SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: February 28, 1995
(Date of earliest event reported)
UAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 1-6033 36-2675207
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
1200 Algonquin Road, Elk Grove Township, Illinois 60007
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (708) 952-4000
Not Applicable
(Former name or former address, if changed since last report)
ITEM 5. OTHER EVENTS.
UAL Corporation is filing herewith Selected Financial Data,
Management's Discussion and Analysis of Financial Condition and
Results of Operations and audited financial statements as
Exhibits 99.1, 99.2 and 99.3, respectively, each of which is
incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
Exhibit No. Description
11 Calculation of fully diluted net earnings per
share.
12.1 Computation of Ratio of Earnings to Fixed Charges.
12.2 Computation of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividend Requirements.
23.1 Consent of Arthur Andersen LLP.
99.1 Selected Financial Data.
99.2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.
99.3 Audited financial statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
UAL CORPORATION
By: /s/ Douglas A. Hacker
Name: Douglas A. Hacker
Title: Senior Vice President -
Finance
Dated: February 27, 1995
EXHIBIT INDEX
Exhibit
Number Description
11 Calculation of fully diluted net earnings per
share.
12.1 Computation of Ratio of Earnings to Fixed Charges.
12.2 Computation of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividend Requirements.
23.1 Consent of Arthur Andersen LLP.
99.1 Selected Financial Data.
99.2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.
99.3 Audited financial statements.
<TABLE>
<CAPTION>
Exhibit 11
UAL Corporation and Subsidiary Companies
Calculation of Fully Diluted Net Earnings Per Share
(In Millions, Except Per Share)
Year Ended December 31
1994(1) 1993(1) 1992(1)
<S> <C> <C> <C>
Earnings or loss:
Earnings (loss) before extraordinary item and
cumulative effect of accounting changes $ 14 $ (31) $ (417)
Interest on Air Wis convertible debentures,
net of income tax - 2 2
Earnings (loss) before cumulative effect of
accounting changes for fully diluted
calculation 14 (29) (415)
Extraordinary loss on early
extinguishment of debt - (19) -
Cumulative effect of accounting changes (25) - (540)
Net loss for fully diluted calculation $ (11) $ (48) $ (955)
Shares:
Average number of shares of common
stock outstanding during the year 18.8 24.3 24.1
Average number of shares of ESOP preferred
stock outstanding during the year 0.3 - -
Additional shares assumed issued at the date
of issuance for conversion of convertible
preferred stock - 3.4 -
Additional shares assumed issued at the
beginning of the year (or at the date of
merger) for conversion of Air Wis
convertible debentures - 0.1 0.1
Additional shares assumed issued at the
beginning of the year (or at the date of
issuance) for exercises of dilutive stock
options and stock award plans (after
deducting shares assumed purchased
under the treasury stock method) 0.3 0.6 0.3
Average number of shares for fully
diluted calculation 19.4 28.4 24.5
Fully diluted per share amounts:
Earnings (loss) before extraordinary item and
cumulative effect of accounting changes $ 0.74 $(1.02) $(16.96)
Extraordinary loss on early
extinguishment of debt - (0.66) -
Cumulative effect of accounting changes (1.33) - (22.00)
Net loss $(0.59) $(1.68) $(38.96)
(1) This calculation is submitted in accordance with Regulation S-K item
601(b)(11), although it is contrary to paragraph 40 of APB Opinion No. 15
because it produces an antidilutive result.
</TABLE>
<TABLE>
<CAPTION>
Exhibit 12.1
UAL Corporation and Subsidiary Companies
Computation of Ratio of Earnings to Fixed Charges
Year Ended December 31
1994 1993 1992 1991 1990
(In Millions)
<S> <C> <C> <C> <C> <C>
Earnings:
Earnings (loss) before
income taxes and
extraordinary items $ 170 $ (47) $ (656) $(508) $164
Fixed charges,
from below 1,052 1,104 1,001 749 592
Interest capitalized (41) (51) (92) (91) (71)
Earnings $1,181 $1,006 $ 253 $ 150 $685
Fixed charges:
Interest expense $ 372 $ 358 $ 329 $ 211 $193
Portion of rental expense
representative of the
interest factor 680 746 672 538 399
Fixed charges $1,052 $1,104 $1,001 $ 749 $592
Ratio of earnings to
fixed charges 1.12 (a) (a) (a) 1.16
(a) Earnings were inadequate to cover fixed charges by $98 million in 1993,
$748 million in 1992 and $599 million in 1991.
</TABLE>
<TABLE>
<CAPTION>
Exhibit 12.2
UAL Corporation and Subsidiary Companies
Computation of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividend Requirements
Year Ended December 31
1994 1993 1992 1991 1990
(In Millions)
<S> <C> <C> <C> <C> <C>
Earnings:
Earnings (loss) before
income taxes and
extraordinary items $ 170 $ (47) $ (656) $(508) $164
Fixed charges and
preferred stock
dividend requirements,
from below 1,184 1,154 1,001 749 592
Interest capitalized (41) (51) (92) (91) (71)
Earnings $1,313 $1,056 $ 253 $ 150 $685
Fixed charges:
Interest expense $ 372 $ 358 $ 329 $ 211 $193
Preferred stock dividend
requirements 132 50 - - -
Portion of rental expense
representative of the
interest factor 680 746 672 538 399
Fixed charges and
preferred stock
dividend requirements $1,184 $1,154 $1,001 $ 749 $592
Ratio of earnings to
fixed charges and
preferred stock
dividend requirements 1.11 (a) (a) (a) 1.16
(a) Earnings were inadequate to cover fixed charges and preferred stock
dividend requirements by $98 million in 1993, $748 million in 1992 and
$599 million in 1991.
</TABLE>
Exhibit 23.1
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 8-K dated
February 28, 1995, into the Company's previously filed Post-
Effective Amendment No. 1 to Form S-8 Registration Statement
(File No. 2-67368) and Post-Effective Amendment No. 2 to
Form S-8 Registration Statement (File No. 33-37613) for the
Employees' Stock Purchase Plan of UAL Corporation; Post-
Effective Amendment No. 1 to Form S-8 Registration Statement
(File No. 33-38613) for the United Air Lines, Inc.
Management and Salaried Employees' 401(k) Retirement Savings
Plan; Form S-8 Registration Statement (File No. 33-57331)
and Post-Effective Amendment No. 1 to Form S-8 Registration
Statement (File No. 33-44552) for the United Air Lines, Inc.
Ground Employees' 401(k) Retirement Savings Plan; Post-
Effective Amendment No. 1 to Form S-8 Registration Statement
(File No. 33-44553) for the United Air Lines, Inc., Flight
Attendant Employees' 401(k) Retirement Savings Plan; Post-
Effective Amendment No. 2 to Form S-8 Registration Statement
(File No. 33-41968) and Form S-8 Registration Statement
(File No. 33-10206) for the UAL Corporation 1981 Incentive
Stock Plan; Form S-3 Registration Statement (File No. 33-
57192), as amended; Post-Effective Amendment No. 1 to Form S-
8 Registration Statement (File No. 33-59950) for the United
Air Lines, Inc. Pilots' Directed Account Retirement Income
Plan; and Form S-4 Registration Statement (File No. 33-
57579), as amended.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Chicago, Illinois,
February 28, 1995
Exhibit 99.1
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31
1994 1993 1992 1991 1990
(In Millions, Except Per Share)
<S> <C> <C> <C> <C> <C>
Operating revenues $13,950 $13,325 $11,853 $10,706 $10,296
Earnings (loss) before
extraordinary item and
cumulative effect of
accounting changes 77 (31) (417) (332) 94
Extraordinary loss on early
extinguishment of debt,
net of tax - (19) - - -
Cumulative effect of
accounting changes (26) - (540) - -
Net earnings (loss) 51 (50) (957) (332) 94
Per share amounts:
Earnings (loss) before
extraordinary item and
cumulative effect of
accounting changes 0.76 (2.64) (17.34) (14.31) 4.33
Extraordinary loss on early
extinguishment of debt - (0.76) - - -
Cumulative effect of
accounting changes (1.37) - (22.41) - -
Net earnings (loss) (0.61) (3.40) (39.75) (14.31) 4.33
Total assets at year end 11,764 12,840 12,257 9,876 7,983
Long-term debt and capital
lease obligations, including
current portion, and
redeemable preferred stock
at year end 4,077 3,735 3,783 2,533 1,329
</TABLE>
Exhibit 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EMPLOYEE INVESTMENT TRANSACTION AND RECAPITALIZATION
On July 12, 1994, the shareholders of UAL Corporation ("UAL") approved
a plan of recapitalization that provides an approximately 55% equity and
voting interest in UAL to certain employees of United Air Lines, Inc.
("United") in exchange for wage concessions and work-rule changes. The
employees' equity interest will be allocated to individual employee accounts
through the year 2000 under Employee Stock Ownership Plans ("ESOPs") which
were created as a part of the recapitalization. Since the ESOP shares will
be allocated over time, the current ownership interest held by employees is
substantially less than 55%. The entire 55% ESOP voting interest is
currently exercisable, which generally will be voted by the ESOP trustee at
the direction of, and on behalf of, the employees participating in the
ESOPs. The employee interest may increase to up to 63%, depending on the
average market value of UAL common stock in the year after the transaction
closed. Based on the average market value of UAL common stock through
February 23, 1995, the market value of UAL common stock for the remainder of
the measuring period would have to average at least $204 for any adjustment
to be made in the ESOP percentage interest. Pursuant to the terms of the
plan of recapitalization, holders of old UAL common stock received
approximately $2.1 billion in cash and the remaining 45% (subject to a
possible reduction to not less than 37%) of the equity in the form of new
common stock. The conversion of certain convertible securities and the
exercise of certain stock options could result in additional cash
distributions of up to $428 million. Distributions on account of stock
option exercises would be reduced by cash proceeds on the exercise of the
options. In connection with the recapitalization, United issued $370
million of 10.67% debentures due in 2004 and $371 million of 11.21%
debentures due in 2014 and UAL issued Series B 12 1/4% preferred stock with
an aggregate liquidation preference of $410 million. Approximately $169
million of pretax costs were incurred in connection with the
recapitalization, including transaction costs and severance payments to
certain former United employees.
The employee investment transaction has put in place a lower cost
structure which allows United to compete more effectively against low-cost
carriers and improve UAL's long-term financial viability. The transaction
also facilitated the creation of a low-cost short-haul operation, Shuttle by
United ("Shuttle"), which began operating on October 1, 1994. This service
achieves lower costs through special work rules and wage rates for pilots,
high station and aircraft utilization and minimal service amenities. Based
on its initial operations, the Shuttle has been well accepted by the
marketplace and its costs are within expectations. As a result, United
expects the Shuttle will be able to sustain a competitive presence in the
short-haul markets against low cost competitors.
As a result of the recapitalization, UAL's capital structure became
more highly leveraged, as UAL's equity decreased by approximately $1.7
billion and debt increased $741 million at the time of the transaction.
With the increase in debt and reduction in equity resulting from the
recapitalization, UAL's exposure to certain industry risks could be greater
than might have been the case prior to the recapitalization. In addition,
the transaction resulted in new labor agreements for certain employee groups
and a new corporate governance structure, which was designed to achieve
balance between the various employee-owner groups and public shareholders.
The new labor agreements and governance structure could inhibit management's
ability to alter strategy in a volatile, competitive industry by restricting
certain operating and financing activities, including the sale of assets and
the issuance of equity securities and the ability to furlough employees.
UAL's ability to react to competition may be hampered further by the fixed
long-term nature of these various agreements. The success of the
recapitalization is dependent upon a number of factors, including the state
of the competitive environment in the airline industry, competitive
responses to United's efforts, United's ability to achieve enduring cost
savings through productivity improvements and the renegotiation of labor
agreements at the end of the investment period.
The employee investment transaction and recapitalization had an
initial adverse effect on UAL's cash position as a result of the cash
consideration paid to holders of old UAL common stock and certain other
recapitalization costs. However, the transaction is expected to result in
an improvement to cash flow through the term of the employee investment.
This improvement is expected to result from the employee concessions which
reduce cash expenses, partially offset by the additional interest expense on
the debentures, dividends on the preferred stock and foregone interest on
the cash consideration distributed to holders of old UAL common stock.
The employee investment transaction will reduce UAL's cash operating
expenses due to wage and benefit reductions and work-rule changes. These
cash expense reductions will be offset by non-cash compensation charges for
stock periodically committed to be released to employees under the ESOPs,
additional interest expense on the debentures and foregone interest on the
cash distributed to shareholders. The amount of the non-cash compensation
expense cannot be predicted, because it is based on the future fair value of
UAL's stock.
The ESOPs consist of two tax-qualified plans, as defined under the
Internal Revenue Code, and one plan that is not tax qualified. Tax
deductions related to the ESOPs are partially based on factors unrelated to
the future fair value of UAL's stock. Accordingly, it is anticipated that
tax provisions (credits) in future periods could be impacted by permanent
differences between tax deductions and book expenses related to the ESOPs.
Additionally, timing differences between tax deductions and book expenses
related to the ESOPs could impact the balance of the net deferred tax asset
in the future.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity -
UAL's total of cash and cash equivalents and short-term investments
was $1.532 billion at December 31, 1994, compared to $1.828 billion at
December 31, 1993. Cash flows during the year were considerable. The most
significant was the distribution of $2.1 billion to holders of old UAL
common stock under the recapitalization, which was partially funded by net
proceeds of $735 million on the issuance of debentures and $400 million on
the issuance of Series B preferred stock. Subsequent to issuance, UAL
repurchased $87 million of the Series B preferred stock to be held in
treasury. Other financing activities included principal payments under debt
and capital lease obligations of $305 million and $87 million, respectively,
and a $46 million reduction of short-term borrowings. Cash flows from
operating activities amounted to $1.334 billion. Investing activities
resulted in cash flows of $198 million.
In 1994, United took delivery of 16 A320 aircraft and two B747
aircraft. With the exception of one B747, these aircraft were acquired
under operating leases. Property additions, including the B747 and spare
parts, amounted to $636 million. Property dispositions, including the sale
and leaseback of the B747 aircraft purchased in 1994, five B737 aircraft and
one B757 aircraft, resulted in proceeds of $432 million.
As of December 31, 1994, UAL had a working capital deficit of $1.714
billion as compared to $1.183 billion at December 31, 1993. Historically,
UAL has operated with a working capital deficit and, as in the past, UAL
expects to meet all of its obligations as they become due.
During 1993, UAL's balance of cash and cash equivalents decreased $85
million while short-term investments increased $430 million. Operating
activities resulted in cash flows of $858 million, which more than offset
cash used for net property additions and financing activities. Investing
activities, including the short-term investment increase and net property
additions, used $740 million. Property additions amounted to $1.496
billion, including the purchase of 34 aircraft, and property dispositions
resulted in proceeds of $1.165 billion, including the sale and leaseback of
18 aircraft. In all, 10 B737 aircraft, 16 B757 aircraft, four B747
aircraft, eight B767 aircraft and five A320 aircraft were acquired,
including purchases and leases. Financing activities used $203 million.
Reductions in short-term borrowings, capital lease obligations and long-term
debt, including the early extinguishment of $500 million of senior
subordinated notes, more than offset cash proceeds from the issuance of
Series A preferred stock and long-term debt.
Operating activities in 1992 generated cash flows of $575 million,
which more than offset cash used for net additions to property, resulting in
a $306 million increase in cash, cash equivalents and short-term
investments. During the year, $2.519 billion was spent on property
additions, principally aircraft. United acquired 25 B737 aircraft, 25 B757
aircraft, 10 B767 aircraft and six B747 aircraft in 1992. Of these, 18
aircraft were purchased, 38 were purchased and then sold and leased back and
10 were acquired in capital lease transactions. Property dispositions
provided cash proceeds of $2.367 billion. In 1992, United also acquired
certain Latin American route authorities and other related assets from Pan
American World Airways, Inc.
Capital Commitments -
At December 31, 1994, commitments for the purchase of property and
equipment, principally aircraft, approximated $3.9 billion, after deducting
advance payments. An estimated $1.2 billion will be spent in 1995, $0.7
billion in 1996, $1.3 billion in 1997, $0.5 billion in 1998 and $0.2 billion
in 1999 and thereafter. The major commitments are for the purchase of
thirty-four B777 aircraft which are expected to be delivered between 1995
and 1999.
In addition to the B777 order, United has arrangements with Airbus
Industrie and International Aero Engines to lease 29 A320 aircraft, which
are scheduled for delivery through 1998. At December 31, 1994, United also
had options for an additional 162 B737 aircraft, 39 B757 aircraft, 34 B777
aircraft, 49 B747 aircraft, 8 B767 aircraft and 50 A320 aircraft. Under the
terms of certain of these options which are exercisable during the period
1995 through 1997, United would forfeit significant deposits on such options
it does not exercise. United continually reviews its fleet to determine
whether aircraft acquisitions will be used to expand the fleet or to replace
older aircraft, depending on market and regulatory conditions at the time of
delivery.
Capital Resources -
Funds necessary to finance aircraft acquisitions are expected to be
obtained from internally generated funds, irrevocable external financing
arrangements or other external sources.
At December 31, 1994, UAL and United had an effective shelf
registration statement on file with the Securities and Exchange Commission
to offer up to $1.035 billion of securities, including secured and unsecured
debt, equipment trust and pass through certificates, equity or a combination
thereof. UAL's ability to issue equity securities is limited by its
certificate of incorporation, which was restated in connection with the
recapitalization.
United's senior unsecured debt is rated BB by Standard and Poor's ("S
& P") and Baa3 by Moody's Investors Service Inc. ("Moody's"). UAL's Series
A and Series B preferred stocks are rated B+ by S & P and ba3 by Moody's.
On February 3, 1995, UAL filed a registration statement with the
Securities and Exchange Commission offering to exchange up to $600 million
aggregate principal amount of convertible subordinated debentures, due 2025,
for up to all shares of the outstanding Series A cumulative 6.25%
convertible preferred stock. Each $1,000 principal amount of debentures
issued would be convertible into a combination of cash in the amount of
$541.90 and approximately 3.192 shares of UAL common stock (equivalent to a
conversion price of $143.50 per share of common stock). To the extent that
shares of Series A preferred stock are exchanged for the debentures, UAL's
shareholders' equity will be reduced on a net basis by the aggregate fair
value of the debentures issued. A reduction in shareholders' equity will
reduce surplus as defined under Delaware General Corporation Law ("DGCL").
DGCL requires that dividends on outstanding capital stock may only be made
from surplus or the net profits of the Company for the fiscal year in which
the dividend is declared and/or the preceding fiscal year.
RESULTS OF OPERATIONS
The results of operations in the airline business historically
fluctuate significantly in response to general economic conditions. This is
because small fluctuations in yield (passenger revenue per revenue passenger
mile) and cost per available seat mile can have a significant effect on
operating results. UAL anticipates industrywide fare levels, increasing
low-cost competition, general economic conditions, fuel costs, international
governmental policies and other factors will continue to affect its
operating results.
Summary of Results and Impact of Recapitalization -
UAL's results of operations improved in 1994 as compared to 1993. In
1994, UAL recorded net earnings of $51 million, representing a loss per
share of $0.61 after preferred stock dividends, compared to a 1993 net loss
of $50 million, or $3.40 per share after preferred stock dividends.
Included in 1994 were $169 million of pretax expenses incurred in connection
with the recapitalization, of which $48 million were recorded in operating
expenses. The 1994 results also include an after tax charge of $26 million
($1.37 per share) for the cumulative effect of adopting Statement of
Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits," which UAL adopted effective January 1, 1994. The
1993 results include an extraordinary loss of $19 million, $0.76 per share,
on the early extinguishment of debt.
In connection with the recapitalization, each share of old common
stock was converted to one half share of new common stock (and cash in lieu
of fractional shares) and $84.81 in cash. As a result, the number of
outstanding shares was reduced proportionately. Accordingly, the weighted
average shares in the earnings per share calculations are based on the
number of old common shares outstanding prior to the recapitalization and
the reduced number of new common shares outstanding subsequent to the
transaction. Thus, a direct comparison of the earnings per share in 1994
versus 1993 is not meaningful. The earnings per share calculations
subsequent to the transaction also include those ESOP shares which have been
committed to be released to employees, if doing so is dilutive.
Management believes that a more complete understanding of UAL's
results can be gained by viewing them on a pro forma, "fully distributed"
basis. This approach considers all ESOP shares which will ultimately be
distributed to employees throughout the ESOP (rather than just the shares
committed to be released) to be immediately outstanding and thus fully
distributed. Consistent with this method, the ESOP compensation expense and
the one-time costs associated with the completion of the transaction, are
excluded from fully distributed expenses. On a fully distributed basis,
UAL's net earnings for the 1994 third and fourth quarters would have been
$233 million ($6.86 per share) and $67 million ($1.47 per share),
respectively. UAL's net earnings for the 1994 third and fourth quarters, as
reported under generally accepted accounting principles, were $82 million
($4.21 per share fully diluted) and $11 million (loss of $0.98 per share),
respectively.
Other Factors Affecting Comparability -
In 1994, United began recording certain air transportation price
adjustments, which were previously recorded as commissions, as adjustments
to revenue. Operating revenue and expense amounts and related operating
statistics for 1993 and prior periods have been adjusted to conform with the
current presentation.
Prior to the September 1993 merger of the Covia Partnership ("Covia")
and Galileo Ltd., United's investments in these companies were carried on
the equity basis. United now owns 77% of Apollo Travel Services Partnership
("ATS"), one of the companies formed in the merger, and its accounts are
consolidated with those of United. As a result, United's consolidated
operating revenues and expenses have increased. In 1993, UAL also
transferred the operations of Air Wisconsin, Inc. to other parties, the
effect of which was to reduce UAL's gross operating revenues and expenses.
In addition, the sales of flight kitchen assets in late 1993 and early 1994
had the effect of reducing United's salaries and related costs and
increasing, to a lesser degree, food and beverage expense. These changes
have affected the 1994 comparisons to 1993 as indicated in the discussion
which follows.
1994 Compared with 1993 -
Operating Revenues. Operating revenues increased $625 million (5%).
United's revenue per available seat mile increased 4% to 9.12 cents.
Passenger revenues increased $337 million (3%) due primarily to a 7%
increase in United's revenue passenger miles, partially offset by a 3%
decrease in yield to 11.31 cents. Domestic revenue passenger miles
increased by 4.1 billion (7%) while international increased by 2.9 billion
(8%). Available seat miles increased 1% systemwide, as increases of 6% in
the Pacific and 2% in the Atlantic were partially offset by decreases of 1%
on domestic routes and 3% in Latin America. As a result, United's system
passenger load factor increased 4.0 points to 71.2%. In addition, Air
Wisconsin, Inc., which accounted for $159 million of passenger revenues in
1993, accounted for no passenger revenue in 1994 as previously discussed.
Cargo revenues increased $26 million (4%), due to increased freight
revenues partially offset by decreased mail revenues. Freight and mail
revenue ton miles increased 3%; however, freight yield increased 5% while
mail yield decreased 8%. Other operating revenues increased $262 million
(37%) primarily as a result of the consolidation of ATS, revenues resulting
from the lease of Air Wisconsin, Inc. assets to other parties and an
increase in fuel sales.
Operating Expenses. Operating expenses increased $367 million (3%).
United's cost per available seat mile also increased 3% from 8.54 cents to
8.79 cents, which includes certain one-time costs relating to the
recapitalization and ESOP compensation expense. Without these costs,
United's cost per available seat mile would have been 8.64 cents. Food and
beverages increased $162 million (51%) due to the new catering arrangements
resulting from the flight kitchen sales as discussed above. Commissions
increased $96 million (7%) due principally to increased commissionable
revenues. An increase of $50 million (3%) in rentals and landing fees
reflects rent associated with a higher number of aircraft on operating
leases, including new aircraft acquired in the past year. Aircraft
maintenance increased $25 million (6%) as a result of increased
vendor-provided maintenance due to the timing of maintenance cycles. Other
operating expenses increased $169 million (20%) due to the consolidation of
ATS, depreciation in 1994 on Air Wisconsin, Inc. assets leased to others and
higher fuel sales.
Aircraft fuel expense decreased $148 million (9%), due to an 8%
decrease in United's average price per gallon of fuel to 58.8 cents and a
slight decrease in United's consumption. Salaries and related costs
decreased $81 million (2%) primarily due to lower wage rates for employees
participating in the ESOPs and a lower number of employees as a result of
the flight kitchen sales, partially offset by higher average wage rates for
other employee groups, higher costs associated with medical benefits and $48
million of one-time costs related to the recapitalization. Depreciation and
amortization decreased $39 million (5%) due principally to the transfer of
Air Wisconsin, Inc. assets to other parties and the subsequent
classification of depreciation on those assets in other expenses. Purchased
services decreased $36 million (4%), as certain services, principally
computer reservations and communications, have been provided by ATS since
the time of the merger.
Other Income and Expense. Other expense amounted to $350 million in
1994 compared to $310 million in 1993. Interest expense increased $14
million (4%) due to higher average interest rates resulting from the
debentures issued in July 1994, partially offset by the benefit of the
extinguishment of $500 million of subordinated debt in 1993. Interest
capitalized decreased $10 million (20%) as a result of lower average advance
payments on new aircraft and lower capitalized interest rates. Interest
income decreased $13 million (13%) due primarily to interest received in
1993 in connection with the final settlement of certain pension benefits.
United's equity in results of affiliates changed from a loss of $30 million
in 1993 to earnings of $23 million in 1994 due primarily to a charge
recorded by Galileo International in 1993 for the cost of eliminating
duplicate facilities and operations after the merger of Covia and Galileo
Ltd. Included in "Miscellaneous, net" in 1994 were charges of $121 million
for fees and costs incurred in connection with the employee investment
transaction and recapitalization, a $22 million charge for minority
interests in ATS and foreign exchange gains of $15 million. Included in
1993 was a $59 million charge to reduce the net book value of 15 DC-10
aircraft to estimated realizable value, a $17 million gain resulting from
the final settlement of certain pension benefits and foreign exchange losses
of $20 million.
Income Tax Provision. The income tax provision for 1994 was
significantly impacted by the nondeductibility of certain recapitalization
costs and the statutory change in the deductibility of other expenses.
1993 Compared with 1992 -
Operating Revenues. Operating revenues increased $1.472 billion
(12%). Passenger revenues increased $1.280 billion (12%) due to a 9%
increase in United's revenue passenger miles and a 3% increase in yield to
11.61 cents. United's domestic revenue passenger miles increased 6% on an
increase of 8% in domestic available seat miles, resulting in a decrease of
1.0 point in domestic passenger load factor to 65.2%. International revenue
passenger miles increased 14%. Passenger traffic increased in substantially
all international markets, especially in Latin America, where United began
service in the first quarter of 1992. Passenger load factors increased in
Latin America, the Atlantic and the Pacific. On a system basis, United's
available seat miles increased 10% and passenger load factor decreased 0.2
points to 67.2%.
Cargo revenues increased $54 million (9%), due to increases of $31
million in freight revenues and $23 million in mail revenues. The freight
revenue increase reflects volume increases largely attributable to increased
international operations. Contract services and other revenues increased
$138 million (24%) primarily as a result of revenues generated by ATS in the
1993 period subsequent to the merger.
Operating Expenses. Operating expenses increased $671 million (5%).
United's cost per available seat mile decreased 4% to 8.54 cents. The
decrease in unit cost was largely due to the implementation of a cost
reduction program in early 1993. Salaries and related costs increased $198
million (4%) primarily due to higher average wage rates and higher costs
associated with pensions and health insurance. Rentals and landing fees
increased $163 million (12%) primarily reflecting rent associated with a
larger number of aircraft on operating leases. Commissions increased $136
million (11%) due to increased revenues and slightly higher cargo commission
rates. Aircraft maintenance increased $55 million (17%) due principally to
higher outside maintenance costs. Purchased services increased $47 million
(5%) due principally to higher computer reservations fees and higher costs
associated with international operations, such as communications, navigation
charges and security. Depreciation and amortization increased $38 million
(5%) due principally to newly acquired aircraft. Aircraft fuel expense
increased $34 million, as a 7% increase in fuel consumption was partially
offset by a 4% decrease in the average price per gallon of fuel to 63.6
cents. Other operating expenses increased $85 million (11%) due principally
to the consolidation of ATS after the merger. Advertising and promotion
decreased $52 million (24%) and food and beverages decreased $25 million
(7%) due to cost reduction efforts.
Other Income and Expense. Other expense amounted to $310 million in
1993 compared to $118 million in 1992. Interest expense increased $30
million due primarily to increased debt and capital lease obligations
incurred in connection with aircraft financings. Interest capitalized
decreased $41 million (45%) due to lower advance payments on new aircraft.
United's equity in the results of affiliates shifted from income of $42
million in 1992, representing United's share of Covia earnings, to losses of
$30 million in 1993, primarily due to a charge recorded by Galileo
International for the cost of eliminating duplicate facilities and
operations after the merger of Covia and Galileo Ltd. Included in
"Miscellaneous, net" were foreign exchange losses of $20 million in 1993
compared to gains of $2 million in 1992. Also included in 1993 was a charge
of $59 million to reduce the net book value of 15 DC-10 aircraft to
estimated net realizable value and a $17 million gain resulting from the
final settlement for overpayment of annuities purchased in 1985 to cover
certain vested pension benefits. Interest income increased $29 million due
principally to interest received in connection with the same settlement. In
1992, "Miscellaneous, net" also included gains on disposition of property of
$32 million, a charge of $13 million to record the cash settlement of class
action claims resulting from litigation relating to the use of airline fare
data and charges of $8 million related to other litigation.
OTHER INFORMATION
Deferred Tax Asset -
UAL's consolidated balance sheet at December 31, 1994 includes a net
cumulative deferred tax asset of $631 million, compared to $714 million at
December 31, 1993. The net deferred tax asset is composed of approximately
$1.9 billion of deferred tax assets and approximately $1.3 billion of
deferred tax liabilities. The deferred tax assets include, among other
things, $537 million related to obligations for postretirement and other
employee benefits, $472 million related to gains on sales and leasebacks,
$262 million related to alternative minimum tax ("AMT") credit carryforwards
and $58 million of federal and state net operating loss ("NOL")
carryforwards. The AMT credit carryforwards do not expire; the federal NOL
carryforwards begin to expire in 2006 if not utilized prior to that time.
The majority of the deferred tax assets will be realized through
reversals of existing deferred tax liabilities with similar reversal
patterns. To realize the benefits of the remaining deferred tax assets
relating to temporary differences, UAL needs to generate approximately $1.2
billion in future taxable income.
Although United experienced book and tax losses in both 1993 and 1992,
1994 resulted in book and taxable income.
<TABLE>
<CAPTION>
Following is a summary of UAL's pretax book income and taxable income, and
the significant differences between them, for the last three years (in
millions):
1994 1993 1992
<S> <C> <C> <C>
Pretax book income (loss) $ 171 $ (47) $(656)
Gains on sale and leasebacks 79 15 304
Depreciation, capitalized interest
and transfers of tax benefits (300) (348) (319)
Rent expense 122 142 127
Nondeductible employee meals 57 22 22
Pension expense (46) (156) (95)
Other employee benefits 91 37 36
Gains on asset dispositions (4) (34) (3)
ESOP transaction costs 55 - -
Other, net 19 54 33
Taxable income (loss) $ 244 $(315) $(551)
</TABLE>
While the losses in 1992 and 1993 were largely attributable to events
beyond management's control, including the unanticipated duration of the
recession in both the U. S. and other areas of the world and the
proliferation of numerous low-cost air carriers, UAL has taken several steps
to reduce costs and improve profitability. Most notably, the employee
investment transaction and recapitalization was partially responsible for
UAL's improved operating results in 1994 versus 1993, and is expected to
continue to improve the financial stability and profitability of the
company. The recapitalization put in place a lower cost structure which is
designed to allow United to compete effectively against low-cost carriers.
The transaction also facilitated the creation of a low-cost short-haul
operation, Shuttle by United, the benefits of which are expected to increase
as it expands into additional markets. Other actions taken by UAL to
improve profitability include the discontinuance of service at 15
unprofitable domestic and international stations and the planned reduction
of capacity in 1995 on certain unprofitable routes such as those to Hawaii.
Resources are expected to be re-allocated to areas that currently benefit
the company the most - the Shuttle and expanding Denver hub.
Severe competition in the airline industry, particularly by new entry
and low-fare carriers, and the general economic outlook could continue to
negatively affect United's operating results. However, the benefits
expected to be derived from the recapitalization and the new era of employee
ownership, should further improve UAL's financial results.
UAL's ability to generate sufficient amounts of taxable income from
future operations is dependent upon numerous factors, including general
economic conditions, inflation, oil prices, the state of the industry and
other factors beyond management's control. There can be no assurances that
UAL will meet its expectation of future taxable income. However, based on
the above factors, including the extended period over which postretirement
benefits will be recognized, and the indefinite carryforward period for AMT
credits, management believes it is more likely than not that future taxable
income will be sufficient to utilize the cumulative deferred tax assets at
December 31, 1994.
Contingencies -
United has been named as a Potentially Responsible Party at certain
Environmental Protection Agency ("EPA") cleanup sites which have been
designated as Superfund Sites. At sites where the EPA has commenced
remedial litigation, potential liability is joint and several. United's
alleged proportionate contributions at the sites are minimal. Additionally,
United has participated and is participating in remediation actions at
certain other sites, primarily airports. The estimated cost of these
actions is accrued when it is determined that it is probable that United is
liable. Such accruals have not been material. Environmental regulations
and remediation processes are subject to future change, and determining the
actual cost of remediation will require further investigation and
remediation experience. Therefore, the ultimate cost cannot be determined
at this time. However, while such cost may vary from United's current
estimate, United believes the difference between its accrued reserve and the
ultimate liability will not be material.
UAL has certain other contingencies resulting from litigation and
claims incident to the ordinary course of business. Management believes,
after considering a number of factors, including (but not limited to) the
views of legal counsel, the nature of such contingencies and prior
experience, that the ultimate disposition of these contingencies is not
likely to materially affect UAL's financial condition, operating results or
liquidity.
Energy Tax -
The Omnibus Budget Reconciliation Act of 1993 signed into law on August
10, 1993, imposes a 4.3 cent per gallon tax on commercial aviation jet fuel
purchased for use in domestic operations. This new fuel tax is scheduled to
become effective October 1, 1995, and continue until October 1, 1998. Based
on United's 1994 domestic fuel consumption of 1.7 billion gallons, the new
fuel tax, when effective, is expected to increase United's operating
expenses by approximately $75 million annually. United, through the Air
Transportation Association, is actively lobbying for repeal of this tax.
Foreign Currency Transactions -
United generates revenues and incurs expenses in numerous foreign
currencies; however, United mitigates its exposure to foreign exchange rate
fluctuations by converting excess local currencies generated to U.S.
dollars. In addition, United has exposure to transaction gains and losses
resulting from rate fluctuation. The foreign exchange gains and losses
recorded by UAL result from the impact of exchange rate changes on foreign
currency-denominated assets and liabilities, primarily Japanese
yen-denominated balances. To the extent such balances are predictable,
United attempts to minimize transaction gains and losses by investing in
yen-denominated time deposits to offset the impact of rate changes on
certain liabilities. In addition, United entered into a foreign currency
swap contract in 1994 to reduce exposure to currency fluctuations in
connection with other long-term yen-denominated obligations. Foreign
currency gains and losses on the swap contract are included in income
currently, exactly offsetting the foreign currency losses and gains on the
obligations being hedged.
Changes Expected to Impact 1995 -
In October 1994, United announced that it will discontinue service to
15 unprofitable destinations by early 1995 and will reallocate resources
elsewhere, including the Shuttle. United will incur certain route
restructuring costs, which are expected to be immaterial. However, this
restructuring is expected to result in improvements to operating earnings of
approximately $25 million annually. Also in October 1994, UAL announced an
agreement to sell for $119 million ten Dash 8 aircraft and spare parts owned
by Air Wisconsin, Inc. to Mesa Airlines, and United agreed to a ten year
extension of its United Express marketing agreement with Mesa Airlines. The
sales are expected to take place in the first quarter of 1995. In addition,
increased rent associated with new airport facilities in Denver and Osaka is
expected to increase 1995 operating expenses by approximately $140 million.
In February 1995, United announced that it would put in place a new
travel agency commission payment plan that offers a maximum of $50 for
round-trip domestic tickets and a maximum of $25 for one-way domestic
tickets. The new commission plan will be implemented in the first quarter
of 1995, and will apply to all tickets issued by U. S. travel agents for
travel within and between the continental United States, Alaska, Hawaii,
Puerto Rico and the U. S. Virgin Islands. Litigation has been initiated
challenging this payment plan.
Exhibit 99.3
AUDITED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors,
UAL Corporation:
We have audited the accompanying statement of consolidated financial
position of UAL Corporation (a Delaware corporation) and subsidiary
companies as of December 31, 1994 and 1993, and the related statements of
consolidated operations, consolidated cash flows and consolidated
shareholders' equity for each of the three years in the period ended
December 31, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
UAL Corporation and subsidiary companies as of December 31, 1994 and 1993,
and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles.
As discussed in notes 7 and 16 to the consolidated financial
statements, effective January 1, 1992, the Company changed its methods of
accounting for income taxes and postretirement benefits other than
pensions.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 23, 1995
<TABLE>
<CAPTION>
UAL CORPORATION AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED OPERATIONS
(In Millions, Except Per Share)
Year Ended December 31
1994 1993 1992
<S> <C> <C> <C>
Operating revenues:
Passenger $12,295 $11,958 $10,678
Cargo 685 659 605
Other operating revenues 970 708 570
13,950 13,325 11,853
Operating expenses:
Salaries and related costs 4,679 4,760 4,562
ESOP compensation expense 182 - -
Aircraft fuel 1,585 1,733 1,699
Rentals and landing fees 1,555 1,505 1,342
Commissions 1,426 1,330 1,194
Purchased services 947 983 936
Depreciation and amortization 725 764 726
Food and beverages 479 317 342
Aircraft maintenance 410 385 330
Personnel expenses 248 263 271
Advertising and promotion 165 163 215
Other operating expenses 1,028 859 774
13,429 13,062 12,391
Earnings (loss) from operations 521 263 (538)
Other income (expense):
Interest expense (372) (358) (328)
Interest capitalized 41 51 92
Interest income 85 98 69
Equity in earnings (loss) of affiliates 20 (30) 42
Miscellaneous, net (124) (71) 7
(350) (310) (118)
Earnings (loss) before income taxes,
extraordinary item and cumulative
effect of accounting changes 171 (47) (656)
Provision (credit) for income taxes 94 (16) (239)
Earnings (loss) before extraordinary item and
cumulative effect of accounting changes 77 (31) (417)
Extraordinary loss on early
extinguishment of debt, net of tax - (19) -
Cumulative effect of accounting changes (26) - (540)
Net earnings (loss) $ 51 $ (50) $ (957)
Per share:
Earnings (loss) before extraordinary
item and cumulative effect of
accounting changes $ 0.76 $ (2.64) $(17.34)
Extraordinary loss on early
extinguishment of debt, net of tax - (0.76) -
Cumulative effect of accounting changes (1.37) - (22.41)
Net loss $ (0.61) $ (3.40) $(39.75)
The accompanying notes to consolidated financial
statements are an integral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
UAL CORPORATION AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(In Millions)
December 31
Assets 1994 1993
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 500 $ 437
Short-term investments 1,032 1,391
Receivables, less allowance for doubtful
accounts (1994 - $22; 1993 - $22) 889 1,095
Aircraft fuel, spare parts and supplies, less
obsolescence allowance (1994 - $44;
1993 - $70) 285 278
Refundable income taxes - 26
Deferred income taxes 151 124
Prepaid expenses 335 362
3,192 3,713
Operating property and equipment:
Owned -
Flight equipment 7,480 7,899
Advances on flight equipment 713 589
Other property and equipment 2,631 2,673
10,824 11,161
Less - Accumulated depreciation and amortization 4,786 4,691
6,038 6,470
Capital leases -
Flight equipment 1,028 1,027
Other property and equipment 104 104
1,132 1,131
Less - Accumulated amortization 447 395
685 736
6,723 7,206
Other assets:
Intangibles, less accumulated amortization
(1994 - $267; 1993 - $213) 814 866
Deferred income taxes 480 590
Other 555 465
1,849 1,921
$11,764 $12,840
The accompanying notes to consolidated financial
statements are an integral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
UAL CORPORATION AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(In Millions, Except Share Data)
December 31
Liabilities and Shareholders' Equity 1994 1993
<S> <C> <C>
Current liabilities:
Short-term borrowings $ 269 $ 315
Long-term debt maturing within one year 384 144
Current obligations under capital leases 76 62
Advance ticket sales 1,020 1,036
Accounts payable 651 599
Accrued salaries, wages and benefits 843 943
Accrued aircraft rent 825 893
Other accrued liabilities 838 904
4,906 4,896
Long-term debt 2,887 2,702
Long-term obligations under capital leases 730 827
Other liabilities and deferred credits:
Deferred pension liability 520 571
Postretirement benefit liability 1,148 1,058
Deferred gains 1,363 1,400
Other 477 148
3,508 3,177
Minority interest 49 35
Shareholders' equity:
Preferred stock (Note 12) -
Series A convertible preferred stock,
$600 million aggregate liquidation value - 30
Series B preferred stock, $327 million
aggregate liquidation value - -
Class 1 ESOP convertible preferred stock,
$227 million aggregate liquidation value - -
Common stock, $0.01 par value in 1994 and $5 par
value in 1993; authorized, 100,000,000 shares;
issued, 13,013,217 shares in 1994 and
25,489,745 shares in 1993 - 127
Additional capital invested 1,287 932
Retained earnings (deficit) (1,335) 249
Unearned ESOP preferred stock (83) -
Stock held in treasury-
Preferred (Note 12) (87) -
Common, 574,111 shares in 1994 and 920,808
shares in 1993 (74) (65)
Other (24) (70)
(316) 1,203
Commitments and contingent liabilities (Note 19)
$11,764 $12,840
The accompanying notes to consolidated financial
statements are an integral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
UAL CORPORATION AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In Millions)
Year Ended December 31
1994 1993 1992
<S> <C> <C> <C>
Cash and cash equivalents at beginning of year $ 437 $ 522 $ 449
Cash flows from operating activities:
Net earnings (loss) 51 (50) (957)
Adjustments to reconcile to net cash provided by
operating activities -
ESOP compensation expense 182 - -
Cumulative effect of accounting change 26 - 540
Extraordinary loss on debt extinguishment - 19 -
Deferred pension expense 276 242 165
Deferred postretirement benefit expense 145 89 75
Depreciation and amortization 725 764 726
Provision (credit) for deferred income taxes 78 (67) (146)
Undistributed (earnings) losses of affiliates (19) 42 (27)
Decrease (increase) in receivables 207 11 (133)
Decrease (increase) in other current assets 40 24 (67)
Increase (decrease) in advance ticket sales (16) (31) 183
Increase (decrease) in accrued income taxes (11) 8 164
Increase (decrease) in accounts payable
and accrued liabilities (389) (163) 142
Amortization of deferred gains (85) (83) (82)
Other, net 124 53 (8)
1,334 858 575
Cash flows from investing activities:
Additions to property and equipment (636) (1,496) (2,519)
Proceeds on disposition of property and equipment 432 1,165 2,367
Decrease (increase) in short-term investments 376 (414) (238)
Acquisition of intangibles - - (150)
Other, net 26 5 3
198 (740) (537)
Cash flows from financing activities:
Issuance of preferred stock 400 591 -
Reacquisition of preferred stock (87) - -
Proceeds from issuance of long-term debt 735 99 198
Repayment of long-term debt (305) (695) (115)
Principal payments under capital leases (87) (55) (50)
Recapitalization distribution (2,070) - -
Increase (decrease) in short-term borrowings (46) (135) 1
Cash dividends (53) (27) -
Other, net 44 19 1
(1,469) (203) 35
Increase (decrease) in cash and cash equivalents
during the year 63 (85) 73
Cash and cash equivalents at end of year $ 500 $ 437 $ 522
The accompanying notes to consolidated financial
statements are an integral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
UAL CORPORATION AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
(In Millions, Except Per Share)
Unearned
Additional ESOP
Preferred Common Capital Retained Preferred Treasury
Stock Stock Invested Earnings Stock Stock Other Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1991 $ - $126 $ 304 $ 1,289 $ - $(105) $(17) $ 1,597
Year ended December 31, 1992:
Net loss - - - (957) - - - (957)
Exercises of stock options - - 5 - - - - 5
Issuance of treasury stock pursuant
to Air Wis acquisition - - 33 - - 31 - 64
Pension liability adjustment - - - - - - (8) (8)
Other - - (1) - - - 6 5
Balance at December 31, 1992 - 126 341 332 - (74) (19) 706
Year ended December 31, 1993:
Net loss - - - (50) - - - (50)
Cash dividends declared on preferred
stock ($5.54 per share) - - - (33) - - - (33)
Issuance of Series A preferred stock 30 - 561 - - - - 591
Exercises of stock options - 1 25 - - - - 26
Issuance of treasury stock
under restricted stock plan - - 6 - - 10 (16) -
Pension liability adjustment - - - - - - (45) (45)
Other - - (1) - - (1) 10 8
Balance at December 31, 1993 30 127 932 249 - (65) (70) 1,203
Year ended December 31, 1994:
Net earnings - - - 51 - - - 51
Cash dividends declared on preferred
stock ($6.25 per Series A share,
$1.44 per Series B share) - - - (59) - - - (59)
Change in Series A stated value (30) - 30 - - - - -
Issuance of ESOP preferred stock - - 227 - (227) - - -
Issuance of Series B preferred stock - - 400 - - - - 400
Exercises of stock options - 1 46 - - - - 47
Issuance of treasury stock
under restricted stock plan - - (7) - - 17 (10) -
Acquisition of treasury shares - - - - - (113) - (113)
Amortization of unearned compensation
under ESOPs and restricted stock plan - - 38 - 144 - 21 203
Recapitalization - (128) (378) (1,576) - - - (2,082)
Pension liability adjustment - - - - - - 37 37
Other - - (1) - - - (2) (3)
Balance at December 31, 1994 $ - $ - $1,287 $(1,335) $ (83) $(161) $(24) $ (316)
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation-
UAL Corporation ("UAL") is a holding company whose principal
subsidiary is United Air Lines, Inc. ("United"). The consolidated financial
statements include the accounts of UAL and all of its subsidiaries
(collectively "the Company"). All significant intercompany transactions are
eliminated. Investments in affiliates are carried on the equity basis.
(b) Accounting Changes-
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 112, "Employers' Accounting for
Postemployment Benefits," resulting in a cumulative after-tax charge of $26
million (see Note 16) and SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" (see Note 17).
Effective January 1, 1992, the Company adopted SFAS No. 106,
"Employers Accounting for Postretirement Benefits Other Than Pensions" (see
Note 16) and SFAS No. 109, "Accounting for Income Taxes" (see Note 7).
(c) Reclassification-
In 1994, United began recording certain air transportation price
adjustments, which were previously recorded as commissions, as adjustments
to revenue. Certain amounts in the Statements of Consolidated Operations
for 1993 and 1992 and these Notes to Consolidated Financial Statements have
been reclassified to conform with the current presentation.
(d) Airline Revenues-
Passenger fares and cargo revenues are recorded as operating revenues
when the transportation is furnished. The value of unused passenger tickets
is included in current liabilities.
(e) Foreign Currency Transactions-
Monetary assets and liabilities denominated in foreign currencies are
converted at exchange rates in effect at the balance sheet date. The
resulting foreign exchange gains and losses are charged or credited directly
to income. United has entered into a foreign currency swap contract to
reduce exposure to certain currency fluctuations. Foreign currency gains
and losses on the contract are included in income currently, exactly
offsetting the foreign currency losses and gains on the obligations.
Foreign exchange gains and losses on foreign currency call options which
were previously used to hedge foreign currency obligations were also charged
or credited directly to income.
(f) Cash and Cash Equivalents and Short-term Investments-
Cash in excess of operating requirements is invested in short-term,
highly liquid, income-producing investments. Investments with an original
maturity of three months or less on their acquisition date are classified as
cash and cash equivalents. Other investments are classified as short-term
investments.
(g) Aircraft Fuel, Spare Parts and Supplies-
Aircraft fuel and maintenance and operating supplies are stated at
average cost. Flight equipment spare parts are stated at average cost less
an obsolescence allowance.
(h) Operating Property and Equipment-
Owned operating property and equipment is stated at cost. Property
under capital leases, and the related obligation for future minimum lease
payments, are initially recorded at an amount equal to the then present
value of those lease payments.
Depreciation and amortization of owned depreciable assets is based on
the straight-line method over their estimated service lives. Leasehold
improvements are amortized over the remaining period of the lease or the
estimated service life of the related asset, whichever is less. Aircraft
are depreciated to estimated salvage values, generally over lives of 10 to
25 years; buildings are depreciated over lives of 25 to 45 years; and other
property and equipment are depreciated over lives of three to 15 years.
Properties under capital leases are amortized on the straight-line
method over the life of the lease, or in the case of certain aircraft, over
their estimated service lives. Lease terms are 10 to 19 years for aircraft
and flight simulators and 25 years to 40 years for buildings. Amortization
of capital leases is included in depreciation and amortization expense.
Maintenance and repairs, including the cost of minor replacements, are
charged to maintenance expense accounts. Costs of additions to and renewals
of units of property are charged to property and equipment accounts.
(i) Intangibles-
Intangibles consist primarily of route acquisition costs, slots and
intangible pension assets (see Note 15). Route acquisition costs and slots
are amortized over 40 years and 5 years, respectively.
(j) Mileage Plus Awards-
United accrues the estimated incremental cost of providing free travel
awards earned under its Mileage Plus frequent flyer program when such award
levels are reached.
(k) Deferred Gains-
Gains on aircraft sale and leaseback transactions are deferred and
amortized over the lives of the leases as a reduction of rental expense.
(l) Interest Rate Swap Agreements-
United enters into interest rate swap agreements to hedge interest
rate exposure on certain obligations. The differential to be paid or
received under the swap agreements is charged or credited to interest
expense or rental expense depending on the obligation.
(2) Employee Investment Transaction and Recapitalization
On July 12, 1994, the shareholders of UAL approved a plan of
recapitalization to provide an approximately 55% equity interest in UAL to
certain employees of United in exchange for wage concessions and work-rule
changes. The employees' equity interest will be allocated to individual
employees through the year 2000 under Employee Stock Ownership Plans
("ESOPs") which were created as a part of the recapitalization. The
employee interest may increase to up to 63%, depending on the average market
value of UAL common stock in the year after the transaction closed. Based
on the average market value of UAL common stock through February 23, 1995,
the market value of UAL common stock for the remainder of the measuring
period would have to average at least $204 for any adjustment to be made in
the ESOP percentage interest. Pursuant to the terms of the plan of
recapitalization, holders of old UAL common stock received approximately
$2.1 billion in cash and the remaining 45% (subject to decrease down to 37%)
of the equity in the form of new common stock, which was issued at the rate
of one half share of new common stock for each share of old common stock.
The cash distribution was recorded as a $1.6 billion reduction in retained
earnings, a $0.4 billion reduction in additional capital invested and a $0.1
billion reduction in common stock. In connection with the recapitalization,
United issued $370 million of 10.67% debentures due in 2004 and $371 million
of 11.21% debentures due in 2014 and UAL issued Series B 12 1/4% preferred
stock with an aggregate liquidation preference of $410 million. Pretax
costs of $169 million were incurred in connection with the recapitalization,
including transaction costs and severance payments to certain former United
employees. Of these costs, $48 million were recorded as operating expenses
while the remaining $121 million were recorded in "Miscellaneous, net."
(3) Employee Stock Ownership Plans
The ESOPs established as part of the recapitalization cover the
pilots, U.S. management and salaried employees, and U.S. union ground
employees. The ESOPs include a "Leveraged ESOP", a "Non-Leveraged ESOP" and
a "Supplemental ESOP". Both the Leveraged ESOP and the Non-Leveraged ESOP
are tax qualified plans while the Supplemental ESOP is not a tax qualified
plan. The purpose of having the three ESOPs is to deliver the agreed-upon
shares to employees in a manner which utilizes the tax incentives available
to tax qualified ESOPs to the greatest degree possible. Accordingly, shares
are delivered to employees primarily through the Leveraged ESOP, secondly,
through the Non-Leveraged ESOP, and lastly, through the Supplemental ESOP.
The equity interests are being delivered to employees through two
classes of preferred stock (Class 1 and Class 2 ESOP Preferred Stock,
collectively "ESOP Preferred Stock") and the voting interests are being
delivered through three separate classes of preferred stocks (Class P, M and
S Voting Preferred Stock, collectively "Voting Preferred Stock"). The Class
1 ESOP Preferred Stock will be issued to an ESOP trust in seven separate
sales through January 1, 2000 under the Leveraged ESOP, one of which took
place at the time of the recapitalization. Based on Internal Revenue Code
limitations, shares of the Class 2 ESOP Preferred Stock will either be
contributed to the Non-Leveraged ESOP or allocated as "book-entry shares" to
the Supplemental ESOP, annually through the year 2000. The classes of
preferred stock are described more fully in Note 12, Preferred Stock.
The Leveraged ESOP and Non-Leveraged ESOP are being accounted for
under AICPA Statement of Position 93-6, "Employers' Accounting for Employee
Stock Ownership Plans" ("SOP"). For the Leveraged ESOP, as shares of the
Class 1 ESOP Preferred Stock are sold to an ESOP trust, the Company reports
the issuance as a credit to additional capital invested and a corresponding
charge to unearned ESOP preferred stock. As the shares are earned by
employees in exchange for services performed, the shares are committed to be
released. ESOP compensation expense is recorded for the average fair value
of the shares committed to be released during the period with a
corresponding credit to unearned ESOP preferred stock for the cost of the
shares. Any difference between the fair value of the shares and the cost of
the shares is charged or credited to additional capital invested. For the
Non-Leveraged ESOP, the Class 2 ESOP Preferred Stock is recorded as
additional capital invested as the shares are committed to be contributed in
exchange for employee services, with the offsetting entry to ESOP
compensation expense. The ESOP compensation expense is based on the average
fair value of the shares committed to be contributed, in accordance with the
SOP. The Supplemental ESOP is being accounted for under Accounting
Principle Board Opinion 25, "Accounting for Stock Issued to Employees."
For the Class 2 ESOP Preferred Stock committed to be contributed to
employees under the Supplemental ESOP, employees can elect to receive their
"book entry" shares in cash upon termination of employment. The fair value
of such shares at December 31, 1994 was insignificant.
Shares of ESOP Preferred Stock are legally released or allocated to
employee accounts as of year end. Dividends on the ESOP Preferred Stock are
also paid at the end of the year. Dividends on unallocated shares are used
by the ESOP to pay down the loan from UAL and are not considered dividends
for financial reporting purposes. Dividends on allocated shares are
satisfied by releasing shares from the ESOP's suspense account to the
employee accounts and are charged to equity.
During 1994, the Company recorded $182 million of ESOP compensation
expense for the period July 13 through December 31, 1994. At December 31,
1994, the year-end allocation of Class 1 ESOP Preferred Stock to employee
accounts had not yet been completed. There were 1,131,912 shares of Class 1
ESOP Preferred Stock committed to be released and 657,673 shares held in
suspense by the ESOP as of December 31, 1994. For the Class 2 ESOP
Preferred Stock, 316,472 shares were committed to be contributed to
employees at December 31, 1994. The fair value of the unearned ESOP shares
recorded on the balance sheet at December 31, 1994 was $79 million.
(4) Affiliates
United owns 38% of the Galileo International Partnership ("Galileo")
through a wholly-owned subsidiary. United's investment in Galileo, which
owns the Apollo and Galileo computer reservations systems, is carried on the
equity basis. United also owns 77% of the Apollo Travel Services
Partnership ("ATS"), which markets the Apollo computer reservations systems
to travel agencies in the U. S. and Mexico, and its accounts are
consolidated. Prior to a September 1993 merger, United owned 50% of the
Covia Partnership ("Covia") and 25.6% of Galileo Ltd., Galileo's and ATS's
predecessor companies, which were accounted for on the equity basis. The
consolidation of ATS resulted in non-cash increases of $78 million in
assets, $46 million in liabilities and $34 million in minority interests as
of the date of the merger.
Under operating agreements with Covia prior to the merger, United
provided certain computer support services for, and purchased computer
reservation services, communications and other information from, Covia.
Revenues derived from the sale of services to Covia amounted to
approximately $21 million in 1993 and $22 million in 1992. The cost to
United of services purchased from Covia amounted to approximately $168
million in 1993 and $219 million in 1992. Under operating agreements with
Galileo subsequent to the merger, United purchases computer reservation
services from Galileo and provides marketing, sales and communication
services to Galileo. Revenues derived from the sale of services to Galileo
amounted to approximately $233 million in 1994 and $58 million in 1993. The
cost to United of services purchased from Galileo amounted to approximately
$94 million in 1994 and $47 million in 1993.
<TABLE>
<CAPTION>
Summarized financial information of Galileo follows (in millions):
December 31,
1994 1993
<S> <C> <C>
Current assets $134 $141
Non-current assets 421 467
Total assets 555 608
Current liabilities 195 173
Long-term liabilities 321 440
Total liabilities 516 613
Net assets $ 39 $ (5)
Period From
Twelve Months September 16,
Ended 1993 Through
December 31, December 31,
1994 1993
Services revenues $801 $ 186
Costs and expenses 752 327
Net earnings (loss) $ 49 $(141)
</TABLE>
During 1993, Galileo recorded $114 million of charges which included the
cost of eliminating duplicate facilities and operations.
(5) Other Income (Expense) - Miscellaneous
<TABLE
[CAPTION]
Other income (expense) - miscellaneous, net consisted of the following:
1994 1993 1992
(In Millions)
[S] [C] [C] [C]
Foreign exchange gains or losses $ 15 $(20) $ 2
Amortization of hedge
transaction costs (6) (6) (5)
Net gains on disposition of property
or rights 10 3 41
Minority interests (22) (1) -
Recapitalization transaction costs (121) - -
Write down of aircraft to
net realizable value - (59) -
Gain on settlement of 1985
annuity purchases - 17 -
Settlement of class action claims
regarding airline fare data - - (13)
Other - (5) (18)
$(124) $(71) $ 7
[/TABLE]
(6) Per Share Amounts
Per share amounts were based on weighted average common shares
outstanding - 18,791,587 in 1994, 24,345,857 in 1993 and 24,069,786 in
1992. Common stock equivalents, including ESOP shares committed to be
released, were not included in the computations as they did not have a
dilutive effect. Per share amounts were calculated after providing for
preferred stock dividends of $59 million in 1994 and $33 million in 1993.
Earnings available to common stockholders were also reduced by $3 million
in 1994 for the excess of amounts paid to reacquire UAL preferred stock
over the liquidation preference of such stock.
In connection with the July 1994 recapitalization, each old common
share was exchanged for one half new common share. As required under
generally accepted accounting principles for transactions of this type,
the historical weighted average shares outstanding have not been restated.
Thus, direct comparisons between 1994 and prior years' per share amounts
are not meaningful.
(7) Income Taxes
In 1994, the Company was subject to the alternative minimum tax
("AMT"). The federal income tax liability is the greater of the tax
computed using the regular tax system or the tax under the AMT system.
Certain preferences, mainly depreciation adjustments, have caused
alternative minimum taxable income and the resulting AMT liability to
exceed regular taxable income and the regular tax liability. The excess
of the AMT liability over the regular tax liability produces AMT credits
which are carried forward indefinitely.
<TABLE>
<CAPTION>
The provision (credit) for income taxes is summarized as follows:
1994 1993 1992
(In Millions)
<S> <C> <C> <C>
Current-
Federal $ 12 $ 52 $ (90)
State 4 (1) (3)
16 51 (93)
Deferred-
Federal 73 (75) (129)
State 5 8 (17)
78 (67) (146)
$ 94 $ (16) $(239)
</TABLE>
The income tax provision (credit) differed from amounts computed at the
statutory federal income tax rate, as follows:
<TABLE>
<CAPTION>
1994 1993 1992
(In Millions)
<S> <C> <C> <C>
Income tax provision (credit)
at statutory rate $ 60 $ (17) $(223)
State income taxes, net of
federal income tax benefit 6 5 (13)
Nondeductible employee meals 22 8 8
Nondeductible ESOP transaction costs 21 - -
Foreign sales corporation benefit (1) (1) (6)
Foreign tax credits (3) (3) (2)
Rate change effect (14) (9) -
Other, net 3 1 (3)
Income tax provision (credit)
as reported $ 94 $ (16) $(239)
</TABLE>
The Company adopted SFAS No. 109 "Accounting for Income Taxes,"
effective January 1, 1992. This statement provides for an asset and
liability approach to accounting for income taxes. The Company recognized
a tax benefit of $40 million for the cumulative effect of adopting SFAS
No. 109. Deferred income taxes (credit) reflect the impact of "temporary
differences" between amounts of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws. These
temporary differences are determined in accordance with SFAS No. 109 and
are more inclusive in nature than "timing differences" as determined under
previously applicable accounting principles.
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities for 1994 and 1993 are as
follows:
<TABLE>
<CAPTION>
1994 1993
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
(In Millions)
<S> <C> <C> <C> <C>
Employee benefits, including
postretirement medical $ 537 $ 13 $ 599 $ 31
Prepaid commissions - 52 - 49
Depreciation, capitalized
interest and transfers of
tax benefits - 1,074 - 1,119
Gains on sale and leasebacks 472 - 480 -
Rent expense 254 - 207 -
AMT credit carryforward 262 - 195 -
Foreign exchange
gains and losses 98 - 84 -
Frequent flyer accrual 70 - 72 -
Net operating loss
carryforwards 58 - 74 -
Other 134 115 272 70
$1,885 $1,254 $1,983 $1,269
</TABLE>
The Company has determined, based on its history of operating
earnings and expectations of future taxable income, that it is more likely
than not that the deferred tax assets at December 31, 1994 will be
realized.
At December 31, 1994, UAL and its subsidiaries had $262 million of
federal AMT credit carryforwards available for an indefinite period, $4
million of general business credit carryforwards which expire between 2004
and 2009, $40 million of state tax benefit from net operating loss
carryforwards expiring between 1997 and 2009 and $18 million of federal
tax benefit from net operating loss carryforwards expiring between 2006
and 2009.
(8) Short-Term Borrowings
At December 31, 1994 and 1993, United had outstanding $269 million
and $315 million, respectively, in short-term borrowings, bearing average
interest rates of 5.63% and 3.34%, respectively. Receivables amounting to
$426 million at December 31, 1994 and $367 million at December 31, 1993
were pledged by United to secure repayment of such outstanding borrowings.
The maximum available amount of borrowings under this arrangement is $360
million.
(9) Long-Term Debt
A summary of long-term debt, excluding current maturities, as of
December 31 is as follows (interest rates are as of December 31, 1994):
<TABLE>
<CAPTION>
1994 1993
(In Millions)
<S> <C> <C>
Secured notes, 5.525% to 11.54%, averaging
8.38%, due through 2014 $ 1,087 $ 1,462
Debentures, 6.75% to 11.21%, averaging 10.03%,
due 1997 to 2021 1,591 1,000
Deferred purchase certificates, Japanese yen-
denominated, 7.75%, due through 1998 169 178
Convertible debentures, 7.75%, due 2000
through 2010 26 36
Promissory notes, 5.83% to 6.82%, averaging
6.04%, due through 1998 34 41
2,907 2,717
Unamortized discount on debt (20) (15)
$ 2,887 $ 2,702
</TABLE>
In connection with the July 1994 recapitalization, United issued
$370 million of 10.67% debentures due in 2004 and $371 million of 11.21%
debentures due in 2014. The debentures are unsecured obligations.
In the second quarter of 1993, United retired $500 million of senior
subordinated notes. The notes were scheduled to mature in 1995 ($150
million) and 1998 ($350 million). An extraordinary loss of $19 million,
after tax benefits of $9 million, was recorded in the first quarter of
1993, based on United's stated intention to retire the notes.
The convertible debentures, which are obligations of Air Wis
Services, Inc. ("Air Wis"), are convertible into shares of old UAL common
stock, at the conversion price of $259.08 (equivalent to approximately
$348.54 per share of new UAL common stock). In addition, $4 million of
these debentures and $3 million of similar debentures with a conversion
price of $198.02 (equivalent to approximately $226.42 per share of new UAL
common stock) are classified in current maturities. In 1994, Air Wis
reacquired $3 million of these debentures, resulting in an insignificant
loss.
In addition to scheduled principal payments, in 1994 the Company
repaid secured notes in the principal amount of $218 million. In January
and February 1995, United repaid an additional $101 million in principal
amount of secured notes and $150 million in principal amount of
debentures, respectively, resulting in an insignificant loss. At December
31, 1994, United had outstanding a total of $316 million of long-term debt
bearing interest at rates 85 to 128 basis points over the London interbank
offered rate ("LIBOR"). In connection with certain of these debt
financings, United has entered interest rate swap agreements to
effectively fix interest rates at December 31, 1994 between 8.554% and
8.6% on $71 million of notional amount (See Note 18).
Maturities of long-term debt for each of the four years after 1995
are: 1996 -- $119 million; 1997 -- $220 million; 1998 -- $188 million;
and 1999 -- $48 million. Various assets, principally aircraft, having an
aggregate book value of $1.409 billion at December 31, 1994, were pledged
under various loan agreements.
At December 31, 1994, UAL and United had an effective shelf
registration statement on file with the Securities and Exchange Commission
to offer up to $1.035 billion of securities, including secured and
unsecured debt, equipment trust and pass through certificates, equity or a
combination thereof. UAL's ability to issue equity securities is limited
by its certificate of incorporation, which was restated in connection with
the recapitalization.
(10) Lease Obligations
The Company leases aircraft, airport passenger terminal space,
aircraft hangars and related maintenance facilities, cargo terminals,
other airport facilities, real estate, office and computer equipment and
vehicles.
Future minimum lease payments as of December 31, 1994, under capital
leases and operating leases having initial or remaining noncancelable
lease terms of more than one year are as follows:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
(In Millions)
<S> <C> <C>
Payable during-
1995 $ 1,337 $ 142
1996 1,358 144
1997 1,343 139
1998 1,377 144
1999 1,199 119
After 1999 20,099 558
Total minimum lease payments $26,713 1,246
Imputed interest (at rates of 5.3%
to 12.2%) (440)
Present value of minimum lease payments 806
Current portion (76)
Long-term obligations under capital leases $ 730
</TABLE>
As of December 31, 1994, United leased 315 aircraft, 45 of which
were under capital leases. These leases have terms of four to 26 years,
and expiration dates range from 1996 through 2018. Under the terms of
leases for 306 of the aircraft, United has the right of first refusal to
purchase, at the end of the lease term, certain aircraft at fair market
value and others at either fair market value or a percentage of cost.
United has 21 Airbus A320-200 aircraft under 24-year operating leases
which are cancelable upon eleven months notice during the initial 10 years
of the leases.
Amounts charged to rent expense, net of minor amounts of sublease
rentals, were $1.230 billion in 1994, $1.208 billion in 1993, and $1.060
billion in 1992. Included in rent expense were insignificant amounts of
contingent rentals, resulting from changes in interest rates for operating
leases under which the rent payments are based on variable interest rates.
In connection with certain of these leases, United has entered interest
rate swap agreements (See Note 18).
(11) Foreign Operations
United conducts operations in various foreign countries, principally
in the Pacific, Europe and Latin America. Operating revenues from foreign
operations were approximately $4.920 billion in 1994, $4.500 billion in
1993 and $3.890 billion in 1992.
(12) Preferred Stock
UAL is authorized to issue up to 16,000,000 shares of serial
preferred stock, 25,000,000 shares each of Class 1 and Class 2 ESOP
Preferred Stock, and an aggregate 25,100,000 shares of Class P, M, and S
Voting Preferred Stock.
At December 31, 1994, there were outstanding 5,999,900 shares of
Series A cumulative 6.25% convertible preferred stock. Effective March
31, 1994, UAL changed the stated capital of the Series A preferred stock
from $30 million ($5.00 per preferred share) to $60,000 ($0.01 per
preferred share), with the difference being attributed to additional
capital invested. Subsequent to the recapitalization, each share of
Series A preferred stock is convertible into $54.19 in cash and
approximately 0.3195 shares of UAL common stock (equivalent to a
conversion price of $143.38 per common share). In December 1994, 100
shares of Series A preferred stock were converted, resulting in the
issuance of 31 shares of UAL common stock. Under its terms, any portion
of the convertible preferred stock is redeemable after April 30, 1996, at
UAL's option, at $100 per share plus a premium which begins at 4.375%
declining to zero ratably over seven years. The Series A shares have an
aggregate liquidation preference of $600 million, or $100 per share.
On February 3, 1995, the Company filed a registration statement with
the Securities and Exchange Commission offering to exchange up to $600
million aggregate principal amount of convertible subordinated debentures,
due 2025, for up to all shares of the outstanding Series A cumulative
6.25% convertible preferred stock. Each $1,000 principal amount of
debentures issued would be convertible into a combination of cash in the
amount of $541.90 and approximately 3.192 shares of new UAL common stock
(equivalent to a conversion price of $143.50 per share of new common
stock). To the extent that shares of Series A preferred stock are
exchanged for the debentures, the Company's shareholders' equity will be
reduced on a net basis by the aggregate fair value of the debentures
issued. A reduction in shareholders' equity will reduce surplus as
defined under Delaware General Corporation Law ("DGCL"). DGCL requires
that dividends on outstanding capital stock may only be made from surplus
or the net profits of the Company for the fiscal year in which the
dividend is declared and/or the preceding fiscal year.
In connection with the July 1994 recapitalization, UAL issued
16,416,000 depositary shares, each representing 1/1000 of one share of
Series B 12 1/4% preferred stock, resulting in net proceeds of $400
million, which was recorded as additional capital invested. The shares
issued had an aggregate liquidation preference of $410 million, or $25 per
depositary share ($25,000 per Series B preferred share), and a stated
capital of $164 ($0.01 per Series B preferred share). Under its terms,
any portion of the Series B preferred stock or the depositary shares is
redeemable for cash after July 11, 2004, at UAL's option, at the
equivalent of $25 per depositary share, plus accrued dividends. The
Series B preferred stock is not convertible into any other securities, has
no stated maturity and is not subject to mandatory redemption. In the
fourth quarter of 1994, UAL repurchased 3,336,400 depositary shares,
representing 3,336.4 shares of Series B preferred stock, at an aggregate
cost of $87 million to be held in treasury. At December 31, 1994, there
were outstanding 13,079,600 depositary shares representing 13,079.6 shares
of Series B preferred stock.
The Series A and B preferred stocks rank senior to all other
preferred and common stocks as to receipt of dividends and amounts
distributed upon liquidation. The Series A and B preferred stocks have
voting rights only to the extent required by law and with respect to
charter amendments that adversely affect the preferred stock or the
creation or issuance of any security ranking senior to the preferred
stock. Additionally, if dividends are not paid for six cumulative
quarters, the Series A and Series B preferred shareholders together are
entitled to elect two additional members to the UAL Board of Directors
until all dividends are paid in full.
At December 31, 1994, 1,789,585 shares of Class 1 ESOP Preferred
Stock and no shares of Class 2 ESOP Preferred Stock were issued. An
aggregate of 17,675,345 shares of Class 1 and Class 2 ESOP Preferred Stock
will be issued in connection with the recapitalization and establishment
of the ESOPs (see notes 2 and 3). Each share of ESOP Preferred Stock is
convertible into one share of UAL common stock, subject to adjustment
under certain conditions. The stock has a par value of $0.01 per share,
is nonvoting, and has a liquidation value of $126.96 per share plus all
accrued and unpaid dividends. The Class 1 ESOP Preferred Stock provides a
fixed annual dividend of $8.8872 per share, which ceases on March 31,
2000; the Class 2 does not pay a fixed dividend.
Class P, M, and S Voting Preferred Stocks were established to
provide the voting power to the employee groups participating in the
ESOPs. As of December 31, 1994, one share each of Class P, M and S Voting
Preferred Stock were outstanding. Additional Voting Preferred Stock will
be issued as shares of the Class 1 and Class 2 ESOP Preferred Stock are
allocated to employees. In the aggregate, 17,675,345 shares of Voting
Preferred Stock will be issued through the year 2000. The Voting
Preferred Stock at any time outstanding commands voting power for
approximately 55% (subject to increase to up to 63%) of the vote of all
classes of capital stock in all matters requiring a shareholder vote,
other than for the election of members of the Board of Directors. The
Voting Preferred Stock will generally continue to represent approximately
55% (subject to increase to up to 63%) of the aggregate voting power until
the "Sunset". The "Sunset" will occur when the common shares issuable
upon conversion of the outstanding Class 1 and Class 2 ESOP Preferred
Stock, plus any common equity and available unissued ESOP shares held in
the ESOPs or any other employee benefit plans sponsored by the Company for
the benefit of its employees, represent, in the aggregate less than 20% of
the common equity and available unissued ESOP shares of the Company.
Under current actuarial assumptions, the Company estimates that the
"Sunset" will occur in the year 2016 if no additional purchases are made
by eligible employee retirement plans. The Voting Preferred Stock has a
par value and liquidation preference of $0.01 per share. The stock is not
entitled to receive any dividends and is convertible into one
ten-thousandth of a share of UAL common stock.
(13) Common Shareholders' Equity
In connection with the July 1994 recapitalization, each share of old
common stock was converted to one half share of new common stock (and cash
in lieu of fractional shares) and $84.81 in cash. As a result, the number
of outstanding shares was reduced proportionately.
<TABLE>
<CAPTION>
Changes in the number of shares of UAL common stock outstanding during the
years ended December 31 were as follows:
1994 1993 1992
<S> <C> <C> <C>
Old shares -
Shares outstanding at
beginning of year 24,568,937 24,238,482 23,758,106
Shares issued in connection
with Air Wis merger - - 443,593
Stock options exercised 79,764 205,075 40,464
Shares issued from treasury
under compensation arrangements 1,100 142,003 3,165
Shares acquired for treasury (88,261) (7,623) (346)
Forfeiture of restricted stock (9,800) (9,000) (6,500)
Other (379) - -
24,551,361 24,568,937 24,238,482
Effect of recapitalization (12,275,680) - -
New shares -
Stock options exercised 237,505 - -
Shares issued from treasury under
compensation arrangements 112,767 - -
Shares acquired for treasury (186,898) - -
Other 51 - -
Shares outstanding at end of year 12,439,106 24,568,937 24,238,482
</TABLE>
At December 31, 1994 and 1993, UAL held 574,111 and 920,808 shares,
respectively, of common stock in treasury.
There is a preferred share purchase right associated with each share
of outstanding UAL common stock. As long as the rights are associated
with the shares of UAL common stock, each new share of common stock issued
by UAL, including shares of common stock into which the ESOP convertible
preferred stock and the Series A preferred stock are convertible, will
include one right. Upon the occurrence of certain events, each right will
entitle its holder to purchase one one-hundredth of a share of Series C
junior participating preferred stock, without par value, for $185 (subject
to antidilution provisions). The rights will become exercisable ten
business days after any person or group announces its beneficial ownership
of 15% or more of UAL common stock, or announces an offer for 30% or more
of UAL common stock. If any person or group acquires 15% or more of UAL
common stock (other than the ESOP trustee, ALPA, the IAM and the
beneficial owners of UAL common stock eligible to report and reporting on
Schedule 13G under the Securities Exchange Act of 1934), each right will
entitle its holder (except the acquiring party) to buy common stock of UAL
having a market value of three times the exercise price of the right. If,
after the rights become exercisable, UAL is involved in a merger or sells
more than 50% of its assets or earning power, each right will entitle its
holder to buy common stock of the surviving entity having a market value
of three times the exercise price of the right. UAL has the right to
redeem the rights for $0.05 per right prior to the time they become
exercisable. The rights expire on December 31, 1996. The rights
agreement provides that the transactions associated with the
recapitalization did not and will not cause the rights to become
exercisable as a result thereof.
(14) Stock Options and Awards
The Company has granted options to purchase common stock to various
officers and employees. The option price for all stock options is at
least 100% of the fair market value of UAL common stock at the date of
grant. Options generally vest and become exercisable in up to five equal,
annual installments beginning one year after the date of grant, and
generally expire in 10 years.
Prior to 1992, stock appreciation rights ("SARs") were granted in
tandem with certain stock options. On exercise of these SARs, holders
would receive, in cash, 100% of the appreciation in fair market value of
the shares subject to the SAR. The estimated payment value of SARs, net
of market value adjustments, was charged to earnings over the vesting
period. In 1992, all active officers relinquished their SARs but retained
the tandem stock options. As a result of the 1994 recapitalization, all
outstanding options became fully vested at the time of the transaction and
the holders of such options became eligible to exercise the cashless
exercise features of stock options. Under a cashless exercise, the
Company withholds, at the election of the optionee, from shares that would
otherwise be issued upon exercise that number of shares having a fair
market value equal to the exercise price and related income taxes. For
outstanding options eligible for cashless exercise, changes in the market
price of the stock are charged to earnings currently. At December 31,
1994, 12,927 SARs were outstanding with an average exercise price of
$75.70 per old share and option holders were eligible for cashless
exercise in connection with 1,068,173 outstanding options with an average
exercise price of $133.76 per old share. The expense (credit) recorded
for SARs and cashless exercises was $15 million in 1994, $1 million in
1993 and $(1) million in 1992.
Stock options which were outstanding at the time of the
recapitalization are exercisable for shares of old common stock, each of
which is in turn converted into one half share of new common stock and
$84.81 in cash upon exercise. Subsequent to the recapitalization, the
Company granted stock options which are exercisable for shares of new
common stock.
<TABLE>
<CAPTION>
Stock option activity for the past three years was as follows:
New Share
Options Old Share Options
1994 1994 1993 1992
<S> <C> <C> <C> <C>
Outstanding at beginning
of year - 1,673,782 1,864,555 1,318,603
Granted 959,500 - 65,750 686,500
Exercised - (554,771) (205,075) (40,464)
Surrendered upon
exercise of SARs - (1,000) (16,198) (8,334)
Terminated (13,500) (36,911) (35,250) (91,750)
Outstanding at end
of year 946,000 1,081,100 1,673,782 1,864,555
Exercisable at
end of year 150,000 1,081,100 733,782 603,180
Reserved for future
grants at end of year 454,000 - 300,111 330,611
Average option price:
Per old share -
Exercised N/A $ 95.32 $ 87.61 $ 88.16
Outstanding at end of year N/A $ 132.77 $ 120.21 $ 116.11
Per new share -
Exercised - $ 21.02 (1) N/A N/A
Outstanding at end of year $ 90.36 $ 95.92 (1) N/A N/A
(1) Represents the new share equivalent of the old share options.
</TABLE>
The expiration dates for options outstanding as of December 31, 1994
ranged from January 12, 1995 to December 15, 2004. At December 31, 1994,
outstanding options were held by 199 officers and key employees.
The Company has also awarded shares of restricted stock to key officers
and employees. These restricted shares generally vest over a five-year
period. Unvested shares are subject to certain transfer restrictions and
forfeiture under certain circumstances. Unearned compensation, representing
the fair market value of the stock on the date of award, is amortized to
salaries and related costs over the vesting period. During 1993, 138,500
restricted shares were issued from treasury stock and awarded to employees.
No restricted shares were issued during 1992. In 1994, 1993 and 1992, 9,800,
9,000 and 6,500 shares, respectively, were forfeited and returned to treasury
stock. As a result of the 1994 recapitalization, all outstanding restricted
shares became vested at the time of the transaction and $12 million of
compensation expense was recorded for the remaining balance of unearned
compensation attributable to the outstanding shares. In 1994, subsequent to
the recapitalization, 112,767 restricted shares of new common stock were
issued from treasury, of which 66,500 were still restricted as of December
31, 1994. Additionally, 29,733 shares were reserved for future award.
(15) Retirement Plans
The Company has various retirement plans which cover substantially all
employees. Defined benefit plans covering certain employees (primarily union
ground employees) provide a stated benefit for specified periods of service,
while defined benefit plans for other employees provide benefits based on
employees' years of service and average compensation for a specified period
of time before retirement. Pension costs are funded to at least the minimum
level required by the Employee Retirement Income Security Act of 1974. The
company also provides several defined contribution plans which cover
substantially all U. S. employees who have completed one year of service.
For certain groups of employees (primarily pilots), the company contributes
an annual amount on behalf of each participant, calculated as a percentage of
the participants' earnings or a percentage of the participants' contributions.
<TABLE>
<CAPTION>
The following table sets forth the defined benefit plans' funded status
and amounts recognized in the statement of consolidated financial position as
of December 31:
1994 1993
Accumulated Accumulated
Benefits Benefits
Exceed Exceed
Assets Assets
(In Millions)
<S> <C> <C>
Actuarial present value of
accumulated benefit obligation $4,191 $4,200
Actuarial present value of
projected benefit obligation $4,577 $5,025
Plan assets at fair value 3,785 3,589
Projected benefit obligation
in excess of plan assets 792 1,436
Unrecognized net gain (loss) (13) (624)
Prior service cost not yet recognized
in net periodic pension cost (523) (455)
Remaining unrecognized net asset (3) 16
Adjustment required to
recognize minimum liability 302 346
Pension liability recognized in the
statement of consolidated financial
position $ 555 $ 719
</TABLE>
For the valuation of pension obligations as of December 31, 1994 and
1993, the weighted average discount rates used were 8.75% and 7.5%,
respectively, and the rates of increase in compensation were 3.15% and
4.0%, respectively. Substantially all of the accumulated benefit
obligation is vested.
Total pension expense for all retirement plans (including defined
contribution plans) was $350 million in 1994, $346 million in 1993, and
$324 million in 1992.
Plan assets are invested primarily in governmental and corporate
debt instruments and corporate equity securities. The expected average
long-term rate of return on plan assets at December 31 was 9.75% for 1994,
9.75% for 1993 and 10.25% for 1992.
<TABLE>
<CAPTION>
The net periodic pension cost of defined benefit plans included the
following components:
1994 1993 1992
(In Millions)
<S> <C> <C> <C>
Service cost - benefits earned
during the year $ 216 $ 186 $ 180
Interest cost on projected
benefit obligation 379 356 320
Actual (return) loss on
plan assets 28 (310) (289)
Net amortization and deferral (351) 19 24
Net periodic pension cost $ 272 $ 251 $ 235
</TABLE>
(16) Other Employee Benefits
The Company provides certain health care benefits, primarily in the
U. S., to retirees and eligible dependents. Benefits are generally funded
from company assets on a current basis, although amounts sufficient to pay
claims incurred, but not yet paid, are held in trust. Certain plan
benefits are subject to co-payments, deductibles and other limits
described in the plans and the benefits are reduced once a retiree becomes
eligible for Medicare. The Company also provides certain life insurance
benefits to retirees. The assets to fund retiree life insurance benefits
are being held in a deposit trust administration fund with a major
insurance company. The Company has reserved the right, subject to
collective bargaining agreements, to modify or terminate the health care
and life insurance benefits for both current and future retirees.
Effective January 1, 1992, the Company adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions".
This standard requires that the expected cost of postretirement benefits
be charged to expense during the years in which employees render service.
Upon adoption, the Company recorded a one-time pretax charge of $925
million ($580 million after tax) as the cumulative effect of accounting
change.
<TABLE>
<CAPTION>
Information on the plans' funded status, on an aggregate basis at
December 31, follows (in millions):
1994 1993
<S> <C> <C>
Accumulated postretirement
benefit obligation:
Retirees $ 383 $ 416
Other fully eligible participants 183 236
Other active participants 590 679
Total accumulated postretirement
benefit obligation 1,156 1,331
Unrecognized net gain (loss) 138 (149)
Fair value of plan assets (95) (91)
Accrued postretirement benefit obligation $1,199 $1,091
</TABLE>
<TABLE>
<CAPTION>
Net postretirement benefit costs included the following components (in
millions):
1994 1993 1992
<S> <C> <C> <C>
Service cost - benefits attributed to
service during the period $ 46 $ 38 $ 28
Amortization of unrecognized net loss 3 3 -
Interest cost on benefit obligation 95 92 83
Net postretirement benefit costs $144 $133 $111
</TABLE>
The discount rate used to estimate the accumulated postretirement
benefit obligation as of December 31, 1994 and 1993 was 8.75% and 7.5%,
respectively. The assumed health care cost trend rate was 10% and 11% for
1994 and 1993, respectively, declining annually to a rate of 4% by the year
2001 and remaining level thereafter. The effect of a 1% increase in the
assumed health care cost trend rate would increase the accumulated
postretirement benefit obligation at December 31, 1994, by $150 million and
the aggregate of the service and interest cost components of net
postretirement benefit cost for 1994 by $22 million.
The Company adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits," effective January 1, 1994. SFAS No. 112 requires
recognition of the liability for postemployment benefits during the period
of employment. Such benefits include company paid continuation of group
life insurance and medical and dental coverage for certain employees after
employment but before retirement. The effect of adopting SFAS No. 112 was a
cumulative charge for recognition of the transition liability of $42
million, before tax benefits of $16 million. The ongoing expenses related
to postemployment benefits will vary based on actual claims experience.
(17) Investments in Debt Securities
The Company adopted SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," effective January 1, 1994. The Company's
investments in such securities are included in "Cash and cash equivalents"
and "Short-term investments." The following information pertains to the
Company's investments in such securities at December 31, 1994 (in millions):
<TABLE>
<CAPTION>
Gross
Aggregate Unrealized Average
Fair Holding Cost Maturity
Value Losses Basis (Months)
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. government agency
debt securities $ 334 $ 2 $ 336 9
Corporate debt securities $ 341 $ 2 $ 343 10
Other debt securities $ 146 $ 1 $ 147 8
Held-to-maturity:
U.S. government agency
debt securities $ 97 $ - $ 97 6
Corporate debt securities $ 222 $ - $ 222 4
Other debt securities $ 384 $ - $ 384 2
</TABLE>
The net unrealized holding loss on available-for-sale securities
of $5 million has been recorded as a component of shareholders' equity,
net of related tax benefits. The proceeds from sales of
available-for-sale securities were $255 million in 1994. Such sales
resulted in insignificant gross realized gains and losses, based on the
cost of the specific securities sold. These gains and losses were
included in interest income for the year.
(18) Financial Instruments and Off-Balance-Sheet Risk
Balance Sheet Financial Instruments: Fair Values
The carrying amounts reported in the consolidated balance sheets
for cash and cash equivalents, short-term investments classified as
"held-to-maturity", and short-term borrowings approximate fair value due
to the immediate or short-term maturities of these financial
instruments. Investments in debt securities classified as
"available-for-sale" are stated at fair value based on the quoted market
prices for the securities (see note 17).
The fair value of long term debt, including debt due within one
year, is primarily based on the quoted market prices for the same or
similar issues or on the then current rates offered for debt with
similar terms and maturities. The fair value of long-term debt,
including debt due within one year, at December 31, 1994 and 1993 was
$2.983 billion and $3.041 billion, respectively, compared with carrying
values of $3.271 billion and $2.846 billion.
Off Balance Sheet Financial Instruments: Risks and Fair Values
United has entered interest rate swap agreements in order to
manage the interest rate exposure associated with certain variable rate
debt and leases. The swap agreements have remaining terms averaging 16
years, corresponding to the terms of the related debt or lease
obligations. Under the agreements, United makes payments to
counterparties at fixed rates and in return receives payments based on
LIBOR. United's theoretical risk in the swaps is the cost of replacing
the contracts at current market interest rates in the event of default
by any of the counterparties; however, United does not anticipate such
default since the counterparties are major financial institutions with
investment grade ratings by all rating agencies. In addition, the risk
of such default is mitigated by provisions in the contracts which
require either party to post increasing amounts of collateral as the
value of the contract moves against them. Counterparty credit risk is
further minimized by periodic settlements throughout the duration of the
contract. At December 31, 1994, a notional amount of $479 million of
interest rate swap agreements effectively fixed interest rates between
8.02% and 8.65% on such obligations. The fair values to United of
interest rate swap agreements at December 31, 1994 and 1993 were $26
million and $(8) million, respectively, taking into account interest
rates in effect at the time.
In the first quarter of 1994, United entered into a ten-year
foreign currency swap contract to reduce exposure to currency
fluctuations in connection with 29 billion of Japanese yen-denominated
obligations. The currency swap contract, which was designated as a
hedge, effectively fixed, at then current exchange rates, future
principal, interest and lease payments. The currency swap contract
exactly matches the cash flows and maturities of the obligations it
hedges. At December 31, 1994, the swap contract had a notional amount
of $293 million, which will reduce periodically as payments are made.
The fair value of the currency swap contract to United at December 31,
1994 was approximately $23 million based on the reduction in the yen to
dollar exchange rate since United entered into the contract.
United's theoretical risk in the currency swap is the cost of
replacing the contract at current market rates in the event of default
by the counterparty; however, United does not anticipate such default
since the counterparty is a major money center bank with an investment
grade rating by all rating agencies. Furthermore, the risk of such
default is mitigated by provisions in the contract which require either
party to post increasing amounts of collateral as either their credit
rating deteriorates or the value of the contract moves against them.
Counterparty credit risk is minimal since currency is exchanged
simultaneously throughout the duration of the contract.
The currency swap replaced short-term foreign currency call
options and forward contracts which expired under their own terms,
resulting in an insignificant loss that was included in income,
offsetting the insignificant gain recorded from the related obligations
that were being hedged. In October 1994, United terminated the portion
of the foreign currency swap contract hedging future interest payments
in connection with the Japanese yen-denominated obligations. While this
portion of the contract was in effect, foreign currency gains and losses
on it were deferred and included in interest as it accrued. The gain
resulting from the contract termination, net of losses previously
deferred in connection with the interest payments, is being deferred and
amortized over the remaining life of the obligations.
Financial Guarantees
As of December 31, 1994, United had guaranteed $77 million of
indebtedness of affiliates.
Special facility revenue bonds have been issued by certain
municipalities to build or improve airport facilities leased by United.
Under the lease agreements, United is required to make rental payments
in amounts sufficient to pay the maturing principal and interest
payments on the bonds. At December 31, 1994, $860 million principal
amount of such bonds was outstanding. As of December 31, 1994, UAL and
United had jointly guaranteed $35 million of such bonds and United had
guaranteed $834 million of such bonds, including accrued interest.
Included in this amount are bonds issued by the City of Denver in
connection with the construction of certain United facilities at Denver
International Airport, which will replace Stapleton International
Airport in 1995.
Transfers of the tax benefits of accelerated depreciation and
investment tax credits associated with the acquisition of certain
equipment have been made previously by United to various tax lessors
through tax lease transactions. Proceeds from tax benefit transfers
were recognized as income in the year the lease transactions were
consummated. The subject equipment is being depreciated for book
purposes. United has agreed to indemnify (guaranteed in some cases by
UAL) the tax lessors against loss of such benefits in certain
circumstances and has agreed to indemnify others for loss of tax
benefits in limited circumstances for certain used aircraft purchased by
United subject to previous tax lease transactions. Certain tax lessors
have required that letters of credit be issued in their favor by
financial institutions as security for United's indemnity obligations
under the leases. The outstanding balance of such letters of credit
totaled $58 million at December 31, 1994. At that date, United had
granted mortgages on aircraft and engines having a total book value of
$238 million as security for indemnity obligations under tax leases and
letters of credit.
Concentration of Credit Risk
The Company does not believe it is subject to any significant
concentration of credit risk. Most of the Company's receivables result
from sales of tickets to individuals through travel agents, company
outlets or other airlines, often through the use of major credit cards.
These receivables are short term, generally being settled shortly after
the sale.
(19) Commitments and Contingent Liabilities
The Company has certain contingencies resulting from litigation
and claims (including environmental issues) incident to the ordinary
course of business. Management believes, after considering a number of
factors, including (but not limited to) the views of legal counsel, the
nature of contingencies to which the Company is subject and its prior
experience, that the ultimate disposition of these contingencies is not
expected to materially affect UAL's consolidated financial position or
results of operations.
At December 31, 1994, commitments for the purchase of property and
equipment, principally aircraft, approximated $3.9 billion after
deducting advance payments. An estimated $1.2 billion is expected to be
expended during 1995, $0.7 billion in 1996, $1.3 billion in 1997, $0.5
billion in 1998 and $0.2 billion in 1999 and thereafter. The major
commitments are for the purchase of thirty-four B777 aircraft, which are
expected to be delivered between 1995 and 1999.
In addition to the B777 order, United has arrangements with Airbus
and International Aero Engines to lease an additional 29 A320 aircraft,
which are scheduled for delivery through 1998. Under the agreement,
United is making advance payments through 1998 which are refundable upon
delivery of each aircraft.
At December 31, 1994, United also had purchase options for 162
B737 aircraft, 39 B757 aircraft, 34 B777 aircraft, 49 B747 aircraft, 8
B767 aircraft and 50 A320 aircraft. Under the terms of certain of these
options which are exercisable during the period 1995 through 1997,
United would forfeit significant deposits on such options it does not
exercise. Consistent with its revised capital spending plan, United has
recently cancelled options on certain aircraft.
United's Indianapolis Maintenance Center began operation in March
1994, initially performing maintenance on B737 aircraft. In December
1994, the UAL Board of Directors approved the relocation of B757 and
B767 airframe maintenance to the Indianapolis Maintenance Center.
Construction of certain B737 airframe facilities is still in process and
construction of facilities for the other fleet types will begin in 1995.
The facilities are being financed primarily with tax-exempt bonds and
other capital sources. In connection with incentives received, United
has agreed to reach an $800 million capital spending target and employ
at least 7,500 individuals.
(20) Statement of Consolidated Cash Flows - Supplemental Disclosures
<TABLE>
<CAPTION>
Supplemental disclosures of cash flow information and non-cash
investing and financing activities were as follows:
1994 1993 1992
(In Millions)
<S> <C> <C> <C>
Cash paid during the year for:
Interest (net of amounts
capitalized) $302 $330 $200
Income taxes $ 69 $135 $ 30
Non-cash transactions:
Capital lease obligations
incurred $ - $ 70 $276
Long-term debt incurred in
connection with additions
to equipment $ 21 $487 $755
Increase in pension intangible $ 20 $ 19 $ 8
Net unrealized loss on investments $ 3 $ - $ -
Issuance of treasury stock in
exchange for Air Wis common
stock $ - $ - 64
</TABLE>
(21) Other Matters
In April 1993, UAL transferred the Air Wisconsin, Inc. operations at
Dulles to Atlantic Coast Airlines. In September 1993, UAL transferred
certain Air Wisconsin, Inc. operations at O'Hare to United Feeder
Services. In December 1993, UAL transferred the jet operations of Air
Wisconsin, Inc. to CJT Holdings. These operations are being conducted by
the counterparties in these agreements under the United Express trade
name. In October 1994, UAL announced an agreement to sell for $119
million ten Dash 8 aircraft and spare parts owned by Air Wisconsin, Inc.
to Mesa Airlines, and United agreed to a ten year extension of its United
Express marketing agreement with Mesa Airlines. The sales will take place
in the first quarter of 1995.
In 1993, United reached agreements to sell assets related to the
operation of 16 of its flight kitchens to Dobbs International Services,
Inc. and Caterair International Corp. for $119 million. These asset sales
were completed by June 1994 and resulted in an insignificant gain. Under
the agreements, the purchasers are providing catering services for United
at the airports served by the flight kitchens for seven years.
(22) Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Year
(In Millions)
<S> <C> <C> <C> <C> <C>
1994:
Operating revenues $3,195 $3,502 $3,814 $3,439 $13,950
Earnings (loss) from
operations (36) 167 312 78 521
Earnings (loss) before
cumulative effect of
accounting changes (71) 55 82 11 77
Cumulative effect of
accounting changes (26) - - - (26)
Net earnings (loss) $ (97) $ 55 $ 82 $ 11 $ 51
Per share amounts, primary:
Earnings (loss) before
cumulative effect of
accounting changes $(3.31) $ 1.89 $ 4.24 $(0.98) $ 0.76
Cumulative effect of
accounting changes (1.06) - - - (1.37)
Net earnings (loss) $(4.37) $ 1.89 $ 4.24 $(0.98) $ (0.61)
Net earnings (loss)
per share, fully diluted $(4.37) $ 1.89 $ 4.21 $(0.98) $ (0.61)
1993:
Operating revenues $3,053 $3,296 $3,629 $3,347 $13,325
Earnings (loss) from
operations (121) 84 281 19 263
Earnings (loss) before
extraordinary item (138) 22 149 (64) (31)
Extraordinary loss on
early extinguishment
of debt (19) - - - (19)
Net earnings (loss) $ (157) $ 22 $ 149 $ (64) $ (50)
Per share amounts, primary:
Earnings (loss) before
extraordinary item $(5.92) $ 0.54 $ 5.74 $(3.02) $ (2.64)
Extraordinary loss on
early extinguishment
of debt (0.77) - - - (0.76)
Net earnings (loss) $(6.69) $ 0.54 $ 5.74 $(3.02) $ (3.40)
Net earnings (loss)
per share, fully diluted $(6.69) $ 0.54 $ 5.21 $(3.02) $ (3.40)
</TABLE>
In 1994, United began recording certain air transportation price
adjustments, which were previously recorded as commissions, as adjustments
to revenue. The revenue amounts for 1993 above have been reclassified to
conform with the current presentation.
The Company adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits," effective January 1, 1994. The effect of
adopting SFAS No. 112 was a cumulative charge for recognition of the
transition liability of $42 million, before tax benefits of $16 million.
In connection with the July 1994 recapitalization, the Company
incurred pretax costs of $19 million, $22 million and $128 million in the
first, second and third quarters, respectively, including transaction
costs and severance payments to certain former United employees. Of these
costs, $48 million were recorded as operating expenses in the third
quarter, while the remaining costs were recorded in "Miscellaneous, net."
In the second quarter of 1993, United retired $500 million of senior
subordinated notes. An extraordinary loss of $19 million, net of tax
benefits of $8 million, was recorded in the first quarter of 1993, based
on United's stated intention to retire the notes.
In the third quarter of 1993, United recorded a charge of $59
million to reduce the net book value of 15 DC-10 aircraft to estimated net
realizable value. In addition, third quarter earnings included a $17
million gain and interest income of $27 million resulting from the final
settlement for overpayment of annuities purchased in 1985 to cover certain
vested pension benefits. The 1993 fourth quarter included $53 million of
equity in the loss of Galileo, which primarily reflects United's share of
a charge recorded by Galileo for the cost of eliminating duplicate
facilities and operations.
<TABLE>
<CAPTION>
Earnings per share were calculated after providing for the following
preferred stock dividend requirements (in millions):
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Year
<S> <C> <C> <C> <C> <C>
1994 $ 9 $ 9 $20 $21 $59
1993 $ 6 $ 9 $ 9 $ 9 $33
</TABLE>
Earnings available to common stockholders were also reduced by $3
million in the 1994 fourth quarter and twelve-month period for the excess
of amounts paid to reacquire UAL preferred stock over the liquidation
preference of such stock. In the 1994 and 1993 third quarters, primary
per share amounts were based on weighted average common shares and common
equivalents outstanding, including ESOP shares committed to be released.
Fully diluted per share amounts assume the exercise of stock options and
vesting of restricted stock at the beginning of the periods and, for the
1993 third quarter, the conversion of convertible preferred stock and
elimination of related dividends. The fully diluted per share amount for
the 1994 third quarter does not assume conversion of convertible preferred
stock since the effect is antidilutive. In the computations for the 1994
and 1993 first, second and fourth quarters and year, common stock
equivalents were not included as they did not have a dilutive effect.
In connection with the July 1994 recapitalization, each old common
share was exchanged for one half new common share. As required under
generally accepted accounting principles for transactions of this type,
the historical weighted average shares outstanding have not been restated.
Thus, direct comparisons between 1994 and 1993 per share amounts are not
meaningful.
The sum of quarterly earnings per share amounts is not the same as
annual earnings per share amounts because of changing numbers of shares
outstanding.
