UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
Commission File Number
Calair L.L.C.
(Exact name of registrant as specified in its charter)
Delaware 76-0566172
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
c/o CALFINCO Inc.
1600 Smith Street, Dept. HQSEO
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 713-324-2950
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
The aggregate market value of the equity securities held by non-
affiliates of registrant is indeterminable, as there is no
established public trading market for the registrant's equity
securities.
<PAGE>
PART I
ITEM 1. BUSINESS.
Calair L.L.C. ("Calair"), a Delaware limited liability company, and
its wholly owned subsidiary, Calair Capital Corporation ("Calair
Capital"), were formed in March 1998 by CALFINCO Inc. ("Calfinco"),
a wholly owned subsidiary of Continental Airlines, Inc.
("Continental"), for the purpose of acquiring certain take-off and
landing rights at Chicago O'Hare International Airport ("O'Hare"),
Ronald Reagan Washington National Airport in Washington, D.C.
("Reagan National") and New York LaGuardia Airport ("LaGuardia")
(collectively, the "Slots") from Continental.
Calair is economically dependent upon Continental for its
operations and cash flow, in the form of rent payments under the
Slot Lease Agreement (as defined below). Calair Capital, a
Delaware corporation and a wholly owned subsidiary of Calair, does
not have any significant assets and does not conduct operations of
its own.
Continental is a major United States air carrier engaged in the
business of transporting passengers, cargo and mail. Continental
is the fifth largest United States airline (as measured by 1998
revenue passenger miles) and, together with its wholly owned
subsidiaries, Continental Express, Inc. ("Express") and Continental
Micronesia, Inc. ("CMI"), each a Delaware corporation, serves 206
airports worldwide at February 1, 1999.
As used in this Form 10-K, the terms "Calair" and "Company" refer
to Calair L.L.C. and its subsidiary, unless the context indicates
otherwise. This Form 10-K may contain forward-looking statements.
In connection therewith, please see the cautionary statements
contained in Item 1. "Business - Risk Factors Relating to the
Company, Risk Factors Relating to Continental and Risk Factors
Relating to the Airline Industry" which identify important factors
that could cause actual results to differ materially from those in
the forward-looking statements.
The Sale Agreement
Under the Sale Agreement entered into between Calair and
Continental (the "Sale Agreement"), Continental sold to Calair
substantially all of Continental's takeoff and landing rights at
O'Hare (29 slots), Reagan National (41 slots) and LaGuardia (32
slots) for $151.1 million, which represented their estimated fair
value. The acquisition of the Slots was funded with a combination
of debt and equity, which included (i) $31.7 million in capital
contributions from Calfinco, (representing a 76% equity interest in
Calair), (ii) $10.0 million in capital contributions from Chase
Equity Associates, L.P. ("CEA"), (representing a 24% equity
interest in Calair) and (iii) net proceeds of $110.5 million from
an offering of 8-1/8% Senior Notes due 2008 (the "Senior Notes"),
which are fully and unconditionally guaranteed on an unsecured,
senior basis by Continental (the "Parent Guarantee"). See Item 1.
"Business - Industry Regulation" and Continental's 1998 Form 10-K
filed with the Securities and Exchange Commission.
The Slot Lease Agreement
Under the Slot Lease Agreement entered into between Calair and
Continental (the "Slot Lease Agreement"), Continental leases the
Slots from Calair for a term of 10 years at a rate equal to
approximately $16.2 million per annum, payable in arrears on April
1 and October 1 of each year of such term.
The Redemption Option Agreement
Pursuant to the terms of a Redemption Option Agreement entered into
between Calair and CEA (the "Redemption Option Agreement"), Calair
has the right to redeem 50% of CEA's member interest (i.e., 12% of
Calair) on April 17, 2003 (the fifth anniversary of the closing
date of the acquisition of the Slots). In addition, Calair has the
right to redeem all of CEA's member interest (either 12% of Calair
if Calair has previously exercised its fifth anniversary redemption
option, or 24% otherwise) on April 17, 2008 (the tenth anniversary
of the closing date of the acquisition of the Slots) or upon the
occurrence of certain events described in the Redemption Option
Agreement and the amended and restated limited liability company
agreement entered into between Calfinco and CEA (the "Company
Agreement"). If Calair has not redeemed all of CEA's member
interest on or before the tenth anniversary of the closing date of
the acquisition of the Slots, CEA will have the right to require
the liquidation of Calair.
The purchase price for any of the foregoing redemption options
depends upon the date of exercise, the appraised fair market value
of the Slots, and the particular circumstances giving rise to the
redemption option. However, in all events it is anticipated that
if Calair exercises such option, all the available cash of Calair
will not be sufficient to pay the redemption purchase price.
Accordingly, Calair will be dependent upon the voluntary capital
contributions of Calfinco to fund any shortfall. Calfinco is not
obligated to make any such voluntary capital contributions to
Calair.
Employees
Calair is managed by Calfinco, its managing member. Calair has no
directors, officers or employees.
Industry Regulation
The Federal Aviation Administration ("FAA") has designated John F.
Kennedy International Airport, LaGuardia, O'Hare and Reagan
National airports as "high density traffic airports" and has
limited the number of departure and arrival slots at those
airports. Currently, slots at the high density traffic airports
may be voluntarily sold or transferred between the carriers. The
Department of Transportation ("DOT") has in the past reallocated
slots to other carriers and reserves the right to withdraw slots.
Various amendments to the slot system and the perimeter rules,
proposed from time to time by the FAA, members of Congress and
others, could, if adopted, significantly affect operations at the
high density traffic airports, significantly change the value of
the slots, expand slot controls to other airports or eliminate
slots entirely. If adopted, certain of such proposals could
restrict the number of flights, limit transfer of the ownership of
slots, increase the risk of slot withdrawals or eliminate slots
entirely, which could in turn result in charges to Calair's
financial statements. The DOT recently proposed the elimination of
slot restrictions at high-density airports other than Reagan
National. Legislation containing a similar proposal is currently
pending consideration before the full House of Representatives.
The Company cannot predict whether any of these proposals will be
adopted or the impact that the adoption of any such proposal would
have on the value of the Slots or the business or operations of
Calair or Continental. However, if adopted, the value of the Slots
could be impaired depending on the timing of adoption.
Risk Factors Relating to the Company
No Operating History; Limited Purposes; Limited Income. Calair's
business is primarily limited to leasing and/or selling the Slots.
The sole sources of revenue for Calair are rental payments received
from Continental under the Slot Lease Agreement and proceeds from
the sale of any of the Slots that may be sold in the future.
Consequently, Calair's ability to make payments of interest on the
Senior Notes in the amounts and on the dates contemplated therein
depends upon the receipt by Calair of payments under the Slot Lease
Agreement. Regular rental payments under the Slot Lease Agreement
will not be sufficient to enable Calair to repay the principal of
the Senior Notes upon maturity. At maturity of the Senior Notes,
it is anticipated that Calfinco will make a voluntary capital
contribution to Calair to fund repayment of the principal of the
Senior Notes. However, Calfinco is under no obligation under the
Company Agreement to do so. If Calfinco does not make such a
capital contribution in an amount equal to the principal balance of
the Senior Notes prior to maturity and Calair is not otherwise able
to pay the Senior Notes, Continental will be obligated to make
payment under the Parent Guarantee with respect to the Senior
Notes.
Absence of Certain Covenants. The terms of the Senior Notes and
the Parent Guarantee do not limit the Company or Continental's or
any of their respective subsidiaries' ability to incur additional
indebtedness, to mortgage or pledge any of their respective assets,
to sell assets or to pay dividends or make other distributions on,
or redeem or repurchase, capital stock. In addition, the Senior
Notes do not contain provisions that would give holders of the
Senior Notes the right to require the Company to repurchase their
Senior Notes in the event of a change of control of the Company or
Continental or a decline in the credit rating of Calair's, Calair
Capital's or Continental's debt securities resulting from a
takeover recapitalization or similar restructuring or any other
reason.
Year 2000 Computer Risk. Calair is dependent on Continental for
the maintenance of its financial data records. See Item 1.
"Business - Risk Factors Relating to Continental - Year 2000
Computer Risk" below.
Risk Factors Relating to Continental
Leverage and Liquidity. Continental has a higher proportion of
debt compared to its equity capital than some of its principal
competitors. In addition, a majority of Continental's property and
equipment is subject to liens securing indebtedness. Accordingly,
Continental may be less able than some of its competitors to
withstand a prolonged recession in the airline industry or respond
as flexibly to changing economic and competitive conditions.
As of December 31, 1998, Continental had approximately $2.7 billion
(including current maturities) of long-term debt and capital lease
obligations and had approximately $1.3 billion of Continental-
obligated mandatorily redeemable preferred securities of subsidiary
trust and common stockholders' equity. As of December 31, 1998,
Continental had $1.4 billion in cash and cash equivalents.
Continental has lines of credit totaling $225 million and
significant encumbered assets.
Continental has substantial commitments for capital expenditures,
including for the acquisition of new aircraft. As of February 8,
1999, Continental had agreed to acquire a total of 109 Boeing jet
aircraft through 2005. Continental anticipates taking delivery of
57 Boeing jet aircraft in 1999. Continental also has options for
an additional 114 aircraft (exercisable subject to certain
conditions). The estimated aggregate cost of Continental's firm
commitments for Boeing aircraft is approximately $5.4 billion.
Continental currently plans to finance its new Boeing aircraft with
a combination of enhanced pass through trust certificates, lease
equity and other third-party financing, subject to availability and
market conditions. As of February 8, 1999, Continental had
approximately $1.1 billion in financing arranged for such future
Boeing deliveries. In addition, Continental had commitments or
letters of intent for backstop financing for approximately one-
third of the anticipated remaining acquisition cost of such Boeing
deliveries. In addition, at February 8, 1999, Continental has firm
commitments to purchase 32 spare engines related to the new Boeing
aircraft for approximately $167 million, which will be deliverable
through December 2004.
As of February 8, 1999, Express had firm commitments for 37 Embraer
ERJ-145 ("ERJ-145") 50-seat regional jets and 25 Embraer ERJ-135
("ERJ-135") 37-seat regional jets, with options for an additional
125 ERJ-145 and 50 ERJ-135 aircraft exercisable through 2008.
Express anticipates taking delivery of 19 ERJ-145 and six ERJ-135
regional jets in 1999. Neither Express nor Continental will have
any obligation to take any of the firm ERJ-145 aircraft that are
not financed by a third party and leased to Continental.
<PAGE>
For 1998, cash expenditures under operating leases relating to
aircraft approximated $702 million compared to $626 million for
1997, and approximated $263 million relating to facilities and
other rentals compared to $236 million in 1997. Continental
expects that its operating lease expenses for 1999 will increase
over 1998 amounts.
Additional financing will be needed to satisfy Continental's
capital commitments. The Company cannot predict whether sufficient
financing will be available for Continental's capital expenditures
not covered by firm financing commitments.
Continental's History of Operating Losses. Continental recorded
net income (including special charges) of $383 million in 1998,
$385 million in 1997, $319 million in 1996 and $224 million in
1995. However, Continental experienced significant operating
losses in the previous eight years. Historically, the financial
results of the U.S. airline industry have been cyclical. The
Company cannot predict whether current industry conditions will
continue.
Aircraft Fuel. Fuel costs constitute a significant portion of
Continental's operating expense. Fuel costs were approximately
10.2% of operating expenses for the year ended December 31, 1998
(excluding fleet disposition/impairment loss) and 13.6% for the
year ended December 31, 1997. Fuel prices and supplies are
influenced significantly by international political and economic
circumstances. Continental enters into petroleum swap contracts,
petroleum call option contracts and jet fuel purchase commitments
to provide some short-term protection (generally three to six
months) against a sharp increase in jet fuel prices. Continental's
fuel hedging strategy could result in Continental not fully
benefiting from certain fuel price declines. If a fuel supply
shortage were to arise from a disruption of oil imports or
otherwise, higher fuel prices or curtailment of scheduled airline
service could result. Significant changes in fuel costs would
materially affect Continental's operating results.
Labor Matters.
In September 1997, Continental announced a plan to bring all
employees to industry standard wages no later than the end of the
year 2000. Wage increases began in 1997, and will continue to be
phased in through 2000 as revenue, interest rates and rental rates
reach industry standards.
Certain Tax Matters. At December 31, 1998, Continental had
estimated net operating loss carryforwards ("NOLs") of $1.1 billion
for federal income tax purposes that will expire through 2009 and
federal investment tax credit carryforwards of $45 million that
will expire through 2001. As a result of the change in ownership
of Continental on April 27, 1993, the ultimate utilization of
Continental's NOLs and investment tax credits could be limited.
Reflecting this possible limitation, Continental has recorded a
valuation allowance of $263 million at December 31, 1998.
Continental had, as of December 31, 1998, deferred tax assets
aggregating $803 million, including $372 million of NOLs. During
the first quarter of 1998, Continental consummated several
transactions, the benefit of which resulted in the elimination of
reorganization value in excess of amounts allocable to identifiable
assets of $164 million. During the third and fourth quarters of
1998, Continental determined that additional NOLs of Continental's
predecessor could be benefited and accordingly reduced both the
valuation allowance and routes, gates and slots on Continental's
balance sheet by $190 million. To the extent Continental were to
determine in the future that additional NOLs of Continental's
predecessor could be recognized in the accompanying consolidated
financial statements, such benefit would further reduce routes,
gates and slots.
As a result of NOLs, Continental will not pay United States federal
income taxes (other than alternative minimum tax) until it has
earned approximately an additional $1.1 billion of taxable income
following December 31, 1998. Section 382 of the Internal Revenue
Code ("Section 382") imposes limitations on a corporation's ability
to utilize NOLs if it experiences an "ownership change." In
general terms, an ownership change may result from transactions
increasing the ownership of certain stockholders in the stock of a
corporation by more than 50 percentage points over a three-year
period. In the event that an ownership change should occur,
utilization of Continental's NOLs would be subject to an annual
limitation under Section 382 determined by multiplying the value of
Continental's stock at the time of the ownership change by the
applicable long-term tax-exempt rate (which was 4.71% for February
1999). Any unused annual limitation may be carried over to later
years, and the amount of the limitation may under certain
circumstances be increased by the built-in gains in assets held by
Continental at the time of the change that are recognized in the
five-year period after the change. Under current conditions, if an
ownership change were to occur, Continental's annual NOL
utilization would be limited to approximately $102 million per year
other than through the recognition of future built-in gain
transactions.
On November 20, 1998, an affiliate of Northwest Airlines, Inc.
(together with such affiliate, "Northwest") completed its
acquisition of certain equity of Continental previously held by Air
Partners, L.P. ("Air Partners") and its affiliates, together with
certain Class A common stock of Continental held by certain other
investors, totaling 8,661,224 shares of the Class A common stock
(the "Air Partners Transaction"). Based on information currently
available, Continental does not believe that the Air Partners
Transaction resulted in an ownership change for purposes of Section
382.
Continental Micronesia. Because the majority of CMI's traffic
originates in Japan, its results of operations are substantially
affected by the Japanese economy and changes in the value of the
yen as compared to the dollar. As a result of the devaluation of
the yen against the dollar, a weak Japanese economy and increased
fuel costs, CMI's operating earnings declined during 1996 and 1997.
Although CMI's results in Asia have declined significantly in
recent years, Continental successfully redeployed CMI capacity into
the stronger domestic markets and CMI's most recent results have
improved.
To reduce the potential negative impact on CMI's earnings,
Continental has entered into forward contracts and purchased
foreign currency average rate option contracts as a hedge against
a portion of its expected net yen cash flow position. As of
December 31, 1998, Continental had hedged approximately 100% of its
first and second quarter 1999 projected net yen-denominated cash
flows and 75% of its third quarter 1999 projected net yen-
denominated cash flows.
Principal Stockholder. As of December 31, 1998, Northwest held
approximately 13.5% of the common equity interest and 45.8% of the
fully-diluted voting power of Continental. In addition, Northwest
holds a limited proxy to vote certain additional shares of
Continental's common stock that would raise its voting power to
approximately 50.3% of Continental's fully diluted voting power.
In connection with the Air Partners Transaction, Continental
entered into a corporate governance agreement with certain
affiliates of Northwest (the "Northwest Parties") designed to
assure the independence of Continental's Board and management
during the six-year term of the governance agreement. Under the
governance agreement, as amended, the Northwest Parties have agreed
not to beneficially own voting securities of Continental in excess
of 50.1% of the fully diluted voting power of Continental's voting
securities, subject to certain exceptions, including third-party
acquisitions or tender offers for 15% or more of the voting power
of Continental's voting securities and a limited exception
permitting a one-time ownership of approximately 50.4% of the fully
diluted voting power. The Northwest Parties have deposited all
voting securities of Continental beneficially owned by them (other
than the shares for which they hold only a limited proxy) in a
voting trust with an independent voting trustee requiring that such
securities be voted (i) on all matters other than the election of
directors, in the same proportion as the votes cast by other
holders of voting securities, and (ii) in the election of
directors, for the election of independent directors (who must
constitute a majority of the Board) nominated by the Board of
Directors. However, in the event of a merger or similar business
combination or a recapitalization, liquidation or similar
transaction, a sale of all or substantially all of Continental's
assets, or an issuance of voting securities that would represent
more than 20% of the voting power of Continental prior to issuance,
or any amendment of Continental's charter or bylaws that would
materially and adversely affect Northwest (each, an "Extraordinary
Transaction"), the shares may be voted as directed by the Northwest
Party owning such shares, and if a third party is soliciting
proxies in an election of directors, the shares may be voted at the
option of such Northwest Party either as recommended by
Continental's Board of Directors or in the same proportion as the
votes cast by the other holders of voting securities.
The Northwest Parties have also agreed to certain restrictions on
the transfer of voting securities owned by them, have agreed not to
seek to affect or influence Continental's Board of Directors or the
control of the management of Continental or the business,
operations, affairs, financial matters or policies of Continental
or to take certain other actions, and have agreed to take all
actions necessary to cause independent directors to at all times
constitute at least a majority of Continental's Board of Directors.
Continental has granted preemptive rights to a Northwest Party with
respect to issuances of Class A common stock and certain issuances
of Class B common stock. The Northwest Parties have agreed that
certain specified actions, together with any material transactions
between Continental and Northwest or its affiliates, including any
modifications or waivers of the governance agreement or the
alliance agreement, may not be taken without the prior approval of
a majority of the Board of Directors, including the affirmative
vote of a majority of the independent directors. The governance
agreement also required Continental to adopt a shareholder rights
plan with reasonably customary terms and conditions, with an
acquiring person threshold of 15% and with appropriate exceptions
for the Northwest Parties for actions permitted by and taken in
compliance with the governance agreement. A rights plan meeting
these requirements was adopted effective November 20, 1998.
The governance agreement will expire on November 20, 2004, or if
earlier, upon the date that the Northwest Parties cease to
beneficially own voting securities representing at least 10% of the
fully diluted voting power of Continental's voting securities.
However, in response to concerns raised by the Department of
Justice ("DOJ") in its antitrust review of the long-term global
alliance between Continental and Northwest ("Northwest Alliance"),
the Air Partners Transaction and the related governance agreement
between Continental and the Northwest Parties (collectively, the
"Northwest Transaction"), a supplemental agreement was adopted,
which extended the effect of a number of the provisions of the
governance agreement for an additional four years. For instance,
the Northwest Parties must act to ensure that a majority of
Continental's Board is comprised of independent directors, and
certain specified actions, together with material transactions
between Continental and Northwest or its affiliates, including any
modifications or waivers of the supplemental agreement or the
alliance agreement, may not be taken without the prior approval of
a majority of the Board of Directors, including the affirmative
vote of a majority of the independent directors. The Northwest
Parties will continue to have the right to vote in their discretion
on any Extraordinary Transaction during the supplemental period,
but also will be permitted to vote in their discretion on other
matters up to 20% of the outstanding voting power (their remaining
votes to be cast neutrally, except in a proxy contest, as
contemplated in the governance agreement), subject to their
obligation set forth in the previous sentence. If, during the term
of the supplemental agreement, Continental's rights plan were
amended to allow certain parties to acquire more shares than is
currently permitted, or if the rights issued thereunder were
redeemed, the Northwest Parties could vote all of their shares in
their discretion. Certain transfer limitations are imposed on the
Northwest Parties during the supplemental period. Continental has
granted preemptive rights to a Northwest Party with respect to
issuances of Class A common stock and certain issuances of Class B
common stock that occur during such period. Continental has agreed
to certain limitations upon its ability to amend its charter,
bylaws, executive committee charter and rights plan during the term
of the supplemental agreement. Following the supplemental period,
the supplemental agreement requires the Northwest Parties to take
all actions necessary to cause Continental's Board to have at least
five independent directors, a majority of whom will be required to
approve material transactions between Continental and Northwest or
its affiliates, including the amendment, modification or waiver of
any provisions of the supplemental agreement or the alliance
agreement.
In certain circumstances, particularly in cases where a change in
control of Continental could otherwise be caused by another party,
Northwest could exercise its voting power so as to delay, defer or
prevent a change in control of Continental.
Risks Regarding Continental/Northwest Alliance. In November 1998,
Continental and Northwest began implementing a long-term global
alliance involving extensive code-sharing, frequent flyer
reciprocity, and other cooperative activities.
Continental's ability to implement the Northwest Alliance
successfully and to achieve the anticipated benefits is subject to
certain risks and uncertainties, including (a) disapproval or delay
by regulatory authorities or adverse regulatory developments; (b)
competitive pressures, including developments with respect to
alliances among other air carriers; (c) customer reaction to the
alliance, including reaction to differences in products and
benefits provided by Continental and Northwest; (d) economic
conditions in the principal markets served by Continental and
Northwest; (e) increased costs or other implementation
difficulties, including those caused by employees; (f)
Continental's ability to modify certain contracts that restrict
certain aspects of the alliance; and (g) the outcome of lawsuits
commenced by certain stockholders of Continental challenging the
Northwest Transaction and certain related matters.
The alliance agreement provides that if after four years
Continental has not entered into a code share with KLM Royal Dutch
Airlines ("KLM") or is not legally able (but for aeropolitical
restrictions) to enter into a new trans-Atlantic joint venture with
KLM and Northwest and place its airline code on certain Northwest
flights, Northwest can elect to (i) cause good faith negotiations
among Continental, KLM and Northwest as to the impact, if any, on
the contribution to the joint venture resulting from the absence of
the code share, and Continental will reimburse the joint venture
for the amount of any loss until it enters into a code share with
KLM, or (ii) terminate (subject to cure rights of Continental)
after one year's notice any or all of such alliance agreement and
any or all of the agreements contemplated thereunder.
<PAGE>
On October 23, 1998, the DOJ filed a lawsuit against Northwest and
Continental challenging Northwest's acquisition of an interest in
Continental. The DOJ did not seek to preliminarily enjoin the
transaction before it closed on November 20, 1998, nor is the DOJ
challenging the Northwest Alliance at this time, although the DOJ
has informed the parties that it continues to investigate certain
specific aspects of the alliance. Continental is in the process of
implementing its alliance with Northwest. While it is not possible
to predict the ultimate outcome of this litigation, Continental's
management does not believe that this litigation will have a
material adverse effect on Continental.
The DOT is reviewing the changes in Continental's ownership
pursuant to DOT procedures for confirming the continuing fitness of
airlines when their ownership changes. In connection with this
review, DOT has exempted Continental and Northwest from regulatory
provisions which DOT has interpreted to require approval for de
facto route transfers when one airline holding international route
authority acquires control of another airline holding international
route authority, and has deferred action until December 10, 1999 as
to its review of the governance and other agreements between
Continental and Northwest to determine whether there has been a de
facto route transfer.
If DOT were to conclude that a de facto route transfer of
Continental routes to Northwest were occurring, it would institute
a proceeding to determine whether such a transfer was in the public
interest. In the past, DOT has approved numerous transfers, but it
has also concluded on occasion that certain overlapping routes in
limited-entry markets should not be transferred. In those
instances, DOT has decided those routes should instead become
available to other airlines to enhance competition on overlapping
routes or between two countries. Continental and Northwest operate
overlapping flights on certain limited entry routes, and
Continental and Northwest offer service between their primary U.S.
hubs and various other countries. If DOT were to institute a route
transfer proceeding, it could consider whether certain of
Continental's international routes overlapping with Northwest's on
a point-to-point or country-to-country basis should be transferred
to Northwest or to another airline. Continental believes that
Northwest has not acquired control of Continental, and that there
is a significant question as to DOT's authority to apply a de facto
route transfer theory to the current relationship between Northwest
and Continental. Continental would vigorously oppose any attempt
by DOT to institute a route transfer proceeding which would
consider any reductions in Continental's route authorities.
Stockholder Litigation. Following the announcement of the
Northwest Transaction, to Continental's knowledge as of February 1,
1999, six separate lawsuits had been filed against Continental and
its Directors and certain other parties (the "Stockholder
Litigation"). The complaints in the Stockholder Litigation, which
were filed in the Court of Chancery of the State of Delaware in and
for New Castle County and seek class certification, and which have
been consolidated under the caption In re Continental Airlines,
Inc. Shareholder Litigation, generally allege that Continental's
Directors improperly accepted the Northwest Transaction in
violation of their fiduciary duties owed to the public stockholders
of Continental. They further allege that Delta Air Lines, Inc.
submitted a proposal to purchase Continental which, in the
plaintiffs' opinion, was superior to the Northwest Transaction.
The Stockholder Litigation seeks, inter alia, to enjoin the
Northwest Transaction and the award of unspecified damages to the
plaintiffs.
While there can be no assurance that the Stockholder Litigation
will not result in a delay in the implementation of any aspect of
the Northwest Transaction, or the enjoining of the Northwest
Transaction, Continental believes the Stockholder Litigation to be
without merit and intends to defend it vigorously.
Year 2000 Computer Risk. The Year 2000 issue arises as a result of
computer programs having been written using two digits (rather than
four) to define the applicable year, among other problems. Any
information technology ("IT") systems that have time-sensitive
software might recognize a date using "00" as the year 1900 rather
than the year 2000, which could result in miscalculations and
system failures. The problem also extends to many "non-IT"
systems; that is, operating and control systems that rely on
embedded chip systems. In addition, Continental is at risk from
Year 2000 failures on the part of third-party suppliers and
governmental agencies with which Continental interacts.
Continental uses a significant number of computer software programs
and embedded operating systems that are essential to its
operations. For this reason, Continental implemented a Year 2000
project in late 1996 so that Continental's computer systems would
function properly in the year 2000 and thereafter. Continental's
Year 2000 project involves the review of a number of internal and
third-party systems. Each system is subjected to the project's
five phases which consist of systems inventory, evaluation and
analysis, modification implementation, user testing and integration
compliance. The systems are currently in various stages of
completion. Continental anticipates completing its review of
systems in the second quarter of 1999 and believes that, with
modifications to its existing software and systems and/or
conversions to new software, the Year 2000 issue will not pose
significant operational problems for its computer systems.
Continental has also initiated communications and on-site visits
with its significant suppliers, vendors and governmental agencies
with which its systems interface and exchange data or upon which
its business depends. Continental is coordinating efforts with
these parties to minimize the extent to which its business may be
vulnerable to their failure to remediate their own Year 2000
problems. Continental's business is dependent upon certain
domestic and foreign governmental organizations or entities such as
the FAA that provide essential aviation industry infrastructure.
There can be no assurance that the systems of such third parties on
which Continental's business relies (including those of the FAA)
will be modified on a timely basis. Continental's business,
financial condition or results of operations could be materially
adversely affected by the failure of its equipment or systems or
those operated by other parties to operate properly beyond 1999.
Although Continental currently has day-to-day operational
contingency plans, management is in the process of updating these
plans for possible Year 2000-specific operational requirements.
Continental anticipates completing the revision of current
contingency plans and the creation of additional contingency plans
by September 1999. In addition, Continental will continue to
monitor third-party (including governmental) readiness and will
modify its contingency plans accordingly. While Continental does
not currently expect any significant modification of its operations
in response to the Year 2000 issue, in a worst-case scenario
Continental could be required to alter its operations
significantly.
The total cost of Continental's Year 2000 project (excluding
internal payroll) is currently estimated at $16-18 million and has
been and will be funded through cash from operations. As of
December 31, 1998, Continental had incurred and expensed
approximately $15 million relating to its Year 2000 project. The
cost of the Year 2000 project is limited by the substantial
outsourcing of Continental's systems and the significant
implementation of new systems following Continental's emergence
from bankruptcy. The costs of Continental's Year 2000 project and
the date on which Continental believes it will be completed are
based on management's best estimates and include assumptions
regarding third-party modification plans. However, in particular
due to the potential impact of third-party modification plans,
there can be no assurance that these estimates will be achieved and
actual results could differ materially from those anticipated.
Risks Factors Relating to the Airline Industry
Competition and Industry Conditions. The airline industry is
highly competitive and susceptible to price discounting. Carriers
have used discount fares to stimulate traffic during periods of
slack demand, to generate cash flow and to increase market share.
Some of Continental's competitors have substantially greater
financial resources or lower cost structures than Continental.
Airline profit levels are highly sensitive to changes in fuel
costs, fare levels and passenger demand. Passenger demand and fare
levels have in the past been influenced by, among other things, the
general state of the economy (both in international regions and
domestically), international events, airline capacity and pricing
actions taken by carriers. Domestically, from 1990 to 1993, the
weak U.S. economy, turbulent international events and extensive
price discounting by carriers contributed to unprecedented losses
for U.S. airlines. In the last several years, the U.S. economy has
improved and excessive price discounting has abated. The Company
cannot predict the extent to which these industry conditions will
continue.
In recent years, the major U.S. airlines have sought to form
marketing alliances with other U.S. and foreign air carriers. Such
alliances generally provide for "code-sharing", frequent flyer
reciprocity, coordinated scheduling of flights of each alliance
member to permit convenient connections and other joint marketing
activities. Such arrangements permit an airline to market flights
operated by other alliance members as its own. This increases the
destinations, connections and frequencies offered by the airline,
which provide an opportunity to increase traffic on its segment of
flights connecting with its alliance partners. The Northwest
Alliance is an example of such an arrangement, and Continental has
existing alliances with numerous other air carriers. Other major
U.S. airlines have alliances or planned alliances more extensive
than Continental's. The Company cannot predict the extent to which
Continental will benefit from its alliances or be disadvantaged by
competing alliances.
Regulatory Matters. Airlines are subject to extensive regulatory
and legal compliance requirements that engender significant costs.
In the last several years, the FAA has issued a number of
directives and other regulations relating to the maintenance and
operation of aircraft that have required significant expenditures.
Some FAA requirements cover, among other things, retirement of
older aircraft, security measures, collision avoidance systems,
airborne windshear avoidance systems, noise abatement, commuter
aircraft safety and increased inspections and maintenance
procedures to be conducted on older aircraft. The Company has been
informed by Continental that it expects to continue incurring
expenses in complying with the FAA's regulations.
Additional laws, regulations, taxes and airport rates and charges
have been proposed from time to time that could significantly
increase the cost of airline operations or reduce revenues.
Congress and the DOT have also proposed the regulation of airlines'
competitive responses and other activities, including ticketing
practices and the treatment of customers. Restrictions on the
ownership and transfer of airline routes and takeoff and landing
slots have also been proposed. The ability of United States
carriers to operate international routes is subject to change
because the applicable arrangements between the United States and
foreign governments may be amended from time to time, or because
appropriate slots or facilities are not made available. The
Company cannot provide assurance that laws or regulations enacted
in the future will not adversely affect Continental and thus, the
Company.
Seasonal Nature of Airline Business. Due to the greater demand for
air travel during the summer months, revenue in the airline
industry in the third quarter of the year is generally
significantly greater than revenue in the first quarter of the year
and moderately greater than revenue in the second and fourth
quarters of the year for the majority of air carriers.
Continental's results of operations generally reflect this
seasonality, but have also been impacted by numerous other factors
that are not necessarily seasonal, including the extent and nature
of competition from other airlines, fare wars, excise and similar
taxes, changing levels of operations, fuel prices, foreign currency
exchange rates and general economic conditions.
<PAGE>
ITEM 2. PROPERTIES.
As of December 31, 1998, Calair's primary asset consists of takeoff
and landing rights at O'Hare (29 slots), Reagan National (41 slots)
and LaGuardia (32 slots).
ITEM 3. LEGAL PROCEEDINGS.
None.
See Continental's annual report on Form 10-K for the year ended
December 31, 1998 for legal matters relating to Continental.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Not applicable.
ITEM 6. SELECTED FINANCIAL DATA.
The table below sets forth certain consolidated financial data of
the Company at December 31, 1998 and for the period from March 31,
1998 (inception) through December 31, 1998 (in thousands of
dollars).
Rental income from Continental
Airlines, Inc.. . . . . . . . . . . . $ 11,523
Operating income . . . . . . . . . . . 6,169
Net loss . . . . . . . . . . . . . . . (441)
Total assets . . . . . . . . . . . . . $150,873
Long-term debt, net. . . . . . . . . . 110,579
Members' equity. . . . . . . . . . . . 37,952
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion may contain forward-looking statements.
In connection therewith, please see the cautionary statements
contained in Item 1. "Business - Risk Factors Relating to the
Company, Risk Factors Relating to Continental and Risk Factors
Relating to the Airline Industry" which identify important factors
that could cause actual results to differ materially from those in
the forward-looking statements.
Liquidity
Calair's business is primarily limited to leasing and/or selling
the Slots. The sole sources of revenue for Calair are rental
payments received from Continental under the Slot Lease Agreement
and proceeds from the sale of any of the Slots that may be sold in
the future. Consequently, Calair's ability to make payments of
interest on the Senior Notes in the amounts and on the dates
contemplated therein depends upon the receipt by Calair of payments
under the Slot Lease Agreement. Regular rental payments under the
Slot Lease Agreement will not be sufficient to enable Calair to
repay the principal of the Senior Notes upon maturity. At maturity
of the Senior Notes, it is anticipated that Calfinco will make a
voluntary capital contribution to Calair to fund repayment of the
principal of the Senior Notes. However, Calfinco is under no
obligation under the Company Agreement between Calfinco and CEA to
do so. If Calfinco does not make such a capital contribution in an
amount equal to the principal balance of the Senior Notes prior to
maturity and Calair is not otherwise able to pay the Senior Notes,
Continental will be obligated to make payment under the Parent
Guarantee with respect to the Senior Notes.
Results of Operations
The following discussion provides an analysis of the Company's
results of operations for the period from March 31, 1998
(inception) through December 31, 1998.
Rental income of $11.5 million for the period ended December 31,
1998 consisted of rental payments due from Continental for the
right to use the Slots.
Amortization expense of $5.4 million for the period ended December
31, 1998 related to the amortization of slots.
Interest expense of $6.6 million for the period ended December 31,
1998 included the interest on the Senior Notes and the amortization
of the related discount as well as the amortization of the deferred
financing costs.
<PAGE>
Year 2000 Computer Risk
Calair is dependent on Continental for the maintenance of its
financial data records. Calair does not anticipate any material
expenditures relating to the Year 2000 project. See Item 1.
"Business - Risk Factors Relating to Continental - Year 2000
Computer Risk."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Market Risk Sensitive Instruments
The Company is subject to market risks related to interest rates.
The adverse effects of potential changes in these market risks are
discussed below. The sensitivity analyses presented below do not
consider the effects that such adverse changes may have on overall
economic activity nor do they consider additional actions
management may take to mitigate the Company's exposure to such
changes. Actual results may differ. See the notes to the
consolidated financial statements for a description of the
Company's accounting policies and other information related to
these financial instruments.
Interest Rates. As of December 31, 1998, the fair value of $112.3
million (carrying value) of the Company's fixed-rate debt was
estimated to be $110.9 million, based upon discounted future cash
flows using current incremental borrowing rates for similar types
of instruments. Market risk, estimated as the potential increase
in fair value resulting from a hypothetical 1.0% decrease in
interest rates, was approximately $7.4 million as of December 31,
1998.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Consolidated Financial Statements
Page No.
Report of Independent Auditors F-2
Consolidated Statement of Operations for
the Period from March 31, 1998 (inception)
through December 31, 1998 F-3
Consolidated Balance Sheets as of
December 31, 1998 and March 31, 1998 F-4
Consolidated Statement of Cash Flows for
the Period from March 31, 1998 (inception)
through December 31, 1998 F-5
Consolidated Statement of Members' Equity
for the Period from March 31, 1998
(inception) through December 31, 1998 F-6
Notes to Consolidated Financial Statements F-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Managing Member
Calair L.L.C.
We have audited the accompanying consolidated balance sheets of
Calair L.L.C. (the "Company") as of December 31, 1998 and March 31,
1998 and the related consolidated statement of operations, members'
equity and cash flows for the period from March 31, 1998
(inception) through December 31, 1998. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of the Company at December 31, 1998 and March
31, 1998, the consolidated results of its operations and its cash
flows for the period from March 31, 1998 (inception) through
December 31, 1998, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Houston, Texas
March 19, 1999
<PAGE>
<TABLE>
CALAIR L.L.C.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands of dollars)
<CAPTION>
For the Period from
March 31, 1998
(inception) through
December 31, 1998
<S> <C>
Rental income from
Continental Airlines, Inc.. . . . . . . . $11,523
Amortization expense . . . . . . . . . . . (5,354)
Operating income . . . . . . . . . . . . . 6,169
Interest expense . . . . . . . . . . . . . (6,610)
Net loss . . . . . . . . . . . . . . . . . $ (441)
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
<PAGE>
<TABLE>
CALAIR L.L.C.
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
<CAPTION>
December 31, 1998 March 31, 1998
<S> <C> <C>
Assets:
Cash. . . . . . . . . . . . . $ 4 $ 1
Receivable from Continental
Airlines, Inc. . . . . . . . 4,378 -
Total current assets. . . . 4,382 1
Slots, net. . . . . . . . . . 145,787 -
Deferred financing costs,
net. . . . . . . . . . . . . 704 -
Total Assets . . . . . . . $150,873 $ 1
Liabilities and Members' Equity:
Interest payable. . . . . . . $ 2,282 $ -
Other accrued liabilities . . 60 -
Total current liabilities. . 2,342 -
Long-term debt, net . . . . . 110,579 -
Members' equity . . . . . . . 37,952 1
Total Liabilities and
Members' Equity. . . . . . $150,873 $ 1
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
<PAGE>
<TABLE>
CALAIR L.L.C.
CONSOLIDATED STATEMENT OF CASH FLOWS
March 31, 1998 (inception) through December 31, 1998
(In thousands of dollars)
<S> <C>
Cash Flows From Operating Activities:
Net loss. . . . . . . . . . . . . . . . . . . . $ (441)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Amortization. . . . . . . . . . . . . . . . . 5,354
Changes in operating assets and liabilities:
Increase in receivable from Continental
Airlines, Inc.. . . . . . . . . . . . . . . (4,872)
Increase in interest payable . . . . . . . . 2,282
Other. . . . . . . . . . . . . . . . . . . . 172
Net cash provided by operating activities . 2,495
Cash Flows from Investing Activities:
Purchase of slots from Continental
Airlines, Inc. . . . . . . . . . . . . . . . . (151,141)
Cash used by investing Activities . . . . . . (151,141)
Cash Flows from Financing Activities:
Net proceeds from issuance of long-term debt. . 110,456
Capital contributions . . . . . . . . . . . . . 41,666
Return of capital . . . . . . . . . . . . . . . (3,273)
Deferred financing costs. . . . . . . . . . . . (200)
Net cash provided by financing activities. . . 148,649
Net Change in Cash . . . . . . . . . . . . . . . 3
Cash - Beginning of Period . . . . . . . . . . . 1
Cash - End of Period . . . . . . . . . . . . . . $ 4
Supplemental Cash Flows Information:
Interest paid . . . . . . . . . . . . . . . . . $ 4,157
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
<PAGE>
<TABLE>
CALAIR L.L.C.
CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
March 31, 1998 (inception) through December 31, 1998
(In thousands of dollars)
<CAPTION>
Members' Equity
<S> <C>
Capital contribution from CALFINCO Inc.
(March 31, 1998). . . . . . . . . . . . . $ 1
Net loss . . . . . . . . . . . . . . . . . (441)
Capital contribution from CALFINCO Inc.. . 31,665
Capital contribution from Chase Equity
Associates, L.P.. . . . . . . . . . . . . 10,000
Return of capital to CALFINCO Inc. . . . . (2,487)
Return of capital to Chase Equity
Associates, L.P.. . . . . . . . . . . . . (786)
Balance, December 31, 1998 . . . . . . . . $37,952
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
<PAGE>
CALAIR L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As used in these Notes to Consolidated Financial Statements, the
terms "Calair" and "Company" refer to Calair L.L.C. and, unless the
context indicates otherwise, its subsidiary.
NOTE 1 - ORGANIZATION
Calair L.L.C. ("Calair"), a Delaware limited liability company, and
its wholly owned subsidiary, Calair Capital Corporation ("Calair
Capital"), were formed in March 1998 by CALFINCO Inc. ("Calfinco"),
a wholly owned subsidiary of Continental Airlines, Inc.
("Continental"), for the purpose of acquiring certain take-off and
landing rights at Chicago O'Hare International Airport ("O'Hare"),
Ronald Reagan Washington National Airport in Washington, D.C.
("Reagan National") and New York LaGuardia Airport ("LaGuardia")
(collectively, the "Slots") from Continental.
In April 1998, Calair acquired the Slots from Continental for
$151.1 million, which represented their estimated fair value. The
acquisition of the Slots was funded with a combination of debt and
equity, which included (i) $31.7 million in capital contributions
from Calfinco, (representing a 76% equity interest in Calair), (ii)
$10.0 million in capital contributions from Chase Equity
Associates, L.P. ("CEA") (representing a 24% equity interest in
Calair) and (iii) net proceeds of $110.5 million from an offering
of 8-1/8% Senior Notes due 2008 (the "Senior Notes").
Pursuant to the terms of a Redemption Option Agreement entered into
between Calair and CEA (the "Redemption Option Agreement"), Calair
has the right to redeem 50% of CEA's member interest (i.e., 12% of
Calair) on April 17, 2003 (the fifth anniversary of the closing
date of the acquisition of the Slots). In addition, Calair has the
right to redeem all of CEA's member interest (either 12% of Calair
if Calair has previously exercised its fifth anniversary redemption
option, or 24% otherwise) on April 17, 2008 (the tenth anniversary
of the closing date of the acquisition of the Slots) or upon the
occurrence of certain events described in the Redemption Option
Agreement and the amended and restated limited liability company
agreement entered into between Calfinco and CEA (the "Company
Agreement"). If Calair has not redeemed all of CEA's member
interest on or before the tenth anniversary of the closing date of
the acquisition of the Slots, CEA will have the right to require
the liquidation of Calair.
The Company Agreement requires Calair to distribute excess cash
(which is generally defined as cash not needed to pay interest or
principal on the Senior Notes or the redemption of CEA's member
interest) semiannually on April 1 and October 1 to its members
based on their respective ownership interests. During the period
March 31 (inception) through December 31, 1998, Calair paid $2.5
million and $0.8 million in return of capital to Calfinco and CEA,
respectively, under this provision.
The Company was organized as a limited liability company because
such an entity would (i) shield the members from unlimited
liability and (ii) qualify as a pass-through entity for tax
purposes. The Company Agreement will govern the relative rights
and duties of the members.
Calair is economically dependent upon Continental for its
operations and cash flow, in the form of rent payments under the
Slot Lease Agreement entered into between Calair and Continental
(the "Slot Lease Agreement").
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation -
The consolidated financial statements of Calair include the
accounts of Calair and its wholly owned subsidiary, Calair
Capital. All intercompany transactions have been eliminated
in consolidation.
(b) Use of Estimates -
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
(c) Slots -
Slots are amortized on a straight-line basis over 20 years.
Calair had accumulated amortization related to slots of $5.4
million as of December 31, 1998.
(d) Deferred Financing Costs -
Deferred financing costs are amortized on a straight-line
basis over the term of the Senior Notes due 2008.
(e) Income Taxes -
Calair is a limited liability corporation, which is not
subject to federal income taxes.
(f) Measurement of Impairment -
In accordance with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), the
Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the
assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the
carrying amount of those assets.
<PAGE>
NOTE 3 - SENIOR NOTES
Calair and Calair Capital have outstanding $112.3 million in Senior
Notes. These notes mature April 1, 2008 and pay interest
semiannually on April 1 and October 1. Continental has fully and
unconditionally guaranteed the Senior Notes. As of December 31,
1998 the unamortized discount relating to these notes totalled $1.7
million.
In October 1998, the Senior Notes were exchanged for new publicly
registered notes with terms identical in all material respects to
the form and terms of the Senior Notes.
NOTE 4 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Fair Value of Debt
The fair value of the Company's debt with a carrying value of
$112.3 million at December 31, 1998, estimated based on the
discounted amount of future cash flows using the current
incremental rate of borrowing for a similar liability, approximates
$110.9 million.
NOTE 5 - RELATED PARTY TRANSACTIONS
Under the terms of the Slot Lease Agreement between Calair and
Continental, Continental pays Calair $8.1 million semiannually on
April 1 and October 1 (except for the period from April 17, 1998
through October 1, 1998, for which Continental paid $7.4 million)
for the right to use the Slots. The term of the Slot Lease
Agreement extends through April 2008.
In connection with the formation of Calair L.L.C. and the offering
of the Senior Notes, Continental and Calfinco paid $494,000 in
financing costs and legal fees on behalf of Calair during the
period from March 31, 1998 (inception) through December 31, 1998.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
There were no changes in or disagreements on any matters of
accounting principles or financial statement disclosure between the
Company and its independent auditors during the current fiscal
year.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
As noted above, Calair has no directors or officers. The following
persons are the directors and executive officers of Calfinco.
<TABLE>
<CAPTION>
Term of Office
Name, Age and Position and Business Experience
<S> <C>
Gordon M. Bethune, age 57 Chairman of the Board since July
1998 and Chief Executive Officer of
Chairman of the Board and Calfinco since March 1998.
Chief Executive Officer Chairman of the Board and Chief
Executive Officer of Continental
since September 1996.
President and Chief Executive
Officer of Continental (November
1994-September 1996);
President and Chief Operating
Officer of Continental (February
1994-November 1994); various
positions with The Boeing Company
commencing in 1988, including Vice
President and General Manager of
the Commercial Airplane Group Renton
Division, Vice President and General
Manager of the Customer Services
Division and Vice President of
Airline Logistics Support, Director
of Sysco Corporation, and nominee
for director of Honeywell Inc.
Gregory D. Brenneman, age 37 Director since July 1998 and
President and Chief Operating
President, Chief Operating Officer of Calfinco since March
Officer and Director 1998. President and Chief Operating
Office of Continental since
September 1996.
Chief Operating Officer of Conti-
nental (May 1995-September 1996);
Consultant to Continental (February-
April 1995); various positions,
including Vice President, with Bain
& Company, Inc. (consulting firm)
for more than five years; Director
of Browning-Ferris Industries,
Inc.; J. Crew Group Inc.
<PAGE>
Lawrence W. Kellner, age 40 Director since July 1998 and
Executive Vice President and Chief
Executive Vice President and Financial Officer of Calfinco since
Chief Financial Officer March 1998. Executive Vice Presi-
and Director dent and Chief Financial Officer of
Continental since November 1996.
Senior Vice President and Chief
Financial Officer of Continental
(June 1995-November 1996); Executive
Vice President and Chief Financial
Officer of American Savings Bank,
F.A. (November 1992-May 1995);
Director of Belden & Blake
Corporation.
Jeffery A. Smisek, age 44 Director since July 1989 and Execu-
tive Vice President, General Counsel
Executive Vice President, and Secretary of Calfinco since
General Counsel and Secretary March 1998. Executive Vice Presi-
and Director dent, General Counsel and Secretary
of Continental since November 1996.
Senior Vice President and Secretary
of Continental (April 1995-November
1996); General Counsel of Conti-
nental since March 1995; Partner
Vinson & Elkins L.L.P. (law firm)
prior to March 1995 for more than
five years; Director of Tuboscope
Inc.
</TABLE>
There is no family relationship between any of the executive
officers. All officers are appointed by the Board of Directors to
serve until their resignation, death or removal.
ITEM 11. EXECUTIVE COMPENSATION.
As noted above, Calair has no directors or officers.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
CALFINCO Inc. owns a 76% interest in Calair L.L.C. The address of
CALFINCO Inc. is 1600 Smith Street, Dept. HQSEO, Houston, Texas
77002. The remaining 24% interest is owned by Chase Equity
Associates, L.P., the address of which is 380 Madison Avenue, 12th
Floor, New York, New York 10017.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See Item 1. Business.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) The following financial statements are included in Item 8.
"Financial Statements and Supplementary Data":
Report of Independent Auditors
Consolidated Statement of Operations for the Period from
March 31, 1998 (inception) through December 31, 1998
Consolidated Balance Sheets as of December 31, 1998 and
March 31, 1998
Consolidated Statement of Cash Flows for the Period from
March 31, 1998 (inception) through December 31, 1998
Consolidated Statement of Members' Equity for the Period
from March 31, 1998 (inception) through December 31, 1998
Notes to Consolidated Financial Statements
(b) Financial Statement Schedules:
All schedules have been omitted because they are
inapplicable, not required, or the information is included
elsewhere in the consolidated financial statements or notes
thereto.
(c) Reports on Form 8-K.
None.
(d) See accompanying Index to Exhibits.<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Calair L.L.C.
(Registrant)
by: CALFINCO Inc., Managing Member
Date: March 31, 1999 by: /s/ Lawrence W. Kellner
Lawrence W. Kellner
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
of CALFINCO Inc., Managing Member
(On behalf of Registrant)
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons in the
capacities indicated on March 25, 1999.
Signature Capacity
GORDON M. BETHUNE* Chairman, Chief Executive Officer
Gordon M. Bethune (Principal Executive Officer) and
Director of CALFINCO Inc.,
Managing Member
GREGORY D. BRENNEMAN* Director of CALFINCO Inc.,
Gregory D. Brenneman Managing Member
/s/ LAWRENCE W. KELLNER Executive Vice President,
Lawrence W. Kellner Chief Financial Officer
(Principal Financial Officer) and
Director of CALFINCO Inc.,
Managing Member
JEFFERY A. SMISEK* Director of CALFINCO Inc.,
Jeffery A. Smisek Managing Member
/s/ MICHAEL P. BONDS Vice President and Controller,
Michael P. Bonds (Principal Accounting Officer)
of CALFINCO Inc., Managing Member
*By /s/ LAWRENCE W. KELLNER
Lawrence W. Kellner
Attorney in-fact
March 31, 1999
<PAGE>
INDEX TO EXHIBITS
OF
CALAIR L.L.C.
3.1 Certificate of Formation of Calair L.L.C., dated March
30, 1998 -- incorporated by reference from Exhibit 3.1 to
Calair L.L.C.'s Form S-4 registration statement (No. 333-
60409) (the "1998 S-4").
3.2 Amended and Restated Company Agreement of Calair L.L.C.,
dated as of April 17, 1998 -- incorporated by reference
from Exhibit 3.2 to the 1998 S-4.
3.3 Certificate of Incorporation of Calair Capital
Corporation, dated March 30, 1998 -- incorporated by
reference from Exhibit 3.3 to the 1998 S-4.
3.4 Bylaws of Calair Capital Corporation, dated March 31,
1998 -- incorporated by reference from Exhibit 3.4 to the
1998 S-4.
4.1 Form of 8 1/8% Senior Notes due 2008 -- incorporated by
reference from Exhibit 4.1 to the 1998 S-4.
4.2 Senior Notes Indenture, dated as of April 1, 1998, among
Calair L.L.C. and Calair Capital Corporation, as Issuers,
Continental, as Guarantor, and Bank One, N.A., as Trustee
-- incorporated by reference from Exhibit 4.2 to the 1998
S-4.
4.3 Exchange and Registration Rights Agreement, dated as of
April 17, 1998, among Calair L.L.C. and Calair Capital
Corporation, as Note Issuers, and Continental Airlines,
Inc. as Guarantor, and Chase Securities Inc., Credit
Suisse First Boston Corporation and Morgan Stanley & Co.
Incorporated, as Purchasers -- incorporated by reference
from Exhibit 4.3 to the 1998 S-4.
10.1 Sale Agreement between Continental Airlines, Inc. and
Calair L.L.C. dated as of April 17, 1998 -- incorporated
by reference from Exhibit 10.1 to the 1998 S-4.
10.2 Slot Lease Agreement between Continental Airlines, Inc.
and Calair L.L.C. dated as of April 17, 1998 --
incorporated by reference from Exhibit 10.2 to the 1998
S-4.
10.3 Redemption Option Agreement between Calair L.L.C. and
Chase Equity Associates, L.P. dated as of April 17, 1998
-- incorporated by reference from Exhibit 10.3 to the
1998 S-4.
21.1 List of Subsidiaries of Calair. (1)
<PAGE>
24.1 Powers of attorney executed by certain directors and
officers of CALFINCO, Inc., as managing member of Calair
L.L.C. (1)
27.1 Financial Data Schedule. (1)
__________
(1) Filed herewith.
EXHIBIT 21.1
<TABLE>
SUBSIDIARIES OF CALAIR L.L.C.
<CAPTION>
SUBSIDIARY STATE OF INCORPORATION
<S> <C>
Calair Capital Corporation Delaware
</TABLE>
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a
director and/or officer of CALFINCO Inc., the Managing Member of
CALAIR L.L.C. ("CALAIR"), does hereby constitute and appoint
Lawrence W. Kellner, Jeffery A. Smisek and Scott R. Peterson, or
any of them, the undersigned's true and lawful attorney or
attorneys to execute in the name, place and stead of the
undersigned CALAIR's Annual Report on Form 10-K for the year ended
December 31, 1998 (and any amendments thereto), to be filed by
CALAIR under the Securities Exchange Act of 1934, as amended, as
fully and effectively in all respects as the undersigned could do
if personally present.
IN WITNESS WHEREOF, the undersigned has signed this Power of
Attorney on and as of the date set forth below.
Date: March 16, 1999 /s/ Gordon M. Bethune
Printed name: Gordon M. Bethune
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a
director and/or officer of CALFINCO Inc., the Managing Member of
CALAIR L.L.C. ("CALAIR"), does hereby constitute and appoint
Lawrence W. Kellner, Jeffery A. Smisek and Scott R. Peterson, or
any of them, the undersigned's true and lawful attorney or
attorneys to execute in the name, place and stead of the
undersigned CALAIR's Annual Report on Form 10-K for the year ended
December 31, 1998 (and any amendments thereto), to be filed by
CALAIR under the Securities Exchange Act of 1934, as amended, as
fully and effectively in all respects as the undersigned could do
if personally present.
IN WITNESS WHEREOF, the undersigned has signed this Power of
Attorney on and as of the date set forth below.
Date: March 16, 1999 /s/ Greg Brenneman
Printed name: Greg Brenneman
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a
director and/or officer of CALFINCO Inc., the Managing Member of
CALAIR L.L.C. ("CALAIR"), does hereby constitute and appoint
Lawrence W. Kellner, Jeffery A. Smisek and Scott R. Peterson, or
any of them, the undersigned's true and lawful attorney or
attorneys to execute in the name, place and stead of the
undersigned CALAIR's Annual Report on Form 10-K for the year ended
December 31, 1998 (and any amendments thereto), to be filed by
CALAIR under the Securities Exchange Act of 1934, as amended, as
fully and effectively in all respects as the undersigned could do
if personally present.
IN WITNESS WHEREOF, the undersigned has signed this Power of
Attorney on and as of the date set forth below.
Date: March 16, 1999 /s/ Jeffery A. Smisek
Printed name: Jeffery A. Smisek
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a
director and/or officer of CALFINCO Inc., the Managing Member of
CALAIR L.L.C. ("CALAIR"), does hereby constitute and appoint
Lawrence W. Kellner, Jeffery A. Smisek and Scott R. Peterson, or
any of them, the undersigned's true and lawful attorney or
attorneys to execute in the name, place and stead of the
undersigned CALAIR's Annual Report on Form 10-K for the year ended
December 31, 1998 (and any amendments thereto), to be filed by
CALAIR under the Securities Exchange Act of 1934, as amended, as
fully and effectively in all respects as the undersigned could do
if personally present.
IN WITNESS WHEREOF, the undersigned has signed this Power of
Attorney on and as of the date set forth below.
Date: March 16, 1999 /s/ Lawrence W. Kellner
Printed name: Lawrence W. Kellner
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 4
<SECURITIES> 0
<RECEIVABLES> 4,378
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,382
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 150,873
<CURRENT-LIABILITIES> 2,342
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 37,952
<TOTAL-LIABILITY-AND-EQUITY> 150,873
<SALES> 0
<TOTAL-REVENUES> 11,523
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,354
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,610
<INCOME-PRETAX> (441)
<INCOME-TAX> 0
<INCOME-CONTINUING> (441)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (441)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
