UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

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Continental Airlines, Inc.

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April 10, 2006

 

To Our Stockholders:

 

On behalf of the Board of Directors, we are pleased to invite you to attend the Continental Airlines, Inc. 2006 Annual Meeting of Stockholders. As indicated in the attached notice, the meeting will be held at The Hyatt Regency, 1200 Louisiana Street, Houston, Texas on Tuesday, June 6, 2006, at 10:00 a.m., local time. At the meeting, we will act on the matters described in the attached proxy statement and there will be an opportunity to discuss other matters of interest to you as a stockholder.

 

Please authorize your proxy or direct your vote by internet or telephone as described in the enclosed proxy statement, even if you plan to attend the meeting in person. Alternatively, you can date, sign and mail the enclosed proxy card in the envelope provided. We look forward to seeing you in Houston.

 

Cordially,

 

 

Larry Kellner

Chairman of the Board and Chief

Executive Officer

 

 

Jeff Smisek

President

 

CONTINENTAL AIRLINES, INC.
1600 Smith Street, Dept. HQSEO
Houston, Texas 77002

 

 

 

 

NOTICE OF 2006 ANNUAL MEETING OF STOCKHOLDERS

To Be Held June 6, 2006

 

 

 

 

The 2006 annual meeting of stockholders of Continental Airlines, Inc. will be held at The Hyatt Regency, 1200 Louisiana Street, Houston, Texas on Tuesday, June 6, 2006, at 10:00 a.m., local time, for the following purposes:

 

1. To elect eleven directors to serve until the next annual meeting of stockholders;

 

2. To consider and act upon a proposal to amend the company’s Amended and Restated Certificate of Incorporation to increase the authorized Class B common stock from 200 million shares to 400 million shares;

 

3. To consider and act upon a proposal to amend the company’s Incentive Plan 2000 to increase the number of shares of common stock issuable under the plan from 3 million shares to 4.5 million shares. The Human Resources Committee has determined that none of the additional 1.5 million shares will be issued to any of the company’s current officers;

 

4. To consider and act upon a proposal to ratify the appointment of Ernst & Young LLP as independent auditors of the company and its subsidiaries for 2006;

 

5. To consider and act upon a proposal submitted by a stockholder related to political activities; and

 

6. To consider and act upon any other matters that may properly come before the annual meeting or any postponement or adjournment thereof.

 

The holders of record of the company’s common stock at the close of business on April 7, 2006 are entitled to notice of and to vote at the meeting. A list of the stockholders entitled to vote at the meeting will be available for examination, during ordinary business hours, for ten days before the meeting at our principal place of business, 1600 Smith Street, Houston, Texas.

 

 

 

Jennifer L. Vogel

Secretary

 

Houston, Texas

April 10, 2006

 

Please authorize your proxy or direct your vote by internet or telephone as described in the enclosed proxy statement, even if you plan to attend the meeting in person. Alternatively, you may date and sign the enclosed proxy and return it promptly by mail in the envelope provided. If you mail the proxy card, no postage is required if mailed in the United States. If you do attend the meeting in person and want to withdraw your proxy, you may do so as described in the enclosed proxy statement and vote in person on all matters properly brought before the meeting.

 

TABLE OF CONTENTS

 

CONTINENTAL AIRLINES, INC.
1600 Smith Street, Dept. HQSEO
Houston, Texas 77002

 

 

 

 

PROXY STATEMENT

 

2006 ANNUAL MEETING OF STOCKHOLDERS

To Be Held June 6, 2006

 

 

 

 

 

We are providing this proxy statement to you in connection with the solicitation on behalf of Continental’s board of directors, which we refer to as the “board,” of proxies to be voted at the company’s 2006 annual stockholders meeting or any postponement or adjournment of that meeting. The meeting will be held at The Hyatt Regency, 1200 Louisiana Street, Houston, Texas on Tuesday, June 6, 2006, at 10:00 a.m., local time, for the purposes set forth in the accompanying Notice of 2006 Annual Meeting of Stockholders. This proxy statement and the accompanying proxy, which are accompanied by a copy of our 2005 Annual Report, are being first mailed or otherwise delivered to stockholders on or about April 13, 2006.

 

Stockholders of record at the close of business on April 7, 2006, the “record date,” are entitled to notice of and to vote at the meeting and at any postponement or adjournment of the meeting. At the close of business on the record date, Continental had outstanding 87,646,518 shares of Class B common stock, which we refer to as “common stock,” and one share of Series B Preferred Stock, held by Northwest Airlines, Inc., which we refer to as “Northwest.” Subject to certain limitations on voting by non-U.S. citizens, as described below, each share of our common stock is entitled to one vote. The share of Series B Preferred Stock held by Northwest is not entitled to vote with respect to the matters set forth in the accompanying Notice.

 

Under U.S. law, no more than 25% of the voting stock of a U.S. air carrier such as Continental may be owned or controlled, directly or indirectly, by persons who are not U.S. citizens, and Continental itself must be a U.S. citizen. For these purposes, a “U.S. citizen” means:

 

 

The U.S. Department of Transportation determines, on a case-by-case basis, whether an air carrier is effectively owned and controlled by citizens of the United States.

 

In order to comply with these rules, our Amended and Restated Certificate of Incorporation provides that persons who are not U.S. citizens may not vote shares of our capital stock unless the shares are registered on a separate stock record maintained by us. A foreign holder wishing to register on this separate stock record should send us a written request for registration identifying the full name and address of the holder, the holder’s citizenship, the total number of shares held and the nature of such ownership (i.e., record or beneficial). Such requests should be addressed to our Secretary at Continental Airlines, Inc., P.O. Box 4607,

Houston, Texas 77210-4607. We will not register shares on this record if the amount registered would cause us to violate the foreign ownership rules or adversely affect our operating certificates or authorities. Registration on this record is made in chronological order based on the date we receive a written request for registration. As of the record date, shares registered on this record comprised less than 25% of our voting stock.

 

A quorum of stockholders is necessary for a valid meeting. The required quorum for the transaction of business at the annual meeting is a majority of the total outstanding shares of stock entitled to vote at the meeting, either present in person or represented by proxy.

 

Abstentions will be included in determining the number of shares present at the meeting for the purpose of determining the presence of a quorum, as will broker non-votes. A “broker non-vote” occurs under stock exchange rules when a broker is not permitted to vote on a matter without instructions from the beneficial owner of the shares and no instruction is given. The rules of the New York Stock Exchange, or “NYSE,” prohibit brokers from voting on the amendment of the Incentive Plan 2000 (Proposal 3), and the proposal of stockholder (Proposal 5), unless instructions have been received from the beneficial owner of the voting shares. However, brokers may vote in their discretion in the absence of timely instructions from beneficial owners with respect to the election of directors (Proposal 1), the amendment of the Amended and Restated Certificate of Incorporation (Proposal 2), and the proposal to ratify the appointment of the independent auditors (Proposal 4).

 

Directors will be elected by a plurality of the votes cast for directors by the holders of common stock entitled to vote thereon.

 

In the vote to elect directors, stockholders may:

 

(a) vote in favor of all nominees;

 

(b) withhold votes as to all nominees; or

 

(c) withhold votes as to specific nominees.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” EACH OF THE NOMINEES.

 

The proposal to amend the company’s Amended and Restated Certificate of Incorporation, which we refer to as our “Certificate of Incorporation,” will require approval by the affirmative votes of the holders of a majority of the outstanding shares of common stock entitled to vote thereon. Abstentions will have the same effect as votes against the proposal.

 

In the vote on the proposal to amend our Certificate of Incorporation, stockholders may:

 

(a) vote in favor of the proposal;

 

(b) vote against the proposal; or

 

(c) abstain from voting on the proposal.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE PROPOSAL TO AMEND OUR CERTIFICATE OF INCORPORATION.

 

The proposal to amend the company’s Incentive Plan 2000 will require approval by a majority of the votes cast at the meeting on Proposal 3 by the holders of common stock entitled to vote thereon. Neither

abstentions nor broker non-votes are treated as votes cast and thus neither will affect the outcome of the proposal.

 

In the vote on the proposal to amend the Incentive Plan 2000, stockholders may:

 

(a) vote in favor of the proposal;

 

(b) vote against the proposal; or

 

(c) abstain from voting on the proposal.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE PROPOSAL TO AMEND THE COMPANY’S INCENTIVE PLAN 2000.

 

The proposal to ratify the appointment of Ernst & Young LLP as our independent auditors will require approval by a majority of the votes cast at the meeting on Proposal 4 by the holders of common stock entitled to vote thereon. Abstentions are not treated as votes cast and thus will not affect the outcome of the proposal.

 

In the vote on the ratification of the appointment of Ernst & Young LLP as our independent auditors, stockholders may:

 

(a) vote in favor of the ratification;

 

(b) vote against the ratification; or

 

(c) abstain from voting on the ratification.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF OUR INDEPENDENT AUDITORS.

 

The proposal of stockholder scheduled to be presented at the meeting will require approval by a majority of the votes cast at the meeting on Proposal 5 by the holders of common stock entitled to vote thereon. Neither abstentions nor broker non-votes are treated as votes cast and thus neither will affect the outcome of the proposal.

 

In the vote on the proposal of stockholder, stockholders may:

 

(a) vote in favor of the proposal;

 

(b) vote against the proposal; or

 

(c) abstain from voting on the proposal.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “AGAINST” THE PROPOSAL OF STOCKHOLDER.

 

Although you may vote by properly signing and returning the proxy card or voting form that accompanies this proxy statement in the enclosed postage-paid envelope, we ask that you vote instead by internet or telephone, which saves us money. Please note that the telephonic voting procedures described below are not available for shares held by non-U.S. citizens.

 

Shares Held of Record.  Stockholders with shares registered in their names with Mellon Investor Services LLC, Continental’s transfer agent and registrar, may authorize a proxy by internet at the following internet address: www.proxyvote.com or telephonically by calling Automatic Data Processing, Inc., which we refer to as “ADP,” at 1-800-690-6903. Proxies submitted through ADP by internet or telephone must be received by

11:59 p.m. eastern time on June 5, 2006. The giving of such proxy will not affect your right to vote in person if you decide to attend the meeting.

 

Shares Held in a Bank or Brokerage Account.  A number of banks and brokerage firms participate in a program, separate from that offered by ADP, that also permits stockholders to direct their vote by internet or telephone. If your shares are held in an account at such a bank or brokerage firm, you may direct the voting of those shares by internet or telephone by following the instructions on their enclosed voting form. Votes directed by internet or telephone through such a program must be received by 11:59 p.m. eastern time on June 5, 2006. Directing the voting of your shares will not affect your right to vote in person if you decide to attend the meeting; however, you must first request a valid proxy either on the internet or the voting form that accompanies this proxy statement. Requesting a valid proxy prior to the deadlines described above will automatically cancel any voting directions you have previously given by internet or by telephone with respect to your shares.

 

The internet and telephone proxy procedures are designed to authenticate stockholders’ identities, to allow stockholders to give their proxy instructions and to confirm that those instructions have been properly recorded. Stockholders authorizing proxies or directing the voting of shares by internet should understand that there may be costs associated with electronic access, such as usage charges from internet access providers and telephone companies, that must be borne by the stockholder.

 

You can revoke your proxy before it is exercised at the meeting in any of three ways:

 

 

Continental will bear the costs of the solicitation of proxies. In addition to the solicitation of proxies by mail, proxies may also be solicited by internet, telephone, telegram, fax or in person by regular employees and directors of Continental, none of whom will receive additional compensation for that solicitation. In addition, we have retained Mellon Investor Services LLC to assist in the solicitation of proxies for a fee estimated not to exceed $8,500 plus reasonable out-of-pocket expenses. Arrangements will be made with brokerage houses and with other custodians, nominees and fiduciaries to forward proxy soliciting materials to beneficial owners, and we will reimburse them for their reasonable out-of-pocket expenses incurred in doing so.

 

We are sending only one copy of our proxy statement to stockholders who share the same last name and address, unless they have notified us that they want to continue receiving multiple copies. This practice, known as “householding,” is designed to reduce duplicate mailings and save significant printing and postage costs.

 

If you received a householded mailing this year and you would like to have additional copies of our proxy statement mailed to you or you would like to opt out of this practice for future mailings, please submit your request to our Secretary in writing at Continental Airlines, Inc., P.O. Box 4607, Houston, Texas 77210-4607. You may also contact us if you received multiple copies of the annual meeting materials and would prefer to receive a single copy in the future.

 

We will not act on any matters at the meeting other than those indicated on the accompanying Notice and procedural matters related to the meeting.

 

We have one class of securities outstanding that is entitled to vote on the matters to be considered at the meeting, Class B common stock, which is entitled to one vote per share, subject to the limitations on voting by non-U.S. citizens described above. The following table sets forth, as of March 31, 2006 (unless otherwise indicated below), information with respect to persons owning beneficially (to our knowledge) more than five percent of any class of our voting securities.

 

 

 

The following table shows, as of March 31, 2006 (unless otherwise indicated below), the number of shares of common stock beneficially owned by our current directors, the executive officers named below in the Summary Compensation Table, and all executive officers and directors as a group.

 

 

 

 

Our board has adopted Corporate Governance Guidelines developed and recommended by the Corporate Governance Committee of the board. The Corporate Governance Guidelines, together with the charters of each of our board committees, the company’s Principles of Conduct for employees and directors and the Directors’ Code of Ethics, provide the framework for the governance of Continental. A complete copy of these documents can be found under “Corporate Governance” at www.continental.com/company/investor, and we will furnish print copies of these documents to interested security holders without charge, upon request. Written requests for such copies should be addressed to our Secretary at Continental Airlines, Inc., P.O. Box 4607, Houston, Texas 77210-4607.

 

In February 2006, upon the recommendation of the Corporate Governance Committee, our board adopted amendments to our Corporate Governance Guidelines to enhance our corporate governance practices as described below.

 

The first governance enhancement limits the total number of boards of directors on which any of our directors may serve. Following the transition period which expires in February 2008, none of our directors will be permitted under our Corporate Governance Guidelines to serve on the board of directors of more than two other public companies if the director is employed on a full-time basis, or four other public companies if the director is employed on less than a full-time basis. For determining the number of boards of directors on which a director serves, the guidelines exclude service on the board of directors of a charitable, philanthropic or non-profit organization, as well as service on the board of the director’s principal employer. Further, if a director serves on the board of directors of two or more affiliated companies that hold joint or concurrent board meetings, that will be considered service on only one other board.

 

The second governance enhancement requires that our directors offer to resign upon a qualifying job change. If a director experiences either a termination of his or her principal employment or position, or a material decrease in responsibilities with respect to that employment or position, the director is required to submit his or her offer to resign to the chair of the Corporate Governance Committee. The committee will then review the circumstances surrounding the employment change and such other matters as it deems appropriate and make a recommendation to our board concerning acceptance or rejection of the director’s offer to resign. Our board will then make the final determination concerning whether to accept or reject the director’s offer to resign.

 

The third governance enhancement establishes minimum stock ownership requirements for our directors, chief executive officer, or “CEO,” president and executive vice presidents. Subject to a one year transition period for newly-elected directors, each of our directors is required by our Corporate Governance Guidelines to beneficially own at least 1,000 shares of our common stock, our CEO and our president are each required to beneficially own at least 5,000 shares, and our executive vice presidents are each required to beneficially own at least 2,000 shares. A director’s or officer’s holdings of restricted stock or stock options exercisable within 60 days are included when determining whether the individual beneficially owns a sufficient number of shares.

 

The board has the authority to amend and/or restate the Corporate Governance Guidelines, including any or all of these governance enhancements, from time to time in its sole discretion without stockholder approval.

 

Regular meetings of our board are generally held four times per year, and special meetings are scheduled when required. The board held five meetings in 2005. During 2005, each director attended at least 75% of the sum of the total number of meetings of the board and each committee of which he or she was a member. Last year, all eleven of our directors attended the annual meeting of stockholders.

The following table lists our five board committees, the directors who currently serve on them and the number of committee meetings held in 2005.

 

Membership on Board Committees

 

 

 

 

Under our Corporate Governance Guidelines, directors are expected to diligently fulfill their fiduciary duties to stockholders, including by preparing for, attending and participating in meetings of the board and the committees of which the directors are a member. We do not have a formal policy regarding director attendance at annual meetings. However, when considering a director’s renomination to the board, the Corporate Governance Committee must consider the director’s history of attendance at annual meetings and at board and committee meetings as well as the director’s preparation for and participation in such meetings.

 

Our non-management directors regularly meet separately in executive session without any members of management present. During 2005, our non-management directors met in such executive sessions on three occasions. Our Corporate Governance Guidelines provide that the presiding director at each such session rotates among the non-management members, in order of seniority of board service. Currently, all of our non-management directors are independent within the meaning of the NYSE’s criteria for independence. See “Proposal 1: Election of Directors — NYSE Independence Determinations” below. If any of our non-management directors were to fail to meet the NYSE’s criteria for independence, then our independent directors would meet separately at least once a year in accordance with the rules of the NYSE.

 

Our board has established the committees described below, each of which operates under a written charter adopted by the board and available on our website as indicated above under “Corporate Governance.” The charter of the Audit Committee, as amended through February 11, 2005, is attached as Appendix B to this proxy statement.

 

Audit Committee.  The Audit Committee has the authority and power to act on behalf of the board of directors with respect to the appointment of our independent auditors and with respect to authorizing all audit and other activities performed for us by our internal and independent auditors. The committee, among other matters, reviews with management and the company’s independent auditors the effectiveness of the accounting and financial controls of the company and its subsidiaries, and reviews and discusses the company’s audited financial statements with management and the independent auditors. It is the responsibility of the committee to evaluate the qualifications, performance and independence of the independent auditors and to maintain free

and open communication among the committee, the independent auditors, the internal auditors and management of the company. See “Report of the Audit Committee” below. All members of the Audit Committee are independent directors as required by the applicable rules of the NYSE, and Mr. Parker and Mr. Munoz each qualifies as an audit committee financial expert under the applicable rules promulgated pursuant to the Securities Exchange Act of 1934, as amended, which we refer to as the “Exchange Act.”

 

Corporate Governance Committee.  The Corporate Governance Committee identifies individuals qualified to become members of the board of directors, consistent with criteria approved by the board, and recommends to the board the slate of directors to be nominated by the board at the annual stockholders meeting and any director to fill a vacancy on the board. The committee will consider recommendations for nominees for directorships submitted by stockholders. Stockholders desiring the committee to consider their recommendations for nominees should submit their recommendations, together with appropriate biographical information and qualifications, in writing to the committee, care of the Secretary of the company at our principal executive offices. The committee also recommends directors to be appointed to committees of the board, including in the event of vacancies, recommends to the board the compensation and benefits of non-employee members of the board and its committees and oversees the evaluation of the board and management. The committee developed and recommended to the board the company’s Corporate Governance Guidelines and is responsible for overseeing the company’s Directors Code of Ethics, including determining the appropriate course of action with respect to any potential or actual conflicts of interest involving a director brought to the attention of the chair of the committee. All members of the Corporate Governance Committee are independent directors as required under the applicable rules of the NYSE.

 

Executive Committee.  The Executive Committee has the authority to exercise certain powers of the board of directors between board meetings. The committee currently consists of our chairman and CEO and three non-management directors.

 

Finance Committee.  The Finance Committee reviews our annual financial budget, including the capital expenditure plan, and makes recommendations to the board of directors regarding adoption of the budget as the committee deems appropriate. The committee currently consists of our chairman and CEO, our president and three non-management directors.

 

Human Resources Committee.  The Human Resources Committee reviews and approves corporate goals and objectives relevant to the compensation of our CEO, evaluates our CEO’s performance in light of those goals and objectives, and determines and approves our CEO’s compensation level based on its evaluation. The committee also reviews and approves compensation of our Section 16 Officers (as defined in Rule 16a-1(f) of the Exchange Act) and incentive compensation plans and programs applicable to them. See “Executive Compensation Report of the Human Resources Committee” below. The committee also administers our equity-based plans, executive bonus program and other incentive programs. All members of the Human Resources Committee are independent directors as required by the applicable rules of the NYSE.

 

Stockholders or other interested parties can contact any director or committee of the board, or our non-management directors as a group, by writing to them c/o Secretary, Continental Airlines, Inc., P. O. Box 4607, Houston, Texas 77210-4607. Comments or complaints relating to the company’s accounting, internal accounting controls or auditing matters will also be referred to members of the Audit Committee. All such communications will be forwarded to the appropriate member(s) of the board, except that the board has instructed the company to direct communications that do not relate to the company’s accounting, internal accounting controls or auditing matters, to the chair of the Corporate Governance Committee and not to forward to the board or the chair of the Corporate Governance Committee certain categories of communications.

 

When identifying director nominees, the Corporate Governance Committee will consider the following:

 

 

In the case of current directors being considered for renomination, the Committee will also take into account the director’s tenure as a member of the board, the director’s responses to the annual director performance self-assessment, the director’s history of attendance at annual stockholder meetings and at board and committee meetings and the director’s preparation for and participation in such meetings.

 

Our director nomination process for new board members is as follows:

 

 

As previously reported, effective February 28, 2005, the non-employee members of our board of directors joined our officers in taking the lead in the $500 million annual pay and benefit cost reduction initiative, voluntarily electing to reduce by 30% their annual cash retainer and board and committee meeting attendance fees, which reductions are reflected in the description below. The board also elected to forego their annual grant of 5,000 stock options that would otherwise have been awarded in connection with their re-election to the board at the 2005 annual meeting. Due to the increased oversight responsibilities caused by compliance with the Sarbanes-Oxley Act of 2002, the board determined not to decrease the audit committee’s meeting fees or that portion of the audit committee’s retainer that exceeds the base retainer for all board members.

 

Members of our board of directors who are not our full-time employees receive:

 

 

In addition, non-employee directors who conduct Continental business in their capacities as directors on Continental’s behalf at the request of the board or the Chairman of the Board are paid (1) for telephone participation in board and committee meetings as if they were physically present, if their conducting that business makes it impractical for them to attend the meeting in person, and (2) $3,000 per day spent outside the United States while conducting that business. Directors may also participate in director education programs and director institutes offered by third parties and the company will reimburse them for expenses incurred in connection with their participation.

 

During 2005, the value we imputed to the use of the Flight Benefits described above, including our reimbursement of related taxes, varied by director, but did not exceed approximately $41,000 for any of the non-employee directors. As is common in the airline industry, directors also receive travel privileges on some other airlines through arrangements entered into between Continental and such airlines.

 

All directors, including those who are full-time employees who serve as directors, receive reimbursement of expenses incurred in attending meetings.

 

In 2005, Karen Hastie Williams, one of our directors, retired as a partner of Crowell & Moring LLP, a law firm that has provided services to us and our subsidiaries for many years. Ms. Williams continues to work on a part-time basis for Crowell & Moring LLP as Senior Counsel. Ms. Williams does not personally provide any legal services to Continental or its subsidiaries. Our fee arrangement with Crowell & Moring LLP is negotiated on the same basis as our arrangements with other outside legal counsel and is subject to the same

terms and conditions. The fees we pay to Crowell & Moring LLP are comparable to those we pay to other law firms for similar services. Our board of directors has reviewed this arrangement and determined that it is not material to Ms. Williams.

 

Our executive compensation programs are administered by the Human Resources Committee of the board of directors. The committee is currently composed of four independent, non-employee directors, and no member of the committee has ever been an officer or employee of Continental or any of its subsidiaries.

 

The Audit Committee is comprised of four non-employee members of the board of directors (listed below). After reviewing the qualifications of the current members of the committee, and any relationships they may have with the company that might affect their independence from the company, the board has determined that (1) all current committee members are “independent” as that concept is defined in Section 10A of the Exchange Act, (2) all current committee members are “independent” as that concept is defined in the applicable rules of the NYSE, (3) all current committee members are financially literate, and (4) Mr. Parker and Mr. Munoz each qualifies as an audit committee financial expert under the applicable rules promulgated pursuant to the Exchange Act.

 

The board of directors appointed the undersigned directors as members of the committee and adopted a written charter setting forth the procedures and responsibilities of the committee. Each year, the committee reviews the charter and reports to the board on its adequacy in light of applicable NYSE rules. In addition, the company will furnish an annual written affirmation to the NYSE relating to, among other things, clauses (2)-(4) of the first paragraph of this report and the adequacy of the committee charter.

 

During the last year, and earlier this year in preparation for the filing with the SEC of the company’s annual report on Form 10-K for the year ended December 31, 2005 (the “10-K”), the committee:

 

 

 

Notwithstanding the foregoing actions and the responsibilities set forth in the committee charter, the charter clarifies that it is not the duty of the committee to plan or conduct audits or to determine that the company’s financial statements are complete and accurate and in accordance with generally accepted accounting principles. Management is responsible for the company’s financial reporting process including its system of internal controls, and for the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States. The independent auditors are responsible for expressing an opinion on those financial statements. Committee members are not employees of the company or accountants or auditors by profession or experts in the fields of accounting or auditing. Therefore, the committee has relied, without independent verification, on management’s representation that the financial statements have been prepared with integrity and objectivity and in conformity with accounting principles generally accepted in the United States and on the representations of the independent auditors included in their report on the company’s financial statements.

 

The committee meets regularly with management and the independent and internal auditors, including private discussions with the independent auditors and the company’s internal auditors and receives the communications described above. The committee has also established procedures for (a) the receipt, retention and treatment of complaints received by the company regarding accounting, internal accounting controls or auditing matters, and (b) the confidential, anonymous submission by the company’s employees of concerns regarding questionable accounting or auditing matters. However, this oversight does not provide us with an independent basis to determine that management has maintained (1) appropriate accounting and financial reporting principles or policies, or (2) appropriate internal controls and procedures designed to assure compliance with accounting standards and applicable laws and regulations. Furthermore, our considerations and discussions with management and the independent auditors do not assure that the company’s financial statements are presented in accordance with generally accepted accounting principles or that the audit of the company’s financial statements has been carried out in accordance with generally accepted auditing standards.

 

The information contained in this report shall not be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filings with the Securities and Exchange Commission, or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that the company specifically incorporates it by reference into a document filed under the Securities Act of 1933, as amended, or the Exchange Act.

 

Respectfully submitted,

 

Audit Committee

George G. C. Parker, Chairman

Henry L. Meyer III

Oscar Munoz

Ronald B. Woodard

 

The following table sets forth information with respect to our current executive officers:

 

 

There is no family relationship between any of our executive officers. All officers are appointed by the board of directors to serve until their resignation, death or removal.

 

 

The Human Resources Committee (the “committee”) of the company’s Board of Directors (the “board”) is comprised of four non-employee members (listed below) of the board who are independent, as defined by the applicable rules of the NYSE. The board appoints the members of the committee and has adopted a written charter setting forth the procedures, authority and responsibilities of the committee, which include reviewing and approving corporate goals and objectives relevant to the compensation of our Chief Executive

Officer (“CEO”), evaluating the CEO’s performance and setting the CEO’s compensation based on that evaluation, setting the compensation of the company’s Section 16 Officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934), reviewing and approving incentive compensation plans and programs applicable to the Section 16 Officers, making recommendations to the board with respect to equity based incentive compensation plans or other equity based programs such as employee stock purchase programs and producing this report on executive compensation.

 

General Compensation Strategy

 

The current U.S. domestic network carrier financial environment continues to be extremely challenging. Faced with a weak domestic yield environment, significant growth by low cost competitors and record fuel prices, Continental has aggressively sought to reduce its cost structure to remain competitive. Many of Continental’s network competitors, such as Delta Air Lines, Northwest Airlines, United Airlines and US Airways, have used or are using bankruptcy to reduce their costs significantly. In 2005, Continental secured nearly $500 million of annual pay and benefit reductions and work rule changes, all without the disruption that occurred or is occurring at many of its network competitors. Upon the recommendation of management and with approval of the committee, the company implemented a number of programs applicable to the broad employee group in connection with the pay and benefit reductions. The company enhanced its profit sharing plan to provide an incentive to participating employees (which excludes officers and certain other management employees) to help the company return to profitability and sustain that profitability. In addition, as described in more detail below, the company issued stock options to certain employees (other than officers and certain international employees). Taken together, the enhanced profit sharing plan and stock option grants align our employees’ interests with one another, as well as with the company’s stockholders.

 

The company’s officers felt it was important to take the lead in the $500 million annual cost reduction initiative. Pursuant to compensation reduction agreements effective February 28, 2005, each of the company’s officers voluntarily agreed to reduce their base salary by up to 25% (and, as a result, the potential payment amounts with respect to their annual incentive bonus and long-term incentive (NLTIP) awards which derive from base salary) and to surrender their entire RSU award (as defined below) for the performance period ended June 30, 2005. Further, Messrs. Kellner, Smisek, Compton, Misner and Moran also voluntarily reduced their unvested stock options, restricted stock and PARs awards (as defined below) and Messrs. Kellner and Smisek voluntarily waived their entire annual incentive bonus payments for 2004.

 

In February 2006, in recognition of the sacrifices of their co-workers, the company’s officers voluntarily agreed to surrender their entire RSU award for the performance period ended March 31, 2006, which had vested and would have otherwise paid out at the end of March 2006. The total value of those RSU awards was $18.3 million on the date of surrender, and those RSU awards would have paid out a total of $22.7 million on March 31, 2006. These recent compensation reductions come on the heels of other compensation reductions arising from changes affecting the airline industry since the September 11 terrorist attacks, including the waiver by Mr. Kellner of his salary and any cash bonus otherwise earned by him with respect to the period between September 26, 2001 and December 31, 2001 and of approximately $3.3 million in other compensation payable to him so that the company would be eligible to receive a reimbursement of approximately $176 million under the Emergency Wartime Supplemental Appropriations Act of 2003, as described below. Although the committee agreed to these voluntary compensation reductions based on the recommendation of management, the committee is aware of the challenge it faces going forward in retaining and attracting experienced executives in light of these significant reductions.

 

Faced with the industry’s difficult operating and financial environment and wanting to ensure that the management incentives were aligned with the incentives provided to employees, the committee retained Mercer Human Resource Consulting (“Mercer”) to perform an independent evaluation of peer group and competitive executive compensation practices and to assist the committee in developing recommendations for restructuring the company’s executive compensation programs. In 2004, the committee worked with Mercer to structure performance-based annual and long-term incentive programs designed to retain the company’s highly experienced executive management team, to keep management focused during this period of unprecedented challenges in the airline industry and to motivate them to achieve goals that maximize the chances of recovery

and increase stockholder value. In 2005 and early 2006, the committee worked with Mercer to review compensation levels and the programs implemented in 2004, and to ensure that these programs properly align management incentive compensation targets with the performance targets relevant to the broader employee group and to stockholders.

 

While aware that industry challenges have significantly diminished stockholder value since the September 11 terrorist attacks, the committee also recognizes that Continental has markedly outperformed its peer network competitors during this difficult period on the basis of a number of operational and financial performance measures that the committee recognizes are important. The committee also noted that, despite these challenges, the company’s stock price has increased 92.3% for the period January 1, 2005 through March 30, 2006. The committee also believes that the company’s experienced and well-regarded management team is key to Continental’s return to profitability and the ultimate preservation and growth of stockholder value. To that end, the committee reexamined and reaffirmed its compensation strategy to:

 

 

In considering appropriate executive compensation levels, the committee applies these factors to available marketplace compensation data for U.S. airlines of comparable size and certain non-airline companies with revenue and other characteristics deemed by the committee and Mercer to be comparable to Continental’s. The committee also considered recent trends in executive compensation and the concerns expressed by institutional investors on the topic of executive compensation. The committee recognized the restructuring of the industry by expanding the peer group for both pay and performance comparisons (which has traditionally included major network carriers such as American Airlines, United Airlines, Delta Air Lines, Northwest Airlines and US Airways) to include America West, which merged with US Airways in 2005, Alaska Airlines and Southwest Airlines. This expanded peer group offers a broader comparison for determining appropriate financial performance goals relative to the broader industry. The committee also introduced a return on capital performance measure to recognize the capital-intensive nature of the industry. The elements of compensation included in the competitive analysis generally are base salaries, annual incentives and long-term incentives. Continental competes for executive talent principally with companies other than airlines; consequently, the committee emphasizes compensation data from non-airline companies of similar size and complexity in its analysis of competitive compensation packages. Based on this analysis and the relative performance of the company’s management compared to that of its competitors, the committee determined that it is appropriate to design programs that deliver total compensation for executives targeted at the 75th percentile of the survey range among the airline industry and at the 50th percentile among general industry. However, because of the significance of the reduction in management’s compensation as described above, the analysis reviewed by the committee showed that the compensation of the company’s named executive officers (as defined below) falls within the lowest quartile of the survey range. This, and the retention concerns that it implies, are significant issues faced by the committee as it seeks to make compensation decisions going forward.

 

Principal Elements of Executive Compensation

 

Base Salaries.  The committee believes it is crucial for the company to provide executive salaries within a competitive market range in order to attract and retain highly talented executives. The specific competitive markets considered depend on the nature and level of the positions in question, the labor markets from which qualified individuals are recruited, and the companies and industries competing for the services of our executives. Base salary levels are also dependent on the performance of each individual executive over time. Thus, executives who sustain higher levels of performance over time will have correspondingly higher salaries. Salary adjustments are based on competitive market salaries and general levels of market increases in salaries, individual performance, overall financial results and changes in job duties and responsibilities. As described

above, each of the named executive officers voluntarily agreed to reduce his base salary effective February 28, 2005 by up to 25% pursuant to compensation reduction agreements. Further, as described below, Mr. Kellner’s base salary was limited during the 12-month period ending March 31, 2004 pursuant to his compensation cap agreement.

 

Annual and Long-Term Incentive Compensation.  The committee developed and implemented new annual and long-term incentive compensation programs for executives of the company effective April 1, 2004. The goal in implementing the new programs described below was to establish an appropriate balance between absolute and relative performance and to develop new performance measures that drive stockholder value.

 

The committee established a new annual executive bonus program, which for 2005 offered bonus opportunities of between 50% (entry) and 150% (stretch) of base salary, with a target of 125% of base salary, depending on achievement of an absolute level of Continental’s cash flow, capital efficiency and financial results reflecting positive net income. The performance measure is Continental’s return on base invested capital (“ROBIC”), which is defined as earnings before interest, income taxes, depreciation, amortization, and aircraft rent (“EBITDAR”) divided by the total of property and equipment (less accumulated depreciation and amortization thereon and less purchase deposits on flight equipment) and 7.5 times aircraft rentals. The ROBIC goals are reviewed and new goals established annually by the committee. The program also permits the committee to establish different levels of target and stretch bonus opportunity, on an annual basis. The program for 2005 also required an unrestricted cash, cash equivalent and short-term investment minimum balance of $1 billion at the end of the fiscal year, which required cash balance amount is also reset by the committee each year. Further, in 2005, the program required that the company report positive net income for the fiscal year before any payments were made at target level or above, and the committee adjusted the ROBIC goals by raising the level of return required before any incentives are paid to eliminate the effect of employee pay and benefit reductions. No bonuses were earned in 2005 under this program. The program was subsequently amended to include, for fiscal year 2006 and beyond, a financial performance hurdle that may be set by the committee annually. No bonuses are paid regardless of ROBIC performance, unless the minimum cash balance and financial performance hurdles are achieved. No payments were made under this program for 2005 because the company did not achieve the entry ROBIC margin.

 

In 2004, the committee also established a new long-term incentive compensation program, which has two components — a new long-term incentive plan (“NLTIP”) based on relative performance, and a restricted stock unit (“RSU”) program based on absolute performance (together, the “NLTIP/ RSU Program”).

 

 

 

The following existing long-term executive compensation programs remain in effect:

 

 

The following existing long-term executive compensation program was terminated in 2005 but remains in effect with respect to one outstanding award:

 

 

Perquisites.  Executive perquisites are discussed in the footnotes to the Summary Compensation Table beginning on page 24. In addition to the described perquisites, executives receive the same perquisites that are offered to the broader employee group. We believe these perquisites are consistent in form and amount as

those offered to executives at similar levels at companies within the airline industry and general industry groups.

 

The committee believes that it has significantly improved the programs adopted in 2004 and revised for 2006 and beyond to appropriately balance absolute and relative performance, and to align executives’ incentives with those of the broad group of employees, in an effort to drive long-term stockholder value by doing the following:

 

 

Compensation of the Chief Executive Officer

 

The committee applies the criteria and strategy described in this report in establishing compensation for the company’s CEO. The committee has established a procedure and criteria for the annual evaluation of the

CEO and the setting of CEO compensation based on this evaluation. The CEO is evaluated based on his performance in various areas including leadership, strategic planning, financial results, human resources and diversity, communications and external relations, board interface, ethics and conduct.

 

In 2005 Mr. Kellner successfully transitioned into his position as Chairman and CEO following the retirement of our former CEO on December 30, 2004 while undertaking numerous initiatives to position the company for future growth and stability. In connection with his promotion to Chairman and CEO, Mr. Kellner received a compensation package in recognition of his increased responsibilities that includes base salary, annual and long-term incentive opportunities and customary perquisites, each determined in accordance with the committee’s compensation strategy described above. In addition, Mr. Kellner participates in a supplemental executive retirement plan that provides an annual retirement benefit expressed as a percentage (that could range up to 75%) of Mr. Kellner’s final average compensation as defined in his employment agreement. Mr. Kellner demonstrated his leadership and commitment to the company by voluntarily reducing his compensation for the 12 months ended March 31, 2004 pursuant to his compensation cap agreement described below and again, effective February 28, 2005, pursuant to his compensation reduction agreement in connection with the company’s initiative to achieve $500 million in annual pay and benefit cost reductions. Mr. Kellner also voluntarily waived his right to receive his 2004 annual performance bonus and surrendered for cancellation 25% of his outstanding unvested stock options, restricted stock and PARs awards and, as described above, also voluntarily surrendered all of his 2005 RSUs and 2006 RSUs.

 

Compensation Cap Agreements.  Continental received reimbursement of approximately $176 million from the Transportation Security Administration (the “TSA”) under the Emergency Wartime Supplemental Appropriations Act of 2003 (the “Act”) for passenger security and air carrier security fees paid to or collected for the TSA through the date of enactment of the Act. As required by the Act as a condition of our obtaining and retaining such reimbursement, the company entered into an agreement with the United States of America, acting through the TSA, pursuant to which we agreed not to provide total cash compensation to either of our then two most highly-compensated named executive officers (which included Mr. Kellner) during the 12-month period ending March 31, 2004 (the “Restricted Period”) in an amount equal to or more than the annual base salary paid to such executive officers with respect to fiscal year 2002. In order to permit us to comply with our agreement with the TSA, Mr. Kellner voluntarily entered into a compensation cap agreement with the company to amend certain of his then existing contractual rights relating to compensation and to waive approximately $3.3 million in compensation otherwise payable to him. Under the compensation cap agreements, Mr. Kellner agreed to reduce his base salary during the Restricted Period, agreed to defer the vesting of his restricted stock and PARs awards under the Incentive Award Program that would otherwise vest during the Restricted Period, agreed not to redeem his vested PARs during the Restricted Period, agreed to surrender without value his bonus awards with respect to 2003 and his LTIP award with respect to the 3-year performance period ending December 31, 2003, agreed that he would not receive any PARs awards during the Restricted Period, and agreed to take such other action with respect to his compensation provided to him by the company during the Restricted Period as he and the company reasonably agreed to be necessary in order to permit the company to comply with the terms of its agreement with the TSA. Mr. Kellner’s willingness to enter voluntarily into the compensation cap agreement resulted in a material reduction to the compensation that otherwise would have been payable to him, and benefited Continental by permitting it to obtain and retain approximately $176 million of passenger and air carrier security fee reimbursements from the TSA. The compensation cap agreement terminated on March 31, 2004.

 

Broad Based Incentive Compensation

 

To recognize the contributions made by the company’s employees in connection with the recent pay and benefit cost reduction efforts, the committee recommended and the board approved the issuance of stock options for up to 10 million shares of Continental’s common stock to all non-officer employees that participated in the cost reduction efforts. On March 30, 2005, the company issued stock options for approximately 8.6 million shares of its Class B common stock with an exercise price of $11.89 per share, the closing price of the company’s common stock on the date of grant, to all employees, except flight attendants, officers, employees of CMI and certain international employees. On February 1, 2006, the company issued to

its flight attendants stock options for approximately 1.1 million shares of the company’s common stock with an exercise price of $20.31 per share. In addition, the company maintains its long-standing on-time arrival bonus program and implemented an enhanced profit sharing plan to incentivize all employees who participate in the pay and benefit reductions (except officers and certain other management employees) to have a continued focus on operational and financial performance. With the changes to the annual executive bonus program and the RSU program described above, management’s annual and long-term incentives are aligned with incentives provided to co-workers. The committee believes that these incentives play a significant part in Continental’s performance and success.

 

Section 162(m) of the Internal Revenue Code

 

In conducting the programs applicable to executives, the committee considers the effects of section 162(m) of the Internal Revenue Code. Section 162(m) denies publicly held companies a tax deduction for annual compensation in excess of one million dollars paid to their chief executive officer or any of their four other most highly compensated executive officers employed on the last day of a given year, unless their compensation is based on qualified performance criteria. To qualify for deductibility, these criteria must be established by a committee of outside directors and approved, as to their material terms, by that company’s stockholders. Most of Continental’s compensation plans applicable to the company’s executive officers, including its stock option plans, the annual executive bonus program, the NLTIP/RSU Program and the PARs Award Program were designed to qualify as performance-based compensation under section 162(m). The committee may approve compensation or changes to plans, programs or awards that may cause the compensation or awards not to comply with section 162(m) if it determines that such action is appropriate and in the company’s best interests. Although some amounts recorded as compensation by the company to certain executives may be limited by section 162(m), that limitation does result in the current payment of increased federal income taxes by the company due to its significant net operating loss carry forwards.

 

Respectfully submitted,

 

Human Resources Committee

Charles A. Yamarone, Chairman

Thomas J. Barrack, Jr.

Kirbyjon H. Caldwell

Ronald B. Woodard

 

The company continues to operate in an extremely challenging U.S. domestic network carrier environment. Faced with a weak domestic yield environment, significant growth by low cost competitors and record fuel prices, Continental has aggressively sought to reduce its cost structure to remain competitive. The company’s management team has taken the lead in these cost reductions by repeatedly voluntarily reducing their compensation.

 

The company entered into compensation reduction agreements, effective February 28, 2005, with all of its officers to reduce contractually provided compensation as an element of the company’s $500 million annual pay and benefit cost reduction initiative. Pursuant to such agreements, each of Messrs. Kellner, Smisek, Compton, Misner and Moran (the executive officers named in the Summary Compensation Table below, collectively referred to in this proxy as the “named executive officers”) voluntarily agreed to reduce his annual base salary by 25%, 20%, 20%, 20% and 20%, respectively.

 

The following table shows, for each named executive officer, the salary reductions that became effective on February 28, 2005.

 

 

Each of the named executive officers also agreed to surrender for cancellation the same percentage of their respective outstanding unvested stock options, unvested restricted stock and unvested PARs (as defined in the PARs Award Program) and agreed to surrender all of their respective awards of RSUs (as defined in the NLTIP/ RSU Program) for the performance period ending in June 2005. In addition, Messrs. Kellner and Smisek each voluntarily waived in its entirety his right to receive his annual incentive bonus payment for 2004 and no annual bonuses were paid to any of the named executive officers with respect to 2005.

 

In February 2006, the company’s officers again voluntarily agreed to surrender their entire RSU award for the performance period ended March 31, 2006, which had vested and would have otherwise paid out at the end of March 2006. The total value of those RSU awards was $18.3 million on the date of surrender, and those RSU awards would have paid out a total of $22.7 million on March 31, 2006. In addition, payouts to these officers under the annual executive bonus program and the NLTIP, if and when earned, as well as benefits under supplemental executive retirement plans (the “SERPs”), will be reduced as a result of the base salary reductions described above.

 

In 2003, Continental received reimbursement of $176 million from the Transportation Security Administration (“TSA”) under the Emergency Wartime Supplemental Appropriations Act of 2003 (the “Act”) for passenger security and air carrier security fees paid to or collected for the TSA through the date of enactment of the Act. As required by the Act as a condition of our obtaining and retaining such reimbursement, the company entered into an agreement with the United States of America, acting through the TSA, pursuant to which we agreed not to provide total cash compensation to either of our then two most highly-compensated named executive officers (which included Mr. Kellner) during the 12-month period ending March 31, 2004 in an amount equal to or more than the annual salary paid to such executive officers with respect to fiscal year 2002. In order to permit us to comply with our agreement with the TSA, Mr. Kellner voluntarily entered into a compensation cap agreement with us to amend certain of his then existing contractual rights relating to compensation and to waive approximately $3.3 million in compensation otherwise payable to him. In addition, in 2001, following the September 11 terrorist attacks and the company’s resulting reduction in force, Mr. Kellner voluntarily waived his salary and any cash bonus otherwise earned by him with respect to the period between September 26, 2001 and December 31, 2001.

The following table sets forth certain of the reductions to contractually provided compensation voluntarily agreed to by each of the named executive officers during the period from September 2001 through March 2006.

 

Total Compensation Reductions of Named Executive Officers 2001- 2006

 

 

Since the September 11, 2001 terrorist attacks and their aftermath, we have focused on taking action to increase productivity and reduce costs, without compromising our product or culture. These efforts have resulted in payroll and headcount cost reductions in many areas of the company, including executive salaries and officer headcount. The following table shows compensation reductions for our five most highly compensated officers and headcount reductions for the officer group since 2001.

 

Officer Salary and Headcount Reductions 2001-2006

 

The following tables set forth (i) the aggregate amount of compensation with respect to 2005, 2004 and 2003 for the chief executive officer and our four other most highly compensated executive officers in 2005, (ii) year-end option values of exercisable and unexercisable options held by them, and (iii) information regarding long-term incentive awards made to them during 2005. None of the named executive officers received any option grants during 2005.

 

Summary Compensation Table

 

 

 

Aggregated Option Exercises in 2005 and Year-End Option Values

 

 

None of the named executive officers exercised options during 2005 and no options were granted to them in 2005. Effective February 28, 2005, the then unexercisable option holdings of each of the named executive officers were reduced pursuant to the compensation reduction agreements discussed above.

 

Long Term Incentive Plans — Awards in 2005

 

The following table sets forth information regarding NLTIP awards granted in 2005 under our Long Term Incentive and RSU Program (the “NLTIP/ RSU Program”) which has been implemented under our Incentive Plan 2000. No RSU awards were made in 2005. The NLTIP/ RSU Program was adopted by the Human Resources Committee in April 2004 in connection with the committee’s review and restructuring of the company’s long-term performance incentive compensation programs. The committee did not make any PARs awards under the PARs Award Program during 2005 and the program was terminated in November 2005.

 

 

 

 

Agreement with Mr. Kellner.  We entered into an employment agreement with Mr. Kellner effective April 14, 2004, relating to his service as an officer and director of the company and providing for a minimum annual base salary of $950,000. As previously discussed, Mr. Kellner and the company subsequently entered into a compensation reduction agreement whereby, effective February 28, 2005, Mr. Kellner agreed to accept a reduction in annual base salary of 25%, reducing his minimum base salary to $712,500. His employment agreement also entitles him to an annual performance bonus and long-term incentive payment opportunities at a level which is not less than the highest participation level made available to other company executives (but not less than between 0% and 150% of the applicable base amount) if performance goals under the applicable program are met. In addition, Mr. Kellner participates in a supplemental executive retirement plan (“SERP”) that provides an annual retirement benefit expressed as a percentage (that could range up to 75%) of Mr. Kellner’s final average compensation as defined in his employment agreement. He is also entitled to

participate in the compensation and benefit plans available to all management employees, receive company-provided disability benefits and life insurance, Flight Benefits, certain tax indemnity payments (some of which may not be deductible by the company), use of a company provided automobile, and certain other fringe benefits. In addition, Mr. Kellner’s compensation will be “grossed up” for any excise or other special additional tax imposed as a result of any payment or benefit provided to Mr. Kellner under the employment agreement, including, without limitation, any excise tax imposed under Section 4999 of the Internal Revenue Code. The agreement is in effect until April 14, 2009, subject to automatic successive five-year extensions, but may be terminated at any time by either party, with or without cause.

 

If Mr. Kellner’s employment is terminated by the company for cause (as described in the agreement) or by Mr. Kellner without good cause (as described in the agreement), he will receive his SERP benefit, Flight Benefits, and continued coverage for himself and his eligible dependents under the company’s medical and health plans for the remainder of his lifetime (at no greater cost to Mr. Kellner than a similarly situated company executive who has not terminated employment), (together with the SERP and the Flight Benefits, the “Base Benefits”). If we terminate his employment for reasons other than death, disability or cause or if he terminates his employment for good cause, then we must, in addition to providing the Base Benefits: (i) cause all options, shares of restricted stock, and awards under the PARs Award Program to vest; (ii) pay to him, at the same time as payments are made to other participants under the NLTIP/ RSU program, all amounts with respect to any outstanding awards made to him under the NLTIP/ RSU program as if he had remained our employee; (iii) make a lump sum cash severance payment to him in an amount equal to three times the sum of (a) his then current annual base salary plus (b) a deemed bonus equal to the amount of such salary times 150% (such payment referred to herein as the “Termination Payment”); (iv) provide him with out-placement, office and other perquisites for certain specified periods and (v) transfer to him title to his company car without cost to Mr. Kellner (which benefit Mr. Kellner receives in all termination events except termination by the company for cause). If his employment is terminated due to his death or disability, then he or his estate will receive the above benefits (but not the Termination Payment, out-placement services, office space or certain other perquisites) and he or his estate will be entitled to certain disability or life insurance payments, as the case may be. Mr. Kellner’s employment agreement also includes a two-year non-compete with the company following termination of his employment, except if such termination is by the company without cause or upon his disability or by Mr. Kellner for good cause, for which he received a cash payment in 2004.

 

Agreements with Other Named Executive Officers.  We have also entered into employment agreements with Messrs. Smisek, Misner, Compton and Moran, effective August 12, 2004, relating to their services as officers of the company and providing for minimum annual base salaries of $720,000, $450,000, $450,000 and $450,000, respectively. Each of these officers subsequently agreed to accept a reduction in annual base salary of 20%, effective February 28, 2005, reducing his base salary to $576,000, $360,000, $360,000 and $360,000, respectively. Each agreement is similar to that of Mr. Kellner’s, except as follows: the agreements do not include non-compete provisions; the automatic extension after the base term of each contract is for successive one year periods; the SERP for Messrs. Misner, Compton and Moran provides a maximum annual retirement benefit that could range up to 65%; and Termination Payments under the agreements with Messrs. Misner, Compton and Moran are limited to two times the sum of (a) the executive’s then current annual base salary and (b) a deemed bonus equal to the amount of such salary times 125%, unless their termination occurs within two years following a change in control (in which case it is three times that sum).

 

The Continental Retirement Plan (the “Retirement Plan”) is a noncontributory, defined benefit pension plan. Substantially all of our non-pilot domestic employees, including the named executive officers, are entitled to participate in the Retirement Plan. The Retirement Plan currently limits the annual compensation it considers for benefit determination purposes to $170,000 for the named executive officers. The named executive officers are also eligible to receive retirement benefits pursuant to a SERP provided for in their employment agreements. Benefits payable under the SERP are not protected from a bankruptcy by the company and will be offset by amounts paid or payable under the Retirement Plan. The combined annual

benefit amounts payable under the Retirement Plan and the SERPs are not subject to a reduction for any social security benefits which may be paid or payable to the named executive officers.

 

The following table represents the estimated combined annual benefits payable under the Retirement Plan and the SERPs as of January 1, 2006 in the form of a single life annuity to the named executive officers at age 60 in specified years of service and compensation categories.

 

Pension Plan Table

 

 

 

 

Payouts under the SERPs are based on final average compensation and credited years of service (up to a maximum of 30 years for Messrs. Kellner and Smisek and 26 years for Messrs. Compton, Misner and Moran). Under the SERP, final average compensation means the average of the participant’s highest five years of compensation during their last ten calendar years with Continental. For purposes of such calculation, compensation includes annual salary and cash bonuses (but excludes other annual compensation, certain stay bonuses and all long-term compensation and other incentive compensation). At December 31, 2005, the final average compensation for purposes of calculating SERP benefits for the named executive officers was as follows: Mr. Kellner, $1,176,771, Mr. Smisek, $1,110,014, Mr. Compton, $603,177, Mr. Misner, $590,948, and Mr. Moran, $538,707.

 

Credited years of service under the SERP began in 1995 for Messrs. Kellner and Smisek, in 2001 for Messrs. Compton and Misner, and in 2004 for Mr. Moran. In addition, to induce our named executive officers to remain in our employ, each of them receive additional credited years of service under the SERP for each actual year of service as follows: from 2000 — 2004, two additional years for each of Messrs. Kellner and Smisek; from 2001 — 2006, one additional year for each of Messrs. Compton and Misner; and from 2004 — 2006, one additional year for Mr. Moran. Their total credited years of service as of December 31, 2005 was as follows: Mr. Kellner — 21 years, Mr. Smisek — 21 years, Mr. Compton — 10 years, Mr. Misner — 10 years, and Mr. Moran — 4 years. In lieu of a monthly annuity, Mr. Kellner may, upon meeting specified age and/or service requirements, elect to receive a lump sum benefit. Messrs. Smisek, Compton, Misner and Moran are not eligible to receive the monthly annuity option and may only receive a lump sum benefit. The lump sum benefit will be the actuarial equivalent of a single life annuity and will vary over time based on actuarial assumptions and other factors such as interest rates, years of service, age and compensation.

 

The following graph compares the cumulative total return on our common stock with the cumulative total returns (assuming reinvestment of dividends) on the Amex Airline Index and the Standard & Poor’s 500 Stock Index as if $100 were invested in the common stock and each of those indices on December 31, 2000.

 

 

 

The table below provides information relating to our equity compensation plans as of December 31, 2005.

 

 

 

PROPOSAL 1:

 

It is the intention of the persons named in the enclosed form of proxy, unless otherwise instructed, to vote duly executed proxies for the election of each nominee for director listed below. Pursuant to our bylaws, directors will be elected by a plurality of the votes duly cast at the stockholders meeting. If elected, each nominee will hold office until the next annual meeting of stockholders and until his or her respective successor has been duly elected and has qualified, except as discussed below. We do not expect any of the nominees to be unavailable to serve for any reason, but if that should occur before the meeting, we anticipate that proxies will be voted for another nominee or nominees to be selected by the board of directors.

 

Our board of directors currently consists of eleven persons. The Corporate Governance Committee of the board of directors has recommended to our board, and our board has unanimously nominated, eleven individuals for election as directors at our annual meeting. Each of the director nominees is presently one of our directors. Stockholder nominations will not be accepted for filling board seats at the meeting because our bylaws require advance notice for such a nomination, the time for which has passed. Your proxy cannot be voted for a greater number of persons than the number of nominees named herein. There is no family relationship between any of the nominees for director or between any nominee and any executive officer.

 

Our board has determined that all non-employee nominees for our board (9 of the 11 nominees) are “independent” as that term is defined by NYSE rules. In making this determination, the board considered transactions and relationships between each director or his or her immediate family and the company and its subsidiaries, including those relationships reported under “Certain Transactions” above and described below:

 

 

The purpose of this review was to determine whether any such relationships or transactions were material and, therefore, inconsistent with a determination that the director is independent. In addition, the board considered additional criteria set forth under NYSE rules in determining director independence. As a result of

this review, the board affirmatively determined, based on its understanding of such transactions and relationships, that, with the exception of Messrs. Kellner and Smisek, none of the directors nominated for election at the annual meeting has any material relationships with the company or its subsidiaries, and that all such directors are independent of the company under the standards set forth by the NYSE. Messrs. Kellner and Smisek are not independent because of their employment as executives of the company.

 

The following table shows, with respect to each nominee, (i) the nominee’s name and age, (ii) the period for which the nominee has served as a director, (iii) all positions and offices with the company currently held by the nominee and his or her principal occupation and business experience during the last five years, (iv) other directorships held by the nominee and (v) the standing committees of the board of directors of which he or she is a member.

 

 

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:

 

AMENDMENT OF THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION

 

On February 22, 2006, upon the recommendation of our Corporate Governance Committee, our board unanimously approved, subject to stockholder approval, an amendment to the company’s Certificate of Incorporation to increase the maximum number of shares of common stock authorized for issuance from 200 million shares to 400 million shares. This increase would be accomplished by restating Article Four of the company’s Certificate of Incorporation to read as follows:

 

“FOUR: The total number of shares of all classes of capital stock which the Corporation shall have the authority to issue is 410 million shares, par value $.01 per share, of which 10 million shall be Preferred Stock (“Preferred Stock”) and 400 million shall be Class B Common Stock (“Class B Common Stock”).”

 

The proposed amendment to the company’s Certificate of Incorporation is attached hereto as Appendix C.  

 

Currently, the authorized capital stock of the company consists of 200 million shares of common stock and 10 million shares of preferred stock. Of the 200 million shares of common stock authorized, as of February 28, 2006, there were 112.4 million shares issued and outstanding, 25.5 million treasury shares, 17.9 million shares reserved for issuance upon the conversion of outstanding convertible debt securities, and 17.4 million shares reserved for issuance under the company’s incentive and option plans and the 2004 Employee Stock Purchase Plan. Consequently, the company has approximately 77.8 million shares of common stock available for future issuance.

 

Our board believes that it is desirable and in the best interests of the company and its stockholders to increase the number of authorized shares of common stock from 200 million shares to 400 million shares to provide the company with greater flexibility, without the delay and expense of a special stockholders’ meeting, to issue common stock for a variety of future corporate purposes, which may include, among other things:

 

 

The company has no present plans, arrangements or understandings to issue additional shares of common stock (other than those currently reserved for issuance), although it reserves the right to do so in the future. If approved by the stockholders, the additional authorized shares of common stock would be available for issuance, at the discretion of our board, in such amounts and upon such terms as our board may determine, without further stockholder approval (subject to applicable Delaware law and New York Stock Exchange rules).

 

Additionally, the holders of common stock do not have preemptive rights with respect to future issuances of common stock, which means that those holders do not have a prior right to purchase shares of common stock in connection with any offering to maintain their proportionate ownership interest. As a result, our issuance of a significant amount of additional authorized common stock (other than as the result of a stock split, stock dividend or other pro rata distribution to stockholders) would result in a significant dilution of the beneficial ownership interests and/or voting power of each stockholder who does not purchase additional shares to maintain his or her pro rata interest. As additional shares are issued, the shares owned by existing stockholders would represent a smaller percentage ownership interest in the company. The issuance of such

additional shares of common stock may also, depending upon the circumstances, have a dilutive effect on the company’s earnings per share.

 

Although an increase in the company’s authorized shares of common stock could, under certain circumstances, be construed as having an anti-takeover effect (for example, by diluting the stock ownership of a person seeking to effect a change in the composition of our board or contemplating a tender offer or other consolidation transaction), this proposal was not prompted by any takeover or acquisition effort or threat. The company is not aware of any threat of takeover or change in control, nor is the company proposing to stockholders any anti-takeover measures.

 

If approved by the stockholders, the amendment will become effective upon its filing with the Secretary of State of the State of Delaware.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE AMENDMENT TO THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION, AS DESCRIBED ABOVE AND AS SET FORTH IN APPENDIX C, WHICH IS DESIGNATED AS PROPOSAL NO. 2 ON THE ENCLOSED PROXY.

PROPOSAL 3:

 

AMENDMENT OF THE INCENTIVE PLAN 2000

 

 

The Continental Airlines, Inc. Incentive Plan 2000, as amended and restated and which we refer to as the “Incentive Plan,” was adopted by our board in March 2000 and approved by our stockholders in May 2000, and the material terms of the performance goals under the performance award provisions of the Incentive Plan were re-approved by our stockholders in June 2005.

 

On February 22, 2006, upon the recommendation of our Human Resources Committee, our board unanimously approved, subject to stockholder approval, an amendment to the Incentive Plan to increase the number of shares of common stock issuable under the plan from 3 million to 4.5 million.

 

The Human Resources Committee has determined that none of the additional 1.5 million shares to be authorized by the proposed amendment will be issued to any of the company’s current officers.

 

If our stockholders approve this proposal, we intend to file, pursuant to the Securities Act of 1933, as amended, a registration statement on Form S-8 to register the additional shares available for issuance under the Incentive Plan.

 

The proposed amendment to the Incentive Plan is attached hereto as Appendix D, and the amended and restated Incentive Plan, prior to giving effect to the proposed amendment, is attached hereto as Appendix E.  

 

 

The Incentive Plan is designed to enable the company and its subsidiaries to attract and retain capable persons to serve as directors and employees of the company and to provide a means whereby those individuals upon whom the responsibilities of the successful administration and management of the company and its subsidiaries rest, and whose present and potential contributions to the welfare of the company and its subsidiaries are of importance, can acquire and maintain stock ownership, thereby strengthening their concern for the welfare of the company and its subsidiaries. A further purpose of the Incentive Plan is to provide such individuals with additional incentive and reward opportunities designed to enhance the profitable growth of the company and its subsidiaries.

 

Our board believes that the Incentive Plan has achieved these purposes and enabled the company to retain and reward its key employees. However, as of February 28, 2006, of the original three million authorized shares of common stock under the Incentive Plan, only 932,869 shares remained available for issuance under the plan. In order for the Incentive Plan to continue to serve these purposes over the next few years, the plan must be amended to increase the number of shares available for issuance. We estimate that the proposed increases will provide the company with sufficient authorized shares to cover awards under the plan through at least the end of 2008.

 

 

The following summary provides a general description of certain features of the Incentive Plan, giving effect to the proposed amendment, and is qualified in its entirety by the complete text of the Incentive Plan. Copies of the programs adopted under the Incentive Plan are on file and publicly available at the SEC. In addition, please read “Executive Compensation Report of the Human Resources Committee” above for additional information regarding the programs adopted under the Incentive Plan. Capitalized terms not otherwise defined herein have the meanings ascribed to them in the Incentive Plan or in the programs adopted thereunder.

 

The Incentive Plan provides that the company may grant Options to purchase shares of Class B common stock, Restricted Stock Awards, Performance Awards, Incentive Awards and Retention Awards to eligible employees or directors. The terms applicable to these various types of Awards, including those terms that may be established by the Administrator when making or administering particular Awards, are set forth in detail in the Incentive Plan. The Administrator may make Awards under the Incentive Plan until October 3, 2009. The Incentive Plan will remain in effect (at least for the purpose of governing outstanding Awards) until all Option

Awards granted under the Incentive Plan have been exercised or expired, all restrictions imposed upon Restricted Stock Awards granted under the Incentive Plan have been eliminated or the Restricted Stock Awards have been forfeited, and all Performance Awards, Incentive Awards and Retention Awards granted under the Incentive Plan have been satisfied or have terminated.

 

Administration.  The Incentive Plan provides that a committee comprised solely of two or more “outside directors” (as defined by Section 162(m) of the Code and within the meaning of the term “Non-Employee Director” as defined by Rule 16b-3 under the Exchange Act) serves as the Administrator of Awards under the Incentive Plan with respect to persons subject to Section 16 of the Exchange Act. Until otherwise determined by the board, the Human Resources Committee serves as such committee under the Incentive Plan. The CEO of the company, so long as he or she is also a director of the company, serves as Administrator with respect to any person not subject to Section 16 of the Exchange Act, unless the Incentive Plan specifies that the Committee must take specific action (in which case such action may only be taken by the Committee) or the Committee specifies that it will serve as Administrator.

 

Eligibility.  Awards may be granted only to persons who, at the time of grant, are directors of the company or employees of the company or one of its subsidiaries. Awards may be granted on more than one occasion to the same person, and, subject to limitations set forth in the Incentive Plan, Awards may consist of any combination of Options, Restricted Stock Awards, Performance Awards, Incentive Awards and Retention Awards, as is best suited to the circumstances of the particular person. As of February 28, 2006, nine non-employee directors were eligible to receive Awards under the Incentive Plan, and it is anticipated that management-level employees at or above specified grade levels (currently comprised of approximately 400 employees) selected by the CEO will receive future awards under the Incentive Plan. Non-employee directors have not received Awards under the Incentive Plan or programs adopted thereunder, other than normal stock option grants as described under “Information About Our Board — Compensation of Directors” above.

 

The Human Resources Committee has determined that the additional 1.5 million shares to be authorized by the proposed amendment will not be available for issuance to the company’s current officers.

 

Stock Options.  The Administrator may grant options that entitle the recipient to purchase shares of Class B common stock at a price equal to or greater than the Market Value per Share on the date of grant. An Option will be exercisable in whole or in such installments and at such times as determined by the Administrator. The option price is payable in full in the manner specified by the Administrator. The holder of an Option is entitled to privileges and rights of a stockholder only with respect to shares of Class B common stock purchased under the Option and for which certificates representing such shares are registered in the Holder’s name. Options granted under the Incentive Plan may be Options that are intended to qualify as “incentive stock options” within the meaning of Section 422 of the Code or Options that are not intended to so qualify. An Incentive Stock Option will be treated as a Non Qualified Option to the extent that the aggregate Market Value per Share (determined at the time of grant) of Class B common stock with respect to which Incentive Stock Options are first exercisable by an individual during any calendar year under all incentive stock option plans of the company (and its parent and subsidiary corporations) exceeds $100,000. An Incentive Stock Option may only be granted to an individual who is an employee at the time the Option is granted. No Incentive Stock Option may be granted to an individual if, at the time the Option is granted, such individual owns stock possessing more than 10% of the total combined voting power of all classes of stock of the company (or of its parent or subsidiary corporation, within the meaning of Section 422(b)(6) of the Code), unless (i) at the time such Option is granted the option price is at least 110% of the Market Value per Share of the Class B common stock subject to the Option and (ii) such Option by its terms is not exercisable after the expiration of five years from the date of grant.

 

An Option Grant Document may provide for the payment of the option price, in whole or in part, by delivery of a number of shares of Class B common stock (plus cash if necessary) having a Market Value per Share equal to such option price. Moreover, an Option Grant Document may provide for a “cashless exercise” of the Option by establishing procedures satisfactory to the Administrator with respect thereto. The terms and conditions of the respective Option Grant Documents need not be identical.

SARs.  The Administrator (concurrently with the grant of an Option or subsequent to such grant) may, in its sole discretion, grant stock appreciation rights, which we refer to as “SARs,” to any Holder of an Option. SARs may give the Holder of an Option the right to surrender any exercisable Option or portion thereof in exchange for cash, whole shares of Class B common stock, or a combination thereof, as determined by the Committee, with a value equal to the excess of the Market Value per Share, as of the date of such request, of one share of Class B common stock over the Option price for such share multiplied by the number of shares covered by the Option or portion thereof to be surrendered. Any SAR granted in connection with an Incentive Stock Option is exercisable only when the Market Value per Share of the Class B common stock exceeds the price specified therefore in the Option (or the portion of the Option to be surrendered). Upon exercise of any SAR granted under the Incentive Plan, the number of shares reserved for issuance under the Incentive Plan will be reduced only to the extent that shares of Class B common stock are actually issued in connection with the SAR exercise. The Administrator may prescribe additional terms and conditions governing any SARs.

 

Options and SARs may be granted under the Incentive Plan in substitution for stock options held by individuals employed by corporations who become employees as a result of a merger or consolidation or other business combination of the employing corporation with the company or any subsidiary.

 

Restricted Stock.  A grant of Restricted Stock pursuant to a Restricted Stock Award constitutes an immediate transfer to the recipient of record and beneficial ownership of the shares of Restricted Stock in consideration of the performance of services by the recipient (or other consideration determined by the Administrator). The recipient is entitled immediately to voting and other ownership rights in the shares, subject to restrictions referred to in the Incentive Plan or contained in the related Grant Document. The transfer may be made without additional consideration or in consideration of a payment by the recipient that is less than the market value of the shares on the date of grant. Each grant may, in the discretion of the Administrator, limit the recipient’s dividend rights during the period in which the shares are subject to a substantial risk of forfeiture and restrictions on transfer. The terms and conditions of the respective Restricted Stock Grant Documents need not be identical.

 

Restricted Stock must be subject, for a period or periods determined by the Administrator at the date of grant, to one or more restrictions, including, without limitation, a restriction that constitutes a “substantial risk of forfeiture” within the meaning of Section 83 of the Code and applicable interpretive authority thereunder. For example, an Award could provide that the Restricted Stock would be forfeited if the Holder ceased to serve the company as an employee during a specified period. In order to enforce these forfeiture provisions, the transfer of Restricted Stock during the period or periods during which such restrictions are to continue will be prohibited or restricted in a manner and to the extent prescribed by the Administrator at the date of grant. The Incentive Plan provides for a shorter period during which the forfeiture provisions are to apply in the event of a Change in Control of the company.

 

The Committee has resolved that all Restricted Stock Awards under the company’s stock incentive plans (including the Incentive Plan) shall vest over at least a three-year period, or over at least a one-year period if vesting is performance-based (or as otherwise provided in the applicable plan or award agreement, such as upon a Change in Control).

 

Performance Awards.  The Administrator will establish, with respect to and at the time of each Performance Award, a performance period over which the performance applicable to the Performance Award will be measured. A Performance Award will be awarded to a Holder contingent upon future performance of the company or any subsidiary, division, or department thereof. The Administrator will establish the performance measures applicable to such performance within the applicable time period permitted by Section 162(m) of the Code, with such adjustments thereto as may be determined by the Administrator. The performance measures may be absolute, relative to one or more other companies, relative to one or more indexes, or measured by reference to the company alone or the company together with its consolidated subsidiaries. The performance measures established by the Administrator may be based upon (i) the price of a share of Class B common stock, (ii) operating income or operating income margin, (iii) EBITDAR or EBITDAR margin, (iv) net income or net income margin, (v) cash flow, (vi) total stockholder return, or (vii) a combination of any of the foregoing, including any average, weighted average, minimum, hurdle, rate of

increase or other measure of any or any combination thereof. The Administrator, in its sole discretion, may provide for an adjustable Performance Award value based upon the level of achievement of performance measures.

 

In determining the value of Performance Awards, the Administrator shall take into account a Holder’s responsibility level, performance, potential, other Awards, and such other considerations as it deems appropriate. The Administrator, in its sole discretion, may provide for a reduction in the value of a Holder’s Performance Award during the performance period, if permitted by the applicable Grant Document.

 

Following the end of the performance period, the Holder of a Performance Award will be entitled to receive payment of an amount not exceeding the maximum value of the Performance Award, based on the achievement of the performance measures for such performance period, as determined by the Administrator and certified by the Committee as required by Section 162(m) of the Code. Payment of a Performance Award may be made in cash, shares of Class B common stock (valued at the Market Value per Share), or a combination thereof, as determined by the Administrator. Payment will be made in a lump sum, except as otherwise set forth in the applicable Grant Document.

 

A Performance Award will terminate if the Holder does not remain continuously employed or in service as a director of the company or a subsidiary at all times during the applicable performance period, except as otherwise set forth in the applicable Grant Document. The Company does not anticipate that non-employee directors will receive Performance Awards.

 

Incentive Awards.  Incentive Awards are rights to receive shares of Class B common stock (or the Market Value per Share thereof), or rights to receive an amount equal to any appreciation or increase in the Market Value per Share of Class B common stock over a specified period of time, which vest over a period of time as established by the Administrator, without satisfaction of any performance criteria or objectives. The Administrator may, in its discretion, require payment or other conditions of the Holder respecting any Incentive Award.

 

Following the end of the vesting period for an Incentive Award (or at such other time as the applicable Grant Document may provide), the Holder of an Incentive Award will be entitled to receive payment of an amount, not exceeding the maximum value of the Incentive Award, based on the then vested value of the Award. Payment of an Incentive Award may be made in cash, shares of Class B common stock (valued at the Market Value per Share), or a combination thereof as determined by the Administrator. Payment will be made in a lump sum, except as otherwise set forth in the applicable Grant Document.

 

An Incentive Award will terminate if the Holder does not remain continuously employed or in service as a director of the company or a subsidiary at all times during the applicable vesting period, except as otherwise set forth in the applicable Grant Document. The Company does not anticipate that non-employee directors will receive Incentive Awards.

 

Retention Awards.  A Retention Award is a right, which vests over a period of time as established by the Committee, to receive a cash payment measured by a portion of the gain and profits associated with an equity holding of the company or a subsidiary in an e-commerce or internet-based business. The portion of any gain and profit is measured to the date the Retention Award (or portion thereof, as applicable) is deemed surrendered for payment in accordance with its terms. The Committee will designate each such equity holding and establish, within the applicable time period permitted by Section 162(m) of the Code, the portion of the gain and profits (not exceeding 3.75% for any individual holder nor 25% in the aggregate for all holders) in such equity holding used to measure cash payments to the Holder of such Retention Award. The terms and conditions of the respective Retention Award Grant Documents need not be identical.

 

In determining the Retention Awards to be granted under the Incentive Plan, the Committee shall take into account a Holder’s responsibility level, performance, potential, other Awards, and such other considerations as it deems appropriate. The Committee, in its sole discretion, may provide for a reduction in the value of a Holder’s Retention Award during the period such Award is outstanding if permitted by the applicable Grant Document.

Following the vesting of a Retention Award in whole or in part (or at such other times and subject to such other restrictions as the applicable Grant Document may provide), the Holder of a Retention Award will be entitled to receive payment of an amount, not exceeding the maximum value of the Retention Award, based on such Holder’s vested interest in such Retention Award and the gain and profit in the underlying equity holding, as certified by the Committee as required by Section 162(m) of the Code. Payment will be made in cash and in a lump sum, except as otherwise set forth in the applicable Grant Document. In no event will a Retention Award grant a Holder an interest in the equity holding, the gain and profit in which is used to measure cash payments under such Award.

 

A Retention Award will terminate if the Holder does not remain continuously employed or in service as a director of the company or a subsidiary at all times during the applicable vesting period, except as otherwise set forth in the applicable Grant Document. The Company does not anticipate that non-employee directors will receive Retention Awards.

 

Shares Subject to the Incentive Plan.  Subject to adjustment as provided in the Incentive Plan, the aggregate number of shares of Class B common stock that may be issued under the Incentive Plan shall not exceed 4,500,000 shares. As of February 28, 2006, without giving effect to the proposed amendment, only 932,869 shares remained available for additional Awards under the plan, including 11,975 shares available for Awards of Restricted Stock. If our stockholders approve the proposed amendment, an additional 1.5 million shares will be available for Awards under the plan, although the number of shares that may be granted as Restricted Stock Awards will not be increased. As of March 30, 2006, the fair market value of a share of our common stock was $26.03.

 

Award Limitations.  The maximum (i) number of shares of Class B common stock that may be subject to Awards granted to any one individual during any calendar year may not exceed 750,000 shares, (ii) number of shares of Class B common stock that may be granted as Restricted Stock Awards may not exceed 250,000 shares (of which only 11,975 shares remain available for Restricted Stock Awards), (iii) amount of compensation that may be paid under all Performance Awards denominated in cash (including the Market Value of any shares of Class B common stock paid in satisfaction of such Performance Awards) granted to any one individual during any calendar year may not exceed $10 million, and any payment due with respect to a Performance Award shall be paid no later than 10 years after the date of grant of such Performance Award, and (iv) amount of compensation that may be paid under all Retention Awards granted to any one individual during any calendar year may not exceed 1% of the aggregate gross revenues of the company and its consolidated subsidiaries for the fiscal year of the company that ended on December 31, 2000, and any payment due with respect to a Retention Award shall be paid no later than 11 years after the date of grant of such Retention Award (in the case of clauses (i) and (ii), subject to adjustment as provided in the Incentive Plan). The limitations set forth in clauses (i), (iii) and (iv) of the preceding sentence will be applied in a manner which will permit compensation generated under the Incentive Plan which is intended to constitute “performance-based” compensation for purposes of Section 162(m) of the Code to be treated as such “performance-based” compensation.

 

Change in Control.  In the event of a “Change in Control,” (i) all outstanding Options shall immediately vest and become exercisable in full, whether or not otherwise exercisable (but subject, in the case of Incentive Stock Options, to certain limitations) and, except as required by law, all restrictions on the transfer of shares acquired pursuant to such Options shall terminate, (ii) all restrictions applicable to outstanding Restricted Stock and Incentive Awards shall be deemed to have been satisfied and such Restricted Stock and Incentive Awards shall immediately vest in full, and (iii) all outstanding Retention Awards shall immediately vest in full.

 

Provision is made under the Incentive Plan (except as otherwise provided in the applicable Grant Document) for the payment to an Award recipient of a Gross-Up Payment intended to cover (i) any excise taxes due under Section 4999 of the Code (or any similar tax) with respect to amounts that are vested and/or payable due to a Change in Control plus (ii) any taxes (including excise taxes) due on the payment of any such Gross-Up Payment.

A “Change in Control” is generally defined to mean (a) any person is or becomes the beneficial owner of securities representing 25% or more of the combined voting power of the company’s outstanding securities, (b) individuals who constituted the board as of March 12, 2004 cease for any reason to constitute at least a majority of the board (unless such individual’s election is approved by a vote of a majority of the incumbent board or such individual was nominated by an Excluded Person), (c) any merger, consolidation or other reorganization or similar transaction in which the company is not the Controlling Corporation, or (d) any sale of all or substantially all of the company’s assets, other than to Excluded Persons.

 

Transferability.  No Awards (other than Incentive Stock Options) are transferable by the recipient except (i) by will or the laws of descent and distribution, (ii) pursuant to a qualified domestic relations order or (iii) with respect to Awards of Non Qualified Options, with the consent of the Administrator. An Incentive Stock Option is not transferable other than by will or the laws of descent and distribution and may be exercised during the Holder’s lifetime only by the Holder or the Holder’s guardian or Personal Representative.

 

In the discretion of the Administrator as set forth in an applicable Grant Document, a percentage of the aggregate shares of Class B common stock obtained from exercise of an Option shall not be transferable prior to the earliest to occur of (x) termination of the relevant Option term, (y) the Holder’s retirement, death or disability or (z) termination of the Holder’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 or other property subject to outstanding Awards and the applicable option or purchase prices per share, shall be adjusted appropriately in the event of stock dividends, spin offs of assets or other extraordinary dividends, stock splits, combinations of shares, recapitalizations, mergers, consolidations, reorganizations, liquidations, issuances of rights or warrants, and similar transactions or events.

 

Amendment and Termination.  Subject to limitations described above regarding outstanding Awards, the board in its discretion may terminate the Incentive Plan at any time. The board has the right to amend the Incentive Plan or any part thereof from time to time, and the Administrator may amend any Award (and its related Grant Document) at any time, except as otherwise specifically provided in such Grant Document. Notwithstanding the foregoing, no change in any outstanding Award may be made which would impair the rights of the Holder of such Award without such Holder’s consent. In addition, without stockholder approval, the board may not amend the Incentive Plan to (i) increase the maximum aggregate number of shares that may be issued under the Incentive Plan or (ii) change the class of individuals eligible to receive Awards under the Incentive Plan.

 

New Plan Benefits.  Because future awards under the Incentive Plan are based on the company’s performance in future years, amounts payable under the Incentive Plan are not determinable for future years.

 

The following is a brief summary of certain of the U.S. federal income tax consequences of certain transactions under the Incentive Plan based on federal income tax laws in effect on January 1, 2006. This summary applies to the Incentive Plan as normally operated and is not intended to provide or supplement tax advice to eligible employees or directors. The summary contains general statements based on current U.S. federal income tax statutes, regulations and currently available interpretations thereof. This summary is not intended to be exhaustive and does not describe state, local or foreign tax consequences or the effect, if any, of gift, estate and inheritance taxes.

 

Tax Consequences to Recipients

 

Non-qualified Stock Options.  In general: (i) no income will be recognized by an optionee at the time a non-qualified stock option is granted; (ii) at the time of exercise of a non-qualified stock option, ordinary income will be recognized by the optionee in an amount equal to the difference between the option price paid for the shares and the fair market value of the shares if they are nonrestricted on the date of exercise; and (iii) at the time of sale of shares acquired pursuant to the exercise of a non-qualified stock option, any

appreciation (or depreciation) in the value of the shares after the date of exercise will be treated as a capital gain (or loss).

 

The total number of shares of Class B common stock subject to Awards granted to any one recipient during any calendar year is limited under the Incentive Plan for the purpose of qualifying any compensation realized upon exercise of options that are granted by the Human Resources Committee as “performance-based compensation” as defined in Section 162(m) of the Code in order to preserve tax deductions by the company with respect to any such compensation in excess of one million dollars paid to “Covered Employees” (i.e., the individuals who, on the last day of the year in question, are the company’s CEO and the four highest compensated officers of the company (other than the CEO)). Options granted by the CEO will not qualify as “performance-based compensation” and will be subject to the limitation on deductibility under Section 162(m) of the Code; however, it is not anticipated that the CEO would have the authority to make grants to Covered Employees.

 

Incentive Stock Options.  No income generally will be recognized by an optionee upon the grant or exercise of an Incentive Stock Option. However, upon exercise, the difference between the fair market value and the exercise price may be subject to the alternative minimum tax. If shares of Class B common stock are issued to an optionee pursuant to the exercise of an Incentive Stock Option and no disqualifying disposition of the shares is made by the optionee within two years after the date of grant or within one year after the transfer of the shares to the optionee, then upon the sale of the shares any amount realized in excess of the option price will be taxed to the optionee as a capital gain and any loss sustained will be a capital loss.

 

If shares of Class B common stock acquired upon the exercise of Incentive Stock Options are disposed of prior to the expiration of either holding period described above, the optionee generally will recognize ordinary income in the year of disposition in an amount equal to any excess of the fair market value of the shares at the time of exercise (or, if less, the amount realized on the disposition of the shares in a sale or exchange) over the option price paid for the shares. Any further gain (or loss) realized by the optionee generally will be taxed as a capital gain (or loss).

 

As described above with respect to non-qualified stock options, the Incentive Plan has been designed to qualify any ordinary compensation income recognized by optionees with respect to Incentive Stock Options granted by the Human Resources Committee as “performance-based compensation” as defined in Section 162(m) of the Code.

 

Restricted Stock.  A recipient of Restricted Stock generally will be subject to tax at ordinary income tax rates on the fair market value of the Restricted Stock reduced by any amount paid by the recipient at such time as the shares are no longer subject either to a risk of forfeiture or restrictions on transfer for purposes of Section 83 of the Code. However, a recipient who so elects under Section 83(b) of the Code within 30 days of the date of transfer of the shares will have taxable ordinary income on the date of transfer of the shares equal to the excess of the fair market value of the shares (determined without regard to the risk of forfeiture or restrictions on transfer) over any purchase price paid for the shares. If a Section 83(b) election is made and the shares are subsequently forfeited, the recipient will not be allowed to take a deduction for the value of the forfeited shares. If a Section 83(b) election has not been made, any dividends received with respect to Restricted Stock that are subject at that time to a risk of forfeiture or restrictions on transfer generally will be treated as compensation that is taxable as ordinary income to the recipient; otherwise the dividends will be treated as dividends. Awards of Restricted Stock to Covered Employees will not qualify as “performance-based compensation” and the company will be subject to the limitation on deductibility under Section 162(m) of the Code.

 

Performance and Incentive Awards.  An individual who has been granted a Performance Award or an Incentive Award generally will not realize taxable income at the time of grant. Whether a Performance Award or an Incentive Award is paid in cash or shares of Class B common stock, the recipient will have ordinary compensation income in the amount of (i) any cash paid at the time of such payment and (ii) the fair market value of any shares of Class B common stock either at the time the Performance or Incentive Award is paid in such shares or at the time any restrictions on the shares (including restrictions under Section 16(b) of the Exchange Act) subsequently lapse, depending on the nature, if any, of the restrictions imposed and whether

the recipient elects under Section 83(b) of the Code to be taxed without regard to any such restrictions. Any dividend equivalents paid with respect to an Incentive Award prior to the actual issuance of shares under the award will be compensation income to the recipient. Incentive Awards will not qualify as “performance-based compensation” and the company will be subject to the limitation on deductibility under Section 162(m) of the Code. The Incentive Plan has been designed to qualify any ordinary compensation income recognized by Covered Employees with respect to Performance Awards granted by the Human Resources Committee as “performance-based compensation” as defined in Section 162(m) of the Code. Performance Awards granted by the CEO will not qualify as “performance-based compensation” and will be subject to the limitation on deductibility under Section 162(m) of the Code; however, it is not anticipated that the CEO would have the authority to make grants to Covered Employees.

 

Retention Awards.  An individual who has been granted a Retention Award generally will not realize taxable income at the time of grant. The recipient of a Retention Award will have ordinary compensation income in the amount of any cash paid with respect to such award at the time of such payment. All Retention Awards under the Retention Award Program must be granted by the Human Resources Committee, and the Incentive Plan has been designed to qualify any ordinary compensation income recognized by Covered Employees with respect to Retention Awards as “performance-based compensation” as defined in Section 162(m) of the Code.

 

Section 409A of the Code.  Section 409A of the Code provides that deferred compensation, as defined therein, will be subject to an additional 20% tax unless it meets certain restrictions set forth in Section 409A of the Code and the guidance promulgated thereunder. The company intends for Awards issued under the Incentive Plan to either be exempt from the application of, or to comply with, Section 409A of the Code.

 

Tax Consequences to the Company or Subsidiary.

 

Section 162(m) of the Code limits the ability of the company to deduct compensation paid during a fiscal year to a Covered Employee in excess of one million dollars, unless such compensation is based on performance criteria established by the Human Resources Committee or meets another exception specified in Section 162(m) of the Code. Certain Awards described above will not qualify as “performance-based compensation” or meet any other exception under Section 162(m) of the Code and, therefore, the 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 available to the company or any subsidiary for any amount paid under the Incentive Plan with respect to (i) any excise taxes due under Section 4999 of the Code with respect to amounts that are vested and/or payable due to a Change in Control and (ii) any taxes due on the payment of such excise taxes described in clause (i).

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE AMENDMENT TO THE INCENTIVE PLAN 2000, AS DESCRIBED ABOVE AND AS SET FORTH IN APPENDIX D, WHICH IS DESIGNATED AS PROPOSAL NO. 3 ON THE ENCLOSED PROXY.

PROPOSAL 4:

 

The firm of Ernst & Young LLP has been our independent auditors since 1993, and the board of directors desires to continue to engage the services of this firm for the fiscal year ending December 31, 2006. Accordingly, the board of directors, upon the recommendation of the Audit Committee, has reappointed Ernst & Young LLP to audit the financial statements of Continental and its subsidiaries for fiscal year 2006 and report on those financial statements. Stockholders are being asked to vote upon the ratification of the appointment. If stockholders do not ratify the appointment of Ernst & Young LLP, the Audit Committee will reconsider their appointment.

 

The following table shows the fees paid for audit services and fees paid for audit related, tax and all other services rendered by Ernst & Young LLP for each of the last three fiscal years (in millions):

 

 

 

 

The charter of the Audit Committee provides that the committee is responsible for the pre-approval of all auditing services and permitted non-audit services to be performed for the company by the independent auditors, subject to the requirements of applicable law. In accordance with such law, the committee has delegated the authority to grant such pre-approvals to the committee chair, which approvals are then reviewed by the full committee at its next regular meeting. Typically, however, the committee itself reviews the matters to be approved. The procedures for pre-approving all audit and non-audit services provided by the independent auditors include the committee reviewing a budget for audit services, audit-related services, tax services and other services. The budget includes a description of, and a budgeted amount for, particular categories of audit and non-audit services that are anticipated at the time the budget is submitted. Committee approval would be required to exceed the budgeted amount for a particular category of non-audit services or to engage the independent auditors for any services not included in the budget. The committee periodically monitors the services rendered by and actual fees paid to the independent auditors to ensure that such services are within the parameters approved by the committee.

 

Representatives of Ernst & Young LLP will be present at the stockholders meeting and will be available to respond to appropriate questions and make a statement should they so desire.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF THE INDEPENDENT AUDITORS, WHICH IS DESIGNATED AS PROPOSAL NO. 4 ON THE ENCLOSED PROXY.

PROPOSAL 5:

 

We have been advised that Mrs. Evelyn Y. Davis, located at Watergate Office Building, 2600 Virginia Avenue, N.W., Suite 215, Washington, D.C. 20037, is the beneficial owner of 500 shares of the company’s common stock and intends to submit the following proposal at the meeting:

 

RESOLVED: “That the stockholders of Continental Airlines assembled in Annual Meeting in person and by proxy, hereby recommend that the Corporation affirm its political non-partisanship. To this end the following practices are to be avoided:

 

‘‘(a) The handing of contribution cards of a single political party to an employee by a supervisor.

 

‘‘(b) Requesting an employee to send a political contribution to an individual in the Corporation for a subsequent delivery as part of a group of contributions to a political party or fund raising committee.

 

‘‘(c) Requesting an employee to issue personal checks blank as to payee for subsequent forwarding to a political party, committee or candidate.

 

‘‘(d) Using supervisory meetings to announce that contribution cards of one party are available and that anyone desiring cards of a different party will be supplied one on request to his supervisor.

 

‘‘(e) Placing a preponderance of contribution cards of one party at mail station locations.”

 

REASONS: “The Corporation must deal with a great number of governmental units, commissions and agencies. It should maintain scrupulous political neutrality to avoid embarrassing entanglements detrimental to its business. Above all, it must avoid the appearance of coercion in encouraging its employees to make political contributions against their personal inclination. The Troy (Ohio) News has condemned partisan solicitation for political purposes by managers in a local company (not Continental Airlines).” “And if the Company did not engage in any of the above practices, to disclose this to ALL shareholders in each quarterly report.”

 

“If you AGREE, please mark your proxy FOR this resolution.”

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “AGAINST” THIS PROPOSAL.

 

The Board of Directors recommends a vote against this proposal. The Board of Directors strongly believes that federal and state regulations, along with the company’s own policies and procedures, adequately address the issues raised by the proposal. Adoption of the proposal is unnecessary and administratively burdensome and not in the best interests of the company or its stockholders.

 

The company, like all U.S. corporations, is subject to federal and state laws and regulations that govern corporate participation in partisan political activity. These laws and regulations prohibit most of the practices identified in the stockholder proposal, and the company does not engage in or endorse any such prohibited practices.

 

As permitted by federal law, the company sponsors a political action committee, or PAC, which is supported solely by voluntary contributions from employees and which is not affiliated with any party or candidate. In addition, the company’s employees periodically assist federal candidates or political committees by raising voluntary personal contributions from among their fellow employees. These activities provide our employees with an opportunity to support candidates for public office whose views are consistent with the company’s long-term legislative and regulatory goals. To the extent the stockholder proposal would (i) restrict the company’s ability to sponsor and administer its PAC or (ii) prohibit employees from acting collectively to support a particular candidate or political committee, the proposal would be contrary to the best interests of the company and its stockholders.

Finally, the proposal’s requirement that the company state on a quarterly basis that it doesn’t engage in the listed practices would be administratively burdensome and unnecessary, and would also impose additional expense at a time when the company is striving to reduce its costs.

 

The company’s policies, together with federal and state laws and regulations, are more than adequate to address the concerns raised by this stockholder proposal, without unduly restricting the company’s legitimate participation in the political process.

 

FOR THESE REASONS, THE BOARD OF DIRECTORS RECOMMENDS A VOTE “AGAINST” THE STOCKHOLDER PROPOSAL, WHICH IS DESIGNATED AS PROPOSAL NO. 5 ON THE ENCLOSED PROXY.

 

We have not received notice as required under our bylaws of any other matters to be proposed at the meeting. Consequently, the only matters to be acted on at the meeting are those described in this proxy statement, along with any necessary procedural matters related to the meeting. As to procedural matters, or any other matters that were determined to be properly brought before the meeting calling for a vote of the stockholders, it is the intention of the persons named in the accompanying proxy, unless otherwise directed in that proxy, to vote on those matters in accordance with their best judgment.

 

Section 16(a) of the Exchange Act requires our directors and Section 16 Officers, and persons who own more than ten percent of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Such persons are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file.

 

To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required, during the fiscal year ended December 31, 2005, all of our directors, Section 16 Officers and greater than ten percent beneficial stockholders were in compliance with applicable Section 16(a) filing requirements.

 

Any stockholder who wants to present a proposal at the 2007 annual meeting of stockholders and to have that proposal set forth in the proxy statement and form of proxy mailed in conjunction with that annual meeting must submit that proposal in writing to the Secretary of the company no later than December 14, 2006. Our bylaws require that for nominations of persons for election to the board of directors or the proposal of business not included in our notice of the meeting to be considered by the stockholders at an annual meeting, a stockholder must give timely written notice thereof. To be timely for the 2007 annual meeting of stockholders, that notice must be delivered to the Secretary of the company at our principal executive offices not less than 70 days and not more than 90 days prior to June 6, 2007. However, if the 2007 annual meeting of stockholders is advanced by more than 20 days, or delayed by more than 70 days, from June 6, 2007, then the notice must be delivered not earlier than the ninetieth day prior to the 2007 annual meeting and not later than the close of business on the later of (a) the seventieth day prior to the 2007 annual meeting or (b) the tenth day following the day on which public announcement of the date of the 2007 annual meeting is first made. The stockholder’s notice must contain and be accompanied by certain information as specified in the bylaws. We recommend that any stockholder desiring to make a nomination or submit a proposal for consideration obtain a copy of our bylaws, which may be obtained on the company’s website under Corporate Governance at www.continental.com/company/investor or without charge from the Secretary of the company upon written request addressed to the Secretary at Continental Airlines, Inc., P.O. Box 4607, Houston, Texas 77210-4607.

 

EVEN IF YOU PLAN TO ATTEND THE MEETING, PLEASE VOTE BY INTERNET OR TELEPHONE AS DESCRIBED ABOVE IN THE PROXY STATEMENT, OR SIGN, DATE AND MAIL PROMPTLY THE ENCLOSED PROXY.

 

Continental’s annual report on Form 10-K for the year ended December 31, 2005, including amendments and exhibits, is available on the company’s website under Annual and Periodic Reports at www.continental.com/company/investor. We will furnish a copy of the 10-K and any amendments to interested stockholders without charge, upon written request. We will also furnish any 10-K exhibit if requested in writing and accompanied by payment of reasonable fees relating to our furnishing the exhibit. Requests for copies should be addressed to our Secretary at Continental Airlines, Inc., P.O. Box 4607, Houston, Texas 77210-4607. The financial statements of the company filed with the 10-K, together with certain other financial data and analysis, are included in this proxy statement as Appendix A.  

 

APPENDIX A

 

INDEX

 

 

 

Selected Operating Data