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PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 33-53107
SUPPLEMENT TO THE PROXY STATEMENT/JOINT PROSPECTUS DATED JUNE 10, 1994
UAL CORPORATION
UNITED AIR LINES, INC.
July 1, 1994
Dear UAL Corporation Stockholder:
The following information amends and supplements the Proxy Statement/Joint
Prospectus, dated June 10, 1994 (the "Proxy Statement/Prospectus"), of UAL
Corporation, a Delaware corporation (the "Company"), and its wholly-owned
subsidiary United Air Lines, Inc., a Delaware corporation ("United"). A copy
of the Proxy Statement/Prospectus has been sent to you previously. An
additional copy of the Proxy Statement/Prospectus may be obtained by calling
(800) 223-2064. Certain information contained in this Supplement modifies, and
should be read in conjunction with, the Proxy Statement/Prospectus.
Capitalized terms used but not defined herein shall have the meanings set
forth in the Proxy Statement/Prospectus, as modified by the provisions of the
Amendment (defined below). Cross references set forth in this Supplement are
to material in the Proxy Statement/Prospectus.
MEETING OF STOCKHOLDERS
A meeting of holders of common stock, $5.00 par value per share (the "Old
Shares"), of the Company (the "Meeting") is scheduled for July 12, 1994, at
8:30 a.m., local time, in the Imperial Ballroom of the Fairmont Hotel, 200
North Columbus Drive, Chicago, Illinois. The principal purpose of the Meeting
is to consider and vote upon various proposals relating to the
Recapitalization of the Company. The other purposes of the Meeting are as
stated in the Notice of Meeting attached to the Proxy Statement/Prospectus
(the "Notice of Meeting").
CONSUMMATION OF THE RECAPITALIZATION IS SUBJECT TO APPROVAL BY THE
STOCKHOLDERS OF THE COMPANY AT THE MEETING.
PROXIES
All Old Shares that are represented at the Meeting by properly executed
proxies received prior to or at the Meeting and not revoked will be voted at
the Meeting in accordance with the instructions indicated in such proxies. IF
NO INSTRUCTIONS ARE INDICATED, SUCH PROXIES WILL BE VOTED FOR APPROVAL OF THE
PLAN OF RECAPITALIZATION, AS AMENDED, THE CHARTER AND BYLAW AMENDMENTS, THE
STOCK ISSUANCE, THE AMENDMENT OF THE 1981 STOCK PROGRAM, THE AMENDMENT OF THE
1988 RESTRICTED STOCK PLAN AND THE AMENDMENT OF THE INCENTIVE PLAN; FOR THE
ELECTION OF FOUR PUBLIC DIRECTORS; FOR THE RATIFICATION OF ARTHUR ANDERSEN;
AND AGAINST THE STOCKHOLDER PROPOSALS. The Board of Directors of the Company
does not know of any matters, other than as described in the Notice of
Meeting, that are to come before the Meeting. IF A PROXY IS GIVEN TO VOTE IN
FAVOR OF THE PLAN OF RECAPITALIZATION, THE PERSONS NAMED IN SUCH PROXY WILL
HAVE AUTHORITY TO VOTE IN ACCORDANCE WITH THEIR BEST JUDGMENT ON ANY OTHER
MATTER THAT IS PROPERLY PRESENTED AT THE MEETING FOR ACTION, INCLUDING WITHOUT
LIMITATION, ANY PROPOSAL TO ADJOURN THE MEETING OR OTHERWISE CONCERNING THE
CONDUCT OF THE MEETING.
A proxy card has been enclosed with this Supplement. STOCKHOLDERS SHOULD
COMPLETE AND RETURN THE PROXY CARD ACCOMPANYING THIS SUPPLEMENT IF THEY HAVE
NOT PREVIOUSLY COMPLETED AND RETURNED A PROXY CARD OR IF THEY DESIRE TO REVOKE
ANY PROXY PREVIOUSLY GIVEN.
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Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of the Company, before the polls are closed with respect to
the vote, a written notice of revocation bearing a later date than the proxy,
(ii) duly executing a subsequent proxy relating to the same Old Shares and
delivering it to the Secretary of the Company or (iii) attending the Meeting
and voting in person (although attendance at the Meeting will not in and of
itself constitute a revocation of a proxy). Any written notice revoking a proxy
in accordance with clause (i) above should be sent to: UAL Corporation, P.O.
Box 66919, Chicago, Illinois 60666, Attention: Francesca M. Maher, Secretary.
In addition, both proxies and revocations of proxy may be given by delivering
to Georgeson & Co. by means of facsimile at (212) 440-9009, before the close of
business on the day before the Meeting, both sides of an executed form of proxy
or a notice of revocation bearing a later date than the proxy.
AMENDMENTS TO AMENDED AND RESTATED PLAN OF RECAPITALIZATION AND AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION OF THE COMPANY
On June 29, 1994, the Company entered into a second amendment (the
"Amendment") to the Amended and Restated Agreement and Plan of
Recapitalization, dated as of March 25, 1994 (as amended, the "Plan of
Recapitalization"), with the Air Line Pilots Association, International and the
International Association of Machinists and Aerospace Workers (the "IAM"),
which was previously amended on June 2, 1994. A copy of the Amendment is
attached hereto as Exhibit 1. The Plan of Recapitalization as it existed prior
to the Amendment was filed as part of the Company's Current Report on Form 8-K
dated June 2, 1994 and the Amendment was filed as part of the Company's Current
Report on Form 8-K dated June 30, 1994.
The Plan of Recapitalization generally provides for the Recapitalization of
the Company and the transfer of between 55% and 63% of the equity of the
Company to various trusts to be established for the benefit of certain employee
groups in exchange for wage and benefit reductions and work rule changes. The
Recapitalization is described in detail in the Proxy Statement/Prospectus.
As a result of the Amendment, stockholders of the Company would be entitled
to receive in the Recapitalization for each Old Share: (i) one-half of a New
Share; (ii) $38.00 in cash from the Company's existing cash resources; (iii)
either $15.05 in cash from the proceeds of the United Series A Offering or, if
the United Series A Offering is not consummated, $15.55 principal amount of
United 10.125% Series A Debentures; (iv) either $15.08 in cash from the
proceeds of the United Series B Offering or, if the United Series B Offering is
not consummated, $15.55 principal amount of United 10.825% Series B Debentures;
and (v) either $16.68 in cash from the proceeds of the UAL Preferred Offering
or, if the UAL Preferred Offering is not consummated, Depositary Preferred
Shares representing interests in $17.96 liquidation preference of UAL 11.375%
Public Preferred Stock.
UNDERWRITING OF PUBLIC PREFERRED STOCK AND DEBENTURES
On June 30, 1994, the Company entered into an underwriting agreement relating
to the UAL Preferred Offering and United entered into an underwriting agreement
relating to the Series A Offering and the Series B Offering. Completion of the
offerings contemplated by each of the underwriting agreements is subject to
completion of the Recapitalization and certain other conditions.
The underwriting agreement relating to the UAL Preferred Offering provides
that the Company will offer 16,416,000 Depositary Preferred Shares representing
interest in $410,400,000 liquidation preference of the Public Preferred Stock.
If the offering is consummated, the Depositary Preferred Shares representing
interests in the Public Preferred will bear an interest rate of 12 1/4%. The
offering price on the Depositary Preferred Shares is $25.00 per share; each
Depositary Preferred Share represents $25 liquidation preference of Public
Preferred Stock.
The underwriting agreement relating to the Series A Offering provides that
United will offer $370,200,000 aggregate principal amount of United 10.67%
Series A Debentures. The underwriting
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agreement relating to the Series B Offering provides that United will offer
$371,000,000 aggregate principal amount of United 11.21% Series B Debentures.
THERE CAN BE NO ASSURANCE THAT ANY OF THE OFFERINGS WILL BE CONSUMMATED.
RECOMMENDATION OF THE BOARD
THE BOARD OF DIRECTORS HAS APPROVED THE PLAN OF RECAPITALIZATION AND HAS
DETERMINED THAT THE RECAPITALIZATION IS FAIR TO THE HOLDERS OF OLD SHARES.
THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE PLAN OF RECAPITALIZATION
AND THE RELATED MATTERS IDENTIFIED IN CLAUSES (II) THROUGH (VII) ON THE
ENCLOSED PROXY CARD.
Set forth below is certain additional information concerning the views of Dr.
Brimmer and Mr. Olson:
In connection with his testimony in the Shareholder Actions (as defined in
"Litigation" below), Dr. Brimmer stated that his abstention on May 20, 1994 was
not intended as a vote in favor of the Recapitalization. He was opposed to the
Recapitalization because, in addition to the reasons previously set qqforth in
the Proxy Statement/Prospectus, he believed that there were preferable
alternatives to the Recapitalization which included modifying the Company's
organization to start or acquire a subsidiary which would compete against other
low cost carriers, giving up non-competitive routes, disposing of high cost
assets, or pursuing alternatives which would not transfer majority control from
the common stockholders.
In connection with his testimony in the Shareholder Action, Mr. Olson stated
that he was opposed to the first amendment to the Agreement and Plan of
Recapitalization, dated as of June 2, 1994, because he did not believe that an
increase in the employees' equity ownership was necessary to secure the
Coalition's agreement to proceed with the transaction or that any modification
was warranted.
RECENT DEVELOPMENTS: UNION ORGANIZING ACTIVITY
On June 9, 1994, the Aircraft Mechanics Fraternal Association ("AMFA") filed
an application with the National Mediation Board seeking authorization to
represent the craft or class of mechanics and related employees at United who
constitute approximately 50% of the IAM's current membership at United. AMFA's
actions or future actions may affect the achievement of estimated labor savings
and harmonious labor relations within the Company.
ADDITIONAL INFORMATION CONCERNING INVESTMENTS AND SAVINGS
In computing the estimated net present value of the labor savings and short-
haul savings set forth in the Proxy Statement/Prospectus, the Company utilized
a 10% discount rate. Such rate, which is generally used by the Company in its
internal discounted cash flow models, was selected by the Company based on the
Company's weighted average cost of capital. If a higher discount rate were
applied to the calculation (if, for example, it was determined that the lack of
assurance that the cost savings would be obtained should result in the
application of such a higher discount rate), the estimated net present value of
the labor savings and short-haul savings would be less than $4.9 billion.
Such $4.9 billion estimate has not been adjusted for taxes. The Company
believes it would be difficult to isolate the tax implications of the savings
and, in any event, believes that the ESOP will generate tax benefits to offset
a significant portion of the income generated by such cost savings.
ADDITIONAL INFORMATION CONCERNING IMPLEMENTATION OF "AIRLINE-WITHIN-AN-AIRLINE"
On June 23, 1994, United issued a press release discussing the implementation
of the "airline-within-an-airline", which read in part as follows:
United Airlines today said it is shifting its planning focus from
conceptual to implementation of its new "airline within an airline," noting
that most key strategic and operational decisions have already been
reached.
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The specialized carrier is targeted to take to the skies first on the
West Coast on Oct. 1, 1994 with an initial schedule of 82 daily flights.
The service will be expanded quickly to 129 flights in November and 143
flights in December.
United said it has established centralized implementation teams matched
with local implementation teams in key West Coast cities to assure a smooth
transition as the new service is introduced.
* * *
The initial group of 14 city pair markets to receive U-2 service include
seven presently served by United and seven not served today by United.
United said the fares to be charged in these markets will be announced
later but emphasized they will be very attractive.
United said that in addition to low fares its new operation will have
these additional features among others:
.Boeing 737 jet aircraft.
.Short ground time between flights (20 minutes).
.Seat assignments at the airport.
.Dedicated gates and a core group of front-line employees.
Other service features including pricing and the name of the new carrier
will be announced at a later date. A number of names suggested by employees
and others are being reviewed through focus groups.
CERTAIN RISK FACTORS
In addition to the other information contained in the Proxy
Statement/Prospectus and this Supplement, holders of Old Shares should
carefully consider the risk factors set forth in the Proxy Statement/Prospectus
and this Supplement concerning the New Shares, and, if the Offerings are not
consummated, the Debentures and/or the Depositary Preferred Shares representing
interests in the Public Preferred Stock.
Financial Effects; Delaware Law Considerations.
The Recapitalization will immediately change the Company's capitalization to
one that is more highly leveraged. In this regard, the following discussion
compares the pro forma book effect of the Recapitalization on long-term debt,
stockholder's equity and income/loss from continuing operations with recent
historical financial information of the Company. On a pro forma book basis at
March 31, 1994, the Company would have had approximately $3.427 billion of
long-term debt and a deficit of approximately $710 million of stockholders'
equity, as compared to the approximately $2.693 billion of long-term debt and
approximately $1.097 billion of stockholder's equity that was shown on the
Company's balance sheet on such date. In addition, if the Recapitalization had
occurred as of January 1, 1993, the Company would have reported, on a pro forma
basis, a loss from continuing operations of approximately $50 million for the
year ended December 31, 1993 and a loss from continuing operations of
approximately $60 million for the three months ended March 31, 1994, as
compared to losses from continuing operations of $31 million for the year ended
December 31, 1993 and $71 million for the three months ended March 31, 1994
that were reported for each period. See "REVISED UNAUDITED PRO FORMA FINANCIAL
INFORMATION."
The Company's earnings were inadequate to cover fixed charges and preferred
stock dividends by $98 million in 1993, by $748 million in 1992 and by $599
million in 1991. On a pro forma basis, the Company's earnings in 1993 were
inadequate to cover fixed charges and preferred stock dividends by $128
million. In addition, the Company's earnings were inadequate to cover fixed
charges and preferred stock dividends for the three month period ended March
31, 1994 by $118 million, and on a pro forma basis they were inadequate by $101
million. United's earnings were inadequate to cover fixed charges by $77
million in 1993, by $694
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million in 1992 and by $604 million in 1991. On a pro forma basis, United's
earnings in 1993 were inadequate to cover fixed charges by $82 million. In
addition, United's earnings were inadequate to cover fixed charges for the
three month period ended March 31, 1994 by $130 million, and on a pro forma
basis they were inadequate by $107 million. Non-cash depreciation and
amortization are deducted in computing earnings before fixed charges. Such non-
cash charges do not significantly affect the ability of United to fund
operations, service debt, or provide funds to service the Company's preferred
stock dividends. Depreciation and amortization of United were $722 million in
1993, $695 million in 1992, $604 million in 1991 and $178 million for the three
month period ended March 31, 1994.
OPINION OF FINANCIAL ADVISORS TO THE BOARD
The valuation ranges as of May 20, 1994 referred to in the fifth sentence of
the section entitled "BACKGROUND OF THE PLAN OF RECAPITALIZATION--Definitive
Documentation Amendment" of the Proxy Statement/Prospectus relate to the
alternative proposal made by the Company to the Coalition and not to the
proposal made by the Coalition.
On July 1, 1994, CS First Boston and Lazard each delivered their updated
written opinions that, as of such date, the consideration to be received by
holders of Old Shares in connection with the Recapitalization, taken as a
whole, was fair to such holders of Old Shares from a financial point of view.
Copies of these opinions are attached hereto as Exhibit 2 and Exhibit 3,
respectively.
LISTING OF NEW SHARES, DEPOSITARY PREFERRED SHARES AND DEBENTURES
The Company has been informed that, subject to approval of the Plan of
Recapitalization by the stockholders of the Company, the New Shares, the
Depositary Preferred Shares and the Debentures have been authorized for listing
on the New York Stock Exchange, Inc. (the "NYSE"). Trading of the Depository
Preferred Shares on the NYSE is expected to commence within a 30-day period
after the initial delivery of the Depository Preferred Shares. The Company
expects to apply for listing of the New Shares on the Pacific Stock Exchange
and the Chicago Stock Exchange.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Generally, the Federal income tax consequences described under the heading
"Certain Federal Income Tax Consequences" in the Proxy Statement/Joint
Prospectus remain as described therein. However, because the amount of cash
that will be exchanged (i) if the Offerings are consummated will decrease from
$88 per Old Share to $84.81 per Old Share and (ii) if the Offerings are not
consummated will increase to $38 per Old Share from $25.80 per Old Share, the
corresponding dollar amounts in numbered paragraph 2 (on page 57 of the Proxy
Statement/Joint Prospectus) should be adjusted accordingly. Specifically, if
the Offerings are consummated, in whole or in part, the maximum taxable gain
associated with the transaction will not exceed $84.81 per Old Share, or such
lesser amount, if as a result of the Offerings the amount of cash (or the
amount of cash and the fair market value of Debentures, as the case may be)
exchanged in the Recapitalization is less than $84.81 per Old Share. If the
Offerings are not consummated, assuming the Debentures have a fair market value
of $30.13 per Old Share, the maximum taxable gain associated with the
transaction will not exceed $68.13 per Old Share (i.e., the sum of the assumed
fair market value of the Debentures and the amount of cash received).
LITIGATION
The Company, together with certain officers and directors of the Company and
the Unions, are parties to two stockholder actions pending in the Court of
Chancery of the State of Delaware, New Castle County, captioned Kaufman v.
Wolf, C.A. No. 13312, and Krasner v. UAL Corp., C.A. No. 13316 (the
"Shareholder Actions"). On June 17, 1994, plaintiffs in these two actions
jointly filed an Amended Complaint. The Amended Complaint alleged, among other
things, that the Proxy Statement issued by the Company in connection with the
proposed Recapitalization of the Company, on which common stockholders of the
Company are scheduled to vote on July 12, 1994, was false and misleading, and
further alleged that the proposed Recapitalization failed to maximize
shareholder value. The Amended Complaint seeks, among other things, a
preliminary and permanent injunction against consummation of the
Recapitalization.
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On June 21, 1994, plaintiffs filed a motion for a preliminary injunction to
enjoin consummation of the Recapitalization. The Court has scheduled a hearing
on this motion for July 7, 1994. On July 1, 1994, the Company and the
plaintiffs entered into a memorandum of understanding relating to a settlement
of the Shareholder Actions, on the basis of changes to the Plan of
Recapitalization (which changes are consistent with the changes disclosed in
this Supplement), and certain disclosures that are contained in this
Supplement. The settlement is subject to, among other things, definitive
documentation and court approval.
In addition, the Company has become aware of an action pending in the United
States District Court for the Northern District of Illinois, Eastern Division,
captioned Wiley v. International Association of Machinists and Aerospace
Workers, No. 94C 3958, filed on June 29, 1994. The Complaint in the Wiley
action alleges that the ratification of the Recapitalization by District Lodge
141 of the IAM was defective and invalid because, among other things, certain
members of the IAM were allegedly treated preferentially and certain
information allegedly was not disclosed to members. The Complaint seeks, among
other things, an order enjoining implementation of the Recapitalization unless
and until it is ratified by the plaintiff's District Lodge. The Company is not
a party to this action.
EFFECT OF THE RECAPITALIZATION ON INCOME STATEMENT, BOOK EQUITY AND CASH FLOW
The effect of the Recapitalization on the Company's equity will be to
immediately reduce it by approximately $1.8 billion due primarily to the
distribution of cash and Debentures as part of the Recapitalization
Consideration, vesting of unvested restricted stock and transaction costs.
Based on the Company's analyses, the reduction in book equity would be expected
to be earned back by year end 1998. The reasons for the rapid recovery of the
reduction in equity were increases in net income and the effect of employee
stock ownership plan accounting. Additionally, the Company's cash balance were
estimated to grow to be $3.8 billion greater than what it would have otherwise
been had the Recapitalization not been consummated.
The following analysis shows the anticipated effect on income statement, book
equity and cash flow resulting from the Recapitalization. This analysis is
based on an assumed purchase price for the Class 1 ESOP Preferred Stock at the
Effective Time of $120 per share. The analysis for subsequent purchases of such
Stock assumes a 14% compounded growth rate for the market price of New Shares
and a purchase price premium for the Class 1 ESOP Preferred Stock in excess of
the market price for the New Shares which is initially approximately 38%,
declining in each successive year. The $120 per share assumed purchase price of
Class 1 ESOP Preferred Stock at the Effective Time is based on an assumed
market price of a New Share at the Effective Time of approximately $87. The
assumption is based upon (i) an assumed market price of an Old Share at the
Effective Time of approximately $128.31 per share, (ii) value of the non-New
Share portion of the Recapitalization Consideration of $84.81 per Old Share,
and (iii) a purchase price premium for the Class 1 ESOP Preferred Stock over
the assumed value of a New Share of 38%. The actual purchase price for the
Class 1 ESOP Preferred Stock at the Effective Time will be determined pursuant
to the terms of the purchase agreement with the ESOP Trustee, which provides
for a purchase price equal to 1.38 times the Closing Price, except that if the
closing price is less than 98% of the average of the Adjusted Old Share Price
for the five trading days immediately preceding the Effective Date, the
purchase price shall equal the product of 1.38 and such average price. See "THE
PLAN OF RECAPITALIZATION--Establishment of ESOPs--Sale of ESOP Preferred
Stock--Leveraged ESOP." There can be no assurance as to the purchase price of
the Class 1 ESOP Preferred Stock either at or subsequent to the Effective Time,
the Closing Price, or the Adjusted Old Share Price or the actual growth rate,
if any, for the market price of the New Shares during the six year wage
investment period. This analysis does not purport to be indicative of the
results of operations that may be obtained in the future. A change in the
purchase price of the Class 1 ESOP Preferred or the New Share market price
growth rate will affect the analysis set forth below. For example, a change in
the assumed purchase price of the Class 1 ESOP Preferred Stock to $130 would
increase the cumulative change in the cash balance in the year 2000 by $80
million. Changing the New Share market price growth rate assumption from 14% to
10% has the effect of reducing cumulative cash by approximately $70 million.
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CHANGES TO INCOME, BOOK EQUITY AND CASH FLOW*
(IN MILLIONS)
RECAPITALIZATION BETTER/(WORSE) THAN STATUS QUO
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<CAPTION>
1994 1995 1996 1997 1998 1999 2000
---- ---- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Flight Kitchen Sale Savings
(Net)..................... $ 16 $ 38 $ 49 $ 49 $ 45 $ 48 $ 50
Employee Investment
Savings................... 262 604 742 805 820 856 591
ESOP Accounting Charge..... (191) (390) (391) (393) (397) (405) (99)
---- ---- ------ ------ ------ ------ ------
Operating Income........... 87 252 400 461 468 499 542
Interest Expense**......... (41) (81) (81) (81) (81) (81) (81)
Interest Income............ (13) (22) (20) (4) 24 51 67
---- ---- ------ ------ ------ ------ ------
Earnings Before Taxes...... 34 149 299 376 411 469 528
Income Taxes***............ (12) (57) (114) (143) (156) (178) (201)
---- ---- ------ ------ ------ ------ ------
Net Income................. 21 92 185 233 255 291 328
Non-Cash ESOP Accounting
Charge****................ 191 390 391 393 397 405 99
Deferred Taxes............. (1) 13 38 53 62 77 65
---- ---- ------ ------ ------ ------ ------
Funds From Operations...... 211 495 614 679 714 773 492
Series A and B Preferred
Stock Dividends........... (25) (50) (26) (13) (13) (13) (13)
---- ---- ------ ------ ------ ------ ------
Net Cash Flow.............. $186 $445 $ 589 $ 666 $ 700 $ 759 $ 478
Change in Cash Balance
(cumulative).............. $186 $631 $1,220 $1,886 $2,586 $3,345 $3,823
Change in Book Equity
(cumulative).............. $187 $619 $1,170 $1,783 $2,421 $3,103 $3,516
</TABLE>
- --------
* Assumes Offerings are successful and existing Series A Preferred Stock is
converted on the first redemption date (May 1996) with the expected $3.25
million cash distribution to the Series A holders coming from corporate
cash with no coincidental debt or preferred offering. Excludes cash and
book equity effects of non-recurring payments (including cash consideration
paid to the shareholders) with the exception of severance benefits paid to
flight kitchen workers which were netted from employee investment. See
"REVISED UNAUDITED PRO FORMA FINANCIAL INFORMATION." Assumes closing date
of the Recapitalization is July 1, 1994.
** Interest and dividend rates on the Debentures and the Preferred Stock have
been set in accordance with the terms set forth above in "Underwriting of
Public Preferred Stock and Debentures."
*** For purposes of this analysis, income taxes were computed using the
statutory rates.
**** See "--Certain Risk Factors--Financial Reporting; Market Assessment."
As shown above, the Recapitalization is expected to result in an improvement
to cash flow averaging over $550 million per year through the year 2000. This
improvement, aggregating $3.8 billion (excluding the cash consideration
distributed to stockholders as part of the Recapitalization Consideration), is
expected to result from (i) the employee investment which reduces cash expenses
an average of $700 million per year, (ii) favorable tax treatment on ESOP
transactions, which is expected to provide over $400 million in annual tax
deductions during the ESOP allocation period, and (iii) partially offsetting
the factors described above, the additional interest expense on the Debentures,
dividends on the Depositary Preferred Shares and foregone interest on the cash
consideration distributed to stockholders in the Recapitalization. The Company
expects that at the Effective Time, taking into account the distribution of
cash in the Recapitalization, it will have an opening cash balance of
approximately $1.5 billion (assuming the Effective Time occurred on either June
30, 1994 or July 12, 1994). Cash generated after the Effective Time is assumed
to accumulate in a cash account; if the available cash was used to repay debt,
free cash flow would improve further.
Due to the accounting rules for stock-based compensation such as the ESOPs,
it is expected to be difficult to compare the financial performance of the
Company to companies without significant stock-based compensation. In addition
to this, since there is a circular relationship between the Company's financial
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results and its stock price (See "--Certain Risk Factors--Financial Reporting;
Market Assessment" and "--Opinions of the Financial Advisors to the Board"), it
is expected that certain financial analysts may adjust the way they analyze the
Company's performance. While there can be no assurances the Company's financial
performance will be considered other than as reported under generally accepted
accounting principles, the Company believes that the following analysis is
consistent with the manner in which certain analysts will evaluate the
Company's performance.
The Earnings per Share Analysis set forth in the Proxy Statement/Prospectus
would change as a result of the changes to net income reflected in the previous
table from that set forth in the Proxy Statement/Prospectus.
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SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING
INFORMATION
UAL CORPORATION AND SUBSIDIARY COMPANIES
The following consolidated financial information has been derived from the
Company's consolidated financial statements, for each of the fiscal years in
the five year period ended December 31, 1993, which statements have been
audited by Arthur Andersen & Co., independent public accountants. Reference is
made to said reports for the years 1993 and 1992 which include an explanatory
paragraph with respect to the changes in methods of accounting for income taxes
and postretirement benefits other than pensions as discussed in the notes to
the consolidated financial statements for such years. The consolidated
financial information for the three months ended March 31, 1994 and 1993 is
unaudited but in the opinion of management includes all adjustments necessary
for a fair presentation. The table also sets forth certain information on a pro
forma basis giving effect to the Recapitalization and the Offerings. The
following should be read in conjunction with the unaudited pro forma financial
statements and notes related thereto included elsewhere herein and the
Consolidated Financial Statements, the related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1993, as amended, and Quarterly Report on Form 10-Q for the
quarter ended March 31, 1994, and the Company's Current Report on Form 8-K
dated May 3, 1994.
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<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1993
PRO FORMA 1993 1992 1991 1990 1989
----------- ------- ------- ------- ------- -------
(UNAUDITED)
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF CONSOLI-
DATED OPERATIONS DATA:
Operating revenues(a)
..................... $13,297 $13,325 $11,853 $10,706 $10,296 $ 9,288
Earnings (loss) from
operations........... 354(e) 263 (538) (494) (36) 465
Earnings (loss) before
extraordinary item
and cumulative effect
of accounting changes
..................... (50) (31) (417) (332) 94 324
Net earnings (loss)... N.A. (50) (957) (332) 94 324
STATEMENT OF CONSOLI-
DATED FINANCIAL POSI-
TION DATA (AT END OF
PERIOD):
Total assets.......... (b) $12,840 $12,257 $ 9,876 $ 7,983 $ 7,194
Total long-term debt
and capital lease
obligations,
including current
portion.............. (b) 3,735 3,783 2,531 1,327 1,405
Shareholder's equity.. (b) 1,203 706 1,597 1,671 1,564
OTHER DATA:
Ratio of earnings to
fixed charges........ (c) (c) (c) (c) 1.16 1.95
Ratio of earnings to
fixed charges and
preferred stock
dividends............ (c) (c) (c) (c) 1.16 1.95
UNITED OPERATING DATA:
Revenue passenger
(millions)........... 70 70 67 62 58 55
Average length of a
passenger trip in
miles................ 1,450 1,450 1,390 1,327 1,322 1,269
Revenue passenger
miles (millions)..... 101,258 101,258 92,690 82,290 76,137 69,639
Available seat miles
(millions)........... 150,728 150,728 137,491 124,100 114,995 104,547
Passenger load factor. 67.2% 67.2% 67.4% 66.3% 66.2% 66.6%
Break even passenger
load factor.......... 65.0% 65.5% 70.6% 69.7% 66.5% 62.8%
Revenue per passenger
mile................. 11.6c 11.6c 11.3c 11.5c 11.8c 11.6c
Cost per available
seat mile............ 8.5c 8.5c 8.9c 9.0c 9.0c 8.4c
Average price per gal-
lon of jet fuel...... 63.6c 63.6c 66.4c 71.6c 80.4c 63.6c
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
(UNAUDITED) THREE MONTHS
ENDED MARCH 31,
--------------------------
1994
PRO FORMA 1994 1993
--------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
STATEMENT OF CONSOLIDATED OPERATIONS DATA:
Operating revenues(a) ........................... $ 3,193 $ 3,195 $ 3,053
Loss from operations............................. (8)(e) (36) (121)
Loss before extraordinary item and cumulative
effect of accounting changes.................... (60) (71) (138)
Net Loss......................................... N.A. (97) (157)
STATEMENT OF CONSOLIDATED FINANCIAL POSITION DATA
(at end of period):
Total assets..................................... $11,805 $12,889 $13,288
Total long-term debt and capital lease
obligations, including current portion.......... 4,421 3,687 4,017
Shareholders' equity............................. (710) 1,097 1,137
OTHER DATA:
Ratio of earnings to fixed charges............... (d) (d) (d)
Ratio of earnings to fixed charges and preferred
stock dividends................................. (d) (d) (d)
UNITED OPERATING DATA:
Revenue passengers (millions).................... 16 16 16
Average length of a passenger trip in miles...... 1,471 1,471 1,433
Revenue passenger miles (millions)............... 23,289 23,289 22,443
Available seat miles (millions).................. 35,598 35,598 35,220
Passenger load factor............................ 65.4% 65.4% 63.7%
Break even passenger load factor................. 65.8% 66.5% 66.3%
Revenue per passenger mile....................... 11.9c 11.9c 12.0c
Cost per available seat mile..................... 9.0c 9.0c 8.8c
Average price per gallon of jet fuel............. 58.6c 58.6c 65.9c
</TABLE>
- --------
(a) In the first quarter of 1994, United began recording certain air
transportation price adjustments, which were previously recorded as
commission expense, as adjustments to revenue. Operating revenues and
certain operating statistics for periods prior to 1994 have been adjusted
to conform with the current presentation. See the Company's Current Report
on Form 8-K dated May 3, 1994.
(b) The Pro Forma Statement of Consolidated Financial Position assumes the
transaction occurred at March 31, 1994. Therefore, pro forma information at
December 31, 1993 is not applicable.
(c) Earnings were inadequate to cover both fixed charges and fixed charges and
preferred stock dividends by $98 million in 1993, by $748 million in 1992
and by $599 million in 1991. On a pro forma basis, earnings were inadequate
to cover both fixed charges and fixed charges and preferred stock dividends
by $128 million in 1993.
(d) Earnings were inadequate to cover both fixed charges and fixed charges and
preferred stock dividends by $118 million and $224 million for the three
month periods ended March 31, 1994 and 1993, respectively. On a pro forma
basis, earnings were inadequate to cover both fixed charges and fixed
charges and preferred stock dividends by $101 million for the three months
ended March 31, 1994.
(e) The loss from operations includes an ESOP accounting charge which is
dependent on the fair market value of the ESOP Preferred Stock during the
period. The pro forma amount is based on an assumed fair value of $120 per
share. See note 4 to the Pro Forma Condensed Statement of Consolidated
Operations for both the year ended December 31, 1993 and the three months
ended March 31, 1994 for the effects of different fair value assumptions on
the ESOP accounting charge.
10
<PAGE>
UNITED AIR LINES, INC. AND SUBSIDIARY COMPANIES
The following consolidated financial information has been derived from
United's consolidated financial statements, for each of the fiscal years in the
five year period ended December 31, 1993, which statements have been audited by
Arthur Andersen & Co., independent public accountants. Reference is made to
said reports for the years 1993 and 1992 which include an explanatory paragraph
with respect to the changes in methods of accounting for income taxes and
postretirement benefits other than pensions as discussed in the notes to the
consolidated financial statements for such years. The consolidated financial
information for the three months ended March 31, 1994 and 1993 is unaudited but
in the opinion of management includes all adjustments necessary for a fair
presentation. The table also sets forth certain information on a pro forma
basis giving effect to the Recapitalization and the Offerings. The following
should be read in conjunction with the unaudited pro forma financial statements
and notes related thereto included elsewhere herein and the Consolidated
Financial Statements, the related notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included in
United's Annual Report on Form 10-K for the year ended December 31, 1993, and
Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, as amended,
and United's Current Report on Form 8-K dated May 3, 1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1993
PRO FORMA 1993 1992 1991 1990 1989
----------- ------- ------- ------- ------- -------
(UNAUDITED)
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF
CONSOLIDATED OPERATIONS
DATA:
Operating revenues(a). 13,140 $13,168 $11,688 $10,703 $10,282 $ 9,267
Earnings (loss) from
operations........... 386(e) 295 (496) (491) (41) 464
Earnings (loss) before
extraordinary item
and cumulative effect
of accounting
changes.............. (20) (17) (386) (335) 96 358
Net earnings (loss)... N.A. (36) (933) (335) 96 358
STATEMENT OF
CONSOLIDATED FINANCIAL
POSITION DATA (at end
of period):
Total assets.......... (b) $12,153 $12,067 $ 9,907 $ 8,001 $ 7,217
Total long-term debt
and capital lease
obligations,
including current
portion.............. (b) 3,614 3,628 2,531 1,326 1,404
Shareholders' equity.. (b) 674 738 1,613 1,769 1,665
OTHER DATA:
Ratio of earnings to
fixed charges........ (c) (c) (c) (c) 1.16 2.08
UNITED OPERATING DATA:
Revenue passengers
(millions)........... 70 70 67 62 58 55
Average length of a
passenger trip in
miles................ 1,450 1,450 1,390 1,327 1,322 1,269
Revenue passenger
miles (millions)..... 101,258 101,258 92,690 82,290 76,137 69,639
Available seat miles
(millions)........... 150,728 150,728 137,491 124,100 114,995 104,547
Passenger load factor. 67.2% 67.2% 67.4% 66.3% 66.2% 66.6%
Break even passenger
load factor.......... 65.0% 65.5% 70.6% 69.7% 66.5% 62.8%
Revenue per passenger
mile................. 11.6c 11.6c 11.3c 11.5c 11.8c 11.6c
Cost per available
seat mile............ 8.5c 8.5c 8.9c 9.0c 9.0c 8.4c
Average price per
gallon of jet fuel... 63.6c 63.6c 66.4c 71.6c 80.4c 63.6c
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
-----------------------------------
1994
PRO FORMA 1994 1993
------------ --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
STATEMENT OF CONSOLIDATED OPERATIONS DATA:
Operating revenues(a)................... $ 3,171 $ 3,173 $ 3,001
Loss from operations.................... (16)(e) (44) (107)
Loss before extraordinary item and cumu-
lative effect of accounting changes.... (65) (79) (129)
Net Loss................................ N.A. (105) (148)
STATEMENT OF CONSOLIDATED FINANCIAL
POSITION DATA
(at end of period):
Total assets............................ $12,101 $12,196 $12,515
Total long-term debt and capital lease
obligations, including current portion. 4,301 3,567 3,864
Shareholders' equity.................... (248) 570 592
OTHER DATA:
Ratio of earnings to fixed charges...... (d) (d) (d)
UNITED OPERATING DATA:
Revenue passengers (millions)........... 16 16 16
Average length of a passenger trip in
miles.................................. 1,471 1,471 1,433
Revenue passenger miles (millions)...... 23,289 23,289 22,443
Available seat miles (millions)......... 35,598 35,598 35,220
Passenger load factor................... 65.4% 65.4% 63.7%
Break even passenger load factor........ 65.8% 66.5% 66.3%
Revenue per passenger mile.............. 11.9c 11.9c 12.0c
Cost per available seat mile............ 9.0c 9.0c 8.8c
Average price per gallon of jet fuel.... 58.6c 58.6c 65.9c
</TABLE>
- --------
(a) In the first quarter of 1994, United began recording certain air
transportation price adjustments, which were previously recorded as
commission expense, as adjustments to revenue. Operating revenues and
certain operating statistics for periods prior to 1994 have been adjusted
to conform with the current presentation. See United's Current Report on
Form 8-K dated May 3, 1994.
(b) The Pro Forma Statement of Consolidated Financial Position assumes the
transaction occurred at March 31, 1994. Therefore, pro forma information at
December 31, 1993 is not applicable.
(c) Earnings were inadequate to cover fixed charges by $77 million in 1993, by
$694 million in 1992 and by $604 million in 1991. On a pro forma basis,
earnings were inadequate to cover fixed charges by $82 million in 1993.
(d) Earnings were inadequate to cover fixed charges by $130 million and $211
million for the three month periods ended March 31, 1994 and 1993,
respectively. On a pro forma basis, earnings were inadequate to cover fixed
charges by $107 million for the three months ended March 31, 1994.
(e) The loss from operations includes an ESOP accounting charge which is
dependent on the fair market value of the ESOP Preferred Stock during the
period. The pro forma amount is based on an assumed fair value of $120 per
share. See note 4 to the Pro Forma Condensed Statement of Consolidated
Operations for both the year ended December 31, 1993 and the three months
ended March 31, 1994 for the effects of different fair value assumptions on
the ESOP accounting charge.
12
<PAGE>
REVISED UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following are the unaudited revised Pro Forma Financial Information for
each of the Company and United. These statements are based on an assumed
purchase price for the Class 1 ESOP Preferred Stock at the Effective Time of
$120 per share. The $120 per share assumed purchase price of Class 1 ESOP
Preferred Stock is based on an assumed market price of a New Share at the
Effective Time of $87. (The assumption is based upon (i) an assumed market
price of an Old Share at the Effective Time of approximately $128.31 per
share, (ii) a value of the non-New Share portion of the Recapitalization
Consideration of $84.81 per Old Share and (iii) a purchase price premium for
the Class 1 ESOP Preferred Stock over the assumed value of a New Share of
38%). The actual purchase price for the Class 1 ESOP Preferred Stock at the
Effective Time will be determined pursuant to the terms of the purchase
agreement with the ESOP Trustee, which provides for a purchase price equal to
1.38 times the Closing Price, except that if the Closing Price is less than
98% of the average of the Adjusted Old Share Price for the five trading days
immediately preceding the Effective Date, the purchase price shall equal the
product of 1.38 and such average price. See "THE PLAN OF RECAPITALIZATION--
Establishment of ESOPs--Sale of ESOP Preferred Stock--Leveraged ESOP." There
can be no assurance as to the actual purchase price of the Class 1 ESOP
Preferred Stock, the Closing Price, or the Adjusted Old Share Price. In
addition, these statements are based on the following assumptions: (i) the
interest rate on the Series A Debentures has been set at 10.67%, the interest
rate on the Series B Debentures has been set at 11.21%, and the dividend rate
on the Depositary Preferred Shares has been set at 12.25%, (ii) the size of
the Depositary Preferred Share underwriting has been reduced to $410 million
from $765 million, and an amount of additional cash equal to $300 million
($12.20 per Old Share) from Company funds will be delivered to holders of Old
Shares in the Recapitalization, as a result of the Amendment and the
application of the interest rate cap provisions set forth in the Plan of
Recapitalization and (iii) shareholders are expected to receive in the
Recapitalization $84.81 per share in cash, consisting of $25.80 provided in
the Plan of Recapitalization prior to the Amendment, $30.13 from the proceeds
of the underwriting of the Series A Debentures and Series B Debentures, $12.20
in additional cash resulting from the Amendment and $16.68 from the proceeds
of the underwriting of the Depositary Preferred Shares. WITH RESPECT TO THE
UNDERWRITINGS OF THE SERIES A DEBENTURES, SERIES B DEBENTURES AND THE
DEPOSITARY PREFERRED SHARES, THERE CAN BE NO ASSURANCE THAT THE RESPECTIVE
UNDERWRITINGS WILL BE COMPLETED. These statements do not purport to be
indicative of the financial position or results of operations that may be
obtained in the future or that would actually have been obtained had the
Recapitalization occurred on the dates indicated. See "THE PLAN OF
RECAPITALIZATION--Establishment of ESOPs--Sales of ESOP Preferred Stock."
UAL CORPORATION AND SUBSIDIARY COMPANIES
The following unaudited Pro Forma Condensed Statements of Consolidated
Operations for the year ended December 31, 1993 and the three months ended
March 31, 1994, and the unaudited Pro Forma Condensed Statement of
Consolidated Financial Position as of March 31, 1994 for the Company and its
subsidiaries have been prepared to reflect the Recapitalization, including:
(i) the reclassification of Old Shares into New Shares and Series D Redeemable
Preferred Stock, (ii) the Offerings of interests in the Public Preferred Stock
(as represented by Depositary Preferred Shares and as modified as described
above) and Debentures, (iii) the exchange of Series D Redeemable Preferred
Stock for cash and proceeds from the Offerings, (iv) the issuance of the first
tranche of Class 1 ESOP Preferred Stock to the ESOP Trustee in exchange for
cash and a promissory note, (v) the recognition of unearned ESOP Preferred
Stock and the related additional capital invested, (vi) the recognition of the
employee stock ownership plan accounting charge, (vii) the reduction of
salaries and related costs for the anticipated impact of the wage and benefit
reduction and certain work rule changes and (viii) the recognition of the
anticipated benefits from the agreement to sell the U.S. flight kitchens. The
unaudited Pro Forma Condensed Statements of Consolidated Operations were
prepared as if the Recapitalization had occurred on January 1, 1993. The
unaudited Pro Forma Condensed Statement of Consolidated Financial Position was
prepared as if the Recapitalization occurred on March 31, 1994.
The pro forma statements assume the Recapitalization is not accounted for as
an acquisition or merger and, accordingly, the Company's assets and
liabilities have not been revalued. The reclassification of Old
13
<PAGE>
Shares into New Shares results in the elimination of the par value of the Old
Shares and recognition of the par value of the New Shares. The distribution of
the cash to holders of Old Shares is charged to additional capital invested and
retained earnings.
The ESOPs are being accounted for in accordance with the American Institute
of Certified Public Accountants Statement of Position 93-6, "Employers'
Accounting for Employee Stock Ownership Plans" ("SOP"). For the Leveraged ESOP,
the Company will issue Class 1 ESOP Preferred Stock through seven ESOP
Tranches, at the Effective Time, approximately thirteen months following the
Effective Time, annually thereafter for four years and on January 1, 2000. As
the shares are issued to the Leveraged ESOP, the Company will report the
issuance of shares as a credit to additional capital invested based on the fair
value of the stock when such issuance occurs and report a corresponding charge
to unearned ESOP Preferred Stock. As consideration for the shares, the Company
will receive from the ESOP Trustee a series of promissory notes and cash. The
notes will not be recorded in the Company's Statement of Consolidated Financial
Position and the related interest income will also not be recorded in the
Company's Statement of Consolidated Operations. As shares of Class 1 ESOP
Preferred Stock are earned or committed to be released, an employee stock
ownership plan accounting charge will be recognized equal to the average fair
value of the shares committed to be released with a corresponding credit to
unearned ESOP Preferred Stock. Any differences between the fair value of the
shares committed to be released and the cost of the shares to the ESOP will be
charged or credited to additional capital invested. For the Non-Leveraged
Qualified ESOP, a credit for the shares of Class 2 ESOP Preferred Stock will be
recorded as the shares are committed to be contributed to the ESOP, with the
offsetting entry to compensation expense. Compensation expense will be recorded
based on the fair value of the shares committed to be contributed to the ESOP,
in accordance with the SOP. The pro forma financial statements assume that the
Supplemental ESOP is accounted for the same as the Non-Leveraged Qualified ESOP
(i.e. pursuant to the SOP). It is possible that, because the Supplemental ESOP
is a non-qualified plan, the Company may account for it under Accounting
Principles Board Opinion 25, "Accounting for Stock Issued to Employees,"
instead. The Company would not expect this to result in a material difference.
The shares committed to be contributed to the Supplemental ESOP will be
reported outside of equity because the employees can elect to receive their
"book entry" shares from the Company in cash upon termination of employment.
The ESOP Preferred Stock is considered to be a common stock equivalent for
accounting purposes since the shares cannot remain outstanding indefinitely and
participants cannot withdraw their shares from the plan. Under the SOP, when
computing primary and fully diluted earnings per share, only those shares
committed to be released in the case of Class 1 ESOP Preferred Stock and shares
committed to be contributed in the case of Class 2 ESOP Preferred Stock are
considered outstanding as common stock equivalents. Prospectively, as dividends
are paid by the Company to the ESOP, only dividends on allocated shares will be
recorded as a charge to equity. Since the Company controls the use of dividends
on unallocated ESOP Preferred Stock, such dividends will not be considered
dividends for financial reporting purposes. Any dividends on unallocated shares
added to participant accounts would be reported as compensation expense.
The unaudited Pro Forma Condensed Statements of Consolidated Operations
include the recurring charges and credits that are directly attributable to the
Recapitalization, such as the interest expense arising from the Debentures, the
effects of the wage and benefit reductions and certain work-rule changes
resulting from the employee investment, and the employee stock ownership plan
accounting charge. No adjustments have been made to the pro forma revenues and
expenses to reflect the results of structural changes in operations, such as
U2, that might have been made had the changes been consummated on the assumed
effective dates for presenting pro forma results.
The pro forma adjustments are based upon available information and upon
certain assumptions that the Company believes are reasonable. In addition, this
information should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended December 31, 1993, as amended, and the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1994 which
include the Company's Consolidated Financial Statements and the related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and the Company's Current Report on Form 8-K dated May
3, 1994.
14
<PAGE>
UAL CORPORATION AND SUBSIDIARY COMPANIES
PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED OPERATIONS
YEAR ENDED DECEMBER 31, 1993
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Operating revenues............... $ 13,325 (11) $ (28)(1) $ 13,297
Operating expenses:
Salaries and related costs...... 4,760 (428)(2)(3)
(191)(1) 4,141
Employee stock ownership plan
accounting charge.............. 369 (4) 369
Other........................... 8,302 (11) 131 (1) 8,433
-------- ----- ---------
13,062 (119) 12,943
-------- ----- ---------
Earnings (loss) from operations.. 263 91 354
-------- ----- ---------
Other income (expense):
Interest, net................... (209) (81)(5)
(40)(6) (330)
Other, net...................... (101) (101)
-------- ----- ---------
(310) (121) (431)
-------- ----- ---------
Loss from continuing operations
before income taxes............. (47) (30) (77)
Provision (credit) for income
taxes........................... (16) (11)(7) (27)
-------- ----- ---------
Loss from continuing operations.. $ (31) $ (19)(8) $ (50)
======== ===== =========
Loss per share from continuing
operations...................... $ (2.64)(9) $ (10.66)(10)
======== =========
Shares used in per share
computations.................... 24.4 (9) 12.5 (10)
======== =========
</TABLE>
See accompanying notes to Pro Forma Condensed Statement of Consolidated
Operations.
15
<PAGE>
UAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO PRO FORMA CONDENSED
STATEMENT OF CONSOLIDATED OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
(1) The Company entered into an agreement to sell its U.S. flight kitchens
over a period of months beginning in December 1993 through June 1994 and
an agreement to acquire catering services for a seven year period. This
adjustment eliminates $28 million of sales revenues and $191 million of
compensation costs recorded in 1993 relating to the U.S. flight kitchens
that were sold and adds estimated incremental catering costs of $131
million.
(2) To adjust compensation expense for the pro forma effect of the wage and
benefit reductions and certain work-rule changes resulting from the
employee investment that provide for wage and other compensation savings
during the approximately six year period beginning at the Effective Time.
The pro forma adjustment represents the estimated savings in the 12 months
assuming that such savings had commenced at the beginning of the period.
The pro forma adjustment does not include any savings related to U2.
(3) The following reconciles the labor cost savings included in the Pro Forma
Condensed Statement of Consolidated Operations to the value of the
employee investments included in the Company Analysis of employee
investments for 1994 (see "SPECIAL FACTORS--Certain Company Analyses"):
<TABLE>
<CAPTION>
(MILLIONS)
<S> <C>
Pro Forma adjustment based on 1993 salaries.................... $428
Estimated compensation savings based on 1994 salaries.......... 68
Estimated benefits of U2 during the first year................. 64
Estimated additional severance for flight kitchen employees
during the first year......................................... (36)
----
Estimated 1994 investments................................... $524
====
Estimated six months of investments included in 1994 analy-
sis......................................................... $262
====
</TABLE>
(4) To record non-cash compensation for shares of ESOP Preferred Stock
committed to be released to employees during the period based on the
average fair value of such ESOP Preferred Stock. The average fair value of
the ESOP Preferred Stock is based on two components: (1) the average fair
value of the New Shares into which the ESOP Preferred Stock is convertible
plus (2) a premium attributable to the dividend paying feature of the ESOP
Preferred Stock. For purposes of the pro forma adjustment, the average
fair value of the ESOP Preferred Stock was assumed to be the initial
assumed purchase price of $120. In future years, it is anticipated that
the ESOP Preferred Stock price, for purposes of computing the employees
stock ownership plan accounting charge, will be determined by an
independent appraiser who will value both components. Additionally, in
future years, the shares committed to be released that are used to satisfy
the dividends payable on previously allocated shares will be charged to
retained earnings rather than compensation expense.
The shares of the ESOP Preferred Stock committed to be released are a
fraction of the original ESOP Preferred Stock shares. It is anticipated
the shares will be released in a level fashion over the 69 months of the
ESOP taking into account the partial periods in 1994 and 2000. This would
result in approximately 3.07 million ESOP Preferred Stock shares committed
to be released in each full calendar year. Shares released in a partial
year would be pro rated.
Since future expense is dependent on the fair market value of the ESOP
Preferred Stock, such expense is difficult to forecast and may vary
significantly from the value in the pro forma adjustment. Changes in the
price of a New Share directly affect the determination of the value of a
share of ESOP Preferred Stock. In addition, if the average value of a New
Share exceeds $136 during the first 12 months after
16
<PAGE>
the Effective Time, additional shares of ESOP Preferred Stock will be
issued to the Qualified ESOP or reserved for issuance to the Supplemental
ESOP to increase the ESOP's ownership from approximately 55% up to a
maximum of approximately 63%. Future expense is also affected by the
premium associated with the dividend paying feature which shrinks over
time as the dividend paying period is reduced.
Following is a summary of the impact to the employee stock ownership plan
accounting charge of a range of fair market values:
<TABLE>
<CAPTION>
AVERAGE ESOP ESOP ACCOUNTING
PREFERRED STOCK CHARGE*
FAIR VALUE (MILLIONS)
--------------- ---------------
<S> <C>
$110 $338
120 369
130 400
140 430
</TABLE>
--------
* Assumes 3.07 million shares committed to be released in the pro forma
period and no shares used to satisfy dividends payable since shares are
not allocated to participants until December 31. In later years shares
will be used to satisfy dividends on allocated shares, which will
reduce the employee stock ownership plan accounting charge.
The following illustrates the impact to the employee stock ownership plan
accounting charge if the average value of the New Shares in the first 12
months exceeds $136 per share.
<TABLE>
<CAPTION>
SHARES TO BE INCREASE IN
AVERAGE AVERAGE ESOP ADDITIONAL RELEASED ESOP ACCOUNTING
NEW SHARE PREFERRED STOCK SHARES TO FOR FIRST CHARGE****
PRICE FAIR VALUE* BE ISSUED** YEAR*** (MILLIONS)
--------- --------------- ----------- ------------ ---------------
<S> <C> <C> <C> <C>
$136 $168 0 0 $ 0
140 172 2,260,410 393,115 68
150 182 6,949,234 1,208,562 220
</TABLE>
--------
* Assumes a dividend premium of $32 per share.
** To achieve the maximum increase in ownership, the price of a New Share
must average at least $149.10 during the first 12 months after the
Effective Time. If the average price of a New Share is less than or
equal to $136, no additional shares of ESOP Preferred Stock will be
issued.
*** The additional shares will be released in a level fashion over the 69
months of the ESOP.
**** Represents the first year increase; subsequent increases are
dependent on changes in the fair value of the ESOP Preferred Stock.
(5) To record the interest expense on the Debentures and to record
amortization of the underwriting discount. The pro forma calculations
assume the United Debt Offerings are consummated and are based on an
interest rate on the Series A Debentures of 10.67% and on the Series B
Debentures of 11.21%. If the United Debt Offerings are not consummated,
the interest rates are subject to the stated maximums under the
Recapitalization of 10.125% for the Series A Debentures and 10.825% for
the Series B Debentures. This will not impact the pro forma interest
expense because even though the interest rate on the series of Debentures
exceeds the stated maximum, the principal amount of the series of
Debentures was reduced so that the yield to maturity will not exceed the
yield to maturity that would have resulted if the par amount of the series
of Debentures (based on the stated maximum interest rate) was priced at a
discount.
(6) To record foregone interest income due to the reduction in the Company's
average investment balance resulting from the Recapitalization. The pro
forma adjustment is based on the Company's average earnings rate during
1993.
17
<PAGE>
(7) To adjust the provision (credit) for income taxes to reflect the tax
effect of changes to pretax income at the statutory rate in effect during
1993. For purposes of the pro forma adjustments, the book and tax
employee stock ownership plan compensation charge are assumed to be the
same.
(8) If the Recapitalization is consummated, the Company expects to recognize
nonrecurring charges of approximately $44 million relating to additional
severance benefits for employees terminated as a result of the sale of
the flight kitchens, up to $49.15 million of transaction fees and
expenses incurred by ALPA, the IAM and certain advisors in connection
with the structuring and establishment of the ESOPs, $30 million for the
Company's transaction fees and expenses, $17 million of compensation
expense relating to vesting the unvested restricted stock as a result of
the change in control, $21 million of payments and benefits to Mr.
Greenwald and officers who are retiring at the Effective Time, and $13
million of compensation expense (based on an assumed Old Share price of
approximately $128.31 at the Effective Time) relating to the vesting of
unvested Options and the implementation of a feature that provides for
cashless exercise of Options in the event of the Recapitalization. (The
existing Option holders are only entitled to utilize the cashless
exercise feature if the Recapitalization occurs. The pro forma financial
information assumes all in-the-money Options are exercised at the
Effective Time and, since the cashless exercise results in variable plan
accounting, there is an initial nonrecurring charge for the cashless
exercise feature but no ongoing impact; however, if Option holders do not
exercise their Options at the Effective Time, there will be an ongoing
accounting impact for the changes in the fair market value of the
Recapitalization Consideration that is issuable upon exercise of such
Options.) The total after-tax effect of the nonrecurring charges is $122
million. Due to the nonrecurring nature of these charges, they have been
excluded from the Pro Forma Condensed Statement of Consolidated
Operations.
(9) Due to the nature of the Recapitalization, a comparison of historical and
pro forma loss per share is not meaningful.
(10) The pro forma loss per common share is based on an estimated 12,519,891
weighted average shares outstanding and is calculated after preferred
stock dividend requirements of $33.2 million on the Company's outstanding
Series A Preferred Stock and $50.3 million on the Public Preferred Stock
issued as a result of the Recapitalization. The number of weighted
average shares assumes the Series A Preferred Stock does not convert
during the first year of the transaction. The number of average shares of
ESOP Preferred Stock committed to be released during the year were not
included in the calculation as a common stock equivalent because the
effect is anti-dilutive. Since no shares of ESOP Preferred Stock are
allocated until December 31, the pro forma calculations assume no
dividends are paid on allocated shares of ESOP Preferred Stock during the
year ended December 31, 1993, and accordingly, dividends on ESOP
Preferred Stock are not included in the pro forma loss per share.
The pro forma calculations assume the UAL Preferred Offering is
consummated and are based on a dividend rate on the Public Preferred Stock
of 12.25%. If the UAL Preferred Offering is not consummated, the dividend
rate is subject to the stated maximum under the Recapitalization of
11.375%. This will not impact the pro forma loss per share because even
though the dividend rate of the Public Preferred Stock exceeds the stated
maximum, the number of Depositary Preferred Shares representing the Public
Preferred Stock was reduced so that the annual dividends will not exceed
the stated maximum which was calculated based upon the dividend rate cap.
18
<PAGE>
Following is a reconciliation of the historical and pro forma weighted
average shares:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Historical weighted average shares during the year......... 24.4
Adjustment for restricted stock issued during the year as-
sumed to be issued and vested on January 1, 1993.......... 0.1
Adjustment for the number of option shares assumed to be
issued at the Effective Time (see "THE PLAN OF RECAPITALI-
ZATION--Terms and Conditions--General")................... 0.5
-----
Adjusted weighted average shares........................... 25.0
Adjustment to give effect to the two for one exchange of
Old Shares for New Shares................................. (12.5)
-----
Pro forma weighted average shares.......................... 12.5
=====
</TABLE>
(11) In the first quarter of 1994, the Company began recording certain air
transportation price adjustments, which were previously recorded as
commission expense, as adjustments to revenue. Historical operating
revenue and expense amounts have been adjusted to conform with the current
presentation. See the Company's Current Report on Form 8-K dated May 3,
1994.
19
<PAGE>
UAL CORPORATION AND SUBSIDIARY COMPANIES
PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1994
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Operating revenues.................... $3,195 $ (2)(1) $3,193
Operating expenses:
Salaries and related costs........... 1,202 (111)(2)(3)
(27)(1) 1,064
Employee stock ownership plan
accounting charge................... 86 (4) 86
Other................................ 2,029 22 (1) 2,051
------ ---- ------
3,231 (30) 3,201
------ ---- ------
Earnings (loss) from operations....... (36) 28 (8)
------ ---- ------
Other income (expense):
Interest, net........................ (56) (20)(5)
(10)(6) (86)
Other, net........................... (16) 19 (7) 3
------ ---- ------
(72) (11) (83)
------ ---- ------
Loss from continuing operations
before income taxes.................. (108) 17 (91)
Provision (credit) for income taxes... (37) 6 (8) (31)
------ ---- ------
Loss from continuing operations....... $ (71) $ 11 $ (60)
====== ==== ======
Loss per share from continuing
operations........................... $(3.31)(9) $(7.05)(10)
====== ======
Shares used in per share computations. 24.5 (9) 12.5 (10)
====== ======
</TABLE>
See accompanying notes to Pro Forma Condensed Statement of Consolidated
Operations.
20
<PAGE>
UAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO PRO FORMA CONDENSED
STATEMENT OF CONSOLIDATED OPERATIONS
THREE MONTHS ENDED MARCH 31, 1994
(1) The Company entered into an agreement to sell its U.S. flight kitchens
over a period of months beginning in December 1993 through June 1994 and
an agreement to acquire catering services for a seven year period. This
adjustment eliminates $2 million of sales revenues and $27 million of
compensation costs recorded in the first quarter of 1994 relating to the
U.S. flight kitchens that were sold and adds estimated incremental
catering costs of $22 million.
(2) To adjust compensation expense for the pro forma effect of the wage and
benefit reductions and certain work-rule changes resulting from the
employee investment that provide for wage and other compensation savings
during the approximately six year period beginning at the Effective Time.
The pro forma adjustment represents the estimated savings in the first
quarter of 1994 assuming that such savings had commenced at the beginning
of the prior year. The pro forma adjustment does not include any savings
related to U2.
(3) The following reconciles the labor cost savings included in the Pro Forma
Condensed Statement of Consolidated Operations to the value of the
employee investments included in the Company Analysis of employee
investments for 1994 (see "SPECIAL FACTORS--Certain Company Analyses"):
<TABLE>
<CAPTION>
(MILLIONS)
<S> <C>
Pro Forma adjustment........................................... $111
Estimated compensation savings based on foregone 1994 raises... 13
Estimated benefits of U2 for three months...................... 16
Estimated additional severance for flight kitchen employees for
three months.................................................. (9)
----
Estimated three months of investments........................ $131
====
Estimated six months of investments included in 1994 analy-
sis......................................................... $262
====
</TABLE>
(4) To record non-cash compensation for shares of ESOP Preferred Stock
committed to be released to employees during the period based on the
average fair value of the ESOP Preferred Stock. For purposes of the pro
forma adjustment, the average fair value of the ESOP Preferred Stock was
assumed to be the initial assumed purchase price of $120. The pro forma
calculations assume that shares committed to be released in 1993 were
allocated to participant accounts at the end of 1993. Thus, the portion of
shares committed to be released in 1994 that will be used to satisfy
dividends payable on allocated shares is charged to retained earnings
rather than non-cash compensation expense. It is anticipated that in the
first quarter of 1994, approximately 768,000 shares of ESOP Preferred
Stock will be committed to be released, and that approximately 54,000 of
these shares will be used for dividends.
Since future expense is dependent on the fair market value of the ESOP
Preferred Stock, such expense is difficult to forecast and may vary
significantly from the value in the pro forma adjustment. Changes in the
price of a New Share directly affect the determination of the value of an
ESOP Preferred Stock share. In addition, if the average value of a New
Share exceeds $136 during the first 12 months after the Effective Time,
additional shares of ESOP Preferred Stock will be issued to the Qualified
ESOP or reserved for issuance to the Supplemental ESOP. Future expense is
also affected by the premium associated with the dividend paying feature
which shrinks over time as the dividend paying period is reduced.
21
<PAGE>
Following is a summary of the impact to the employee stock ownership plan
accounting charge of a range of fair market values:
<TABLE>
<CAPTION>
AVERAGE ESOP ESOP ACCOUNTING
PREFERRED STOCK CHARGE*
FAIR VALUE (MILLIONS)
--------------- ---------------
<S> <C>
$110 $ 79
120 86
130 93
140 100
</TABLE>
--------
* Assumes 768,000 shares committed to be released in the pro forma period
and approximately 54,000 shares used for dividends which are charged to
retained earnings. As additional shares are allocated in later years,
the employee stock ownership plan accounting charge will be reduced.
The following illustrates the impact to the employee stock ownership plan
accounting charge for the quarter if the average value of the New Shares
in the first 12 months exceeds $136 per share.
<TABLE>
<CAPTION>
AVERAGE ESOP SHARES TO INCREASE IN
AVERAGE PREFERRED ADDITIONAL BE RELEASED ESOP ACCOUNTING
NEW SHARE STOCK FAIR SHARES TO FOR THE CHARGE****
PRICE VALUE* BE ISSUED** QUARTER*** (MILLIONS)
--------- ------------ ----------- ----------- ---------------
<S> <C> <C> <C> <C>
$136 $168 0 0 $ 0
140 172 2,260,410 98,279 16
150 182 6,949,234 302,141 51
</TABLE>
* Assumes a dividend premium of $32.
** To achieve the maximum increase in additional Shares, the price of a
New Share must average at least $149.10 during the first 12 months
after the Effective Time. If the average price of a New Share is less
than or equal to $136, no additional shares of ESOP Preferred Stock
will be issued.
*** The additional shares will be released in a level fashion over the 69
months of the ESOP.
****Represents the increase for the quarter; subsequent increases are
dependent on changes in the fair value of the ESOP Preferred Stock.
(5) To record the interest expense on the Debentures and to record
amortization of the underwriting discount. The pro forma calculations
assume the United Debt Offerings are consummated and are based on an
interest rate on the Series A Debentures of 10.67% and on the Series B
Debentures of 11.21%. If the United Debt Offerings are not consummated,
the interest rates are subject to the stated maximums under the
Recapitalization of 10.125% for the Series A Debentures and 10.825% for
the Series B Debentures. This will not impact the pro forma interest
expense because even though the interest rate on the series of Debentures
exceeds the stated maximum, the principal amount of the series of
Debentures was reduced so that the yield to maturity will not exceed the
yield to maturity that would have resulted if the par amount of the series
of Debentures (based on the stated maximum interest rate) was priced at a
discount.
(6) To record foregone interest income due to the reduction in the Company's
average investment balance resulting from the Recapitalization. The pro
forma adjustment is based on the Company's average earnings rate during
the first quarter of 1994.
(7) To reverse $19 million of nonrecurring fees and expenses relating to the
Recapitalization which were recorded in the first quarter of 1994.
(8) To adjust the provision (credit) for income taxes to reflect the tax
effect of changes to pretax income at the statutory rate in effect during
the first quarter of 1994. For purposes of the pro forma adjustment the
book and tax employee stock ownership plan compensation charge are assumed
to be the same.
22
<PAGE>
(9) Due to the nature of the Recapitalization, a comparison of historical and
pro forma loss per share is not meaningful.
(10) The pro forma loss per common share is based on an estimated 12,547,163
weighted average shares outstanding and is calculated after preferred
stock dividend requirements of $9.4 million on the Company's outstanding
Series A Preferred Stock, $12.6 million on the Public Preferred Stock
issued as a result of the Recapitalization and $6.5 million on the ESOP
Preferred Stock issued as a result of the Recapitalization. The dividends
on the ESOP Preferred Stock relate to the estimated 3,073,974 shares
allocated at the end of 1993 (of the total 17,675,345 shares that will be
allocated) and a dividend rate of 7%. The number of weighted average
shares assumes the Series A Preferred Stock does not convert during the
first year of the transaction. The number of average shares of ESOP
Preferred Stock committed to be released during the period were not
included in the calculation as a common stock equivalent because the
effect is anti-dilutive. In addition, the pro forma calculations assume
the UAL Preferred Offering is consummated and are based on a divided rate
on the Public Preferred Stock of 12.25%.
Following is a reconciliation of the historical and pro forma weighted
average shares:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Historical weighted average shares for the quarter.......... 24.5
Adjustment for restricted stock issued subsequent to January
1, 1993 assumed to be issued and vested on January 1, 1993. 0.1
Adjustment for the number of option shares assumed to be
issued at the Effective Time (see "THE PLAN OF
RECAPITALIZATION--Terms and Conditions--General").......... 0.5
-----
Adjusted weighted average shares............................ 25.1
Adjustment to give effect to the two for one exchange of Old
Shares for New Shares...................................... (12.6)
-----
Pro forma weighted average shares........................... 12.5
=====
</TABLE>
23
<PAGE>
UAL CORPORATION AND SUBSIDIARY COMPANIES
PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
MARCH 31, 1994
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS HISTORICAL ADJUSTMENTS PRO FORMA
------ ---------- ----------- ---------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................ $ 1,046 $1,133 (1a) $
(2,129)(1b) 50
Short-term investments................... 1,020 (140)(2)
8 (11) 888
Other.................................... 1,837 44 (3) 1,881
------- ------- -------
3,903 (1,084) 2,819
------- ------- -------
Operating property and equipment........... 12,226 12,226
Less: Accumulated depreciation and
amortization........................... (5,177) (5,177)
------- ------- -------
7,049 7,049
------- ------- -------
Other assets:
Other.................................... 1,937 1,937
------- ------- -------
$12,889 $(1,084) $11,805
======= ======= =======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current liabilities:
Short-term borrowings, long-term debt
maturing within one year and current
obligations under capital leases........ $ 486 $ $ 486
Other.................................... 4,502 (11)(11) 4,491
------- ------- -------
4,988 (11) 4,977
------- ------- -------
Long-term debt............................. 2,693 734 (1c) 3,427
------- ------- -------
Long-term obligations under capital leases. 777 777
------- ------- -------
Other liabilities, deferred credits and
minority interest......................... 3,334 3,334
------- ------- -------
Class 2 ESOP Preferred Stock, $.01 par,
none issued............................... -- (13)
------- ------- -------
Shareholders' equity:
Series A Preferred Stock, $.01 stated
value, 6,000,000 shares issued,
$100 liquidation value.................. -- -- --
Series B Preferred Stock, $.01 stated
value, 16,416 shares issued,
$25,000 liquidation value............... -- (1d) --
Class 1 ESOP Preferred Stock, $.01 par,
1,899,059 shares issued,
$120 liquidation value.................. -- (4) --
Class 2 ESOP Preferred Stock, $.01 par,
none issued ............................ -- (4) --
Voting Preferred Stock, $.01 par, 3
shares issued, $.01 liquidation value... -- (5) --
Common stock, $5 par value, 25,500,662
shares issued and
outstanding--historical................. 128 (128)(1e) --
Common stock, $.01 par value, 13,006,564
shares issued and outstanding--pro
forma(12)............................... -- (1e) --
Additional capital invested.............. 963 (963)(1e)
399 (1d)
228 (4)
13 (6) 640
Retained earnings (deficit).............. 142 (1,038)(1e)
(108)(7) (1,004)
Pension liability adjustment............. (53) (53)
Unearned compensation.................... (14) 14 (8) --
Unearned ESOP Preferred Stock............ (228)(4) (228)
Unrealized loss on investments........... (2) (2)
Common stock held in treasury, 929,631
shares--historical, 439,816 shares--pro
forma .................................. (67) 4 (9) (63)
------- ------- -------
1,097 (1,807)(10) (710)
------- ------- -------
$12,889 $(1,084) $11,805
======= ======= =======
</TABLE>
See the accompanying notes to Pro Forma Condensed Statement of Consolidated
Financial Position.
24
<PAGE>
UAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
MARCH 31, 1994
(1) To record the Recapitalization (as described in "THE PLAN OF
RECAPITALIZATION--Terms and Conditions"). The entries assume that (i) the
Offerings of Debentures and Depositary Preferred Shares representing
interests in Public Preferred Stock are consummated, (ii) all in-the-money
Options are vested and exercised at the Effective Time using a cashless
exercise mechanism, (iii) treasury stock held by the Company immediately
prior to the Effective Time will convert into New Shares that remain
outstanding after the Recapitalization and (iv) Convertible Company
Securities that are outstanding immediately prior to the Effective Time
will not convert into the Recapitalization Consideration at the Effective
Time. The cashless exercise feature permits holders of Options to exercise
them by surrendering to the Company a portion of the proceeds of the
Option in lieu of paying the exercise price in cash. When the cashless
exercise feature is used, each element of the Recapitalization
Consideration that is issuable upon the exercise of such Options is
reduced proportionately, and the net Recapitalization Consideration
(including the New Shares) that is issued is equal in value to the spread
value of the Options exercised. See footnote 8 to the Pro Forma Condensed
Statement of Consolidated Operations for the year ended December 31, 1993.
(a) To record the proceeds from the Offerings of approximately $741
million of Debentures and approximately $410 million of Depositary
Preferred Shares representing interests in Public Preferred Stock, net
of underwriting discount of $7 million for the Debentures and $11
million for the Public Preferred Stock. (If the Offerings are not
consummated, the Debentures and the Depositary Preferred Shares
included in entry 1(c) and 1(d) will be issued to the holders of Old
Shares upon redemption of the Series D Redeemable Preferred Stock.)
(b) To record the cash payment to holders of Old Shares upon the
redemption of the Redeemable Preferred Stock. The cash payment
includes $25.80 per share plus an additional amount of cash equal to
$12.20 per share plus proceeds from the sales of $30.13 face amount of
Debentures and Depositary Preferred Shares representing interests in
$16.68 liquidation preference of Public Preferred Stock (before
deducting underwriting discounts). The pro forma adjustment also
includes the cash payment of $84.81 per share upon exercise of
Options. (If the amounts to be sold in the Offerings differ from the
amounts discussed in entry 1(c) and 1(d) or if any of the Offerings
are not consummated, the amount paid to holders of Old Shares will
change.)
(c) To record the issuance of $370 million of principal amount of Series A
Debentures and $371 million of principal amount of Series B
Debentures, less the underwriting discount of $7 million. The pro
forma adjustment assumes that the United Debt Offerings are
consummated and that the interest rate is 10.67% for the Series A
Debentures and 11.21% for the Series B Debentures based on the pricing
of the United Debt Offerings. The Debentures are being recorded at
their face amount on the assumption that they are priced to trade at
par.
If the underwritings are not consummated, $382.5 of principal amount of
Series A Debentures and $382.5 million of principal amount of Series B
Debentures will be issued. The actual rates on the Debentures have been
set at the applicable stated maximum rates of 10.125% for the Series A
Debentures and 10.825% for the Series B Debentures. If either or both
of the United Debt Offerings are not consummated and the then current
market interest rate exceeds the applicable stated maximum, such
Debentures will be recorded at a discount.
(d) To record the issuance of Depositary Preferred Shares representing
interests in $410 million liquidation preference of Public Preferred
Stock, net of underwriting discount of $11 million. The pro forma
adjustment assumes the UAL Preferred Offering is consummated and that
the dividend rate is 12.25% based on the pricing of the UAL Preferred
Offering. The Public Preferred Stock is
25
<PAGE>
recorded at its stated value of $.01 per share, with the excess of
liquidation value over stated value and net of underwriting discount
recorded as additional capital invested.
If the UAL Preferred Offering is not consummated, Depositary Preferred
Shares representing interests in approximately $442 million of
liquidation preference of Public Preferred Stock will be issued. The
dividend rate has been set to the maximum rate of 11.375%.
(e) To record the reclassification of Old Shares into New Shares and
Series D Redeemable Preferred Stock. The Series D Redeemable Preferred
Stock is assumed to immediately convert to cash, including proceeds
from the sale of Debentures and Depositary Preferred Shares
representing interests in the Public Preferred Stock. (The pro forma
adjustments do not reflect the Series D Redeemable Preferred Stock
issued to the Company upon reclassification of the treasury stock
because such shares are surrendered for cancellation immediately after
issuance.)
The New Shares are recorded at their par value of $.01 per share.
Following is a summary of the entries to additional capital invested
and retained earnings (in millions):
<TABLE>
<CAPTION>
ADDITIONAL
CAPITAL RETAINED
INVESTED EARNINGS
---------- --------
<S> <C> <C>
Cancellation of Old Shares........................... $ 128 $ --
Distribution of cash................................. (1,091) (1,038)
------- -------
Pro forma adjustment................................. $ (963) $(1,038)
======= =======
</TABLE>
(2) To record the cash impact of the estimated fees and transaction expenses,
including expenses for the Company, ALPA and the IAM, severance payments
to terminated officers and flight kitchen employees and payments relating
to the employment agreement with Mr. Greenwald.
(3) To record the tax effects relating to nonrecurring charges recognized as a
result of the Recapitalization.
(4) To record the initial issuance of Class 1 ESOP Preferred Stock to the
Leveraged ESOP for an aggregate purchase price of $228 million. The $228
million was determined based on (i) 1,899,059 shares of Class 1 ESOP
Preferred Stock expected to be issued in the first ESOP Tranche as of the
Effective Time and (ii) an assumed purchase price of $120 per share. The
Company and the Unions may, prior to the Effective Time, agree to increase
or decrease the number of shares of Class 1 ESOP Preferred Stock sold at
the Effective Time. The agreement with the ESOP Trustee provides that the
number of shares of Class 1 ESOP Preferred Stock sold at the Effective
Time shall be no more than 2,088,965 and no fewer than 1,709,153 provided,
however, that the number of shares sold in the first ESOP Tranche will be
adjusted if the Effective Time is before or after July 1, 1994. The
actual price per share for the first ESOP Tranche will be calculated as
provided in the ESOP Stock Purchase Agreement (see "THE PLAN OF
RECAPITALIZATION--Establishment of ESOPs"). Thus, the ultimate amount
recorded at the Effective Time will differ from the pro forma adjustment
in order to reflect the actual number of shares issued and the purchase
price calculated under the ESOP Stock Purchase Agreement.
Six additional ESOP Tranches will be issued to the Leveraged ESOP during
the 69 months subsequent to the Effective Time, with the total shares of
Class 1 ESOP Preferred Stock issued in the seven ESOP Tranches
aggregating approximately 14,000,000 shares (subject to increase, see
"THE PLAN OF RECAPITALIZATION--Establishment of ESOPs--Additional
Shares"). The price for the subsequent ESOP Tranches will be as agreed
between the Company and the ESOP Trustee at the time of each sale. As the
subsequent ESOP Tranches are issued, the shares will be reported as a
credit to additional capital invested based on the fair value of the
stock when such issuances occur with a corresponding charge to "Unearned
ESOP Preferred Stock."
26
<PAGE>
The unearned ESOP Preferred Stock recorded in the pro forma adjustment
together with the unearned ESOP Preferred Stock recorded from subsequent
ESOP Tranches will be recognized as compensation expense over the
approximately six year investment period as the shares are committed to
be released. The difference between the compensation expense recorded,
which is based on the fair value of the stock during an accounting
period, and the recorded cost of the unearned ESOP Preferred Stock will
be recorded to additional capital invested.
The shares of Class 2 ESOP Preferred Stock will be recorded over the
approximately six year investment period as the shares are committed to
be contributed to the Non-Leveraged Qualified ESOP and credited to
employees pursuant to the Supplemental ESOP with the offsetting entry
being to compensation expense. The number of shares of Class 2 ESOP
Preferred Stock that will be issued will be equal to 17,675,345 less the
number of Shares of Class 1 ESOP Preferred Stock that will be sold to the
Qualified ESOP.
The ESOP Preferred Stock is convertible into New Shares at any time at
the election of the ESOP Trustee at a rate of one New Share for each
share of ESOP Preferred Stock (subject to adjustment). Primarily because
of limitations imposed by the Internal Revenue Code, the ESOP consists of
three major portions: the Leveraged ESOP, the Non-Leveraged Qualified
ESOP, and the Supplemental ESOP. Shares of ESOP Preferred Stock issued
under the Leveraged ESOP and the Non-Leveraged Qualified ESOP will be
held by the ESOP Trustee under the Qualified Trust. Under the
Supplemental ESOP, shares will be credited as Book-Entry Shares when
earned by employees, and will be issued to employees as New Shares,
generally upon termination of employment. ALPA has the right to elect, at
any time, before or after the Effective Time, that the Supplemental ESOP
be maintained by the actual issuance of Class 2 ESOP Preferred Stock to a
non-qualified trust established under the Supplemental Plan. In general,
the Plan of Recapitalization is designed to maximize the number of shares
of ESOP Preferred Stock that may be sold to the Qualified Trust. However,
because of certain limitations imposed by the Internal Revenue Code, a
portion of the equity interest to be obtained by the ESOP Trustee may not
be sold to the Qualified Trust. The Class 1 ESOP Preferred Stock contains
a fixed dividend feature which is intended to maximize the number of
shares of Class 1 ESOP Preferred Stock that may be sold to the Qualified
Trust consistent with the applicable provisions of the Internal Revenue
Code. To the extent that the Qualified Trust is unable to purchase the
Class 1 ESOP Preferred Stock, Class 2 ESOP Preferred Stock will be
issued, to the extent permitted by the limitations of the Internal
Revenue Code, to the ESOP Trustee pursuant to the Non-Leveraged Qualified
ESOP. Class 2 ESOP Preferred Stock will not contain a fixed dividend. To
the extent that Class 2 ESOP Preferred Stock cannot be issued to the ESOP
Trustee because of the limitations of the Internal Revenue Code, the
Company will credit Book-Entry Shares to accounts established for the
employees.
(5) To record the issuance at par of one share of Class P Voting Preferred
Stock, one share of Class M Voting Preferred Stock, and one share of
Class S Voting Preferred Stock to the ESOP Trusts. The remaining Voting
Preferred Stock will be issued when it is contributed to the Supplemental
ESOP Trust. The Class P Voting Preferred Stock, the Class M Voting
Preferred Stock and the Class S Voting Preferred Stock, which are
referred to collectively as the Voting Preferred Stock, represent and
permit, in connection with the establishment of the ESOPs, the exercise
of voting power representing 55% (which under certain circumstances may
be increased to up to 63%) of the voting power of the Company. See
"DESCRIPTION OF SECURITIES--The Voting Preferred Stock." The ESOPs
provide that upon the conversion of all the ESOP Preferred Stock into New
Shares, each share of Voting Preferred Stock will be converted into one
ten-thousandth of a New Share.
(6) To account for the cashless exercise of options in the event of the
Recapitalization. (Amount of the entry is based on an assumed Old Share
price at the Effective Time of approximately $128.31 per share.)
(7) Represents the offset to entries (2), (3), (6), (8), (9) and (11).
27
<PAGE>
(8) To record the vesting of the unvested restricted stock as a result of the
Recapitalization.
(9) To record 25,000 restricted shares to Mr. Greenwald that will vest at the
Effective Time.
(10) Does not reflect the issuance of four shares of Class I Preferred Stock,
one share of Class Pilot MEC Preferred Stock, one share of Class IAM
Preferred Stock, and three shares of Class SAM Preferred Stock. These
stocks have a $.01 par value and nominal economic value. The Class I
Preferred Stock will be issued to the Independent Directors and will have
the power to elect such directors to the Board. The Class Pilot MEC
Preferred Stock will be issued to the ALPA-MEC and will have the power to
elect the ALPA Director. The Class IAM Preferred Stock will be issued to
the IAM or its designee and will have the power to elect the IAM Director.
The Class SAM Preferred Stock will be issued to the Salaried and
Management Director and to the senior executive at United who has primary
responsibility for human resources and will have the power to elect the
Salaried and Management Director. Such classes of stock are referred to
collectively as the Director Preferred Stock. See "DESCRIPTION OF
SECURITIES--The Director Preferred Stock." Upon the occurrence of an
Uninstructed Trustee Action (as defined below), the Class Pilot MEC
Preferred Stock will succeed to the voting power previously held by the
Class P Voting Preferred Stock, the Class IAM Preferred Stock will succeed
to the voting power previously held by the Class M Voting Preferred Stock
and the Class SAM Preferred Stock will succeed to the voting power
previously held by the Class S Voting Preferred Stock. See "DESCRIPTION OF
SECURITIES--The Director Preferred Stock--Uninstructed Trustee Actions."
(11) To reverse $19 million of transaction fees and expenses recorded during
the first quarter of 1994 because these expenses are included in entry
(2).
(12) The number of New Shares issued on a pro forma basis is based on Fully
Diluted Old Shares assuming the Convertible Company Securities do not
convert. See "THE PLAN OF RECAPITALIZATION--Terms and Conditions--
General."
(13) The Class 2 ESOP Preferred Stock committed to be contributed to the
Supplemental ESOP will be reported outside of equity because the employees
can elect to receive their "book entry" shares from the Company in cash
upon termination of employment.
28
<PAGE>
UNITED AIR LINES, INC. AND SUBSIDIARY COMPANIES
The following unaudited Pro Forma Condensed Statements of Consolidated
Operations for the year ended December 31, 1993 and the three months ended
March 31, 1994, and the unaudited Pro Forma Condensed Statement of Consolidated
Financial Position as of March 31, 1994 for United and its subsidiaries have
been prepared to reflect the impact of the Recapitalization on United,
including: (i) the recognition of unearned ESOP Preferred Stock and related
ESOP capital as a result of the issuance of the first tranche of UAL Class 1
ESOP Preferred Stock, (ii) the offering of Debentures and distribution of
proceeds to UAL, (iii) the recognition of the employee stock ownership plan
accounting charge, (iv) the reduction in salaries and related cost for the
anticipated impact of the wage and benefit reductions and certain work rule
changes, (v) the recognition of the anticipated benefits of the agreement to
sell the U.S. flight kitchens and (vi) the intercompany loan to UAL. The
unaudited Pro Forma Condensed Statements of Consolidated Operations were
prepared as if the Recapitalization had occurred on January 1, 1993. The
unaudited Pro Forma Condensed Statement of Consolidated Financial Position was
prepared as if the Recapitalization occurred on March 31, 1994.
The pro forma statements assume the Recapitalization is not accounted for as
an acquisition or merger and, accordingly, United's assets and liabilities have
not been revalued. The distribution to UAL of proceeds from the United Debt
Offerings of Debentures is charged to additional capital invested.
The ESOPs are being accounted for in accordance with the American Institute
of Certified Public Accountants Statement of Position 93-6, "Employers'
Accounting for Employee Stock Ownership Plans" ("SOP"). For the Leveraged ESOP,
the Company will issue Class 1 ESOP Preferred Stock through seven ESOP
Tranches, at the Effective Time, approximately thirteen months following the
Effective Time, annually thereafter for four years and on January 1, 2000. As
the Shares are issued to the Leveraged ESOP, United will report the issuance of
shares as a credit to ESOP capital based on the fair value of the stock when
such issuance occurs and report a corresponding charge to unearned ESOP
Preferred Stock. As shares of Class 1 ESOP Preferred Stock are earned or
committed to be released, compensation expense will be recognized equal to the
average fair value of the shares committed to be released with a corresponding
credit to unearned ESOP Preferred Stock. Any differences between the fair value
of the shares committed to be released and the cost of the shares to the ESOP
will be charged or credited to ESOP capital. For the Non-Leveraged Qualified
ESOP, the shares of Class 2 ESOP Preferred Stock will be recorded as the shares
are committed to be contributed to the ESOP, with the offsetting entry to
compensation expense. Compensation expense will be recorded based on the fair
value of the shares committed to be contributed to the ESOP, in accordance with
the SOP. The pro forma financial statements assume that the Supplemental ESOP
is accounted for the same as the Non-Leveraged Qualified ESOP (i.e., pursuant
to the SOP). It is possible that, because the Supplemental ESOP is a non-
qualified plan, the Company may account for it under Accounting Principles
Board Opinion 25, "Accounting for Stock Issued to Employees," instead. The
Company would not expect this to result in a material difference. The unearned
ESOP Preferred Stock, ESOP capital and employee stock ownership accounting
charge will be recorded on United's books since participants in the ESOP are
employees of United.
The unaudited Pro Forma Condensed Statements of Consolidated Operations
include the recurring charges and credits which are directly attributable to
the Recapitalization, such as the interest expense arising from the Debentures,
the effects of the wage and benefit reductions and certain work-rule changes
resulting from the employee investment, and the employee stock ownership plan
accounting charge. No adjustments have been made to the pro forma revenues and
expenses to reflect the results of structural changes in operations, such as
U2, that might have been made had the changes been consummated on the assumed
effective dates for presenting pro forma results.
The pro forma adjustments are based upon available information and upon
certain assumptions that United believes are reasonable. In addition, this
information should be read in conjunction with United's Annual Report on Form
10-K for the year ended December 31, 1993, and United's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1994, as amended, and which include
United's Consolidated Financial Statements, the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and United's Current Report on Form 8-K dated May 3, 1994.
29
<PAGE>
UNITED AIR LINES, INC. AND SUBSIDIARY COMPANIES
PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED OPERATIONS
YEAR ENDED DECEMBER 31, 1993
(IN MILLIONS)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Operating revenues....................... $13,168(8) $ (28)(1) $13,140
Operating expenses:
Salaries and related costs.............. 4,695 (428)(2)(3)
(191)(1) 4,076
Employee stock ownership plan accounting
charge................................. 369 (4) 369
Other................................... 8,178(8) 131 (1) 8,309
------- ----- -------
12,873 (119) 12,754
------- ----- -------
Earnings from operations................. 295 91 386
------- ----- -------
Other income (expense):
Interest, net........................... (221) (96)(5) (317)
Other, net.............................. (100) (100)
------- ----- -------
(321) (96) (417)
------- ----- -------
Loss from continuing operations
before income taxes..................... (26) (5) (31)
Provision (credit) for income taxes...... (9) (2)(6) (11)
------- ----- -------
Loss from continuing operations.......... $ (17) $ (3)(7) $ (20)
======= ===== =======
</TABLE>
See accompanying notes to Pro Forma Condensed Statement of Consolidated
Operations.
30
<PAGE>
UNITED AIR LINES, INC. AND SUBSIDIARY COMPANIES
NOTES TO PRO FORMA CONDENSED
STATEMENT OF CONSOLIDATED OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
(1) United entered into an agreement to sell its U.S. flight kitchens over a
period of months beginning in December 1993 through June 1994, and an
agreement to acquire catering services for a seven year period. This
adjustment eliminates $28 million of sales revenues and $191 million of
compensation costs recorded in 1993 relating to the U.S. flight kitchens
that were sold, and adds estimated incremental catering costs of $131
million.
(2) To adjust compensation expense for the pro forma effect of wage and
benefit reductions and certain work-rule changes resulting from the
employee investment that provide for wage and other compensation savings
during the approximately six year period beginning at the Effective Time.
The pro forma adjustment represents the estimated savings in the 12 months
assuming that such savings had commenced at the beginning of the period.
The pro forma adjustment does not include any savings related to U2.
(3) The following reconciles the labor cost savings included in the Pro Forma
Condensed Statement of Consolidated Operations to the value of the
employee investments included in the Company Analysis of employee
investments for 1994 (see "SPECIAL FACTORS--Certain Company Analyses"):
<TABLE>
<CAPTION>
(MILLIONS)
<S> <C>
Pro Forma adjustment based on 1993 salaries.................... $428
Estimated compensation savings based on 1994 salaries.......... 68
Estimated benefits of U2 during the first year................. 64
Estimated additional severance for flight kitchen employees
during the first year......................................... (36)
----
Estimated 1994 investments................................... $524
====
Estimated six months of investments included in 1994 analy-
sis......................................................... $262
====
</TABLE>
(4) To record non-cash compensation for shares of ESOP Preferred Stock
committed to be released to employees during the period based on the
average fair value of such ESOP Preferred Stock. The average fair value of
the ESOP Preferred Stock is based on two components: (1) the average fair
value of the New Shares into which the ESOP Preferred Stock is convertible
plus (2) a premium attributable to the dividend paying feature of the ESOP
Preferred Stock. For purposes of the pro forma adjustment, the average
fair value of the ESOP Preferred Stock was assumed to be the initial
assumed purchase price of $120. In future years, it is anticipated that
the ESOP Preferred Stock price, for purposes of computing the employee
stock ownership plan accounting charge, will be determined by an
independent appraiser who will value both components. Additionally, in
future years, the shares committed to be released that are used to satisfy
the dividends payable on previously allocated shares will be charged to
retained earnings rather than compensation expense.
The shares of the ESOP Preferred Stock committed to be released are a
fraction of the original ESOP Preferred Stock shares. It is anticipated the
shares will be released in a level fashion over the 69 months of the ESOP
taking into account the partial period in 1994 and 2000. This would result
in approximately 3.07 million ESOP Preferred Stock shares committed to be
released in each full calendar year. Shares released in a partial year
would be pro rated.
Since future expense is dependent on the fair market value of the ESOP
Preferred Stock, such expense is difficult to forecast and may vary
significantly from the value in the pro forma adjustment. Changes in the
price of a New Share directly affect the determination of the value of an
ESOP Preferred Stock share. In
31
<PAGE>
addition, if the average value of a New Share exceeds $136 during the first
12 months after the Effective Time, additional shares of ESOP Preferred
Stock will be issued to the Qualified ESOP or reserved for issuance to the
Supplemental ESOP to increase the ESOP's ownership from approximately 55%
up to a maximum of approximately 63%. Future expense is also affected by
the premium associated with the dividend paying feature which shrinks over
time as the dividend paying period is reduced.
Following is a summary of the impact to the employee stock ownership plan
accounting charge of a range of fair market values:
<TABLE>
<CAPTION>
AVERAGE ESOP ESOP ACCOUNTING
PREFERRED STOCK CHARGE*
FAIR VALUE (MILLIONS)
--------------- ---------------
<S> <C>
$110 $338
120 369
130 400
140 430
</TABLE>
- --------
*Assumes 3.07 million shares committed to be released in the pro forma
period and no shares used to satisfy dividends payable since shares are
not allocated to participants until December 31. In later years shares
will be used to satisfy dividends on allocated shares, which will
reduce the ESOP accounting charge.
The following illustrates the impact to the ESOP accounting charge if the
average value of the New Shares in the first 12 months exceeds $136 per
share.
<TABLE>
<CAPTION>
SHARES TO
BE INCREASE IN
AVERAGE AVERAGE ESOP ADDITIONAL RELEASED ESOP ACCOUNTING
NEW SHARE PREFERRED STOCK SHARES TO FOR FIRST CHARGE****
PRICE FAIR VALUE* BE ISSUED** YEAR*** (MILLIONS)
--------- --------------- ----------- --------- ---------------
<S> <C> <C> <C> <C>
$136 $168 0 0 $ 0
140 172 2,260,410 393,115 68
150 182 6,949,234 1,208,562 220
</TABLE>
- --------
*Assumes a dividend premium of $32 per share.
**To achieve the maximum increase in ownership, the price of a New Share
must average at least $149.10 during the first 12 months after the
Effective Time. If the average price of a New Share is less than or
equal to $136, no additional shares of ESOP Preferred Stock will be
issued.
***The additional shares will be released in a level fashion over the 69
months of the ESOP.
****Represents the first year increase; subsequent increases are dependent
on changes in the fair value of ESOP Preferred Stock.
(5) To record interest expense of $81 million on the Debentures and to record
amortization of the underwriting discount. The pro forma adjustment also
includes approximately $15 million of foregone interest income due to the
reduction in United's average investment balance resulting from the
transaction. The pro forma calculations assume the United Debt Offerings
are consummated and are based on an interest rate on the Series A
Debentures of 10.67% and on the Series B Debentures of 11.21%. If the
United Debt Offerings are not consummated, the interest rates are subject
to the stated maximums under the Recapitalization of 10.125% for the
Series A Debentures and 10.825% for the Series B Debentures. This will not
impact the pro forma interest expense because even though the interest
rate on the series of Debentures exceeds the stated maximum, the principal
amount of the series of Debentures was reduced so that the yield to
maturity will not exceed the yield to maturity that would have resulted if
the par amount of the series of Debentures (based on the stated maximum
interest rate) was priced at a discount.
32
<PAGE>
(6) To adjust the provision (credit) for income taxes to reflect the tax effect
of changes to pretax income at the statutory rate in effect during 1993.
For purposes of the pro forma adjustment, the book and tax employee stock
ownership plan compensation charge are assumed to be the same.
(7) If the Recapitalization is consummated, United expects to recognize
nonrecurring charges of approximately $44 million relating to additional
severance benefits for employees terminated as a result of the sale of the
flight kitchens, up to $49.15 million of transaction fees and expenses
incurred by ALPA, the IAM and certain advisors in connection with the
structuring and establishment of the ESOPs, $30 million for United's
transaction fees and expenses, $17 million of compensation expense relating
to vesting the unvested restricted stock as a result of the change in
control, $21 million of payments and benefits to Mr. Greenwald and officers
who are retiring at the Effective Time, and $13 million of compensation
expense (based on an assumed Old Share price of approximately $128.31 at
the Effective Time) relating to the vesting of unvested Options and the
implementation of a feature that provides for cashless exercise of Options
in the event of the Recapitalization. (The existing Option holders are only
entitled to utilize the cashless exercise feature if the Recapitalization
occurs. The pro forma financial information assumes all in-the-money
Options are exercised at the Effective Time and, since the cashless
exercise results in variable plan accounting, there is an initial
nonrecurring charge for the cashless exercise feature but no ongoing
impact; however, if Option holders do not exercise their Options at the
Effective Time, there will be an ongoing accounting impact for the changes
in the fair market value of the Recapitalization Consideration that is
issuable upon exercise of such Options.) The total after-tax effect of the
nonrecurring charges is $122 million. Due to the nonrecurring nature of
these charges, they have been excluded from the Pro Forma Condensed
Statement of Consolidated Operations.
(8) In the first quarter of 1994, United began recording certain air
transportation price adjustments, which were previously recorded as
commission expense, as adjustments to revenue. Historical operating revenue
and expense amounts have been adjusted to conform with the current
presentation. See United's Current Report on Form 8-K dated May 3, 1994.
33
<PAGE>
UNITED AIR LINES, INC. AND SUBSIDIARY COMPANIES
PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED OPERATIONS
FOR THE THREE MONTHS MARCH 31, 1994
(IN MILLIONS)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Operating revenues........................ $3,173 $ (2)(1) $3,171
Operating expenses:
Salaries and related costs............... 1,202 (111)(2)(3)
(27)(1) 1,064
Employee stock ownership plan accounting
charge.................................. 86 (4) 86
Other.................................... 2,015 22 (1) 2,037
------ ----- ------
3,217 (30) 3,187
------ ----- ------
Earnings (loss) from operations........... (44) 28 (16)
------ ----- ------
Other income (expense):
Interest, net............................ (60) (24)(5) (84)
Other, net............................... (16) 19 (6) 3
------ ----- ------
(76) (5) (81)
------ ----- ------
Loss from continuing operations
before income taxes...................... (120) 23 (97)
Provision (credit) for income taxes....... (41) 9 (7) (32)
------ ----- ------
Loss from continuing operations........... $ (79) $ 14 $ (65)
====== ===== ======
</TABLE>
See accompanying notes to Pro Forma Condensed Statement of Consolidated
Operations.
34
<PAGE>
UNITED AIR LINES, INC. AND SUBSIDIARY COMPANIES
NOTES TO PRO FORMA CONDENSED
STATEMENT OF CONSOLIDATED OPERATIONS
THREE MONTHS ENDED MARCH 31, 1994
(1) United entered into an agreement to sell its U.S. flight kitchens over a
period of months beginning in December 1993 through June 1994, and an
agreement to acquire catering services for a seven year period. This
adjustment eliminates $2 million of sales revenues and $27 million of
compensation costs recorded in the first quarter of 1994 relating to the
U.S. flight kitchens that were sold, and adds estimated incremental
catering costs of $22 million.
(2) To adjust compensation expense for the pro forma effect of wage and benefit
reductions and certain work-rule changes resulting from the employee
investment that provide for wage and other compensation savings during the
approximately six year period beginning at the Effective Time. The pro
forma adjustment represents the estimated savings in the first quarter of
1994 assuming that such savings had commenced at the beginning of the prior
year. The pro forma adjustment does not include any savings related to U2.
(3) The following reconciles the labor cost savings included in the Pro Forma
Condensed Statement of Consolidated Operations to the value of the employee
investments included in the Company Analysis of employee investments for
1994 (see "SPECIAL FACTORS--Certain Company Analyses"):
<TABLE>
<CAPTION>
(MILLIONS)
<S> <C>
Pro Forma adjustment........................................... $111
Estimated compensation savings based on foregone 1994 raises... 13
Estimated benefits of U2 for three months...................... 16
Estimated additional severance for flight kitchen employees for
three months.................................................. (9)
----
Estimated three months of investments........................ $131
====
Estimated six months of investments included in 1994 analy-
sis......................................................... $262
====
</TABLE>
(4) To record non-cash compensation for shares of ESOP Preferred Stock
committed to be released to employees during the period based on the
average fair value of the ESOP Preferred Stock. For purposes of the pro
forma adjustment, the average fair value of the ESOP Preferred Stock was
assumed to be the initial assumed purchase price of $120. The pro forma
calculations assume that shares committed to be released in 1993 were
allocated to participant accounts at the end of 1993. Thus, the portion of
shares committed to be released in 1994 that will be used to satisfy
dividend payable on allocated shares is charged to retained earnings rather
than non-cash compensation expense. It is anticipated that in the first
quarter of 1994, approximately 768,000 shares of ESOP Preferred Stock will
be committed to be released, and that approximately 54,000 of these shares
will be used for dividends.
Since future expense is dependent on the fair market value of the ESOP
Preferred Stock, such expense is difficult to forecast and may vary
significantly from the value in the pro forma adjustment. Changes in the
price of a New Share directly affect the determination of the value of an
ESOP Preferred Stock share. In addition, if the average value of a New
Share exceeds $136 during the first 12 months after the Effective Time,
additional shares of ESOP Preferred Stock will be issued to the Qualified
ESOP or reserved for issuance to the Supplemental ESOP. Future expense is
also affected by the premium associated with the dividend paying feature
which shrinks over time as the dividend paying period is reduced.
35
<PAGE>
Following is a summary of the impact to the employee stock ownership plan
accounting charge of a range of fair market values:
<TABLE>
<CAPTION>
Average ESOP ESOP Accounting
Preferred Stock Charge*
Fair Value (millions)
--------------- ---------------
<S> <C>
$110 $ 79
120 86
130 93
140 100
</TABLE>
--------
* Assumes 768,000 shares committed to be released in the pro forma period
and approximately 54,000 shares used for dividends which are charged to
retained earnings. As additional shares are allocated in later years,
the employee stock ownership plan accounting charge will be reduced.
The following illustrates the impact to the employee stock ownership plan
accounting charge for the quarter if the average value of the New Shares in
the first 12 months exceeds $136 per share.
<TABLE>
<CAPTION>
Average ESOP Shares to be Increase in
Average Preferred Additional Released ESOP Accounting
New Share Stock Fair Shares to for the Charge****
Price Value* be Issued** Quarter*** (millions)
--------- ------------ ----------- ------------ ---------------
<S> <C> <C> <C> <C>
$136 $168 0 0 $ 0
140 172 2,260,410 98,279 16
150 182 6,949,239 302,141 51
</TABLE>
--------
*Assumes a dividend premium of $32.
**To achieve the maximum increase in additional shares, the price of a
New Share must average at least $149.10 during the first 12 months
after the Effective Time. If the average price of a New Share is less
than or equal to $136, no additional shares of ESOP Preferred Stock
will be issued.
***The additional shares will be released in a level fashion over the 69
months of the ESOP.
****Represents the increase for the quarter; subsequent increases are
dependent on changes in the fair value of the ESOP Preferred Stock.
(5) To record interest expense of $20 million on the Debentures and to record
amortization of the underwriting discount. The pro forma adjustment also
includes approximately $4 million of foregone interest income due to the
reduction in United's average investment balance resulting from the
transaction. The pro forma calculations assume the United Debt Offerings
are consummated and are based on an interest rate on the Series A
Debentures of 10.67% and on the Series B Debentures of 11.21%. If the
United Debt Offerings are not consummated, the interest rates are subject
to the stated maximums under the Recapitalization of 10.125% for the Series
A Debentures and 10.825% for the Series B Debentures. This will not impact
the pro forma interest expense because even though the interest rate on the
series of Debentures exceeds the stated maximum, the principal amount of
the series of Debentures was reduced so that the yield to maturity will not
exceed the yield to maturity that would have resulted if the par amount of
the series of Debentures (based on the stated maximum interest rate) was
priced at a discount.
(6) To reverse $19 million of nonrecurring fees and expenses relating to the
Recapitalization which were recorded in the first quarter of 1994.
(7) To adjust the provision (credit) for income taxes to reflect the tax effect
of changes to pretax income at the statutory rate in effect during the
first quarter of 1994. For purposes of the pro forma adjustment the book
and tax employee stock ownership plan compensation charge are assumed to be
the same.
36
<PAGE>
UNITED AIR LINES, INC. AND SUBSIDIARY COMPANIES
PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
MARCH 31, 1994
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS HISTORICAL ADJUSTMENTS PRO FORMA
------ ---------- ----------- ---------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................. $ 666 $(140)(1) $
734 (3)
(741)(3)
(300)(10)
8 (9) 227
Short-term investments.................... 542 542
Other..................................... 2,241 44 (2) 2,285
------- ----- -------
3,449 (395) 3,054
------- ----- -------
Operating property and equipment............ 12,211 12,211
Less: Accumulated depreciation
and amortization........................ (5,164) (5,164)
------- ----- -------
7,047 7,047
------- ----- -------
Other assets:
Other..................................... 1,700 300 (10) 2,000
------- ----- -------
$12,196 $ (95) $12,101
======= ===== =======
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
<S> <C> <C> <C>
Current liabilities:
Short-term borrowings, long-term debt
maturing within one year and current
obligations under capital leases......... $ 466 $ $ 466
Other..................................... 4,473 (11)(9) 4,462
------- ----- -------
4,939 (11) 4,928
------- ----- -------
Long-term debt.............................. 2,596 734 (3) 3,330
------- ----- -------
Long-term obligations under capital leases.. 774 774
------- ----- -------
Other liabilities, deferred credits and
minority interest.......................... 3,317 3,317
------- ----- -------
Shareholder's equity:
Common stock, $5 par value; 1,000 shares
authorized; 200 shares outstanding....... -- --
Additional capital invested............... 839 (741)(3)
13 (5)
4 (6) 115
Retained earnings (deficit)............... (200) (108)(7) (308)
ESOP capital.............................. 228 (4) 228
Unearned ESOP Preferred Stock............. (228)(4) (228)
Unearned compensation..................... (14) 14 (8) --
Pension liability adjustment ............. (53) (53)
Unrealized loss of investments............ (2) (2)
------- ----- -------
570 (818) (248)
------- ----- -------
$12,196 $ (95) $12,101
======= ===== =======
</TABLE>
See the accompanying notes to Pro Forma Condensed Statement of Consolidated
Financial Position.
37
<PAGE>
UNITED AIR LINES, INC. AND SUBSIDIARY COMPANIES NOTES TO PRO FORMA CONDENSED
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
MARCH 31, 1994
(1) To record the cash impact of the estimated fees and transaction expenses,
including expenses for United, ALPA and the IAM, severance payments to
terminated officers and flight kitchen employees, and payments relating to
the employment agreement with Mr. Greenwald.
(2) To record the tax effects relating to nonrecurring charges recognized as a
result of the transaction.
(3) To record the issuance of $370 million of principal amount of Series A
Debentures and $371 million of principal amount of Series B Debentures and
to record the distribution of proceeds to UAL. The pro forma adjustment
assumes that the United Debt Offerings are consummated and that the
interest rate is 10.67% for the Series A Debentures and 11.21% for the
Series B Debentures based on the pricing of the United Debt Offerings. The
Debentures are being recorded at their face amount on the assumption that
they are priced to trade at par, less the underwriting discount of $7
million.
If the underwritings are not consummated, $382.5 of principal amount of
Series A Debentures and $382.5 million of principal amount of Series B
Debentures will be issued. The actual rates on the Debentures have been set
at the applicable stated maximum rates of 10.125% for the Series A
Debentures and 10.825% for the Series B Debentures. If either or both of the
United Debt Offerings are not consummated and the then current market
interest rate exceeds the applicable stated maximum, such Debentures will be
recorded at a discount.
(4) To record the ESOP capital as a result of the initial issuance of shares of
UAL's Class 1 ESOP Preferred Stock to the Leveraged ESOP for an aggregate
purchase price of $228 million and to record the related charge to unearned
ESOP Preferred Stock. The $228 million was determined based on (i)
1,899,059 shares of Class 1 ESOP Preferred Stock expected to be issued in
the first ESOP Tranche as of the Effective Time and (ii) an assumed
purchase price of $120 per share. The Company and the Unions may, prior to
the Effective Time, agree to increase or decrease the number of shares of
Class 1 ESOP Preferred Stock sold at the Effective Time. The agreement with
the ESOP Trustee provides that the number of shares of Class 1 ESOP
Preferred Stock sold at the Effective Time shall be no more than 2,088,965
and no fewer than 1,709,153 provided, however, that the number of shares
sold in the first ESOP Tranche will be adjusted if the Effective Time is
before or after July 1, 1994. The actual price per share for the first ESOP
Tranche will be calculated as provided in the ESOP Stock Purchase
Agreement. Thus, the ultimate amount recorded at the Effective Time will
differ from the pro forma adjustment in order to reflect the actual number
of shares issued and the purchase price calculated under the ESOP Stock
Purchase Agreement.
Six additional ESOP Tranches will be issued to the Leveraged ESOP during the
69 months subsequent to the Effective Time, with the total shares of Class 1
ESOP Preferred Stock issued in the seven ESOP Tranches aggregating
approximately 14,000,000 shares (subject to increase, see "THE PLAN OF
RECAPITALIZATION--Establishment of ESOPs--Additional Shares"). The price for
the subsequent ESOP Tranches will be as agreed between the Company and the
ESOP Trustee at the time of each sale. As the subsequent ESOP Tranches are
issued, the shares will be reported as a credit to additional capital
invested based on the fair value of the stock when such issuances occur with
a corresponding charge to "Unearned ESOP Preferred Stock."
The unearned ESOP Preferred Stock recorded in the pro forma adjustment
together with the unearned ESOP Preferred Stock recorded from subsequent
ESOP Tranches will be recognized as compensation expense over the
approximately six year investment period as the shares are committed to be
released. The difference between the compensation expense recorded, which
is based on the fair value of the stock
38
<PAGE>
during an accounting period, and the recorded cost of the unearned ESOP
Preferred Stock will be recorded to ESOP capital.
ESOP capital will also be recorded over the approximately six year
investment period as the shares of UAL's Class 2 ESOP Preferred Stock are
committed to be contributed to the Non-Leveraged Qualified ESOP and
credited to employees pursuant to the Supplemental ESOP with the
offsetting entry being to compensation expense. The number of shares of
Class 2 ESOP Preferred Stock that will be issued will be equal to
17,675,345 less the number of shares of Class 1 ESOP Preferred Stock that
will be sold to the Qualified ESOP.
(5) To account for the cashless exercise of options in the event of the
Recapitalization. (Amount of the entry is based on an assumed Old Share
price at the Effective Time of approximately $128.31 per share.)
(6) To record 25,000 restricted shares to Mr. Greenwald that will vest at the
Effective Time.
(7) Represents the offset to entries (1), (2), (5), (6), (8) and (9).
(8) To record the vesting of the unvested restricted stock as a result of the
Recapitalization.
(9) To reverse $19 million of transaction fees and expenses recorded during the
first quarter of 1994 because these expenses are included in entry (1).
(10) To record an intercompany loan to UAL which will be used to pay a portion
of the Recapitalization Consideration to holders of Old Shares.
39
<PAGE>
CAPITALIZATION
UAL CORPORATION AND SUBSIDIARY COMPANIES
The following table sets forth the unaudited consolidated capitalization of
the Company as of March 31, 1994, as adjusted to give effect to the
consummation of the Recapitalization and the Offerings, including (i)
reclassification of Old Shares into New Shares and Series D Redeemable
Preferred Stock, (ii) the Offerings of the Public Preferred Stock (as
represented by Depositary Preferred Shares) and Debentures, (iii) redemption of
the Series D Redeemable Preferred Stock for cash and proceeds from the
Offerings and (iv) the issuance of the first tranche of Class 1 ESOP Preferred
Stock, the Voting Preferred Stock and the Director Preferred Stock. The table
should be read in conjunction with the Pro Forma Condensed Statement of
Consolidated Financial Position included elsewhere in this document.
<TABLE>
<CAPTION>
MARCH 31, 1994
------------------
(IN MILLIONS)
PRO
HISTORICAL FORMA
---------- -------
(UNAUDITED)
<S> <C> <C>
Short-term borrowings, long-
term debt maturing within one
year and current obligations
under capital leases......... $ 486 $ 486
------- -------
Long-term debt, excluding por-
tion due within one year:
Secured notes............... 1,388 1,388
Deferred purchase certifi-
cates...................... 194 194
Debentures.................. 1,000 1,741
Convertible debentures...... 33 33
Promissory notes............ 93 93
Unamortized discount on
debt....................... (15) (22)
------- -------
2,693 3,427
Long-term obligations under
capital leases............... 777 777
------- -------
Total long-term debt and
capital lease obligations.. 3,470 4,204
------- -------
Class 2 ESOP Preferred Stock,
$.01 par value............... -- (a)
------- -------
Shareholders' equity:
Series A Preferred Stock,
$.01 stated value.......... -- --
Series B Preferred Stock,
$.01 stated value.......... --
Class 1 ESOP Preferred
Stock, $.01 par value...... --
Class 2 ESOP Preferred
Stock, $.01 par value...... --
Class P, M and S Voting Pre-
ferred Stock, $.01 par val-
ue......................... --
Class I, Pilot MEC, IAM, and
SAM Preferred Stock, $.01
par value.................. --
Common stock, $5 par value.. 128 --
Common stock, $.01 par val-
ue......................... --
Additional capital invested. 963 640
Retained earnings (deficit)... 142 (1,004)
Pension liability adjust-
ment....................... (53) (53)
Unearned compensation....... (14) --
Unearned ESOP Preferred
Stock...................... (228)
Unrealized loss on invest-
ments...................... (2) (2)
Common stock held in trea-
sury....................... (67) (63)
------- -------
Total shareholders' equi-
ty....................... 1,097 (710)
------- -------
Total capitalization.... $ 5,053 $ 3,980
======= =======
</TABLE>
- --------
(a) The Class 2 ESOP Preferred Stock committed to be contributed to the
Supplemental ESOP will be reported outside of equity because the employees
can elect to receive their "book entry" shares from the Company in cash
upon termination of employment.
40
<PAGE>
UNITED AIR LINES, INC. AND SUBSIDIARY COMPANIES
The following table sets forth the unaudited consolidated capitalization of
United as of March 31, 1994 and as adjusted to give effect to the consummation
of the Recapitalization and the Offerings, including (i) the issuance of
Debentures and (ii) the ESOP capital recorded as a result of the issuance of
the first tranche of UAL's Class 1 ESOP Preferred Stock to the ESOP Trustee for
the Qualified ESOP and the related charge for unearned ESOP Preferred Stock.
The table should be read in conjunction with the Pro Forma Condensed Statement
of Consolidated Financial Position included elsewhere in this document.
<TABLE>
<CAPTION>
MARCH 31, 1994
-----------------
(IN MILLIONS)
PRO
HISTORICAL FORMA
---------- ------
(UNAUDITED)
<S> <C> <C>
Short-term borrowings, long-
term debt maturing within one
year and current obligations
under capital leases......... $ 466 $ 466
------ ------
Long-term debt, excluding por-
tion due within one year:
Secured notes............... $1,388 $1,388
Deferred purchase certifi-
cates...................... 194 194
Debentures.................. 1,000 1,741
Promissory notes............ 29 29
Unamortized discount on
debt....................... (15) (22)
------ ------
2,596 3,330
Long-term obligations under
capital leases............... 774 774
------ ------
Total long-term debt and
capital lease obligations.. 3,370 4,104
------ ------
Shareholder's equity:
Common stock, $5 par value.. -- --
Additional capital invested. 839 115
Retained earnings (deficit)... (200) (308)
ESOP capital................ 228
Unearned ESOP shares........ (228)
Pension liability adjust-
ment....................... (53) (53)
Unearned compensation....... (14) --
Unrealized loss on invest-
ments...................... (2) (2)
------ ------
Total shareholder's equi-
ty....................... 570 (248)
------ ------
Total capitalization.... $4,406 $4,322
====== ======
</TABLE>
41
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
Exhibit 1 Second Amendment to the Plan of Recapitalization.
Exhibit 2 Opinion of CS First Boston Corporation dated July 1, 1994.
Exhibit 3 Opinion of Lazard Freres & Co. dated July 1, 1994.
</TABLE>
42
<PAGE>
EXHIBIT 1
SECOND AMENDMENT TO THE AGREEMENT
AND PLAN OF RECAPITALIZATION
Second Amendment (this "Amendment"), dated as of June 29, 1994, to the
Agreement and Plan of Recapitalization (as amended, the "Plan of
Recapitalization"), dated as of March 25, 1994, by and among UAL Corporation, a
Delaware corporation (the "Company"), Air Line Pilots Association,
International, pursuant to its authority as the collective bargaining
representative for the crafts or class of pilots employed by United Air Lines,
Inc., a Delaware corporation and a wholly-owned subsidiary of the Company
("United"), and the International Association of Machinists and Aerospace
Workers, pursuant to its authority as the collective bargaining representative
for the crafts or classes of mechanics and related employees, ramp and stores
employees, food service employees, dispatchers and security officers employed
by United, as amended by the First Amendment to the Plan of Recapitalization,
dated as of June 2, 1994.
W I T N E S S E T H
WHEREAS, the parties hereto desire to amend the Plan of Recapitalization and
certain Schedules thereto; and
WHEREAS, Section 10.3(a) of the Plan of Recapitalization permits amendments
to the Plan of Recapitalization and the Schedules thereto by written instrument
signed by all parties;
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, the parties hereto agree as follows:
1. Section 1.3 of the Plan of Recapitalization is hereby amended and
restated in its entirety in the form attached to this Amendment as Exhibit
A.
2. Section 1.5(b) of the Plan of Recapitalization is hereby amended and
restated in its entirety in the form attached to this Amendment as Exhibit
B.
3. Section 1.11 of the Plan of Recapitalization is hereby amended and
restated in its entirety in the form attached to this Amendment as Exhibit
C.
4. Article FOURTH, Part I.D, Section 2.5 of the Restated Certificate is
hereby amended and restated in its entirety in the form attached to this
Amendment as Exhibit D.
MISCELLANEOUS
A. Definitions. Capitalized terms used in this Amendment and not defined
herein shall have the meanings ascribed to them in the Plan of Recapitalization
or the Schedules or other attachments thereto.
B. Entire Plan of Recapitalization; Restatement. The Plan of
Recapitalization, as amended by this Amendment, is the entire agreement of the
parties with respect to the subject matter hereof and the parties hereto hereby
agree that the Plan of Recapitalization and all Schedules thereto may be
restated to reflect all amendments provided for in this Amendment.
C. Governing Law. This Amendment shall be deemed to be made in and in all
respects shall be interpreted, governed by and construed in accordance with the
laws of the State of Delaware, without regard to the conflicts of laws
principles thereof.
D. Counterparts. This Amendment may be executed in counterparts, each of
which shall be an original and all of which shall together constitute one and
the same instrument.
<PAGE>
SECOND AMENDMENT TO THE AGREEMENT
AND PLAN OF RECAPITALIZATION
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized on the date
first above written.
UAL Corporation
/s/ Stephen M. Wolf
By: _________________________________
Name: Stephen M. Wolf
Title: Chairman and Chief
Executive Officer
Air Line Pilots Association,
International
/s/ Roger D. Hall
By: _________________________________
Name: Roger D. Hall
Title: Chairman, UAL-MEC
International Association of
Machinists and Aerospace Workers
/s/ Ken Thiede
By: _________________________________
Name: Ken Thiede
Title: President and General
Chairman, District Lodge
141
2
<PAGE>
EXHIBIT INDEX
Exhibit A--Section 1.3 of the Plan of Recapitalization
Exhibit B--Section 1.5(b) of the Plan of Recapitalization
Exhibit C--Section 1.11 of the Plan of Recapitalization
Exhibit D--Article FOURTH, Part I.D, Section 2.5 of the Restated Certificate
3
<PAGE>
EXHIBIT A
Section 1.3 Redemption. Following the Effective Time, all outstanding shares
of Redeemable Preferred Stock shall, to the extent of funds legally available
therefor and subject to the provisions of the Restated Certificate, be redeemed
immediately after issuance according to the terms thereof (the "Redemption").
Pursuant to the Redemption, the holders of Redeemable Preferred Stock, if any,
shall be entitled to receive, in respect of each one one-thousandth of a share
of Redeemable Preferred Stock, subject to the terms thereof and Section 1.5(f):
(i) 25.80 in cash;
(ii) either (a) if the Underwriting Alternative with respect to
depositary shares (the "Depositary Shares") representing interests in
Series B Preferred Stock of the Company, without par value (the "Public
Preferred Stock"), is not consummated, both (I) an additional cash payment
equal to $12.20, plus (II) Depositary Shares representing interests in a
liquidation preference of Public Preferred Stock equal to the excess of
(xx) $31.10 over (yy) the product of $12.20 and a fraction (but in no event
less than one) the numerator of which is the Applicable Rate with respect
to the Depositary Shares assuming that the Underwriting Alternative with
respect to the Depositary Shares is consummated, and the denominator of
which is 11.375%, or (b) if the Underwriting Alternative with respect to
the Depositary Shares is consummated, a cash payment equal to the
Depositary Share Proceeds Amount (as defined in Section 1.11 below);
(iii) either (a) $15.55 principal amount of Series A Senior Unsecured
Debentures due 2004 of United issued as provided below (the "Series A
Debentures") or (b) if the Underwriting Alternative with respect to the
Series A Debentures is consummated, a cash payment equal to the Series A
Debenture Proceeds Amount (as defined in Section 1.11 below); and
(iv) either (a) $15.55 principal amount of Series B Senior Unsecured
Debentures due 2014 of United issued as provided below (the "Series B
Debentures" and, together with the Series A Debentures, collectively, the
"Debentures") or (b) if the Underwriting Alternative with respect to the
Series B Debentures is consummated, a cash payment equal to the Series B
Debenture Proceeds Amount (as defined in Section 1.11 below).
The Depositary Shares shall be issued pursuant to a Deposit Agreement
substantially in the form set forth on Schedule 1.3(a) (the "Deposit
Agreement"). The Depositary Shares shall be issued only in denominations of
$25.00 of liquidation preference and integral multiples thereof. The Public
Preferred Stock shall have the rights, powers and privileges described in the
Restated Certificate, which shall include a per share liquidation preference of
$25,000. The Debentures shall be issued pursuant to the Indenture, dated as of
July 1, 1991, between United and the Bank of New York, and the Officers'
Certificate (the "Officers' Certificate") in form and substance as set forth on
Schedule 1.3(b) (collectively, the "Indenture"). Such Indenture shall be
qualified under the Trust Indenture Act of 1939, and the rules and regulations
promulgated thereunder (the "TIA"). The Debentures shall be issued only in
denominations of $100 and integral multiples thereof or, if the Underwriting
Alternative with respect to either series of Debentures is consummated at or
prior to the Effective Time and the Company so elects, denominations of $1,000
and integral multiple thereof, in which case conforming changes shall be made
to this Agreement and the attachments hereto to take into account such greater
denominations with respect to such series.
A-1
<PAGE>
EXHIBIT B
[Section 1.5 Surrender and Exchange.]
(b) Each holder of Old Shares that have been converted into New Shares and
Redeemable Preferred Stock, upon surrender to the Exchange Agent of an Old
Certificate or Certificates, together with a properly completed letter of
transmittal covering such Old Shares, will be entitled to receive in respect of
such Old Shares, subject to Section 1.5(f):
(i) a certificate or certificates representing 0.5 of a New Share for
each Old Share formerly represented by such Old Certificate or Certificates
in accordance with Section 1.2;
(ii) either (a) if the Underwriting Alternative with respect to
Depositary Shares representing interests in the Public Preferred Stock is
not consummated, for each Old Share formerly represented by such Old
Certificate or Certificates in respect of the Redemption, both (I) a cash
payment equal to $12.20, plus (II) a depositary receipt or receipts
representing Depositary Shares representing interests in a liquidation
preference of Public Preferred Stock equal to the excess of (xx) $31.10
over (yy) the product of $12.20 and a fraction (but in no event less than
one) the numerator of which is the Applicable Rate with respect to the
Depositary Shares assuming that the Underwriting Alternative with respect
to the Depositary Shares is consummated, and the denominator of which is
11.375%, or (b) if the Underwriting Alternative with respect to the
Depositary Shares is consummated, a cash payment equal to the Depositary
Share Proceeds Amount in respect of the Redemption;
(iii) either (a) $15.55 principal amount of Series A Debentures for each
Old Share formerly represented by such Old Certificate or Certificates in
respect of the Redemption or (b) if the Underwriting Alternative with
respect to the Series A Debentures is consummated, a cash payment equal to
the Series A Debenture Proceeds Amount in respect of the Redemption;
(iv) either (a) $15.55 principal amount of Series B Debentures for each
Old Share formerly represented by such Old Certificate or Certificates in
respect of the Redemption or (b) if the Underwriting Alternative with
respect to the Series B Debentures is consummated, a cash payment equal to
the Series B Debenture Proceeds Amount in respect of the Redemption; and
(v) a cash payment of $25.80 for each Old Share formerly represented by
such Old Certificate or Certificates in respect of the Redemption (the cash
and/or securities distributed pursuant to clauses (i) through (v),
collectively, the "Recapitalization Consideration").
Until so surrendered, each Old Certificate or Certificates formerly
representing Old Shares shall, after the Effective Time, represent for all
purposes only the right to receive such Recapitalization Consideration.
<PAGE>
EXHIBIT C
Section 1.11 Underwriting Alternative
The Company has elected to pursue the underwriting of (a) a number of
Depositary Shares calculated as provided in the next sentence, (b) $382.5
million principal amount of Series A Debentures, subject to reduction as
described below, and (c) $382.5 principal amount of Series B Debentures,
subject to reduction as described below (referred to collectively herein as the
"Underwriting Alternative"), and the consummation of the underwritings with
respect to the Depositary Shares and the Debentures shall be in lieu of issuing
Depositary Shares and Debentures to holders of Old Shares pursuant to Section
1.5 hereof, to holders of Options pursuant to Section 1.7 hereof and to holders
of Convertible Company Securities pursuant to Section 1.8 hereof. The number of
Depositary Shares that shall be subject to the Underwriting Alternative (which
may be rounded up to produce an aggregate amount of Depositary Shares that is
consistent with customary aggregate underwriting denominations) shall equal one
twenty-fifth of the excess of (I) the product of $765 million and a fraction
(such fraction, which shall in no event be greater than one, is referred to
herein as the "Liquidation Preference Fraction"), the numerator of which is
11.375%, and the denominator of which is the Applicable Rate with respect to
the Depositary Shares assuming that the Underwriting Alternative with respect
to the Depositary Shares is consummated, over (II) $300 million. The Company
shall use its best efforts to accomplish such underwritings, including entering
into a firm commitment underwriting agreement or agreements, provided, however,
that the Company may elect to terminate the Underwriting Alternative at any
time prior to the Effective Time. The Unions will cooperate and use their
respective best efforts to facilitate the underwritings. The Underwriting
Alternative will be effected in accordance with customary underwriting
agreements which may reflect that, if the Company is advised by the managing
underwriter or managing underwriters that the Series A Debentures or Series B
Debentures would be priced in excess of the maximum price applicable to such
security (so that such security, if priced at the applicable Maximum Pricing,
could only be sold at less than par), and is further advised that consistent
with industry practice the Underwriting Alternative will be facilitated by the
sale of such securities at or closer to par, the Company may reduce the amount
of such securities to be sold and increase the interest rate above the
applicable Maximum Pricing so that such securities may be sold at or closer to
par, provided that (1) the yield to maturity of the reduced par amount of
Debentures will not exceed the yield to maturity that would result if the
unreduced par amount of such Debentures were priced at a discount to par using
the Maximum Pricing for the respective Debenture and (2) the proceeds from the
issuance of the reduced par amount of Debentures will equal the proceeds that
would result if the unreduced par amount of such Debentures were priced at a
discount to par using the Maximum Pricing for the respective Debenture. If the
Underwriting Alternative is consummated, the amount of cash payable in respect
of each Old Share shall equal the sum of (i) $25.80 per share, (ii) the sum of
$12.20 and the gross proceeds (price to the public without deducting any
underwriting discount or other cost) received by the Company from the sale of
the "Underwriting Liquidation Preference" of Public Preferred Stock as
represented by Depositary Shares in the Underwriting Alternative (collectively,
the "Depositary Share Proceeds Amount"), (iii) the gross proceeds (price to the
public without deducting any underwriting discount or other costs) received by
United from the sale of each $15.55 principal amount of Series A Debentures in
the Underwriting Alternative (subject to adjustment as described in the
immediately preceding sentence, the "Series A Debenture Proceeds Amount") and
(iv) the gross proceeds (price to the public without deducting any underwriting
discount or other costs) received by United from the sale of each $15.55
principal amount of Series B Debentures in the Underwriting Alternative
(subject to adjustment as described in the immediately preceding sentence, the
"Series B Debenture Proceeds Amount"). The "Underwriting Liquidation
Preference" shall equal the excess of (I) the product of $31.10 and the
Liquidation Preference Fraction over (III) $12.20.
C-1
<PAGE>
EXHIBIT D
[D. DESIGNATION, PREFERENCES AND RIGHTS OFSERIES D REDEEMABLE PREFERRED STOCK]
2.5 "Redemption Consideration" shall mean (subject to Section 6 hereof) (i)
$25.80 in cash, (ii) $15.55 principal amount of Series A Debentures,* (iii)
$15.55 principal amount of Series B Debentures** and (iv) an additional $12.20
in cash and Depositary Shares representing interests in $ *** in liquidation
preference of shares of Series B Preferred Stock, which Preferred Stock shall
be issued in the name of the Depositary pursuant to the Deposit Agreement and
against which the Depositary shall issue Depositary Shares to the holder of the
fraction of a share of the Series D Preferred Stock being redeemed, as provided
in the Deposit Agreement,**** such Redemption Consideration to be distributed
by the Corporation in respect of each 1/1,000th of a share of Series D
Preferred Stock to the holder thereof upon the redemption of such fraction of a
share as provided in Section 6 hereof and as adjusted as provided in Section 6
hereof.
- --------
* If the Underwriting Alternative with respect to the Series A Debentures is
consummated, delete clause (ii), increase the cash payment in clause (i)
by the Series A Debenture Proceeds Amount and revise definitions as
appropriate.
** If the Underwriting Alternative with respect to the Series B Debentures is
consummated, delete clause (iii), increase the cash payment in clause (i)
by the Series B Debenture Proceeds Amount and revise definitions as
appropriate.
*** Amount to be calculated in accordance with Plan of Recapitalization.
**** If the Underwriting Alternative with respect to the Depositary Shares is
consummated, delete clause (iv), increase the cash payment in clause (i)
by the Depositary Share Proceeds Amount and revise definitions as
appropriate.
D-1
