<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
Continental Airlines, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
[CONTINENTAL AIRLINES LOGO]
April 15, 1998
To Our Stockholders:
On behalf of the Board of Directors, we are pleased to invite you to attend
the Continental Airlines, Inc. 1998 Annual Meeting of Stockholders. As indicated
in the attached notice, the meeting will be held at The Hyatt Regency, 1200
Louisiana Street, Houston, Texas on Thursday, May 21, 1998, at 9:30 a.m., local
time. At the meeting, in addition to acting on the matters described in the
attached proxy statement, there will be an opportunity to discuss other matters
of interest to you as a stockholder.
Please date, sign and mail the enclosed proxy card in the envelope
provided, even if you plan to attend the meeting in person. We look forward to
seeing you in Houston.
Cordially,
/s/ GORDON BETHUNE
Gordon Bethune
Chairman of the Board and Chief
Executive Officer
/s/ GREG BRENNEMAN
Greg Brenneman
President and Chief Operating
Officer
<PAGE> 3
CONTINENTAL AIRLINES, INC.
2929 ALLEN PARKWAY, SUITE 2010
HOUSTON, TEXAS 77019
---------------------
NOTICE OF 1998 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 21, 1998
---------------------
NOTICE IS HEREBY GIVEN that the 1998 Annual Meeting of Stockholders of
Continental Airlines, Inc., a Delaware corporation (the "Company" or
"Continental"), will be held at The Hyatt Regency, 1200 Louisiana Street,
Houston, Texas on Thursday, May 21, 1998, at 9:30 a.m., local time, for the
following purposes:
1. To elect thirteen directors to serve until the next annual meeting
of stockholders;
2. To consider and act upon a proposal to approve the Company's 1998
Stock Incentive Plan;
3. To consider and act upon a proposal to ratify the appointment of
Ernst & Young LLP as independent auditors of the Company and its
subsidiaries for 1998; and
4. To consider and act upon any other matters that may properly come
before the Annual Meeting or any adjournment or adjournments thereof.
The holders of record of the Company's common stock at the close of
business on March 27, 1998 are entitled to notice of and to vote at the Annual
Meeting.
By Order of the Board of Directors,
/s/ JEFFREY A. SMISEK
Jeffery A. Smisek
Secretary
Houston, Texas
April 15, 1998
PLEASE SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY BY MAIL IN
THE ENCLOSED ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON.
NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES. IF YOU DO ATTEND THE
MEETING IN PERSON AND DESIRE TO WITHDRAW YOUR PROXY, YOU MAY DO SO IN THE MANNER
DESCRIBED IN THE ENCLOSED PROXY STATEMENT AND VOTE PERSONALLY ON ALL MATTERS
BROUGHT BEFORE THE MEETING.
<PAGE> 4
CONTINENTAL AIRLINES, INC.
2929 ALLEN PARKWAY, SUITE 2010
HOUSTON, TEXAS 77019
---------------------
PROXY STATEMENT
1998 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 21, 1998
---------------------
This proxy statement is furnished in connection with the solicitation by
and on behalf of the Board of Directors of Continental Airlines, Inc., a
Delaware corporation (the "Company" or "Continental"), of proxies to be voted at
the 1998 Annual Meeting of Stockholders of the Company or any adjournment or
adjournments thereof (the "Meeting"), to be held at The Hyatt Regency, 1200
Louisiana Street, Houston, Texas on Thursday, May 21, 1998, at 9:30 a.m., local
time, for the purposes set forth in the accompanying Notice of 1998 Annual
Meeting of Stockholders. This proxy statement and the accompanying proxy,
together with a copy of the Company's 1997 Annual Report, are being first mailed
to stockholders on or about April 15, 1998.
THE PROXY
Stockholders giving proxies may revoke them at any time before they are
voted by notifying the Secretary of the Company in writing of such revocation or
by delivering to such Secretary a duly executed proxy bearing a later date. Any
such revocation or subsequent proxy must be received prior to the commencement
of voting at the Meeting to be effective. If a proxy is properly signed by a
holder of common stock and is not revoked, it will be voted at the Meeting in
the manner specified on the proxy or, if no manner is specified, it will be
voted "FOR" the election of directors nominated by the Board of Directors of the
Company (the "Board of Directors" or the "Board") and "FOR" approval of the
other matters set forth in the accompanying Notice.
The Company will bear the costs of the solicitation of proxies. In addition
to the solicitation of proxies by mail, proxies may also be solicited by
telephone, telegram, fax and in person by regular employees and directors of the
Company, none of whom will receive additional compensation therefor, and by
Morrow & Co., Inc., which the Company has retained to assist in the solicitation
of proxies for a fee estimated not to exceed $6,500 plus reasonable
out-of-pocket expenses. Arrangements will be made with brokerage houses and with
other custodians, nominees and fiduciaries to forward proxy soliciting materials
to beneficial owners, and the Company will reimburse such persons for their
reasonable out-of-pocket expenses incurred in connection therewith.
RECORD DATE AND VOTING SECURITIES
The Board of Directors fixed the close of business on March 27, 1998 as the
record date for the determination of stockholders entitled to notice of and to
vote at the Meeting. At the close of business on the record date, the Company
had outstanding 8,379,464 shares of Class A common stock, par value $.01 per
share, and 50,738,288 shares of Class B common stock, par value $.01 per share.
Continental's Restated Certificate of Incorporation ("Charter") authorizes
the issuance of up to 10 million shares of preferred stock, 50 million shares
each of Class A common stock and Class D common stock, and 200 million shares of
Class B common stock. No shares of Class D common stock have been issued.
Subject to certain limitations on voting by non-U.S. citizens, each share of
Class A common stock is entitled to ten votes per share and each share of Class
B common stock is entitled to one vote per share. Shares of Class A common stock
may be converted at any time into shares of Class B common stock. The holders of
shares representing a majority of the aggregate voting power of the outstanding
voting securities entitled to vote at the Meeting, present or represented by
proxy, will constitute a quorum for the transaction of business at the Meeting.
<PAGE> 5
In establishing the presence of a quorum, abstentions and broker non-votes
(if any) will be included in the determination of the number of shares
represented at the Meeting. Abstentions are treated as votes cast and thus will
have the same effect as a vote against a proposal. As to a specific proposal,
however, broker non-votes are not treated as votes cast or shares entitled to
vote with respect to such matter and thus will not affect the election of
directors (who will be elected by a plurality of the votes cast for directors),
or the outcome of the proposals to approve the Company's 1998 Stock Incentive
Plan or ratify the appointment of independent auditors (each of which requires
approval by a majority of the votes cast on the applicable proposal).
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE PROPOSALS
CONTAINED IN THIS PROXY STATEMENT.
LIMITATION ON VOTING BY FOREIGN OWNERS
The Charter 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
directors be U.S. Citizens. For purposes of the Charter, "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 who are
citizens of the United States. The Charter 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 ("Bylaws") further provide that no shares will be registered on
the Foreign Stock Record if the amount so registered would cause the Company to
violate 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 shares acquired by Air Partners, L.P., a
Texas limited partnership ("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.
RECENT DEVELOPMENTS
On January 26, 1998, the Company announced that, in connection with an
agreement by Air Partners to dispose of its interest in the Company to an
affiliate of Northwest Airlines, Inc. ("Northwest"), the Company had entered
into a long-term global alliance with Northwest ("Northwest Alliance") involving
schedule coordination, frequent flyer reciprocity, executive lounge access,
airport facility coordination, code sharing, the formation of a joint venture
among the two carriers and KLM Royal Dutch Airlines ("KLM") with respect to
their trans-Atlantic services, cooperation regarding other alliance partners of
the two carriers and regional alliance development, certain coordinated sales
programs, preferred reservations displays and other activities.
The Northwest Alliance is expected to be phased in over a multi-year
period. A significant portion of the alliance activities will commence promptly.
Code sharing will commence, subject to governmental approvals, with the Company
initially placing its designator code on all of Northwest's international
flights (other than its trans-Atlantic flights) and those Northwest domestic
flights which create international connecting itineraries to and from Latin
America. Thereafter, subject to governmental approval and approval by
Northwest's pilots under their collective bargaining agreement, (i) Northwest
and the Company anticipate entering into a joint venture among themselves and
KLM with respect to their respective trans-Atlantic flights, (ii) Northwest
anticipates placing its designator code on substantially all of the Company's
other international flights, and (iii) Northwest and the Company each anticipate
placing their respective designator codes on substantially all of the other
carrier's domestic flights.
2
<PAGE> 6
The Company estimates that the alliance, when fully phased in over a
three-year period, will generate in excess of $500 million in additional annual
pre-tax operating income for the carriers, and anticipates that approximately
45% of such pre-tax operating income will accrue to the Company. The Company
believes that a significant portion of the alliance synergies allocable to the
Company can be achieved even without the activities that are subject to approval
of Northwest's pilots.
The Company also announced on January 26, 1998 that Air Partners, the
holder of approximately 14% of the Company's equity and approximately 51% of its
voting power (after giving effect to the exercise of warrants), had entered into
an agreement to dispose of its interest in the Company to an affiliate of
Northwest (the "Air Partners Transaction") in exchange for approximately $308
million in cash and equity securities of an affiliate of Northwest valued at
approximately $211 million. According to a Schedule 13D filed with the
Securities and Exchange Commission (the "SEC" or the "Commission") by an
affiliate of Northwest, the cash consideration will be provided from working
capital and the proceeds of unsecured borrowings in the public capital markets.
The Air Partners Transaction is subject to, among other matters, governmental
approval and expiration of applicable waiting periods under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976. The agreement also extends
to an affiliate of Air Partners a right of first offer to purchase certain
shares of Class A common stock of the Company to be acquired by Northwest or its
affiliates if such entities intend to dispose of those securities prior to the
fifth anniversary of the closing of the Air Partners Transaction.
In connection with the Air Partners Transaction, the Company entered into a
corporate governance agreement with certain affiliates of Northwest (the
"Northwest Parties") designed to assure the independence of the Company's Board
and management during the six-year term of the governance agreement. Under the
corporate governance agreement, as amended, the Northwest Parties have agreed
not to beneficially own voting securities of the Company in excess of 50.1% of
the fully diluted voting power of the Company's voting securities, subject to
certain exceptions involving third-party acquisitions or tender offers for 15%
or more of the voting power of the Company's voting securities and a limited
exception permitting a one-time ownership of approximately 50.4% of the fully
diluted voting power. The Northwest Parties have agreed to deposit all voting
securities of the Company beneficially owned by them in a voting trust with an
independent voting trustee requiring that such securities be voted (i) on all
matters other than the election of directors, either as recommended by the
Company's Board of Directors (a majority of whom must be independent directors
as defined in the agreement) or in the same proportion as the votes cast by
other holders of voting securities, and (ii) in the election of directors, for
the election of independent directors nominated by the Board of Directors;
provided, that in the event of a merger or similar business combination or a
recapitalization, liquidation or similar transaction, a sale of all or
substantially all of the Company's assets, or an issuance of voting securities
which would represent more than 20% of the voting power of the Company prior to
issuance, or any amendment of the Charter or Bylaws that would materially and
adversely affect Northwest, the shares may be voted as directed by the Northwest
Party owning such shares, and if a third party is soliciting proxies in
connection with an election of directors, the shares may be voted at the option
of such Northwest Party either as recommended by the Company's Board of
Directors or in the same proportion as the votes cast by the other holders of
voting securities.
The Northwest Parties have also agreed to certain restrictions on the
transfer of voting securities owned by them, have agreed not to seek to affect
or influence the Company's Board of Directors or the control of the management
of the Company or the business, operations, affairs, financial matters or
policies of the Company or to take certain other actions, and have agreed to
take all actions as are necessary to cause independent directors to at all times
constitute at least a majority of the Company's Board of Directors. The Company
has agreed to cause one designee of a Northwest Party reasonably acceptable to
the Board of Directors to be appointed to the Company's Board immediately after
the closing of the Air Partners Transaction, and has agreed to grant preemptive
rights to a Northwest Party with respect to certain issuances of Class A common
stock and Class B common stock. The Northwest Parties have agreed that certain
specified actions, together with any material transactions between the Company
and Northwest or its affiliates, including any modifications or waivers of the
corporate governance agreement and the alliance agreement, may not be taken
without the prior approval of a majority of the Board of Directors, including
the affirmative vote of a majority of the
3
<PAGE> 7
independent directors. The governance agreement also provides for the Company to
adopt a shareholder rights plan with reasonably customary terms and conditions,
with an acquiring person threshold of 15% and with appropriate exceptions for
the Northwest Parties for actions permitted by and taken in compliance with the
corporate governance agreement.
The corporate governance agreement provides that, if after three years
Northwest's pilots have not consented to those portions of the alliance
agreement requiring their consent and the Company, at its election, then chooses
to terminate the alliance agreement, the Northwest Parties can elect either to
dispose of their shares in the Company or negotiate with a committee of
independent directors of the Company regarding a merger. If a merger agreement
cannot be reached within six months of the establishment of the committee,
certain appraisal procedures are specified. If upon completion of the appraisal
procedures, Northwest is unwilling to enter into a merger agreement at the value
for the shares not held by the Northwest Parties determined by such appraisal
procedures, then the Northwest Parties must sell their voting securities, and if
the Company and the committee are unwilling to approve a merger agreement at
such value, then the corporate governance agreement (except for certain
provisions requiring continuing independent directors and approval by a majority
of such independent directors of material transactions between the Company and
the Northwest Parties) will expire.
The corporate governance agreement will otherwise expire after the sixth
anniversary of the date of closing of the Air Partners Transaction, or if
earlier, upon the date that the Northwest Parties cease to beneficially own
voting securities representing at least 10% of the fully diluted voting power of
the Company's voting securities. Upon a termination of the above described terms
of the governance agreement, the Northwest Parties must nonetheless take such
actions as are necessary to cause the Company's Board of Directors to at all
times include at least five directors who are independent of and otherwise
unaffiliated with Northwest or the Company and their respective affiliates, and
any material transaction between the Company and Northwest or its affiliates, or
relating to the governance agreement or the alliance agreement, may not be taken
without prior approval thereof by a majority vote of the independent directors.
The alliance agreement provides that if after four years the Company has
not entered into a code share with KLM or is not legally able (but for
aeropolitical restrictions) to enter into a new trans-Atlantic joint venture
with KLM and Northwest and place its airline code on certain Northwest flights,
Northwest can elect to (i) cause good faith negotiations among the Company, KLM
and Northwest as to the impact, if any, on the contribution to the joint venture
resulting from the absence of the code share, and the Company will reimburse the
joint venture for the amount of any loss until it enters into a code share with
KLM, or (ii) terminate (subject to cure rights of the Company) after one year's
notice any or all of such alliance agreement and any or all of the agreements
contemplated thereunder.
The closing of the Air Partners Transaction will constitute a "Change in
Control" for purposes of the Company's 1994 Incentive Equity Plan, as amended
(the "1994 Plan"), the 1997 Stock Incentive Plan, as amended (the "1997 Plan"),
the Company's executive bonus program (the "Executive Bonus Program") and the
Company's employment agreements with its management. Upon a Change in Control,
all options granted to participants under the 1994 Plan and the 1997 Plan
immediately vest and become exercisable in full and all outstanding restricted
stock vests in full. As of the end of April 1998, there will be unvested options
with respect to approximately 2.6 million shares of Class B common stock
outstanding and 35,000 shares of unvested restricted stock outstanding, all of
which will vest upon a Change in Control. There were approximately 560 employee
participants in the 1994 Plan and/or the 1997 Plan as of March 27, 1998. Under
the Executive Bonus Program, if a participant's participation in the program or
his employment is terminated (or constructively terminated as described in the
program) other than for cause or for other specified exceptions during the year
in which a Change in Control occurs, the participant will receive an amount
equal to 125% of his base salary less any bonuses earlier received by the
participant under the program during such year. There were 25 participants in
the Executive Bonus Program as of March 27, 1998. Under the Company's employment
agreements with Mr. Bethune and Mr. Brenneman, if either executive terminates
his employment with the Company for any reason following a Change in Control,
such executive is entitled to payment of the severance specified in his
agreement. Under the Company's employment agreements with Messrs. Kellner,
McLean and Smisek (and certain other officers of the Company), if such
executive's employment with the
4
<PAGE> 8
Company is terminated within two years following a Change in Control (other than
by the Company for cause or upon such executive's death or disability and other
than voluntarily (without constructive termination) by the executive), the
executive is entitled to an enhanced severance payment from the Company. In
connection with and conditioned on the closing of the Air Partners Transaction,
the Company has agreed to pay stay bonuses to the named executive officers and
certain other officers of the Company. See "Certain Transactions."
VOTING RIGHTS AND PRINCIPAL STOCKHOLDERS
The following table sets forth, as of March 27, 1998 (except as otherwise
set forth below), certain information 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 in the table is
based on reports that have been filed with the SEC pursuant to the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and information furnished
to the Company by such holders. In accordance with regulations promulgated by
the Commission, the table reflects for each beneficial owner the exercise of
warrants or the conversion of convertible securities (exercisable or convertible
within 60 days after March 27, 1998) owned by such beneficial owner, but, in
determining the percentage ownership and general voting power of such person,
does not assume the exercise of warrants or the conversion of securities owned
by any other person.
As part of the Air Partners Transaction, certain affiliates of Northwest
(Northwest Airlines Corporation and Newbridge Parent Corporation, the address of
which is 5101 Northwest Drive, St. Paul, Minnesota 55111-3034) have agreed to
acquire Air Partners' interests in the Company, along with the Class A common
stock owned by certain affiliates of Air Partners, including Bonderman Family
Limited Partnership, 1992 Air, Inc. and Air Saipan, Inc. In addition, such
affiliates of Northwest have agreed to acquire an additional 979,000 shares of
Class A common stock owned by certain third parties in exchange for
approximately $59.5 million in cash, conditioned on the closing of the Air
Partners Transaction. According to a statement on Schedule 13D filed with the
SEC by an affiliate of Northwest, such consideration is expected to be funded
from Northwest's general working capital and from the proceeds of unsecured
borrowings in the public capital markets. As a result of such agreements, such
affiliates of Northwest may be deemed to beneficially own an aggregate of
9,514,868 shares of Class A common stock of the Company, comprising 83.3% of the
outstanding Class A common stock (assuming exercise of all outstanding warrants
to purchase Class A common stock) and 57.7% of the general voting power (50.4%
of the fully diluted voting power of the Company as of March 27, 1998) of the
Company. The voting and disposition of this stock are limited by the terms of
the governance agreement between the Company and the Northwest Parties. See
"Recent Developments." Northwest has informed the Company that it intends to
cause the Class A common stock outstanding on the record date and subject to the
Air Partners Transaction (5,496,400 shares), with respect to which it has been
granted a limited proxy, to vote with respect to the proposal to approve the
Company's 1998 Stock Incentive Plan in the same proportion as the votes cast by
other holders of voting securities of the Company.
5
<PAGE> 9
<TABLE>
<CAPTION>
AMOUNT
AND NATURE GENERAL
NAME AND ADDRESS OF BENEFICIAL PERCENT VOTING
OF BENEFICIAL HOLDER TITLE OF CLASS OWNERSHIP OF CLASS POWER(1)
-------------------- -------------- ------------- -------- --------
<S> <C> <C> <C> <C>
Air Partners, L.P.(2) Class A common stock 8,302,656(3) 72.7% 50.3%
2420 Texas Commerce Tower
201 Main Street
Fort Worth, TX 75102
American General Corporation Class A common stock 1,548,992(4) 17.3% 11.1%
2929 Allen Parkway Class B common stock 566(5) (5)
Houston, TX 77019
The Equitable Companies
Incorporated Class B common stock 11,225,564(6) 22.1% 8.3%
1290 Avenue of the Americas
New York, NY 10104
Goldman, Sachs & Co. Class B common stock 2,888,474(7) 5.7% 2.2%
85 Broad Street
New York, NY 10004
Invesco PLC Class B common stock 2,620,200(8) 5.2% 2.0%
11 Devonshire Square
London, England EC2M 4YR
Morgan Stanley, Dean Witter, Class B common stock 7,118,753(9) 14.0% 5.3%
Discover & Co.
1585 Broadway
New York, NY 10036
Neuberger & Berman, LLC Class B common stock 5,968,785(10) 11.8% 4.4%
605 Third Ave.
New York, NY 10158-3698
</TABLE>
- ---------------
(1) 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. Shares of Class A common stock may be
converted at any time into 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, such conversions effectively increase the relative
voting power of those Class A stockholders who do not convert.
(2) Based on reports filed with the Commission pursuant to the Exchange Act and
information provided to the Company, 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. Mr.
Bonderman also holds, directly and indirectly, limited partnership
interests in Air Partners. Not included in the amounts shown are (a)
180,483 shares of Class B common stock and 16,000 such shares subject to
director stock options held by Mr. Bonderman, (b) 16,400 shares of Class A
common stock and 682,450 shares of Class B common stock held by Bonderman
Family Limited Partnership ("BFLP"), of which Mr. Bonderman is the general
partner, and (c) 213,110 shares of Class A common stock beneficially owned
by 1992 Air, Inc. On the basis of certain provisions of the Air Partners
limited partnership agreement, limited partners may be deemed the owners of
the shares beneficially owned by Air Partners that are attributable to
their respective limited partnership interests. In addition, such limited
partners, together with Air Partners, may be deemed to be acting as a group
for purposes of the federal securities laws. BFLP, Bondo Air Limited
Partnership ("Bondo Air") and Donald Sturm, a director of the Company, each
holds limited partnership interests in Air Partners. However, each such
party, pursuant to Rule 13d-4 under the Exchange Act, disclaims beneficial
ownership of the shares attributable to their respective interests. The
estate of Larry Hillblom, solely in its capacity as the sole
6
<PAGE> 10
shareholder of Air Saipan, Inc., may be deemed the beneficial owner of
shares held by Air Partners. In addition, the estate of Mr. Hillblom also
holds limited partnership interests in Air Partners. 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. As part of the Air Partners Transaction, the
general partners and limited partners of Air Partners have agreed to
dispose of their partnership interests in Air Partners (and thus the
beneficial ownership of Class A common stock owned by Air Partners) to an
affiliate of Northwest, and BFLP, 1992 Air, Inc. and Air Saipan, Inc. have
agreed to dispose of the Class A common stock of the Company held by them
to such affiliate of Northwest.
(3) Includes 3,039,468 shares issuable upon exercise of warrants held by Air
Partners. Air Partners may be deemed to have shared voting and dispositive
power with respect to all such shares.
(4) The shares reported represent the proportionate interest in shares
beneficially owned by Air Partners, of which American General Corporation
("American General") is a limited partner, including shares issuable upon
exercise of warrants held by Air Partners to purchase 552,630 shares of
Class A common stock. On the basis of certain provisions of the limited
partnership agreement of Air Partners, American General may be deemed to
beneficially own the shares 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. American General may be deemed to
share voting and dispositive power with respect to all such shares.
American General has agreed to dispose of its limited partnership interest
in Air Partners to an affiliate of Northwest as part of the Air Partners
Transaction.
(5) Represents shares held by an indirect wholly owned subsidiary of American
General and less than 1% of the outstanding Class B common stock. American
General may be deemed to share voting and dispositive power with respect to
all such shares. Does not include the 1,548,992 shares of Class A common
stock shown above which are convertible into an equal number of shares of
Class B common stock. See also note 4, above.
(6) As of December 31, 1997, based on a report filed with the Commission
pursuant to the Exchange Act in February 1998 by The Equitable Companies
Incorporated ("Equitable"), AXA-UAP (which beneficially owns a majority
interest in Equitable), four French mutual insurance companies (AXA
Assurances I.A.R.D. Mutuelle, AXA Assurances Vie Mutuelle, Alpha Assurances
Vie Mutuelle and AXA Courtage Assurance Mutuelle (as a group, which
beneficially own a majority interest in AXA-UAP)), and their subsidiaries.
The shares shown represent beneficial ownership by registered broker-dealer
or investment advisor subsidiaries of Equitable. According to such report,
none of such subsidiaries has an interest in the reported securities
representing greater than 5% of the Class B common stock other than
Alliance Capital Management L.P. (8,296,286 shares) and Equitable Life
Assurance Society of the United States (2,929,200 shares). Equitable may be
deemed to have sole voting power with respect to 3,901,759 shares, shared
voting power with respect to 7,315,700 shares, sole dispositive power with
respect to 11,225,490 shares and shared dispositive power with respect to
74 shares.
(7) Based on a report filed with the Commission under the Exchange Act in
February 1998, the shares reported represent the aggregated beneficial
ownership of Goldman, Sachs & Co. ("Goldman") and The Goldman Sachs Group,
L.P. ("Goldman Group"). Goldman made such filing as a registered broker
dealer and investment advisor and Goldman Group filed as a parent holding
company. Each of Goldman and Goldman Group may be deemed to have shared
voting power with respect to 2,758,774 shares, shared dispositive power
with respect to 2,888,474 shares and sole voting and dispositive power with
respect to none of the reported shares.
(8) Based on a report filed with the Commission under the Exchange Act in
February 1998, the shares reported represent the aggregated beneficial
ownership of group members including Aim Management
7
<PAGE> 11
Group Inc., Amvescap Group Services, Inc., Avescap PLC, AVZ, Inc., Invesco
Capital Management, Inc., Invesco Funds Group, Inc., Invesco Management &
Research, Inc., Invesco North American Holdings, Inc., Invesco PLC, Invesco
Realty Advisers, Inc., and Invesco, Inc., each of which is organized under
the laws of England. Such report indicates that Avescap PLC is a parent
holding company. Each entity may be deemed to have shared voting and
dispositive power with respect to all of the reported shares and sole
voting and dispositive power with respect to none of the reported shares.
(9) Based on a report filed with the Commission under the Exchange Act in March
1998, the shares reported represent the aggregated beneficial ownership of
Morgan Stanley, Dean Witter, Discover & Co. ("Morgan Stanley") and its
wholly owned subsidiary Morgan Stanley Asset Management Inc. ("MSAM"),
which reports holdings representing greater than 5% of the Class B common
stock. Each reporting company is a registered investment adviser. Morgan
Stanley may be deemed to have shared voting power with respect to 5,311,253
shares and shared dispositive power with respect to all reported shares.
MSAM may be deemed to have shared voting power with respect to 3,516,700
shares and shared dispositive power with respect to 5,097,200 shares.
Neither reporting company has sole voting or dispositive power with respect
to any of the reported shares.
(10) Based on a report filed with the Commission under the Exchange Act in
February 1998, the shares reported represent the aggregated beneficial
ownership of Neuberger & Berman, LLC and Neuberger & Berman Management
Incorporated. The filing persons reported the amounts as a registered
broker dealer, investment advisor and investment company. The reporting
persons may be deemed to have sole voting power with respect to 2,237,785
shares, shared voting power with respect to 3,692,900 shares, sole
dispositive power with respect to no shares and shared dispositive power
with respect to 5,968,785 shares.
BENEFICIAL OWNERSHIP OF COMMON STOCK BY DIRECTORS AND EXECUTIVE OFFICERS
The following table shows, as of March 27, 1998, the number of shares of
Class B common stock beneficially owned by each of the current directors, the
executive officers named below in the Summary Compensation Table, and all
executive officers and directors as a group. Also reflected in the amounts shown
are shares of Class A common stock, which are convertible into an equal number
of shares of Class B common stock and are set forth in the footnotes to the
table. See also "Voting Rights and Principal Stockholders."
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT
NAME OF BENEFICIAL OWNERS OWNERSHIP(1) OF CLASS
------------------------- ------------ --------
<S> <C> <C>
Thomas J. Barrack, Jr.................................. 21,600(2) *
Lloyd M. Bentsen, Jr................................... 19,160(3) *
Gordon M. Bethune...................................... 335,692(4) *
David Bonderman........................................ 9,411,099(5) 15.9%
Gregory D. Brenneman................................... 308,653(6) *
Patrick Foley.......................................... 1,814,190(7) 3.5%
Lawrence W. Kellner.................................... 92,748(8) *
Douglas H. McCorkindale................................ 16,000(9) *
C.D. McLean............................................ 98,614(10) *
George G. C. Parker.................................... 11,400(11) *
Richard W. Pogue....................................... 2,000(12) *
William S. Price III................................... 8,318,656(13) 14.1%
Jeffery A. Smisek...................................... 108,992(12)(14) *
Donald L. Sturm........................................ 1,125,289(15) 2.2%
Karen Hastie Williams.................................. 16,000(9) *
Charles A. Yamarone.................................... 21,000(16) *
All executive officers and directors as a group........ 12,156,197(17) 20.0%
</TABLE>
- ---------------
* Less than 1%
8
<PAGE> 12
(1) The persons listed have the sole power to vote and dispose of the shares
beneficially owned by them except as otherwise indicated. See also the
previous table and text under the caption "Voting Rights and Principal
Stockholders."
(2) Includes 13,000 shares subject to vested director stock options, and 3,000
shares held in trust for the benefit of Mr. Barrack's children as to which
shares Mr. Barrack disclaims beneficial ownership.
(3) Includes 10,000 shares subject to vested director stock options.
(4) Includes 334,167 shares subject to vested options, or vesting within 60
days after March 27, 1998.
(5) Includes 16,000 shares subject to vested director stock options and 682,450
shares beneficially owned by BFLP. Mr. Bonderman is the sole general
partner of BFLP and has the sole power to vote and dispose of the shares
beneficially owned by it. Also includes the following shares of Class A
common stock: 5,263,188 shares beneficially owned by Air Partners, 213,110
shares beneficially owned by 1992 Air, Inc., 16,400 beneficially owned by
BFLP and 3,039,468 shares subject to warrants owned by Air Partners. Mr.
Bonderman may be deemed to own beneficially the shares beneficially owned
by Air Partners. See generally note 2 to the previous table.
(6) Includes 270,167 shares subject to vested options, or vesting within 60
days after March 27, 1998, and 37,500 restricted shares scheduled to vest
on April 27, 1998.
(7) Includes 16,000 shares subject to vested director stock options and 645,940
shares held by DHL Management Services, Inc. ("DHL"). Also includes 741,165
shares of Class A common stock representing DHL's proportionate interest in
Class A common stock beneficially owned by Air Partners and 411,085 shares
of such stock subject to warrants representing DHL's proportionate interest
in warrants to purchase Class A common stock owned by Air Partners. DHL,
and Mr. Foley as President of DHL, may be deemed to share voting and
dispositive power with respect to all such shares.
(8) Includes 66,668 shares subject to vested options, or vesting within 60 days
after March 27, 1998, and 25,000 restricted shares scheduled to vest on
June 5, 1998.
(9) Represents shares subject to vested director stock options.
(10) Includes 98,168 shares subject to vested options, or vesting within 60 days
after March 27, 1998.
(11) Includes 10,000 shares subject to vested director stock options.
(12) Includes 2,000 shares of Class A common stock.
(13) Includes 16,000 shares of Class B common stock subject to vested director
stock options. Also includes 5,263,188 shares of Class A common stock
beneficially owned by Air Partners, and 3,039,468 shares of Class A common
stock subject to warrants held by Air Partners, which Mr. Price may be
deemed to own beneficially through shared voting and dispositive power as a
Managing Director of Air Partners.
(14) Includes 104,168 shares subject to vested options, or vesting within 60
days after March 27, 1998.
(15) Shares of Class B common stock shown include 16,000 shares subject to
vested director stock options, 60,400 shares held in trusts for the benefit
of Mr. Sturm's children and 130,200 shares held in a charitable trust for
which Mr. Sturm acts as Trustee. Also includes 463,230 shares of Class A
common stock representing Mr. Sturm's proportionate interest in Class A
common stock beneficially owned by Air Partners and 256,929 shares of such
stock subject to warrants representing Mr. Sturm's proportionate interest
in warrants owned by Air Partners. Mr. Sturm is a limited partner of Air
Partners and, as such, may be deemed to share voting and dispositive power
with respect to the shares beneficially owned by Air Partners that are
attributable to such limited partnership interest.
(16) Includes 13,000 shares subject to vested director stock options.
(17) Includes 1,587,441 shares of Class B common stock subject to vested
options, or vesting within 60 days after March 27, 1998, which are held by
executive officers and non-employee directors of the Company and 3,039,468
shares of Class A common stock subject to warrants owned by Air Partners.
See notes 5, 7, 13 and 15. Also includes 5,496,698 shares of Class A common
stock.
9
<PAGE> 13
GENERAL INFORMATION
BOARD OF DIRECTORS MEETINGS
Regular meetings of the Board of Directors are generally held four times
per year, and special meetings are scheduled when required. The Board held four
regular meetings in 1997.
STANDING COMMITTEES OF THE BOARD
The Audit Committee has the authority and power to act on behalf of the
Board of Directors with respect to the appointment of independent auditors for
the Company and with respect to authorizing any special audit or audit-related
activities which, in its discretion, are deemed necessary to perform its
functions. The committee monitors the audit activities of the Company and its
subsidiaries to assure that they have implemented proper internal accounting
controls. The committee, which consists of four non-employee directors, met
three times in 1997.
The Executive Committee exercises certain powers of the Board of Directors
between Board meetings. The committee, which consists of two non-employee
directors and one officer-director of the Company, held no formal meetings in
1997, but took numerous actions by unanimous written consent.
The Finance and Strategy Committee reviews the Company's annual budget, its
short and long-term strategic plans and its plans for raising capital and
increasing liquidity, and makes recommendations to the Board of Directors
regarding implementation of those plans as the committee deems appropriate. The
committee, which consists of two officer-directors and three non-employee
directors, met once in 1997.
The Human Resources Committee has the authority and power to act on behalf
of the Board of Directors with respect to all matters relating to the employment
of senior officers by the Company and its subsidiaries, including but not
limited to approval of compensation, benefits, incentives and employment
contracts and administers the 1994 Plan, the 1997 Plan, the Company's employee
stock purchase and profit sharing plans and the Executive Bonus Program. The
committee, which consists of four non-employee directors, met two times in 1997.
The Company does not have a nominating committee.
During 1997, each director of the Company attended all of the meetings of
the Board and each standing committee of which he or she was a member.
COMPENSATION OF DIRECTORS
Members of the Board of Directors who are not full-time employees of the
Company are paid $20,000 per year, $2,000 (or $3,000 for the chairperson) for
each Board and committee meeting physically attended, $1,000 for each Board
meeting attended by telephone, and $500 for each committee meeting attended by
telephone. Directors who conduct Company business in their capacities as
directors on behalf of the Company at the request of the Board or the Chairman
of the Board are paid (i) for telephone participation in Board and Committee
meetings as if they were physically present, if their conducting Company
business makes it reasonably impracticable for them to attend the meeting in
person, and (ii) $3,000 per day spent outside the United States while conducting
such Company business. An additional $2,000 was paid in 1997 to non-employee
members of the Executive Committee to compensate them for substantial attention
to substantive Company matters not addressed in a meeting of the Executive
Committee. The Board authorized compensation for members of a special committee
formed to review the Air Partners Transaction and related matters in the amount
of $2,000 for each meeting attended personally or by telephone and a one-time
fee of $25,000 for the chairman of the committee in recognition of the
substantial demands placed on his time while serving as such chair. The
committee, which was comprised of Messrs. Bentsen, McCorkindale, Parker
(Chairman), Pogue and Yamarone, met twice in 1997. Stock options relating to
5,000 shares of Class B common stock are granted to non-employee directors
following each annual meeting of stockholders and bear exercise prices equal to
the fair market value of such stock on such date. A grant of options to purchase
5,000 shares of Class B common stock is also made to directors who are first
elected to the Board other than at an annual
10
<PAGE> 14
meeting of stockholders. In addition, each non-employee director receives
lifetime flight benefits, comprised of space-available personal and family
flight passes, a travel card permitting positive space travel by the director,
the director's family and certain other individuals (which is taxable to the
director, subject to the payment of certain of such taxes by the Company during
Board service), a frequent flyer card and an airport lounge card. During 1997,
the value imputed by the Company to the use of such flight benefits by the
Company's non-employee directors, including the payment of related taxes by the
Company, ranged from approximately $1,000 to $8,000.
Full-time employees of the Company who serve as directors receive
reimbursement of expenses incurred in attending meetings, in addition to flight
and other benefits provided in their employment agreements or shared generally
by other employees of the Company.
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
Company's current executive officers:
<TABLE>
<CAPTION>
NAME, AGE AND POSITION TERM OF OFFICE AND BUSINESS EXPERIENCE
---------------------- --------------------------------------
<S> <C>
GORDON M. BETHUNE, age 56..................... Chairman of the Board and Chief Executive
Chairman of the Board and Officer since September 1996. Director since
Chief Executive Officer August 1994; President and Chief Executive
Officer (November 1994-September 1996);
President and Chief Operating Officer
(February 1994-November 1994); various
positions with The Boeing Company commencing
in 1988, including Vice President and Gen-
eral Manager of the Commercial Airplane Group
Renton Division, Vice President and General
Manager of the Customer Services Division and
Vice President of Airline Logistics Support.
GREGORY D. BRENNEMAN, age 36.................. President and Chief Operating Officer since
President, Chief Operating Officer September 1996. Director since June 1995;
and Director Chief Operating Officer (May 1995-September
1996); Consultant to the Company
(February-April 1995); various positions,
including Vice President, with Bain & Com-
pany, Inc. (consulting firm) for more than
five years; Director of Browning-Ferris
Industries, Inc.
LAWRENCE W. KELLNER, age 39................... Executive Vice President and Chief Financial
Executive Vice President and Officer since November 1996. Senior Vice
Chief Financial Officer President and Chief Financial Officer (June
1995-November 1996); Executive Vice President
and Chief Financial Officer of American
Savings Bank, F.A. (November 1992-May 1995);
Director of Belden & Blake Corporation.
C.D. McLEAN, age 56........................... Executive Vice President -- Operations since
Executive Vice President -- Operations November 1996. Senior Vice
President -- Operations (April 1994-November
1996); Executive Vice Presi-
dent -- Operations (January 1992-March 1994)
of Leisure Air, Inc.
JEFFERY A. SMISEK, age 43..................... Executive Vice President, General Counsel and
Executive Vice President, Secretary since November 1996. Senior Vice
General Counsel and Secretary President and Secretary (April 1995-November
1996); General Counsel since March 1995;
Partner, Vinson & Elkins L.L.P. (law firm)
prior to March 1995 for more than five years;
Director of Tuboscope Inc.
</TABLE>
11
<PAGE> 15
<TABLE>
<CAPTION>
NAME, AGE AND POSITION TERM OF OFFICE AND BUSINESS EXPERIENCE
---------------------- --------------------------------------
<S> <C>
MICHAEL H. CAMPBELL, age 49................... Senior Vice President -- Human Resources and
Senior Vice President -- Human Labor Relations since January 1997. Partner,
Resources and Labor Relations Ford & Harrison LLP (law firm) 1978 to
December 1997.
MARK A. ERWIN, age 42......................... Senior Vice President -- Airport Services
Senior Vice President -- Airport Services since April 1995. Vice President -- Newark Hub
(1994-1995); Staff Vice President -- Airport
Services Planning (1991-1994); Staff Vice
President -- International Division
(1990-1991).
J. DAVID GRIZZLE, age 43...................... Senior Vice President -- Corporate Development
Senior Vice President -- Corporate since November 1996. Vice
Development President -- Alliance Development (April
1995-November 1996); Vice President -- Asia
and Pacific Development (May 1993-April 1995);
various positions with the Company prior to
May 1993 for more than five years.
GEORGE L. MASON, age 51....................... Senior Vice President -- Technical Operations
Senior Vice President -- Technical since November 1996. Vice
Operations President -- Technical Operations (March
1994-November 1996); Vice Presi-
dent -- Operations of Tramco Inc. (a division
of BF Goodrich Aerospace) (February 1992-March
1994).
JAMES B. REAM, age 42......................... Senior Vice President -- Asia since March
Senior Vice President -- Asia 1998; President and Chief Operating Officer of
Continental Micronesia, Inc. ("CMI") (October
1996-present); Executive Vice President and
Chief Operating Officer of CMI (June
1996-October 1996); Vice President -- Finance
of Continental Airlines, Inc. (December
1994-June 1996); Managing
Director -- Financial Planning of American
Airlines, Inc. (1992-1994).
BONNIE S. REITZ, age 45....................... Senior Vice President -- Sales and
Senior Vice President -- Sales and Distribution since November 1996. Vice
Distribution President -- Marketing and Sales (August
1994-November 1996); Vice Presi-
dent -- Marketing and Sales of System One
Information Management, Inc. (1989-1994).
BARRY P. SIMON, age 55........................ Senior Vice President -- International since
Senior Vice President -- International November 1996. Senior Vice President -- Europe
(June 1995-November 1996); Senior Vice Presi-
dent -- Strategic Business Units (April 1995-
June 1995); Senior Vice President -- Widebody
Division (August 1994-April 1995); Senior Vice
President and General Counsel (June
1990-August 1994), except Senior Vice
President, General Counsel and Director, GAF
Corporation (January-March 1993).
KUNIAKI TSURUTA, age 62....................... Senior Vice President -- Purchasing and
Senior Vice President -- Purchasing and Materials Services since November 1996. Vice
Materials Services President -- Purchasing (April 1994-November
1996); President and Chief Operating Officer
of Piedmont Aerospace, Inc. (February
1992-April 1994).
</TABLE>
12
<PAGE> 16
<TABLE>
<CAPTION>
NAME, AGE AND POSITION TERM OF OFFICE AND BUSINESS EXPERIENCE
---------------------- --------------------------------------
<S> <C>
JANET P. WEJMAN, age 40....................... Senior Vice President and Chief Information
Senior Vice President and Chief Officer since November 1996. Vice President
Information Officer and Chief Information Officer (February
1996-November 1996); President, North Western
Aviation, Inc. (flight school in Chicago,
Illinois) (since August 1995); independent
consultant (August 1995- February 1996);
Assistant Vice President of System Technology
and User Training, Chicago & North Western
Railroad (August 1992-August 1995).
</TABLE>
There is no family relationship between any of the executive officers. All
officers are appointed by the Board of Directors to serve until their
resignation, death or removal.
COMPENSATION OF EXECUTIVE OFFICERS
The following tables set forth (i) the aggregate amount of remuneration
paid by the Company during 1997, 1996 and 1995 to the chief executive officer
and the four other most highly compensated executive officers of the Company in
1997, (ii) the number of shares of Class B common stock subject to options
granted to such individuals during 1997 and the Black-Scholes value thereof and
(iii) information regarding stock options exercised in 1997 and the value of the
options held by such individuals at the end of 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION -----------------------
---------------------------------- RESTRICTED SECURITIES ALL OTHER
OTHER ANNUAL STOCK UNDERLYING ANNUAL
NAME AND PRINCIPAL POSITION YEAR(1) SALARY BONUS COMPENSATION AWARDS(2) OPTIONS COMPENSATION
--------------------------- ------- -------- -------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gordon M. Bethune.................. 1997 $755,750 $937,500 $ 2,005(3) $ 0 150,000 $ 0
Chairman of the Board and 1996 604,755 882,292 1,052(3) 0 220,000 1,572,500(4)
Chief Executive Officer 1995 561,012 550,000 278,638(5) 0 50,000(6) 522,978(7)
Gregory D. Brenneman............... 1997 $583,410 $718,749 $ 9,011(3) $ 0 90,000 $ 0
President and Chief Operating 1996 535,500 787,502 5,957(3) 0 154,000 776,563(4)
Officer 1995 338,726 354,039 56,459(8) 1,200,000 550,000 79,016(9)
Lawrence W. Kellner................ 1997 $427,172 $525,000 $ 7,279(3) $ 0 60,000 $ 0
Executive Vice President 1996 390,172 569,128 7,106(3) 0 70,000 0
and Chief Financial Officer 1995 193,369 438,500(10) 17,928(3) 862,500 150,000 32,718(9)
C.D. McLean........................ 1997 $381,600 $468,752 $ 3,511(3) $ 0 60,000 $ 0
Executive Vice President 1996 321,625 473,438 3,586(3) 0 70,000 0
-- Operations 1995 305,604 300,000 514(3) 115,000 50,000(11) 0
Jeffery A. Smisek.................. 1997 $355,992 $437,500 $ 9,561(3) $ 0 60,000 $ 0
Executive Vice President, 1996 316,415 465,625 4,766(3) 0 70,000 0
General Counsel and Secretary 1995 205,166 213,911 3,869(3) 115,000 150,000 0
</TABLE>
- ---------------
(1) Messrs. Brenneman, Kellner and Smisek commenced employment with the Company
in April 1995, June 1995 and March 1995, respectively.
(2) Determined based on the closing price of the Class B common stock on the
date the restricted shares were granted. At the end of 1997, the aggregate
number of restricted shares held by Messrs. Bethune, Brenneman, Kellner,
McLean and Smisek was zero, 37,500, 25,000, zero and zero, respectively,
and the value of such shares was $0, $1,804,688, $1,203,125, $0 and $0,
respectively, based on the December 31, 1997 closing price of the Class B
common stock of $48.125. The shares held by Mr. Brenneman vested in 25%
increments on October 27, 1995 and April 27, 1996 and 1997 and the
remaining shares are scheduled to vest on April 27, 1998. The shares held
by Mr. Kellner vested in 25% increments on December 6, 1995 and June 5,
1996 and 1997 and the remaining shares are scheduled to vest on June 5,
1998. The shares held by Messrs. McLean and Smisek vested in 50% increments
on April 4, 1996 and
13
<PAGE> 17
1997. Although the Company has paid no dividends on its common stock, any
dividends would be payable upon both vested and non-vested shares. All
unvested restricted stock will vest upon the closing of the Air Partners
Transaction. See "Recent Developments."
(3) Represents a tax adjustment relating to (i) certain moving expenses paid by
the Company and/or (ii) certain travel benefits provided by the Company.
(4) Represents payments made to Messrs. Bethune and Brenneman in connection
with the waiver of certain rights under their respective employment
agreements.
(5) Represents a tax adjustment relating to termination of certain supplemental
retirement plan benefits ($277,159) and certain travel benefits provided by
the Company ($1,479). See note 7 below.
(6) Does not include an option to purchase 250,000 shares granted to Mr.
Bethune in 1994 that was repriced in 1995 from $7.0625 per share to $5.50
per share (which exceeded the market value of the Class B common stock on
the date of such adjustment) to comply with the terms of Mr. Bethune's
agreements with the Company.
(7) Represents payment in lieu of certain supplemental executive retirement
plan benefits previously provided under Mr. Bethune's employment agreement.
(8) Represents a tax adjustment relating to (i) certain moving expenses paid by
the Company, (ii) reimbursement for other costs of Mr. Brenneman's
relocation to Houston, Texas and (iii) certain travel benefits provided by
the Company.
(9) Represents certain moving expenses paid by the Company in connection with
the named executives' relocation to Houston, Texas and, for Mr. Brenneman,
other costs of Mr. Brenneman's relocation to Houston, Texas (see note 8).
(10) Includes $176,000 signing bonus.
(11) Does not include an option to purchase 100,000 shares granted to Mr. McLean
in 1994 that was repriced in 1995 from $10.6875 to $8.00 per share.
OPTION GRANTS DURING 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE GRANT DATE
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME GRANTED(1) FISCAL YEAR ($/ SHARE) DATE VALUE(2)
---- ---------- --------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Gordon M. Bethune........ 150,000 7.8% $28.625 2/28/02 $1,175,155
Gregory D. Brenneman..... 90,000 4.7 28.625 2/28/02 705,093
Lawrence W. Kellner...... 60,000 3.1 28.625 2/28/02 470,062
C.D. McLean.............. 60,000 3.1 28.625 2/28/02 470,062
Jeffery A. Smisek........ 60,000 3.1 28.625 2/28/02 470,062
</TABLE>
- ---------------
(1) The options vest in annual one-third increments commencing February 28,
1998. All such options will vest upon the closing of the Air Partners
Transaction. See "Recent Developments."
(2) Estimated using the Black-Scholes option pricing model. Such model requires
the input of highly subjective assumptions, including expected stock price
volatility. The model was developed for use in estimating the fair value of
traded options, which have no vesting restrictions and are fully
transferable, unlike the Company's employee stock options. These
differences, and changes in the subjective input assumptions, can materially
affect the estimated values shown. Consequently, such model does not
necessarily provide a reliable estimate of the options' value. The estimated
values shown are based on the following input assumptions: risk-free
interest rate of 6.1%; dividend yield of 0%; volatility factor of the
expected market price of the Company's common stock of 34%; and a weighted
average expected life of the options of 2.5 years.
14
<PAGE> 18
AGGREGATED OPTION EXERCISES IN 1997 AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS AT
SHARES OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END(1)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gordon M. Bethune......... 137,500 $3,479,688 73,334 434,166 $1,686,471 $12,072,123
Gregory D. Brenneman...... 137,500 3,222,656 51,334 330,166 1,147,096 9,566,342
Lawrence W. Kellner....... 37,500 1,012,500 23,334 144,166 541,681 3,734,569
C.D. McLean............... 37,500 900,000 23,334 144,166 541,681 3,758,006
Jeffery A. Smisek......... 37,500 979,375 23,334 144,166 541,681 3,842,381
</TABLE>
- ---------------
(1) Determined based on the closing price of the Class B common stock on
December 31, 1997 of $48.125.
EMPLOYMENT AGREEMENTS
Continental has entered into an employment agreement with Mr. Bethune
relating to his service as an officer of the Company. The agreement provides for
an annual base salary of not less than $750,000, participation in any Company
cash bonus program at the maximum level available to any executive, a
supplemental executive retirement plan, flight benefits and certain other
matters. Pursuant to the supplemental executive retirement plan, Mr. Bethune
receives a base retirement benefit in the form of an annual straight life
annuity in an amount equal to the product of (1) 1.6% times (2) the number of
his credited years of service (with the executive receiving an additional three
years of credited service if he receives a severance payment under his
employment agreement) times (3) his final average compensation. Amounts payable
under the Company's Retirement Plan are offset against such retirement benefit.
The agreement may be terminated at any time by either party, with or without
cause. The agreement is in effect until June 6, 1999 and is automatically
extended for an additional three-year period on each successive third
anniversary of such date, unless earlier terminated. If Mr. Bethune's employment
is terminated (A) because the Company elects to permit his employment agreement
to expire, (B) by the Company for reasons other than death, incapacity, cause or
material breach of the agreement, or (C) by Mr. Bethune due to certain specified
reasons, including a material diminution in responsibility, or for any reason
following a Change in Control (as defined in the 1994 Plan) then the Company
shall (i) cause all options and shares of restricted stock awarded to Mr.
Bethune to vest immediately upon such termination, (ii) make a lump-sum cash
severance payment to Mr. Bethune (calculated as described below), (iii) provide
Mr. Bethune with out-placement services and (iv) provide Mr. Bethune and his
eligible dependents with certain insurance benefits. In addition, following
termination of his employment by the Company for any reason, or if Mr. Bethune
elects to terminate his employment for any reason, benefits under the
supplemental executive retirement plan will continue to be payable, and Mr.
Bethune will be provided flight benefits substantially identical to those
currently provided to non-employee directors. The severance payment referred to
above is equal to three times the sum of (a) Mr. Bethune's then current annual
base salary (of not less than $750,000) and (b) a deemed annual bonus equal to
the Bonus Percentage (defined below) of such salary. The "Bonus Percentage" is
equal to the annual percentage of base salary (i.e., 0% to 125%) paid or payable
under the Company's Executive Bonus Program with respect to the most recently
ended fiscal year prior to the executive's termination of employment.
Additionally, the Company is required to maintain life insurance on his behalf
in an amount equal to the severance payment described above. Mr. Bethune is
indemnified by the Company for his tax obligations with respect to payments
under the agreement or otherwise to the extent that such payments are subject to
an excise or other special additional tax that would not have been imposed
absent such payments. See also "Recent Developments" and "Certain Transactions."
Continental has entered into an employment agreement with Mr. Brenneman
relating to his service as an officer of the Company. The agreement provides for
an annual base salary of not less than $575,000, participation in any Company
cash bonus program at the maximum level available to any executive, flight
benefits and certain other matters. The agreement may be terminated at any time
by either party, with or without cause. The agreement is in effect until June 6,
1999 and is automatically extended for an additional
15
<PAGE> 19
three-year period on each successive third anniversary of such date. If Mr.
Brenneman's employment is terminated (A) because the Company elects to permit
his employment agreement to expire, (B) by the Company for reasons other than
death, incapacity, cause or material breach of the agreement, or (C) by Mr.
Brenneman due to certain specified reasons, including a material diminution in
responsibility, or for any reason following a Change in Control (as defined in
the 1994 Plan) then the Company shall (i) cause all options and shares of
restricted stock awarded to Mr. Brenneman to vest immediately upon such
termination, (ii) make a lump-sum cash severance payment to Mr. Brenneman
(calculated as described below), (iii) provide Mr. Brenneman with out-placement
services and (iv) provide Mr. Brenneman and his eligible dependents with certain
insurance benefits. In addition, following termination of his employment by the
Company for any reason, or if Mr. Brenneman elects to terminate his employment
for any reason, he will be provided with flight benefits substantially identical
to those currently provided to non-employee directors. The severance payment is
equal to three times the sum of (a) Mr. Brenneman's then current annual base
salary (of not less than $575,000) and (b) a deemed annual bonus equal to the
Bonus Percentage of such salary. Additionally, the Company is required to
maintain life insurance on his behalf in an amount equal to the severance
payment described above. Mr. Brenneman is indemnified by the Company for his tax
obligations with respect to payments under the agreement or otherwise to the
extent that such payments are subject to an excise or other special additional
tax that would not have been imposed absent such payments. See also "Recent
Developments" and "Certain Transactions."
Continental has entered into an employment agreement with each of Messrs.
Kellner, McLean and Smisek, which agreements contain substantially identical
terms and provide for an annual base salary of not less than $420,000, $375,000
and $350,000, respectively, participation in any Company cash bonus program at
the maximum level available to any executive, flight benefits and certain other
matters. Each of the agreements may be terminated at any time by either party,
with or without cause. Each agreement is for a four-year term of employment
ending in June 1999. If the applicable executive's employment is terminated (A)
by the Company for reasons other than death, incapacity, cause or material
breach of the agreement, or (B) by the executive for certain specified reasons,
including a material diminution in responsibility, then the Company shall (i)
make a lump-sum cash severance payment to the executive (calculated as described
below), (ii) provide the executive with out-placement services and (iii) provide
the executive and his eligible dependents with certain insurance benefits. In
addition, following any such termination (or expiration of the agreement), or if
the executive elects to terminate his employment for any reason, each agreement
provides the executive with flight benefits substantially identical to those
currently provided to non-employee directors. The severance payment referenced
above is equal to the product of (A) the sum of (1) the executive's then current
annual base salary and (2) a deemed annual bonus equal to the Bonus Percentage
of such salary, multiplied by (B) a fraction, the numerator of which is the
number of months in the severance period (described below) and the denominator
of which is 12. If the executive's employment is terminated within two years
after a Change in Control (as defined in the 1994 Plan) the severance period
means the period commencing on the date of termination and continuing for 36
months. If the executive's employment is terminated prior to a Change in Control
or after the date which is two years after a Change in Control, the severance
period means the period commencing on the date of termination and continuing for
24 months. Each of the executives is indemnified by the Company for his tax
obligations with respect to payments under his agreement or otherwise to the
extent that such payments are subject to an excise or other special additional
tax that would not have been imposed absent such payments. See also "Recent
Developments" and "Certain Transactions."
RETIREMENT PLAN
The Continental Airlines, Inc. Retirement Plan (the "Retirement Plan"),
adopted in 1988, is a noncontributory, defined benefit pension plan.
Substantially all employees of Continental and certain designated affiliates are
eligible to participate in the Retirement Plan. The following table represents
the estimated annual benefits payable in the form of a single life annuity to
participants in specified service and compensation categories under the
Retirement Plan. Under the Retirement Plan, final average compensation means the
average of the participant's highest five consecutive years of compensation
during the last ten calendar years with Continental and its affiliates. Final
average compensation includes regular pay and shift
16
<PAGE> 20
differential, but excludes bonuses, overtime, severance pay, incentive and other
special forms of pay. Regulations under the Internal Revenue Code of 1986, as
amended (the "Code"), limit the compensation covered by the Retirement Plan to
$160,000 in 1997 and 1998. This limit is indexed and is increased from time to
time in accordance with IRS regulations. The table reflects benefit amounts
calculated using the compensation limit and average social security wage base in
effect for participants who reach age 65 in 1998.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
---------------------------------------------------------
FINAL AVERAGE COMPENSATION 5 10 15 20 25 30
-------------------------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
$100,000.................... $ 7,541 $15,081 $22,622 $30,163 $37,703 $45,244
$125,000.................... 9,591 19,181 28,772 38,363 47,953 57,544
$150,000.................... 11,641 23,281 34,922 46,563 58,203 69,844
$160,000.................... 12,461 24,921 37,382 49,843 62,303 74,764
</TABLE>
The estimated credited years of service for Messrs. Bethune, Brenneman,
Kellner, McLean and Smisek are four years, three years, three years, four years
and three years, respectively. In addition, Mr. Bethune's employment agreement
provides for certain supplemental retirement benefits, which benefits will be
offset by amounts received under the Retirement Plan. Under the Retirement Plan,
a retired participant's annual benefit commencing at or after the normal
retirement age of 65 is equal to 1.19% of the participant's final average
compensation plus 0.45% of the participant's final average compensation in
excess of the average Social Security wage base, multiplied by the participant's
years of participation up to a maximum of 30 years.
17
<PAGE> 21
PERFORMANCE GRAPH
The following graph compares the cumulative total return on the Class B
common stock (the more widely traded of the Company's common stocks) with the
cumulative total returns (assuming reinvestment of dividends) on the Standard &
Poor's Airline Index and the Standard & Poor's 500 Stock Index as if $100 were
invested in the Class B common stock and each such index on July 14, 1993, the
date on which the Company's common stock began trading on the New York Stock
Exchange on a "when-issued" basis.
<TABLE>
<CAPTION>
Measurement Period Continental S&P Airline S&P 500
(Fiscal Year Covered) Airlines Index Index
<S> <C> <C> <C>
7/14/93 100 100 100
12/31/93 79.61 108.56 104.97
12/30/94 35.92 75.75 106.35
12/29/95 168.93 110.63 146.32
12/31/96 219.42 121.28 179.92
12/31/97 373.79 204.11 239.39
</TABLE>
<TABLE>
<CAPTION>
7/14/93 12/31/93 12/30/94 12/29/95 12/31/96 12/31/97
------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Continental Airlines... $100 $ 79.61 $ 35.92 $168.93 $219.42 $373.79
S&P Airline Index...... $100 $108.56 $ 75.75 $110.63 $121.28 $204.11
S&P 500 Index.......... $100 $104.97 $106.35 $146.32 $179.92 $239.39
</TABLE>
18
<PAGE> 22
EXECUTIVE COMPENSATION REPORT OF THE HUMAN RESOURCES COMMITTEE
To the Stockholders of Continental Airlines, Inc.:
This report to the stockholders is submitted by the Human Resources
Committee of the Board of Directors of Continental Airlines, Inc. (the
"Committee").
General Compensation Strategy
In its previous reports to stockholders, the Committee explained the
process it used to develop its compensation strategy and the nature of that
strategy. In 1997, the Committee continued its compensation strategy, which is
to:
- Develop an appropriate linkage between compensation levels and the
creation of stockholder value
- Provide that the total compensation program will be able to attract,
motivate and retain employees of outstanding talent
- Achieve competitiveness of total compensation
- Focus on variable pay to provide incentive to improve performance
In considering appropriate executive compensation levels for 1997, the
Committee applied these factors to available marketplace compensation data for
U.S. airlines of comparable size, including industry peer airlines shown in the
performance graph. The elements of compensation included in the competitive
analysis were base salaries, annual incentives and long-term incentives.
Having generally enhanced executive base salaries to further the
competitiveness of total compensation in 1996, the Committee did not raise
executive salaries across the board in 1997. The salaries of certain officers
who were promoted at the end of 1996 were adjusted to reflect their advancement.
The salaries of Messrs. Brenneman and Kellner were also modestly increased, but
the Committee left the primary emphasis for executive officer compensation on
incentive pay. The Company continued to raise the salaries and wages of
non-executive employees to be more competitive with industry standards, and in
September 1997 the Company announced its intention to bring all employees to
industry standard wages over a three-year period. Nearly all employees other
than officers of the Company are incentivized through the Company's profit
sharing plan and on-time arrival bonus structure, and all employees are able to
participate in the Company's success through participation in the employee stock
purchase plan approved by stockholders at the 1997 annual meeting. Executives'
incentives are linked to the Company's performance through the quarterly
Executive Bonus Program and through the award of stock options. No shares of
restricted stock were awarded in 1997.
In conducting the programs applicable to executives, the Committee
considered the effects of Section 162(m) of the Code, which denies publicly held
companies a tax deduction for annual compensation in excess of one million
dollars paid to their chief executive officer or any of their four other most
highly compensated executive officers who are employed on the last day of a
given year, unless their compensation is based on performance criteria that are
established by a committee of outside directors and approved, as to their
material terms, by such company's stockholders. Stock options under the 1997
Stock Incentive Plan, and incentive compensation received under the Company's
Executive Bonus Program, are designed to qualify as performance-based
compensation under Section 162(m), and the Committee believes that these items
should be excluded from the limitation on deductibility. However, other awards,
such as restricted stock grants that have been made in previous years, do not so
qualify and are subject to the limitation on deductibility. Although certain
amounts recorded as compensation by the Company to certain of the most highly
compensated officers of the Company with respect to 1997 were limited by Section
162(m), such limitation did not result in the payment of increased taxes by the
Company in 1997 due to the Company's significant net operating loss
carryforwards.
Base Salaries. As noted above, the Company raised certain executive
salaries in 1997 in connection with enhanced responsibilities and to further
align the salaries of certain executives with their peers in the industry. As
discussed below, this includes the salary of Mr. Bethune. In addition to their
retention elements, base salary levels are also dependent on the performance of
each individual employee over time. Thus, employees
19
<PAGE> 23
who sustain higher levels of performance over time will have correspondingly
higher salaries. Salary adjustments are based on general levels of market
increases in salaries, individual performance, overall financial results and
changes in job duties and responsibilities. All base salary increases are based
on a philosophy of pay-for-performance.
Incentive Compensation. The Committee believes that appropriate base
salaries must be coupled with incentive compensation that not only attracts and
retains qualified employees, but rewards them for increased performance.
Compensation linked to the performance of the Company's common stock is one of
the best incentives to align employees' interests with those of stockholders and
to enhance performance. The Company maintains an employee stock purchase plan
open to all employees of the Company and a stock incentive plan, each of which
is designed to encourage employees, including the Company's executive officers
and key employees, to identify their interests with those of stockholders and
enhance the Company's performance. In addition, the Company maintains a profit
sharing plan, under which 15% of the Company's pre-tax earnings (before unusual
or nonrecurring items) is distributed to substantially all non-management
employees of the Company (other than employees whose collective bargaining
agreement provides otherwise or who participate in profit sharing arrangements
required by local law) each year on a pro rata basis according to base salary.
Based on 1997 earnings, the Company distributed approximately $105 million in
profit sharing payments to its employees in February 1998. Finally, the Company
maintains a management bonus program and a non-management on-time performance
bonus to focus employees on common goals and to encourage them to work together
to achieve profitability. The Committee believes that these incentives play a
significant part in the Company's continuing improvement and success.
1997 Executive Compensation
Base Salaries. As described above, based in part on the Company's continued
operational and financial performance in 1996 and on the salaries of their peers
in the industry, two of the executive officers named above in the Summary
Compensation Table received modest salary increases in 1997. As described below,
Mr. Bethune also received a base salary increase. As discussed above, certain
other executive officers also received salary increases in 1997 in accordance
with the criteria set forth above under "Base Salaries."
Stock Incentives. Consistent with its compensation strategy, the Company
awarded stock options to executive officers and key employees during 1997.
Options granted to the five most highly compensated officers, as well as stock
option exercises by those individuals, are described in the Summary Compensation
and other tables included above. Options granted during 1997 bear five-year
terms and vest ratably over three years. The Company made no restricted stock
grants in 1997.
Other Plans. The Company's Executive Bonus Program makes the Company's
executive officers and certain additional officers nominated by the Chief
Executive Officer and approved by the Committee eligible to receive on a fiscal
quarterly basis a cash bonus of up to 125% of their salary for such quarter
based on the Company's cumulative net income earned through such quarter as
compared to the cumulative net income targeted through such quarter in the
Company's annual financial plan approved by the Board. The stockholders approved
the plan to ensure that amounts received thereunder by the Chief Executive
Officer and the other four most highly compensated executive officers would be
eligible for deduction by the Company under Section 162(m) of the Code. The
Company maintained a separate annual bonus program for other officers and
management employees throughout 1997.
20
<PAGE> 24
1997 CEO Compensation
In early 1997, the Committee increased Mr. Bethune's salary from $600,000
to $750,000 in light of (i) Mr. Bethune's performance in leading the Company's
turnaround, (ii) the salaries of Mr. Bethune's peers in the industry and (iii)
the record financial and operating results achieved by the Company in both 1995
and 1996. The Committee believes the increase was appropriate under the base
salary criteria detailed above and recognizes Mr. Bethune's value to the
Company. The Committee does not anticipate such significant salary increases for
Mr. Bethune in the future. In addition, in February 1997, the Committee awarded
Mr. Bethune a stock option to purchase 150,000 shares of Class B common stock.
Respectfully submitted,
Human Resources Committee
Thomas J. Barrack, Jr., Chairman
Douglas McCorkindale
George G. C. Parker
Charles A. Yamarone
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's executive compensation programs are administered by the Human
Resources Committee of the Board of Directors. The committee is currently
composed of four independent, non-employee directors, and no member of the
committee has been an officer or employee of the Company or any of its
subsidiaries.
CERTAIN TRANSACTIONS
Until its divestment of the Company's shares in January 1997, Air Canada
owned in excess of five percent of the Company's Class B common stock. In
connection with Air Canada's investment in the Company, Air Canada, Air Partners
and the Company agreed to identify and pursue opportunities to achieve cost
savings, revenue enhancement or other synergies from areas of joint operation
between the Company and Air Canada. The Company and Air Canada entered into a
series of synergy agreements, primarily in the areas of aircraft maintenance and
commercial and marketing alliances (including agreements regarding coordination
of connecting flights). The Company believes that the synergy agreements
allocate potential benefits to the Company and Air Canada in a manner that is
equitable and commercially reasonable, and contain terms at least as favorable
to the Company as could be obtained from unrelated parties. As a result of these
agreements, during 1997 Continental paid Air Canada $30 million, and Air Canada
paid Continental $16 million, primarily relating to aircraft maintenance.
In April 1997, Continental redeemed for cash all of the 460,247 outstanding
shares of its Series A 12% Cumulative Preferred Stock held by an affiliate of
Air Canada for $100 per share plus accrued dividends thereon. The redemption
price, including accrued dividends, totaled $48 million.
On June 2, 1997, the Company purchased for $94 million from Air Partners
warrants to purchase 3,842,542 shares of Class B common stock (representing a
portion of the total warrants held by Air Partners). The purchase price
represented the intrinsic value of the warrants (the difference between the
closing market price of the Class B common stock on May 28, 1997 ($34.25) and
the applicable exercise price). The Company anticipates that Air Partners will
exercise warrants to purchase 3,039,468 shares of Class A common stock
(representing the remaining warrants held by Air Partners) on or before April
27, 1998 (the expiration date of such warrants). The aggregate exercise price of
such warrants is approximately $28.4 million.
In July 1997, the Company purchased the rights of United Micronesia
Development Association, Inc. ("UMDA"), a corporation controlled by the estate
of Larry Hillblom, to receive future payments under a services agreement between
UMDA and Continental's then 91% indirectly owned subsidiary, Continental
Micronesia, Inc. ("CMI") (pursuant to which CMI was to pay UMDA approximately 1%
of the gross revenues of CMI, as defined, through January 1, 2012,) and UMDA's
9% interest in the parent of CMI, Air
21
<PAGE> 25
Micronesia, Inc. ("AMI"), terminated the Company's obligations to UMDA under a
settlement agreement entered into in 1987, and terminated substantially all of
the other contractual arrangements between the Company, AMI and CMI, on the one
hand, and UMDA on the other hand, for an aggregate consideration of $73 million.
CMI paid UMDA $1.5 million for the year ended December 31, 1997 under the terms
of the services agreement.
The Company and America West Airlines, Inc. ("America West"), in which Mr.
Bonderman holds a significant interest, entered into a series of agreements
during 1994 related to code-sharing and ground handling that have created
substantial benefits for both airlines. The services provided are considered
normal to the daily operations of both airlines. As a result of these
agreements, Continental paid America West $16 million and America West paid
Continental $23 million in 1997.
The Company's Senior Vice President -- Human Resources and Labor Relations,
Michael H. Campbell, was a partner with the law firm of Ford & Harrison LLP
through December 1997. During 1997, the Company paid Ford & Harrison LLP legal
fees of $37,500 per month and provided no cash compensation to Mr. Campbell
until November 1997.
Karen Hastie Williams is a partner of Crowell & Moring, a law firm that has
provided services to the Company and its subsidiaries for many years. The
Company's fee arrangement with Crowell & Moring is negotiated on the same basis
as the Company's arrangements with its other outside legal counsel and is
subject to the same terms and conditions. The fees paid by the Company to
Crowell & Moring are comparable to those it pays to other law firms for similar
services.
Each of Messrs. Bethune, Brenneman, Kellner, McLean and Smisek has entered
into a Stay Bonus Agreement with the Company, pursuant to which the Company has
agreed to pay a stay bonus of $6,660,000 in the case of Mr. Bethune, $4,500,000
in the case of Mr. Brenneman, and $2,250,000 in the case of each of Messrs.
Kellner, McLean and Smisek, payable in equal monthly installments over the
fifteen-month period following the closing of the Air Partners Transaction;
provided that the applicable executive remains in the employ of the Company
during the month in which the payment is made or, if the executive's employment
is terminated by the Company, such termination is not for cause. In addition,
the Company has agreed to make charitable contributions in the executive's name,
including to the We Care Trust (the employee assistance charitable fund of
Continental), in the amount of $340,000 in the case of Mr. Bethune, $1,000,000
in the case of Mr. Brenneman, and $250,000 in the case of each of Messrs.
Kellner, McLean and Smisek, in equal monthly installments over the same period
and subject to the same provisos. The Company's Human Resources Committee has
been considering amendments to the Company's employment agreements with certain
of its senior executives in light of the anticipated Air Partners Transaction,
and anticipates taking action with respect to appropriate amendments later in
1998.
The Company has also entered into stay bonus agreements with certain of its
other officers calling for payment of up to an aggregate of $9.5 million over a
fifteen-month period following the closing of the Air Partners Transaction and
has implemented a severance program with respect to certain officers and other
managers who participate in the Company's stock option program but who do not
have employment agreements with the Company as of the date of a Change in
Control (within the meaning of the new Change in Control provision contained in
the Company's proposed 1998 Stock Incentive Plan, but excluding the change in
control to be caused by the Air Partners Transaction) of the Company
("Participating Managers"), which are effective as of the closing of the Air
Partners Transaction. Pursuant to such severance program, if there is a Change
in Control of the Company (within the meaning of the new Change in Control
provision contained in the Company's proposed 1998 Stock Incentive Plan) and the
chief executive officer of the Company prior to the Change in Control is not the
chief executive officer of the Company, the other entity involved in the Change
in Control transaction and certain affiliates for at least six months following
the Change in Control, and within two years after the Change in Control the
Participating Manager's employment by the Company and its subsidiaries is
terminated by the Company other than for Cause (as defined in the program),
Disability (as defined in the program) or death, the Participating Manager will
receive a severance payment in an amount equal to $20 million times a fraction,
the numerator of which is such Participating Manager's annual base salary as in
effect on the date of the Change in Control, and the denominator of which
22
<PAGE> 26
is the aggregate base salaries, as in effect on such date, of all Participating
Managers. At March 27, 1998, approximately 475 employees would be eligible to
participate in the severance program.
PROPOSAL 1:
ELECTION OF DIRECTORS
It is the intention of the persons named in the enclosed form of proxy,
unless otherwise instructed, to vote duly executed proxies for the election of
each nominee for director listed below. Pursuant to the Company's Bylaws,
directors will be elected by a plurality of the votes duly cast at the Meeting.
If elected, such nominee will hold office until the next annual meeting of
stockholders and until his or her respective successor has been duly elected and
has qualified. Management does not contemplate that any of the nominees will
become unavailable to serve for any reason, but if that should occur before the
Meeting, proxies will be voted for another nominee or nominees to be selected by
the Board of Directors.
Air Partners has the limited right, in certain circumstances, to convert
its Class A common stock into Class D common stock. No person may hold or own
Class D common stock other than Air Partners and certain of its affiliates. The
Class D common stock, if issued, would permit Air Partners to elect one-third of
the directors to the Company's Board. To date, no shares of Class D common stock
have been issued. In the Air Partners Transaction, affiliates of Northwest will
acquire Air Partners and will be able to exercise Air Partners' rights under
this provision.
Continental's Board of Directors currently consists of thirteen persons.
Pursuant to the governance agreement described above in "Recent Developments,"
the Company and the Northwest Parties agreed to take all actions necessary
following the closing of the Air Partners Transaction to cause Independent
Directors (as therein defined) to constitute at least a majority of the Board of
Directors. Ms. Williams and Messrs. Bentsen, Foley, McCorkindale, Parker, Pogue,
Sturm and Yamarone are "Independent Directors" as defined by the governance
agreement. Pursuant to the governance agreement, the Company has also agreed to
cause a designee of an affiliate of Northwest reasonably acceptable to the
Company's Board of Directors to be appointed to the Company's Board of Directors
immediately after the closing of the Air Partners Transaction. At the date
hereof, no such person has been designated by the Northwest affiliate. Such
designee shall not be an officer or employee of Northwest or the Company or any
of their respective affiliates, or any person who has served in any such
capacity within the prior three years. Should the Air Partners Transaction close
prior to the date of the Meeting, the Company anticipates that its Board of
Directors will expand the size of the Board from thirteen to fourteen members
and elect such designee to the newly created position for a term expiring at the
Meeting, and that its Board of Directors will also elect such designee to the
vacant position immediately following the Meeting.
There is no family relationship between any of the nominees for director or
between any nominee and any executive officer.
The following table shows, with respect to each nominee, (i) such person's
name and age, (ii) the period for which such person has served as a director of
the Company, (iii) all positions and offices with the Company currently held by
the nominee and his or her principal occupation and business experience during
the last five years, (iv) other directorships held by the nominee and (v) the
standing committees of the Board of Directors of which he or she is a member.
Each of the nominees is currently a director of the Company.
<TABLE>
<CAPTION>
NAME, AGE, POSITION
AND COMMITTEE MEMBERSHIPS TERM OF OFFICE AND BUSINESS EXPERIENCE
------------------------- --------------------------------------
<S> <C>
THOMAS J. BARRACK, JR., age 50............. Director since August 1994. Chief Executive
(Human Resources Committee) Officer of Colony Capital, Inc. and Colony
Advisors, Inc. (real estate investments)
since 1991; Officer of Keystone, Inc. (a
private investment firm) (1987-1991);
Director of Virgin/MGM Cinemas (U.K.).
</TABLE>
23
<PAGE> 27
<TABLE>
<CAPTION>
NAME, AGE, POSITION
AND COMMITTEE MEMBERSHIPS TERM OF OFFICE AND BUSINESS EXPERIENCE
------------------------- --------------------------------------
<S> <C>
LLOYD M. BENTSEN, JR., age 77.............. Director since September 1996. Shareholder
(Audit Committee) of Verner, Liipfert, Bernhard, McPherson
and Hand (law firm) since 1995; United
States Secretary of the Treasury
(1993-1995); Member of the United States
Senate (1971-1993); Chairman of the Board
of Directors of New Holland N.V.; Director
of: American International Group, Inc.;
FEMSA; IVAX Corp.; PanEnergy Corp.
GORDON M. BETHUNE, age 56.................. Director since August 1994. Chairman of the
Chairman of the Board and Chief Executive Board and Chief Executive Officer since
Officer (Executive Committee, Finance and September 1996. President and Chief
Strategy Committee) Executive Officer (November 1994-September
1996); President and Chief Operating
Officer (February 1994-November 1994);
various positions with The Boeing Company
commencing in 1988, including Vice
President and General Manager of the
Commercial Airplane Group Renton Division,
Vice President and General Manager of the
Customer Services Division and Vice
President of Airline Logistics Support.
DAVID BONDERMAN, age 55.................... Director since April 1993. Chairman of the
(Executive Committee, Finance and Board (May 1993-September 1996); Managing
Strategy Committee) Partner of Texas Pacific Group since 1992;
Director of: Bell & Howell Holdings
Company; Beringer Wine Estates; Denbury
Resources, Inc.; Washington Mutual, Inc.
GREGORY D. BRENNEMAN, age 36............... Director since June 1995. President and
President and Chief Operating Officer Chief Operating Officer since September
(Finance and Strategy Committee) 1996. Chief Operating Officer (May
1995-September 1996); Consultant to the
Company (February-April 1995); various
positions, including Vice President, with
Bain & Company, Inc. (consulting firm) for
more than five years; Director of Brown-
ing-Ferris Industries, Inc.
PATRICK FOLEY, age 66...................... Director since April 1993. Chairman of the
(Audit Committee) Board, President and Chief Executive
Officer of DHL Airways, Inc. since 1988;
Director of: Foundation Health Systems,
Inc.; Glenborough Realty Trust, Inc.;
Flextronics International Ltd.; Del Monte
Foods Company.
DOUGLAS McCORKINDALE, age 58............... Director since April 1993. Vice Chairman
(Human Resources Committee) and President of Gannett Co., Inc. (a
nationwide diversified communications
company) since September 1997; Vice
Chairman and Chief Financial and
Administrative Officer of Gannett Co., Inc.
(1984 - 1997); Director of: a group of
Prudential Mutual Funds; Frontier
Corporation.
</TABLE>
24
<PAGE> 28
<TABLE>
<CAPTION>
NAME, AGE, POSITION
AND COMMITTEE MEMBERSHIPS TERM OF OFFICE AND BUSINESS EXPERIENCE
------------------------- --------------------------------------
<S> <C>
GEORGE G. C. PARKER, age 59................ Director since June 1996. Associate Dean
(Finance and Strategy Committee, Human for Academic Affairs and Director of MBA
Resources Committee) Program since 1993; Dean Witter Professor
of Finance and Management (since 1996) and
Professor of Management (1973-1996) at the
Graduate School of Business, Stanford
University; Director of: California
Casualty Group of Insurance Companies; Bai-
lard, Biehl, and Kaiser, Inc.; RCM/Dresdner
Global Mutual Funds; H. Warshow & Sons,
Inc.; Community First Banking Group.
RICHARD W. POGUE, age 69................... Director since April 1993. Senior Advisor
(Executive Committee) of Dix & Eaton (a public relations firm)
since 1994; Senior Partner (1993-1994) and
Managing Partner (1984-1992) of Jones, Day,
Reavis & Pogue (law firm); Director of:
Derlan Industries, Ltd.; M.A. Hanna Co.;
KeyCorp; LAI Associates, Inc.; OHM
Corporation; Rotek Incorporated; TRW Inc.
WILLIAM S. PRICE III, age 41............... Director since April 1993. Managing Partner
(Finance and Strategy Committee) of Texas Pacific Group since 1992; Vice
President -- Strategic Planning and
Business Development of GE Capital
Corporation (1991-1992); Vice President of
Bain & Company, Inc. (consulting firm)
(1985-1991); Chairman of the Executive
Committee of the Board of Directors of:
Favorite Brands, Inc.; Director of Belden &
Blake Corporation; Beringer Wine Estates;
Del Monte Foods Company; Denbury Resources,
Inc.; VSP, Holdings, Inc.; Zilog, Inc.
DONALD L. STURM, age 66.................... Director since April 1993. Chairman of the
(Audit Committee) Board and Chief Executive Officer of:
Community First Bankshares, Inc. (which
owns four banks in Colorado) since 1993;
Community First Bancorp, Inc. (which owns
four banks in Wyoming) since 1993; Premier
Bancorp, Inc. (which owns one bank in
Kansas) since 1996; FirstWorld
Communications, Inc. (local telephone
exchange carrier) since January 1998;
Continental Can Company, Inc., and various
subsidiaries and affiliated corporations
(1984-1991); various positions culminating
in Vice Chairman of Peter Kiewit Sons, Inc.
(1963-1991).
KAREN HASTIE WILLIAMS, age 53.............. Director since April 1993. Partner of
(Audit Committee) Crowell & Moring (law firm) since 1982;
Director of: Federal National Mortgage
Association; Crestar Financial Corporation;
Gannett Co., Inc.; SunAmerica, Inc.;
Washington Gas Light Company.
CHARLES A. YAMARONE, age 39................ Director since January 1995. Executive Vice
(Human Resources Committee) President of Libra Investments, Inc.
("Libra") since January 1997; Executive
Vice President and Research Director of
Libra (July 1994-January 1997); Senior Vice
President and General Counsel of Libra
(1991-1994); Director of El Paso Electric
Company.
</TABLE>
25
<PAGE> 29
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF THE NOMINEES
NAMED ABOVE, WHICH IS DESIGNATED AS PROPOSAL NO. 1 ON THE ENCLOSED PROXY.
PROPOSAL 2:
APPROVAL OF THE
1998 STOCK INCENTIVE PLAN
GENERAL
The Human Resources Committee recognized that options representing the
substantial majority of the value of all outstanding options of the Company
would vest by the end of April 1998, irrespective of and unrelated to whether
the Air Partners Transaction closed, due to the vesting of lower exercise price
options, which were issued principally in April 1995 and February 1996, and the
significant increase in value of the Company's Class B common stock since those
dates. For example, over 71% of the value of Mr. Bethune's options and over 76%
of the value of Mr. Brenneman's options (measured by the difference between the
market value of the Company's Class B common stock, assumed to be $57 per share
for purposes of this calculation, and the exercise price of the relevant
options) vest by the end of April 1998, and over 62% of the value of all the
Company's officers' options (measured on the same basis) vests by the end of
April 1998.
The Human Resources Committee also recognized that the Company's existing
stock option plans did not contain sufficient authorized shares to provide
appropriate incentives for the Company's managers, and that the Change in
Control features of the Company's existing plans would need to be modified with
respect to future grants to take into account the Air Partners Transaction. As a
result, the Human Resources Committee recommended to the Board that it adopt a
new 1998 Stock Incentive Plan containing sufficient shares to appropriately
incentivize the Company's managers and containing a new Change in Control
definition, and also amend the Company's existing stock option plans to conform
them to the new 1998 Stock Incentive Plan with respect to options granted after
the closing of the Air Partners Transaction. On April 14, 1998, the Board of
Directors adopted the Continental Airlines, Inc. 1998 Stock Incentive Plan (the
"Incentive Plan" or the "1998 Plan"), subject to approval by the stockholders of
the Company at the Meeting, and so amended the Company's existing stock option
plans.
The purpose of the Incentive Plan is to enable the Company and its
subsidiaries to attract and retain capable persons to serve as directors and
employees and to provide a means whereby those individuals upon whom the
responsibilities of the successful administration and management of the Company
and its subsidiaries rest, and whose present and potential contributions to the
welfare of the Company and its subsidiaries are of importance, can acquire and
maintain stock ownership, thereby strengthening their concern for the welfare of
the Company and its subsidiaries. A further purpose of the Incentive Plan is to
provide such individuals with additional incentive and reward opportunities
designed to enhance the profitable growth of the Company and its subsidiaries.
SUMMARY OF INCENTIVE PLAN
The following general description of certain features of the Incentive Plan
is qualified in its entirety by reference to the Incentive Plan, which is
attached as Appendix A. Capitalized terms not otherwise defined herein have the
meanings ascribed to them in the Incentive Plan.
The Incentive Plan provides that the Company may grant the option to
purchase shares of Class B common stock or shares of Restricted Stock to certain
employees or directors. The terms applicable to these various types of Awards,
including those terms that may be established by the Administrator when making
or administering particular Awards, are set forth in detail in the Incentive
Plan. The Administrator may make Awards under the Incentive Plan until April 14,
2008. The Incentive Plan will remain in effect until all options granted under
the Incentive Plan have been satisfied or expired and all shares of Restricted
Stock granted under the Incentive Plan have vested or been forfeited.
26
<PAGE> 30
Eligibility. Awards may be granted only to persons who, at the time of
grant, are directors of the Company or employees of the Company or one of its
subsidiaries. Awards may be granted on more than one occasion to the same
person, and Awards may consist of any combination of options and Restricted
Stock. As of March 27, 1998, 11 non-employee directors and approximately 500
employees (substantially all of the Company's management-level employees) were
eligible to receive Awards under the Incentive Plan.
Stock Options. The Administrator may grant options that entitle the
recipient to purchase shares of Class B common stock at a price equal to or
greater than market value on the date of grant. The market value of a share of
Class B common stock was $57.0625 on March 27, 1998, which was the closing price
of the Class B common stock on the New York Stock Exchange on that date. The
option price is payable in full in the manner specified by the Administrator.
Options granted under the Incentive Plan may be options that are intended
to qualify as "incentive stock options" within the meaning of Section 422 of the
Code or options that are not intended to so qualify. An Incentive Stock Option
may only be granted to an individual who is an employee at the time the option
is granted. No Incentive Stock Option may be granted to an individual if, at the
time the option is granted, such individual owns stock possessing more than 10%
of the total combined voting power of all classes of stock of the Company (or of
its parent or subsidiary corporation, within the meaning of Section 422(b)(6) of
the Code), unless (i) at the time such option is granted the option price is at
least 110% of the Market Value per Share of the Class B common stock subject to
the option and (ii) such option by its terms is not exercisable after the
expiration of five years from the date of grant.
Each Option Agreement must specify the effect of termination of employment
or Board membership, as applicable, on the exercisability of the option. An
Option Agreement may provide for the payment of the option price, in whole or in
part, by delivery of a number of shares of Class B common stock (plus cash if
necessary) having a Market Value per Share equal to such option price. Moreover,
an Option Agreement may provide for a "cashless exercise" of the option by
establishing procedures satisfactory to the Administrator with respect thereto.
The terms and conditions of the respective Option Agreements need not be
identical.
Restricted Stock. A grant of Restricted Stock constitutes an immediate
transfer to the recipient of record and beneficial ownership of the shares of
Restricted Stock in consideration of the performance of services by the
recipient (or other consideration determined by the Administrator). The
recipient is entitled immediately to voting and other ownership rights in the
shares, subject to restrictions referred to in the Incentive Plan or contained
in the related Restricted Stock Agreement. The transfer may be made without
additional consideration or in consideration of a payment by the recipient that
is less than the market value of the shares on the date of grant. Each grant
may, in the discretion of the Administrator, limit the recipient's dividend
rights during the period in which the shares are subject to a substantial risk
of forfeiture and restrictions on transfer.
Restricted Stock must be subject, for a period or periods determined by the
Administrator at the date of grant, to one or more restrictions, including,
without limitation, a restriction that constitutes a "substantial risk of
forfeiture" within the meaning of Section 83 of the Code and applicable
interpretive authority thereunder. For example, an award could provide that the
Restricted Stock would be forfeited if the recipient ceased to serve the Company
as an employee during a specified period. In order to enforce these forfeiture
provisions, the transferability of Restricted Stock during the period or periods
during which such restrictions are to continue will be prohibited or restricted
in a manner and to the extent prescribed by the Administrator at the date of
grant. The Incentive Plan provides for a shorter period during which the
forfeiture provisions are to apply in the event of a Change in Control of the
Company.
The Human Resources Committee has resolved that all future grants of
Restricted Stock under the Company's stock incentive plans (including the 1998
Plan) shall vest over at least a three-year period, or over at least a one-year
period if vesting is performance based (or as otherwise provided in the
applicable plan or award agreement, such as upon a Change in Control).
27
<PAGE> 31
Shares Subject to the Incentive Plan. Subject to adjustment as provided in
the Incentive Plan, the aggregate number of shares of Class B common stock that
may be issued under the Incentive Plan shall not exceed 5,500,000 shares. There
are approximately 750,000 shares of Class B common stock available to be issued
under the Company's other stock option plans. Shares shall be deemed to have
been issued under the Incentive Plan only to the extent actually issued and
delivered pursuant to an option or a grant of Restricted Stock. To the extent
that an option or a grant of Restricted Stock lapses or the rights of the
recipient with respect thereto terminate, any shares of Class B common stock
then subject to such option or grant of Restricted Stock will again be available
for grant under the Incentive Plan. The maximum number of shares of Class B
common stock that (i) may be subject to options granted to any one individual
during any calendar year may not exceed 750,000 shares and (ii) may be granted
as Restricted Stock may not exceed 250,000 shares (in each case subject to
adjustment as provided in the Incentive Plan). The limitation set forth in
clause (i) of the preceding sentence shall be applied in a manner which will
permit compensation generated in connection with options awarded under the
Incentive Plan by the Human Resources Committee to constitute "performance
based" compensation for purposes of Section 162(m) of the Code, including,
without limitation, counting against such maximum number of shares, to the
extent required under Section 162(m) of the Code and applicable interpretive
authority thereunder, any shares subject to options that are canceled or
repriced.
Change in Control. As used in the Incentive Plan, the term "Change in
Control" means (except as otherwise provided in an applicable agreement
evidencing an Award), if the Air Partners Transaction closes: (a) any person is
or becomes the beneficial owner of securities representing the greater of (i)
25% of the combined voting power of the Company's outstanding securities and
(ii) the proportion of the combined voting power of the Company's outstanding
securities beneficially owned by Northwest Airlines Corporation ("Northwest")
and any person controlling, controlled by or under common control with
Northwest; (b) individuals who constituted the Board as of February 26, 1998
cease for any reason to constitute at least a majority of the Board (unless such
individual's election is approved by a vote of a majority of the incumbent board
or such individual was nominated by an Excluded Person, as described below); (c)
any merger, consolidation or other reorganization or similar transaction in
which the Company is not the "Controlling Corporation" (as described below); or
(d) any sale of all or substantially all of the Company's assets, other than to
Excluded Persons or any sale of all or substantially all of the Company's assets
to Northwest or any person controlling, controlled by or under common control
with Northwest.
Beneficial ownership as described in clause (a) above does not include
beneficial ownership by (1) the Company or any subsidiary of the Company, (2)
any employee benefit plan of the Company (with certain exceptions), (3)
Northwest or any person controlling, controlled by or under common control with
Northwest (unless Northwest is controlled by or under common control with Delta
Air Lines, Inc.), or (4) certain persons, and certain affiliates of such
persons, controlling Air Partners prior to the acquisition of Air Partners by
Northwest (persons referred to in clauses (1) through (4) above are referred to
as "Excluded Persons"). The persons in clause (3) of the previous sentence are
not deemed to be Excluded Persons if Northwest (together with any person
controlling, controlled by or under common control with Northwest) ceases to
beneficially own at least 25% of the combined voting power of the Company's
outstanding securities for 30 consecutive calendar days. The exclusion described
in clause (4) of the second preceding sentence will cease to have any effect
(and the persons described therein will cease to be Excluded Persons) if the
person acquiring beneficial ownership is not controlled by David Bonderman or
James Coulter or the person acquiring beneficial ownership (together with any
person controlling, controlled by or under common control with such person)
ceases to beneficially own at least 25% of the combined voting power of the
Company's outstanding securities for 30 consecutive calendar days.
For purposes of clause (c) above, the Company will generally be considered
the "Controlling Corporation" in any merger, consolidation, reorganization or
similar transaction unless either (1) the Company's stockholders immediately
prior to such transaction (excluding the other party to the transaction and
persons acting in concert with such other party) would not, immediately after
such transaction, beneficially own securities of the resulting entity that would
entitle them to elect a majority of the board of the resulting entity,
28
<PAGE> 32
or (2) those persons constituting the Company's board of directors immediately
prior to such transaction would not, immediately after such transaction,
constitute a majority of the directors of the resulting entity.
If the Air Partners Transaction does not close, the term "Change in
Control" means: (a) any person is or becomes the beneficial owner of securities
representing the greater of (i) 25% of the combined voting power of the
Company's outstanding securities and (ii) the proportion of the combined voting
power of the Company's outstanding securities beneficially owned by Air Partners
and any person controlling, controlled by or under common control with Air
Partners; (b) individuals who constituted the Board as of February 28, 1997
cease for any reason to constitute at least a majority of the Board (unless such
individuals' election is approved by a vote of a majority of the incumbent
board); (c) any merger, consolidation or other reorganization or similar
transaction in which the Company is not the "Controlling Corporation" (as
described below); or (d) any sale of all or substantially all of the Company's
assets, other than to "Excluded Persons" (as described below). Beneficial
ownership as described in clause (a) above does not include beneficial ownership
by (1) the Company or any subsidiary of the Company, (2) any employee benefit
plan of the Company (with certain exceptions) or (3) Air Partners or any person
controlling, controlled by or under common control with Air Partners (with
certain exceptions) (persons referred to in clauses (1) through (3) above are
referred to as "Excluded Persons"). The persons in clause (3) of the previous
sentence are not deemed to be Excluded Persons if Air Partners ceases to
beneficially own at least 25% of the combined voting power of the Company's
outstanding securities for 30 consecutive calendar days or if there occurs a
"change in the ownership or effective control" (within the meaning of Section
280G of the Code) of Air Partners. For purposes of clause (c) above, the Company
will generally be considered the "Controlling Corporation" in any merger,
consolidation, reorganization or similar transaction unless either (1) the
Company's stockholders immediately prior to such transaction (excluding the
other party to the transaction and persons acting in concert with such other
party) would not, immediately after such transaction, beneficially own
securities of the resulting entity that would entitle them to elect a majority
of the board of directors of the resulting entity or (2) those persons
constituting the Company's board of directors immediately prior to such
transaction would not, immediately after such transaction, constitute a majority
of the directors of the resulting entity.
Upon the occurrence of a Change in Control, with respect to each recipient,
(AA) all options granted to such recipient and outstanding at such time shall
immediately vest and become exercisable in full, whether or not otherwise
exercisable (but subject, in the case of Incentive Stock Options, to certain
limitations) and, except as required by law, all restrictions on the transfer of
shares acquired pursuant to such options shall terminate and (BB) all
restrictions applicable to such recipient's Restricted Stock shall be deemed to
have been satisfied and such Restricted Stock shall vest in full.
Provision is made for payment under the Incentive Plan (except as otherwise
provided in the applicable Option Agreement) of (i) any excise taxes due under
Section 4999 of the Code with respect to amounts that are vested and/or payable
due to a Change in Control plus (ii) any taxes due on the payment of such excise
taxes described in clause (i).
Transferability. No options (other than Incentive Stock Options) are
transferable by the recipient except (i) by will or the laws of descent and
distribution, (ii) by a qualified domestic relations order or (iii) with the
consent of the Administrator. An Incentive Stock Option is not transferable
other than by will or the laws of descent and distribution and may not be
exercised during the optionee's lifetime except by the optionee or the
optionee's guardian or legal representative.
At the discretion of the Administrator, a percentage of the aggregate
shares of Common Stock obtained from exercise of an option shall not be
transferable prior to the earliest to occur of (x) termination of the relevant
option term, (y) the optionee's retirement, death or disability or (z)
termination of the optionee's employment with the Company and its subsidiaries.
Adjustments. The maximum number of shares that may be issued under the
Incentive Plan, as well as the number or type of shares subject to outstanding
options and Restricted Stock grants and the applicable option prices per share
shall be adjusted appropriately in the event of stock dividends, spin-offs of
assets or other extraordinary dividends, stock splits, combinations of shares,
recapitalizations, mergers, consolidations, reorganizations, liquidations,
issuances of rights or warrants, and similar transactions or events.
29
<PAGE> 33
Administration and Amendments. The Incentive Plan provides that a committee
comprised solely of two or more "outside directors" (as defined by Section
162(m) of the Code and applicable interpretive authority thereunder and within
the meaning of the term "Non-Employee Director" as defined by Rule 16b-3 under
the Exchange Act) serves as the Administrator of Awards under the Incentive Plan
with respect to persons subject to Section 16 of the Exchange Act. Until
otherwise determined by the Board, the Human Resources Committee serves as such
committee under the Incentive Plan. The Chief Executive Officer of the Company
serves as Administrator with respect to any person not subject to Section 16 of
the Exchange Act.
The Board in its discretion may terminate the Incentive Plan at any time
with respect to any shares of Class B common stock for which Awards have not yet
been granted. The Board has the right to alter or amend the Incentive Plan or
any part thereof from time to time; provided that no change in any Award
theretofore granted may be made which would impair the rights of the recipient
thereof without the consent of such recipient. Without stockholder approval, the
Board may not amend the Incentive Plan to (a) increase the maximum aggregate
number of shares that may be issued under the Incentive Plan or (b) change the
class of individuals eligible to receive Awards under the Incentive Plan.
NEW PLAN BENEFITS
The Company anticipates that all or a substantial portion of the options
available for grant under the Incentive Plan will be awarded to eligible
employees during 1998, promptly following the determination by the Human
Resources Committee of the size and terms of option grants. Although the Human
Resources Committee has not yet determined the size and terms of option grants
under the Incentive Plan, it currently anticipates being in a position to report
to the Board with respect to its discussions concerning compensation, including
options, at the next regularly scheduled meeting of the Board immediately
following the Meeting. In addition, the Company anticipates that options to
purchase 5,000 shares of Class B common stock will be awarded under the
Incentive Plan to each of the Company's non-employee directors elected at the
Meeting if the Incentive Plan is approved by the Company's stockholders, or
under the Company's other stock option plans. See "General Information."
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a brief summary of certain of the U.S. federal income tax
consequences of certain transactions under the Incentive Plan based on federal
income tax laws in effect on January 1, 1998. This summary applies to the
Incentive Plan as normally operated and is not intended to provide or supplement
tax advice to eligible employees or directors. The summary contains general
statements based on current U.S. federal income tax statutes, regulations and
currently available interpretations thereof. This summary is not intended to be
exhaustive and does not describe state, local or foreign tax consequences or the
effect, if any, of gift, estate and inheritance taxes.
Tax Consequences to Recipients
Non-qualified Stock Options. In general: (i) no income will be recognized
by an optionee at the time a non-qualified stock option is granted; (ii) at the
time of exercise of a non-qualified stock option, ordinary income will be
recognized by the optionee in an amount equal to the difference between the
option price paid for the shares and the fair market value of the shares if they
are nonrestricted on the date of exercise; and (iii) at the time of sale of
shares acquired pursuant to the exercise of a non-qualified stock option, any
appreciation (or depreciation) in the value of the shares after the date of
exercise will be treated as a capital gain (or loss).
The total number of shares of Class B common stock subject to options
granted to any one recipient during any calendar year is limited under the
Incentive Plan for the purpose of qualifying any compensation realized upon
exercise of such options that are granted by the Human Resources Committee as
"performance-based compensation" as defined in Section 162(m) of the Code in
order to preserve tax deductions by the Company with respect to any such
compensation in excess of one million dollars paid to "Covered Employees" (i.e.,
the Company's Chief Executive Officer and the four highest compensated officers
of the
30
<PAGE> 34
Company or those individuals deemed to be executive officers of the Company
(other than the Chief Executive Officer) and who are officers of the Company on
the last day of the year in question). Options granted by the Chief Executive
Officer will not qualify as "performance-based compensation" and will be subject
to the limitation on deductibility under Section 162(m) of the Code; however, it
is not anticipated that the Chief Executive Officer would have the authority to
make grants to Covered Employees.
Incentive Stock Options. No income generally will be recognized by an
optionee upon the grant or exercise of an Incentive Stock Option. However, upon
exercise, the difference between the fair market value and the exercise price
may be subject to the alternative minimum tax. If shares of Class B common stock
are issued to an optionee pursuant to the exercise of an Incentive Stock Option
and no disqualifying disposition of the shares is made by the optionee within
two years after the date of grant or within one year after the transfer of the
shares to the optionee, then upon the sale of the shares any amount realized in
excess of the option price will be taxed to the optionee as a capital gain and
any loss sustained will be a capital loss.
If shares of Class B common stock acquired upon the exercise of Incentive
Stock Options are disposed of prior to the expiration of either holding period
described above, the optionee generally will recognize ordinary income in the
year of disposition in an amount equal to any excess of the fair market value of
the shares at the time of exercise (or, if less, the amount realized on the
disposition of the shares in a sale or exchange) over the option price paid for
the shares. Any further gain (or loss) realized by the optionee generally will
be taxed as a capital gain (or loss).
As described above with respect to non-qualified stock options, the
Incentive Plan has been designed to qualify any ordinary compensation income
recognized by optionees with respect to Incentive Stock Options granted by the
Human Resources Committee as "performance-based compensation" as defined in
Section 162(m) of the Code.
Restricted Stock. A recipient of Restricted Stock generally will be subject
to tax at ordinary income tax rates on the fair market value of the Restricted
Stock reduced by any amount paid by the recipient at such time as the shares are
no longer subject either to a risk of forfeiture or restrictions on transfer for
purposes of Section 83 of the Code. However, a recipient who so elects under
Section 83(b) of the Code within 30 days of the date of transfer of the shares
will have taxable ordinary income on the date of transfer of the shares equal to
the excess of the fair market value of the shares (determined without regard to
the risk of forfeiture or restrictions on transfer) over any purchase price paid
for the shares. If a Section 83(b) election is made and the shares are
subsequently forfeited, the recipient will not be allowed to take a deduction
for the value of the forfeited shares. If a Section 83(b) election has not been
made, any dividends received with respect to Restricted Stock that are subject
at that time to a risk of forfeiture or restrictions on transfer generally will
be treated as compensation that is taxable as ordinary income to the recipient;
otherwise the dividends will be treated as dividends. Awards of Restricted Stock
to Covered Employees will not qualify as "performance-based compensation" and
the Company will be subject to the limitation on deductibility under Section
162(m) of the Code.
Tax Consequences to the Company or Subsidiary
Section 162(m) of the Code limits the ability of the Company to deduct
compensation paid during a fiscal year to a Covered Employee in excess of one
million dollars, unless such compensation is based on performance criteria
established by the Human Resources Committee or meets another exception
specified in Section 162(m) of the Code. Certain awards described above will not
qualify as "performance-based compensation" or meet any other exception under
Section 162(m) of the Code and, therefore, the Company's deductions with respect
to such awards will be subject to the limitations imposed by such Section. To
the extent a recipient recognizes ordinary income in the circumstances described
above, the Company or subsidiary for which the recipient performs services will
be entitled to a corresponding deduction provided that, among other things, (i)
the income meets the test of reasonableness, is an ordinary and necessary
business expense and is not an "excess parachute payment" within the meaning of
Section 280G of the Code and (ii) either the compensation is "performance-based"
within the meaning of Section 162(m) of the Code or the one million dollar
limitation of Section 162(m) of the Code is not exceeded. No deduction will be
31
<PAGE> 35
available to the Company or any subsidiary for any amount paid under the
Incentive Plan with respect to (i) any excise taxes due under Section 4999 of
the Code with respect to amounts that are vested and/or payable due to a Change
in Control and (ii) any taxes due on the payment of such excise taxes described
in clause (i).
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE 1998 STOCK
INCENTIVE PLAN AS DESCRIBED ABOVE AND AS SET FORTH IN APPENDIX A, WHICH IS
DESIGNATED AS PROPOSAL NO. 2 ON THE ENCLOSED PROXY.
PROPOSAL 3:
RATIFICATION OF APPOINTMENT
OF INDEPENDENT AUDITORS
The firm of Ernst & Young LLP has been the Company's independent auditors
since 1993, and the Board of Directors desires to continue to engage the
services of this firm for the fiscal year ending December 31, 1998. Accordingly,
the Board of Directors, upon the recommendation of the Audit Committee, has
reappointed Ernst & Young LLP to audit the financial statements of the Company
and its subsidiaries for fiscal 1998 and report thereon. Stockholders are being
asked to vote upon the ratification of such appointment. If stockholders do not
ratify such appointment, the Audit Committee and Board will reconsider such
appointment.
Representatives of Ernst & Young LLP will be present at the Meeting and
will be available to respond to appropriate questions and make a statement
should they so desire.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THE
APPOINTMENT OF THE INDEPENDENT AUDITORS, WHICH IS DESIGNATED AS PROPOSAL NO. 3
ON THE ENCLOSED PROXY.
OTHER MATTERS
Management knows of no business to be presented for action at the Meeting
other than that described in this proxy statement. If any other matters should
properly come before the Meeting calling for a vote of the stockholders, it is
the intention of the persons named in the accompanying proxy, unless otherwise
directed in such proxy, to vote on such matters in accordance with their best
judgment.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Each director, executive officer (and, for a specified period, certain
former directors and executive officers) and each holder of greater than ten
percent of a class of the Company's equity securities is required to report to
the Commission his or her pertinent position or relationship, as well as
transactions in such securities, by certain specified dates. A report during
1997 with respect to one transaction was filed after the specified filing date
by each of Donald Sturm, a director, and Barry Simon, an executive officer.
1999 ANNUAL MEETING
Any stockholder who desires to present proposals at the 1999 annual meeting
of stockholders and to have such proposals set forth in the proxy statement and
form of proxy mailed in conjunction with such annual meeting must submit such
proposals in writing to the Secretary of the Company no later than December 16,
1998. The Company's Bylaws require that for nominations of persons for election
to the Board of Directors of the Company or the proposal of business to be
considered by the stockholders at an annual meeting, a stockholder must give
timely written notice thereof. To be timely for the 1999 annual meeting of
stockholders, such notice must be delivered to the Secretary of the Company at
the principal executive offices of the Company not less than 70 days nor more
than 90 days prior to May 21, 1999, provided, that if the 1999 annual meeting of
stockholders is advanced by more than 20 days, or delayed by more than 70 days,
from May 21, 1999, such notice must be delivered not earlier than the ninetieth
day prior to the 1999 annual meeting and not
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later than the close of business on the later of (a) the seventieth day prior to
the 1999 annual meeting or (b) the tenth day following the day on which public
announcement of the date of the 1999 annual meeting is first made. The
stockholder's notice must contain and be accompanied by certain information as
specified in the Bylaws. It is recommended that any stockholder desiring to make
a nomination or submit a proposal for consideration obtain a copy of the
Company's Bylaws, which may be obtained without charge from the Secretary of the
Company upon written request addressed to the Secretary at the Company's
principal executive offices.
EVEN IF YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN, DATE AND MAIL PROMPTLY
THE ENCLOSED PROXY.
By Order of the Board of Directors,
/s/ JEFFREY A. SMISEK
Jeffery A. Smisek
Secretary
Houston, Texas
April 15, 1998
THE COMPANY WILL FURNISH TO INTERESTED SECURITY HOLDERS WITHOUT CHARGE,
UPON WRITTEN REQUEST, A COPY OF ITS ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1997. THE COMPANY WILL FURNISH ANY EXHIBIT TO SUCH
REPORT, UPON WRITTEN REQUEST, TO ANY SECURITY HOLDER REQUESTING SUCH REPORT UPON
PAYMENT OF REASONABLE FEES RELATING TO THE COMPANY'S FURNISHING SUCH EXHIBIT.
REQUESTS FOR COPIES SHOULD BE ADDRESSED TO THE SECRETARY OF THE COMPANY AT THE
COMPANY'S HEADQUARTERS: 2929 ALLEN PARKWAY, SUITE 2010, HOUSTON, TEXAS 77019.
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APPENDIX A
CONTINENTAL AIRLINES, INC.
1998 STOCK INCENTIVE PLAN
I. PURPOSE
The purpose of the CONTINENTAL AIRLINES, INC. 1998 STOCK INCENTIVE PLAN is
to provide a means through which Continental Airlines, Inc. and its subsidiaries
may attract able persons to serve as directors, or to enter or remain in the
employ of the Company (as defined below) or its subsidiaries, and to provide a
means whereby those individuals upon whom the responsibilities of the successful
administration and management of the Company and its subsidiaries rest, and
whose present and potential contributions to the welfare of the Company and its
subsidiaries are of importance, can acquire and maintain stock ownership,
thereby strengthening their concern for the welfare of the Company and its
subsidiaries. A further purpose of the Plan is to provide such individuals with
additional incentive and reward opportunities designed to enhance the profitable
growth of the Company and its subsidiaries. Accordingly, the Plan provides that
the Company may grant to certain employees or directors shares of Restricted
Stock, or the option to purchase shares of Common Stock, as hereinafter set
forth. Options granted under the Plan may be either Incentive Stock Options or
options that do not constitute Incentive Stock Options.
II. DEFINITIONS
The following definitions (including any plural thereof) shall be
applicable throughout the Plan unless specifically modified by any Section:
(a) "ADMINISTRATOR" means (i) in the context of Awards made to, or the
administration (or interpretation of any provision) of the Plan as it relates
to, any person who is subject to Section 16 of the Exchange Act (including any
successor section to the same or similar effect, "Section 16"), the Committee,
or (ii) in the context of Awards made to, or the administration (or
interpretation of any provision) of the Plan as it relates to, any person who is
not subject to Section 16, the Chief Executive Officer of the Company (or, if
the Chief Executive Officer is not a Director of the Company, the Committee).
(b) "AWARD" means an Option or grant of Restricted Stock.
(c) "BOARD" means the Board of Directors of the Company.
(d) "CODE" means the Internal Revenue Code of 1986, as amended. Reference
in the Plan to any section of the Code shall be deemed to include any amendments
or successor provisions to such section and any regulations promulgated under
such section.
(e) "COMMITTEE" means a committee of the Board comprised solely of two or
more outside Directors (within the meaning of the term "outside directors" as
used in section 162(m) of the Code and applicable interpretive authority
thereunder and within the meaning of "Non-Employee Director" as defined in Rule
16b-3). Such committee shall be the Human Resources Committee of the Board
unless and until the Board designates another committee of the Board to serve as
Administrator as described in the Plan.
(f) "COMMON STOCK" means the Class B common stock, $.01 par value, of the
Company, or any security into which such Common Stock may be changed by reason
of any transaction or event of the type described in Section IX(b).
(g) "COMPANY" shall mean Continental Airlines, Inc., a Delaware
corporation, or any successor thereto.
(h) "DIRECTOR" means an individual elected to the Board by the stockholders
of the Company or by the Board under applicable corporate law who is serving on
the Board on the date the Plan is adopted by the Board or is elected to the
Board after such date.
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(i) "DISABILITY" means any complete and permanent disability as defined in
section 22(e)(3) of the Code.
(j) "EMPLOYEE" means any person (which may include a Director) in an
employment relationship with the Company or any parent or subsidiary corporation
(as defined in section 424 of the Code).
(k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
(l) "INCENTIVE STOCK OPTION" means an incentive stock option within the
meaning of section 422 of the Code.
(m) "MARKET VALUE PER SHARE" means, as of any specified date, the closing
sale price of the Common Stock on that date (or, if there are no sales on that
date, the last preceding date on which there was a sale) in the principal
securities market in which the Common Stock is then traded. If the Common Stock
is not publicly traded at the time a determination of "Market Value per Share"
is required to be made hereunder, the determination of such amount shall be made
by the Administrator in such manner as it deems appropriate.
(n) "OPTION" means an option to purchase Common Stock granted under Section
VII of the Plan and includes both Incentive Stock Options to purchase Common
Stock and Options that do not constitute Incentive Stock Options to purchase
Common Stock.
(o) "OPTION AGREEMENT" means a written agreement between the Company and an
Optionee with respect to, and evidencing the grant of, an Option.
(p) "OPTIONEE" means an employee or Director who has been granted an
Option.
(q) "PLAN" means the Continental Airlines, Inc. 1998 Stock Incentive Plan,
as amended from time to time.
(r) "RESTRICTED STOCK" means shares of Common Stock granted pursuant to
Section VIII of the Plan as to which neither the substantial risk of forfeiture
nor the restriction on transfers referred to therein has expired.
(s) "RESTRICTED STOCK AGREEMENT" means a written agreement between the
Company and a recipient of Restricted Stock with respect to, and evidencing the
grant of, Restricted Stock.
(t) "RULE 16B-3" means Rule 16b-3 under the Exchange Act, as such rule may
be amended from time to time, and any successor rule, regulation or statute
fulfilling the same or similar function.
(u) "SUBSIDIARY" means any entity (other than the Company) with respect to
which the Company, directly or indirectly through one or more other entities,
owns equity interests possessing 50 percent or more of the total combined voting
power of all equity interests of such entity (excluding voting power that arises
only upon the occurrence of one or more specified events).
III. EFFECTIVE DATE AND DURATION OF THE PLAN
The Plan shall become effective upon the date of its adoption by the Board;
provided, that the Plan is approved by the stockholders of the Company within
twelve months thereafter. Notwithstanding any provision of the Plan or of any
Option Agreement or Restricted Stock Agreement, no Option shall be exercisable,
and no shares of Restricted Stock shall vest, prior to such stockholder
approval. No further Options or Restricted Stock may be granted under the Plan
after ten years from the date the Plan is adopted by the Board. The Plan shall
remain in effect until all Options granted under the Plan have been satisfied or
expired, and all shares of Restricted Stock granted under the Plan have vested
or been forfeited.
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IV. ADMINISTRATION
(a) ADMINISTRATOR. The Plan shall be administered by the Administrator, so
that Awards made to, and the administration (or interpretation of any provision)
of the Plan as it relates to, any person who is subject to Section 16, shall be
made or effected by the Committee, and Awards made to, and the administration
(or interpretation of any provision) of the Plan as it relates to, any person
who is not subject to Section 16, shall be made or effected by the Chief
Executive Officer of the Company (or, if the Chief Executive Officer is not a
Director of the Company, the Committee).
(b) POWERS. Subject to the express provisions of the Plan, the
Administrator shall have authority, in its discretion, to determine which
employees or Directors shall receive an Award, the time or times when such Award
shall be granted, whether an Incentive Stock Option or nonqualified Option shall
be granted, and the number of shares to be subject to each Award. In making such
determinations, the Administrator shall take into account the nature of the
services rendered by the respective employees or Directors, their present and
potential contribution to the Company's success and such other factors as the
Administrator in its discretion shall deem relevant. Subject to the express
provisions of the Plan, the Administrator shall also have the power to construe
the Plan and the respective agreements executed hereunder, to prescribe rules
and regulations relating to the Plan, and to determine the terms, restrictions
and provisions of the Option Agreements and the Restricted Stock Agreements,
including such terms, restrictions and provisions as shall be requisite in the
judgment of the Administrator to cause designated Options to qualify as
Incentive Stock Options, and to make all other determinations necessary or
advisable for administering the Plan. The Administrator may correct any defect
or supply any omission or reconcile any inconsistency in the Plan or in any
agreement relating to an Award in the manner and to the extent it shall deem
expedient to carry it into effect. The determination of the Administrator on the
matters referred to in this Section IV shall be conclusive; provided, however,
that in the event of any conflict in any such determination as between the
Committee and the Chief Executive Officer of the Company, each acting in
capacity as Administrator of the Plan, the determination of the Committee shall
be conclusive.
V. SHARES SUBJECT TO THE PLAN; GRANT OF OPTIONS; GRANT OF RESTRICTED STOCK
(a) SHARES SUBJECT TO THE PLAN. Subject to adjustment as provided in
Section IX(b), the aggregate number of shares of Common Stock that may be issued
under the Plan shall not exceed 5,500,000 shares. Shares shall be deemed to have
been issued under the Plan only to the extent actually issued and delivered
pursuant to an Option or a grant of Restricted Stock. To the extent that an
Option or a grant of Restricted Stock lapses or the rights of the recipient with
respect thereto terminate, any shares of Common Stock then subject to such
Option or grant of Restricted Stock shall again be available for grant under the
Plan. Notwithstanding any provision in the Plan to the contrary, the maximum
number of shares of Common Stock that (i) may be subject to Options granted to
any one individual during any calendar year may not exceed 750,000 shares, and
(ii) may be granted as Restricted Stock may not exceed 250,000 shares (in each
case subject to adjustment as provided in Section IX(b)). The limitation set
forth in clause (i) of the preceding sentence shall be applied in a manner which
will permit compensation generated in connection with Options awarded under the
Plan by the Committee to constitute "performance based" compensation for
purposes of section 162(m) of the Code, including, without limitation, counting
against such maximum number of shares, to the extent required under section
162(m) of the Code and applicable interpretive authority thereunder, any shares
subject to Options that are canceled or repriced.
(b) GRANT OF OPTIONS. The Administrator may from time to time grant Options
to one or more employees or Directors determined by it to be eligible for
participation in the Plan in accordance with the terms of this Plan.
(c) GRANT OF RESTRICTED STOCK. The Administrator may from time to time
grant Restricted Stock to one or more employees or Directors determined by it to
be eligible for participation in the Plan in accordance with the terms of this
Plan.
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(d) STOCK OFFERED. Subject to the limitations set forth in Section V(a)
above, the stock to be offered pursuant to an Award may be authorized but
unissued Common Stock or Common Stock previously issued and outstanding and
reacquired by the Company. Any of such shares which remain unissued and which
are not subject to outstanding Awards at the termination of the Plan shall cease
to be subject to the Plan but, until termination of the Plan, the Company shall
at all times make available a sufficient number of shares to meet the
requirements of the Plan.
VI. ELIGIBILITY
Awards may be granted only to persons who, at the time of grant, are
employees or Directors. An Award may be granted on more than one occasion to the
same person and, subject to the limitations set forth in the Plan, Awards
consisting of Options may include an Incentive Stock Option or an Option that is
not an Incentive Stock Option or any combination thereof, and Awards may consist
of any combination of Options and Restricted Stock.
VII. STOCK OPTIONS
(a) OPTION PERIOD. The term of each Option shall be as specified by the
Administrator at the date of grant.
(b) LIMITATIONS ON EXERCISE OF OPTION. An Option shall be exercisable in
whole or in such installments and at such times as determined by the
Administrator at the date of grant.
(c) SPECIAL LIMITATIONS ON INCENTIVE STOCK OPTIONS. An Incentive Stock
Option may be granted only to an individual who is an employee at the time the
Option is granted. To the extent that the aggregate Market Value per Share
(determined at the time the respective Incentive Stock Option is granted) of
Common Stock with respect to which Incentive Stock Options granted after 1986
are exercisable for the first time by an individual during any calendar year
under all incentive stock option plans of the Company and its parent and
subsidiary corporations exceeds $100,000, such Incentive Stock Options shall be
treated as Options which do not constitute Incentive Stock Options. The
Administrator shall determine, in accordance with applicable provisions of the
Code, Treasury Regulations and other administrative pronouncements, which of an
Optionee's Incentive Stock Options will not constitute Incentive Stock Options
because of such limitation and shall notify the Optionee of such determination
as soon as practicable after such determination. No Incentive Stock Option shall
be granted to an individual if, at the time the Option is granted, such
individual owns stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company or of its parent or subsidiary
corporation, within the meaning of section 422(b)(6) of the Code, unless (i) at
the time such Option is granted the option price is at least 110% of the Market
Value per Share of the Common Stock subject to the Option and (ii) such Option
by its terms is not exercisable after the expiration of five years from the date
of grant. An Incentive Stock Option shall not be transferable otherwise than by
will or the laws of descent and distribution, and shall be exercisable during
the Optionee's lifetime only by such Optionee or the Optionee's guardian or
legal representative.
(d) OPTION AGREEMENT. Each Option shall be evidenced by an Option Agreement
in such form and containing such provisions not inconsistent with the provisions
of the Plan as the Administrator from time to time shall approve, including,
without limitation, provisions to qualify an Incentive Stock Option under
section 422 of the Code. Each Option Agreement shall specify the effect of
termination of (i) employment, or (ii) membership on the Board, as applicable,
on the exercisability of the Option. An Option Agreement may provide for the
payment of the option price, in whole or in part, by delivery of a number of
shares of Common Stock (plus cash if necessary) having a Market Value per Share
equal to such option price. Moreover, an Option Agreement may provide for a
"cashless exercise" of the Option by establishing procedures satisfactory to the
Administrator with respect thereto. The terms and conditions of the respective
Option Agreements need not be identical.
(e) OPTION PRICE AND PAYMENT. The price at which a share of Common Stock
may be purchased upon exercise of an Option shall be set forth in the Option
Agreement and shall be determined by the Administrator
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but, subject to adjustment as provided in Section IX(b), such purchase price
shall not be less than the Market Value per Share of a share of Common Stock on
the date such Option is granted. The Option or portion thereof may be exercised
by delivery of an irrevocable notice of exercise to the Company, as specified by
the Administrator. The purchase price of the Option or portion thereof shall be
paid in full in the manner specified by the Administrator. Separate stock
certificates shall be issued by the Company for those shares acquired pursuant
to the exercise of an Incentive Stock Option and for those shares acquired
pursuant to the exercise of any Option that does not constitute an Incentive
Stock Option.
(f) STOCKHOLDER RIGHTS AND PRIVILEGES. The Optionee shall be entitled to
all the privileges and rights of a stockholder only with respect to such shares
of Common Stock as have been purchased under the Option and for which
certificates representing such Common Stock have been registered in the
Optionee's name.
(g) OPTIONS IN SUBSTITUTION FOR STOCK OPTIONS GRANTED BY OTHER
CORPORATIONS. Options may be granted under the Plan from time to time in
substitution for stock options held by individuals employed by corporations who
become employees as a result of a merger or consolidation or other business
combination of the employing corporation with the Company or any subsidiary.
VIII. RESTRICTED STOCK
(a) OWNERSHIP OF RESTRICTED STOCK. Each grant of Restricted Stock will
constitute an immediate transfer of record and beneficial ownership of the
shares of Restricted Stock to the recipient of the grant in consideration of the
performance of services by such recipient (or other consideration determined by
the Administrator), entitling the recipient to all voting and other ownership
rights, but subject to the restrictions hereinafter referred to or contained in
the related Restricted Stock Agreement. Each grant may, in the discretion of the
Administrator, limit the recipient's dividend rights during the period in which
the shares of Restricted Stock are subject to a substantial risk of forfeiture
and restrictions on transfer.
(b) SUBSTANTIAL RISK OF FORFEITURE AND RESTRICTIONS ON TRANSFER. Each grant
of Restricted Stock will provide that (i) the shares covered thereby will be
subject, for a period or periods determined by the Administrator at the date of
grant, to one or more restrictions, including, without limitation, a restriction
that constitutes a "substantial risk of forfeiture" within the meaning of
section 83 of the Code and applicable interpretive authority thereunder, and
(ii) during such period or periods during which such restrictions are to
continue, the transferability of the Restricted Stock subject to such
restrictions will be prohibited or restricted in a manner and to the extent
prescribed by the Administrator at the date of grant.
(c) RESTRICTED STOCK HELD IN TRUST. Shares of Common Stock awarded pursuant
to a grant of Restricted Stock will be held in trust by the Company for the
benefit of the recipient until such time as the applicable restriction on
transfer thereof shall have expired or otherwise lapsed, at which time
certificates representing such Common Stock will be delivered to the recipient.
(d) RESTRICTED STOCK AGREEMENT; CONSIDERATION. Each grant of Restricted
Stock shall be evidenced by a Restricted Stock Agreement in such form and
containing such provisions not inconsistent with the provisions of the Plan as
the Administrator from time to time shall approve. The terms and conditions of
the respective Restricted Stock Agreements need not be identical. Each grant of
Restricted Stock may be made without additional consideration or in
consideration of a payment by the recipient that is less than the Market Value
per Share on the date of grant, as determined by the Administrator.
IX. RECAPITALIZATION, REORGANIZATION AND CHANGE IN CONTROL
(a) NO EFFECT ON RIGHT OR POWER. The existence of the Plan and the Awards
granted hereunder shall not affect in any way the right or power of the Board or
the stockholders of the Company or any subsidiary to make or authorize any
adjustment, recapitalization, reorganization or other change in the Company's or
any subsidiary's capital structure or its business, any merger or consolidation
of the Company or any subsidiary, any issue of debt or equity securities ahead
of or affecting Common Stock or the rights thereof, the dissolution or
liquidation of the Company or any subsidiary or any sale, lease, exchange or
other disposition of all or any part of its assets or business or any other
corporate act or proceeding.
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(b) CHANGES IN COMMON STOCK. The provisions of Section V(a) imposing limits
on the numbers of shares of Common Stock covered by Awards granted under the
Plan, as well as the number or type of shares or other property subject to
outstanding Options and Restricted Stock grants and the applicable option prices
per share, shall be adjusted appropriately by the Committee in the event of
stock dividends, spin offs of assets or other extraordinary dividends, stock
splits, combinations of shares, recapitalizations, mergers, consolidations,
reorganizations, liquidations, issuances of rights or warrants and similar
transactions or events.
(c) CHANGE IN CONTROL.*(1) As used in the Plan (except as otherwise
provided in an applicable Option Agreement or Restricted Stock Agreement), the
term "Change in Control" shall mean:
(aa) any person (within the meaning of Section 13(d) or 14(d) under the
Exchange Act, including any group (within the meaning of Section 13(d)(3) under
the Exchange Act), a "Person") is or becomes the "beneficial owner" (as such
term is defined in Rule 13d-3 promulgated under the Exchange Act), directly or
indirectly, of securities of the Company (such Person being referred to as an
"Acquiring Person") representing the greater of (x) 25% of the combined voting
power of the Company's outstanding securities and (y) the proportion of the
combined voting power of the Company's outstanding securities represented by
securities of the Company beneficially owned, directly or indirectly, by
Northwest Airlines Corporation ("Northwest") and any Person controlling,
controlled by or under common control with Northwest at the time of reference
(excluding, for purposes of determining such proportion of the combined voting
power under this clause (y), any securities beneficially owned by Northwest (and
any Person controlling, controlled by or under common control with Northwest)
which are deemed beneficially owned by such Acquiring Person); other than
beneficial ownership by (i) the Company or any subsidiary of the Company, (ii)
any employee benefit plan of the Company or any Person organized, appointed or
established pursuant to the terms of any such employee benefit plan (unless such
plan or Person is a party to or is utilized in connection with a transaction led
by Outside Persons), (iii) Northwest or any Person controlling, controlled by or
under common control with Northwest (unless Northwest is controlled by or under
common control with Delta Air Lines, Inc.), or (iv) (I) 1992 Air, Inc., (II) any
Person who controlled 1992 Air, Inc. as of February 26, 1998, including David
Bonderman and James Coulter, or (III) any Person controlled by any such Person
(Persons referred to in clauses (i) through (iv) hereof are hereinafter referred
to as "Excluded Persons"); or
(bb) individuals who constituted the Board as of February 26, 1998 (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board, provided that any individual becoming a director subsequent to February
26, 1998 whose appointment to fill a vacancy or to fill a new Board position or
whose nomination for election by the Company's shareholders was approved by a
vote of at least a majority of the directors then comprising the Incumbent Board
or who was nominated for election by Excluded Persons shall be considered as
though such individual were a member of the Incumbent Board; or
(cc) the Company merges with or consolidates into or engages in a
reorganization or similar transaction with another entity (including Northwest)
pursuant to a transaction in which the Company is not the "Controlling
Corporation"; or
(dd) the Company sells or otherwise disposes of all or substantially all of
its assets, other than to Excluded Persons, or the Company sells or otherwise
disposes of all or substantially all of its assets to Northwest or any Person
controlling, controlled by or under common control with Northwest.
For purposes of clause (aa) above, if at any time there exist securities of
different classes entitled to vote separately in the election of directors, the
calculation of the proportion of the voting power held by a beneficial owner of
the Company's securities shall be determined as follows: first, the proportion
of the voting power represented by securities held by such beneficial owner of
each separate class or group of classes voting
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*1. If the acquisition of Air Partners' interest in the Company contemplated
by the Investment Agreement dated as of January 25, 1998 among Northwest,
Newbridge Parent Corporation, Air Partners, L.P., the partners of Air Partners,
L.P. signatory thereto, Bonderman Family Limited Partnership, 1992 Air, Inc. and
Air Saipan, Inc., as amended by Amendment No. 1 thereto dated as of February 27,
1998, is not consummated, there shall automatically be substituted, in lieu of
the Change in Control provision of the Plan (Section IX(c)) set forth herein,
the alternate Change in Control provision attached to the Plan and captioned
"Alternate Change in Control Provision".
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separately in the election of directors shall be determined, provided that
securities representing more than 50% of the voting power of securities of any
such class or group of classes shall be deemed to represent 100% of such voting
power; second, such proportion shall then be multiplied by a fraction, the
numerator of which is the number of directors which such class or classes is
entitled to elect and the denominator of which is the total number of directors
elected to membership on the Board at the time; and third, the product obtained
for each such separate class or group of classes shall be added together, which
sum shall be the proportion of the combined voting power of the Company's
outstanding securities held by such beneficial owner.
For purposes of clause (aa) above, the term "Outside Persons" means any
Persons other than (I) Persons described in clauses (aa)(i) or (iii) or (iv)
above (as to Persons described in clause (aa)(iii) or (iv) above, while they are
Excluded Persons) and (II) members of senior management of the Company in office
immediately prior to the time the Acquiring Person acquires the beneficial
ownership described in clause (aa).
For purposes of clause (cc) above, the Company shall be considered to be
the Controlling Corporation in any merger, consolidation, reorganization or
similar transaction unless either (1) the shareholders of the Company
immediately prior to the consummation of the transaction (the "Old
Shareholders") would not, immediately after such consummation, beneficially own,
directly or indirectly, securities of the resulting entity entitled to elect a
majority of the members of the Board of Directors or other governing body of the
resulting entity or (2) those persons who were directors of the Company
immediately prior to the consummation of the proposed transaction would not,
immediately after such consummation, constitute a majority of the directors of
the resulting entity, provided that (I) there shall be excluded from the
determination of the voting power of the Old Shareholders securities in the
resulting entity beneficially owned, directly or indirectly, by the other party
to the transaction and any such securities beneficially owned, directly or
indirectly, by any Person acting in concert with the other party to the
transaction, (II) there shall be excluded from the determination of the voting
power of the Old Shareholders securities in the resulting entity acquired in any
such transaction other than as a result of the beneficial ownership of Company
securities prior to the transaction and (III) persons who are directors of the
resulting entity shall be deemed not to have been directors of the Company
immediately prior to the consummation of the transaction if they were elected as
directors of the Company within 90 days prior to the consummation of the
transaction.
The exclusion described in clause (aa)(iii) above shall cease to have any
force or effect (and the Persons described therein shall cease to be Excluded
Persons) if Northwest (together with any Person controlling, controlled by or
under common control with Northwest) ceases to be, for a period of thirty
consecutive calendar days, the beneficial owner, directly or indirectly, of
securities of the Company representing at least 25% of the combined voting power
of the Company's outstanding securities. The exclusion described in clause
(aa)(iv) above shall cease to have any force or effect (and the Persons
described therein shall cease to be Excluded Persons) if (A) the Person
acquiring beneficial ownership is not controlled by David Bonderman or James
Coulter, or (B) the Person acquiring beneficial ownership (together with any
Person controlling, controlled by or under common control with such Person)
ceases to be, for a period of thirty consecutive calendar days, the beneficial
owner, directly or indirectly, of securities of the Company representing at
least 25% of the combined voting power of the Company's outstanding securities.
Upon the occurrence of a Change in Control, with respect to each recipient
of an Award hereunder, (AA) all Options granted to such recipient and
outstanding at such time shall immediately vest and become exercisable in full
(but subject, however, in the case of Incentive Stock Options, to the aggregate
fair market value, determined as of the date the Incentive Stock Options are
granted, of the stock with respect to which Incentive Stock Options are
exercisable for the first time by such recipient during any calendar year not
exceeding $100,000) and, except as required by law, all restrictions on the
transfer of shares acquired pursuant to such Options shall terminate and (BB)
all restrictions applicable to such recipient's Restricted Stock shall be deemed
to have been satisfied and such Restricted Stock shall vest in full.
In addition, except as otherwise provided in the applicable Option
Agreement, if a recipient of an Award hereunder becomes entitled to one or more
payments (with a "payment" including, without limitation, the vesting of an
Award) pursuant to the terms of the Plan (the "Total Payments"), which are or
become subject
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to the tax imposed by section 4999 of the Code (or any similar tax that may
hereafter be imposed) (the "Excise Tax"), the Company or subsidiary for whom the
recipient is then performing services shall pay to the recipient an additional
amount (the "Gross-Up Payment") such that the net amount retained by the
recipient, after reduction for any Excise Tax on the Total Payments and any
federal, state and local income or employment tax and Excise Tax on the Gross-Up
Payment, shall equal the Total Payments. For purposes of determining the amount
of the Gross-Up Payment, the recipient shall be deemed (aa) to pay federal
income taxes at the highest stated rate of federal income taxation (including
surtaxes, if any) for the calendar year in which the Gross-Up Payment is to be
made (for 1998, the highest stated rate is 39.6%); and (bb) to pay any
applicable state and local income taxes at the highest stated rate of taxation
(including surtaxes, if any) for the calendar year in which the Gross-Up Payment
is to be made. Any Gross-Up Payment required hereunder shall be made to the
recipient at the same time any Total Payment subject to the Excise Tax is paid
or deemed received by the recipient.
X. AMENDMENT AND TERMINATION OF THE PLAN
The Board in its discretion may terminate the Plan at any time with respect
to any shares of Common Stock for which Awards have not theretofore been
granted. The Board shall have the right to alter or amend the Plan or any part
thereof from time to time; provided that no change in any Award theretofore
granted may be made which would impair the rights of the recipient thereof
without the consent of such recipient, and provided further that the Board may
not, without approval of the stockholders of the Company, amend the Plan to (a)
increase the maximum aggregate number of shares that may be issued under the
Plan or (b) change the class of individuals eligible to receive Awards under the
Plan.
XI. MISCELLANEOUS
(a) NO RIGHT TO AN OPTION OR RESTRICTED STOCK. Neither the adoption of the
Plan nor any action of the Board or the Administrator shall be deemed to give an
employee or Director any right to be granted an Award or any other rights
hereunder except as may be evidenced by an Option Agreement or Restricted Stock
Agreement duly executed and delivered on behalf of the Company, and then only to
the extent and on the terms and conditions expressly set forth therein. The Plan
shall be unfunded. The Company shall not be required to establish any special or
separate fund or to make any other segregation of funds or assets to assure the
performance of its obligations under any Award.
(b) NO EMPLOYMENT OR MEMBERSHIP RIGHTS CONFERRED. Nothing contained in the
Plan shall (i) confer upon any employee any right with respect to continuation
of employment with the Company or any subsidiary or (ii) interfere in any way
with the right of the Company or any subsidiary to terminate his or her
employment at any time. Nothing contained in the Plan shall confer upon any
Director any right with respect to continuation of membership on the Board.
(c) OTHER LAWS; WITHHOLDING. The Company shall not be obligated to issue
any Common Stock pursuant to any Award granted under the Plan at any time when
the shares covered thereby have not been registered under the Securities Act of
1933, as amended, and such other state and federal laws, rules and regulations
as the Company or the Administrator deems applicable and, in the opinion of
legal counsel to the Company, there is no exemption from the registration
requirements of such laws, rules and regulations available for the issuance and
sale of such shares. No fractional shares of Common Stock shall be delivered,
nor shall any cash in lieu of fractional shares be paid. The Company shall have
the right to (i) make deductions from any settlement or exercise of an Award
made under the Plan, including the delivery of shares, or require shares or cash
or both be withheld from any Award, in each case in an amount sufficient to
satisfy withholding of any federal, state or local taxes required by law, or
(ii) take such other action as may be necessary or appropriate to satisfy any
such tax withholding obligations. The Administrator may determine the manner in
which such tax withholding may be satisfied, and may permit shares of Common
Stock (together with cash, as appropriate) to be used to satisfy required tax
withholding based on the Market Value per Share of any such shares of Common
Stock, as of the last trading day preceding the exercise or settlement of the
Award.
A-8
<PAGE> 45
(d) NO RESTRICTION ON CORPORATE ACTION. Subject to the restrictions
contained in Section X, nothing contained in the Plan shall be construed to
prevent the Company or any subsidiary from taking any corporate action, whether
or not such action would have an adverse effect on the Plan or any Award granted
hereunder. No employee, Director, beneficiary or other person shall have any
claim against the Company or any subsidiary as a result of any such action.
(e) RESTRICTIONS ON TRANSFER OF OPTIONS AND CERTAIN UNDERLYING SHARES. An
Option (other than an Incentive Stock Option, which shall be subject to the
transfer restrictions set forth in Section VII(c)) shall not be transferable
otherwise than (i) by will or the laws of descent and distribution, (ii)
pursuant to a qualified domestic relations order as defined by the Code or Title
I of the Employee Retirement Income Security Act of 1974, as amended, or the
rules thereunder, or (iii) with the consent of the Administrator. In the
discretion of the Administrator, a percentage (determined by the Administrator
and set forth in the applicable Option Agreement) of the aggregate shares of
Common Stock obtained from exercises of an Option (which percentage may be
satisfied out of particular exercises as determined by the Administrator and set
forth in the applicable Option Agreement) shall not be transferable prior to the
earliest to occur of (x) the termination of the relevant Option term (or such
shorter period as may be determined by the Administrator and set forth in the
Option Agreement), (y) the Optionee's retirement, death or Disability, or (z)
termination of the Optionee's employment with the Company and its subsidiaries.
(f) GOVERNING LAW. The Plan shall be construed in accordance with the laws
of the State of Delaware.
A-9
<PAGE> 46
ALTERNATE CHANGE IN CONTROL PROVISION*(2)
(c) CHANGE IN CONTROL. As used in the Plan, the term "Change in Control" shall
mean:
(aa) any person (within the meaning of Section 13(d) or 14(d) under the
Exchange Act, including any group (within the meaning of Section 13(d)(3) under
the Exchange Act), a "Person") is or becomes the "beneficial owner" (as such
term is defined in Rule 13d-3 promulgated under the Exchange Act), directly or
indirectly, of securities of the Company (such Person being referred to as an
"Acquiring Person") representing the greater of (x) 25% of the combined voting
power of the Company's outstanding securities and (y) the proportion of the
combined voting power of the Company's outstanding securities represented by
securities of the Company beneficially owned, directly or indirectly, by Air
Partners, L.P. ("Air Partners") and any Person controlling, controlled by or
under common control with Air Partners at the time of reference (excluding, for
purposes of determining such proportion of the combined voting power under this
clause (y), any securities beneficially owned by Air Partners (and any Person
controlling, controlled by or under common control with Air Partners) which are
deemed beneficially owned by such Acquiring Person); other than beneficial
ownership by (i) the Company or any subsidiary of the Company, (ii) any employee
benefit plan of the Company or any Person organized, appointed or established
pursuant to the terms of any such employee benefit plan (unless such plan or
Person is a party to or is utilized in connection with a transaction led by
Outside Persons), or (iii) Air Partners or any Person (other than any air
carrier that is not the Company and that is currently controlled by or under
common control with Air Partners, or a holding company or subsidiary of any such
air carrier) controlling, controlled by or under common control with Air
Partners (Persons referred to in clauses (i) through (iii) hereof are
hereinafter referred to as "Excluded Persons"); or
(bb) individuals who constituted the Board as of February 28, 1997 (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board, provided that any individual becoming a director subsequent to February
28, 1997 whose appointment to fill a vacancy or to fill a new Board position or
whose nomination for election by the Company's shareholders was approved by a
vote of at least a majority of the directors then comprising the Incumbent Board
or who was nominated for election by Excluded Persons shall be considered as
though such individual were a member of the Incumbent Board; or
(cc) the Company merges with or consolidates into or engages in a
reorganization or similar transaction with another entity pursuant to a
transaction in which the Company is not the "Controlling Corporation"; or
(dd) the Company sells or otherwise disposes of all or substantially all of
its assets, other than to Excluded Persons.
For purposes of clause (aa) above, if at any time there exist securities of
different classes entitled to vote separately in the election of directors, the
calculation of the proportion of the voting power held by a beneficial owner of
the Company's securities shall be determined as follows: first, the proportion
of the voting power represented by securities held by such beneficial owner of
each separate class or group of classes voting separately in the election of
directors shall be determined, provided that securities representing more than
50% of the voting power of securities of any such class or group of classes
shall be deemed to represent 100% of such voting power; second, such proportion
shall then be multiplied by a fraction, the numerator of which is the number of
directors which such class or classes is entitled to elect and the denominator
of which is the total number of directors elected to membership on the Board at
the time; and third, the product obtained for each such separate class or group
of classes shall be added together, which sum shall be the proportion of the
combined voting power of the Company's outstanding securities held by such
beneficial owner.
For purposes of clause (aa) above, the term "Outside Persons" means any
Persons other than Persons described in clauses (aa)(i) or (iii) above (as to
Persons described in clause (aa)(iii) above, while they are
- ---------------
*2. If the acquisition of Air Partners' interest in the Company contemplated
by the Investment Agreement dated as of January 25, 1998 among Northwest,
Newbridge Parent Corporation, Air Partners, L.P., the partners of Air Partners,
L.P. signatory thereto, Bonderman Family Limited Partnership, 1992 Air, Inc. and
Air Saipan, Inc., as amended by Amendment No. 1 thereto dated as of February 27,
1998, is not consummated, there shall automatically be substituted, in lieu of
the Change in Control provision of the Plan (Section IX(c)) set forth herein,
this alternate Change in Control provision captioned "Alternate Change in
Control Provision".
A-10
<PAGE> 47
Excluded Persons) or members of senior management of the Company in office
immediately prior to the time the Acquiring Person acquires the beneficial
ownership described in clause (aa).
For purposes of clause (cc) above, the Company shall be considered to be
the Controlling Corporation in any merger, consolidation, reorganization or
similar transaction unless either (1) the shareholders of the Company
immediately prior to the consummation of the transaction (the "Old
Shareholders") would not, immediately after such consummation, beneficially own,
directly or indirectly, securities of the resulting entity entitled to elect a
majority of the members of the Board of Directors or other governing body of the
resulting entity or (2) those persons who were directors of the Company
immediately prior to the consummation of the proposed transaction would not,
immediately after such consummation, constitute a majority of the directors of
the resulting entity, provided that (I) there shall be excluded from the
determination of the voting power of the Old Shareholders securities in the
resulting entity beneficially owned, directly or indirectly, by the other party
to the transaction and any such securities beneficially owned, directly or
indirectly, by any Person acting in concert with the other party to the
transaction (unless such other party or such Person is Air Partners, if Air
Partners has not ceased to be an Excluded Person), (II) there shall be excluded
from the determination of the voting power of the Old Shareholders securities in
the resulting entity acquired in any such transaction other than as a result of
the beneficial ownership of Company securities prior to the transaction and
(III) persons who are directors of the resulting entity shall be deemed not to
have been directors of the Company immediately prior to the consummation of the
transaction if they were elected as directors of the Company within 90 days
prior to the consummation of the transaction.
The exclusion described in clause (aa)(iii) above shall cease to have any
force or effect (and the Persons described therein shall cease to be Excluded
Persons) if (A) Air Partners ceases to be, for a period of thirty consecutive
calendar days, the beneficial owner, directly or indirectly, of securities of
the Company representing at least 25% of the combined voting power of the
Company's outstanding securities or (B) there occurs a "change in the ownership
or effective control" (within the meaning of section 280G of the Code) of Air
Partners.
Upon the occurrence of a Change in Control, with respect to each recipient
of an Award hereunder, (AA) all Options granted to such recipient and
outstanding at such time shall immediately vest and become exercisable in full
(but subject, however, in the case of Incentive Stock Options, to the aggregate
fair market value, determined as of the date the Incentive Stock Options are
granted, of the stock with respect to which Incentive Stock Options are
exercisable for the first time by such recipient during any calendar year not
exceeding $100,000) and, except as required by law, all restrictions on the
transfer of shares acquired pursuant to such Options shall terminate and (BB)
all restrictions applicable to such recipient's Restricted Stock shall be deemed
to have been satisfied and such Restricted Stock shall vest in full.
In addition, if a recipient of an Award hereunder becomes entitled to one
or more payments (with a "payment" including, without limitation, the vesting of
an Award) pursuant to the terms of the Plan (the "Total Payments"), which are or
become subject to the tax imposed by section 4999 of the Code (or any similar
tax that may hereafter be imposed) (the "Excise Tax"), the Company or subsidiary
for whom the recipient is then performing services shall pay to the recipient an
additional amount (the "Gross-Up Payment") such that the net amount retained by
the recipient, after reduction for any Excise Tax on the Total Payments and any
federal, state and local income or employment tax and Excise Tax on the Gross-Up
Payment, shall equal the Total Payments. For purposes of determining the amount
of the Gross-Up Payment, the recipient shall be deemed (aa) to pay federal
income taxes at the highest stated rate of federal income taxation (including
surtaxes, if any) for the calendar year in which the Gross-Up Payment is to be
made (for 1996, the highest stated rate is 39.6%); and (bb) to pay any
applicable state and local income taxes at the highest stated rate of taxation
(including surtaxes, if any) for the calendar year in which the Gross-Up Payment
is to be made. Any Gross-Up Payment required hereunder shall be made to the
recipient at the same time any Total Payment subject to the Excise Tax is paid
or deemed received by the recipient.
A-11
<PAGE> 48
COMMON STOCK COMMON STOCK
CONTINENTAL AIRLINES, INC.
P ANNUAL MEETING OF STOCKHOLDERS -- MAY 21, 1998
R THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
O The undersigned hereby authorizes Gordon M. Bethune, Jeffery A. Smisek and
Scott R. Peterson, and each of them, with full power of substitution, to
X represent and vote the stock of the undersigned in Continental Airlines,
Inc. as directed and, in their sole discretion, on all other matters that
Y may properly come before the Annual Meeting of Stockholders to be held on
May 21, 1998, and at any adjournment or adjournments thereof, as if the
undersigned were present and voting thereat. The undersigned acknowledges
receipt of the notice of annual meeting and proxy statement with respect to
such Annual Meeting and certifies that, to the knowledge of the undersigned,
all equity securities of the Company owned of record or beneficially by the
undersigned are owned and controlled only by U.S. Citizens (as defined in
the proxy statement), except as indicated on the reverse side hereof.
WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING, PLEASE EXECUTE AND
RETURN THIS PROXY, WHICH MAY BE REVOKED AT ANY TIME PRIOR TO ITS USE.
Nominees for Director:
Thomas J. Barrack, Jr., Lloyd M. Bentsen, Jr., THIS FORM OF PROXY RELATES
Gordon M. Bethune, David Bonderman, TO BOTH CLASS A AND CLASS B
Gregory D. Brenneman, Patrick Foley, COMMON STOCK. IF YOU
Douglas H. McCorkindale, George G. C. Parker, RECEIVED TWO PROXY CARDS,
Richard W. Pogue, William S. Price III, PLEASE EXECUTE AND
Donald L. Strum, Karen Hastie Williams, RETURN EACH.
Charles A. Yamarone
This proxy, when properly executed, will be voted in the manner directed by
the undersigned stockholder(s). IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED "FOR" THE ELECTION OF DIRECTORS NOMINATED BY THE BOARD OF DIRECTORS
(PROPOSAL 1) AND "FOR" PROPOSALS 2 AND 3.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSALS 1, 2 AND 3.
SEE REVERSE
<PAGE> 49
CONTINENTAL AIRLINES, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. O
[ ]
For Withhold For All
All All Except
1. Election of Directors
See Reverse Side. O O O
For, except vote withheld from
the following nominee(s):
________________________________________ For Against Abstain
2. Approval of 1998 Stock Incentive Plan. O O O
3. Ratification of Appointment of
Independent Auditors. O O O
Please mark this box ONLY if any Class A
or Class B common stock owned of record or
beneficially by you is owned or controlled O
by Foreigners (as defined in the proxy
statement), and indicate the number and
class so owned or controlled by Foreigners.
Class A ___________________________________
Class B ___________________________________
Dated: ___________________, 1998
Signature(s) ______________________________
___________________________________________
NOTE: Please sign exactly as name appears
hereon. Joint owners should each sign. When
signing as attorney, executor, administrator,
trustee or guardian, please give full title
as such.
FOLD AND DETACH HERE
