase shares of our common stock were not included in the
computation of diluted earnings per share because the
options exercise price was greater than the average market
price of the common shares or the effect of including the
options would have been antidilutive.
A-48
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE 4 LONG-TERM
DEBT
Long-term debt as of December 31 is summarized as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Secured
|
|
|
|
|
|
|
|
|
Notes payable, interest rates of
5.0% to 8.5%, (weighted average rate of 6.90% as of
December 31, 2005) payable through 2019
|
|
$
|
2,832
|
|
|
$
|
3,147
|
|
Floating rate notes, interest
rates of LIBOR (4.54% on December 31, 2005) plus 0.45%
to 1.6%; Eurodollar (4.52% on December 31, 2005) plus
1.375%, payable through 2014
|
|
|
925
|
|
|
|
872
|
|
Floating rate notes, interest rate
of LIBOR plus 5.375%, payable in 2011
|
|
|
350
|
|
|
|
|
|
Floating rate notes, interest rate
of LIBOR plus 2.5% to 4.5%, payable through 2016
|
|
|
208
|
|
|
|
343
|
|
Floating rate notes, interest rate
of LIBOR plus 4.53%, payable through 2007
|
|
|
104
|
|
|
|
123
|
|
Floating rate notes, interest rate
of LIBOR plus 7.5%, payable through 2007
|
|
|
97
|
|
|
|
97
|
|
Other
|
|
|
79
|
|
|
|
17
|
|
Unsecured
|
|
|
|
|
|
|
|
|
Convertible junior subordinated
debentures, interest rate of 6.0%, payable in 2030
|
|
|
248
|
|
|
|
248
|
|
Convertible notes, interest rate
of 4.5%, payable in 2007
|
|
|
200
|
|
|
|
200
|
|
Senior notes payable, interest
rate of 8.0%, payable in 2005
|
|
|
|
|
|
|
195
|
|
Convertible notes, interest rate
of 5.0%, callable beginning in 2010
|
|
|
175
|
|
|
|
175
|
|
Note payable, interest rate of
8.1%, payable in 2008
|
|
|
112
|
|
|
|
112
|
|
Other
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,330
|
|
|
|
5,537
|
|
Less: current maturities
|
|
|
524
|
|
|
|
642
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,806
|
|
|
$
|
4,895
|
|
|
|
|
|
|
|
|
|
|
Maturities of long-term debt due over the next five years are as
follows (in millions):
|
|
|
|
|
Year ending December 31,
|
|
|
|
|
2006
|
|
$
|
524
|
|
2007
|
|
|
937
|
|
2008
|
|
|
632
|
|
2009
|
|
|
460
|
|
2010
|
|
|
602
|
|
Substantially all of our property and equipment, spare parts
inventory, certain routes, and the outstanding common stock and
substantially all of the other assets of our wholly-owned
subsidiaries Air Micronesia, Inc. (AMI) and CMI are
subject to agreements securing our indebtedness. We do not have
any debt obligations that would be accelerated as a result of a
credit rating downgrade.
We also have letters of credit and performance bonds relating to
various real estate and customs obligations at December 31,
2005 in the amount of $54 million with expiration dates
through June 2008.
A-49
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Secured Loan Facility. In June
2005, we and our two wholly-owned subsidiaries, AMI and CMI,
closed on a $350 million secured loan facility. AMI and CMI
have unconditionally guaranteed the loan made to us, and we and
AMI have unconditionally guaranteed the loan made to CMI.
The facility consists of two loans, both of which have a term of
six years and are
non-amortizing,
except for certain mandatory prepayments described below. The
loans accrue interest at a floating rate determined by reference
to the three-month London Interbank Offered Rate, known as
LIBOR, plus 5.375% per annum. The loans and guarantees are
secured by certain of our
U.S.-Asia
routes and related assets, all of the outstanding common stock
of AMI and CMI and substantially all of the other assets of AMI
and CMI, including route authorities and related assets.
The loan documents require us to maintain a minimum balance of
unrestricted cash and short-term investments of
$1.0 billion dollars at the end of each month. The loans
may become due and payable immediately if we fail to maintain
the monthly minimum cash balance and upon the occurrence of
other customary events of default under the loan documents. If
we fail to maintain a minimum balance of unrestricted cash and
short-term investments of $1.125 billion, we and CMI will
be required to make a mandatory aggregate $50 million
prepayment of the loans. In addition, if the ratio of the
outstanding loan balance to the value of the collateral securing
the loans, as determined by periodic appraisals, is greater than
48%, we and CMI will be required to post additional collateral
or prepay the loans to reestablish a
loan-to-collateral
value ratio of not greater than 48%. We are currently in
compliance with these covenants.
Credit Card Marketing Agreement. In
March 2005, we extended our current agreement with Chase
Manhattan Bank USA, N.A. (Chase) to jointly market
credit cards. In addition to reaching an agreement on
advertising and other marketing commitments, Chase agreed to
increase the rate it pays for mileage credits under our frequent
flyer program. In April 2005, Chase purchased $75 million
of mileage credits under the program, which will be redeemed for
mileage purchases in 2007 and 2008 and recognized as other
revenue consistent with other mileage sales in 2007 and 2008. In
consideration for the advance purchase of mileage credits, we
have provided a security interest to Chase in certain
transatlantic routes. The $75 million purchase of mileage
credits has been treated as a loan from Chase and will be
reduced ratably in 2007 and 2008 as the mileage credits are
redeemed. The new agreement expires at the end of 2009.
Notes Secured by Spare Parts
Inventory. Our $97 million of Floating
Rate Secured Subordinated Notes due December 2007, which bear
interest at the three month LIBOR plus 7.5% (the Junior
Notes), and our $195 million of Floating Rate Secured
Notes due December 2007, which bear interest at the three-month
LIBOR plus 0.9% (the Senior Notes), are secured by a
portion of our spare parts inventory. In connection with these
notes, we have entered into a collateral maintenance agreement
requiring us, among other things, to maintain a
loan-to-collateral
value ratio of not greater than 45% with respect to the Senior
Notes and a
loan-to-collateral
value ratio of not greater than 67.5% with respect to both the
Senior Notes and the Junior Notes combined. We must also
maintain a certain level of rotable components within the spare
parts collateral pool. The ratios are calculated semi-annually
based on an independent appraisal of the spare parts collateral
pool. If any of the collateral ratio requirements are not met,
we must take action to meet all ratio requirements by adding
additional eligible spare parts to the collateral pool,
purchasing or redeeming some of the outstanding notes, providing
other collateral acceptable to the bond insurance policy
provider for the Senior Notes, or any combination of the above.
We met the collateral ratio requirements at December 25,
2005, the most recent valuation date.
Convertible Debt Securities. In
November 2000, Continental Airlines Finance Trust II, a
Delaware statutory business trust (the Trust) of
which we own all the common trust securities, completed a
private placement of five million 6% Convertible Preferred
Securities, Term Income Deferrable Equity Securities or
TIDES. The TIDES have a liquidation value of
$50 per preferred security and are convertible at any time
at the option of the holder into shares of common stock at a
conversion rate of $60 per share of common stock
(equivalent to approximately 0.8333 share of common stock
for each preferred security). Distributions on the
A-50
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
preferred securities are payable by the Trust at an annual rate
of 6% of the liquidation value of $50 per preferred
security.
The sole assets of the trust are 6% Convertible Junior
Subordinated Debentures (Convertible Subordinated
Debentures) with an aggregate principal amount of
$248 million as of December 31, 2005 issued by us and
which mature on November 15, 2030. The Convertible
Subordinated Debentures are redeemable by us, in whole or in
part, on or after November 20, 2003 at designated
redemption prices. If we redeem the Convertible Subordinated
Debentures, the Trust must redeem the TIDES on a pro rata basis
having an aggregate liquidation value equal to the aggregate
principal amount of the Convertible Subordinated Debentures
redeemed. Otherwise, the TIDES will be redeemed upon maturity of
the Convertible Subordinated Debentures, unless previously
converted.
Taking into consideration our obligations under (i) the
Preferred Securities Guarantee relating to the TIDES,
(ii) the Indenture relating to the Convertible Subordinated
Debentures to pay all debt and obligations and all costs and
expenses of the Trust (other than U.S. withholding taxes)
and (iii) the Indenture, the Declaration relating to the
TIDES and the Convertible Subordinated Debentures, we have fully
and unconditionally guaranteed payment of (i) the
distributions on the TIDES, (ii) the amount payable upon
redemption of the TIDES and (iii) the liquidation amount of
the TIDES.
The $200 million of 4.5% convertible notes due
February 1, 2007 are convertible into our common stock at
an initial conversion price of $40 per share. The notes are
redeemable at our option at specified redemption prices.
The $175 million of 5% Convertible Notes due 2023 are
convertible into our common stock at an initial conversion price
of $20 per share, subject to certain conditions on
conversion. The notes are redeemable for cash at our option on
or after June 18, 2010 at par plus accrued and unpaid
interest, if any. Holders of the notes may require us to
repurchase the notes on June 15 of 2010, 2013 or 2018, or in the
event of certain changes in control at par plus accrued and
unpaid interest, if any.
NOTE 5 LEASES
We lease certain aircraft and other assets under long-term lease
arrangements. Other leased assets include real property, airport
and terminal facilities, maintenance facilities, training
centers and general offices. Most aircraft leases include both
renewal options and purchase options. Because renewals of our
existing leases are not considered to be reasonably assured,
rental payments that would be due during the renewal periods are
not included in the determination of rent expense until the
leases are renewed. Leasehold improvements are amortized over
the shorter of the contractual lease term, which does not
include renewal periods, or their useful life. The purchase
options are generally effective at the end of the lease term at
the then-current fair market value. Our leases do not include
residual value guarantees.
A-51
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December 31, 2005, the scheduled future minimum lease
payments under capital leases and the scheduled future minimum
lease rental payments required under operating leases, that have
initial or remaining noncancelable lease terms in excess of one
year, are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating Leases
|
|
|
|
Leases
|
|
|
Aircraft
|
|
|
Non-aircraft
|
|
|
Year ending December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
39
|
|
|
$
|
1,003
|
|
|
$
|
429
|
|
2007
|
|
|
40
|
|
|
|
966
|
|
|
|
400
|
|
2008
|
|
|
46
|
|
|
|
955
|
|
|
|
377
|
|
2009
|
|
|
16
|
|
|
|
910
|
|
|
|
374
|
|
2010
|
|
|
16
|
|
|
|
924
|
|
|
|
364
|
|
Later years
|
|
|
457
|
|
|
|
6,310
|
|
|
|
4,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
614
|
|
|
$
|
11,068
|
|
|
$
|
6,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amount representing interest
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of capital leases
|
|
|
273
|
|
|
|
|
|
|
|
|
|
Less: current maturities of
capital leases
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term capital leases
|
|
$
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005, we had 482 aircraft under operating
leases and three aircraft under capital leases, including
aircraft subleased to ExpressJet. These operating leases have
remaining lease terms ranging up to 19 years. Projected
sublease income to be received from ExpressJet through 2022, not
included in the above table, is approximately $3.0 billion.
Rent expense for non-aircraft operating leases totaled
$466 million, $426 million and $407 million for
the years ended December 31, 2005, 2004 and 2003,
respectively.
NOTE 6 FINANCIAL
INSTRUMENTS AND RISK MANAGEMENT
As part of our risk management program, we use or have used a
variety of financial instruments, including foreign currency
average rate options, foreign currency forward contracts,
interest rate cap and swap agreements, petroleum call options,
petroleum swap contracts and jet fuel purchase commitments. We
do not hold or issue derivative financial instruments for
trading purposes.
Notional Amounts 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 our exposure resulting from our
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.
Foreign Currency Exchange Risk
Management. We use a combination of foreign
currency average rate options and forward contracts to hedge
against the currency risk associated with our forecasted
Japanese yen, British pound, Canadian dollar and
euro-denominated cash flows. The average rate options and
forward contracts have only nominal intrinsic value at the date
contracted.
We account for these instruments as cash flow hedges. They are
recorded at fair value in other assets in the accompanying
consolidated balance sheets with the offset to accumulated other
comprehensive income (loss), net of applicable income taxes and
hedge ineffectiveness, and recognized as passenger revenue when
the underlying service is provided. We measure hedge
effectiveness of average rate options and forward contracts
based on the forward price of the underlying currency. Hedge
ineffectiveness is included in other nonoperating income
(expense) in the accompanying consolidated statement of
operations and was not material for the years ended
December 31, 2005, 2004 and 2003. Our net gain (loss) on
our foreign currency forward
A-52
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and option contracts was $5 million for the year ended
December 31, 2005, $(10) million for the year ended
December 31, 2004 and was not material in the year ended
December 31, 2003. These gains (losses) are included in
passenger revenue in the accompanying consolidated statement of
operations.
At December 31, 2005, we had forward contracts outstanding
to hedge a portion of our projected Canadian dollar-denominated
cash flows for 2006. At December 31, 2004, we had foreign
currency forward or option contracts outstanding to hedge
portions of our projected Japanese yen, British pound, Canadian
dollar and euro-denominated cash flows for 2005. These hedges
had a liability fair value that was not material at
December 31, 2005 and was $7 million at
December 31, 2004.
Interest Rate Risk Management. We had
entered into an interest rate swap agreement to reduce the
impact of potential interest rate increases on floating rate
debt. This swap expired in November 2005. The notional amount of
the outstanding interest rate swap at December 31, 2004 was
$143 million. We accounted for the interest rate swap as a
cash flow hedge whereby the fair value of the interest rate swap
was reflected in other assets in the accompanying consolidated
balance sheet with the offset, net of income taxes and any hedge
ineffectiveness (which was not material), recorded as
accumulated other comprehensive income (loss). The fair value of
the interest rate swap liability was $4 million at
December 31, 2004. Amounts recorded in accumulated other
comprehensive income (loss) were amortized as an adjustment to
interest expense over the term of the related hedge. Such
amounts were not material during 2005, 2004 or 2003.
Fuel Price Risk Management. We had no
fuel hedges outstanding at December 31, 2005,
December 31, 2004 or at any time during 2005, although we
did have fuel hedges in place prior to December 31, 2004.
In February 2006, we entered into petroleum swap contracts to
hedge a minimal portion of our projected 2006 fuel usage. In the
past, we have used a combination of petroleum call options,
petroleum swap contracts
and/or jet
fuel purchase commitments to provide us with short-term hedge
protection (generally three to six months) against sudden
and significant increases in jet fuel prices, while
simultaneously ensuring that we are not competitively
disadvantaged in the event of a substantial decrease in the
price of jet fuel.
We account for the call options and swap contracts as cash flow
hedges. They are recorded at fair value in other assets in the
accompanying consolidated balance sheet with the offset to
accumulated other comprehensive income (loss), net of applicable
income taxes and hedge ineffectiveness, and recognized as a
component of fuel expense when the underlying fuel being hedged
is used. The ineffective portion of these call options and swap
agreements is determined based on the correlation between West
Texas Intermediate Crude Oil prices and jet fuel prices. Hedge
ineffectiveness is included in other nonoperating income
(expense) in the accompanying consolidated statement of
operations and was not material for the years ended
December 31, 2004 and 2003. Our gain related to these
hedging instruments, net of premium expense, was
$74 million in 2004 and $4 million in 2003.
Other Financial Instruments. Judgment
is necessarily required in interpreting market data and the use
of different market assumptions or estimation methodologies may
affect the estimated fair value amounts.
(a) Cash Equivalents and Restricted
Cash. Cash equivalents and restricted cash
are carried at cost and consist primarily of commercial paper
with original maturities of three months or less and approximate
fair value due to their short-term maturity.
(b) Short-term
Investments. Short-term investments consist
primarily of commercial paper, asset-backed securities and
U.S. government agency securities with original maturities
in excess of three months but less than one year and approximate
fair value due to their short-term maturity.
(c) Investment in
Affiliates. Shares of Copa Holdings, S.A.
(Copa), the parent company of Copa Airlines, and
Holdings are publicly traded. At December 31, 2005, based
on market prices, our investment in Copa shares, with a carrying
value of $87 million, had a fair value of $325 million
and our investment in
A-53
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Holdings shares, with a carrying value of $19 million, had
a fair value of $38 million. See Note 14 for further
discussion of investments in affiliates.
(d) Debt. The fair value of our
debt with a carrying value of $4.8 billion at
December 31, 2005 and $4.9 billion at
December 31, 2004 was approximately $4.5 billion and
$4.3 billion, respectively. These estimates were based on
the discounted amount of future cash flows using our current
incremental rate of borrowing for similar liabilities or market
prices. The fair value of the remaining debt was not practical
to estimate.
(e) Investment in Company Owned Life Insurance (COLI)
Products. In connection with certain of our
supplemental retirement plans, we have company owned life
insurance policies on certain of our employees. As of
December 31, 2005 and 2004, the carrying value of the
underlying investments was $39 million and
$38 million, respectively, which approximated fair value.
(f) Note Receivable from
Holdings. The fair value of our note
receivable from Holdings with a carrying value of
$18 million and $99 million at December 31, 2005
and 2004, respectively, approximated carrying value. The fair
value was estimated based on anticipated future cash flows
discounted using ExpressJets current incremental borrowing
rate.
(g) Accounts Receivable and Accounts
Payable. The fair values of accounts
receivable and accounts payable approximated carrying value due
to their short-term maturity. We had $515 million of
accounts receivable and $846 million of accounts payable at
December 31, 2005, and $472 million of accounts
receivable and $766 million of accounts payable at
December 31, 2004.
Credit Exposure of Financial
Instruments. We are exposed to credit losses
in the event of non-performance by issuers of financial
instruments. To manage credit risks, we select issuers based on
credit ratings, limit our exposure to a single issuer under our
defined guidelines and monitor the market position with each
counterparty.
NOTE 7 PREFERRED
AND COMMON STOCK
Preferred Stock. We have ten million
shares of authorized preferred stock. We currently have one
share of Series B preferred stock outstanding, which is
held by Northwest Airlines, Inc. The Series B preferred
stock ranks junior to all classes of capital stock other than
our common stock upon liquidation, dissolution or winding up of
the company. No dividends are payable on the Series B
preferred stock.
The holder of the Series B preferred stock has the right to
block certain actions we may seek to take, including:
|
|
|
|
|
Certain business combinations and similar changes of control
transactions involving us and a third party major air carrier;
|
|
|
|
Certain amendments to our rights plan (or redemption of those
rights);
|
|
|
|
Any dividend or distribution of all or substantially all of our
assets; and
|
|
|
|
Certain reorganizations and restructuring transactions involving
us.
|
The Series B preferred stock is redeemable by us at a
nominal price under the following circumstances:
|
|
|
|
|
Northwest Airlines, Inc. or certain of its affiliates transfers
or encumbers the Series B preferred stock;
|
|
|
|
Northwest Airlines Corporation or certain of its affiliates
experiences a change of control as defined by the
certificate of designations establishing the Series B
preferred stock;
|
|
|
|
Our alliance with Northwest Airlines Corporation terminates or
expires (other than as a result of a breach by us); or
|
A-54
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
Northwest Airlines Corporation or certain of its affiliates
materially breaches its standstill obligations to us or triggers
our rights agreement.
|
Common Stock. We currently have one
class of common stock issued and outstanding, Class B
common stock. Each share of common stock is entitled to one vote
per share. On October 24, 2005, we completed a public
offering of 18 million shares of common stock, raising
$203 million in cash. At December 31, 2005,
approximately 37 million shares were reserved for future
issuance related to the conversion of convertible debt
securities and the issuance of stock under our stock incentive
plans.
Stockholder Rights Plan. We have a
Rights Plan which was adopted effective November 20, 1998
and expires on November 20, 2008, unless extended or unless
the rights are earlier redeemed or exchanged by us.
The rights become exercisable upon the earlier of (1) 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% (25%
in the case of an institutional investor) or more of the total
number of votes entitled to be cast generally by holders of our
common stock then outstanding, voting together as a single class
(such person or group being an Acquiring Person), or
(2) the tenth business day (or such later date as may be
determined by action of our 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
entities related to us are exempt from the definition of
Acquiring Person; however, Northwest Airlines is not
an exempt entity.
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 shares of common stock 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,
(1) we merge into any other person, (2) any person
merges into us and all of our outstanding common stock does not
remain outstanding after such merger, or (3) we sell 50% or
more of our 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 us 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
our voting power, our Board of Directors may exchange the rights
(other than rights owned by such Acquiring Person, which will
have become void), in whole or in part, at an exchange ratio of
one share of common stock per right (subject to adjustment).
At any time prior to any person becoming an Acquiring Person,
our Board of Directors may redeem the rights at a price of
$.001 per right. The Rights Plan may be amended by our
Board of Directors without the consent of the holders of the
rights, except that from and after the time that 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, its holder, as such, will have no rights as
one of our stockholders, including the right to vote or to
receive dividends.
Restrictions on Dividends and Share
Repurchases. Our agreement with the union
representing our pilots provides that we will not declare a cash
dividend or repurchase our outstanding common stock for cash
until we have contributed at least $500 million to the
pilot defined benefit pension plan, measured from March 30,
2005. Through December 31, 2005, we have made
$112 million of such contributions to the plan.
A-55
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE 8 STOCK
PLANS AND AWARDS
Stock Options. We have a number of
equity incentive plans which permit the issuance of shares of
our common stock. One of these plans provides for awards in the
form of stock options, restricted stock, performance awards and
incentive awards. Each of the other plans permits awards of
either stock options or restricted stock. In general, our plans
permit awards to be made to the non-employee directors of the
company or the employees of the company or its subsidiaries.
Stock issued under the plans may be originally issued shares,
treasury shares or a combination thereof. Approximately
3.3 million shares remained for award under the plans as of
December 31, 2005.
Stock options are awarded under the plans with exercise prices
equal to the fair market value of the stock on the date of grant
and typically vest over a three to four-year period. Employee
stock options generally have five to eight-year terms, while
outside director stock options have ten-year terms. Under the
terms of the plans, a change in control would result in all
outstanding options under these plans becoming exercisable in
full and restricted shares being fully vested.
In connection with pay and benefit cost reductions, on
March 30, 2005 we issued to substantially all employees,
except flight attendants, officers, employees of CMI and certain
international employees, stock options for approximately
8.6 million shares of our common stock with an exercise
price of $11.89 per share. Additionally, on
February 1, 2006, we issued to our flight attendants stock
options for approximately 1.1 million shares of our common
stock with an exercise price of $20.31 per share. The
exercise price for each grant was the closing price of our
common stock on the date of grant. The options become
exercisable in three equal installments on the first, second and
third anniversaries of the dates of grant, and have terms of
either six or eight years.
The table below summarizes stock option transactions pursuant to
our plans (share data in thousands):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Outstanding at beginning of year
|
|
|
6,175
|
|
|
$
|
17.10
|
|
|
|
6,469
|
|
|
$
|
17.86
|
|
|
|
6,871
|
|
|
$
|
18.28
|
|
Granted
|
|
|
8,648
|
|
|
$
|
11.91
|
|
|
|
729
|
|
|
$
|
11.99
|
|
|
|
296
|
|
|
$
|
15.00
|
|
Exercised
|
|
|
(1,178
|
)
|
|
$
|
15.52
|
|
|
|
(181
|
)
|
|
$
|
14.62
|
|
|
|
(306
|
)
|
|
$
|
15.62
|
|
Cancelled
|
|
|
(935
|
)
|
|
$
|
19.12
|
|
|
|
(842
|
)
|
|
$
|
19.10
|
|
|
|
(392
|
)
|
|
$
|
24.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
12,710
|
|
|
$
|
13.57
|
|
|
|
6,175
|
|
|
$
|
17.10
|
|
|
|
6,469
|
|
|
$
|
17.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of year
|
|
|
3,896
|
|
|
$
|
17.17
|
|
|
|
4,837
|
|
|
$
|
17.91
|
|
|
|
5,018
|
|
|
$
|
18.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A-56
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2005 (share data in thousands):
Options
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Range of
|
|
|
|
|
Average Remaining
|
|
|
Weighted Average
|
|
Exercise Prices
|
|
Outstanding
|
|
|
Contractual Life
|
|
|
Exercise Price
|
|
|
$ 3.65 - $11.87
|
|
|
631
|
|
|
|
3.39
|
|
|
$
|
11.19
|
|
$11.89
|
|
|
8,123
|
|
|
|
5.98
|
|
|
$
|
11.89
|
|
$11.96 - $15.78
|
|
|
3,580
|
|
|
|
1.69
|
|
|
$
|
15.66
|
|
$15.79 - $56.81
|
|
|
376
|
|
|
|
3.00
|
|
|
$
|
33.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 3.65 - $56.81
|
|
|
12,710
|
|
|
|
4.55
|
|
|
$
|
13.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Exercisable
|
|
|
|
|
|
|
|
|
Range of
|
|
|
|
|
Weighted Average
|
|
Exercise Prices
|
|
Exercisable
|
|
|
Exercise Price
|
|
|
$ 3.65 - $11.87
|
|
|
196
|
|
|
$
|
10.68
|
|
$11.96 - $15.78
|
|
|
3,396
|
|
|
$
|
15.73
|
|
$15.79 - $56.81
|
|
|
304
|
|
|
$
|
37.40
|
|
|
|
|
|
|
|
|
|
|
$ 3.65 - $56.81
|
|
|
3,896
|
|
|
$
|
17.17
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock. In April 2002, we
awarded 444,750 shares of restricted stock. The restricted
stock was awarded pursuant to our equity incentive plans and had
a fair value on the grant date of $12 million ($28.10 per
share). The restricted stock vests in 25% increments on the
first four anniversaries of the date of grant.
Employee Stock Purchase Plan. All of
our employees (including CMI employees) are eligible to
participate in the 2004 Employee Stock Purchase Plan. At the end
of each fiscal quarter, participants may purchase shares of our
common stock at a discount of 15% off the fair market value of
the stock on either the first day or the last day of the quarter
(whichever is lower), subject to a minimum purchase price of
$10 per share. This discount is reduced to zero as the fair
market value approaches $10 per share. If the fair market
value is below the $10 per share minimum price on the last
day of a quarter, then the participants will not be permitted to
purchase common stock for such quarterly purchase period and we
will refund to those participants the amount of their unused
payroll deductions. In the aggregate, 3,000,000 shares may
be purchased under the plan. These shares may be originally
issued shares, treasury shares or a combination thereof. During
2005 and 2004, 573,848 shares and 249,160 shares,
respectively, of common stock were issued to participants at a
weighted-average purchase price of $10.06 and $10.00 per
share, respectively.
SFAS 123 Assumptions. We account
for our stock-based compensation plans under the recognition and
measurement principles of APB 25. Pro forma information
regarding net income and earnings per share disclosed in
Note 1(o) has been determined as if we had accounted for
our employee stock options and purchase rights under the fair
value method of SFAS 123. For purposes of the pro forma
SFAS 123 calculation,
A-57
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 indicated below for the
year ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Risk-free interest rate
|
|
|
3.4
|
%
|
|
|
3.3
|
%
|
|
|
2.5
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected market price volatility
of our common stock
|
|
|
74
|
%
|
|
|
78
|
%
|
|
|
77
|
%
|
Weighted-average expected life of
options (years)
|
|
|
3.7
|
|
|
|
3.5
|
|
|
|
3.2
|
|
Weighted-average fair value of
options granted
|
|
$
|
6.47
|
|
|
$
|
6.59
|
|
|
$
|
7.77
|
|
For purposes of the pro forma SFAS 123 calculation, the
fair value of the purchase rights under the stock purchase plan
that was begun in 2004 was also estimated using the
Black-Scholes model with the following weighted-average
assumptions indicated below for the year ended December 31:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
Risk-free interest rate
|
|
|
3.0
|
%
|
|
|
1.4
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected market price volatility
of our common stock
|
|
|
55
|
%
|
|
|
48
|
%
|
Weighted-average expected life of
the purchase rights (years)
|
|
|
0.25
|
|
|
|
0.25
|
|
Weighted-average fair value of
purchase rights granted
|
|
$
|
6.77
|
|
|
$
|
3.40
|
|
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 transferable. In addition,
option valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because our 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 our opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of our employee stock options and
purchase rights.
Restricted Stock Units. During 2004, we
implemented the RSU program. This program is designed to reward
our officers for specified increases in our stock price over
multi-year performance periods. If our stock price averages at
least the target price for 20 consecutive trading days during
the relevant performance period, the officers are paid cash for
each unit equal to the average stock price for the 20 trading
days preceding the date specified below. As of December 31,
2005, there were awards outstanding with respect to two
performance periods that began on April 1, 2004 and end as
follows:
|
|
|
|
|
|
|
|
|
|
|
Units
|
|
|
Target Price per Share
|
|
|
|
(In thousands)
|
|
|
March 31, 2006
|
|
|
955
|
|
|
$
|
20.48
|
|
December 31, 2007
|
|
|
1,195
|
|
|
|
22.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005, our stock price had not achieved
either of the target prices and, accordingly, we had recorded no
expense or liability related to the RSU program. In January
2006, our stock price achieved the target for the awards for the
performance period ending March 31, 2006. However, on
February 1, 2006, our officers surrendered their RSU awards
for this performance period in light of the pay and benefit
reductions taken by our employees. As discussed in Note 2,
we will account for the RSUs on a fair value basis effective
with the adoption of SFAS 123R on January 1, 2006.
A-58
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 9
|
ACCUMULATED
OTHER COMPREHENSIVE LOSS
|
The components of accumulated other comprehensive loss (which
are all net of applicable income taxes) are as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Minimum
|
|
|
Gain/(Loss) on
|
|
|
|
|
|
|
Pension
|
|
|
Derivative
|
|
|
|
|
|
|
Liability
|
|
|
Instruments
|
|
|
Total
|
|
|
Balance at December 31, 2002
|
|
$
|
(388
|
)
|
|
$
|
(7
|
)
|
|
$
|
(395
|
)
|
Current year net change in
accumulated other comprehensive loss
|
|
|
(20
|
)
|
|
|
(2
|
)
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
(408
|
)
|
|
|
(9
|
)
|
|
|
(417
|
)
|
Current year net change in
accumulated other comprehensive loss
|
|
|
(176
|
)
|
|
|
6
|
|
|
|
(170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
(584
|
)
|
|
|
(3
|
)
|
|
|
(587
|
)
|
Current year net change in
accumulated other comprehensive loss
|
|
|
(96
|
)
|
|
|
8
|
|
|
|
(88
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
$
|
(680
|
)
|
|
$
|
5
|
|
|
$
|
(675
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The minimum pension liability recorded in other comprehensive
loss before applicable income taxes was $914 million and
$818 million at December 31, 2005 and 2004,
respectively.
|
|
NOTE 10
|
EMPLOYEE
BENEFIT PLANS
|
We have defined benefit pension and defined contribution
(including 401(k) savings) plans. Substantially all of our
domestic employees are covered by one or more of these plans.
The benefits under our defined benefit pension plans are based
on years of service and an employees final average
compensation. Our pension obligations are measured as of
December 31 of each year.
Defined Benefit Pension Plans. Under
the new collective bargaining agreement with our pilots ratified
on March 30, 2005, which we refer to as the pilot
agreement, future defined benefit accruals for pilots
ceased and retirement benefits accruing in the future are
provided through two new pilot-only defined contribution plans.
As required by the pilot agreement, defined benefit pension
assets and obligations related to pilots in our primary defined
benefit pension plan (covering substantially all
U.S. employees other than Chelsea Food Services
(Chelsea) and CMI employees) were spun out into a
separate pilot-only defined benefit pension plan, which we refer
to as the pilot defined benefit pension plan.
Subsequently, on May 31, 2005, future benefit accruals for
pilots ceased and the pilot defined benefit pension plan was
frozen. As of that freeze date, all existing accrued
benefits for pilots (including the right to receive a lump sum
payment upon retirement) were preserved in the pilot defined
benefit pension plan. Accruals for non-pilot employees under our
primary defined benefit pension plan continue.
A-59
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the defined benefit pension
plans change in projected benefit obligation at
December 31 (in millions):
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Accumulated benefit obligation
|
|
$
|
2,494
|
|
|
$
|
2,412
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at
beginning of year
|
|
$
|
2,863
|
|
|
$
|
2,362
|
|
Service cost
|
|
|
86
|
|
|
|
151
|
|
Interest cost
|
|
|
151
|
|
|
|
152
|
|
Plan amendments
|
|
|
7
|
|
|
|
(6
|
)
|
Actuarial losses
|
|
|
105
|
|
|
|
310
|
|
Benefits paid
|
|
|
(310
|
)
|
|
|
(113
|
)
|
Plan curtailment
|
|
|
(272
|
)
|
|
|
|
|
Other
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at
end of year
|
|
$
|
2,630
|
|
|
$
|
2,863
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the defined benefit pension
plans change in the fair value of plan assets at
December 31 (in millions):
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Fair value of plan assets at
beginning of year
|
|
$
|
1,281
|
|
|
$
|
1,280
|
|
Actual gain on plan assets
|
|
|
69
|
|
|
|
113
|
|
Employer contributions
|
|
|
381
|
|
|
|
1
|
|
Benefits paid
|
|
|
(310
|
)
|
|
|
(113
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end
of year
|
|
$
|
1,421
|
|
|
$
|
1,281
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension cost recognized in the accompanying
consolidated balance sheets at December 31 is computed as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Funded status of the
plans net underfunded
|
|
$
|
(1,209
|
)
|
|
$
|
(1,582
|
)
|
Unrecognized net actuarial loss
|
|
|
1,051
|
|
|
|
1,275
|
|
Unrecognized prior service cost
|
|
|
54
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(104
|
)
|
|
$
|
(206
|
)
|
|
|
|
|
|
|
|
|
|
Accrued benefit liability
|
|
$
|
(1,078
|
)
|
|
$
|
(1,132
|
)
|
Intangible asset
|
|
|
60
|
|
|
|
108
|
|
Accumulated other comprehensive
loss
|
|
|
914
|
|
|
|
818
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(104
|
)
|
|
$
|
(206
|
)
|
|
|
|
|
|
|
|
|
|
The following actuarial assumptions were used to determine the
actuarial present value of our projected benefit obligation at
December 31:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Weighted average assumed discount
rate
|
|
|
5.68
|
%
|
|
|
5.75
|
%
|
Weighted average rate of
compensation increase
|
|
|
2.25
|
%
|
|
|
3.0
|
%
|
A-60
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net periodic defined benefit pension expense for the years ended
December 31 included the following components (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Service cost
|
|
$
|
86
|
|
|
$
|
151
|
|
|
$
|
156
|
|
Interest cost
|
|
|
151
|
|
|
|
152
|
|
|
|
134
|
|
Expected return on plan assets
|
|
|
(124
|
)
|
|
|
(116
|
)
|
|
|
(72
|
)
|
Amortization of prior service cost
|
|
|
11
|
|
|
|
19
|
|
|
|
20
|
|
Amortization of unrecognized net
actuarial loss
|
|
|
73
|
|
|
|
87
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit expense
|
|
|
197
|
|
|
|
293
|
|
|
|
328
|
|
Curtailment loss (included in
special charges)
|
|
|
43
|
|
|
|
|
|
|
|
|
|
Settlement charge (included in
special charges)
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit expense
|
|
$
|
280
|
|
|
$
|
293
|
|
|
$
|
328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized prior service cost is expensed using a
straight-line amortization of the cost over the average future
service of employees expected to receive benefits under the
plans.
In March 2005, we recorded a $43 million non-cash
curtailment charge in accordance with SFAS No. 88,
Employers Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for
Termination Benefits, (SFAS 88) in
connection with freezing the portion of our defined benefit
pension plan related to our pilots, using actuarial assumptions
consistent with those we used at December 31, 2004.
SFAS 88 requires curtailment accounting if an event
eliminates, for a significant number of employees, the accrual
of defined benefits for some or all of their future services. In
the event of a curtailment, a loss must be recognized for the
unrecognized prior service cost associated with years of
expected future service that will no longer be recognized for
benefit accrual purposes. Additionally, the projected benefit
obligation was reduced by $272 million to reflect the fact
that related future pay increases assumed in the opening
projected benefit obligation will no longer be considered in
calculating the projected benefit obligations.
During 2005, we recorded non-cash settlement charges totaling
$40 million related to lump sum distributions from our
benefit pension plans to pilots who retired. SFAS 88
requires the use of settlement accounting if, for a given year,
the cost of all settlements exceeds, or is expected to exceed,
the sum of the service cost and interest cost components of net
periodic pension expense for the plan. Under settlement
accounting, unrecognized plan gains or losses must be recognized
immediately in proportion to the percentage reduction of the
plans projected benefit obligation. We anticipate that we
will have additional non-cash settlement charges in the future
in conjunction with lump-sum distributions to retiring pilots.
The following actuarial assumptions were used to determine our
net periodic benefit expense for the year ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Weighted average assumed discount
rate
|
|
|
5.71
|
%
|
|
|
6.25
|
%
|
|
|
6.75
|
%
|
Expected long-term rate of return
on plan assets
|
|
|
9.00
|
%
|
|
|
9.00
|
%
|
|
|
9.00
|
%
|
Weighted average rate of
compensation increase
|
|
|
2.48
|
%
|
|
|
2.87
|
%
|
|
|
3.34
|
%
|
A-61
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The plans assets consist primarily of equity and
fixed-income securities. As of December 31, 2005, the plans
held 4.3 million shares of Holdings common stock, which had
a fair value of $34 million. As of December 31, the
asset allocations by category were as follows:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
U.S. equities
|
|
|
49
|
%
|
|
|
49
|
%
|
International equities
|
|
|
21
|
|
|
|
17
|
|
Fixed income
|
|
|
22
|
|
|
|
28
|
|
Other
|
|
|
8
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
We develop our expected long-term rate of return assumption
based on historical experience and by evaluating input from the
trustee managing the plans assets. Our expected long-term
rate of return on plan assets is based on a target allocation of
assets, which is based on our goal of earning the highest rate
of return while maintaining risk at acceptable levels. The plans
strive to have assets sufficiently diversified so that adverse
or unexpected results from one security class will not have an
unduly detrimental impact on the entire portfolio. We regularly
review our actual asset allocation and periodically rebalance
the pension plans investments to our targeted allocation
when considered appropriate. Plan assets are allocated within
the following guidelines:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Long-Term
|
|
|
|
Percent of Total
|
|
|
Rate of Return
|
|
|
U.S. equities
|
|
|
35-55
|
%
|
|
|
9.4
|
%
|
International equities
|
|
|
15-25
|
|
|
|
9.4
|
|
Fixed income
|
|
|
15-25
|
|
|
|
6.8
|
|
Other
|
|
|
0-15
|
|
|
|
12.4
|
|
Funding obligations for our defined benefit plans are determined
under applicable law. In 2005, we contributed $224 million
in cash and 12.1 million shares of Holdings common stock
valued at $130 million to our defined benefit plans. Due to
high fuel prices, the weak revenue environment and our desire to
maintain adequate liquidity, we elected in 2004 and 2005 to use
deficit contribution relief under the Pension Funding Equity Act
of 2004. As a result, we were not required to make any
contributions to our primary defined benefit pension plan in
2004 and did not do so. The elections also allowed us to make
smaller contributions to our defined benefit pension plans in
2005, and will allow smaller contributions in 2006, than would
have been otherwise required. Based on current assumptions and
applicable law, we will be required to contribute
$258 million to our defined benefit pension plans in 2006
to meet our minimum funding obligations.
We project that our defined benefit pension plans will make the
following benefit payments, which reflect expected future
service, for the years ended December 31 (in millions):
|
|
|
|
|
2006
|
|
$
|
185
|
|
2007
|
|
|
273
|
|
2008
|
|
|
251
|
|
2009
|
|
|
193
|
|
2010
|
|
|
214
|
|
2011 through 2015
|
|
|
1,023
|
|
Defined Contribution Plans for Pilots.
As required by the new pilot agreement, two new pilot-only
defined contribution plans were established effective
September 1, 2005. One of these plans is a money purchase
pension plan a type of defined contribution
plan subject to the minimum funding rules of the
A-62
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Internal Revenue Code. Contributions under that plan are
generally expressed as a percentage of applicable pilot
compensation, subject to limits under the Internal Revenue Code.
The initial contribution to that plan was based on applicable
compensation for a period beginning July 1, 2005. The other
new pilot-only defined contribution plan is a 401(k) plan that
was established by transferring the pilot accounts from our
pre-existing primary 401(k) plan (covering substantially all of
our U.S. employees other than CMI employees) to a separate
pilot-only 401(k) plan. Pilots may make elective pre-tax
and/or
post-tax contributions to the pilot-only 401(k) plan. In
addition, the pilot agreement calls for employer contributions
to the pilot-only 401(k) plan based on pre-tax profits during a
portion of the term of the pilot agreement. To the extent the
Internal Revenue Code limits preclude employer contributions
called for by the pilot agreement, the disallowed amount will be
paid directly to the pilots as current wages under a
corresponding nonqualified arrangement. Our expense related to
the defined contribution plans for pilots was $20 million
in the year ended December 31, 2005.
We have also agreed with each of the unions representing our
major work groups that for a limited time period we will not
seek to reject or modify the collective bargaining agreements or
retiree benefits in the event of our bankruptcy, subject to
certain exceptions.
Other 401(k) Plans. Our other two
defined contribution 401(k) employee savings plans cover
substantially all domestic employees except for pilots
(beginning in 2005). Company matching contributions are made in
cash. For the years ended December 31, 2005, 2004 and 2003,
total expense for the defined contribution plans was
$22 million, $30 million and $35 million,
respectively. During the second quarter of 2005, company
matching contributions were terminated for substantially all
employees other than flight attendants, mechanics and CMI
employees subject to collective bargaining agreements. Company
matching contributions for flight attendants were terminated in
the first quarter of 2006.
Retiree Medical Benefits. Effective
April 1, 2005, we made changes to certain retiree medical
programs available to eligible retirees. The retiree medical
programs are self-insured arrangements that permit retirees who
meet certain age and service requirements to continue medical
coverage between retirement and Medicare eligibility. Eligible
employees are required to pay a portion of the costs of their
retiree medical benefits, which in some cases may be offset by
accumulated unused sick time at the time of their retirement.
Plan benefits are subject to co-payments, deductibles and other
limits as described in the plans. Previously, we offered these
benefits on a
workgroup-by-workgroup
basis and had the periodic option of discontinuing the benefits.
As a result of revising and extending these benefits, we now
account for them as if they are permanent.
We account for the retiree medical benefits plan under
SFAS No. 106, Employers Accounting for
Postretirement Benefits other than Pensions, which
requires recognition of the expected cost of benefits over the
employees service period. The following table sets forth
the retiree medical benefits plans change in projected
benefit obligation during 2005 (in millions):
|
|
|
|
|
Projected benefit obligation at
inception of plan
|
|
$
|
246
|
|
Service cost
|
|
|
8
|
|
Interest cost
|
|
|
11
|
|
Actuarial gain
|
|
|
(7
|
)
|
Participant contributions
|
|
|
1
|
|
Benefits paid
|
|
|
(9
|
)
|
|
|
|
|
|
Projected benefit obligation at
end of year
|
|
$
|
250
|
|
|
|
|
|
|
A-63
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The retiree medical benefits plan is unfunded. Retiree medical
benefits plan cost recognized in the accompanying consolidated
balance sheets at December 31, 2005 is computed as follows
(in millions):
|
|
|
|
|
|
|
2005
|
|
|
Funded status of the
plan net underfunded
|
|
$
|
(250
|
)
|
Unrecognized net gain
|
|
|
(7
|
)
|
Unrecognized prior service cost
|
|
|
231
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(26
|
)
|
|
|
|
|
|
Accrued benefit liability
|
|
$
|
(26
|
)
|
|
|
|
|
|
The following actuarial assumptions were used to determine the
actuarial present value of our projected benefit obligation and
our net periodic benefit expense at December 31, 2005:
|
|
|
|
|
2005
|
|
Weighted average assumed discount
rate
|
|
5.57%
|
Health care cost trend
|
|
9%, decreasing to 5% by 2010
|
Net periodic retiree medical benefit expense for the year ended
December 31, 2005 included the following components (in
millions):
|
|
|
|
|
Service cost
|
|
$
|
8
|
|
Interest cost
|
|
|
11
|
|
Amortization of prior service cost
|
|
|
15
|
|
|
|
|
|
|
Net periodic benefit expense
|
|
$
|
34
|
|
|
|
|
|
|
Unrecognized prior service cost is expensed using a
straight-line amortization of the cost over the average future
service of employees expected to receive benefits under the
plans.
We project that our retiree medical benefit plan will make the
following benefit payments, which reflect expected future
service, for the years ended December 31 (in millions):
|
|
|
|
|
2006
|
|
$
|
11
|
|
2007
|
|
|
13
|
|
2008
|
|
|
16
|
|
2009
|
|
|
17
|
|
2010
|
|
|
19
|
|
2011 through 2015
|
|
|
113
|
|
A one percent increase in the assumed health care cost trend
rate would increase the accumulated postretirement benefit
obligation as of December 31, 2005 by approximately
$24 million and our run-rate annual expense by
approximately $3 million. A one percent decrease in the
assumed health care cost trend rate would decrease the
accumulated postretirement benefit obligation as of
December 31, 2005 by approximately $21 million and our
run-rate annual expense by approximately $3 million.
Profit Sharing Plan. In January 2005,
we announced an enhanced profit sharing plan. The new plan,
which will be in place through 2009, creates an award pool of
30% of the first $250 million of pre-tax income, 25% of the
next $250 million and 20% of amounts over
$500 million, subject to certain adjustments. Half of the
profit-sharing pool will be allocated based on the relative
share of pay and benefit concessions of each work group and the
other half will be allocated based on the relative wages of each
work group. Substantially all Continental employees (other than
employees who participate in our management or officer
A-64
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
bonus programs and certain
non-U.S. employees)
will participate in the plan. We paid no profit sharing to
Continental employees in 2005, 2004 or 2003.
Income tax benefit (expense) for the years ended
December 31 consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(7
|
)
|
Deferred
|
|
|
(5
|
)
|
|
|
147
|
|
|
|
(89
|
)
|
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
Deferred
|
|
|
(3
|
)
|
|
|
13
|
|
|
|
(7
|
)
|
Foreign:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
Deferred
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
9
|
|
|
|
(120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit (expense)
|
|
$
|
|
|
|
$
|
40
|
|
|
$
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reconciliations of income tax computed at the United States
federal statutory tax rates to income tax benefit (expense) for
the years ended December 31 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Income tax benefit (expense) at
United States statutory rates
|
|
$
|
24
|
|
|
$
|
157
|
|
|
$
|
(65
|
)
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income tax benefit
(expense), net of federal benefit
|
|
|
2
|
|
|
|
8
|
|
|
|
(8
|
)
|
|
|
3.4
|
|
|
|
1.8
|
|
|
|
4.3
|
|
Tax on equity in the income of
subsidiary
|
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
8.6
|
|
Non-deductible loss on
contribution of Holdings stock to defined benefit pension plan
|
|
|
(27
|
)
|
|
|
|
|
|
|
(9
|
)
|
|
|
(39.6
|
)
|
|
|
|
|
|
|
4.8
|
|
Meals and entertainment
disallowance
|
|
|
(7
|
)
|
|
|
(6
|
)
|
|
|
(8
|
)
|
|
|
(11.0
|
)
|
|
|
(1.3
|
)
|
|
|
4.3
|
|
Valuation allowance
|
|
|
9
|
|
|
|
(120
|
)
|
|
|
|
|
|
|
13.8
|
|
|
|
(26.6
|
)
|
|
|
|
|
Other
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
(3
|
)
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense)
|
|
$
|
|
|
|
$
|
40
|
|
|
$
|
(109
|
)
|
|
|
0.0
|
%
|
|
|
8.9
|
%
|
|
|
58.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For financial reporting purposes, income tax benefits recorded
on losses result in deferred tax assets for financial reporting
purposes. We are required to provide a valuation allowance for
deferred tax assets to the extent management determines that it
is more likely than not that such deferred tax assets will
ultimately not be realized. Due to our continued losses, we were
required to provide a valuation allowance on deferred tax assets
beginning in the first quarter of 2004. As a result, all of our
2005 losses and the majority of our 2004 losses were not reduced
by any tax benefit. Furthermore, we expect to be required to
provide additional valuation allowance in conjunction with
deferred tax assets recorded on losses in the future.
Holdings initial public offering caused it to separate
from our consolidated tax group. As a result, we were required
to accrue income tax expense on our share of Holdings net
income after its initial public
A-65
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
offering in all periods where we consolidated Holdings
operations. The impact of this is reflected above in tax on
equity in the income of subsidiary.
In 2005 and 2003, we contributed shares of Holdings common stock
valued at approximately $130 million and $100 million,
respectively, to our primary defined benefit pension plan. For
tax purposes, our deductions were limited to the market value of
the shares contributed. Since our tax basis in the shares was
higher than the market value at the time of the contributions,
the nondeductible portion increased our tax expense by
$27 million and $9 million, respectively.
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
our deferred tax liabilities and assets as of December 31
are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Fixed assets, intangibles and
spare parts
|
|
$
|
1,571
|
|
|
$
|
1,574
|
|
Other, net
|
|
|
198
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
1,769
|
|
|
|
1,739
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
|
(1,544
|
)
|
|
|
(1,209
|
)
|
Pension liability
|
|
|
(343
|
)
|
|
|
(343
|
)
|
Accrued liabilities
|
|
|
(318
|
)
|
|
|
(295
|
)
|
Basis in subsidiary stock
|
|
|
(59
|
)
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
(2,264
|
)
|
|
|
(1,931
|
)
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
495
|
|
|
|
404
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
|
|
|
|
|
212
|
|
Less: current deferred tax asset
|
|
|
(154
|
)
|
|
|
(166
|
)
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax liability
|
|
$
|
154
|
|
|
$
|
378
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005, we had estimated tax NOLs of
$4.1 billion for federal income tax purposes that will
expire beginning in 2006 through 2025.
Section 382 of the Internal Revenue Code
(Section 382) imposes limitations on a
corporations 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
of an ownership change, utilization of our NOLs would be subject
to an annual limitation under Section 382 determined by
multiplying the value of our stock at the time of the ownership
change by the applicable long-term tax-exempt rate (which is
4.40% for December 2005). Any unused annual limitation may be
carried over to later years. The amount of the limitation may,
under certain circumstances, be increased by built-in gains held
by us at the time of the change that are recognized in the
five-year period after the change. If we were to have an
ownership change under current conditions, our annual NOL
utilization could be limited to approximately $81 million
per year, before consideration of any built-in gains.
During 2005, we entered into a final settlement agreement with
the Internal Revenue Service (IRS) resolving all
matters raised by the IRS during its examination of our federal
income tax returns through the year ended December 31,
1999. As a result of the settlement with the IRS and the
associated deferred tax account reconciliation, deferred tax
liabilities and long-term assets (primarily routes and airport
operating rights, which values were established upon our
emergence from bankruptcy in April 1993) were reduced by
$215 million to reflect the ultimate resolution of tax
uncertainties existing at the point we emerged from
A-66
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
bankruptcy. The composition of the individual elements of
deferred taxes recorded on the balance sheet was also adjusted;
however, the net effect of these changes was entirely offset by
an increase in the deferred tax valuation allowance due to our
prior determination that it is more likely than not that our net
deferred tax assets will ultimately not be realized. The
settlement did not have a material impact on our results of
operations, financial condition or liquidity.
|
|
NOTE 12
|
SPECIAL
CHARGES
|
Special Charges. In 2005, we recorded
special charges of $67 million. In the first quarter of
2005, we recorded a $43 million non-cash curtailment charge
relating to the freezing of the portion of our defined benefit
pension plan attributable to pilots. In the third and fourth
quarters of 2005, we recorded non-cash settlement charges
totaling $40 million related to lump sum distributions from
our pilot defined benefit pension plans to pilots who retired.
These charges are discussed further in Note 10. Also in
2005, we reduced our allowance for future lease payments and
return conditions related to permanently grounded aircraft by
$16 million following negotiated settlements with the
aircraft lessors in an improved aircraft market.
In 2004, we recorded special charges of $87 million
primarily associated with future obligations for rent and return
conditions related to 16 leased MD-80 aircraft that were
permanently grounded during the period. Our last two active
MD-80 aircraft were permanently grounded in January 2005. We
also recorded a non-cash charge of $34 million related to
the termination of a 1993 service agreement with United
Micronesia Development Association in the first quarter of 2004.
In 2003, we recorded fleet impairment losses and other special
charges of $100 million. In the first quarter of 2003, we
recorded fleet impairment losses and the special charges of
$65 million. This charge includes a $44 million
additional impairment of our fleet of owned MD-80s, which was
initially determined to be impaired and written down to then
current fair value in 2002. The remainder of the charge
consisted primarily of the write-down to market value of spare
parts inventory for permanently grounded fleets. The charge
reflected the impact of the war in Iraq and the resulting
deterioration of the already weak revenue environment for the
U.S. airline industry. These write-downs were necessary
because the fair market values of the MD-80 and spare parts
inventory had declined as a result of the difficult financial
environment and further reductions in capacity by
U.S. airlines. In the second quarter of 2003, we recorded a
special charge of $14 million relating to the deferral of
aircraft deliveries. In December 2003, we determined five
previously grounded leased MD-80 aircraft to be permanently
grounded and recorded a charge of $21 million associated
with future obligations for rent and return conditions, net of
estimated sublease income, on those aircraft.
The impairment losses in 2003 were partially the result of the
September 11, 2001 terrorist attacks and the related
aftermath. As a result of the U.S. domestic airline industry
environment and our continuing losses, we determined that
indicators of impairment were present for certain fleet types.
We estimated undiscounted cash flows to be generated by each
fleet type based on historical results adjusted to reflect our
best estimate of future market and operating conditions. The net
carrying values of impaired aircraft and related items not
recoverable were reduced to fair value. Our estimates of fair
value represented our best estimate based on industry trends and
reference to market rates.
A-67
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Allowance Activity. Activity related
to the accruals for the allowance for future lease payments and
return conditions and closure/under-utilization of facilities
for the years ended December 31 are as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
|
|
Balance
|
|
|
Accrual
|
|
|
Payments
|
|
|
Other
|
|
|
Balance
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for future lease
payments and return conditions
|
|
$
|
116
|
|
|
$
|
|
|
|
$
|
(61
|
)
|
|
$
|
(16
|
)(A)
|
|
$
|
39
|
|
Closure/under-utilization of
facilities
|
|
|
14
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
12
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for future lease
payments and return conditions
|
|
$
|
83
|
|
|
$
|
87
|
|
|
$
|
(57
|
)
|
|
$
|
3
|
|
|
$
|
116
|
|
Closure/under-utilization of
facilities
|
|
|
17
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
14
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for future lease
payments and return conditions
|
|
$
|
107
|
|
|
$
|
21
|
|
|
$
|
(45
|
)
|
|
$
|
|
|
|
$
|
83
|
|
Closure/under-utilization of
facilities
|
|
|
22
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
17
|
|
|
|
|
(A) |
|
Primarily reserve reductions on permanently grounded aircraft,
recorded as a credit to special charges in our consolidated
statement of operations. |
We expect these accruals to be substantially paid during 2006.
Out-of-Service
Aircraft. We had 14 MD-80 aircraft
permanently removed from service as of December 31, 2005.
The eight owned
out-of-service
MD-80 aircraft are being carried at an aggregate fair
market value of $14 million, and the remaining rentals on
the six leased
out-of-service
MD-80 aircraft
have been accrued. We are currently exploring lease or sale
opportunities for the
out-of-service
aircraft. We cannot predict when or if purchasers, lessees or
sublessees can be found, and it is possible that our owned
MD-80 aircraft
could suffer additional impairment.
Additionally, we own seven
out-of-service
Empresa Brasileira de Aeronautica S.A. (Embraer)
120 turboprop aircraft. These aircraft are being carried at
fair value of $6 million. We are currently exploring lease
or sale opportunities for the remaining
out-of-service
aircraft, subject to the same uncertainties as the
out-of-service
mainline aircraft discussed above.
|
|
NOTE 13
|
SECURITY
FEE REIMBURSEMENT
|
In May 2003, we received and recognized in earnings
$176 million in cash from the United States government
pursuant to the Emergency Wartime Supplemental Appropriations
Act enacted in April 2003. This amount is reimbursement for our
proportional share of passenger security and air carrier
security fees paid or collected by U.S. air carriers as of
the date of enactment of the law, together with other items.
|
|
NOTE 14
|
INVESTMENT
IN AFFILIATES
|
At December 31, 2005, investment in affiliates includes our
investments in Copa and Holdings. In prior years, we also had
investments in Orbitz and Hotwire, two internet travel companies.
Copa. As of December 31, 2005, we
had a 27% interest in Copa with a carrying value of
$87 million. This investment is accounted for using the
equity method of accounting. The carrying amount of our
investment exceeds the amount of underlying equity in
Copas net assets by $23 million. This difference is
treated as goodwill and is not amortized.
A-68
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In December 2005, we completed the sale of 9.1 million
shares of common stock in the initial public offering
(IPO) of Copa. The sale decreased our percentage
ownership in Copa from 49% to 27%, resulting in a
$17 million decrease in the associated goodwill balance. We
received $172 million cash from the sale and recognized a
gain of $106 million. At December 31, 2005, we
continue to hold 11.9 million shares of Copa.
We record our equity in Copas earnings on a one-quarter
lag. Copas results of operations on a stand-alone basis
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Year Ended
December 31,
|
|
|
|
September 30,
2005
|
|
|
2004
|
|
|
2003
|
|
|
Revenue
|
|
$
|
429
|
|
|
$
|
400
|
|
|
$
|
342
|
|
Operating income
|
|
|
82
|
|
|
|
82
|
|
|
|
58
|
|
Net income
|
|
|
65
|
|
|
|
69
|
|
|
|
48
|
|
Copas balance sheet information at December 31, 2004,
the latest fiscal year end available as of the date of this
report, was as follows (in millions):
|
|
|
|
|
Current assets
|
|
$
|
156
|
|
Total assets
|
|
|
702
|
|
Current liabilities
|
|
|
143
|
|
Stockholders equity
|
|
|
174
|
|
Audited financial statements of Copa as of December 31,
2004 are incorporated by reference from Exhibit 99.1 to our
annual report on
Form 10-K.
Copas audited financial statements as of December 31,
2005 will be filed as an amendment to this report on or before
June 30, 2006.
ExpressJet Holdings. We held an 8.6%
interest in Holdings at December 31, 2005. See
notes 15 and 16 for a discussion of this investment and our
capacity purchase agreement with ExpressJet. Holdings
stand-alone financial statements and the calculation of our
equity in Holdings earnings in our consolidated financial
statements are based on Holdings results of operations
under the capacity purchase agreement, which differ from the
amounts presented for our regional segment in Note 18.
Holdings results of operations on a stand-alone basis were
as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Revenue
|
|
$
|
1,563
|
|
|
$
|
1,508
|
|
|
$
|
1,311
|
|
Operating income
|
|
|
157
|
|
|
|
205
|
|
|
|
182
|
|
Net income
|
|
|
98
|
|
|
|
123
|
|
|
|
108
|
|
Holdings balance sheet information at December 31 was as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Current assets
|
|
$
|
280
|
|
|
$
|
254
|
|
Total assets
|
|
|
560
|
|
|
|
543
|
|
Current liabilities
|
|
|
150
|
|
|
|
207
|
|
Stockholders equity
|
|
|
209
|
|
|
|
114
|
|
Audited financial statements of Holdings as of December 31,
2005 are incorporated by reference from Exhibit 99.2 to our
annual report on
Form 10-K.
Orbitz. During 2003 and 2004, we sold
all of our investment in Orbitz in two separate transactions. On
December 19, 2003, we sold approximately 28% of our
investment in Orbitz in connection with its IPO, reducing our
interest in Orbitz from approximately 13% to 9%, for proceeds of
$34 million, net of
A-69
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
underwriting discount. Our gain on the sale was
$32 million. Subsequent to the IPO in 2003, we accounted
for our investment in Orbitz in accordance with
SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. We designated the remaining
investment as a trading security, based on our
intention to dispose of the securities of Orbitz that we owned.
Therefore, the remaining investment was carried at its fair
value, with changes in the fair value reported in our statement
of operations. The fair value adjustment on the Orbitz shares
during 2004 was $15 million and is included in other
nonoperating income in the accompanying consolidated statement
of operations, as was the gain recognized on the disposition of
Orbitz in 2003. On November 12, 2004, we sold our remaining
Orbitz shares for proceeds of $98 million.
Hotwire. In November 2003, we sold all
of our investment in Hotwire, Inc. for $42 million in cash,
resulting in a gain of $40 million. This gain is included
in other nonoperating income in the accompanying consolidated
statement of operations.
|
|
NOTE 15
|
VARIABLE
INTEREST ENTITIES
|
FASB Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46), requires the
consolidation of certain types of entities in which a company
absorbs a majority of another entitys expected losses,
receives a majority of the other entitys expected residual
returns, or both, as a result of ownership, contractual or other
financial interests in the other entity. These entities are
called variable interest entities. The principal
characteristics of variable interest entities are (1) an
insufficient amount of equity to absorb the entitys
expected losses, (2) equity owners as a group are not able
to make decisions about the entitys activities, or
(3) equity that does not absorb the entitys losses or
receive the entitys residual returns. Variable
interests are contractual, ownership or other monetary
interests in an entity that change with fluctuations in the
entitys net asset value. As a result, variable interest
entities can arise from items such as lease agreements, loan
arrangements, guarantees or service contracts.
If an entity is determined to be a variable interest
entity, the entity must be consolidated by the
primary beneficiary. The primary beneficiary is the
holder of the variable interests that absorbs a majority of the
variable interest entitys expected losses or receives a
majority of the entitys residual returns in the event no
holder has a majority of the expected losses. There is no
primary beneficiary in cases where no single holder absorbs the
majority of the expected losses or receives a majority of the
residual returns. The determination of the primary beneficiary
is based on projected cash flows at the inception of the
variable interests.
We have variable interests in the following types of variable
interest entities:
Aircraft Leases. We are the lessee in
a series of operating leases covering the majority of our leased
aircraft. The lessors are trusts established specifically to
purchase, finance and lease aircraft to us. These leasing
entities meet the criteria for variable interest entities. We
are generally not the primary beneficiary of the leasing
entities if the lease terms are consistent with market terms at
the inception of the lease and do not include a residual value
guarantee, fixed-price purchase option or similar feature that
obligates us to absorb decreases in value or entitles us to
participate in increases in the value of the aircraft. This is
the case for many of our operating leases; however, leases of
approximately 75 mainline jet aircraft contain a fixed-price
purchase option that allows us to purchase the aircraft at
predetermined prices on specified dates during the lease term.
Additionally, leases of approximately 127 regional jet aircraft
contain an option to purchase the aircraft at the end of the
lease term at prices that, depending on market conditions, could
be below fair value. We have not consolidated the related trusts
upon application of FIN 46 because, even taking into
consideration these purchase options, we are still not the
primary beneficiary based on our cash flow analysis. Our maximum
exposure under these leases is the remaining lease payments,
which are reflected in future lease commitments in Note 5.
A-70
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Airport Leases. We are the lessee of
real property under long-term operating leases at a number of
airports where we are also the guarantor of approximately
$1.7 billion of underlying debt and interest thereon. These
leases are typically with municipalities or other governmental
entities. FIN 46 is not applicable to arrangements with
governmental entities. To the extent our lease and related
guarantee are with a separate legal entity other than a
governmental entity, we are not the primary beneficiary because
the lease terms are consistent with market terms at the
inception of the lease and the lease does not include a residual
value guarantee, fixed price purchase option or similar feature
as discussed above.
Subsidiary Trust. We have a subsidiary
trust that has Mandatorily Redeemable Preferred Securities
outstanding with a liquidation value of $248 million. The
trust is a variable interest entity under FIN 46 because we
have a limited ability to make decisions about its activities.
However, we are not the primary beneficiary of the trust.
Therefore, the trust and the Mandatorily Redeemable Preferred
Securities issued by the trust are not reported on our balance
sheets. Instead, we report our 6% Convertible Junior
Subordinated Debentures held by the trust as long-term debt and
interest on the notes is recorded as interest expense for all
periods presented in the accompanying financial statements.
Capacity Purchase Agreement. Holdings
and ExpressJet each meet the criteria for a variable interest
entity because the economic interests we hold in these entities
are disproportional to our obligations to absorb expected losses
or receive expected residual returns. The variable interests in
Holdings and ExpressJet include our capacity purchase agreement,
a tax sharing agreement between Holdings and us, a note payable
from Holdings to us, convertible debentures issued by Holdings
and held by third parties and Holdings common stock. Our
assessment under FIN 46 of expected losses and expected
residual returns indicated that the main factors that caused us
to have a disproportionate share of the expected losses were the
possibility that ExpressJet would be unable to fully repay its
debt or to make payments under the tax sharing agreement. The
assessment indicated that we exceeded 50% of the expected losses
even though our equity interest had fallen below 50%.
Furthermore, the assessment indicated that only when our
combined direct equity interest and the interest held by our
defined benefit pension plan fell to 41% did our share of the
expected losses drop below 50%, the point at which FIN 46
required deconsolidation. This occurred on November 12,
2003. Therefore, we deconsolidated Holdings as of that date. See
Note 16 for further discussion of our ownership of Holdings
and our capacity purchase agreement with Holdings and ExpressJet.
|
|
NOTE 16
|
INVESTMENT
IN EXPRESSJET AND REGIONAL CAPACITY PURCHASE AGREEMENT
|
Investment
in ExpressJet
During the third quarter of 2003, we sold approximately
9.8 million shares of our Holdings common stock to
Holdings, reducing our ownership interest in Holdings from 53.1%
to 44.6%. In a subsequent transaction in the third quarter of
2003, we contributed approximately 7.4 million shares of
Holdings common stock to our defined benefit pension plan,
further reducing our ownership of Holdings to below 31%. We
recognized gains totaling $173 million in 2003 as a result
of these transactions. We continued to consolidate Holdings
because, under FIN 46, we were the primary beneficiary
until November 12, 2003, when, as a result of sales of
Holdings shares to unrelated parties by our defined benefit
pension plan, the combined amount of Holdings common stock owned
by us and our defined benefit pension plan fell below 41%, the
point at which we no longer were the primary beneficiary under
FIN 46. Therefore, in accordance with FIN 46, we
deconsolidated Holdings as of November 12, 2003 and began
to account for our interest in Holdings using the equity method
of accounting. As a result, after deconsolidation, we continue
to record the related passenger revenue and related expenses,
with payments under the capacity purchase agreement reflected as
a separate operating expense. Prior to November 12, 2003,
expenses under the capacity purchase agreement were eliminated
in consolidation and the portion of Holdings net income
attributable to the equity of Holdings that we did not own was
reported as minority interest in our consolidated statement of
operations. After
A-71
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
deconsolidation, nonoperating income has increased due to our
equity in Holdings earnings and earnings under our tax
sharing agreement with Holdings. Additionally, after
deconsolidation, we no longer record minority interest on either
our balance sheet or statement of operations.
On January 6, 2005, we contributed 6.0 million shares
of Holdings common stock to our defined benefit pension plan. We
recognized a gain of $51 million in the first quarter of
2005 related to this transaction. On April 7, 2005, we
contributed an additional 6.1 million shares of Holdings
common stock to our defined benefit pension plan. We recognized
a gain of $47 million in the second quarter of 2005 related
to this transaction. Our ownership of Holdings common stock
following these transactions was 4.7 million shares, or an
8.6% interest in Holdings. These 4.7 million shares had a
market value of $38 million at December 31, 2005. We
do not currently intend to remain a stockholder of Holdings over
the long term. Subject to market conditions, we intend to sell
or otherwise dispose of all of our shares of Holdings common
stock in the future. Additionally, during 2005 we relinquished
our right to appoint a director to Holdings Board of
Directors. However, we will continue to account for our interest
in Holdings using the equity method of accounting because of our
ongoing ability to influence Holdings operations
significantly through our capacity purchase agreement.
In addition to the Holdings shares we own, our defined benefit
pension plans owned 4.2 million shares of Holdings common
stock at December 31, 2005, which represented a 7.9%
interest in Holdings. The independent fiduciary for our defined
benefit pension plans, which exercises sole and exclusive
control over the voting and disposition of all securities owned
by our defined benefit pension plans, sold 7.9 million
shares to third parties during 2005. Our ownership of Holdings
common stock, together with the shares held by our defined
benefit pension plans (which shares are subject to the exclusive
control of the independent fiduciary), totaled 8.9 million
shares, or 16.5% of Holdings outstanding shares, at
December 31, 2005.
Capacity
Purchase Agreement with ExpressJet
General. Under our capacity purchase
agreement (the agreement), ExpressJet currently
flies all of its aircraft (which consist entirely of regional
jet aircraft) on our behalf, and we handle scheduling, ticket
prices and seat inventories for these flights. In exchange for
ExpressJets operation of the flights and performance of
other obligations under the agreement, we pay them for each
scheduled block hour based on an agreed formula. Under the
agreement, we recognize all passenger, cargo and other revenue
associated with each flight, and are responsible for all
revenue-related expenses, including commissions, reservations,
catering and passenger ticket processing expenses.
Compensation and Operational
Responsibilities. Under the agreement, we
pay ExpressJet a base fee for each scheduled block hour based on
a formula that was in place through December 31, 2005. The
formula was designed to provide ExpressJet with an operating
margin of approximately 10% before taking into account
variations in some costs and expenses that are generally
controllable by them, the most significant of which is wages,
salaries and benefits. In addition, ExpressJets prevailing
margin, which is the operating margin excluding certain revenues
and costs as specified in the agreement, will be capped at 10%
before certain incentive payments. Pursuant to the terms of the
agreement, the block hour rate portion of the compensation we
pay to ExpressJet is re-negotiated annually.
Payments made under the capacity purchase agreement are reported
as ExpressJet capacity purchase, net in our consolidated
statement of operations. ExpressJet capacity purchase, net
includes all of ExpressJets fuel expense plus a margin on
ExpressJets fuel expense up to a cap provided in the
capacity purchase agreement and a related fuel purchase
agreement (which margin applies only to the first 71.2 cents per
gallon, including fuel taxes) and is net of our rental income on
aircraft we lease to ExpressJet. Such capacity purchase, net
payments totaled $1.6 billion, $1.4 billion and
$1.1 billion in 2005, 2004 and 2003, respectively. Prior to
November 12, 2003, these amounts were eliminated in our
consolidated financial statements.
A-72
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our future payments under the capacity purchase agreement are
dependent on numerous variables, and are therefore difficult to
predict. The most important of those variables is the number of
scheduled block hours, which takes into account the number of
ExpressJet aircraft and our utilization rates of such aircraft.
Set forth below are estimates of our future minimum
noncancelable commitments under the capacity purchase agreement.
These estimates of our future minimum noncancelable commitments
under the capacity purchase agreement do not include the portion
of the underlying obligations for aircraft and facility rent
that are disclosed as part of our consolidated operating lease
commitments. For purposes of calculating these estimates, we
have assumed (1) that ExpressJets aircraft deliveries
continue as scheduled through June 2006, (2) that
applicable expenses include a 10% margin, (3) a constant
fuel rate of 71.2 cents per gallon, including fuel taxes,
(4) that aircraft are removed from the capacity purchase
agreement beginning December 28, 2006 based on a withdrawal
schedule provided to ExpressJet, (5) we exercise our right
to initiate termination of the capacity purchase agreement on
March 1, 2006 with a wind-down beginning in June 2007 after
the withdrawal (noted in (4) above) is completed,
(6) an average daily utilization rate of 9.7 for 2006
through 2008, (7) cancellations are at historical levels
resulting in no incentive compensation payable to ExpressJet and
(8) that inflation is 2% per year. Based on these
assumptions, our future minimum noncancelable commitments under
the capacity purchase agreement at December 31, 2005 are
estimated as follows (in millions):
|
|
|
|
|
2006
|
|
$
|
1,339
|
|
2007
|
|
|
922
|
|
2008
|
|
|
107
|
|
|
|
|
|
|
Total
|
|
$
|
2,368
|
|
|
|
|
|
|
It is important to note that in making the assumptions used to
develop these estimates, we are attempting to estimate our
minimum noncancelable commitments and not the amounts that we
currently expect to pay to ExpressJet. In addition, our actual
minimum noncancelable commitments to ExpressJet could differ
materially from the estimates discussed above, because actual
events could differ materially from the assumptions described
above. For example, a 10% increase or decrease in scheduled
block hours (whether a result of change in delivery dates of
aircraft or average daily utilization) in 2006 would result in a
corresponding increase or decrease in cash obligations under the
capacity purchase agreement of approximately 7.8%, or
$105 million.
ExpressJets base fee includes compensation for scheduled
block hours associated with some cancelled flights, based on
historical cancellation rates constituting rolling five-year
monthly averages. To the extent that ExpressJets rate of
controllable or uncontrollable cancellations is less than its
historical cancellation rate, ExpressJet will be entitled to
additional payments. ExpressJet is also entitled to receive a
small per-passenger fee and incentive payments for first flights
of a day departing on time and baggage handling performance. As
a result of a
better-than-expected
completion rate and other incentives, ExpressJet earned an
additional $7 million, $17 million and
$16 million in 2005, 2004, and 2003, respectively.
If a change of control (as defined in the agreement) of
ExpressJet occurs without our consent, the block hour rates that
we will pay under the agreement will be reduced by an amount
approximately equal to the operating margin built into the rates.
In accordance with the agreement, ExpressJet has agreed to meet
with us each year to review and set the block hour rates to be
paid in the following year, in each case based on the formula
used to set the original block hour rates (including a 10%
targeted operating margin). If we and ExpressJet cannot come to
an agreement on the annual adjustments, we have agreed to submit
our disagreement to arbitration. In addition, the agreement
gives each party the right to meet and confer with
the other regarding any material change in the underlying
assumptions regarding the cost of providing services under the
agreement and whether the compensation provisions of the
agreement should be changed as a result, but does not require
any party to agree to any change in the compensation provisions.
A-73
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Capacity and Fleet Matters. The
capacity purchase agreement covers all of ExpressJets
existing fleet, as well as the final eight Embraer regional jets
currently on order. Under the agreement, we have the right to
give no less than twelve months notice to ExpressJet
reducing the number of its aircraft covered by the contract. In
December 2005, we gave notice to ExpressJet that we would
withdraw 69 of the 274 regional jet aircraft (including 2006
deliveries) from the capacity purchase agreement because we
believe the rates charged by ExpressJet for regional capacity
are above the current market. While our discussions with
ExpressJet continue, we have requested proposals from numerous
regional jet operators to provide regional jet service to
replace the withdrawn capacity. Any transition of service from
ExpressJet to a new operator would begin in January 2007 and be
completed during the summer of 2007.
Under our agreement with ExpressJet, once we have given notice
of withdrawal of aircraft from the agreement, ExpressJet will
have the option to decide, within nine months of that notice, to
(1) fly any of the withdrawn aircraft for another airline
(subject to its ability to obtain facilities, such as gates,
ticket counters, hold rooms and other operations-related
facilities, and subject to its arrangement with us that
prohibits ExpressJet during the term of the agreement from
flying under its or another carriers code in or out of our
hub airports), (2) fly any of the withdrawn aircraft under
ExpressJets own flight designator code, subject to its
ability to obtain facilities and subject to ExpressJets
arrangement with us respecting our hubs, or (3) decline to
fly any of the withdrawn aircraft, return the aircraft to us and
cancel the related subleases with us. If ExpressJet elects to
retain the aircraft, the implicit interest rate used to
calculate the scheduled lease payments under our aircraft
subleases with ExpressJet will automatically increase by 200
basis points to compensate us for our continued participation in
ExpressJets lease financing arrangements. Should
ExpressJet retain the withdrawn aircraft, we anticipate that the
new operator will supply any aircraft needed for its operations
for us.
Term of Agreement. The agreement
currently expires on December 31, 2010 but allows us to
terminate the agreement at any time after December 31, 2006
upon 12 months notice, or at any time without notice
for cause (as defined in the agreement). We may also terminate
the agreement at any time upon a material breach by ExpressJet
that does not constitute cause and continues for 90 days
after notice of such breach, or without notice or opportunity to
cure if we determine that there is a material safety concern
with ExpressJets flight operations. We have the option to
extend the term of the agreement with 24 months
notice for up to four additional five-year terms through
December 31, 2030.
Service Agreements. We provide various
services to ExpressJet and charge them at rates in accordance
with the capacity purchase agreement. The services provided to
ExpressJet by us include loading fuel into aircraft, certain
customer services such as ground handling and infrastructure
services, including but not limited to insurance, technology
(including transaction processing), treasury, tax, real estate,
environmental affairs, corporate security, human resources,
internal corporate accounting, payroll, accounts payable and
risk management. For providing these services, we charged
ExpressJet approximately $101 million, $135 million
and $117 million in 2005, 2004 and 2003, respectively.
Note Receivable from ExpressJet.
At December 31, 2005 we had a $18 million note
receivable from ExpressJet. In accordance with our amended and
restated promissory note agreement dated November 5, 2002,
principal and accrued interest on the note are payable quarterly
by ExpressJet. We anticipate that the final payment will be made
on March 31, 2006. The interest rate is fixed for each
quarter at a rate equal to the three-month London interbank
offered rate (LIBOR) on the second business day
prior to such quarter plus 1.25% per annum, subject to an
aggregate cap of 6.72% in 2004. There is no such cap in
subsequent years.
Leases. As of December 31, 2005,
ExpressJet leased all 266 of its aircraft under long-term
operating leases from us. ExpressJets lease agreements
with us have substantially the same terms as the lease
agreements between us and the lessors and expire between 2013
and 2020. ExpressJet leases or subleases, under various
operating leases, ground equipment and substantially all of its
ground facilities, including facilities at public airports, from
us or the municipalities or agencies owning and controlling such
airports. If
A-74
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ExpressJet defaults on any of its payment obligations with us,
we are entitled to reduce any payments required to be made by us
to ExpressJet under the capacity purchase agreement by the
amount of the defaulted payment. ExpressJets total rental
expense related to all leases with us was approximately
$323 million, $293 million and $281 million in
2005, 2004 and 2003, respectively. After deconsolidation of
Holdings on November 12, 2003, our related aircraft rental
income is reported as a reduction to ExpressJet capacity
purchase, net.
Income Taxes. In conjunction with
Holdings IPO, our tax basis in the stock of Holdings and
the tax basis of ExpressJets tangible and intangible
assets were increased to fair value. The increased tax basis
should result in additional tax deductions available to
ExpressJet over a period of 15 years. To the extent
ExpressJet generates taxable income sufficient to realize the
additional tax deductions, our tax sharing agreement with
ExpressJet provides that it will be required to pay us a
percentage of the amount of tax savings actually realized,
excluding the effect of any loss carrybacks. ExpressJet is
required to pay us 100% of the first third of the anticipated
tax benefit, 90% of the second third and 80% of the last third.
However, if the anticipated benefits are not realized by the end
of 2018, ExpressJet will be obligated to pay us 100% of any
benefits realized after that date. We recognize the benefit of
the tax savings associated with ExpressJets asset
step-up for
financial reporting purposes in the year paid to us by
ExpressJet due to the uncertainty of realization. Income from
the tax sharing agreement totaled $28 million,
$52 million and $17 million in 2005, 2004 and 2003,
respectively, and is included in income from affiliates in the
accompanying statement of operations.
Other. So long as we are
ExpressJets largest customer, if ExpressJet enters into an
agreement with another major airline (as defined in the
agreement) to provide regional airline services on a capacity
purchase or other similar economic basis for ten or more
aircraft on terms and conditions that are in the aggregate less
favorable to ExpressJet than the terms and conditions of the
capacity purchase agreement, we will be entitled to amend our
capacity purchase agreement to conform the economic terms and
conditions of the capacity purchase agreement to the economic
terms and conditions of the agreement with the other major
airline.
|
|
NOTE 17
|
RELATED
PARTY TRANSACTIONS
|
The following is a summary of significant related party
transactions that occurred during 2005, 2004 and 2003, other
than those discussed elsewhere in the Notes to Consolidated
Financial Statements. The payments to and from the related
parties in the ordinary course of business were based on
prevailing market rates and do not include interline billings,
which are common among airlines for transportation-related
services.
Northwest Airlines. Northwest
Airlines, Inc. holds the one share of our Series B
Preferred Stock issued and outstanding. We have a long-term
global alliance with Northwest involving extensive codesharing,
frequent flyer reciprocity and other cooperative activities. The
services provided are considered normal to the daily operations
of both airlines. As a result of these activities, we paid
Northwest $28 million, $32 million and
$47 million in 2005, 2004 and 2003, respectively, and
Northwest paid us $26 million, $26 million and
$24 million in 2005, 2004 and 2003, respectively.
Copa Airlines. As of December 31,
2005, we had a 27% interest in Copa. We have a long-term global
alliance with Copa Airlines involving extensive codesharing,
frequent flyer reciprocity and other cooperative activities. The
services provided are considered normal to the daily operations
of both airlines. As a result of these activities, we paid Copa
$1 million, $2 million and $3 million in 2005,
2004 and 2003, respectively, and Copa paid us $6 million,
$8 million and $5 million in 2005, 2004 and 2003,
respectively.
Orbitz. Until November 2004, we had an
investment in Orbitz, a comprehensive travel planning website,
as more fully discussed in Note 14. Other airlines also
owned equity interests in Orbitz until November 2004 and
distribute air travel tickets through Orbitz. We paid Orbitz
approximately $6 million and $7 million for services
during 2004 and 2003, respectively. Customers booked
approximately $226 million and
A-75
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$229 million of air travel on us via Orbitz in 2004 and
2003, respectively. The distribution services provided by Orbitz
are considered normal to the daily operations of both Orbitz and
us.
Hotwire. Until November 2003, we and
other airlines had an investment in Hotwire, Inc., a web-based
travel services company. We have a marketing agreement with
Hotwire pursuant to which we make available to Hotwire tickets
for air travel. The base term of the agreement expired on
January 7, 2006, but the agreement remains in effect unless
terminated by either party. Other airlines also sell tickets to
Hotwire. Prior to the sale of their indirect interests in
Hotwire during 2003, two of our former directors, David
Bonderman and William Price, controlled approximately 27% of
Hotwires general voting power. We sold Hotwire
approximately $38 million of tickets during 2003. The
distribution services provided to us by Hotwire are considered
normal to both their and our daily operations.
Gate Gourmet. We pay Gate Gourmet
International AG for catering services considered normal to the
daily operations of both Gate Gourmet and us. Payments to Gate
Gourmet totaled $43 million in 2003. Former directors
Bonderman and Price may be deemed to indirectly control
substantially all of the voting securities of Gate Gourmet.
|
|
NOTE 18
|
SEGMENT
REPORTING
|
We have two reportable segments: mainline and regional. The
mainline segment consists of flights to cities using jets with a
capacity of greater than 100 seats while the regional
segment consists of flights using jets with a capacity of 50 or
fewer seats. The regional segment is operated by ExpressJet
through a capacity purchase agreement. See Note 16 for
further discussion of the capacity purchase agreement and the
impact of the deconsolidation of Holdings effective
November 12, 2003.
We evaluate segment performance based on several factors, of
which the primary financial measure is operating income (loss).
However, we do not manage our business or allocate resources
based on segment operating profit or loss because (1) our
flight schedules are designed to maximize revenue from
passengers flying, (2) many operations of the two segments
are substantially integrated (for example, airport operations,
sales and marketing, scheduling and ticketing) and
(3) management decisions are based on their anticipated
impact on the overall network, not on one individual segment.
Financial information for the year ended December 31 by
business segment is set forth below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Operating Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$
|
9,377
|
|
|
$
|
8,327
|
|
|
$
|
7,690
|
|
Regional
|
|
|
1,831
|
|
|
|
1,572
|
|
|
|
1,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated
|
|
$
|
11,208
|
|
|
$
|
9,899
|
|
|
$
|
9,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$
|
(378
|
)
|
|
$
|
(404
|
)
|
|
$
|
(419
|
)
|
Regional
|
|
|
(11
|
)
|
|
|
(11
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated
|
|
$
|
(389
|
)
|
|
$
|
(415
|
)
|
|
$
|
(447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Charges (Note 12):
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$
|
(67
|
)
|
|
$
|
(121
|
)
|
|
$
|
(91
|
)
|
Regional
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated
|
|
$
|
(67
|
)
|
|
$
|
(121
|
)
|
|
$
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A-76
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$
|
215
|
|
|
$
|
(7
|
)
|
|
$
|
219
|
|
Regional
|
|
|
(254
|
)
|
|
|
(231
|
)
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated
|
|
$
|
(39
|
)
|
|
$
|
(238
|
)
|
|
$
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$
|
(393
|
)
|
|
$
|
(371
|
)
|
|
$
|
(372
|
)
|
Regional
|
|
|
(17
|
)
|
|
|
(18
|
)
|
|
|
(27
|
)
|
Intercompany Eliminations
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated
|
|
$
|
(410
|
)
|
|
$
|
(389
|
)
|
|
$
|
(393
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$
|
69
|
|
|
$
|
25
|
|
|
$
|
16
|
|
Regional
|
|
|
3
|
|
|
|
4
|
|
|
|
9
|
|
Intercompany Eliminations
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated
|
|
$
|
72
|
|
|
$
|
29
|
|
|
$
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Benefit (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$
|
|
|
|
$
|
8
|
|
|
$
|
(105
|
)
|
Regional
|
|
|
|
|
|
|
32
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated
|
|
$
|
|
|
|
$
|
40
|
|
|
$
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$
|
189
|
|
|
$
|
(215
|
)
|
|
$
|
121
|
|
Regional
|
|
|
(257
|
)
|
|
|
(194
|
)
|
|
|
(93
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated
|
|
$
|
(68
|
)
|
|
$
|
(409
|
)
|
|
$
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts presented above are presented on the basis of how
our management reviews segment results. Under this basis, the
regional segments revenue includes a pro-rated share of
our ticket revenue for segments flown by Holdings and expenses
include all activity related to the regional operations,
regardless of whether the costs were paid by us or by Holdings.
Net loss for the regional segment for 2003 includes a
$49 million after tax reduction in earnings attributable to
the minority interest that is reflected in our consolidated
statement of operations. Net income (loss) for the mainline
segment includes income from Copa and gains on the sale of Copa
shares and dispositions of Holdings shares.
Information concerning operating revenue by principal geographic
area for the year ended December 31 is as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Domestic (U.S.)
|
|
$
|
6,914
|
|
|
$
|
6,570
|
|
|
$
|
6,181
|
|
Atlantic
|
|
|
1,993
|
|
|
|
1,489
|
|
|
|
1,203
|
|
Latin America
|
|
|
1,427
|
|
|
|
1,139
|
|
|
|
1,050
|
|
Pacific
|
|
|
874
|
|
|
|
701
|
|
|
|
567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,208
|
|
|
$
|
9,899
|
|
|
$
|
9,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A-77
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We attribute revenue among the geographical areas based upon the
origin and destination of each flight segment. Our tangible
assets and capital expenditures consist primarily of flight and
related ground support equipment, which is mobile across
geographic markets and, therefore, has not been allocated.
|
|
NOTE 19
|
COMMITMENTS
AND CONTINGENCIES
|
Purchase Commitments. We have
substantial commitments for capital expenditures, including the
acquisition of new aircraft and related spare engines. As of
December 31, 2005, we had firm commitments for 52 new
aircraft from Boeing, with an estimated cost of
$2.5 billion, and options to purchase 30 additional Boeing
aircraft. We are scheduled to take delivery of six new 737-800
aircraft in 2006, with delivery of the remaining 46 new Boeing
aircraft occurring from 2007 through 2011. In addition, we are
scheduled to take delivery of two used 757-300 aircraft in 2006
under operating leases.
We have backstop financing for six 737-800 aircraft to be
delivered in 2006 and two 777-200ER aircraft to be delivered in
2007. By virtue of these agreements, we have financing available
for all Boeing aircraft scheduled to be delivered through 2007.
However, we do not have backstop financing or any other
financing currently in place for the remainder of the aircraft.
Further financing will be needed to satisfy our capital
commitments for our firm aircraft and other related capital
expenditures. We can provide no assurance that sufficient
financing will be available for the aircraft on order or other
related capital expenditures, or for our capital expenditures in
general.
As of December 31, 2005, ExpressJet had firm commitments
for the final eight regional jets currently on order from
Embraer with an estimated cost of approximately
$0.2 billion. ExpressJet currently anticipates taking
delivery of these regional jets in 2006. ExpressJet does not
have an obligation to take any of these firm Embraer aircraft
that are not financed by a third party and leased to either
ExpressJet or us. Under the capacity purchase agreement between
us and ExpressJet, we have agreed to lease as lessee and
sublease to ExpressJet the regional jets that are subject to
ExpressJets firm purchase commitments. In addition, under
the capacity purchase agreement with ExpressJet, we generally
are obligated to purchase all of the capacity provided by these
new aircraft as they are delivered to ExpressJet.
Financings and Guarantees. We are the
guarantor of approximately $1.7 billion aggregate principal
amount of tax-exempt special facilities revenue bonds and
interest thereon, excluding the US Airways contingent liability
discussed below. These bonds, issued by various municipalities
and other governmental entities, are payable solely from our
rentals paid under long-term agreements with the respective
governing bodies. The leasing arrangements associated with
approximately $1.5 billion of these obligations are
accounted for as operating leases, and the leasing arrangements
associated with approximately $200 million of these
obligations are accounted for as capital leases in our financial
statements.
We are contingently liable for US Airways obligations
under a lease agreement between US Airways and the Port
Authority of New York and New Jersey related to the East End
Terminal at LaGuardia airport. These obligations include the
payment of ground rentals to the Port Authority and the payment
of other rentals in respect of the full amounts owed on special
facilities revenue bonds issued by the Port Authority having an
outstanding par amount of $156 million at December 31,
2005 and a final scheduled maturity in 2015. If US Airways
defaults on these obligations, we would be obligated to cure the
default and we would have the right to occupy the terminal after
US Airways interest in the lease had been terminated.
We also have letters of credit and performance bonds relating to
various real estate and customs obligations at December 31,
2005 in the amount of $54 million with expiration dates
through June 2008.
General Guarantees and
Indemnifications. We are the lessee under
many real estate leases. It is common in such commercial lease
transactions for us as the lessee to agree to indemnify the
lessor and other related third parties for tort liabilities that
arise out of or relate to our use or occupancy of the leased
premises. In some cases, this indemnity extends to related
liabilities arising from the negligence of the indemnified
A-78
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
parties, but usually excludes any liabilities caused by their
gross negligence or willful misconduct. Additionally, we
typically indemnify such parties for any environmental liability
that arises out of or relates to our use of the leased premises.
In our aircraft financing agreements, we typically indemnify the
financing parties, trustees acting on their behalf and other
related parties against liabilities that arise from the
manufacture, design, ownership, financing, use, operation and
maintenance of the aircraft and for tort liability, whether or
not these liabilities arise out of or relate to the negligence
of these indemnified parties, except for their gross negligence
or willful misconduct.
We expect that we would be covered by insurance (subject to
deductibles) for most tort liabilities and related indemnities
described above with respect to real estate we lease and
aircraft we operate.
In our financing transactions that include loans, we typically
agree to reimburse lenders for any reduced returns with respect
to loans due to any change in capital requirements and, in the
case of loans in which the interest rate is based on LIBOR, for
certain other increased costs that the lenders incur in carrying
these loans as a result of any change in law, subject in most
cases to certain mitigation obligations of the lenders. At
December 31, 2005, we had $1.0 billion of floating
rate debt and $0.3 billion of fixed rate debt, with
remaining terms of up to 10 years, that is subject to these
increased cost provisions. In several financing transactions
involving loans or leases from
non-U.S. entities,
with remaining terms of up to 10 years and an aggregate
carrying value of $1.1 billion, we bear the risk of any
change in tax laws that would subject loan or lease payments
thereunder to
non-U.S. entities
to withholding taxes, subject to customary exclusions. In
addition, in cross-border aircraft lease agreements for two 757
aircraft, we bear the risk of any change in U.S. tax laws
that would subject lease payments made by us to a resident of
Japan to withholding taxes, subject to customary exclusions.
These capital leases for two 757 aircraft expire in 2008 and
have a carrying value of $49 million at December 31,
2005.
We cannot estimate the potential amount of future payments under
the foregoing indemnities and agreements due to unknown
variables related to potential government changes in capital
adequacy requirements or tax laws.
Credit Card Processing Agreement. Our
bank-issued credit card processing agreement contains financial
covenants which require, among other things, that we maintain a
minimum EBITDAR (generally, earnings before interest, taxes,
depreciation, amortization, aircraft rentals and income from
affiliates, adjusted for special items) to fixed charges
(interest and aircraft rentals) ratio of 0.9 to 1.0 through
June 30, 2006 and 1.1 to 1.0 thereafter. The liquidity
covenant requires us to maintain a minimum level of
$1.0 billion of unrestricted cash and short-term
investments and a minimum ratio of unrestricted cash and
short-term investments to current liabilities of .27 to 1.0
through June 30, 2006 and .29 to 1.0 thereafter. The
agreement also requires that we must maintain a debt rating of
at least Caa3 as rated by Moodys or CCC- as rated by
Standard & Poors. Although we are currently in
compliance with all of the covenants, failure to maintain
compliance would result in our being required to post up to an
additional $330 million of cash collateral, which would
adversely affect our liquidity. Depending on our unrestricted
cash and short-term investments balance at the time, the posting
of a significant amount of cash collateral could cause our
unrestricted cash and short-term investments balance to fall
below the $1.0 billion minimum balance requirement under
our $350 million secured loan facility, resulting in a
default under such facility.
Employees. As of December 31,
2005, we had approximately 42,200 employees, or
39,530 full-time equivalent employees, consisting of
approximately 16,895 customer service agents, reservations
agents, ramp and other airport personnel, 8,570 flight
attendants, 5,925 management and clerical employees, 4,420
pilots, 3,610 mechanics and 110 dispatchers. While there can be
no assurance that our generally good labor relations and high
labor productivity will continue, we have established as a
significant component of our business
A-79
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
strategy the preservation of good relations with our employees,
approximately 44% of whom are represented by unions.
Environmental Matters. We could be
responsible for environmental remediation costs primarily
related to jet fuel and solvent contamination surrounding our
aircraft maintenance hangar in Los Angeles. In 2001, the
California Regional Water Quality Control Board
(CRWQCB) mandated a field study of the site and it
was completed in September 2001. In April 2005, under the threat
of a CRWQCB enforcement action, we began environmental
remediation of jet fuel contamination surrounding our aircraft
maintenance hangar pursuant to a work plan submitted to (and
approved by) the CRWQCB and our landlord, the Los Angeles World
Airports.
We have established a reserve for estimated costs of
environmental remediation at Los Angeles and elsewhere in our
system, based primarily on third party environmental studies and
estimates as to the extent of the contamination and nature of
the required remedial actions. We expect our total losses from
environmental matters to be approximately $45 million, for
which we were fully accrued at December 31, 2005. We have
evaluated and recorded this accrual for environmental
remediation costs separately from any related insurance
recovery. We have not recognized any material receivables
related to insurance recoveries at December 31, 2005.
Based on currently available information, we believe that our
reserves for potential environmental remediation costs are
adequate, although reserves could be adjusted as further
information develops or circumstances change. However, we do not
expect these items to materially impact our results of
operations, financial condition or liquidity.
Legal Proceedings. During the period
between 1997 and 2001, we reduced or capped the base commissions
that we paid to travel agents, and in 2002 we eliminated such
base commissions. This was similar to actions also taken by
other air carriers. We are now a defendant, along with several
other air carriers, in two remaining lawsuits brought by travel
agencies that purportedly opted out of a prior class action
entitled Sarah Futch Hall d/b/a/ Travel Specialists v.
United Air Lines, et al. (U.S.D.C., Eastern District of
North Carolina), filed on June 21, 2000, in which the
defendant airlines prevailed on summary judgment that was upheld
on appeal. These similar suits against Continental and other
major carriers allege violations of antitrust laws in reducing
and ultimately eliminating the base commission formerly paid to
travel agents. The pending cases are Tam Travel, Inc. v.
Delta Air Lines, Inc., et al. (U.S.D.C., Northern
District of California), filed on April 9, 2003 and
Swope Travel Agency, et al. v. Orbitz LLC et
al. (U.S.D.C., Eastern District of Texas), filed on
June 5, 2003. Another such similar lawsuit, styled Paula
Fausky, et al. v. American Airlines, et al.
(U.S.D.C., Northern District of Ohio) and filed on May 8,
2003, was dismissed without prejudice in July 2005. By order
dated November 10, 2003, the remaining actions were
transferred and consolidated for pretrial purposes by the
Judicial Panel on Multidistrict Litigation to the Northern
District of Ohio. Discovery has commenced.
In each of the foregoing cases, we believe the plaintiffs
claims are without merit and are vigorously defending the
lawsuits. Nevertheless, a final adverse court decision awarding
substantial money damages could have a material adverse impact
on our results of operations, financial condition or liquidity.
We and/or
certain of our subsidiaries are defendants in various other
lawsuits, including suits relating to certain environmental
claims, and proceedings arising in the normal course of
business. Although the outcome of these lawsuits and proceedings
cannot be predicted with certainty and could have a material
adverse effect on our results of operations, financial condition
or liquidity, it is our opinion, after consulting with outside
counsel, that the ultimate disposition of such suits will not
have a material adverse effect on our results of operations,
financial condition or liquidity.
A-80
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 20
|
QUARTERLY
FINANCIAL DATA (UNAUDITED)
|
Unaudited summarized financial data by quarter for 2005 and 2004
is as follows (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
2,505
|
|
|
$
|
2,857
|
|
|
$
|
3,001
|
|
|
$
|
2,845
|
|
Operating income (loss)
|
|
|
(173
|
)
|
|
|
119
|
|
|
|
109
|
|
|
|
(94
|
)
|
Nonoperating income (expense), net
|
|
|
(13
|
)
|
|
|
(19
|
)
|
|
|
(48
|
)
|
|
|
51
|
|
Net income (loss)
|
|
|
(186
|
)
|
|
|
100
|
|
|
|
61
|
|
|
|
(43
|
)
|
Earnings (Loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(2.79
|
)
|
|
$
|
1.49
|
|
|
$
|
0.91
|
|
|
$
|
(0.53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(2.79
|
)
|
|
$
|
1.26
|
|
|
$
|
0.80
|
|
|
$
|
(0.53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
2,307
|
|
|
$
|
2,553
|
|
|
$
|
2,602
|
|
|
$
|
2,437
|
|
Operating income (loss)
|
|
|
(137
|
)
|
|
|
40
|
|
|
|
22
|
|
|
|
(163
|
)
|
Nonoperating expense, net
|
|
|
(58
|
)
|
|
|
(68
|
)
|
|
|
(40
|
)
|
|
|
(45
|
)
|
Net loss
|
|
|
(155
|
)
|
|
|
(28
|
)
|
|
|
(18
|
)
|
|
|
(208
|
)
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(2.36
|
)
|
|
$
|
(0.41
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(3.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(2.37
|
)
|
|
$
|
(0.43
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(3.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The sum of the four quarterly earnings (loss) 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.
The quarter results are impacted by the following significant
items:
In the first quarter of 2005, we recognized a gain of
$51 million related to the contribution of 6.0 million
shares of Holdings common stock to our primary defined benefit
pension plan. We also recorded a $43 million non-cash
curtailment charge relating to the freezing of the portion of
our defined benefit pension plan attributable to pilots.
In the second quarter of 2005, we recognized a gain of
$47 million related to the contribution of 6.1 million
shares of Holdings common stock to our primary defined benefit
pension plan.
In the third quarter of 2005, we recorded an $18 million
non-cash settlement charge related to lump sum distributions
from our defined benefit pension plans to pilots who retired.
Also in the third quarter of 2005, we reduced our allowance for
future lease payments and return conditions related to
permanently grounded aircraft by $15 million following
negotiated settlements with the aircraft lessors in an improved
aircraft market.
In the fourth quarter of 2005, we recorded a gain of
$106 million related to our sale of 9.1 million shares
of Copa common stock in Copas IPO. We also recorded
special charges of $21 million consisting primarily of a
non-cash settlement charge relating to lump-sum distributions
from our defined benefit pension plans.
A-81
CONTINENTAL
AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In 2004, we recorded the following special charges primarily
associated with future obligations for rent and return
conditions related to leased MD-80 aircraft that were
permanently grounded during the applicable quarter (in millions):
|
|
|
|
|
Three months ended:
|
|
|
|
|
March 31, 2004
|
|
$
|
21
|
|
June 30, 2004
|
|
|
30
|
|
September 30, 2004
|
|
|
22
|
|
December 31, 2004
|
|
|
14
|
|
|
|
|
|
|
Total
|
|
$
|
87
|
|
|
|
|
|
|
In the first quarter of 2004, we recorded a non-cash charge of
$34 million related to the termination of a 1993 service
agreement with United Micronesia Development Association.
In the fourth quarter of 2004, we recorded operating expense of
$18 million related to a change in expected future costs
for frequent flyer reward redemptions on alliance carriers.
A-82
COMMON
STOCK INFORMATION
Our common stock (Class B common stock) trades on the New
York Stock Exchange under the symbol CAL. The table below shows
the high and low sales prices for our common stock as reported
in the consolidated transaction reporting system during 2005 and
2004.
|
|
|
|
|
|
|
|
|
|
|
Class B
|
|
|
|
Common Stock
|
|
|
|
High
|
|
|
Low
|
|
|
2005
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
21.97
|
|
|
$
|
9.62
|
|
Third Quarter
|
|
$
|
16.60
|
|
|
$
|
9.03
|
|
Second Quarter
|
|
$
|
15.60
|
|
|
$
|
11.08
|
|
First Quarter
|
|
$
|
14.19
|
|
|
$
|
8.50
|
|
2004
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
14.01
|
|
|
$
|
7.63
|
|
Third Quarter
|
|
$
|
11.68
|
|
|
$
|
7.80
|
|
Second Quarter
|
|
$
|
13.93
|
|
|
$
|
9.05
|
|
First Quarter
|
|
$
|
18.70
|
|
|
$
|
10.85
|
|
As of February 24, 2006, there were approximately 20,594
holders of record of our common stock. We have paid no cash
dividends on our common stock and have no current intention of
doing so. Our agreement with the union representing our pilots
provides that we will not declare a cash dividend or repurchase
our outstanding common stock for cash until we have contributed
at least $500 million to the pilots defined benefit
plan, measured from March 31, 2005. Through
December 31, 2005, we have made $112 million of such
contributions to the plan.
Our 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 the shares are registered
on a separate stock record. Our bylaws further provide that no
shares will be registered on the separate stock record if the
amount so registered would exceed United States foreign
ownership restrictions. United States law currently limits the
voting power in us (and other U.S. airlines) of persons who
are not citizens of the United States to 25%.
A-83
DIRECTORS
AND EXECUTIVE OFFICERS
Board of
Directors
|
|
|
Name
|
|
Title & Principal
Employer
|
|
Thomas J. Barrack, Jr.
|
|
Chairman and Chief Executive
Officer
Colony Capital, LLC and Colony Advisors, LLC (real
estate investments)
|
Kirbyjon H. Caldwell
|
|
Senior Pastor
The Windsor Village-United Methodist Church
|
Lawrence W. Kellner
|
|
Chairman of the Board and Chief
Executive Officer Continental Airlines, Inc.
|
Douglas H. McCorkindale
|
|
Chairman
Gannett Co., Inc. (a nationwide diversified
communications company)
|
Henry L. Meyer III
|
|
Chairman of the Board, President
and Chief Executive Officer
KeyCorp (banking)
|
Oscar Munoz
|
|
Executive Vice President and Chief
Financial Officer CSX Corporation (freight transportation)
|
George G. C. Parker
|
|
Dean Witter Distinguished
Professor of Finance and Management, Graduate School of Business
Stanford University
|
Jeffery A. Smisek
|
|
President
Continental Airlines, Inc.
|
Karen Hastie Williams
|
|
Senior Counsel
Crowell & Moring LLP (law firm)
|
Ronald B. Woodard
|
|
Chairman of the Board
MagnaDrive Corporation (supplier of new engine power
transfer technology applications for industrial equipment)
|
Charles A. Yamarone
|
|
Executive Vice President
Libra Securities, LLC (institutional broker-dealer)
|
Executive
Officers of Continental Airlines, Inc.
(excluding Messrs. Kellner and Smisek, who are included in
the table above)
|
|
|
Name
|
|
Title
|
|
James Compton
|
|
Executive Vice
President Marketing
|
Jeffrey J. Misner
|
|
Executive Vice President and Chief
Financial Officer
|
Mark J. Moran
|
|
Executive Vice
President Operations
|
Jennifer L. Vogel
|
|
Senior Vice President, General
Counsel, Secretary and Corporate Compliance Officer
|
A-84
APPENDIX B
CHARTER OF THE AUDIT COMMITTEE
OF THE BOARD OF DIRECTORS OF
CONTINENTAL AIRLINES, INC.
As amended through February 11, 2005
Establishment
and Purpose
1. This Charter of the Audit Committee (the
Committee) of the Board of Directors (the
Board) of Continental Airlines, Inc., a Delaware
corporation (the Company), has been approved and
adopted, as amended, by resolution of the Board adopted on
March 12, 2004. The purposes of the Committee shall be to
oversee the accounting and financial reporting processes and
audits of the financial statements of the Company, to prepare
the report required by applicable rules of the Securities and
Exchange Commission (SEC) to be included in the
Companys annual proxy statement and to otherwise assist
the Boards oversight of:
(a) the integrity of the Companys financial
statements;
(b) the Companys compliance with legal and regulatory
requirements;
(c) the qualifications, independence and performance of the
Companys independent auditors;
(d) the performance of the Companys internal audit
function; and
(e) the Companys systems of internal accounting and
financial controls.
In so doing, it is the responsibility of the Committee to
maintain free and open communication between the Committee,
independent auditors, the internal auditors and management of
the Company.
Committee
Member Qualifications
2. The Committee shall at all times consist of at least
three members of the Board, and may consist of such greater
number of members of the Board as the Board appoints to the
Committee from time to time by resolution of the Board. Each
member of the Committee shall be a director of the Company who
qualifies to be a member of an audit committee pursuant to
applicable law and the rules of the New York Stock Exchange
(NYSE). The Committee shall be comprised of
directors who are independent of management and the Company
within the meaning of §10A of the Securities Exchange Act
of 1934, as amended, and the rules of the SEC and NYSE, and the
determination of a directors independence shall be made by
the Board. All Committee members must be financially literate,
and at least one member must have the accounting or financial
expertise required by the rules of the SEC
and/or NYSE
as determined by the Board. Audit committee members shall not
serve simultaneously on the audit committees of more than two
other public companies without the prior approval of the full
Board.
3. The members of the Committee shall be appointed or
reappointed by the Board at the meeting of the Board immediately
following each annual meeting of stockholders of the Company.
Each member of the Committee shall continue as a member thereof
until his or her successor is appointed by the Board or until
his or her earlier death, resignation, removal or cessation as a
member of the Board.
Meetings
4. The Chairman of the Board or, if the Chairman of the
Board shall fail to do so, the members of the Committee, shall
appoint a Chair of the Committee from among the members of the
Committee. If the Chair of the Committee is not present at any
meeting of the Committee, the members of the Committee shall
appoint an acting Chair for such meeting. The Secretary of the
Company, or any Assistant Secretary of the Company, shall attend
each meeting of the Committee and shall act as secretary of such
meeting (but shall not be present when requested by the
Committee).
B-1
5. The time and place of meetings of the Committee and the
procedures to be followed at such meetings shall be determined
from time to time by the members of the Committee; provided that:
(a) a quorum for meetings shall be a majority of the
members, present in person or by telephone or other
telecommunications device permitting all persons participating
in the meeting to speak to and hear each other;
(b) the affirmative vote of a majority of the members of
the Committee present at a meeting at which a quorum is present
shall be the act of the Committee;
(c) the Committee may act by unanimous written consent
signed by each member of the Committee;
(d) the Committee shall keep minutes of its proceedings and
shall deliver the same (and reports and recommendations to the
Board) to the Secretary of the Company;
(e) all minutes of meetings of the Committee, and all
unanimous written consents of the Committee, shall be filed with
the records of meetings of the Committee:
(f) the Chair, or any member of the Committee, or the
Secretary of the Company at the direction of the Chair of the
Committee, the Chairman of the Board or the Chief Executive
Officer of the Company, shall have the authority to call
meetings of the Committee; and
(g) notice of the time and place of every regular meeting
of the Committee (which meeting shall be deemed a regular
meeting if it occurs on the same date as a meeting of the Board
of Directors) shall be given in writing or by facsimile or
electronic mail transmission to each member of the Committee at
least five days before any such regular meeting, and notice of
the time and place of every special meeting of the Committee
shall be given in writing or by facsimile or electronic mail
transmission to each member of the Committee not later than the
close of business on the second day next preceding the day of
the meeting; provided that in each case a member may waive
notice of any meeting.
Responsibilities
6. The Committee shall review and assess at least annually
its performance, and the adequacy of this Charter in light of
applicable law and the rules of the SEC and NYSE. A copy of this
Charter as it may be amended from time to time shall be included
on the Companys website and in the Companys annual
proxy statement to the extent required by applicable rules of
the NYSE and the SEC.
7. The Committee shall review at least annually the
internal audit procedures of the Company and advise and make
recommendations to the Board on auditing practices and
procedures.
8. The Committee shall be solely responsible for
(a) the appointment, compensation, oversight (including
resolution of disagreements between management and the
independent auditors regarding financial reporting) and
termination of the Companys independent auditors, who
shall report directly to the Committee, and (b) the
approval of all services to be provided to the Company by such
independent auditors, including the pre-approval of (i) all
auditing services, including the scope of the annual audit, and
(ii) any permitted non-audit services to be performed for
the Company by the independent auditors, subject to the
requirements of applicable law. The Committee may delegate the
authority to grant such pre-approvals to one or more Committee
members designated by the Committee, provided that any matters
so pre-approved shall be presented to the full Committee at its
next regular meeting.
9. The Committee shall, no less than annually, evaluate the
qualifications, performance and independence of the independent
auditors, including the lead partner, taking into account the
opinions of management and the internal auditors. The Committee
shall present its conclusions to the Board.
10. The Committee shall establish clear policies for the
Companys hiring of employees or former employees of its
independent auditors in accordance with applicable law and NYSE
rules.
B-2
11. The Committee shall discuss earnings press releases, as
well as financial information and earnings guidance provided to
analysts and rating agencies. Such matters may be discussed
generally (e.g., types of information and presentations) and
need not include specific releases or guidance.
12. The Committee shall (a) to the extent it
determines appropriate, review from time to time, the expenses
of the senior officers (and, if it so desires, any other
officers) of the Company charged to the Company or any of its
subsidiaries, and any transactions between the Company or any of
its subsidiaries and any affiliate of the Company and
(b) at least annually, review those related party
transactions that are required to be disclosed in the
Companys proxy statement.
13. The Committee shall discuss the Companys policies
with respect to risk assessment and risk management, including
(a) legal and ethical compliance programs and
(b) material foreign currency risk management strategies,
jet fuel hedging strategies and other material usage by the
Company or any of its subsidiaries of hedges, options, futures,
swaps or other derivative products or securities.
14. The Committee shall review with management, including
the internal auditors (as appropriate), and the Companys
independent auditors:
(a) all critical accounting policies and practices and any
other material components of the Companys financial
statements involving managements judgment or estimates,
and the independent auditors judgments about the quality
of accounting principles and the clarity of financial disclosure
practices used or proposed to be used by the Company;
(b) the alternative treatments of financial information
within generally accepted accounting principles that have been
discussed with management officials, ramifications of the use
thereof, and the treatment preferred by the independent auditors;
(c) material off-balance sheet transactions, arrangements,
obligations and other relationships of the Company with
unconsolidated entities or others that may have a material
current or future effect on the Companys financial
condition, changes in financial condition, results of
operations, liquidity, capital expenditures, capital resources
or significant components of revenue or expenses;
(d) any material changes in accounting policies or
practices and the impact thereof on the Companys financial
statements;
(e) the interim financial statements of the Company, and
the Companys disclosures under Managements
Discussion and Analysis of Financial Condition and Results of
Operations prior to their being filed with the SEC;
(f) the annual audited financial statements of the Company,
and the Companys disclosures under Managements
Discussion and Analysis of Financial Condition and Results of
Operations prior to their being filed with the SEC; based
on this review, the Committee will recommend to the Board
whether to include such financial statements in the
Companys annual report on
Form 10-K;
(g) the effectiveness of the accounting and financial
controls of the Company and its subsidiaries, the implementation
of additional or improved internal control procedures, any
significant deficiencies in the design or operation of internal
controls that could adversely affect the Companys ability
to record, process, summarize and report financial data and any
material weaknesses in internal controls; and
(h) any fraud that involves management or other employees
who have a significant role in the Companys internal
controls.
15. The Committee shall review with the Companys
independent auditors:
(a) any report or recommendation of the independent
auditors;
(b) at least annually, a written report by the independent
auditors describing (i) their internal quality control
procedures, (ii) any material issues raised by their most
recent internal quality-control review, peer review or any
inquiry or investigation by governmental or professional
authorities, within the preceding five years, respecting one or
more of their independent audits, and any steps taken to deal
with any such
B-3
issues, (iii) (to assess the independence of the
independent auditors) all relationships between the independent
auditors and the Company, together with any other matters
required to be included by Independence Standards Board
No. 1, Independence Discussions with Audit
Committees, and (iv) the nature and scope of any
disclosed relationships or professional services;
(c) the results of the annual audit, the quarterly reviews
of the Companys financial statements and any other matters
required by Statement on Auditing Standards No. 61,
Communication with Audit Committees, as applicable
and as may be modified from time to time;
(d) the responsibilities, budget and staffing of the
Companys internal audit function;
(e) any audit problems or difficulties and
managements response; and
(f) material written communications between the independent
auditors and management, such as management letters and
schedules of unadjusted differences.
16. The Committee shall prepare a report for inclusion in
the Companys annual proxy statement which addresses the
matters required to be included therein by the rules of the SEC
or NYSE as then in effect.
17. The Committee shall periodically meet separately with
management, with the internal auditors and with the independent
auditors to discuss issues or concerns that warrant Committee
attention.
18. The Committee shall review the Companys
environmental policies and standards, and such reports as it may
request from management or environmental consultants or
advisors, and shall periodically discuss with management and
legal counsel any material environmental proceedings, claims or
other contingencies and such other environmental matters
affecting the Company or any of its subsidiaries as the
Committee shall from time to time determine appropriate or as
the Board may specifically direct.
19. The Committee shall establish procedures for the
(a) receipt, retention and treatment of complaints received
by the Company regarding accounting, internal accounting
controls or auditing matters and (b) confidential,
anonymous submission by the Companys employees of concerns
regarding questionable accounting or auditing matters.
Limitation
of Committees Role
20. Notwithstanding the foregoing responsibilities, it is
not the duty of the Committee to plan or conduct audits or to
determine that the Companys financial statements are
complete and accurate and in accordance with generally accepted
accounting principles.
Miscellaneous
21. The Committee shall fulfill such other duties and
responsibilities as assigned to the Committee from time to time
by the Board.
22. The Committee shall regularly report on its activities
to the Board and shall provide the Board with such information
as the Board may from time to time request.
23. In performing its duties hereunder, the Committee shall
have the authority to retain and terminate such outside legal,
accounting or other advisors as it shall deem necessary to carry
out its duties hereunder, without seeking further approval of
the Board, and the Company shall provide for appropriate funding
therefor and for payment of compensation to the independent
auditors, as determined by the Committee.
B-4
APPENDIX C
CERTIFICATE OF AMENDMENT OF THE
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF CONTINENTAL AIRLINES, INC.
Continental Airlines, Inc. (the Company), a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the DGCL), does hereby certify
that:
FIRST: At a meeting of the Board of Directors of the Company on February 22, 2006, resolutions were
duly adopted setting forth a proposed amendment to the Amended and Restated Certificate of
Incorporation (the Certificate of Incorporation) of the Company, declaring said amendment to be
advisable and directing that the amendment proposed be considered at the next annual meeting of the
stockholders. The resolution setting forth the proposed amendment is as follows:
NOW, THEREFORE, IT IS HEREBY RESOLVED, that the Board approves the amendment of the
Certificate of Incorporation by deleting the first sentence of Article Four thereof in its
entirety and substituting the following in its entirety therefor:
FOUR: The total number of shares of all classes of capital stock which the Corporation
shall have the authority to issue is 410 million shares, par value $.01 per share, of which
10 million shall be Preferred Stock (Preferred Stock) and 400 million shall be Class B
Common Stock (Class B Common Stock); and
SECOND: That thereafter, pursuant to resolution of the Board of Directors of the Company, the
annual meeting of the stockholders of the Company was duly called and held upon notice in
accordance with Section 222 of the DGCL, at which meeting the necessary number of shares as
required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the
DGCL.
IN WITNESS WHEREOF, the Company has caused this certificate to be signed this day
of , 2006.
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APPENDIX D
SECOND
AMENDMENT TO
CONTINENTAL AIRLINES, INC.
INCENTIVE PLAN 2000
(as amended and restated through February 20,
2002)
WHEREAS, Continental Airlines, Inc. (the
Company) has heretofore adopted the Continental
Airlines, Inc. Incentive Plan 2000 (as amended and restated
through February 20, 2002) (the Plan); and
WHEREAS, the Company desires to amend the Plan in certain
respects;
NOW, THEREFORE, the Plan shall be amended as follows:
1. The second sentence of Section 5(a) of the Plan
shall be deleted and the following shall be substituted therefor:
Subject to adjustment as provided in Section 12(b)
hereof, the aggregate number of shares of Common Stock that may
be issued under the Plan shall not exceed
4,500,000 shares.
2. The amendment to the Plan set forth in
paragraph 1 hereof shall be effective as of
February 22, 2006, provided that the amendment is
approved by the stockholders of the Company at the 2006 annual
meeting of the Companys stockholders.
3. As amended hereby, the Plan is specifically ratified and
reaffirmed.
IN WITNESS WHEREOF, the undersigned officer of the
Company acting pursuant to authority granted to him by the Board
of Directors of the Company has executed this instrument on
this day
of ,
2006.
CONTINENTAL AIRLINES, INC.
Jeffery A. Smisek
President
D-1
APPENDIX E
CONTINENTAL AIRLINES, INC.
INCENTIVE PLAN 2000
(as amended through March 12, 2004)
1. PURPOSE
The purpose of the Continental Airlines, Inc. Incentive Plan 2000 is to provide a means
through which Continental Airlines, Inc. and its subsidiaries may attract able persons to serve as
directors, or to enter or remain in the employ of the Company (as defined below) or its
subsidiaries, and to provide a means whereby those individuals upon whom the responsibilities of
the successful administration and management of the Company and its subsidiaries rest, and whose
present and potential contributions to the welfare of the Company and its subsidiaries are of
importance, can acquire and maintain stock ownership, thereby strengthening their concern for the
welfare of the Company and its subsidiaries. A further purpose of the Plan is to provide such
individuals with additional incentive and reward opportunities designed to enhance the profitable
growth of the Company and its subsidiaries. So that the maximum incentive can be provided, the Plan
provides for granting Incentive Stock Options, Non-Qualified Options, Restricted Stock Awards,
Performance Awards, Incentive Awards, and Retention Awards, or any combination of the foregoing, as
is best suited to the circumstances of the particular person.
2. DEFINITIONS
The following definitions (including any plural thereof) shall be applicable throughout the
Plan unless specifically modified by any Section:
(a) Administrator means (i) in the context of Awards made to, or the administration (or
interpretation of any provision) of the Plan as it relates to, any person who is subject to Section
16 of the Exchange Act (including any successor section to the same or similar effect, Section
16), the Committee, or (ii) in the context of Awards made to, or the administration (or
interpretation of any provision) of the Plan as it relates to, any person who is not subject to
Section 16, the Chief Executive Officer of the Company (or, if the Chief Executive Officer is not a
Director of the Company, the Committee), unless the Plan specifies that the Committee shall take
specific action (in which case such action may only be taken by the Committee) or the Committee (as
to any Award described in this clause (ii) or the administration or interpretation of any specific
provision of the Plan) specifies that it shall serve as Administrator.
(b) Award means, individually or collectively, any Option, Restricted Stock Award,
Performance Award, Incentive Award, or Retention Award.
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(c) Board means the Board of Directors of the Company.
(d) Code means the Internal Revenue Code of 1986, as amended from time to time. Reference in
the Plan to any section of the Code shall be deemed to include any amendments or successor
provisions to such section and any regulations promulgated under such section.
(e) Committee means a committee of the Board comprised solely of two or more outside
Directors (within the meaning of the term outside directors as used in section 162(m) of the Code
and applicable interpretive authority thereunder and within the meaning of Non-Employee Director
as defined in Rule 16b-3). Such committee shall be the Human Resources Committee of the Board
unless and until the Board designates another committee of the Board to serve as the Committee.
(f) Common Stock means the Class B common stock, $.01 par value, of the Company, or any
security into which such Common Stock may be changed by reason of any transaction or event of the
type described in Section 12(b).
(g) Company shall mean Continental Airlines, Inc., a Delaware corporation, or any successor
thereto.
(h) Director means an individual elected to the Board by the stockholders of the Company or
by the Board under applicable corporate law who is serving on the Board on the date the Plan is
adopted by the Board or is elected to the Board after such date.
(i) Disability means, with respect to a Participant, such Participants disability entitling
him or her to benefits under the Companys group long-term disability plan; provided, however, that
if such Participant is not eligible to participate in such plan, then such Participant shall be
considered to have incurred a Disability if and when the Administrator determines in its
discretion that such Participant has become incapacitated for a period of at least 180 days by
accident, sickness, or other circumstance which renders such Participant mentally or physically
incapable of performing the material duties and services required of him or her in his or her
employment on a full-time basis during such period.
(j) employee means any person (which may include a Director) in an employment relationship
with the Company or any parent or subsidiary corporation (as defined in section 424 of the Code).
(k) Exchange Act means the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder.
(l) Grant Document means the document or documents evidencing an Award under the Plan, which
may be either an agreement between the Company and the Holder as to the Award (with any amendments
thereto) or a notice of grant of the Award from the Company to the Holder
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(including any attached statement of the terms and conditions
of the Award and any modifications thereto made in accordance with the Plan).
(m) Holder means an employee or a non-employee Director who has been granted an Option, a
Restricted Stock Award, a Performance Award, an Incentive Award, or a Retention Award.
(n) Incentive Award means an Award granted under Section 10 of the Plan.
(o) Incentive Stock Option means an incentive stock option within the meaning of section 422
of the Code.
(p) Market Value per Share means, as of any specified date, the closing sale price of the
Common Stock on that date (or, if there are no sales on that date, the last preceding date on which
there was a sale) in the principal securities market in which the Common Stock is then traded. If
the Common Stock is not publicly traded at the time a determination of Market Value per Share is
required to be made hereunder, the determination of such amount shall be made by the Administrator
in such manner as it deems appropriate.
(q) Non-Qualified Option means an Option that is not an Incentive Stock Option.
(r) Option means an Award under Section 7 of the Plan and includes both Non-Qualified
Options and Incentive Stock Options to purchase Common Stock.
(s) Performance Award means an Award granted under Section 9 of the Plan.
(t) Personal Representative means the person who upon the death, disability, or
incompetency of a Holder shall have acquired, by will or by the laws of descent and distribution or
by other legal proceedings, the right to exercise an Option or the right to any Restricted Stock
Award, Performance Award, Incentive Award, or Retention Award theretofore granted or made to such
Holder.
(u) Plan means the Continental Airlines, Inc. Incentive Plan 2000, as amended from time to
time.
(v) Restricted Stock means shares of Common Stock granted pursuant to a Restricted Stock
Award as to which neither the substantial risk of forfeiture nor the restriction on transfer
referred to in Section 8 of the Plan has expired.
(w) Restricted Stock Award means an Award granted under Section 8 of the Plan.
(x) Retention Award means an Award granted under Section 11 of the Plan.
(y) Rule 16b-3 means Rule 16b-3 under the Exchange Act, as such rule may be amended from
time to time, and any successor rule, regulation or statute fulfilling the same or similar
E - 3
function.
(z) SAR means a stock appreciation right granted in connection with an Option under Section
7 of the Plan.
(aa) subsidiary means any entity (other than the Company) with respect to which the Company,
directly or indirectly through one or more other entities, owns equity interests possessing 50
percent or more of the total combined voting power of all equity interests of such entity
(excluding voting power that arises only upon the occurrence of one or more specified events).
3. EFFECTIVE DATE AND DURATION OF THE PLAN
The Plan originally became effective on October 4, 1999. The Plan as set forth herein
constitutes an amendment and restatement of the Plan as previously adopted and amended by the
Board, and shall supersede and replace in its entirety such previously adopted and amended plan.
This amendment and restatement of the Plan shall be effective as of February 20, 2002. No further
Awards may be granted under the Plan after October 3, 2009. The Plan shall remain in effect (at
least for the purpose of governing outstanding Awards) until all Option Awards granted under the
Plan have been exercised or expired, all restrictions imposed upon Restricted Stock Awards granted
under the Plan have been eliminated or the Restricted Stock Awards have been forfeited, and all
Performance Awards, Incentive Awards and Retention Awards granted under the Plan have been
satisfied or have terminated.
4. ADMINISTRATION
(a) Administrator. The Plan shall be administered by the Administrator, so that (i) Awards
made to, and the administration (or interpretation of any provision) of the Plan as it relates to,
any person who is subject to Section 16, shall be made or effected by the Committee, and (ii)
Awards made to, and the administration (or interpretation of any provision) of the Plan as it
relates to, any person who is not subject to Section 16, shall be made or effected by the Chief
Executive Officer of the Company (or, if the Chief Executive Officer is not a Director of the
Company, the Committee), unless the Plan specifies that the Committee shall take specific action
(in which case such action may only be taken by the Committee) or the Committee (as to any Award
described in this clause (ii) or the administration or interpretation of any specific provision of
the Plan) specifies that it shall serve as Administrator.
(b) Powers. Subject to the express provisions of the Plan, the Administrator shall have
authority, in its discretion, to determine which employees or Directors shall receive an Award, the
time or times when such Award shall be granted, whether an Incentive Stock Option or Non-Qualified
Option shall be granted, the number of shares to be subject to each Option and Restricted Stock
Award, and the value of each Performance Award, Incentive Award and Retention Award. In making such
determinations, the Administrator shall take into account the nature of the services rendered by
the respective employees or Directors, their present and potential contribution to the Companys
success and such other factors as the Administrator in its discretion shall deem relevant.
E - 4
Subject
to the express provisions of the Plan, the Administrator shall also have the power to construe the
Plan and the respective agreements executed hereunder, to prescribe rules and regulations relating
to the Plan, and to determine the terms, restrictions and provisions of the Grant Documents,
including such terms, restrictions and provisions as shall be requisite in the judgment of the
Administrator to cause designated Options to qualify as Incentive Stock Options, and to make all
other determinations necessary or advisable for administering the Plan. The Administrator may
correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any
Grant Document relating to an Award in the manner and to the extent it shall deem expedient to
carry it into effect. The determination of the Administrator on the matters referred to in this
Section 4 shall be conclusive; provided, however, that in the event of any conflict in any such
determination as between the Committee and the Chief Executive Officer of the Company, each acting
in capacity as Administrator of the Plan, the determination of the Committee shall be conclusive.
5. SHARES SUBJECT TO THE PLAN, AWARD LIMITATIONS,
AND GRANT OF AWARDS
(a) Shares Subject to the Plan; Award Limitations. The Administrator may from time to time
grant Awards to one or more employees or Directors determined by it to be eligible for
participation in the Plan in accordance with the provisions of Section 6 hereof. Subject to
adjustment as provided in Section 12(b) hereof, the aggregate number of shares of Common Stock that
may be issued under the Plan shall not exceed 3,000,000 shares. Shares shall be deemed to have been
issued under the Plan only to the extent actually issued and delivered pursuant to an Award. To the
extent that an Award lapses, the rights of its Holder terminate, or an Award is paid in cash or is
settled in a manner such that all or some of the shares of Common Stock covered by the Award are
not issued to the Holder, any shares of Common Stock then subject to such Award shall again be
available for the grant of an Award under the Plan. Notwithstanding any provision in the Plan to
the contrary, (i) the maximum number of shares of Common Stock that may be subject to Awards
granted to any one individual during any calendar year may not exceed 750,000 shares (subject to
adjustment as provided in Section 12(b)), (ii) the maximum number of shares of Common Stock that
may be granted as Restricted Stock Awards may not exceed 250,000 shares (subject to adjustment as
provided in Section 12(b)), (iii) the maximum amount of compensation that may be paid under all
Performance Awards denominated in cash (including the fair market value (priced at the Market Value
per Share) of any shares of Common Stock paid in satisfaction of such
Performance Awards) granted to any one individual during any calendar year may not exceed $10
million, and any payment due with respect to a Performance Award shall be paid no later than 10
years after the date of grant of such Performance Award, and (iv) the maximum amount of
compensation that may be paid under all Retention Awards granted to any one individual during any
calendar year may not exceed 1% of the aggregate gross revenues of the Company and its consolidated
subsidiaries for the fiscal year of the Company that ends on December 31, 2000 (determined based on
the regularly prepared and publicly available statements of operations of the Company prepared in
accordance with United States generally accepted accounting principles, consistently applied), and
any payment due with respect to a Retention Award shall be paid no later than 11 years after the
date of grant of such Retention Award. The limitations set forth in clauses (i), (iii), and (iv) of
the preceding sentence shall be applied in a manner which will permit compensation generated under
the Plan which is intended
E - 5
to constitute performance-based compensation for purposes of section
162(m) of the Code to be treated as such performance-based compensation.
(b) Grant of Awards. The Administrator may from time to time grant Awards to one or more
employees or Directors determined by it to be eligible for participation in the Plan in accordance
with the terms of this Plan.
(c) Stock Offered. Subject to the limitations set forth in Section 5(a) above, the stock to be
offered pursuant to an Award may be authorized but unissued Common Stock or Common Stock previously
issued and outstanding and reacquired by the Company. Any of such shares which remain unissued and
which are not subject to outstanding Awards at the termination of the Plan shall cease to be
subject to the Plan but, until termination of the Plan, the Company shall at all times make
available a sufficient number of shares to meet the requirements of the Plan.
6. ELIGIBILITY
Awards may be granted only to persons who, at the time of grant, are employees or
Directors. An Award may be granted on more than one occasion to the same person and, subject to
the limitations set forth in the Plan, Awards may include an Incentive Stock Option, a
Non-Qualified Option, a Restricted Stock Award, a Performance Award, an Incentive Award, a
Retention Award or any combination thereof.
7. STOCK OPTIONS
(a) Option Period. The term of each Option shall be as specified by the Administrator at the
date of grant.
(b) Limitations on Exercise of Option. An Option shall be exercisable in whole or in such
installments and at such times as determined by the Administrator.
(c) Special Limitations on Incentive Stock Options. An Incentive Stock Option may be granted
only to an individual who is an employee at the time the Option is granted. To the extent that the
aggregate Market Value per Share (determined at the time the respective Incentive Stock Option is
granted) of Common Stock with respect to which Incentive Stock Options granted after 1986 are
exercisable for the first time by an individual during any calendar year under all incentive stock
option plans of the Company and its parent and subsidiary corporations exceeds $100,000, such
Incentive Stock Options shall be treated as Non-Qualified Options. The Administrator shall
determine, in accordance with applicable provisions of the Code, Treasury Regulations and other
administrative pronouncements, which of a Holders Incentive Stock Options will not constitute
Incentive Stock Options because of such limitation and shall notify the Holder of such
determination as soon as practicable after such determination. No Incentive Stock Option shall be
granted to an individual if, at the time the Option is granted, such individual owns stock
possessing more than 10% of the total combined voting power of all classes of stock of the Company
or of its parent or subsidiary corporation, within the meaning of section 422(b)(6) of the Code,
unless (i) at the time
E - 6
such Option is granted the option price is at least 110% of the Market Value
per Share of the Common Stock subject to the Option and (ii) such Option by its terms is not
exercisable after the expiration of five years from the date of grant. An Incentive Stock Option
shall not be transferable otherwise than by will or the laws of descent and distribution, and shall
be exercisable during the Holders lifetime only by such Holder or the Holders guardian or
Personal Representative.
(d) Option Grant Document. Each Option shall be evidenced by an Option Grant Document in such
form and containing such provisions not inconsistent with the provisions of the Plan as the
Administrator from time to time shall approve, including, without limitation, provisions to qualify
an Incentive Stock Option under section 422 of the Code. An Option Grant Document may provide for
the payment of the option price, in whole or in part, by delivery of a number of shares of Common
Stock (plus cash if necessary) having a Market Value per Share equal to such option price.
Moreover, an Option Grant Document may provide for a cashless exercise of the Option by
establishing procedures satisfactory to the Administrator with respect thereto. The terms and
conditions of the respective Option Grant Documents need not be identical.
(e) Option Price and Payment. The price at which a share of Common Stock may be purchased upon
exercise of an Option shall be set forth in the Option Grant Document and shall be determined by
the Administrator but, subject to adjustment as provided in Section 12(b), such purchase price
shall not be less than the Market Value per Share of a share of Common Stock on the date such
Option is granted. The Option or portion thereof may be exercised by delivery of an irrevocable
notice of exercise to the Company. The purchase price of the Option or portion thereof shall be
paid in full in the manner specified by the Administrator. Separate stock certificates shall be
issued by the Company for those shares acquired pursuant to the exercise of an Incentive Stock
Option and for those shares acquired pursuant to the exercise of any Non-Qualified Option.
(f) Stockholder Rights and Privileges. The Holder of an Option shall be entitled to all the
privileges and rights of a stockholder only with respect to such shares of Common Stock as have
been purchased under the Option and for which certificates representing such Common Stock have been
registered in the Holders name.
(g) Stock Appreciation Rights. The Administrator (concurrently with the grant of an Option or
subsequent to such grant) may, in its sole discretion, grant stock appreciation rights (SARs) to
any Holder of an Option. SARs may give the Holder of an Option the right, upon written request, to
surrender any exercisable Option or portion thereof in exchange for cash, whole shares of Common
Stock, or a combination thereof, as determined by the Committee, with a value equal to the excess
of the Market Value per Share, as of the date of such request, of one share of Common Stock over
the Option price for such share multiplied by the number of shares covered by the Option or portion
thereof to be surrendered. In the case of any SAR which is granted in connection with an Incentive
Stock Option, such SAR shall be exercisable only when the Market Value per Share of the Common
Stock exceeds the price specified therefor in the Option or portion thereof to be surrendered. In
the event of the exercise of any SAR granted hereunder, the number of shares reserved for issuance
under the Plan shall be reduced only to the extent that shares of Common Stock are actually issued
in connection with the exercise of such SAR. Additional terms
E - 7
and conditions governing any such
SARs may from time to time be prescribed by the Administrator in its sole discretion.
(h) Options and SARs in Substitution for Stock Options Granted by Other Corporations. Options
and SARs may be granted under the Plan from time to time in substitution for stock options held by
individuals employed by corporations who become employees as a result of a merger or consolidation
or other business combination of the employing corporation with the Company or any subsidiary.
8. RESTRICTED STOCK AWARDS
(a) Ownership of Restricted Stock. Each grant of Restricted Stock pursuant to a Restricted
Stock Award will constitute an immediate transfer of record and beneficial ownership of the shares
of Restricted Stock to the recipient of the grant in consideration of the performance of services
by such recipient (or other consideration determined by the Administrator), entitling the recipient
to all voting and other ownership rights, but subject to the restrictions hereinafter referred to
or contained in the related Grant Document. Each grant may, in the discretion of the Administrator,
limit the recipients dividend rights during the period in which the shares of Restricted Stock are
subject to a substantial risk of forfeiture and restrictions on transfer.
(b) Substantial Risk of Forfeiture and Restrictions on Transfer. Each grant of Restricted
Stock will provide that (i) the shares covered thereby will be subject, for a period or periods
determined by the Administrator at the date of grant, to one or more restrictions, including,
without limitation, a restriction that constitutes a substantial risk of forfeiture within the
meaning of section 83 of the Code and applicable interpretive authority thereunder, and (ii) during
such period or periods during which
such restrictions are to continue, the transferability of the Restricted Stock subject to such
restrictions will be prohibited or restricted in a manner and to the extent prescribed by the
Administrator at the date of grant.
(c) Restricted Stock Held in Trust. Shares of Common Stock awarded pursuant to each Restricted
Stock Award will be held in trust by the Company for the benefit of the recipient until such time
as the applicable restriction on transfer thereon shall have expired or otherwise lapsed, at which
time certificates representing such Common Stock will be delivered to the recipient.
(d) Restricted Stock Grant Document; Consideration. Each grant of Restricted Stock shall be
evidenced by a Grant Document in such form and containing such provisions not inconsistent with the
provisions of the Plan as the Administrator from time to time shall approve. The terms and
conditions of the respective Restricted Stock Grant Documents need not be identical. Each grant of
Restricted Stock may be made without additional consideration or in consideration of a payment by
the recipient that is less than the Market Value per Share on the date of grant, as determined by
the Administrator.
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9. PERFORMANCE AWARDS
(a) Performance Period. The Administrator shall establish, with respect to and at the time of
each Performance Award, a performance period over which the performance applicable to the
Performance Award shall be measured.
(b) Performance Measures. A Performance Award shall be awarded to a Holder contingent upon
future performance of the Company or any subsidiary, division, or department thereof. The
Administrator shall establish the performance measures applicable to such performance within the
applicable time period permitted by section 162(m) of the Code, with such adjustments thereto as
may be determined by the Administrator. The performance measures may be absolute, relative to one
or more other companies, relative to one or more indexes, or measured by reference to the Company
alone or the Company together with its consolidated subsidiaries. The performance measures
established by the Administrator may be based upon (i) the price of a share of Common Stock, (ii)
operating income or operating income margin, (iii) earnings before interest, income taxes,
depreciation, amortization and aircraft rent (EBITDAR) or EBITDAR margin, (iv) net income or net
income margin, (v) cash flow, (vi) total shareholder return, or (vii) a combination of any of the
foregoing, including any average, weighted average, minimum, hurdle, rate of increase or other
measure of any or any combination thereof. The Administrator, in its sole discretion, may provide
for an adjustable Performance Award value based upon the level of achievement of performance
measures.
(c) Awards Criteria. In determining the value of Performance Awards, the Administrator shall
take into account a Holders responsibility level, performance, potential, other Awards, and such
other considerations as it deems appropriate. The
Administrator, in its sole discretion, may provide for a reduction in the value of a Holders
Performance Award during the performance period, if permitted by the applicable Grant Document.
(d) Payment. Following the end of the performance period, the Holder of a Performance Award
shall be entitled to receive payment of an amount not exceeding the maximum value of the
Performance Award, based on the achievement of the performance measures for such performance
period, as determined by the Administrator and certified by the Committee as required by section
162(m) of the Code. Payment of a Performance Award may be made in cash, Common Stock (valued at the
Market Value per Share), or a combination thereof, as determined by the Administrator. Payment
shall be made in a lump sum, except as otherwise set forth in the applicable Grant Document.
(e) Termination of Employment. A Performance Award shall terminate if the Holder does not
remain continuously in the employ (or in service as a Director) of the Company or a subsidiary at
all times during the applicable performance period, except as otherwise set forth in the applicable
Grant Document.
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10. INCENTIVE AWARDS
(a) Incentive Awards. Incentive Awards are rights to receive shares of Common Stock (or the
Market Value per Share thereof), or rights to receive an amount equal to any appreciation or
increase in the Market Value per Share of Common Stock over a specified period of time, which vest
over a period of time as established by the Administrator, without satisfaction of any performance
criteria or objectives. The Administrator may, in its discretion, require payment or other
conditions of the Holder respecting any Incentive Award.
(b) Award Period. The Administrator shall establish, with respect to and at the time of each
Incentive Award, a period over which the Award shall vest with respect to the Holder.
(c) Awards Criteria. In determining the value of Incentive Awards, the Committee shall take
into account a Holders responsibility level, performance, potential, other Awards, and such other
considerations as it deems appropriate.
(d) Payment. Following the end of the vesting period for an Incentive Award (or at such other
time as the applicable Grant Document may provide), the Holder of an Incentive Award shall be
entitled to receive payment of an amount, not exceeding the maximum value of the Incentive Award,
based on the then vested value of the Award. Payment of an Incentive Award may be made in cash,
Common Stock (valued at the Market Value per Share), or a combination thereof as determined by the
Administrator. Payment shall be made in a lump sum, except as otherwise set forth in the
applicable Grant Document. Cash dividend equivalents may be paid during or after the vesting
period with respect to an Incentive Award, as determined by the Administrator.
(e) Termination of Employment. An Incentive Award shall terminate if the Holder does not
remain continuously in the employ (or in service as a Director) of the Company or a subsidiary at
all times during the applicable vesting period, except as otherwise set forth in the applicable
Grant Document.
11. RETENTION AWARDS
(a) Retention Awards. A Retention Award is a right, which vests over a period of time as
established by the Committee, to receive a cash payment measured by a portion (not exceeding 3.75%
for any individual Holder nor 25% in the aggregate for all Holders) of the gain and profits
(measured to the date such Award (or portion thereof, as applicable) is deemed surrendered for
payment in accordance with its terms) associated with an equity holding of the Company or a
subsidiary in an e-commerce or internet-based business. The Committee shall designate each such
equity holding, a portion of the gain and profits with respect to which shall determine the
relevant cash payment that is the subject of a Retention Award, and the Committee shall establish,
with respect to each Retention Award and within the applicable time period permitted by Section
162(m) of the Code, the portion of the gain and profits in such equity holding used to measure cash
payments to the Holder of such Retention Award.
(b) Awards Criteria. In determining the Retention Awards to be granted under the Plan, the
Committee shall take into account a Holders responsibility level, performance, potential, other
E - 10
Awards, and such other considerations as it deems appropriate. The Committee, in its sole
discretion, may provide for a reduction in the value of a Holders Retention Award during the
period such Award is outstanding, if permitted by the applicable Grant Document.
(c) Payment. Following the vesting of a Retention Award in whole or in part (or at such other
times and subject to such other restrictions as the applicable Grant Document may provide), the
Holder of such Retention Award shall be entitled to receive payment of an amount, not exceeding the
maximum value of the Retention Award, based on such Holders vested interest in such Retention
Award and the gain and profit in the underlying equity holding, as certified by the Committee as
required by section 162(m) of the Code. Payment shall be made in cash and in a lump sum, except as
otherwise set forth in the applicable Grant Document. In no event shall a Retention Award grant a
Holder an interest in the equity holding, the gain and profit in which is used to measure cash
payments under such Award.
(d) Retention Award Grant Document. Each grant of a Retention Award shall be evidenced by a
Grant Document in such form and containing such provisions not inconsistent with the provisions of
the Plan as the Committee from time to time shall approve. The terms and conditions of the
respective Retention Award Grant Documents need not be identical. A Retention Award shall
terminate if the Holder does not remain continuously in the employ (or in service as a Director) of
the Company or a subsidiary at all times during the applicable vesting period, except as otherwise
set forth in the applicable Grant Document.
12. RECAPITALIZATION, REORGANIZATION AND CHANGE IN CONTROL
(a) No Effect on Right or Power. The existence of the Plan and the Awards granted hereunder
shall not affect in any way the right or power of the Board or the stockholders of the Company or
any subsidiary to make or authorize any adjustment, recapitalization, reorganization or other
change in the Companys or any subsidiarys capital structure or its business, any merger or
consolidation of the Company or any subsidiary, any issue of debt or equity securities ahead of or
affecting Common Stock or the rights thereof, the dissolution or liquidation of the Company or any
subsidiary or any sale, lease, exchange or other disposition of all or any part of its assets or
business or any other corporate act or proceeding.
(b) Changes in Common Stock. The provisions of Section 5(a) imposing limits on the numbers of
shares of Common Stock covered by Awards granted under the Plan, as well as the number or type of
shares or other property subject to outstanding Awards and the applicable option or purchase prices
per share, shall be adjusted appropriately by the Committee in the event of stock dividends, spin
offs of assets or other extraordinary dividends, stock splits, combinations of shares,
recapitalizations, mergers, consolidations, reorganizations, liquidations, issuances of rights or
warrants and similar transactions or events.
(c) Change in Control. As used in the Plan (except as otherwise provided in an applicable
Grant Document), the term Change in Control shall mean:
E - 11
(aa) any person (within the meaning of Section 13(d) or 14(d) under the Exchange Act,
including any group (within the meaning of Section 13(d)(3) under the Exchange Act), a Person) is
or becomes the beneficial owner (as such term is defined in Rule 13d-3 promulgated under the
Exchange Act), directly or indirectly, of securities of the Company (such Person being referred to
as an Acquiring Person) representing 25% or more of the combined voting power of the Companys
outstanding securities; other than beneficial ownership by (i) the Company or any subsidiary of the
Company, (ii) any employee benefit plan of the Company or any Person organized, appointed or
established pursuant to the terms of any such employee benefit plan (unless such plan or Person is
a party to or is utilized in connection with a transaction led by Outside Persons), or (iii) a
Person who has a Schedule 13G on file with the Securities and Exchange Commission pursuant to the
requirements of Rule 13d-1 under the Exchange Act, with respect to its holdings of the Companys
voting securities (Schedule 13G), so long as (1) such Person is principally engaged in the
business of managing investment funds for unaffiliated securities investors and, as part of such
Persons duties as agent for fully managed accounts, holds or exercises voting or dispositive power
over voting securities of the Company, (2) such Person acquires beneficial ownership of voting
securities of the Company pursuant to trading activities undertaken in the ordinary course of such
Persons business and not with the purpose nor the effect, either alone or in concert with any
Person, of exercising the power to direct or cause the direction of the management and policies of
the Company or of otherwise changing or influencing the control of the
Company, nor in connection with or as a participant in any transaction having such purpose or
effect, including any transaction subject to Rule 13d-3(b) of the Exchange Act and (3) if such
Person is a Person included in Rule 13d-1(b)(1)(ii) of the Exchange Act, such Person is not
obligated to, and does not, file a Schedule 13D with respect to the securities of the Company
(Persons referred to in clauses (i) through (iii) hereof are hereinafter referred to as Excluded
Persons); or
(bb) individuals who constituted the Board as of March 12, 2004 after giving effect to changes
in the composition of the Board as of that date (the Incumbent Board) cease for any reason to
constitute at least a majority of the Board, provided that any individual becoming a director on or
after March 12, 2004 whose appointment to fill a vacancy or to fill a new Board position or whose
nomination for election by the Companys shareholders was approved by a vote of at least a majority
of the directors then comprising the Incumbent Board or who was nominated for election by Excluded
Persons shall be considered as though such individual were a member of the Incumbent Board; or
(cc) the Company merges with or consolidates into or engages in a reorganization or similar
transaction with another entity pursuant to a transaction in which the Company is not the
Controlling Corporation; or
(dd) the Company sells or otherwise disposes of all or substantially all of its assets, other
than to Excluded Persons.
For purposes of clause (aa) above, if at any time there exist securities of different classes
entitled to vote separately in the election of directors, the calculation of the proportion of the
voting power held by a beneficial owner of the Companys securities shall be determined as follows:
first,
E - 12
the proportion of the voting power represented by securities held by such beneficial owner
of each separate class or group of classes voting separately in the election of directors shall be
determined, provided that securities representing more than 50% of the voting power of securities
of any such class or group of classes shall be deemed to represent 100% of such voting power;
second, such proportion shall then be multiplied by a fraction, the numerator of which is the
number of directors which such class or classes is entitled to elect and the denominator of which
is the total number of directors elected to membership on the Board at the time; and third, the
product obtained for each such separate class or group of classes shall be added together, which
sum shall be the proportion of the combined voting power of the Companys outstanding securities
held by such beneficial owner.
For purposes of clause (aa) above, the term Outside Persons means any Persons other than (I)
Persons described in clauses (aa)(i) or (iii) above (as to Persons described in clause (aa)(iii)
above, while they are Excluded Persons) and (II) members of senior management of the Company in
office immediately prior to the time the Acquiring Person acquires the beneficial ownership
described in clause (aa).
For purposes of clause (cc) above, the Company shall be considered to be the Controlling
Corporation in any merger, consolidation, reorganization or similar transaction unless either (1)
the shareholders of the Company immediately prior to the consummation of the transaction (the Old
Shareholders) would not, immediately after such consummation, beneficially own, directly or
indirectly, securities of the resulting entity entitled to elect a majority of the members of the
Board of Directors or other governing body of the resulting entity or (2) those persons who were
directors of the Company immediately prior to the consummation of the proposed transaction would
not, immediately after such consummation, constitute a majority of the directors of the resulting
entity, provided that (I) there shall be excluded from the determination of the voting power of the
Old Shareholders securities in the resulting entity beneficially owned, directly or indirectly, by
the other party to the transaction and any such securities beneficially owned, directly or
indirectly, by any Person acting in concert with the other party to the transaction, (II) there
shall be excluded from the determination of the voting power of the Old Shareholders securities in
the resulting entity acquired in any such transaction other than as a result of the beneficial
ownership of Company securities prior to the transaction and (III) persons who are directors of the
resulting entity shall be deemed not to have been directors of the Company immediately prior to the
consummation of the transaction if they were elected as directors of the Company within 90 days
prior to the consummation of the transaction.
The exclusion described in clause (aa)(iii) above shall cease to have any force or effect (and
the Person described therein shall cease to be an Excluded Person) if that Person becomes an
Acquiring Person within the meaning of the Amended and Restated Rights Agreement dated as of
November 15, 2000 between the Company and Mellon Investor Services LLC, as amended from time to
time.
Upon the occurrence of a Change in Control, with respect to each recipient of an Award
hereunder, (AA) all Options granted to such recipient and outstanding at such time shall
immediately vest and become exercisable in full (but subject, however, in the case of Incentive
Stock Options, to
E - 13
the aggregate fair market value, determined as of the date the Incentive Stock
Options are granted, of the stock with respect to which Incentive Stock Options are exercisable for
the first time by such recipient during any calendar year not exceeding $100,000) and, except as
required by law, all restrictions on the transfer of shares acquired pursuant to such Options shall
terminate, (BB) all restrictions applicable to such recipients Restricted Stock and Incentive
Awards that are outstanding at such time shall be deemed to have been satisfied and such Restricted
Stock and Incentive Awards shall immediately vest in full, and (CC) all Retention Awards granted to
such recipient and outstanding at such time shall immediately vest in full.
In addition, except as otherwise provided in the applicable Grant Document, if a recipient of
an Award hereunder becomes entitled to one or more payments (with a payment including, without
limitation, the vesting of an Award) pursuant to the terms of the Plan (the Total Payments),
which are or become subject to the tax imposed by section 4999 of the Code (or any similar tax that
may hereafter be imposed) (the Excise Tax), the Company or subsidiary for whom the recipient is
then performing services
shall pay to the recipient an additional amount (the Gross-Up Payment) such that the net
amount retained by the recipient, after reduction for any Excise Tax on the Total Payments and any
federal, state and local income or employment tax and Excise Tax on the Gross-Up Payment, shall
equal the Total Payments. For purposes of determining the amount of the Gross-Up Payment, the
recipient shall be deemed (aa) to pay federal income taxes at the highest stated rate of federal
income taxation (including surtaxes, if any) for the calendar year in which the Gross-Up Payment is
to be made; and (bb) to pay any applicable state and local income taxes at the highest stated rate
of taxation (including surtaxes, if any) for the calendar year in which the Gross-Up Payment is to
be made. Any Gross-Up Payment required hereunder shall be made to the recipient at the same time
any Total Payment subject to the Excise Tax is paid or deemed received by the recipient.
E - 14
13. AMENDMENT AND TERMINATION OF THE PLAN
Subject to the last sentence of Section 3 hereof, the Board in its discretion may
terminate the Plan at any time. The Board shall have the right to amend the Plan or any part
thereof from time to time, and the Administrator may amend any Award (and its related Grant
Document) at any time, except as otherwise specifically provided in such Grant Document;
provided that no change in any Award theretofore granted may be made which would impair the
rights of the Holder thereof without the consent of such Holder, and provided further that the
Board may not, without approval of the stockholders of the Company, amend the Plan to (a)
increase the maximum aggregate number of shares that may be issued under the Plan or (b) change
the class of individuals eligible to receive Awards under the Plan.
14. MISCELLANEOUS
(a) No Right to an Award. Neither the adoption of the Plan nor any action of the Board or the
Administrator shall be deemed to give an employee or Director any right to be granted an Award
except as may be evidenced by a Grant Document from the Company reflecting a grant by the Company
of an Award to such person and setting forth the terms and conditions thereof. The Plan shall be
unfunded. The Company shall not be required to establish any special or separate fund or to make
any other segregation of funds or assets to assure the performance of its obligations under any
Award.
(b) No Employment or Membership Rights Conferred. Nothing contained in the Plan shall (i)
confer upon any employee any right with respect to continuation of employment with the Company or
any subsidiary or (ii) interfere in any way with the right of the Company or any subsidiary to
terminate his or her employment at any time. Nothing contained in the Plan shall confer upon any
Director any right with respect to continuation of membership on the Board.
(c) Other Laws; Withholding. The Company shall not be obligated to issue any Common Stock
pursuant to any Award granted under the Plan until there has been compliance with applicable laws
and regulations with respect thereto. No fractional shares of Common Stock shall be delivered, nor
shall any cash in lieu of fractional shares be paid. The Company shall have the right to (i) make
deductions from any settlement or exercise of an Award made under the Plan, including the delivery
of shares, or require shares or cash or both be withheld from any Award, in each case in an amount
sufficient to satisfy withholding of any taxes required by law, or (ii) take such other action as
may be necessary or appropriate to satisfy any such tax withholding obligations. The Administrator
may determine the manner in which such tax withholding may be satisfied, and may permit shares of
Common Stock (together with cash, as appropriate) to be used
to satisfy required tax withholding based on the Market Value per Share of any such shares of
Common Stock.
E - 15
(d) No Restriction on Corporate Action. Subject to the restrictions contained in Section 13,
nothing contained in the Plan shall be construed to prevent the Company or any subsidiary from
taking any corporate action, whether or not such action would have an adverse effect on the Plan or
any Award granted hereunder. No employee, Director, beneficiary or other person shall have any
claim against the Company or any subsidiary as a result of any such action.
(e) Restrictions on Transfer. An Award (other than an Incentive Stock Option, which shall be
subject to the transfer restrictions set forth in Section 7(c)) shall not be transferable otherwise
than (i) by will or the laws of descent and distribution, (ii) pursuant to a qualified domestic
relations order as defined by the Code or Title I of the Employee Retirement Income Security Act of
1974, as amended, or the rules thereunder, or (iii) with respect to Awards of Non-Qualified
Options, with the consent of the Administrator. In the discretion of the Administrator, a
percentage (determined by the Administrator and set forth in the applicable Grant Document) of the
aggregate shares of Common Stock obtained from exercises of an Option (which percentage may be
satisfied out of particular exercises as determined by the Administrator and set forth in the
applicable Grant Document) shall not be transferable prior to the earliest to occur of (x) the
termination of the relevant Option term (or such shorter period as may be determined by the
Administrator and set forth in the Grant Document), (y) the Holders retirement, death or
Disability, or (z) termination of the Holders employment with the Company and its subsidiaries.
(f) Governing Law. The Plan shall be construed in accordance with the laws of the State of
Texas.
E - 16
CONTINENTAL AIRLINES, INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
June 6, 2006
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby authorizes Larry Kellner, Jennifer L. Vogel and Lori A. Gobillot, and each of them, with full power of
substitution, to represent and vote the stock of the undersigned in Continental Airlines, Inc. as directed and, in their sole
discretion, on all other matters that may properly come before the Annual Meeting of Stockholders to be held on June 6, 2006, and at
any postponement or adjournment thereof, as if the undersigned were present and voting thereat. The undersigned acknowledges receipt
of the notice of annual meeting and proxy statement with respect to such annual meeting and certifies that, to the knowledge of the
undersigned, all equity securities of Continental Airlines, Inc. owned of record or beneficially by the undersigned are owned and
controlled only by U.S. citizens (as defined in the proxy statement), except as indicated on the reverse side hereof.
Whether or not you expect to attend the annual meeting, please vote the shares. As explained on the other side of this proxy,
you may vote by Internet or by telephone, or you may execute and return this proxy, which may be revoked at any time prior to its use.
This proxy, when properly executed, will be voted in the manner directed by the undersigned stockholder(s). IF NO DIRECTION IS
MADE, THIS PROXY WILL BE VOTED FOR THE
ELECTION OF DIRECTORS NAMED ON THE OTHER SIDE OF THIS PROXY (PROPOSAL
1), FOR AMENDMENT OF
THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION (PROPOSAL 2),
FOR AMENDMENT OF THE INCENTIVE PLAN 2000
(PROPOSAL 3), FOR RATIFICATION OF APPOINTMENT OF
INDEPENDENT AUDITORS (PROPOSAL 4), AND
AGAINST PROPOSAL OF STOCKHOLDER (PROPOSAL 5).
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Address Changes/Comments: |
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(If you noted any Address Changes/Comments above, please mark corresponding box on the reverse side.)
(Continued and to be signed on other side)
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1600 SMITH ST.
41 FL HQSLG
HOUSTON, TX 77002
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VOTE BY
INTERNET - www.proxyvote.com
Use the Internet to transmit your voting instructions and for electronic
delivery of information up until 11:59 P.M. Eastern Time the day before the
cut-off date or meeting date. Have your proxy card in hand when you
access the web site and follow the instructions to obtain your records and
to create an electronic voting instruction form.
ELECTRONIC DELIVERY OF FUTURE SHAREHOLDER COMMUNICATIONS
If you would like to reduce the costs incurred by Continental Airlines, Inc.
in mailing proxy materials, you can consent to receiving all future proxy
statements, proxy cards and annual reports electronically via e-mail or the
Internet. To sign up for electronic delivery, please follow the instructions
above to vote using the Internet and, when prompted, indicate that you
agree to receive or access shareholder communications electronically in
future years.
VOTE BY PHONE - 1-800-690-6903
Use any touch-tone telephone to transmit your voting instructions up until
11:59 P.M. Eastern Time the day before the cut-off date or meeting date.
Have your proxy card in hand when you call and then follow the instructions.
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the postage-paid
envelope we have provided or return it to Continental Airlines, Inc., c/o
ADP, 51 Mercedes Way, Edgewood, NY 11717.
If you vote by Internet or telephone,
you do NOT need to mail back your proxy card.
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TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:
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CONTI 1
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KEEP THIS PORTION FOR YOUR RECORDS |
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DETACH AND RETURN THIS PORTION ONLY |
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
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CONTINENTAL AIRLINES, INC. |
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IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED |
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FOR THE ELECTION OF DIRECTORS NAMED, FOR |
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PROPOSAL 2, FOR PROPOSAL 3, FOR PROPOSAL |
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4 AND AGAINST PROPOSAL 5. |
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1. Election of Directors: |
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For
All |
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Withhold
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For All
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To withhold authority to vote for one or more individual nominees,
mark For All Except and write the name(s) of the nominee(s) on the line below. |
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01 Thomas J. Barrack, Jr
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07 George G.C. Parker
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02 Kirbyjon H. Caldwell
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08 Jeffery A. Smisek |
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03 Lawrence W. Kellner
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09 Karen Hastie Williams |
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04 Douglas H. McCorkindale
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10 Ronald B. Woodard |
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05 Henry L. Meyer III
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11 Charles A. Yamarone |
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06 Oscar Munoz |
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Vote on Proposals |
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For |
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Against |
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Abstain |
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For |
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Against |
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Abstain |
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2.
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Proposal to amend the Amended and
Restated Certificate of
Incorporation to increase the
authorized Class B common stock
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4. |
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Ratification of Appointment of
Independent Auditors
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o
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o
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3.
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Proposal to amend the Incentive Plan
2000 to increase the number of shares of
common stock issuable under the plan
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o
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5. |
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Proposal of Stockholder
regarding
political activities
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For address changes and/or comments, please check this
box and write them on the back where indicated. |
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Note: Please sign exactly as name appears hereon.
Joint owners should each sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such.
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Yes
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No |
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Please indicate if you plan to attend this
meeting. |
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HOUSEHOLDING
ELECTION Please indicate if
you plan consent to receive certain future
investor communications in a single
package per household. |
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Please mark this box ONLY if stock
owned of record or beneficially by you is
owned or controlled by persons who
are not U.S. citizens
(as defined in the proxy statement). |
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Signature
[PLEASE SIGN WITHIN BOX]
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Date
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Signature (Joint Owners)
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Date |
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