<PAGE>
RULE NO. 424(b)(1)
REGISTRATION NO. 333-02701
PROSPECTUS
- ----------
3,730,240 SHARES
CONTINENTAL [LOGO]
AIRLINES
CLASS B COMMON STOCK
----------------
Of the 3,730,240 shares (the "Shares") of Class B common stock, par value
$.01 per share (the "Class B common stock"), of Continental Airlines, Inc.
(the "Company" or "Continental") offered hereby, 2,984,192 Shares are being
offered in the United States and Canada (the "U.S. Shares") by the U.S.
Underwriters (the "U.S. Offering"), and 746,048 Shares are being concurrently
offered outside the United States and Canada by the International Underwriters
(the "International Offering" and, together with the U.S. Offering, the
"Offering"). The offering price and underwriting discounts and commissions of
the U.S. Offering and the International Offering are identical. See
"Underwriting."
All of the Shares offered hereby are being sold by Air Canada, a Canadian
corporation ("Air Canada"), and certain partners of Air Partners, L.P., a
Texas limited partnership ("Air Partners") (collectively, the "Selling
Stockholders"). See "Principal and Selling Stockholders." Continental will not
receive any of the proceeds from the sale of the Shares by the Selling
Stockholders.
The Class B common stock is listed on the New York Stock Exchange, Inc. (the
"NYSE") under the trading symbol "CAI.B." On May 8, 1996, the last reported
sale price of the Class B common stock on the NYSE was $53 1/2 per share. See
"Market Price of Common Stock and Dividends."
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING
AN INVESTMENT IN THE SHARES, SEE "RISK FACTORS" ON PAGES 12 TO 15.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) STOCKHOLDERS(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........................ $53.50 $1.66 $51.84
- --------------------------------------------------------------------------------
Total(3)......................... $199,567,840 $6,192,198 $193,375,642
</TABLE>
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- -------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have severally agreed to
indemnify the several Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) The Company has agreed to pay certain expenses of the Offering estimated
at $350,000.
(3) Air Canada has granted the U.S. Underwriters a 30-day option to purchase
up to 200,000 additional shares of Class B common stock on the same terms
and conditions as set forth above. If all such additional shares are
purchased by the Underwriters, the total Price to Public will be
$210,267,840, the total Underwriting Discount will be $6,524,198 and the
total Proceeds to Selling Stockholders will be $203,743,642. See
"Underwriting."
----------------
The Shares are offered by the several Underwriters, subject to prior sale,
when, as and if delivered to and accepted by them, subject to approval of
certain legal matters by counsel to the Underwriters, and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the Shares will be made in New York, New York on or about May 14,
1996.
----------------
MERRILL LYNCH & CO.
GOLDMAN, SACHS & CO.
LEHMAN BROTHERS
MORGAN STANLEY & CO.
INCORPORATED
----------------
The date of this Prospectus is May 8, 1996.
<PAGE>
AVAILABLE INFORMATION
Continental is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the following
public reference facilities maintained by the Commission: Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; Suite 1300, Seven World
Trade Center, New York, New York 10048; and The Citicorp Center, Suite 1400,
500 West Madison Street, Chicago, Illinois 60661. Copies of such material may
also be obtained from the Public Reference Section of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, upon
payment of prescribed rates. In addition, reports, proxy statements and other
information concerning Continental may be inspected and copied at the offices
of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York
10005.
Continental is the successor to Continental Airlines Holdings, Inc.
("Holdings"), which merged with and into Continental on April 27, 1993.
Holdings had also been subject to the informational requirements of the
Exchange Act.
This Prospectus constitutes a part of a registration statement on Form S-3
(together with all amendments and exhibits, the "Registration Statement")
filed by Continental with the Commission under the Securities Act of 1933, as
amended (the "Securities Act"). This Prospectus omits certain of the
information contained in the Registration Statement, and reference is hereby
made to the Registration Statement for further information with respect to
Continental and Holdings and the securities offered hereby. Although
statements concerning and summaries of certain documents are included herein,
reference is made to the copy of such document filed as an exhibit to the
Registration Statement or otherwise filed with the Commission. These documents
may be inspected without charge at the office of the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies may be
obtained at fees and charges prescribed by the Commission.
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NYSE OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNT OR FOR
THE ACCOUNTS OF OTHERS IN THE SHARES PURSUANT TO EXEMPTIONS FROM RULES 10b-6,
10b-7, AND 10b-8 UNDER THE EXCHANGE ACT.
FOR FLORIDA RESIDENTS
The Company does not conduct business with the government of Cuba or any
person or affiliate located in Cuba, except that Continental aircraft conduct
Cuban overflights for which Continental makes monthly payments through a
clearing house of Cubana de Aviacion pursuant to a specific license from the
Office of Foreign Assets Control, United States Department of Treasury.
The information set forth above is accurate as of the date hereof. Current
information concerning the Company's business dealings with the government of
Cuba or with any person or affiliate located in Cuba may be obtained from the
Division of Securities and Investor Protection of the Florida Department of
Banking and Finance, The Capital, Tallahassee, Florida 32399-0350, telephone
number (904) 488-9805.
2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission (File No. 0-9781) are
hereby incorporated by reference in this Prospectus: (i) Continental's Annual
Report on Form 10-K for the year ended December 31, 1995 (as amended by Forms
10-K/A1 and 10-K/A2 filed on March 8, 1996 and April 10, 1996, respectively),
(ii) the description of the Class B common stock contained in Continental's
registration statement (RegistrationNo. 0-21542) on Form 8-A, (iii)
Continental's Quarterly Report on Form 10-Q for the quarter ended March 31,
1996 and (iv) Continental's Current Reports on Forms 8-K, filed on January 31,
1996, March 26, 1996 and May 7, 1996.
All reports and any definitive proxy or information statements filed by
Continental pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of this Prospectus and prior to the termination of the
offering of the Securities offered hereby shall be deemed to be incorporated
by reference into this Prospectus and to be a part hereof from the date of
filing of such documents. Any statement contained in a document incorporated
or deemed to be incorporated herein by reference, or contained in this
Prospectus, shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
Continental will provide without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of such person, a
copy of any or all documents incorporated herein by reference, other than
exhibits to such documents (unless such exhibits are specifically incorporated
by reference into such documents). Requests for such documents should be
directed to Continental Airlines, Inc., 2929 Allen Parkway, Suite 2010,
Houston, Texas 77019, Attention: Secretary, telephone (713) 834-2950.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by the
detailed information and financial statements (including the notes thereto)
appearing elsewhere or incorporated by reference in this Prospectus.
Prospective investors should consider carefully the matters discussed under the
caption "Risk Factors." Unless otherwise stated or unless the context otherwise
requires, references to "Continental" or the "Company" include Continental
Airlines, Inc. and its predecessors and subsidiaries. All route, fleet, traffic
and similar information appearing in this Prospectus is as of or for the period
ended March 31, 1996, unless otherwise stated herein.
THE COMPANY
Continental Airlines, Inc. 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 revenue passenger miles in
the first three months of 1996) and, together with its wholly owned subsidiary,
Continental Express, Inc. ("Express"), and its 91%-owned subsidiary,
Continental Micronesia, Inc. ("CMI"), serves 175 airports worldwide.
The Company operates its route system primarily through domestic hubs at
Newark, Houston Intercontinental and Cleveland, and a Pacific hub on Guam and
Saipan. Each of Continental's three U.S. hubs is located in a large business
and population center, contributing to a high volume of "origin and
destination" traffic. The Guam/Saipan hub is strategically located to provide
service from Japanese and other Asian cities to popular resort destinations in
the western Pacific. Continental is the primary carrier at each of these hubs,
accounting for 51%, 78%, 54% and 58% of all daily jet departures, respectively.
Continental directly serves 118 U.S. cities, with additional cities
(principally in the western and southwestern United States) connected to
Continental's route system under agreements with America West Airlines, Inc.
("America West"). Internationally, Continental flies to 57 destinations and
offers additional connecting service through alliances with foreign carriers.
Continental operates 52 weekly departures to five European cities and markets
service to four other cities through code-sharing agreements. Continental is
one of the leading airlines providing service to Mexico and Central America,
serving more destinations in Mexico than any other United States airline. In
addition, Continental flies to four cities in South America and plans to
commence service between Newark and Bogota, Colombia, with service on to Quito,
Ecuador, in June 1996. Through its Guam/Saipan hub, Continental provides
extensive service in the western Pacific, including service to more Japanese
cities than any other United States carrier.
In late 1994 and early 1995, Continental's new management team, led by Gordon
Bethune (President and Chief Executive Officer) and Greg Brenneman (Chief
Operating Officer), put in place a comprehensive strategic and operational plan
designed to fundamentally change the Company. The plan, labeled the "Go Forward
Plan," was a "back to basics" approach, which focused on improving
profitability and financial condition by delivering a consistent quality
product to customers and improving employee morale and working conditions.
Management believes that the initiatives put in place under the Go Forward
Plan and the support of Continental's employees contributed significantly to
the Company's record $224 million in net income and other accomplishments in
1995. These accomplishments included substantial improvements in revenue per
available seat mile, load factor and yields, increased cash from operations,
consistent interior and exterior aircraft appearance, achievement of number one
ranking in on-time performance and fewest mishandled bags among major carriers
in the fourth quarter (as reported by the U.S. Department of Transportation
("DOT")), significant reductions in customer complaints, payment of profit
sharing to employees, and improved employee relations (including signing the
first collective bargaining agreement with pilots in 12 years).
4
<PAGE>
In addition, management believes that these Go Forward Plan initiatives and
Continental employee support have continued to contribute to the Company's
results in 1996, as evidenced by the Company's $88 million net income for the
first quarter and substantially higher revenue per available seat mile, load
factor and yields, as compared with the first quarter of 1995.
1996 GO FORWARD PLAN
The Company's 1996 Go Forward Plan combines the four basic components of the
1995 plan, Fly to Win, Fund the Future, Make Reliability a Reality and Working
Together, with new initiatives intended to build upon Continental's operational
and strategic strengths.
Fly to Win. The Company's 1996 Fly to Win initiatives center around three
principal themes: Focus on Hub Operations, Improve Business/Leisure Mix and
Develop an Alliance Network.
Focus on Hub Operations. Continental plans to continue focusing on its hub
operations, adding selected flights and refining its scheduling to
capitalize on the strength of its hubs. The last 9 jet aircraft currently
deployed to serve Greensboro, North Carolina as a "mini-hub" are scheduled
to be redeployed in June to bolster the Company's Newark and Houston hubs.
In 1996, Continental will also focus on expanding international traffic
through service to new destinations and additional code-sharing alliances
with foreign carriers.
. Newark. Continental is the only major U.S. carrier with a hub in the New
York metropolitan area, the largest population center in the United
States. Through its state-of-the-art facility, Continental operates 51%
(214 departures) of the average daily jet departures and, together with
Express, accounted for 57% (333 departures) of all average daily
departures (jet and turboprop) from Newark. As the only hub carrier in
the New York metropolitan area, Continental believes it has several
advantages. For example, in addition to international travelers
attracted to the New York metropolitan area as a tourist and business
destination, Continental's Newark hub attracts international travelers
seeking convenient connections to other destinations throughout the
Company's route system. Management believes that combining the Company's
own flying with alliance flying (discussed below) over the next few
years can develop Newark into a global gateway of considerable
significance. A new international passenger facility was opened at
Newark in 1996 to permit growth in international service, and a
passenger monorail is expected to open in the next few months which will
allow prompt connections between the international facility (Terminal B)
and the Company's domestic operations in Terminal C.
. Houston. Continental operates 55% (308 departures) of average daily jet
departures and together with Express accounted for 60% (418 departures)
of all average daily departures from Houston Intercontinental and Hobby
airports. The Company occupies space in two terminals (C and IAB) at
Houston Intercontinental and has realigned the Houston hub's gate
structure to allow for more convenient connections of domestic and
international flights. Management believes that Houston is also well
suited for east/west connecting traffic and features faster ground
connection times than the east/west hubs of certain of its principal
competitors. Management believes that Houston, like Newark, has
significant growth potential. Continental currently has 41 gates under
use at Intercontinental airport at the time of peak bank departures.
This compares to approximately 55 gates used by American Airlines at
Dallas-Fort Worth International Airport during peak bank departures and
approximately 50 gates used by Northwest Airlines at Minneapolis during
peak bank departures. The Company is currently negotiating with the City
of Houston for an additional 10 gates at Intercontinental airport.
Houston is the focus of Continental's operations in Mexico and Central
America, serving 11 cities in Mexico and every country in Central
America. Continental serves more destinations in Mexico than any other
United States airline. Continental also serves three cities in South
America through its Houston hub, flies directly to London and Paris and
has code-sharing agreements through Newark for Rome, Milan, Amsterdam and
Prague.
5
<PAGE>
. Cleveland. Continental operates 54% (106 departures) of the average
daily jet departures and, together with Express, accounted for 62% (216
departures) of all average daily departures from Cleveland. Management
believes that Cleveland is currently underserved as a hub, given the
size of its population base relative to that of other hub cities (such
as Pittsburgh and Cincinnati) with higher levels of service. In 1996,
Continental intends to begin expansion of service at Cleveland, in part
by adding Express flights to new destinations in the midwestern United
States. Management expects these Express flights to generate additional
feed traffic that ultimately can support additional jet service in
Cleveland.
. Guam/Saipan. CMI is a United States-certificated international carrier
engaged in the business of transporting passengers, cargo and mail in
the western Pacific. From its hub operations based on Guam and Saipan,
CMI provides service to seven cities in Japan, more than any other
United States carrier, and to other Pacific rim destinations, including
Taiwan, the Philippines, Hong Kong, South Korea and Indonesia. Service
to these Japanese cities and certain other Pacific rim destinations is
subject to a variety of regulatory restrictions, limiting the ability of
other carriers to begin servicing these markets. CMI is the principal
air carrier in the Micronesian Islands, where it pioneered scheduled air
service in 1968. CMI's route system is linked to the United States
market through Honolulu, which CMI serves non-stop from both Tokyo and
Guam. CMI and Continental also maintain a code-sharing agreement and
coordinate schedules on certain flights from the west coast of the
United States to Honolulu, and from Honolulu to Guam and Tokyo to
facilitate travel from the United States into CMI's route system.
Management believes that by adding domestic and international flights to
the Company's hubs, attracting more international passengers through
alliances with foreign carriers and further refining the efficiency of the
Company's hub operations, Continental can continue to capture additional
flow traffic through its hubs and attract a larger share of higher yielding
business travelers, while growing both its domestic and international
operations.
Improve Business/Leisure Mix. The Company's passenger load factors have
increased substantially from 59.7% in the first quarter of 1995 to 67.0% in
the first quarter of 1996. This increase in load factor facilitates the
Company's efforts to manage the business versus leisure traveler mix on its
aircraft. Since the average business traveler generally pays a higher fare
(on a revenue per seat mile basis) for the convenience of booking later and
being able to make last minute travel changes, increases in business
traffic contribute to incremental profitability. Business fares (i.e.,
unrestricted fares) accounted for approximately 44.8% of the Company's
passenger revenue in the first quarter of 1996 compared to 37.8% in the
first quarter of 1995. The Company has recently invested in state-of-the-
art revenue management and pricing systems, which management believes will
enhance its ability to manage the business versus leisure mix.
Develop an Alliance Network. Management believes that developing a network
of international alliance partners will better leverage the Company's hub
assets and result in improved returns to the Company. Focusing on multiple
tactical alliances allows the Company to benefit from the strengths of its
alliance partners in their local markets while reducing the Company's
reliance on any individual alliance partner.
Management has a goal of developing alliance relationships that, together
with the Company's own flying, would permit expanded service out of Newark
to major destinations in South America, Europe and Asia, and would permit
expanded service out of Houston to certain destinations in South America
and Europe, and service to Japan. Certain route authorities that would be
required for the Company's own service to certain of these destinations are
not currently available to the Company.
6
<PAGE>
Continental currently has international code-sharing alliances with
Alitalia Airlines ("Alitalia"), Air Canada, Transavia Airlines
("Transavia") and CSA Czech Airlines, and joint marketing agreements with
other airlines not involving code-sharing. The Company has recently entered
into code-sharing agreements or arrangements with China Airlines, the TACA
Group (serving Central America and the northern tier of South America) and
World Airways (serving South Africa, Senegal, Israel and two points in
Ireland); all of these agreements or arrangements are scheduled to be
implemented by the end of the second quarter. The Company anticipates
entering into other code-sharing agreements in 1996.
Fund the Future. Having achieved its 1995 goals of building overall liquidity
and improving financial condition, management is shifting its financial focus
in 1996 to target the Company's interest and lease expense. Through refinancing
and other initiatives, management hopes to achieve substantial reductions in
interest and lease expense attributable to financing arrangements that were
entered into when the Company was in a less favorable financial position.
In the first quarter of 1996, the Company completed a number of transactions
intended to strengthen its long-term financial position and enhance earnings:
. In January, the Company consummated the offering of $489 million of
enhanced pass-through certificates that refinanced the underlying debt
associated with 18 leased aircraft and will reduce Continental's annual
operating lease expense by more than $15 million for the affected
aircraft.
. During January and February, Continental repurchased or redeemed without
prepayment penalty the remaining amount of the Series A convertible
secured debentures for $125 million (including payment-in-kind interest
of $7 million).
. In February, Continental sold approximately 1.4 million of the shares it
owned in America West, realizing net proceeds of approximately $25
million and recognizing a gain of $12.5 million.
. In March, Continental completed the offering of $230 million of 6 3/4%
convertible subordinated notes.
. In March, Continental repaid $257 million of secured indebtedness to
General Electric Company and affiliates (collectively, "GE") (of which
$47 million was required as a result of the convertible debt financing
and the America West stock sale and $210 million was an optional
prepayment), obtaining the elimination of certain restrictive covenants.
Make Reliability a Reality. Customer service will continue to be a focus in
1996. Management believes Continental's on-time performance record is crucial
to its other operational objectives and, together with its other initiatives
(such as improved baggage handling and customer satisfaction) is an important
tool to attract higher-margin business travelers.
Continental's goal for 1996 is to be ranked monthly by the DOT among the top
three major carriers in on-time performance, baggage handling and customer
satisfaction. In 1995, $65 bonuses were paid to employees (up to the manager
level) for each month that the Company ranked among the top five major carriers
for on-time performance statistics. For 1996, bonuses of $65 will continue to
be paid to these employees for each month that Continental ranks second or
third in on-time performance, and bonuses of $100 will be paid for each month
that Continental ranks first.
In addition to programs intended to improve Continental's standings in DOT
performance data, the Company has acted in a number of additional areas to
enhance Continental's attractiveness to business travelers and the travel agent
community. Specifically, Continental implemented various initiatives designed
to offer travelers cleaner, more attractive aircraft interiors; consistent
interior and exterior decor; first class seating on all jet aircraft; better
meals; and greater benefits under its award-winning frequent flyer program. In
1996, Continental intends to continue making improvements designed to attract
business travelers, such as upgraded on-board telecommunications, entertainment
and information systems, refurbished Presidents Clubs with
7
<PAGE>
specialty bars, and on-board specialty coffees and microbrewery beer, among
others. The Company continues to refine its award-winning BusinessFirst
service.
Working Together. Management believes that Continental's employees are its
greatest asset, as well as the cornerstones of improved reliability and
customer service. Management has introduced a variety of programs to increase
employee participation and foster a sense of shared community. These
initiatives include significant efforts to communicate openly and honestly with
all employees through daily news bulletins, weekly voicemail updates from
Gordon Bethune, quarterly Continental publications, videotapes mailed to
employees, and Go Forward Plan bulletin boards in all departments system-wide.
In addition, regularly scheduled visits to airports throughout the route system
are made by the senior executives of the Company (each of whom is assigned an
airport for this purpose) and monthly meetings open to all employees, as well
as other periodic on-site visits by management designed to encourage employee
participation and cooperation.
Management believes that it enjoys good relations with all employee groups.
The Company's jet pilots are represented by the Independent Association of
Continental Pilots ("IACP"), which signed a collective bargaining agreement,
which was ratified by the union membership, effective July 1, 1995. This
agreement was the first collective bargaining agreement with the Company's
pilots in 12 years.
The Company is a Delaware corporation. Its executive offices are located at
2929 Allen Parkway, Suite 2010, Houston, Texas 77019, and its telephone number
is (713) 834-2950.
8
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Shares Offered by
Selling Stockholders(1):
U.S. Offering.......... 2,984,192 Shares
International
Offering.............. 746,048 Shares
----------------
Total................ 3,730,240 Shares
================
Shares Outstanding after
the Offering(2):
Class A................ 4,640,000 shares
Class B................ 23,153,180 shares
-----------------
Total................ 27,793,180 shares
=================
Use of Proceeds.......... The Company will not receive any proceeds from the
Offering.
Voting Control........... Assuming consummation of the Offering (and exercise of
the Underwriters' overallotment option) and consumma-
tion of the transactions described under "Recent Devel-
opments," approximately 4.0% of the general voting
power and 10.1% of the common equity interests would be
held by Air Canada and 9.9% of the common equity inter-
ests and 39.4% of the general voting power would be
held by Air Partners. In addition, assuming exercise of
all of the warrants held by Air Partners, approximately
52.2% of the general voting power and 23.4% of the com-
mon equity interests would be held by Air Partners. See
"Recent Developments" and "Principal and Selling Stock-
holders."
The Company, Air Canada and Air Partners have agreed to
amend the Subscription and Stockholders' Agreement
dated as of April 27, 1993 among the Company, Air Part-
ners and Air Canada (the "Stockholders' Agreement") and
certain related agreements upon the closing of the Of-
fering (except for certain specified provisions which
were amended, effective April 19, 1996) as part of the
consummation of the transactions described under "Re-
cent Developments." In addition, at its annual meeting
of stockholders to be held June 26, 1996 (the "Annual
Meeting"), the Company has proposed to eliminate a num-
ber of the provisions of the Company's Restated Certif-
icate of Incorporation (the "Certificate of Incorpora-
tion") that currently provide Air Partners and Air Can-
ada special rights. See "Recent Developments" and "De-
scription of Capital Stock."
Limitations on Foreign
Ownership of Common
Stock................... Foreign Ownership Restrictions (as defined herein) con-
tained in the Company's Certificate of Incorporation
and bylaws (the "Bylaws") limit the number of shares of
voting stock that may be voted by foreign holders. See
"Description of Capital Stock--Class A Common Stock and
Class B Common Stock--Limitation on Voting by Foreign
Owners."
NYSE Symbol.............. "CAI.B"
</TABLE>
- --------
(1) Excludes 200,000 shares subject to the Underwriters' overallotment option.
(2) Excludes 1,519,734 shares of Class A common stock and 3,382,632 shares of
Class B common stock reserved for issuance upon exercise of warrants held
by Air Partners, and shares of Class B common stock issued after April 30,
1996 pursuant to the Company's employee benefit plans; reflects the
contemplated conversion by Air Canada of all its 1,661,056 shares of Class
A common stock into Class B common stock.
9
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
The following tables summarize certain financial and operating data of the
Company and certain financial data of Holdings. The consolidated financial data
of both the Company, for the two years ended December 31, 1995 and 1994 and for
the period from April 28, 1993 through December 31, 1993, and Holdings, for the
period from January 1, 1993 through April 27, 1993, are derived from their
respective audited consolidated financial statements. On April 27, 1993, in
connection with the Reorganization (as defined herein), the Company adopted
fresh start reporting in accordance with SOP 90-7 (as defined herein). A
vertical black line is shown in the table below to separate Continental's post-
reorganized consolidated financial data from the pre-reorganized consolidated
financial data of Holdings since they have not been prepared on a consistent
basis of accounting. The consolidated financial data of the Company for the
three months ended March 31, 1996 and 1995 are derived from its unaudited
consolidated financial statements. The unaudited consolidated financial
statements include all adjustments (consisting solely of normal recurring
accruals) that the Company considers necessary for the presentation of the
financial position and results of operations for these periods. Operating
results for the three months ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1996. The summary consolidated financial data should be read in conjunction
with, and are qualified in their entirety by reference to, the Company's
consolidated financial statements, including the notes thereto, incorporated by
reference herein. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
REORGANIZATION JANUARY 1,
THREE MONTHS YEAR ENDED (APRIL 28, 1993 1993
ENDED MARCH 31, DECEMBER 31, THROUGH THROUGH
----------------- --------------- DECEMBER 31, APRIL 27,
1996 1995 1995 1994 1993) 1993
------- -------- ------ ------- --------------- -----------
(IN MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating Revenue:
Passenger................................................... $ 1,375 $ 1,240 $5,302 $ 5,036 $ 3,493 $1,622
Cargo, mail and other....................................... 114 169 523 634 417 235
------- -------- ------ ------- ------- ------
1,489 1,409 5,825 5,670 3,910 1,857
Operating Expenses........................................... 1,369 1,381 5,440 5,681 3,815 1,971
------- -------- ------ ------- ------- ------
Operating Income (Loss)..................................... 120 28 385 (11) 95 (114)
------- -------- ------ ------- ------- ------
Nonoperating Income (Expense):
Interest expense............................................ (47) (53) (213) (241) (165) (52)
Interest capitalized........................................ 1 1 6 17 8 2
Interest income............................................. 9 6 31 23 14 --
Gain on System One transactions............................. -- -- 108 -- -- --
Reorganization items, net................................... -- -- -- -- -- (818)
Other, net.................................................. 12 (10) (7) (439)(1) (4) 5
------- -------- ------ ------- ------- ------
(25) (56) (75) (640) (147) (863)
------- -------- ------ ------- ------- ------
Income (Loss) before Income Taxes, Minority Interest and
Extraordinary Gain.......................................... 95 (28) 310 (651) (52) (977)
Net Income (Loss)............................................ $ 88 $ (30) $ 224 $ (613) $ (39) $2,640(2)
Earnings (Loss) per Common and Common Equivalent Share....... $ 2.70 $ (1.21) $ 7.20 $(23.76) $ (2.33) N.M.(3)
======= ======== ====== ======= =======
Earnings (Loss) per Common Share Assuming Full Dilution...... $ 2.36 $ (1.21) $ 6.29 $(23.76) $ (2.33) N.M.(3)
======= ======== ====== ======= =======
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
---------------- ------------------------------
1996 1995 1995 1994 1993 1992
------- ------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA (UNAUDITED):
(4)
Revenue passenger miles
(millions)................. 9,752 9,561 40,023 41,588 42,324 43,072
Available seat miles
(millions)................. 14,551 16,003 61,006 65,861 67,011 67,877
Passenger load factor....... 67.0% 59.7% 65.6% 63.1% 63.2% 63.5%
Breakeven passenger load
factor..................... 61.0% 58.2% 60.8% 62.9% 63.3% 65.4%
Passenger revenue per
available seat mile
(cents).................... 8.90 7.37 8.20 7.22 7.17 6.66
Operating cost per available
seat mile (cents).......... 8.92 7.90 8.36 7.86 7.90 7.56
Average yield per revenue
passenger mile (cents)..... 13.28 12.34 12.51 11.44 11.35 10.49
Average length of aircraft
flight (miles)............. 876 803 836 727 856 851
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
(IN MILLIONS OF DOLLARS)
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents, including restricted Cash
and Cash Equivalents of $124 and $144,
respectively(5)...................................... $ 657 $ 747
Other Current Assets.................................. 655 568
Total Property and Equipment, Net..................... 1,410 1,461
Routes, Gates and Slots, Net.......................... 1,517 1,531
Other Assets, Net..................................... 507 514
------ ------
Total Assets......................................... $4,746 $4,821
====== ======
Current Liabilities................................... $2,040 $1,984
Long Term Debt and Capital Leases..................... 1,462 1,658
Deferred Credits and Other Long-term Liabilities...... 542 564
Minority Interest..................................... 28 27
Continental-Obligated Mandatorily Redeemable Preferred
Securities of Trust(6)............................... 242 242
Redeemable Preferred Stock............................ 42 41
Common Stockholders' Equity........................... 390 305
------ ------
Total Liabilities and Stockholders' Equity........... $4,746 $4,821
====== ======
</TABLE>
- --------
(1) Includes a provision of $447 million recorded in the fourth quarter of 1994
associated with the planned early retirement of certain aircraft and closed
or underutilized airport and maintenance facilities and other assets.
(2) Includes a $3.6 billion extraordinary gain from the extinguishment of debt.
(3) Historical per share data for Holdings is not meaningful since the Company
has been recapitalized and has adopted fresh start reporting as of April
27, 1993.
(4) Operating cost and breakeven passenger load factor data for periods prior
to April 28, 1993 are not comparable with data after April 27, 1993.
(5) Restricted cash and cash equivalents agreements relate primarily to
workers' compensation claims and the terms of certain other agreements. In
addition, CMI is required by its loan agreement with GE to maintain certain
minimum cash balances and net worth levels, which effectively restrict the
amount of cash available to Continental from CMI.
(6) The sole assets of the Trust are convertible subordinated debentures which
are expected to be repaid by 2020. Upon repayment, the Continental-
Obligated Mandatorily Redeemable Preferred Securities of Trust will be
mandatorily redeemed.
11
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the factors set forth below,
in addition to the other information contained or incorporated by reference in
this Prospectus, in evaluating an investment in the Shares offered hereby.
CONTINENTAL'S HISTORY OF OPERATING LOSSES
Although Continental recorded net income of $224 million in 1995 and $88
million in the three months ended March 31, 1996, it had experienced
significant operating losses in the previous eight years. In the long term,
Continental's viability depends on its ability to sustain profitable results
of operations.
LEVERAGE AND LIQUIDITY
Continental has successfully negotiated a variety of agreements to increase
its liquidity during 1995 and 1996. Nevertheless, Continental remains more
leveraged and has significantly less liquidity than certain of its
competitors, several of whom have available lines of credit and/or significant
unencumbered assets. Accordingly, Continental may be less able than certain of
its competitors to withstand a prolonged recession in the airline industry.
As of March 31, 1996, Continental and its consolidated subsidiaries had
approximately $1.7 billion (including current maturities) of long-term
indebtedness and capital lease obligations and had approximately $702 million
of minority interest, preferred securities of trust, redeemable preferred
stock and common stockholders' equity. Common stockholders' equity reflects
the adjustment of the Company's balance sheet and the recording of assets and
liabilities at fair market value as of April 27, 1993 in accordance with fresh
start reporting.
During the first and second quarters of 1995, in connection with
negotiations with various lenders and lessors, Continental ceased or reduced
contractually required payments under various agreements, which produced a
significant number of events of default under debt, capital lease and
operating lease agreements. Through agreements reached with the various
lenders and lessors, Continental has cured all of these events of default. The
last such agreement was put in place during the fourth quarter of 1995.
As of March 31, 1996, Continental had approximately $657 million of cash and
cash equivalents, including restricted cash and cash equivalents of $124
million. Continental does not have general lines of credit and has no
significant unencumbered assets.
Continental has firm commitments with The Boeing Company ("Boeing") to take
delivery of 43 new jet aircraft during the years 1998 through 2002. The
estimated aggregate cost of these aircraft is $2.6 billion. In addition, six
Beech 1900-D turboprop aircraft are scheduled to be delivered later in 1996.
The Company currently anticipates that the firm financing commitments
available to it with respect to its acquisition of new aircraft from Beech
Acceptance Corporation ("Beech") will be sufficient to fund all deliveries
scheduled during 1996, and that it will have remaining financing commitments
from aircraft manufacturers of $676 million for jet aircraft deliveries beyond
1996. However, the Company believes that further financing will be needed to
satisfy the remaining amount of such capital commitments. There can be no
assurance that sufficient financing will be available for all aircraft and
other capital expenditures not covered by firm financing commitments.
For 1996, Continental expects to incur cash expenditures under operating
leases of approximately $586 million, compared with $521 million for 1995,
relating to aircraft and approximately $229 million relating to facilities and
other rentals, the same amount as for 1995. In addition, Continental has
capital requirements relating to compliance with regulations that are
discussed below. See "--Regulatory Matters."
12
<PAGE>
Continental and CMI have secured borrowings from GE which aggregated $373
million as of March 31, 1996. CMI's secured loans contain significant
financial covenants, including requirements to maintain a minimum cash balance
and consolidated net worth, restrictions on unsecured borrowings and mandatory
prepayments on the sale of most assets. These financial covenants limit the
ability of CMI to pay dividends to Continental. In addition, Continental's
secured loans require Continental to, among other things, maintain a minimum
cumulative operating cash flow, a minimum monthly cash balance and a minimum
ratio of operating cash flow to fixed charges. Continental also is prohibited
generally from paying cash dividends on its capital stock, from purchasing or
prepaying indebtedness and from incurring certain additional secured
indebtedness.
AIRCRAFT FUEL
Since fuel costs constitute a significant portion of Continental's operating
costs (approximately 12.5% for the year ended December 31, 1995 and 12.9% for
the three months ended March 31, 1996), significant changes in fuel costs
would materially affect the Company's operating results. Fuel prices continue
to be susceptible to international events, and have risen in recent months.
The Company cannot predict near or longer-term fuel prices. The Company has
entered into petroleum option contracts to provide some short-term protection
(currently approximately seven months) against a sharp increase in jet fuel
prices. In the event of a fuel supply shortage resulting from a disruption of
oil imports or otherwise, higher fuel prices or curtailment of scheduled
service could result.
CERTAIN TAX MATTERS
The Company's United States federal income tax return reflects net operating
loss carryforwards ("NOLs") of $2.5 billion, subject to audit by the Internal
Revenue Service, of which $1.2 billion are not subject to the limitations of
Section 382 of the Internal Revenue Code ("Section 382"). As a result, the
Company will not pay United States federal income taxes (other than
alternative minimum tax) until it has recorded approximately an additional
$1.2 billion of taxable income following December 31, 1995. For financial
reporting purposes, however, Continental will be required to begin accruing
tax expense on its income statement once it has realized an additional $122
million of taxable income following March 31, 1996. Section 382 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. The
sale of the Company's common stock resulting from this offering will give rise
to an increase in percentage ownership by certain stockholders for this
purpose. Based upon the advice of counsel, the Company believes that such
percentage increase will not give rise to an ownership change under Section
382 as a result of the Offering. However, no assurance can be given that
future transactions, whether within or outside the control of the Company,
will not cause a change in ownership, thereby substantially limiting the
potential utilization of the NOLs in a given future year. In the event that an
ownership change should occur, utilization of Continental's NOLs would be
subject to an annual limitation under Section 382. This Section 382 limitation
for any post-change year would be determined by multiplying the value of the
Company's stock (including both common and preferred stock) at the time of the
ownership change by the applicable long-term tax exempt rate (which is 5.31%
for April 1996). Unused annual limitation may be carried over to later years,
and the limitation may under certain circumstances be increased by the built-
in gains in assets held by the Company at the time of the change that are
recognized in the five-year period after the change. Under current conditions,
if an ownership change were to occur, Continental's NOL utilization would be
limited to a minimum of approximately $90 million.
In connection with the Company's 1993 reorganization under Chapter 11 of the
U.S. bankruptcy code effective April 27, 1993 (the "Reorganization") and the
recording of assets and liabilities at fair market value under the American
Institute of Certified Public Accountants' Statement of Position 90-7--
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
("SOP 90-7"), the Company recorded a deferred tax liability at April 27, 1993,
net of the amount of the Company's estimated realizable net operating loss
carryforwards as required by Statement of Financial Accounting Standards No.
109--"Accounting for Income Taxes." Realization of a substantial portion of
the Company's net operating loss carryforwards will require the completion
during the five-year period following the Reorganization of transactions
resulting in recognition of
13
<PAGE>
built-in gains for federal income tax purposes. The Company has consummated
one such transaction, which had the effect of realizing approximately 40% of
the built-in gains required to be realized over the five-year period, and
currently intends to consummate one or more additional transactions. If the
Company were to determine in the future that not all such transactions will be
completed, an adjustment to the net deferred tax liability of up to $116
million would be charged to income in the period such determination was made.
CMI
CMI's operating profit margins have consistently been greater than the
Company's margins overall. In addition to its non-stop service between
Honolulu and Tokyo, CMI's operations focus on the neighboring islands of Guam
and Saipan, resort destinations that cater primarily to Japanese travelers.
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. Appreciation of the yen
against the dollar during 1993 and 1994 increased CMI's profitability and a
decline of the yen against the dollar may be expected to decrease it. To
reduce the potential negative impact on CMI's dollar earnings, CMI from time
to time purchases average rate options as a hedge against a portion of its
expected net yen cash flow position. Any significant and sustained decrease in
traffic or yields to and from Japan could materially adversely affect
Continental's consolidated profitability.
PRINCIPAL STOCKHOLDERS
As of March 31, 1996, approximately 9.9% of the Company's common equity
interests and approximately 32.4% of the general voting power of the Company's
common stock were held by Air Partners (after giving effect to the
distribution, effective March 29, 1996, of all the 2,742,773 shares of Class B
common stock held by Air Partners to its partners), and approximately 18.0% of
the common equity interests and 23.6% of the general voting power were held by
Air Canada, exclusive in each case of warrants held by Air Partners and
certain exchange rights of Air Canada. Assuming (i) consummation of the
transactions described under "Recent Developments," (ii) consummation of this
Offering (and exercise of the Underwriters' overallotment option) and (iii)
exercise of the warrants held by Air Partners, approximately 8.6% of the
common equity interests and 3.2% of the general voting power would be held by
Air Canada, and 23.4% of the common equity interests and 52.2% of the voting
power would be held by Air Partners. See "Principal and Selling Stockholders."
Various provisions in the Company's Certificate of Incorporation, Bylaws and
the Stockholders' Agreement currently provide Air Partners and Air Canada with
a variety of special rights to elect directors and otherwise affect the
corporate governance of the Company; a number of these provisions could have
the effect of delaying, deferring or preventing a change in control of the
Company. See "Description of Capital Stock--Corporate Governance and Control."
The Company has proposed to eliminate a number of these provisions and will
propose for approval by its stockholders the related amendments to the
Certificate of Incorporation at the Annual Meeting. Air Canada and Air
Partners (unless otherwise directed by its investors) have agreed to vote in
favor of these amendments at the Annual Meeting. See "Recent Developments."
LIMITATION ON VOTING BY FOREIGN OWNERS
The Company's Certificate of Incorporation provides that no shares of
capital stock may be voted by or at the direction of persons who are not
citizens of the United States unless the shares are registered on a separate
stock record. The Company's Bylaws further provide that no shares will be
registered on this separate stock record if the amount so registered would
exceed Foreign Ownership Restrictions (as defined herein). United States law
currently requires that no more than 25% of the voting stock of the Company
(or any other domestic airline) may be owned directly or indirectly by persons
who are not citizens of the United States. See "Description of Capital Stock--
Class A Common Stock and Class B Common Stock--Limitation on Voting by Foreign
Owners."
INDUSTRY CONDITIONS AND COMPETITION
The airline industry is highly competitive and susceptible to price
discounting. The Company has in the past both responded to discounting actions
taken by other carriers and initiated significant discounting actions
14
<PAGE>
itself. Continental's competitors include carriers with substantially greater
financial resources, as well as smaller carriers with lower cost structures.
Airline profit levels are highly sensitive to, and during recent years have
been severely impacted by, changes in fuel costs, fare levels (or "average
yield") and passenger demand. Passenger demand and yields have been adversely
affected by, among other things, the general state of the economy,
international events and actions taken by carriers with respect to fares. From
1990 to 1993, these factors contributed to the domestic airline industry's
incurring unprecedented losses. Although fare levels have increased recently,
significant industry-wide discounts could be reimplemented at any time, and
the introduction of broadly available, deeply discounted fares by a major
United States airline would likely result in lower yields for the entire
industry and could have a material adverse effect on the Company's operating
results.
The airline industry has consolidated in past years as a result of mergers
and liquidations and may further consolidate in the future. Among other
effects, such consolidation has allowed certain of Continental's major
competitors to expand (in particular) their international operations and
increase their market strength. Furthermore, the emergence in recent years of
several new carriers, typically with low cost structures, has further
increased the competitive pressures on the major United States airlines. In
many cases, the new entrants have initiated or triggered price discounting.
Aircraft, skilled labor and gates at most airports continue to be readily
available to start-up carriers. Although management believes that Continental
is better able than some of its major competitors to compete with fares
offered by start-up carriers because of its lower cost structure, competition
with new carriers or other low cost competitors on Continental's routes could
negatively impact Continental's operating results.
REGULATORY MATTERS
In the last several years, the United States Federal Aviation Administration
(the "FAA") has issued a number of maintenance directives and other
regulations relating to, among other things, retirement of older aircraft,
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 expects to continue
incurring expenses for the purpose of complying with the FAA's noise and aging
aircraft regulations. In addition, several airports have recently sought to
increase substantially the rates charged to airlines, and the ability of
airlines to contest such increases has been restricted by federal legislation,
DOT regulations and judicial decisions.
Management believes that the Company benefitted from the expiration of the
aviation trust fund tax (the "ticket tax") on December 31, 1995, although the
amount of any such benefit directly resulting from the expiration of the
ticket tax cannot be determined. Reinstatement of the ticket tax will result
in higher costs to consumers, which may have an adverse effect on passenger
traffic, revenue and margins. The Company is unable to predict when or in what
form the ticket tax may be reenacted.
Additional laws and regulations have been proposed from time to time that
could significantly increase the cost of airline operations by imposing
additional requirements or restrictions on operations. Laws and regulations
have also been considered that would prohibit or restrict the ownership and/or
transfer of airline routes or takeoff and landing slots. Also, the
availability of international routes to United States carriers is regulated by
treaties and related agreements between the United States and foreign
governments that are amendable. Continental cannot predict what laws and
regulations may be adopted or their impact, but there can be no assurance that
laws or regulations currently enacted or enacted in the future will not
adversely affect the Company.
15
<PAGE>
RECENT DEVELOPMENTS
On April 19, the Company's Board of Directors approved certain agreements
(the "Agreements") with its two major stockholders, Air Canada and Air
Partners. The Agreements contain a variety of arrangements intended generally
to reflect the intention that Air Canada has expressed to the Company of
divesting its investment in Continental by early 1997, subject to market
conditions. Air Canada has indicated to the Company that its original
investment in Continental has become less central to Air Canada in light of
other initiatives it has undertaken--particularly expansion within Canada and
exploitation of the 1995 Open Skies agreement to expand Air Canada's own
flights into the U.S. As a result of these initiatives, Air Canada has
determined it appropriate to redeploy the funds invested in the Company into
other uses in Air Canada's business. The Agreements also reflect the
distribution by Air Partners, effective March 29, 1996, to its investors (the
"AP Investors") of all of the shares of Class B common stock held by Air
Partners and the desire of some of the AP Investors to realize the increase in
value of their investment in the Company by selling all or a portion of their
shares of Class B common stock. The Agreements required the Company to
undertake the Offering, and upon the closing of the Offering:
. in light of its then-reduced equity stake, Air Canada will no longer be
entitled to designate directors of Continental, will cause the four
present or former members of Air Canada's Board of Directors currently
serving as Continental directors to decline nomination for reelection as
directors, and will convert all of its Class A common stock to Class B
common stock;
. Air Canada and Air Partners will be restricted, prior to December 16,
1996, from the further disposition of the common stock of the Company
held by either of them; and
. each of the existing Stockholders' Agreement and Registration Rights
Agreement among the parties will be modified in a number of respects to
reflect, among other matters, the changing composition of the respective
equity interests of the parties.
Reflecting the reduction of Air Canada's interest and the decision of the
current directors designated by Air Canada not to stand for reelection if the
Offering is consummated (except under certain limited circumstances), along
with the expiration of various provisions of the Company's Certificate of
Incorporation and Bylaws specifically included at the time of the
Reorganization, Continental's Board of Directors has also approved changes to
the Company's Certificate of Incorporation and Bylaws (the "Proposed
Amendments") generally eliminating special classes of directors (except for
Air Partners' right to elect directors in certain circumstances) and
supermajority provisions, and making a variety of other modifications aimed at
streamlining the Company's corporate governance structure.
The Proposed Amendments also provide that, at any time after January 1,
1997, shares of Class A common stock would become freely convertible into an
equal number of shares of Class B common stock. Under agreements put in place
at the time of the Reorganization, and designed in part to ensure compliance
with the foreign ownership limitations applicable to United States air
carriers in light of the substantial stake in the Company then held by Air
Canada, holders of Class A common stock (other than Air Canada) are not
currently permitted under the Company's Certificate of Incorporation to
convert their shares to Class B common stock. In recent periods, the market
price of Class A common stock has generally been below the price of Class B
common stock, which the Company believes is attributable in part to the
reduced liquidity present in the trading market for Class A common stock. A
number of Class A stockholders have requested that the Company provide for
free convertibility of Class A common stock into Class B common stock, and in
light of the reduction of Air Canada's equity stake, the Company has
determined that the restriction is no longer necessary. Any such conversion
would effectively increase the relative voting power of those Class A
stockholders who do not convert.
The Company and Air Canada also expect to enter into discussions regarding
modifications to the Company's existing "synergy" agreements with Air Canada,
covering items such as maintenance and ground facilities, with a view to
resolving certain outstanding commercial issues under the agreements and
otherwise modifying the agreements to reflect Continental's and Air Canada's
current needs. The Company has entered into an agreement with Air Partners for
the sale by Air Partners to the Company from time to time at Air Partners'
election for the one-year period beginning August 15, 1996, of up to an
aggregate of $50 million in
16
<PAGE>
intrinsic value (then-current Class B common stock price minus exercise price)
of Air Partners' Class B common stock warrants. The purchase price would be
payable in cash. The Board of Directors has authorized the Company to publicly
issue up to $50 million of Class B common stock in connection with any such
purchase. In connection with this agreement, the Company will reclassify $50
million from common equity to redeemable warrants.
Because certain aspects of the Agreements raised issues under the change in
control provisions of certain of the Company's employment agreements and
employee benefit plans, these agreements and plans are being modified to
provide a revised change of control definition that the Company believes is
appropriate in light of the prospective changes to its equity ownership
structure. In connection with the modifications, payments are being made to
certain employees, benefits are being granted to certain employees and options
equal to 10% of the amount of the options previously granted to each optionee
are being granted (subject to certain conditions) to substantially all
employees holding outstanding options.
Certain of the Proposed Amendments and employee benefit actions are subject
to stockholder approval at the Annual Meeting. Air Canada has delivered an
irrevocable proxy in favor of Air Partners, authorizing Air Partners to vote,
in its sole discretion, all the shares of common stock beneficially owned,
directly or indirectly, by Air Canada as of the record date, April 30, 1996,
(approximately 23.6% of the voting power of all voting securities outstanding
as of such record date) with respect to such Proposed Amendments and employee
benefit actions, among other matters to be voted on by the Company's
stockholders. Air Partners has indicated to the Company that it intends to
vote all such shares in favor of all such matters and, unless otherwise
directed by its investors with respect to the shares of the Company held by
Air Partners that are attributable to such investors' respective limited
partnership interests, to vote the shares of common stock held by it as of the
record date (approximately 35.7% of the voting power of all voting securities
outstanding as of such date) in favor of all such matters.
Following the anticipated sale of Air Canada's Class B common stock in the
Offering (and exercise of the Underwriters' overallotment option) and the
conversion of all its Class A common stock to Class B common stock, Air Canada
is expected to own approximately 4.0% of the voting power and 10.1% of the
equity of the Company and Air Partners to own approximately 39.4% of the
voting power and 9.9% of the equity of the Company (assuming no exercise of
the warrants held by Air Partners).
17
<PAGE>
USE OF PROCEEDS
All of the Shares to which this Prospectus relates are being offered by the
Selling Stockholders. Continental will not receive any of the proceeds from
the sale of such Shares.
MARKET PRICE OF COMMON STOCK AND DIVIDENDS
The Class A common stock and the Class B common stock are listed for trading
on the NYSE, which is its principal market. As of March 31, 1996, there were
approximately 3,928 and 9,176 holders of record of Continental's Class A
common stock and Class B common stock, respectively.
Certain of the Company's credit agreements currently restrict the Company's
ability to pay cash dividends to its common stockholders. The Company has not
paid any cash dividends on its common stock and has no current intention of
doing so.
The table below shows the quarterly high and low sales prices for the
Company's Class A common stock and Class B common stock as reported on the
NYSE since January 1, 1994.
<TABLE>
<CAPTION>
CLASS A COMMON CLASS B COMMON
STOCK PRICE STOCK PRICE
--------------- ---------------
PERIOD HIGH LOW HIGH LOW
- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C>
1994
First Quarter................................. $30 3/4 $18 3/4 $27 1/4 $16 7/8
Second Quarter................................ 21 13 1/2 19 3/4 11 1/4
Third Quarter................................. 22 1/4 14 21 1/2 13
Fourth Quarter................................ 18 1/2 8 1/8 18 1/8 7 1/2
1995
First Quarter................................. 12 1/8 7 12 1/4 6 1/2
Second Quarter................................ 25 3/4 10 3/8 25 3/4 10 5/8
Third Quarter................................. 39 3/4 23 1/8 40 1/8 23 3/8
Fourth Quarter................................ 46 7/8 34 3/8 47 1/2 34 3/4
1996
First Quarter................................. 54 38 1/4 56 3/8 38 7/8
Second Quarter (through May 8)................ 59 1/2 51 7/8 61 53 1/2
</TABLE>
The last reported sale prices for the Company's Class A common stock and
Class B common stock on the NYSE on May 8, 1996 were $51 7/8 and $53 1/2,
respectively.
18
<PAGE>
SELECTED FINANCIAL DATA
The following tables set forth selected financial data of (i) the Company
for the three months ended March 31, 1996 and 1995, the two years ended
December 31, 1995 and 1994 and for the period from April 28, 1993 through
December 31, 1993 and (ii) Holdings for the period from January 1, 1993
through April 27, 1993. The consolidated financial data of both the Company,
for the two years ended December 31, 1995 and 1994 and for the period from
April 28, 1993 through December 31, 1993, and Holdings, for the period from
January 1, 1993 through April 27, 1993, are derived from their respective
audited consolidated financial statements. On April 27, 1993, in connection
with the Reorganization, the Company adopted fresh start reporting in
accordance with SOP 90-7 (as defined herein). A vertical black line is shown
in the table below to separate Continental's post-reorganized consolidated
financial data from the pre-reorganized consolidated financial data of
Holdings since they have not been prepared on a consistent basis of
accounting. The consolidated financial data of the Company for the three
months ended March 31, 1996 and 1995 are derived from its unaudited
consolidated financial statements, which include all adjustments (consisting
solely of normal recurring accruals) that the Company considers necessary for
the presentation of the financial position and results of operations for these
periods. Operating results for the three months ended March 31, 1996 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996. The selected consolidated financial data should be read in
conjunction with, and are qualified in their entirety by reference to, the
Company's consolidated financial statements, including the notes thereto,
incorporated by reference herein. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
PERIOD FROM
REORGANIZATION PERIOD FROM
THREE MONTHS YEAR ENDED (APRIL 28, 1993 JANUARY 1,
ENDED MARCH 31, DECEMBER 31, THROUGH 1993 THROUGH
---------------- ----------------- DECEMBER 31, APRIL 27,
1996 1995 1995 1994 1993) 1993
------- ------- ------ ------- --------------- ------------
(IN MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
(UNAUDITED)
STATEMENT OF OPERATIONS
DATA:
<S> <C> <C> <C> <C> <C> <C>
Operating Revenue:
Passenger.............. $1,375 $1,240 $5,302 $ 5,036 $3,493 $1,622
Cargo, mail and other.. 114 169 523 634 417 235
------- ------- ------ ------- ------ ------
1,489 1,409 5,825 5,670 3,910 1,857
------- ------- ------ ------- ------ ------
Operating Expenses:
Wages, salaries and re-
lated costs........... 364 366 1,432(1) 1,532 1,000 502
Aircraft fuel.......... 177 169 681 741 540 272
Aircraft rentals....... 124 123 497 433 261 154
Commissions............ 126 119 489 439 378 175
Maintenance, materials
and repairs........... 112 97 429 495 363 184
Other rentals and land-
ing fees.............. 84 92 356 392 258 120
Depreciation and amor-
tization.............. 65 64 253 258 162 77
Other.................. 317 351 1,303 1,391 853 487
------- ------- ------ ------- ------ ------
1,369 1,381 5,440 5,681 3,815 1,971
------- ------- ------ ------- ------ ------
Operating Income
(Loss)................. 120 28 385 (11) 95 (114)
------- ------- ------ ------- ------ ------
Nonoperating Income (Ex-
pense):
Interest expense....... (47) (53) (213) (241) (165) (52)
Interest capitalized... 1 1 6 17 8 2
Interest income........ 9 6 31 23 14 --
Gain on System One
transactions.......... -- -- 108 -- -- --
Reorganization items,
net................... -- -- -- -- -- (818)
Other, net............. 12 (10) (7) (439)(2) (4) 5
------- ------- ------ ------- ------ ------
(25) (56) (75) (640) (147) (863)
------- ------- ------ ------- ------ ------
Income (Loss) before In-
come Taxes, Minority
Interest and Extraordi-
nary Gain.............. 95 (28) 310 (651) (52) (977)
Net Income (Loss)....... $ 88 $ (30) $ 224 $ (613) $ (39) $2,640 (3)
Earnings (Loss) per Com-
mon and Common Equiva-
lent Share............. $ 2.70 $(1.21) $ 7.20 $(23.76) $(2.33) N.M. (4)
======= ======= ====== ======= ======
Earnings (Loss) per
Common Share Assuming
Full Dilution.......... $ 2.36 $(1.21) $ 6.29 $(23.76) $(2.33) N.M. (4)
======= ======= ====== ======= ======
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
(IN MILLIONS OF DOLLARS)
BALANCE SHEET DATA: (UNAUDITED)
<S> <C> <C>
Cash and Cash Equivalents, including restricted Cash
and Cash Equivalents of $124 and $144,
respectively(5)...................................... $ 657 $ 747
Other Current Assets.................................. 655 568
Total Property and Equipment, Net..................... 1,410 1,461
Routes, Gates and Slots, Net.......................... 1,517 1,531
Other Assets, Net..................................... 507 514
------ ------
Total Assets......................................... $4,746 $4,821
====== ======
Current Liabilities................................... $2,040 $1,984
Long-term Debt and Capital Leases..................... 1,462 1,658
Deferred Credits and Other Long-term Liabilities...... 542 564
Minority Interest..................................... 28 27
Continental-Obligated Mandatorily Redeemable Preferred
Securities of Trust(6)............................... 242 242
Redeemable Preferred Stock............................ 42 41
Common Stockholders' Equity........................... 390 305
------ ------
Total Liabilities and Stockholders' Equity........... $4,746 $4,821
====== ======
</TABLE>
- --------
(1) Includes a $20 million cash payment in 1995 by the Company in connection
with a 24-month collective bargaining agreement entered into by the
Company and the Independent Association of Continental Pilots.
(2) Includes a provision of $447 million recorded in the fourth quarter of
1994 associated with the planned early retirement of certain aircraft and
closed or underutilized airport and maintenance facilities and other
assets.
(3) Includes a $3.6 billion extraordinary gain from extinguishment of debt.
(4) Historical per share data for Holdings is not meaningful since the Company
has been recapitalized and has adopted fresh start reporting as of April
27, 1993.
(5) Restricted cash and cash equivalents agreements relate primarily to
workers' compensation claims and the terms of certain other agreements. In
addition, CMI is required by its loan agreement with GE to maintain
certain minimum cash balances and net worth levels, which effectively
restrict the amount of cash available to Continental from CMI.
(6) The sole assets of the Trust are convertible debentures which are expected
to be repaid by 2020. Upon repayment, the Continental-Obligated
Mandatorily Redeemable Preferred Securities of Trust will be mandatorily
redeemed.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion provides an analysis of the Company's results of
operations and reasons for material changes therein for the three months ended
March 31, 1996 as compared to the corresponding period ended March 31, 1995.
For an analysis of the Company's results of operations for the year ended
December 31, 1995 as compared to the year ended December 31, 1994 and for the
year ended December 31, 1994 as compared to the year ended December 31, 1993,
see the Company's Annual Report on Form 10-K for the year ended December 31,
1995 incorporated by reference herein.
Comparison of Three Months Ended March 31, 1996 to Three Months Ended March
31, 1995
Continental's financial and operating performance improved dramatically in
the first quarter of 1996 compared to the first quarter of 1995, reflecting
among other things, continued implementation of the Company's strategic
program to enhance the fundamentals of its operations, rationalize capacity,
improve customer service and employee relations and strengthen Continental's
balance sheet and liquidity. In addition, management believes that the Company
benefitted from the expiration of the ticket tax on December 31, 1995,
although the amount of any such benefit directly resulting from the expiration
of the ticket tax cannot be determined. The Company recorded consolidated net
income of $88 million for the three months ended March 31, 1996 as compared to
a consolidated net loss of $30 million for the three months ended March 31,
1995. The Company's net income in the first quarter of 1996 included a $12.5
million gain related to the sale of approximately 1.4 million shares of
America West common stock.
Implementation of the Company's route realignment and capacity
rationalization initiatives reduced capacity by 9.1% in the first quarter of
1996 as compared to the first quarter of 1995. This decrease in capacity,
combined with a 2.0% increase in traffic, produced a 7.3 percentage point
increase in load factor to 67.0%. This higher load factor, combined with a
7.6% increase in the average yield per revenue passenger mile, contributed to
a 10.9% increase in passenger revenue to $1.4 billion despite the decreased
capacity.
Cargo, mail and other revenue decreased 32.5%, $55 million, in the three
months ended March 31, 1996 as compared to the same period in the prior year,
principally as a result of the transactions involving the Company's System One
Information Management, Inc. ("System One") subsidiary, which were effective
April 27, 1995.
Wages, salaries and related costs decreased 0.6%, $2 million, during the
quarter ended March 31, 1996 as compared to the same period in 1995, primarily
due to a reduction in the number of full-time equivalent employees from
approximately 35,000 as of March 31, 1995 to approximately 32,900 as of March
31, 1996. Such decrease was substantially offset by accruals totalling $15
million for employee profit sharing and other incentive programs, including
the payment of bonuses for on-time airline performance. In addition, wage
rates were impacted by a longevity pay increase for substantially all employee
groups, effective July 1, 1995.
Aircraft fuel expense increased 4.7%, $8 million, in the three months ended
March 31, 1996 as compared to the same period in the prior year. The average
price per gallon increased 12.7% from 52.61 cents in the first quarter of 1995
to 59.31 cents in the first quarter of 1996. Such increase was partially
offset by a 7.1% decrease in the quantity of jet fuel used from 312 million
gallons in the first quarter of 1995 to 290 million gallons in the first
quarter of 1996, principally reflecting capacity reductions and increased
stage lengths.
Commission expense increased 5.9%, $7 million, in the quarter ended March
31, 1996 as compared to the same period in the prior year, primarily due to
increased passenger revenue.
Maintenance, materials and repairs increased 15.5%, $15 million, during the
quarter ended March 31, 1996 as compared to the same period in 1995, due
principally to the volume and timing of engine overhauls as part of the
Company's ongoing maintenance program.
21
<PAGE>
Other rentals and landing fees decreased 8.7%, $8 million, for the three
months ended March 31, 1996 compared to the same period in 1995, principally
due to reduced facility rentals and landing fees resulting from capacity
reductions.
Other operating expense decreased 9.7%, $34 million, in the three months
ended March 31, 1996 as compared to the same period in the prior year,
primarily as a result of the System One transactions (which were effective
April 27, 1995) coupled with decreases in advertising expense and other
miscellaneous expense.
Interest expense decreased 11.3%, $6 million, during the three months ended
March 31, 1996 as compared to the same period in 1995, primarily due to
principal reductions of long-term debt and capital lease obligations.
Interest income increased 50.0%, $3 million, in the first quarter of 1996
compared to the same period in the prior year, principally due to an increase
in the average interest rate earned on investments coupled with an increase in
the average invested balance of cash and cash equivalents.
The Company's other nonoperating income (expense) in the quarter ended March
31, 1996 included a $12.5 million gain related to the sale of approximately
1.4 million shares of America West common stock (39 cents and 32 cents per
primary and fully diluted share, respectively). Other nonoperating income
(expense) in the first quarter of 1995 consisted primarily of foreign exchange
and other losses of $9.6 million (related to the Japanese yen and Mexican
peso).
The income tax provision for the three months ended March 31, 1996 consists
of foreign income taxes. No provision for federal income taxes was recorded
for the three months ended March 31, 1996 or 1995 since the Company had
previously incurred net operating losses for which a tax benefit had not
previously been recorded.
22
<PAGE>
An analysis of statistical information for Continental's jet operations for
the periods indicated is as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------- NET INCREASE/
1996 1995 (DECREASE)
------- ------- -------------
<S> <C> <C> <C>
Revenue passenger miles (millions) (a)..... 9,752 9,561 2.0%
Available seat miles (millions) (b)........ 14,551 16,003 (9.1)%
Block hours (thousands) (c)................ 270 281 (3.9)%
Passenger load factor (d).................. 67.0% 59.7% 7.3pts.
Breakeven passenger load factor (e)........ 61.0% 58.2% 2.8pts.
Passenger revenue per available seat mile
(cents) (f)............................... 8.90 7.37 20.8%
Total revenue per available seat mile
(cents) (g)............................... 9.77 8.15 19.9%
Operating cost per available seat mile
(cents) (h)............................... 8.92 7.90 12.9%
Operating cost per block hour.............. $ 4,806 $ 4,496 6.9%
Average yield per revenue passenger mile
(cents) (i)............................... 13.28 12.34 7.6%
Average fare per revenue passenger......... $142.54 $129.10 10.4%
Revenue passengers (thousands)............. 9,087 9,141 (0.6)%
Average length of aircraft flight (miles).. 876 803 9.1%
Average daily utilization of each aircraft
(hours) (j)............................... 9:29 9:34 (0.5)%
Actual aircraft in fleet at end of period.. 314 324 (3.1)%
</TABLE>
- --------
(a) The number of scheduled miles flown by revenue passengers.
(b) The number of seats available for passengers multiplied by the number of
scheduled miles those seats are flown.
(c) The number of hours an aircraft is operated in revenue service from gate-
to-gate.
(d) Revenue passenger miles divided by available seat miles.
(e) The percentage of seats that must be occupied by revenue passengers in
order for the airline to break even on an income before income taxes
basis, excluding nonrecurring charges, nonoperating items and other
special items.
(f) Passenger revenue divided by available seat miles.
(g) Total revenue divided by available seat miles.
(h) Operating expenses divided by available seat miles.
(i) The average revenue received for each mile a revenue passenger is carried.
(j) The average block hours flown per day in revenue service per aircraft.
23
<PAGE>
LIQUIDITY AND CAPITAL COMMITMENTS
In the first quarter of 1996, the Company completed a number of transactions
intended to strengthen its long-term financial position and enhance earnings.
On January 31, the Company consummated the offering of $489 million of
enhanced pass-through certificates that refinanced the underlying debt
associated with 18 leased aircraft and will reduce Continental's annual
operating lease expense by more than $15 million for the affected aircraft.
During January and February, Continental repurchased or redeemed without
prepayment penalty the remaining amount of the Series A convertible secured
debentures for $125 million (including payment-in-kind interest of $7
million). In February, Continental sold approximately 1.4 million of the
shares it owned in America West, realizing net proceeds of approximately $25
million and recognizing a gain of $12.5 million. On March 26, Continental sold
$230 million of 6 3/4% convertible subordinated notes. The net proceeds from
this offering and from the America West stock sale, as well as cash on hand,
were used for the repayment of certain outstanding GE indebtedness totaling
$257 million (of which $47 million was required as a result of the convertible
debt financing and the America West stock sale and $210 million was an
optional prepayment).
As a result of NOLs, the Company will not pay United States federal income
taxes (other than alternative minimum tax) until it has recorded approximately
an additional $1.2 billion of taxable income following December 31, 1995. For
financial reporting purposes, however, Continental will be required to begin
accruing tax expense on its income statement once it has realized an
additional $122 million of taxable income following March 31, 1996. Section
382 of the Internal Revenue Code imposes limitations on a corporation's
ability to utilize NOLs if it experiences an "ownership change." In general
terms, an ownership change may result from transactions increasing the
ownership of certain stockholders in the stock of a corporation by more than
50 percentage points over a three-year period. However, no assurance can be
given that future transactions, whether within or outside the control of the
Company, will not cause a change in ownership, thereby substantially limiting
the potential utilization of the NOLs in a given future year. In the event
that an ownership change should occur, utilization of Continental's NOLs would
be subject to an annual limitation under Section 382. The Section 382
limitation for any post-change year would be determined by multiplying the
value of the Company's stock (including both common and preferred stock) at
the time of the ownership change by the applicable long-term tax exempt rate
(which is 5.31% for April 1996). Unused annual limitation may be carried over
to later years, and the limitation may under certain circumstances be
increased by the built-in gains in assets held by the Company at the time of
the change that are recognized in the five-year period after the change. Under
current conditions, if an ownership change were to occur, Continental's NOL
utilization would be limited to a minimum of approximately $90 million.
Continental has firm commitments with Boeing to take delivery of one new 757
aircraft in April 1996 (which aircraft has been delivered) and 43 new jet
aircraft during the years 1998 through 2002. The estimated aggregate cost of
these aircraft is $2.6 billion. In addition, six Beech 1900-D turboprop
aircraft are scheduled to be delivered later in 1996. The Company currently
anticipates that the firm financing commitments available to it with respect
to its acquisition of new aircraft from Boeing and Beech will be sufficient to
fund all deliveries scheduled during 1996, and that it will have remaining
financing commitments from aircraft manufacturers of $676 million for jet
aircraft deliveries beyond 1996.
In addition, in March 1996, Express entered into an agreement to acquire
eight new ATR aircraft that are expected to be placed into service during
1996. These aircraft will be accounted for as operating leases. In conjunction
with the acquisition, in 1996, the Company will return eight older ATR
aircraft accounted for as capital leases.
Continental expects its cash outlays for 1996 capital expenditures,
exclusive of aircraft acquisitions, to aggregate $120 million primarily
relating to mainframe, software application and automation infrastructure
projects, aircraft modifications and mandatory maintenance projects, passenger
terminal facility improvements and office, maintenance, telecommunications and
ground equipment. Continental's capital expenditures during the three months
ended March 31, 1996, aggregated $14 million, exclusive of aircraft
acquisitions.
24
<PAGE>
The Company expects to fund its 1996 and future capital commitments through
internally generated funds, together with general Company financings and
aircraft financing transactions. However, there can be no assurance that
sufficient financing will be available for all aircraft and other capital
expenditures not covered by firm financing commitments.
As of March 31, 1996, the Company had $657 million in cash and cash
equivalents, compared to $747 million as of December 31, 1995. Net cash
provided by operating activities increased $74 million during the three months
ended March 31, 1996 compared to the same period in the prior year principally
due to earnings improvement. In addition, net cash provided by investing
activities increased $9 million, primarily as a result of proceeds received
from the sale of approximately 1.4 million shares of Continental's America
West stock slightly offset by higher net capital expenditures in 1996. Net
cash used by financing activities for the three months ended March 31, 1996
compared to the same period in the prior year increased $194 million primarily
due to the repayment of long-term debt using in part, proceeds received from
the issuance of the 6 3/4% convertible subordinated notes.
Continental does not have general lines of credit, and substantially all of
its assets, including the stock of its subsidiaries, are encumbered.
Approximately $124 million and $144 million of cash and cash equivalents at
March 31, 1996 and December 31, 1995, respectively, were held in restricted
arrangements relating primarily to workers' compensation claims and in
accordance with the terms of certain other agreements. Continental and CMI, a
91% owned subsidiary, have secured borrowings from GE which as of March 31,
1996 and December 31, 1995 aggregated $373 million and $634 million,
respectively. CMI's secured loans contain significant financial covenants,
including requirements to maintain a minimum cash balance and consolidated net
worth, restrictions on unsecured borrowings and mandatory prepayments on the
sale of most assets. These financial covenants limit the ability of CMI to pay
dividends to Continental. As of March 31, 1996, CMI had a minimum cash balance
requirement of $30 million. In addition, certain of Continental's secured
loans require the Company to, among other things, maintain a minimum
cumulative operating cash flow, a minimum monthly cash balance and a minimum
ratio of operating cash flow to fixed charges. Continental also is prohibited
generally from paying cash dividends in respect of its capital stock, from
purchasing or prepaying indebtedness and from incurring certain additional
secured indebtedness.
The Company has entered into petroleum option contracts to provide some
short-term protection (currently approximately seven months) against a sharp
increase in jet fuel prices, and CMI has entered into average rate option
contracts to hedge a portion of its Japanese yen-denominated ticket sales
against a significant depreciation in the value of the yen versus the United
States dollar. The petroleum option contracts generally cover the Company's
forecasted jet fuel needs for the next three to nine months, and the average
rate option contracts cover a portion of CMI's yen-denominated ticket sales
for the next three to nine months. At March 31, 1996, the Company had
petroleum option contracts outstanding with an aggregate notional value of
$252 million and CMI had an average rate option contract outstanding with a
contract value of $158 million. At March 31, 1996, the carrying value of the
option contracts was immaterial. The Company and CMI are exposed to credit
loss in the event of nonperformance by the counterparties on the option
contracts; however, management does not anticipate nonperformance by these
counterparties. The amount of such exposure is generally the unrealized gains,
if any, on such option contracts.
Management believes that the Company's costs are likely to be affected in
1996 by, among other factors, (i) increased wages, salaries and benefits, (ii)
higher aircraft rental expense as new aircraft are delivered, (iii) changes in
the costs of materials and services (in particular, the cost of fuel, which
can fluctuate significantly in response to global market conditions), (iv)
changes in governmental regulations and taxes affecting air transportation and
the costs charged for airport access, (v) changes in the Company's fleet and
related capacity and (vi) the Company's continuing efforts to reduce costs
throughout its operations.
25
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, as of April 30, 1996, certain information
with respect to the Selling Stockholders and with respect to persons owning
beneficially (to the knowledge of the Company) more than five percent of any
class of the Company's voting securities. The table also sets forth the
respective general voting power of such persons. Information set forth in the
following table is based on reports filed with the Commission pursuant to the
Exchange Act and on information that has been furnished to the Company by the
respective stockholders. In accordance with regulations promulgated by the
Commission, the table shows the effect of the exercise of warrants by Air
Partners, and, in the case of Air Canada for amounts owned prior to the
Offering, the exchange of certain shares of Class B common stock for Class A
common stock, but, in determining the denominator used to show percentage
ownership of such person, does not assume the exercise of warrants or the
exchange of shares owned by any other person. In addition to the shares owned
directly, each of the partners in Air Partners owns an interest in Air
Partners and may be deemed to beneficially own a portion of the Continental
securities owned by Air Partners.
The table does not show under "General Voting Power" the effect of Air
Canada's potential exchange of certain shares of Class B common stock for an
equal number of shares of Class A common stock, because, prior to the
Offering, the voting of most of the Class A common stock acquirable as a
result of such exchange would currently be prohibited by applicable Foreign
Ownership Restrictions and, after the Offering, Air Canada will have waived
its right to cause such exchange. See "--Stockholders' Agreement." Such
information is, however, shown in the footnotes to the table. Upon completion
of the Offering, Air Canada will convert all of its shares of Class A common
stock into Class B common stock and irrevocably waive its right to exchange
Class B common stock for Class A common stock. See "--Stockholders'
Agreement."
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED PRIOR TO THE SHARES BENEFICIALLY OWNED AFTER
OFFERING THE OFFERING
------------------------------------------- ---------------------------------------
CLASS OF PERCENT GENERAL PERCENT GENERAL
COMMON OF VOTING SHARES OF VOTING
BENEFICIAL OWNER STOCK NUMBER CLASS(1) POWER(1)(2) BEING OFFERED NUMBER CLASS(1)(3) POWER(2)(3)
---------------- -------- --------- -------- ----------- ------------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Air Canada............ Class A 2,740,000(4) 37.1% 23.6%(5) -- -- (6) -- 4.3%
Air Canada Center Class B 3,338,944(7) 15.5% 2,000,000(8) 3,000,000(6)(9) 13.0%
Montreal Int'l
Airport (Dorval)
P.O. Box 14000
Postal Station, St.
Laurent
Canada H4Y 1H4
Air Partners,
L.P.(10)............. Class A 4,259,734(11) 54.5% 44.6% -- 4,259,734(11) 69.2% 52.2%
2420 Texas Commerce Class B 3,382,632(12) 13.6% 3,382,632(12) 12.8%
Tower --
201 Main Street
Fort Worth, TX 75102
American General
Corporation(13)...... Class A 774,496(14) 11.8% 9.9% -- 774,496(14) 15.8% 11.5%
2929 Allen Parkway Class B 997,381(15) 4.5% 382,074 615,307(15) 2.6%
Houston, TX 77019
FMR Corp.............. Class B 3,657,250(16) 16.6% 4.3% -- 3,657,250(16) 15.4% 5.2%
82 Devonshire Street
Boston, MA 02109
David Bonderman....... Class A 4,267,934(17) 54.5% 45.6% -- 4,267,934(17) 69.3% 52.9%
Class B 4,341,052(18) 17.5% 50,000 3,983,193(18) 15.0%
Bonderman Family
Limited
Partnership(19)...... Class B 441,225 2.1% * -- 441,225 1.9% *
Estate of Larry L.
Hillblom(19)(20)..... Class B 319,800 1.5% * 319,800 -- -- --
DHL Management Servic-
es, Inc.(19)(20)..... Class B 322,970 1.5% * -- 322,970 1.4% *
SunAmerica Inc.(19)... Class B 143,152 * * 143,152 -- -- --
Eli Broad(19)......... Class B 95,434 * * 66,488 28,946 * *
Donald Sturm(19)(21).. Class B 356,064 1.7% * -- 356,064 1.5% *
Conair Limited Part-
ners, L.P.(19)....... Class B 38,282 * * 38,282 -- -- --
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED PRIOR TO THE SHARES BENEFICIALLY OWNED AFTER
OFFERING THE OFFERING
---------------------------------------- ---------------------------------
CLASS OF GENERAL GENERAL
NAME AND ADDRESS OF COMMON PERCENT VOTING SHARES BEING PERCENT VOTING
BENEFICIAL HOLDER STOCK NUMBER OF CLASS(1) POWER(1)(2) OFFERED NUMBER OF CLASS(1)(3) POWER(2)(3)
------------------- -------- ------- ----------- ----------- ------------ ------ -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bondo Air, L.P.(19).... Class B 412,499 1.9% * 412,499 -- -- --
Air Saipan, Inc.(22)... Class B 10,086 * * 10,086 -- -- --
1992 Air, Inc.(22)..... Class B 369,108 1.7% * 305,456 63,652 * *
Air II General,
Inc.(23).............. Class B 2,403 * * 2,403 -- -- --
---------
Total................ 3,730,240
=========
</TABLE>
- --------
*less than 1%
(1) Does not show the effect of Air Canada's potential exchange of certain
shares of Class B common stock for an equal number of shares of Class A
common stock.
(2) Each share of Class A common stock is entitled to ten votes, and each
share of Class B common stock is entitled to one vote. General Voting Power
includes the combined total of the votes attributable to Class A common
stock and Class B common stock.
(3) Amount assumes conversion of 1,661,056 shares of Class A common stock
held by Air Canada into an equal number of shares of Class B common
stock.
(4) Amount includes 1,078,944 shares of Class A common stock issuable upon
exchange of a like number of shares of Class B common stock held by Air
Canada.
(5) Does not include the exchange of 1,078,944 shares of Class B common stock
for Class A common stock as described in Note 4 above, which would be
subject to Foreign Ownership Restrictions. If Air Canada were permitted
to exchange the 1,078,944 shares of Class B common stock for an equal
number of shares of Class A common stock, its General Voting Power would
be 31.5%.
(6) Amount assumes conversion of 1,661,056 shares of Class A common stock
held by Air Canada into an equal number of shares of Class B common stock
and that 1,078,944 shares of Class B common stock held by Air Canada
would no longer be exchangeable for an equal number of shares of Class A
common stock.
(7) Amount includes 1,078,944 shares of Class B common stock held by Air
Canada which are exchangeable, under certain circumstances, for a like
number of shares of Class A common stock. Such shares are also included
in the number of shares of Class A common stock reported herein pursuant
to SEC Rule 13d-3 under the Exchange Act.
(8) Does not include 200,000 shares of Class B common stock subject to the
Underwriters' overallotment option.
(9) Amount includes 200,000 shares of Class B common stock subject to the
Underwriters' overallotment option.
(10) Based on reports filed with the Commission pursuant to the Exchange Act,
the general partners of Air Partners are 1992 Air GP, managing general
partner, and Air II General, Inc. The general partners of 1992 Air GP are
1992 Air, Inc., majority general partner, and Air Saipan, Inc. David
Bonderman is the controlling shareholder of Air II General, Inc. and 1992
Air, Inc. and accordingly may be deemed the beneficial owner of shares
held by Air Partners. In addition, Mr. Bonderman holds, directly and
indirectly, limited partnership interests in Air Partners. See notes (17)
and (18). Mr. Bonderman also holds director stock options to purchase
3,000 shares of Class B common stock and may be deemed to own 369,108
shares of Class B common stock owned by 1992 Air, Inc. and 2,403 shares
of Class B common stock owned by Air II General, Inc. that are not
included in the amounts shown. Bonderman Family Limited Partnership, of
which David Bonderman is the general partner, holds 8,200 shares of Class
A common stock and 441,225 shares of Class B common stock that are not
included in the amounts shown. The holders of limited partnership
interests in Air Partners, together with Air Partners, may be deemed to
be acting as a group for purposes of the federal securities laws. In
addition, Bonderman Family Limited Partnership holds limited partnership
interests in Air Partners. On the basis of certain provisions of the
limited partnership agreement of Air Partners, Bonderman Family Limited
Partnership may be deemed to beneficially own the shares of Class A
common stock and any Class B common stock beneficially owned by Air
Partners that are attributable to such limited partnership interests.
However, Bonderman Family Limited Partnership, pursuant to Rule 13d-4
under the Exchange Act, disclaims beneficial ownership of all such
shares. The estate of Larry L. Hillblom, solely in its capacity as the
sole shareholder of Air Saipan, Inc., may be deemed the beneficial owner
of shares of Class A common stock and any Class B common stock held by
Air Partners. In addition, the estate of Mr. Hillblom also holds limited
partnership interests in Air Partners. On the basis of certain provisions
of the limited partnership agreement of Air Partners, the estate of Mr.
Hillblom may be deemed to beneficially own the shares of Class A common
stock and any Class B common stock beneficially owned by Air Partners
that are attributable to such limited partnership interests. Bondo Air
Limited Partnership ("Bondo Air"), solely in its capacity as a limited
partner of Air Partners, may be deemed to beneficially own the shares of
Class A common stock and any Class B common stock held by Air Partners
that are attributable to such limited partnership interest. However,
Bondo Air, pursuant to Rule 13d-4 under the Exchange Act, disclaims
beneficial ownership of all such shares. Mr. Alfredo Brener, through a
limited partnership whose corporate general partner he controls, owns
warrants to purchase a 98.5% limited partnership interest in Bondo Air,
and on the basis of certain provisions of the limited partnership
agreement of Bondo Air, Mr. Brener may be deemed to beneficially own such
limited partnership interests and, in turn, the shares attributable to
Bondo Air's limited partnership interest in Air Partners. However, Mr.
Brener, pursuant to Rule 13d-4 under the Exchange Act, disclaims
beneficial ownership of all such shares. Donald Sturm, a director of the
Company, holds a limited partnership interest in Air Partners. On the
basis of certain provisions of the limited partnership agreement of Air
Partners, Mr. Sturm may be deemed to beneficially own the shares of Class
A common stock and any Class B common stock beneficially owned by Air
Partners that are attributable to such limited partnership interest.
However, Mr. Sturm, pursuant to Rule 13d-4 under the Exchange Act,
disclaims beneficial ownership of all such shares.
(11) Includes 1,519,734 shares issuable upon exercise of warrants by Air
Partners to purchase Class A common stock.
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(12) Represents shares subject to warrants held by Air Partners to purchase
Class B common stock.
(13) American General Corporation ("American General") holds a limited
partnership interest in Air Partners. On the basis of certain provisions
of the limited partnership agreement of Air Partners, American General
may be deemed to beneficially own the shares of Class A common stock and
any Class B common stock (including shares subject to warrants)
beneficially owned by Air Partners that are attributable to such limited
partnership interest. However, American General, pursuant to Rule 13d-4
under the Exchange Act, disclaims beneficial ownership of all such
shares.
(14) Based on reports filed with the Commission under the Exchange Act, the
shares reported represent American General's proportionate interest in
shares beneficially owned by Air Partners, including 276,315 shares of
Class A common stock issuable upon exercise of warrants held by Air
Partners and attributable to the limited partnership interest of American
General.
(15) Based on reports filed with the Commission under the Exchange Act, the
shares reported include 283 shares held by an indirect wholly-owned
subsidiary of American General, and 615,024 shares of Class B common
stock issuable upon exercise of warrants held by Air Partners and
attributable to the limited partnership interest of American General.
(16) Based on reports filed with the Commission under the Exchange Act and
information provided to the Company, the shares reported include 165,589
shares of Class B common stock issuable upon conversion of the Company's
6 3/4% Convertible Subordinated Notes due April 15, 2006 and 420,011
shares of Class B common stock issuable upon conversion of the Company's
8 1/2% Convertible Preferred Securities of Trust. FMR, together with its
wholly owned subsidiaries, Fidelity Management & Research Company and
Fidelity Management Trust Company, has sole dispositive power with
respect to all of the shares beneficially owned by it and sole voting
power with respect to 2,509,399 of such shares. Members of the Edward D.
Johnson 3d family own approximately 49% of the voting power of FMR Corp.
(17) Includes 8,200 shares of Class A common stock beneficially owned by
Bonderman Family Limited Partnership. Also includes 2,740,000 shares of
Class A common stock beneficially owned by Air Partners or 1,519,734 such
shares subject to warrants (collectively, 54.5% of the class) owned by
Air Partners, which Mr. Bonderman may be deemed to own beneficially. See
note 10.
(18) Includes 3,000 shares subject to vested director stock options, 441,225
shares beneficially owned by Bonderman Family Limited Partnership,
369,108 (63,652 post-Offering) shares owned by 1992 Air, Inc. and 2,403
(none post-Offering) shares owned by Air II General, Inc. See note 10.
Also includes 3,382,632 shares subject to warrants owned by Air Partners,
which Mr. Bonderman may be deemed to own beneficially. See note 10.
(19) The referenced stockholder holds limited partnership interests in Air
Partners. On the basis of certain provisions of the limited partnership
agreement of Air Partners, the referenced stockholder may also be deemed
to beneficially own the shares of Class A common stock and any Class B
common stock beneficially owned by Air Partners that are attributable to
such limited partnership interests. Such shares are not included in the
amounts shown for the referenced stockholder.
(20) The Estate of Larry L. Hillblom owns 60.6 percent of one class of shares
and 100 percent of another class of shares of DHL Corporation. DHL
Corporation, in turn, owns 100 percent of the outstanding shares of DHL
Management Services, Inc. Accordingly, the estate may be deemed to own
beneficially the 322,970 shares of Class B common stock of the Company
held by DHL Management Services, Inc.
(21) Includes 3,000 shares to vested director stock options. Also includes
30,200 shares held in trusts for the benefit of Mr. Sturm's children,
15,100 shares held in a charitable trust for which Mr. Sturm acts as
Trustee, and 4,300 shares held by a corporation of which Mr. Sturm is the
principal stockholder.
(22) This entity is a general partner of 1992 Air GP, one of the general
partners of Air Partners. See note 10.
(23) This entity is one of the general partners of Air Partners. See note 10.
STOCKHOLDERS' AGREEMENT
Pursuant to the existing Stockholders' Agreement, Air Partners and Air
Canada have each agreed that they will vote their shares of common stock to
elect six directors designated by Air Canada, six directors designated by Air
Partners and six directors not affiliated with Air Canada or Air Partners and
who are satisfactory to Air Partners, and to give effect to certain other
agreements regarding the composition of the board and its committees. They
have further agreed through April 27, 1996 to vote for the election of three
persons designated by the committee representing Prepetition Creditors to
serve among the six independent directors. Each such party has also agreed to
limit its holdings to a specified percentage of total voting power and to
restrict its transfers of certain Class A common stock, certain shares of
Class B common stock owned by Air Canada, and as applicable, Class C common
stock, ($.01 par value (the "Class C common stock")) and Class D common stock,
($.01 par value (the "Class D common stock")), through April 27, 1997, unless
the other party consents to the proposed transfer. Air Partners has further
granted Air Canada a right of first refusal to acquire certain of its shares
of Class A common stock or its Class D common stock in the event it receives,
after April 27, 1997, a good faith offer from a third party to purchase all or
any portion of such shares, and in the event it proposes to sell any such
shares in a Rule 144 transaction after such date. Air Partners has also given
Air Canada an option, exercisable after April 27, 1997 (and subject to
applicable Foreign Ownership Restrictions, as defined in the Company's
Certificate of Incorporation), to purchase certain of these shares at their
market price plus a specified control premium. In addition, Air Partners has
agreed to restrict its ability to sell certain Class B common stock to any air
carrier in a private sale at any time prior to April 27, 1997. Unless extended
by the parties, or
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terminated earlier due to the occurrence of certain terminating events, the
Stockholders' Agreement will terminate on April 27, 2002.
On April 19, 1996, the Company's Board of Directors approved an amendment to
the Stockholders' Agreement, which (except for certain specified provisions
that were effective as of such date) will become effective upon the closing of
the Offering. The amendment to the Stockholders' Agreement reflects Air
Canada's proposed disposition of Continental stock by, among other things: (a)
deleting the purchase options, rights of first refusal and other restrictions
on the transfer of Continental securities that currently exist between Air
Partners and Air Canada; (b) deleting the limitation on minimum and maximum
aggregate voting power that may be held by Air Partners and Air Canada; and
(c) eliminating the voting arrangement between Air Partners and Air Canada
relating to the election of directors.
The amendment includes certain agreements among the Company, Air Partners
and Air Canada relating to the exercise of registration rights under the
Registration Rights Agreement. See "--Certain Rights of Air Partners and Air
Canada." The amendment also provides that Air Canada will: (a) convert its
shares of Class A common stock to Class B common stock; (b) grant an
irrevocable proxy to Air Partners to enable Air Partners to vote Air Canada's
shares of Continental common stock with respect to the election of directors,
approval of certain amendments to the Certificate of Incorporation, and
approval of amendments to certain employee benefit-related contracts and other
matters at the Annual Meeting; (c) irrevocably waive its right to convert
shares of Class B common stock into Class A common stock; and (d) cause each
of its designees to the Board of Directors to resign at any time following the
closing of the Offering upon the request of Continental.
In addition, each of Air Canada and Air Partners has agreed that prior to
December 16, 1996, without Continental's prior written consent, it will not
enter into certain transactions in Continental securities that would, pursuant
to Section 382, have an adverse effect on the Company's ability to fully
utilize its NOLs.
WARRANTS
In connection with the Reorganization, Air Partners and Air Canada acquired
warrants to purchase shares of Class A common stock and Class B common stock
at exercise prices of $15 and $30 per share. The warrants held by Air Canada
were repurchased and canceled by the Company on September 29, 1995. The
warrants held by Air Partners expire if not exercised on or before April 27,
1998. The Company has entered into an agreement with Air Partners for the sale
by Air Partners to the Company from time to time at Air Partners' election for
the one-year period beginning August 15, 1996, of up to an aggregate of $50
million in intrinsic value (then-current Class B common stock price minus
exercise price) of Air Partners' Class B common stock warrants. The purchase
price would be payable in cash. The Board of Directors has authorized the
Company to publicly issue up to $50 million of Class B common stock in
connection with any such purchase. In connection with this agreement, the
Company will reclassify $50 million from common equity to redeemable warrants.
PREEMPTIVE RIGHTS OF AIR PARTNERS AND AIR CANADA
Air Partners and Air Canada each has the right to purchase additional shares
of Class B common stock to preserve its current proportional ownership of such
stock. If the amendments to the Certificate of Incorporation are approved by
stockholders at the Annual Meeting Air Canada will no longer have this right.
See "Description of Capital Stock--Corporate Governance and Control--
Preemptive Rights of AP/AC Investors."
CERTAIN CONVERSION RIGHTS
Air Canada has the right at any time to convert its shares of Class A common
stock into an equal number of shares of Class B common stock and, subject to
applicable Foreign Ownership Restrictions, to exchange certain shares of Class
B common stock for an equal number of shares of Class A common stock. See
"Description of Capital Stock--Class B Common Stock and Class A Common Stock."
In specified limited circumstances, Air Partners has the right to convert its
shares of Class A common stock into Class D common stock, and Air Canada has
the right to convert its shares of Class A common stock to Class C common
stock. See "Description of Capital Stock--Special Classes of Common Stock"
regarding the terms of the Class C common stock and Class D common stock and
the conversion of such stock back into Class A common stock.
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As discussed above in "--Stockholders' Agreement," upon the closing of the
Offering, Air Canada's agreement to convert its shares of Class A common stock
into shares of Class B common stock and its waiver of its right to exchange
certain shares of Class B common stock for Class A common stock will become
effective.
CERTAIN RIGHTS OF AIR PARTNERS AND AIR CANADA
Pursuant to a Registration Rights Agreement, the Company has granted
extensive demand and incidental registration rights to Air Partners and Air
Canada to have their common stock registered under the Securities Act in
connection with proposed sales of such stock. On April 19, 1996, the Company's
Board of Directors approved amendments to the Registration Rights Agreement.
See "Recent Developments." Air Canada has a preferential right to bid for take
off and landing slots at LaGuardia, Washington National and Chicago O'Hare
airports and leasehold interests at Chicago O'Hare, LAX and Seattle-Tacoma
airports in the event Continental were to determine to sell such assets.
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DESCRIPTION OF CAPITAL STOCK
The current authorized capital stock of the Company consists of 50,000,000
shares of Class A common stock, 100,000,000 shares of Class B common stock
50,000,000 shares of Class C common stock, 50,000,000 shares of Class D common
stock (such classes of common stock referred to collectively as the "common
stock"), and 10,000,000 shares of preferred stock, $.01 par value (the
"Preferred Stock"). Amendments to the Certificate of Incorporation have been
proposed by the Board of Directors for a vote at the Annual Meeting that would
increase the amount of authorized Class B common stock to 200,000,000 shares
and eliminate the Class C common stock as an authorized class of shares. See
"Recent Developments." As of April 30, 1996, there were 6,301,056 outstanding
shares of Class A common stock, 21,492,124 outstanding shares of Class B
common stock and 409,662 shares of Series A 12% Cumulative Preferred Stock.
Pursuant to the Reorganization, on April 27, 1993 the Company issued
1,900,000 shares of Class A common stock and 5,042,368 shares of Class B
common stock to a distribution agent for the benefit of the Company's
Prepetition Creditors. As of March 31, 1996, there remained 291,459 shares of
Class A common stock, 762,291 shares of Class B common stock, and
approximately $1 million of cash available for distribution. Pending
resolution of certain disputed claims, a distribution agent will continue to
hold undistributed Class A common stock and Class B common stock and will vote
such shares of each class pro rata in accordance with the vote of all other
shares of such class on any matter submitted to a vote of stockholders. Also
pursuant to the Reorganization, the Company issued 493,621 shares of Class B
common stock to its retirement plan.
The following summary description of capital stock accurately describes the
material matters with respect thereto, but is not intended to be complete and
reference is made to the provisions of the Company's Certificate of
Incorporation and Bylaws and the agreements referred to in this summary
description. As used in this section, except as otherwise stated or required
by context, each reference to Air Canada or Air Partners includes any
successor by merger, consolidation or similar transaction and any wholly owned
subsidiary of such entity or such successor.
COMMON STOCK--ALL CLASSES
Holders of common stock of all classes participate ratably as to any
dividends or distributions on the common stock, except that dividends payable
in shares of common stock, or securities to acquire common stock, are paid in
common stock, or securities to acquire common stock, of the same class as that
upon which the dividend or distribution is being paid. Upon any liquidation,
dissolution or winding up of the Company, holders of common stock of all
outstanding classes are entitled to share ratably the assets of the Company
available for distribution to the stockholders, subject to the prior rights of
holders of any outstanding Preferred Stock. Holders of common stock have no
preemptive, subscription, conversion or redemption rights (other than
preemptive, subscription and conversion rights of Air Partners and Air Canada
described under "--Corporate Governance and Control"), and are not subject to
further calls or assessments. Holders of common stock have no right to
cumulate their votes in the election of directors. All series of common stock
vote together as a single class, subject to the right to a separate class vote
in certain instances required by law and to the rights of holders of Class C
common stock and Class D common stock to vote separately as a class to elect
directors as described under "--Special Classes of Common Stock."
CLASS B COMMON STOCK AND CLASS A COMMON STOCK
The holders of Class B common stock are entitled to one vote per share, and
the holders of Class A common stock are entitled to ten votes per share, on
all matters submitted to a vote of stockholders, except that voting rights of
non-U.S. citizens are limited as set forth below under "--Limitation on Voting
by Foreign Owners" and no holder of Class C common stock or Class D common
stock can vote any of its Class B common stock for the election of directors
(see "--Special Classes of Common Stock").
Air Canada and Air Partners (together, the "AP/AC Investors") owned as of
April 30, 1996 in the aggregate approximately 28% of the outstanding Class A
common stock and Class B common stock, representing
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approximately 56% of total voting power (excluding the exercise of warrants
held by Air Partners and the exchange of Class B common stock for Class A
common stock by Air Canada), and Air Partners has warrants to acquire up to an
additional 3,382,632 shares of Class B common stock and 1,519,734 of Class A
common stock (together representing approximately 21% of total voting power,
assuming exercise of such warrants). See "Principal and Selling Stockholders"
for a description of the number of securities beneficially owned by each of
Air Partners and Air Canada as of April 30, 1996 and certain other matters
relating to their ownership and "--Corporate Governance and Control" below for
a discussion of arrangements regarding the composition of the Board of
Directors of the Company.
Air Canada may at any time and from time to time convert shares of Class A
common stock into an equal number of shares of Class B common stock and, so
long as such exchange would comply with the Foreign Ownership Restrictions (as
defined below under the caption "--Limitation on Voting by Foreign Owners")
may exchange up to 1,078,944 of its shares of Class B common stock for an
equal number of shares of Class A common stock. Except for these special
conversion and exchange rights of Air Canada, Class B common stock is not
convertible into or exchangeable for Class A common stock and Class A common
stock is not convertible into or exchangeable for Class B common stock.
Upon the closing of the Offering, pursuant to the amendment to the
Stockholders' Agreement, Air Canada will convert its Class A common stock into
Class B common stock and will irrevocably waive its right to exchange certain
shares of Class B common stock for Class A common stock.
In addition, under the Proposed Amendments, the Certificate of Incorporation
would be amended to permit all stockholders at any time and from time to time
after January 1, 1997 to convert shares of Class A common stock into an equal
number of shares of Class B common stock. Because the Class A common stock has
ten votes per share and the Class B common stock has one vote per share, any
such conversion would effectively increase the relative voting power of those
Class A stockholders who do not convert. The limitation in the current charter
was designed to ensure compliance with applicable Foreign Ownership
Restrictions by giving Air Canada a method for reducing its voting power, if
necessary, while preventing conversions by other stockholders that would have
the effect of increasing Air Canada's voting control without any action by Air
Canada itself. In light of Air Canada's reduced stake in the Company, the
Company has determined that this restriction is no longer necessary. In
addition, in recent periods, the market price of Class A common stock has
generally been below the price of Class B common stock, which the Company
believes is attributable in part to the reduced liquidity present in the
trading market for Class A common stock. A number of holders of Class A common
stock have requested that the charter be amended to give all stockholders the
right to convert Class A common stock into Class B common stock. The effective
date of this amendment is proposed to be January 1, 1997.
Limitation on Voting by Foreign Owners. The Company's Certificate of
Incorporation defines "Foreign Ownership Restrictions" as "applicable
statutory, regulatory and interpretive restrictions regarding foreign
ownership or control of U.S. air carriers (as amended or modified from time to
time)." Such restrictions currently require that no more than 25% of the
voting stock of the Company be owned or controlled, directly or indirectly, by
persons who are not U.S. Citizens ("Foreigners") for purposes of the Foreign
Ownership Restrictions, and that the Company's president and at least two-
thirds of its other managing officers and directors be U.S. Citizens. For
purposes of the Certificate of Incorporation, "U.S. Citizen" means (i) an
individual who is a citizen of the United States; (ii) a partnership each of
whose partners is an individual who is a citizen of the United States; or
(iii) 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,
and in which at least 75% of the voting interest is owned or controlled by
persons that are citizens of the United States. The Certificate of
Incorporation provides that no shares of capital stock may be voted by or at
the direction of Foreigners, unless such shares are registered on a separate
stock record (the "Foreign Stock Record") maintained by the Company for the
registration of ownership of voting stock by Foreigners. The Company's Bylaws
further provide that no
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shares will be registered on the Foreign Stock Record if the amount so
registered would exceed the Foreign Ownership Restrictions or adversely affect
the Company's operating certificates or authorities. Registration on the
Foreign Stock Record is made in chronological order based on the date the
Company receives a written request for registration, except that certain
shares held by Air Canada, and, after such shares, certain shares acquired by
Air Partners in connection with its original investment in the Company that
are subsequently transferred to any Foreigner are entitled to be registered
prior to, and to the exclusion of, other shares. Shares currently owned by Air
Canada and registered on the Foreign Stock Record constitute a substantial
portion of the shares that may be voted by Foreigners under the Foreign
Ownership Restrictions. Accordingly, at this time only a very limited number
of shares of Class B common stock or Class A common stock of the Company may
be registered on the Foreign Stock Record and voted by any Foreigner other
than Air Canada.
Under the Proposed Amendments, the Bylaws would be amended to delete Air
Canada's right to have its shares included in the Foreign Stock Record on a
preferential basis. Furthermore, after Air Canada converts its Class A common
stock to Class B common stock upon the closing of the Offering, a larger
number of shares of Class B common stock and/or Class A common stock could be
registered on the Foreign Stock Record and voted by Foreigners other than Air
Canada.
CORPORATE GOVERNANCE AND CONTROL
Board of Directors. The Certificate of Incorporation provides that the
Company's Board of Directors must consist of eighteen directors to be elected
by holders of common stock, exclusive of any directors who may be elected by
holders of Preferred Stock. Pursuant to the Stockholders' Agreement, the AP/AC
Investors agreed to vote their shares to elect six directors designated by Air
Partners, six directors designated by Air Canada, and six additional directors
satisfactory to Air Partners. Pursuant to the Certificate of Incorporation,
(i) the six additional directors must be independent of Air Partners and Air
Canada and, until the first annual meeting of stockholders after April 27,
1996, must include three directors designated by the committee representing
Prepetition Creditors (as defined in the Stockholders' Agreement), and (ii) at
each annual meeting, the Board must nominate the chief executive officer for
election as a director.
Under the Proposed Amendments, the Certificate of Incorporation would be
amended to provide that the number of directors may be determined from time to
time by the Board in accordance with the Bylaws, subject to the rights of
holders of preferred stock to elect additional directors as set forth in any
preferred stock designation. The Bylaws would also be amended to provide that
the number of directors will be determined from time to time by the Board (and
will initially consist of 12 directors). In addition, provisions relating to
the Board designees of Air Canada and the committee representing Prepetition
Creditors would be deleted.
Supermajority Vote Requirements. The Certificate of Incorporation requires
the affirmative vote of shares having at least two-thirds of the total voting
power of all issued and outstanding shares of common stock, voting together as
a single class, to amend the provisions of the Certificate of Incorporation
that govern the number of authorized shares and the relative rights of classes
of capital stock, election and voting of directors, and rights of the AP/AC
Investors to purchase additional shares of Class B common stock.
The Certificate of Incorporation also provides that, unless prohibited by
law, the affirmative vote of at least 70% (75% if more than one director is
elected by holders of Preferred Stock or in certain other instances) of
directors (a "Supermajority Vote") is required to approve certain
extraordinary transactions, including (i) authorization, issuance or
disposition of Class A common stock or rights to acquire Class A common stock,
(ii) liquidation or dissolution of the Company, (iii) any fundamental change
in the lines of business of the Company, (iv) appointment of a receiver for
the Company or commencement of bankruptcy proceedings or (v) any amendment to
the Plan of Reorganization. In addition, a Supermajority Vote of directors is
required to approve the following transactions, if such Supermajority Vote
requirements are first presented to and approved by DOT as complying with the
Foreign Ownership Restrictions: (a) approval of capital expenditures in any
fiscal year that exceed by more than $50,000,000 the amount of capital
expenditures set forth in the Company's capital budget; (b) approval to incur
indebtedness for money borrowed in any fiscal year that exceeds by more than
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$50,000,000 the maximum principal amount of indebtedness projected in the
Company's financial plan for such year; (c) certain acquisitions or
dispositions of a significant amount of assets other than in the ordinary
course of business; and (d) the taking of certain actions with respect to
material contracts (including, among others, contracts providing for the
merger or consolidation of the Corporation, contracts with periods in excess
of four years or contemplating expenditures in excess of $50 million in any
year and $150 million in the aggregate), and any compensatory plan in which
any director or executive officer of the Company participates.
The Certificate of Incorporation further requires approval by two-thirds of
the directors in office (assuming no vacancies) to approve contracts (or any
amendments thereof) between the Company and any air carrier (other than Air
Canada) with respect to a code-sharing or marketing alliance or to amend
certain provisions of the Company's Bylaws governing (i) the election and
voting of directors and committees of the Board of Directors or (ii) the
ownership and voting of stock by Foreigners. Such Bylaw amendments also must
be approved by at least a majority of the total voting power of all issued and
outstanding shares of common stock, unless they have been approved by a
majority of the directors designated or elected by the AP/AC Investors. The
Certificate of Incorporation also requires approval by the holders of at least
two-thirds of the voting power of all issued and outstanding shares of common
stock in order to amend the sections of the Certificate of Incorporation
relating to (i) the Corporation's capital stock, (ii) composition and voting
of the Board of Directors, and (iii) preemptive rights of Air Partners and Air
Canada.
Contracts and transactions between the Company and its directors, officers
or other related parties also must be approved by a majority (or, in cases
otherwise subject to a Supermajority Vote, by 75%) of disinterested directors,
unless such contracts or transactions are approved by the stockholders or are
otherwise fair to the Company.
Under the Proposed Amendments, the Certificate of Incorporation would be
amended to delete the foregoing provisions.
Fairness Opinion; Business Combinations. The Certificate of Incorporation
provides that the Board of Directors will not approve any merger or similar
corporate transaction unless, prior to the approval, the board receives an
opinion of an independent investment banking firm that the consideration to be
received by the holders of common stock is fair from a financial point of view
to such holders. The Certificate of Incorporation provides that the Company is
not governed by Section 203 of the General Corporation Law of Delaware that,
in the absence of such provisions, would have imposed additional requirements
regarding mergers and other business combinations.
Under the Proposed Amendments, the Certificate of Incorporation would be
amended to delete the requirement that the board receive such opinion.
Preemptive Rights of AP/AC Investors. Pursuant to the Certificate of
Incorporation, each AP/AC Investor is given the right to purchase from the
Company additional shares of Class B common stock to the extent necessary to
maintain its pro rata ownership of the outstanding Class B common stock. Such
preemptive rights terminate as to an AP/AC Investor if the total voting power
of the common stock beneficially owned by such AP/AC Investor is less than 20%
of the total voting power of all of the outstanding common stock.
Under the Proposed Amendments, the Certificate of Incorporation would be
amended to delete Air Canada's preemptive rights.
Procedural Matters. The Company's Bylaws require stockholders seeking to
nominate directors or propose other matters for action at a stockholders'
meeting to deliver notice thereof to the Company certain specified periods in
advance of the meeting and to follow certain other specified procedures.
Change in Control. The cumulative effect of the provisions of the
Certificate of Incorporation and Bylaws referred to under this heading
"Description of Capital Stock" and the Stockholders' Agreement is to maintain
certain rights of the AP/AC Investors to elect directors and otherwise to
preserve their relative ownership and voting positions. These provisions may
have the effect of delaying, deferring or preventing a change in control of
the Company.
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The cumulative effect of the Agreements and the Proposed Amendments will be
to maintain certain rights of Air Partners to elect directors and otherwise to
preserve its relative ownership and voting positions. Air Canada will not
continue to have similar rights.
SPECIAL CLASSES OF COMMON STOCK
The Certificate of Incorporation authorizes Class C common stock and Class D
common stock as a mechanism to provide, under certain circumstances, a
specified level of Board representation for each of the AP/AC Investors. No
shares of Class C common stock or Class D common stock are currently
outstanding, and they may only be issued in limited circumstances upon
conversion of Class A common stock held by AP/AC Investors. In the event the
AP/AC Investors hold shares of Class A common stock and Class B common stock
representing 50% or less of the combined voting power of all classes of common
stock, or if the Stockholders' Agreement is no longer in effect, each of the
AP/AC Investors has the option, which may be exercised only once, to convert
all (but not less than all) shares of Class A common stock held by it into an
equal number of shares of Class C common stock, in the case of Air Canada, or
Class D common stock, in the case of Air Partners. Such right of conversion is
further conditioned upon the AP/AC Investor holding common stock having at
least 20% of the total voting power of all classes of common stock.
After such conversion, holders of Class C common stock and Class D common
stock are each entitled to elect six directors, voting as a separate class.
When shares of Class C common stock are outstanding, Air Canada has no right
to vote any of its shares of Class B common stock for the election of
directors; and if Air Canada becomes the beneficial owner of additional shares
of Class A common stock during such time, such shares will automatically be
converted into an equal number of shares of Class C common stock. Likewise,
when shares of Class D common stock are outstanding, Air Partners may not vote
any of its shares of Class B common stock for the election of directors; and
if Air Partners becomes the beneficial owner of any additional shares of
Class A common stock during such time, such shares will automatically be
converted into Class D common stock. Each share of Class C common stock and
Class D common stock has ten votes and, as to matters other than the election
of directors, votes together with all other classes of common stock as a
single class. In the event the voting power of all common stock held by an
AP/AC Investor represents less than 20% of the voting power of all classes of
common stock, all Class C common stock or Class D common stock held by such
AP/AC Investor will automatically convert into an equal number of shares of
Class A common stock. Shares of Class C common stock and Class D common stock
also convert automatically into an equal number of shares of Class A common
stock upon the transfer of record or beneficial ownership of such Class C
common stock or Class D common stock to any person other than certain related
parties of the original holder. Each AP/AC Investor may also at any time
voluntarily convert all (but not less than all) shares of Class C common stock
or Class D common stock held by it into an equal number of shares of Class A
common stock. All shares of Class C common stock or Class D common stock
surrendered by an AP/AC Investor for conversion into Class A common stock will
be canceled and may not be reissued.
Under the Proposed Amendments, the Certificate of Incorporation would be
amended to delete the Class C common stock and provide that the holders Class
D common stock are entitled to elect one-third of the number of directors
determined by the Board of Directors pursuant to the Bylaws (rounded to the
nearest whole number).
REDEEMABLE PREFERRED STOCK
The Company has authorized and issued a class of preferred stock, designated
as Series A 12% Cumulative Preferred Stock.
Holders of the Series A 12% Preferred are entitled to receive, when, as and
if declared by the Board of Directors, cumulative dividends payable quarterly
in additional shares of such preferred stock for dividends accumulating
through December 31, 1996. Thereafter dividends are payable in cash at an
annual rate of $12 per share; provided, however, that to the extent net income
(as defined in the certificate of designation for the preferred stock) for any
calendar quarter is less than the amount of dividends due on all outstanding
shares of
35
<PAGE>
the Series A 12% Preferred for such quarter, the Board of Directors may
declare dividends payable in additional shares of Series A 12% Preferred in
lieu of cash. At any time, the Company may redeem, in whole or in part, on a
pro rata basis among the stockholders, any outstanding shares of the Series A
12% Preferred. All outstanding shares of the Series A 12% Preferred are
mandatorily redeemable on April 27, 2003 out of legally available funds. The
redemption price is $100 per share plus accrued and unpaid dividends. Shares
of the Series A 12% Preferred are not convertible into shares of common stock
and such shares do not have voting rights, except under limited circumstances
described in the following two paragraphs. Shares of the Series A 12%
Preferred have a liquidation preference of $100 per share plus accrued and
unpaid dividends, senior to any distribution on shares of common stock.
In the event the Company violates certain covenants set forth in the
certificate of designation relating to the Series A 12% Preferred, fails to
pay the full amount of dividends on the preferred stock for nine consecutive
quarterly payment dates or shall not have redeemed the preferred stock within
five days of the date of any redemption of which the Company has given, or is
required to give, notice (a "Default"), the holders of the Series A 12%
Preferred as to which a Default exists, voting (subject to the Foreign
Ownership Restrictions) together as one class, are entitled to elect one
member of the Board of Directors. In the event the Company pays in full all
dividends accrued on the preferred stock for three consecutive payment dates
following such Default (and no dividend arrearages exist as to such stock), or
otherwise cures any other default that gives rise to such voting rights, the
holders of the Series A 12% Preferred will cease to have the right to elect a
director.
The consent or approval of the holders of a majority of the then-outstanding
shares of Series A 12% Preferred is required for the creation of certain
classes of senior or parity stock, certain mergers or sales of substantially
all of the Company's assets, the voluntary liquidation or dissolution of the
Company and amendments to the terms of the preferred stock that would
adversely affect the Series A 12% Preferred.
The Board of Directors of the Company has the authority, without any vote by
the stockholders, to issue additional shares of preferred stock, up to the
number of shares authorized in the Certificate of Incorporation, as it may be
amended from time to time, in one or more series, and to fix the number of
shares constituting any such series, the designations, preferences and
relative rights and qualifications of such series, including the voting
rights, dividend rights, dividend rate, terms of redemption (including sinking
fund provisions), redemption price or prices, conversion rights and
liquidation preferences of the shares constituting any series.
LIMITATION OF DIRECTOR LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation provides, to the fullest extent
permitted by Delaware law as it may from time to time be amended, that no
director shall be liable to the Company or any stockholder for monetary
damages for breach of fiduciary duty as a director. Delaware law currently
provides that such waiver may not apply to liability (i) for any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts
or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law (governing distributions to stockholders), or (iv) for any
transaction from which the director derived any improper personal benefit. The
Certificate of Incorporation further provides that the Company will indemnify
each of its directors and officers to the full extent permitted by Delaware
law and may indemnify certain other persons as authorized by law. The
foregoing provisions do not eliminate any monetary liability of directors
under the federal securities laws.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering (assuming no exercise of the overallotment
option) and after giving effect to the conversion by Air Canada of its Class A
common stock for Class B common stock, Continental will have a total of
4,640,000 shares of Class A common stock and 23,153,180 shares of Class B
common stock outstanding (excluding shares of Class B common stock issued
after April 30, 1996 pursuant to the Company's employee benefit plans). Of
such shares, approximately 291,459 shares of Class A common stock and
approximately 762,291 shares of Class B common stock are held in trust by a
distribution agent pending resolution of certain disputed claims and
subsequent distribution to, or sale for the benefit of, Prepetition Creditors.
Upon distribution to Prepetition Creditors, these shares will also be freely
tradeable. An independent investment manager has discretion over the continued
holding or sale of the 78,621 shares of Class B common stock held in trust for
the benefit of the Company's retirement plan.
36
<PAGE>
Shares of Class A common stock and Class B common stock held by Air Partners
and Air Canada are "restricted" securities within the meaning of Rule 144
under the Securities Act and may not be sold in the absence of registration
under the Securities Act, unless an exemption from registration is available,
including the exemption provided by Rule 144. Each of Air Canada and Air
Partners have entered into agreements with Continental restricting, prior to
December 16, 1996, the further disposition of Continental stock held by either
of them. See "Recent Developments." Air Canada has indicated its intention to
dispose of its remaining equity interest in the Company by early 1997, subject
to market conditions. The Company has granted Air Canada and Air Partners
extensive registration rights. See "Principal and Selling Stockholders--
Certain Rights of Air Partners and Air Canada."
The Company has agreed that, except with the prior written consent of
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), it will
not, directly or indirectly, for a period of 90 days after the date of the
U.S. Purchase Agreement, offer, sell, contract to sell or otherwise dispose of
any shares of common stock of the Company or any interests therein or any
securities convertible into or exchangeable for shares of common stock or
other equity interests of the Company, except that the Company may (i) issue
shares of common stock or other equity interests (a) as a result of the
exercise or conversion of options, warrants or other securities outstanding on
the date of the U.S. Purchase Agreement, (b) as a result of the grant of stock
options or other stock-based awards (and the exercise thereof) to directors,
officers and employees of the Company or its subsidiaries, and (c) if required
pursuant to the Certificate of Incorporation and (ii) cause to be registered
with the Commission (x) a resale shelf registration statement for the
Company's outstanding 6 3/4% Convertible Subordinated Notes due 2006 and 8
1/2% Convertible Preferred Securities of Trust, (y) a registration statement
for the sale (only after the expiration of the 90-day period referred to
above) of up to $50 million of Class B common stock and (z) a registration
statement for the sale by Air Canada and certain partners of Air Partners of
shares of Class B common stock (or the use of such shares in connection with
hedging transactions), provided that this clause (z) does not affect the
obligations of Air Canada and such partners pursuant to the 90-day lockup
agreement described below.
Air Canada and Air Partners have agreed that, except with the prior written
consent of Merrill Lynch, they will not, directly or indirectly, for a period
of 90 days after the date of the U.S. Purchase Agreement, offer, sell,
contract to sell or otherwise dispose of any shares of common stock of the
Company (except, in the case of Air Canada, for Shares included in the
Offering), any interests therein, or any securities convertible into or
exchangeable for shares of common stock of the Company, except that Air
Partners may (i) convert shares of common stock of one class for shares of
common stock of another class or for other equity interests in the Company and
(ii) transfer common stock or other equity interests in the Company to any of
its partners or affiliates (including the Company) if such transferee agrees
to be bound by the agreement set forth in this paragraph and Air Canada may
transfer shares of common stock of the Company to any entity that is wholly-
owned by Air Canada if such transferee agrees to be bound by the agreement set
forth in this paragraph.
Each of the AP Investors has agreed that, except with the prior written
consent of Merrill Lynch, it will not directly or indirectly, for a period of
90 days after the date of the U.S. Purchase Agreement, offer, sell, contract
to sell or otherwise dispose of any shares of common stock of the Company
(except for Shares included in the Offering) or any interests therein or any
securities convertible into or exchangeable for shares of common stock of the
Company, in each case that have been received, or that may hereafter be
acquired, from Air Partners.
CERTAIN U.S. TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the purchase, ownership and disposition
of Class B common stock by a person who is (as to the United States) a foreign
corporation, a nonresident alien individual, a nonresident alien fiduciary of
an estate or trust the income of which is not subject to United States
taxation regardless of its source, or a foreign partnership (a "Non-U.S.
Holder"). This summary does not address all aspects of United States federal
income and estate taxes that may be relevant to Non-U.S. Holders in light of
their personal circumstances including Non-U.S. Holders that may be subject to
special treatment under United States federal income tax laws (for example,
insurance companies,
37
<PAGE>
tax-exempt organizations, financial institutions or broker-dealers) and is
based on current provisions of the Internal Revenue Code of 1986 as amended
(the "Code"), existing and proposed regulations promulgated thereunder, and
administrative and judicial interpretation thereof, all of which are subject
to change. Accordingly, each Non-U.S. Holder is urged to consult its own tax
advisor with respect to the United States tax consequences of the ownership
and disposition of Class B common stock, as well as any tax consequences that
may arise under the laws of any state, municipality, foreign country or other
taxing jurisdiction or under the provisions of an applicable tax treaty.
DIVIDENDS
Dividends paid to a Non-U.S. Holder of Class B common stock ordinarily will
be subject to withholding of United States federal income tax at a 30 percent
rate, or at a lower rate under an applicable income tax treaty that provides
for a reduced rate of withholding. However, if the dividends are effectively
connected with the conduct by the Non-U.S. Holder of a trade or business
within the United States, then the dividends will be exempt from the
withholding tax described above and instead will be subject to United States
federal income tax on a net income basis, unless an applicable tax treaty
provides otherwise. In such case, if the Non-U.S. Holder is a foreign
corporation, it may also be subject to a 30% United States branch profits tax.
A Non-U.S. Holder that is eligible for a reduced rate of United States
withholding tax pursuant to a tax treaty and does not realize the benefit of
such reduced rate when the dividend is paid may obtain a refund of excess
amounts withheld by filing an appropriate claim for refund with the United
States Internal Revenue Service ("IRS").
The Company must report annually to the IRS the amount of dividends paid to
a Non-U.S. Holder and tax withheld from such dividends. This information also
may be made available to the tax authorities of the country in which the Non-
U.S. Holder resides, pursuant to the terms of a tax treaty between the United
States and such country.
GAIN ON DISPOSITION OF CLASS B COMMON STOCK
The gain realized on the sale or exchange of the Class B common stock by a
Non-U.S. Holder will not be subject to United States federal income tax,
including withholding tax, unless (i) such gain is effectively connected with
the conduct by the Non-U.S. Holder of a trade or business in the United
States, or (ii) in the case of gain realized by a Non-U.S. Holder who is an
individual, the Non-U.S. Holder is present in the United States for 183 days
or more in the taxable year of sale and either (A) such gain or income is
attributable to an office or other fixed place of business maintained in the
United States by such Non-U.S. Holder or (B) such Non-U.S. Holder has a tax
home in the United States.
FEDERAL ESTATE TAXES
Class B common stock held by an individual Non-U.S. Holder at the time of
death will be included in such Non-U.S. Holder's gross estate for United
States federal estate tax purposes, unless an applicable estate tax treaty
provides otherwise.
U.S. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
U.S. information reporting requirements and backup withholding tax will not
apply to dividends paid on Class B common stock to a Non-U.S. Holder at an
address outside the United States. As a general matter, information reporting
and backup withholding also will not apply to a payment of the proceeds of a
sale of Class B common stock effected outside the United States by a foreign
office of a foreign broker. However, information reporting requirements (but
not backup withholding) will apply to a payment of the proceeds of a sale of
Class B common stock effected outside the United States by a foreign office of
a broker if the broker is a U.S. person, derives 50 percent or more of its
gross income for certain periods from the conduct of a trade or business in
the United States, or is a "controlled foreign corporation" as to the United
States, unless the broker has documentary evidence in its records that the
holder is a Non-U.S. Holder and certain conditions are met, or the holder
otherwise establishes an exemption. Payment by a United States office of a
broker of the proceeds of a sale of Class B common stock will be subject to
backup withholding and information reporting unless the holder certifies its
non-United States status under penalties of perjury or otherwise establishes
an exemption.
38
<PAGE>
PROPOSED REGULATIONS
On April 15, 1996, the Internal Revenue Service released proposed
regulations (the "Proposed Regulations") that would, among other matters,
change the withholding tax and backup withholding tax rules applicable to
dividends paid with respect to stock of U.S. corporations. These regulations,
if adopted in the form proposed, would require that certain Non-U.S. Holders
of Class B common stock that seek to rely on a tax treaty to obtain a
reduction in the rate of the dividend withholding tax provide certifications
regarding their eligibility for receiving such treaty benefits. In addition,
under the Proposed Regulations, a Non-U.S. Holder that fails to comply with
certain certification requirements may be subject to backup withholding tax at
a rate of 31% in lieu of the dividend withholding tax. It is uncertain
whether, or in what form, the Proposed Regulations will be adopted. If adopted
in the form proposed, the Proposed Regulations would not apply to dividends
paid prior to 1998. Non-U.S. Holders are urged to consult their tax advisers
regarding the possible applicability to them of the Proposed Regulations.
39
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"U.S. Purchase Agreement") between the Selling Stockholders, the Company and
each of the underwriters named below (the "U.S. Underwriters"), and
concurrently with the sale of 746,048 Shares to the International Underwriters
(as defined below), the Selling Stockholders have agreed to sell to each of
the U.S. Underwriters named below, and each of the U.S. Underwriters, for whom
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman, Sachs & Co.,
Lehman Brothers Inc. and Morgan Stanley & Co. Incorporated are acting as
representatives (the "U.S. Representatives"), severally has agreed to purchase
from the Selling Stockholders, the aggregate number of Shares set forth
opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITERS SHARES
----------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated........................................... 311,048
Goldman, Sachs & Co. ........................................... 311,048
Lehman Brothers Inc. ........................................... 311,048
Morgan Stanley & Co. Incorporated............................... 311,048
BT Securities Corporation....................................... 120,000
CS First Boston Corporation..................................... 120,000
Dean Witter Reynolds Inc. ...................................... 120,000
Dillon, Read & Co. Inc. ........................................ 120,000
Donaldson, Lufkin & Jenrette Securities Corporation............. 120,000
Furman Selz LLC................................................. 120,000
Lazard Freres & Co. LLC......................................... 120,000
PaineWebber Incorporated........................................ 120,000
Salomon Brothers Inc ........................................... 120,000
Smith Barney Inc. .............................................. 120,000
S.G. Warburg & Co. Inc. ........................................ 120,000
Wasserstein Perella Securities, Inc. ........................... 120,000
Nesbitt Burns Securities Inc. .................................. 30,000
Legg Mason Wood Walker, Incorporated............................ 30,000
McDonald & Company Securities, Inc. ............................ 30,000
The Ohio Company................................................ 30,000
Piper Jaffray Inc. ............................................. 30,000
Principal Financial Securities, Inc. ........................... 30,000
Rauscher Pierce Refsnes, Inc. .................................. 30,000
The Robinson-Humphrey Company, Inc. ............................ 30,000
Scott & Stringfellow, Inc. ..................................... 30,000
Utendahl Capital Partners, L.P. ................................ 30,000
---------
Total...................................................... 2,984,192
=========
</TABLE>
The Company and the Selling Stockholders also have entered into a purchase
agreement (the "International Purchase Agreement") with certain underwriters
outside the United States and Canada (the "International Underwriters" and,
together with the U.S. Underwriters, the "Underwriters") for whom Merrill
Lynch International, Goldman Sachs International, Lehman Brothers
International (Europe) and Morgan Stanley & Co. International Limited are
acting as representatives (the "International Representatives"). Subject to
the terms and conditions set forth in the International Purchase Agreement,
and concurrently with the sale of 2,984,192 Shares to the U.S. Underwriters
pursuant to the U.S. Purchase Agreement, the Selling Stockholders have agreed
to sell to the International Underwriters, and the International Underwriters
severally have agreed to purchase, an aggregate of 746,048 Shares. The initial
public offering price per share and the underwriting discount per share are
identical under the U.S. Purchase Agreement and the International Purchase
Agreement.
40
<PAGE>
In the U.S. Purchase Agreement and the International Purchase Agreement, the
several U.S. Underwriters and the several International Underwriters,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the Shares being sold pursuant to each such
Agreement if any of the shares being sold pursuant to each such Agreement are
purchased. Under certain circumstances, the commitments of non-defaulting U.S.
Underwriters or International Underwriters (as the case may be) may be
increased. The closings with respect to the sale of the Shares to the U.S.
Underwriters and the International Underwriters are conditioned upon one
another.
The U.S. Underwriters and the International Underwriters have entered into
an intersyndicate agreement (the "Intersyndicate Agreement") which provides
for the coordination of their activities. The Underwriters are permitted to
sell Shares to each other for the purposes of resale at the initial public
offering price, less an amount not greater than the selling concession. Under
the terms of the Intersyndicate Agreement, the U.S. Underwriters and any
dealer to whom they sell Shares will only offer to sell or sell Shares to
persons who are United States or Canadian persons or to persons they believe
intend to resell to persons who are United States or Canadian persons, and the
International Underwriters and any dealer to whom they sell Shares will not
offer to sell or sell Shares to United States or Canadian persons or to
persons they believe intend to resell to United States or Canadian persons,
except, in each case, for transactions pursuant to the Intersyndicate
Agreement.
The U.S. Representatives have advised the Selling Stockholders that the U.S.
Underwriters propose initially to offer the Shares to the public at the
initial public offering price set forth on the cover page of this Prospectus,
and to certain dealers (who may include U.S. Underwriters) at such price less
a concession not in excess of $1.00 per share. The U.S. Underwriters may
allow, and such dealers may reallow, a discount not in excess of $.10 per
share on sales to certain other dealers. After the Offering, the public
offering price, concession and discount may be changed.
Air Canada has granted an option to the U.S. Underwriters exercisable during
the 30-day period after the date of this Prospectus, to purchase up to an
aggregate of 200,000 additional shares at the initial public offering price
set forth on the cover page of this Prospectus, less the underwriting
discount. The U.S. Underwriters may exercise the option only to cover over-
allotments, if any, made on the sale of the Shares offered hereby. To the
extent that the U.S. Underwriters exercise the option, each U.S. Underwriter
will be obligated, subject to certain conditions, to purchase the same
percentage of such of additional shares as the number of Shares to be
purchased by it shown in the foregoing table bears to the total number of
Shares initially offered by the U.S. Underwriters hereby.
The Company has agreed that, except with the prior written consent of
Merrill Lynch, it will not, directly or indirectly, for a period of 90 days
after the date of the U.S. Purchase Agreement, offer, sell, contract to sell
or otherwise dispose of any shares of common stock of the Company or any
interests therein or any securities convertible into or exchangeable for
shares of common stock or other equity interests of the Company, except that
the Company may (i) issue shares of common stock or other equity interests (a)
as a result of the exercise or conversion of options, warrants or other
securities outstanding on the date of the U.S. Purchase Agreement, (b) as a
result of the grant of stock options or other stock-based awards (and the
exercise thereof) to directors, officers and employees of the Company or its
subsidiaries, and (c) if required pursuant to the Certificate of Incorporation
and (ii) cause to be registered with the Commission (x) a resale shelf
registration statement for the Company's outstanding 6 3/4% Convertible
Subordinated Notes due 2006 and 8 1/2% Convertible Preferred Securities of
Trust, (y) a registration statement for the sale (only after the expiration of
the 90-day period referred to above) of up to $50 million of Class B common
stock and (z) a registration statement for the sale by Air Canada and certain
partners of Air Partners of shares of Class B common stock (or the use of such
shares in connection with hedging transactions), provided that this clause (z)
does not affect the obligations of Air Canada and such partners pursuant to
the 90-day lockup agreement described below.
Air Canada and Air Partners have agreed that, except with the prior written
consent of Merrill Lynch, they will not, directly or indirectly, for a period
of 90 days after the date of the U.S. Purchase Agreement, offer, sell,
contract to sell or otherwise dispose of any shares of common stock of the
Company (except, in the case of Air
41
<PAGE>
Canada, for Shares included in the Offering), any interests therein, or any
securities convertible into or exchangeable for shares of common stock of the
Company, except that Air Partners may (i) convert shares of common stock of
one class for shares of common stock of another class or for other equity
interests in the Company and (ii) transfer common stock or other equity
interests in the Company to any of its partners or affiliates (including the
Company) if such transferee agrees to be bound by the agreement set forth in
this paragraph and Air Canada may transfer shares of common stock of the
Company to any entity that is wholly owned by Air Canada if such transferee
agrees to be bound by the agreement set forth in this paragraph.
Each of the AP Investors has agreed that, except with the prior written
consent of Merrill Lynch, it will not directly or indirectly, for a period of
90 days after the date of the U.S. Purchase Agreement, offer, sell, contract
to sell or otherwise dispose of any shares of common stock of the Company
(except for Shares included in the Offering) or any interests therein or any
securities convertible into or exchangeable for shares of common stock of the
Company, in each case that have been received, or that may hereafter be
acquired, from Air Partners.
The Company and the Selling Stockholders have severally agreed to indemnify
the several Underwriters against certain liabilities, including liabilities
under the Securities Act or to contribute to payments the Underwriters may be
required to make in respect thereof.
Certain of the Underwriters or their affiliates have provided from time to
time, and may provide in the future, investment banking services to the
Company and its affiliates, for which such Underwriters or their affiliates
have received or will receive fees and commissions.
LEGAL MATTERS
The validity of the Class B common stock offered hereby will be passed upon
for Continental by Jeffery A. Smisek, Esq., General Counsel of the Company.
Certain legal matters will be passed upon for Continental by Cleary, Gottlieb,
Steen & Hamilton, New York, New York, and for the Underwriters by Cahill
Gordon & Reindel, a partnership including a professional corporation, New
York, New York.
EXPERTS
The consolidated financial statements (including schedules incorporated by
reference) of Continental Airlines, Inc. at December 31, 1995 and 1994 and for
each of the two years ended December 31, 1995 and for the period April 28,
1993 through December 31, 1993, and the consolidated statements of operations,
redeemable and non-redeemable preferred stock and common stockholders' equity
and cash flows of Continental Airlines Holdings, Inc. for the period January
1, 1993 through April 27, 1993, incorporated by reference in this Prospectus
and Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon included therein and
incorporated herein by reference, in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
42
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY THE CLASS B COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PER-
SON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DE-
LIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUM-
STANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS
SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................... 2
Incorporation of Certain Documents by Reference.......................... 3
Prospectus Summary....................................................... 4
Risk Factors............................................................. 12
Recent Developments...................................................... 16
Use of Proceeds.......................................................... 18
Market Price of Common Stock and Dividends............................... 18
Selected Financial Data.................................................. 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Principal and Selling Stockholders....................................... 26
Description of Capital Stock............................................. 31
Shares Eligible for Future Sale.......................................... 36
Certain U.S. Tax Consequences to Non-U.S. Holders........................ 37
Underwriting............................................................. 40
Legal Matters............................................................ 42
Experts.................................................................. 42
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,730,240 SHARES
CONTINENTAL [LOGO]
AIRLINES
CLASS B COMMON STOCK
---------------
PROSPECTUS
---------------
MERRILL LYNCH & CO.
GOLDMAN, SACHS & CO.
LEHMAN BROTHERS
MORGAN STANLEY & CO.
INCORPORATED
MAY 8, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
- ----------
3,730,240 SHARES
CONTINENTAL [LOGO]
AIRLINES
CLASS B COMMON STOCK
----------------
Of the 3,730,240 shares (the "Shares") of Class B common stock, par value
$.01 per share (the "Class B common stock"), of Continental Airlines, Inc.
(the "Company" or "Continental") offered hereby, 746,048 Shares are being
offered outside the United States and Canada by the International Underwriters
(the "International Offering"), and 2,984,192 Shares are being concurrently
offered in the United States and Canada by the U.S. Underwriters (the "U.S.
Offering" and, together with International Offering, the "Offering"). The
offering price and underwriting discounts and commissions of the International
Offering and the U.S. Offering are identical. See "Underwriting."
All of the Shares offered hereby are being sold by Air Canada, a Canadian
corporation ("Air Canada") and certain partners of Air Partners, L.P., a Texas
limited partnership ("Air Partners") (collectively, the "Selling
Stockholders"). See "Principal and Selling Stockholders." Continental will not
receive any of the proceeds from the sale of the Shares by the Selling
Stockholders.
The Class B common stock is listed on the New York Stock Exchange, Inc. (the
"NYSE") under the trading symbol "CAI.B." On May 8, 1996, the last reported
sale price of the Class B common stock on the NYSE was $53 1/2 per share. See
"Market Price of Common Stock and Dividends."
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING
AN INVESTMENT IN THE SHARES, SEE "RISK FACTORS" ON PAGES 12 TO 15.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) STOCKHOLDERS(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........................ $53.50 $1.66 $51.84
- --------------------------------------------------------------------------------
Total(3)......................... $199,567,840 $6,192,198 $193,375,642
</TABLE>
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- -------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have severally agreed to
indemnify the several Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) The Company has agreed to pay certain expenses of the Offering estimated
at $350,000.
(3) Air Canada has granted the U.S. Underwriters a 30-day option to purchase
up to 200,000 additional shares of Class B common stock on the same terms
and conditions as set forth above. If all such additional shares are
purchased by the Underwriters, the total Price to Public will be
$210,267,840, the total Underwriting Discount will be $6,524,198 and the
total Proceeds to Selling Stockholders will be $203,743,642. See
"Underwriting."
----------------
The Shares are offered by the several Underwriters, subject to prior sale,
when, as and if delivered to and accepted by them, subject to approval of
certain legal matters by counsel to the Underwriters, and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the Shares will be made in New York, New York on or about May 14,
1996.
----------------
MERRILL LYNCH INTERNATIONAL
GOLDMAN SACHS INTERNATIONAL
LEHMAN BROTHERS
MORGAN STANLEY & CO.
INTERNATIONAL
CREDIT LYONNAIS SECURITIES
----------------
The date of this Prospectus is May 8, 1996.
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"International Purchase Agreement") between the Selling Stockholders, the
Company and each of the underwriters named below (the "International
Underwriters"), and concurrently with the sale of 2,984,192 Shares to the U.S.
Underwriters (as defined below), the Selling Stockholders have agreed to sell
to each of the International Underwriters named below, and each of the
International Underwriters, for whom Merrill Lynch International, Goldman
Sachs International, Lehman Brothers International (Europe) and Morgan Stanley
& Co. International Limited are acting as representatives (the "International
Representatives"), severally has agreed to purchase from the Selling
Stockholders, the aggregate number of Shares set forth opposite its name
below:
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL UNDERWRITERS SHARES
-------------------------- ---------
<S> <C>
Merrill Lynch International...................................... 182,248
Goldman Sachs International...................................... 182,100
Lehman Brothers International (Europe)........................... 182,100
Morgan Stanley & Co. International Limited....................... 182,100
Credit Lyonnais Securities....................................... 17,500
-------
Total....................................................... 746,048
=======
</TABLE>
The Company and the Selling Stockholders also have entered into a purchase
agreement (the "U.S. Purchase Agreement") with certain underwriters in the
United States and Canada (the "U.S. Underwriters" and, together with the
International Underwriters, the "Underwriters") for whom Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Goldman, Sachs & Co., Lehman Brothers
Inc. and Morgan Stanley & Co. Incorporated are acting as representatives (the
"U.S. Representatives"). Subject to the terms and conditions set forth in the
U.S. Purchase Agreement, and concurrently with the sale of 746,048 Shares to
the International Underwriters pursuant to the International Purchase
Agreement, the Selling Stockholders have agreed to sell to the U.S.
Underwriters, and the U.S. Underwriters severally have agreed to purchase, an
aggregate of 2,984,192 Shares. The initial public offering price per share and
the underwriting discount per share are identical under the International
Purchase Agreement and the U.S. Purchase Agreement.
In the International Purchase Agreement and the U.S. Purchase Agreement, the
several International Underwriters and the several U.S. Underwriters,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the Shares being sold pursuant to each such
Agreement if any of the shares being sold pursuant to each such Agreement are
purchased. Under certain circumstances, the commitments of non-defaulting
International Underwriters or U.S. Underwriters (as the case may be) may be
increased. The closings with respect to the sale of the Shares to the
International Underwriters and the U.S. Underwriters are conditioned upon one
another.
The International Underwriters and the U.S. Underwriters have entered into
an intersyndicate agreement (the "Intersyndicate Agreement") which provides
for the coordination of their activities. The Underwriters are permitted to
sell Shares to each other for the purposes of resale at the initial public
offering price, less an amount not greater than the selling concession. Under
the terms of the Intersyndicate Agreement, the U.S. Underwriters and any
dealer to whom they sell Shares will only offer to sell or sell Shares to
persons who are United States or Canadian persons or to persons they believe
intend to resell to persons who are United States or Canadian persons, and the
International Underwriters and any dealer to whom they sell Shares will not
offer to sell or sell Shares to United States or Canadian persons or to
persons they believe intend to resell to United States or Canadian persons,
except, in each case, for transactions pursuant to the Intersyndicate
Agreement.
The International Representatives have advised the Selling Stockholders that
the International Underwriters propose initially to offer the Shares to the
public at the initial public offering price set forth on the cover page of
40
<PAGE>
this Prospectus, and to certain dealers (who may include International
Underwriters) at such price less a concession not in excess of $1.00 per
share. The International Underwriters may allow, and such dealers may reallow,
a discount not in excess of $.10 per share on sales to certain other dealers.
After the Offering, the public offering price, concession and discount may be
changed.
Air Canada has granted an option to the U.S. Underwriters exercisable during
the 30-day period after the date of this Prospectus, to purchase up to an
aggregate of 200,000 additional shares at the initial public offering price
set forth on the cover page of this Prospectus, less the underwriting
discount. The U.S. Underwriters may exercise the option only to cover over-
allotments, if any, made on the sale of the Shares offered hereby. To the
extent that the U.S. Underwriters exercise the option, each U.S. Underwriter
will be obligated, subject to certain conditions, to purchase the same
percentage of such of additional shares as the number of Shares to be
purchased by it bears to the total number of Shares initially offered by the
U.S. Underwriters.
The Company has agreed that, except with the prior written consent of
Merrill Lynch, it will not, directly or indirectly, for a period of 90 days
after the date of the U.S. Purchase Agreement, offer, sell, contract to sell
or otherwise dispose of any shares of common stock of the Company or any
interests therein or any securities convertible into or exchangeable for
shares of common stock or other equity interests of the Company, except that
the Company may (i) issue shares of common stock or other equity interests (a)
as a result of the exercise or conversion of options, warrants or other
securities outstanding on the date of the U.S. Purchase Agreement, (b) as a
result of the grant of stock options or other stock-based awards (and the
exercise thereof) to directors, officers and employees of the Company or its
subsidiaries, and (c) if required pursuant to the Certificate of Incorporation
and (ii) cause to be registered with the Commission (x) a resale shelf
registration statement for the Company's outstanding 6 3/4% Convertible
Subordinated Notes due 2006 and 8 1/2% Convertible Preferred Securities of
Trust, (y) a registration statement for the sale (only after the expiration of
the 90-day period referred to above) of up to $50 million of Class B common
stock and (z) a registration statement for the sale by Air Canada and certain
partners of Air Partners of shares of Class B common stock (or the use of such
shares in connection with hedging transactions), provided that this clause (z)
does not affect the obligations of Air Canada and such partners pursuant to
the 90-day lockup agreement described below.
Air Canada and Air Partners have agreed that, except with the prior written
consent of Merrill Lynch, they will not, directly or indirectly, for a period
of 90 days after the date of the U.S. Purchase Agreement, offer, sell,
contract to sell or otherwise dispose of any shares of common stock of the
Company (except, in the case of Air Canada, for Shares included in the
Offering), any interests therein, or any securities convertible into or
exchangeable for shares of common stock of the Company, except that Air
Partners may (i) convert shares of common stock of one class for shares of
common stock of another class or for other equity interests in the Company and
(ii) transfer common stock or other equity interests in the Company to any of
its partners or affiliates (including the Company) if such transferee agrees
to be bound by the agreement set forth in this paragraph and Air Canada may
transfer shares of common stock of the Company to any entity that is wholly-
owned by Air Canada if such transferee agrees to be bound by the agreement set
forth in this paragraph.
Each of the AP Investors has agreed that, except with the prior written
consent of Merrill Lynch, it will not directly or indirectly, for a period of
90 days after the date of the U.S. Purchase Agreement, offer, sell, contract
to sell or otherwise dispose of any shares of common stock of the Company
(except for Shares included in the Offering) or any interests therein or any
securities convertible into or exchangeable for shares of common stock of the
Company, in each case that have been received, or that may hereafter be
acquired, from Air Partners.
Each International Underwriter has agreed that (i) it has not offered or
sold, and will not for a period of six months following consummation of the
Offering offer or sell, in the United Kingdom by means of any document, any
shares of Class B common stock offered hereby, other than to persons whose
ordinary activities involve them in acquiring, holding, managing or disposing
of investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances that do not constitute an offer to the public
within the meaning of the Public Offers of Securities Regulations 1995, (ii)
it has complied with and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in relation to
the shares of
41
<PAGE>
Class B common stock in, from, or otherwise involving the United Kingdom and
(iii) it has only issued or passed on and will only issue or pass on to any
person in the United Kingdom any document received by it in connection with
the issue of the shares of Class B common stock if that person is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1995, as amended, or is a person to whom
the document may otherwise lawfully be issued or passed on.
The Company and the Selling Stockholders have severally agreed to indemnify
the several Underwriters against certain liabilities, including liabilities
under the Securities Act or to contribute to payments the Underwriters may be
required to make in respect thereof.
Purchasers of the Shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase, in addition to the offering price set forth on the cover page
hereof.
Certain of the Underwriters or their affiliates have provided from time to
time, and may provide in the future, investment banking services to the
Company and its affiliates, for which such Underwriters or their affiliates
have received or will receive fees and commissions.
LEGAL MATTERS
The validity of the Class B common stock offered hereby will be passed upon
for Continental by Jeffery A. Smisek, Esq., General Counsel of the Company.
Certain legal matters will be passed upon for Continental by Cleary, Gottlieb,
Steen & Hamilton, New York, New York, and for the Underwriters by Cahill
Gordon & Reindel, a partnership including a professional corporation, New
York, New York.
EXPERTS
The consolidated financial statements (including schedules incorporated by
reference) of Continental Airlines, Inc. at December 31, 1995 and 1994 and for
each of the two years ended December 31, 1995 and for the period April 28,
1993 through December 31, 1993, and the consolidated statements of operations,
redeemable and non-redeemable preferred stock and common stockholders' equity
and cash flows of Continental Airlines Holdings, Inc. for the period January
1, 1993 through April 27, 1993, incorporated by reference in this Prospectus
and Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon included therein and
incorporated herein by reference, in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
42
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY THE CLASS B COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PER-
SON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DE-
LIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUM-
STANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS
SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF.
IN THIS PROSPECTUS, REFERENCES TO "DOLLARS" AND "$" ARE TO UNITED STATES DOL-
LARS.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................... 2
Incorporation of Certain Documents by Reference.......................... 3
Prospectus Summary....................................................... 4
Risk Factors............................................................. 12
Recent Developments...................................................... 16
Use of Proceeds.......................................................... 18
Market Price of Common Stock and Dividends............................... 18
Selected Financial Data.................................................. 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Principal and Selling Stockholders....................................... 26
Description of Capital Stock............................................. 31
Shares Eligible for Future Sale.......................................... 36
Certain U.S. Tax Consequences to Non-U.S. Holders........................ 37
Underwriting............................................................. 40
Legal Matters............................................................ 42
Experts.................................................................. 42
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,730,240 SHARES
CONTINENTAL [LOGO]
AIRLINES
CLASS B COMMON STOCK
---------------
PROSPECTUS
---------------
MERRILL LYNCH INTERNATIONAL
GOLDMAN SACHS INTERNATIONAL
LEHMAN BROTHERS
MORGAN STANLEY & CO.
INTERNATIONAL
CREDIT LYONNAIS SECURITIES
MAY 8, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
