UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________to____________
Commission File No. 1-6033
UAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 36-2675207
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Location: 1200 East Algonquin Road, Elk Grove Township, Illinois 60007
Mailing Address: P. O. Box 66919, Chicago, Illinois 60666
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 700-4000
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Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.01 par value New York, Chicago and
Pacific Stock Exchanges
Depositary Shares each representing
1/1,000 of a share of Series B
Preferred Stock, without par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
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Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of
the Registrant was $4,887,954,500 as of February 28, 1998. The number of
shares of common stock outstanding as of February 28, 1998 was
57,507,227.
Documents Incorporated by Reference
Part III of this Form 10-K incorporates by reference certain
information from the Registrant's definitive Proxy Statement for its
Annual Meeting of Stockholders to be held on May 7, 1998.
PART I
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ITEM 1. BUSINESS.
UAL Corporation ("UAL" or the "Company") was incorporated under
the laws of the State of Delaware on December 30, 1968. The world
headquarters of the Company are located at 1200 East Algonquin Road,
Elk Grove Township, Illinois 60007. The Company's mailing address
is P.O. Box 66919, Chicago, Illinois 60666. The telephone number for
the Company is (847) 700-4000.
The Company is a holding company and its principal subsidiary is
United Air Lines, Inc., a Delaware corporation ("United"), which is
wholly owned. United accounted for virtually all of the Company's
revenues and expenses in 1997. United is a major commercial air
transportation company, engaged in the transportation of persons,
property and mail throughout the United States and abroad.
Airline Operations
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During 1997, United carried, on average, more than 230,000
passengers per day and flew more than 121 billion revenue passenger
miles. It is the world's largest airline as measured by revenue
passenger miles flown, providing passenger service in 27 countries.
United has a global network of hubs primarily designed to fly
travelers between North America (domestic segment) and the Pacific,
Latin America and Europe (international segment). North American
hubs include Chicago, Denver, Los Angeles, San Francisco, and
Washington, D.C. (Dulles). United also operates a major hub in
Tokyo. Operating revenues attributed to United's North America
segment were approximately $11.2 billion in 1997, $10.7 billion in
1996, and $9.6 billion in 1995. Operating revenues attributed to
United's international segment were approximately $6.1 billion in
1997, $5.6 billion in 1996 and $5.3 billion in 1995.
Since October 1994, United has operated a service, Shuttle by
United (R) within its domestic segment. This service is designed to
compete with low-cost carriers on routes under 750 miles. While
Shuttle by United is principally concentrated on the West Coast, it
has expanded to offer approximately 466 daily flights on 24 routes
between 20 cities in the western United States. Shuttle by United
provides critical feed traffic, at competitive prices, for United.
Pacific. Via its Tokyo hub, United provides passenger service
between its U.S. gateway cities (Chicago, Honolulu, Los Angeles, New
York, and San Francisco) and the Asian cities of Bangkok, Beijing,
Hong Kong, Seoul, Shanghai and Singapore. United provides nonstop
service between Chicago and Hong Kong; between San Francisco and each
of Hong Kong, Osaka, Seoul and Taipei; between Los Angeles and each
of Hong Kong and Osaka; and between Honolulu and each of Tokyo and
Osaka. Additionally, United provides service between Osaka and
Seoul, and between Hong Kong and each of Singapore and New Delhi.
During 1997, United served the Guam-Osaka and Manila-Seoul markets,
but on February 20, 1998, all Guam service and all Manila passenger
service were terminated. Cargo service in Manila continues.
On January 30, 1998, the U.S. and Japanese governments agreed to
expand the 1952 air services agreement between the two countries.
One of the benefits under the new agreement is that certain carriers,
including United, will have no limits on the number of frequencies
they can operate. Accordingly, on April 8, 1998, United will
increase nonstop service between Chicago and Tokyo from six flights
each week to 14 weekly fights. On July 8, 1998, United will begin
daily nonstop service between Chicago and Osaka.
In addition, the agreement allows code-sharing between U.S. and
Japanese carriers. The new agreement also settles long-standing
disputes regarding the utilization of "beyond Japan" flying rights.
United holds significant traffic rights beyond Japan and as capacity
increases at Japan's two major airports, Narita and Kansai, United
plans to add service from Japan to other Asian points.
United serves the South Pacific market with flights between
Sydney and each of Los Angeles and San Francisco, and between
San Francisco and each of Auckland and Melbourne. In 1997,
United was the leading U.S. carrier in the Pacific in terms of
available seat miles. United's Pacific operations accounted for
20% of United's revenues in 1997.
Europe. United provides nonstop passenger service between six
U.S. cities and London, as well as service between London and each of
Amsterdam and New Delhi; nonstop service between Paris and each of
Chicago, San Francisco, and Washington Dulles; nonstop service
between Washington Dulles and each of Amsterdam, Brussels, Frankfurt,
Milan and Zurich (discontinued as of March 1, 1998); and nonstop
service between Chicago and each of Dusseldorf and Frankfurt. In
April 1997, United initiated a second nonstop flight between Chicago
and London Heathrow and plans to add a third seasonal flight in April
1998, pending government approval. New service between Munich and
Washington Dulles will begin June 1998. In 1997, United's Atlantic
operations accounted for 10% of United's revenues.
The European Commission is investigating transatlantic
alliances, including the alliance between United, Lufthansa, and SAS,
and their impact upon competition. The Commission has proposed
certain conditions, such as frequency reductions, slot forfeitures,
prohibitions on combining frequent flyer programs, and restrictions
on display screens of computer reservation systems, which, if
implemented, may impair the efficiency of United's alliance with
Lufthansa and SAS.
Latin America. United provides nonstop passenger service
between Miami and each of Buenos Aires, Caracas, Lima, Montevideo,
Rio de Janeiro, Santiago and Sao Paolo; between Los Angeles and each
of Guatemala City, Mexico City, and San Salvador; between New York
Kennedy and each of Buenos Aires, Caracas, Rio de Janeiro, and San
Juan; between Chicago and each of Mexico City, San Juan, and Sao
Paolo; and one flight between Mexico City and each of Denver, San
Francisco, and Washington Dulles. Service between Chicago and Sao
Paulo was initiated in November 1997. United also provides service
between Costa Rica and each of Guatemala City and Mexico City. In
April 1998, United will add nonstop service between Chicago and
Guatemala City, as well as a second flight between Chicago and Mexico
City. In July 1998, nonstop service will be added between Washington
Dulles and San Salvador. In 1997, United's Latin America operations
accounted for 5% of United's revenues.
Alliances and Marketing Arrangements. United has formed
alliances with other airlines to participate in markets that it
cannot serve directly for commercial or governmental reasons. An
alliance is a collaborative marketing arrangement between carriers
which can include joint frequent flyer participation, coordination of
reservations, baggage handling, and flight schedules, and code-
sharing of operations. "Code-sharing" is an agreement under which a
carrier's flights can be marketed under the two-letter airline
designator code of another carrier. Through an alliance, carriers
can provide their customers a seamless global travel network under
their own airline code.
In May 1997, United, Lufthansa, Air Canada, SAS and Thai Airways
formed the Star Alliance (TM), an integrated worldwide transport network
which provides customers with global recognition and a wide range of
other benefits. The Star Alliance should enable its member carriers
to more effectively compete with other worldwide alliances. In
October 1997, Varig joined the alliance. United holds antitrust
immunity with Lufthansa, SAS and Air Canada.
Other alliance air carriers include Aeromar, Aeromexico, Air New
Zealand, ALM Antillean, Aloha, Ansett (which operates in both
Australia and New Zealand), British Midland, Cayman Airways,
Continental Connection, Emirates, Gulfstream International, Mexicana,
Saudi Arabian, and TW Express.
In addition, United has a marketing program in North America,
known as the United Express (R) program, under which independent
regional carriers, utilizing turboprop equipment and some regional
jets, feed United hubs and international gateways. The carriers in
the United Express program provide service to United at 182 airports.
Cargo Service. United's cargo division accounts for
approximately 5% of the Company's operating revenues. In 1997,
United introduced all-cargo service between the U.S. and Asia,
operating four DC10-30F freighter aircraft. United also opened two
cargo facilities: a cargo consolidation center in Charlotte, North
Carolina to serve the Southeastern and mid-Atlantic states and a
transfer center at John F. Kennedy International Airport in New York.
A large cargo transfer facility is currently being constructed in
Honolulu and is scheduled to open during the second quarter of 1998.
The Hawaii facility is expected to be a major connection point for
Japanese traffic to and from the U.S. mainland, and for local traffic
in and out of Hawaii.
Frequent Flyer Program. United established the Mileage Plus (R)
frequent flyer program to retain and develop passenger loyalty by
offering awards to frequent travelers. Mileage Plus members earn
mileage credit for flights on United, Shuttle by United, United
Express and certain other participating airlines, or for utilizing
the services of other program participants, such as hotels, car
rental companies and bank credit card issuers. Mileage credits can
be redeemed for free, discounted or upgraded travel awards on United
and other participating airlines, or for other travel industry
awards. The redemption of awards under the program is restricted
with expiration dates, blackout periods and capacity controlled
bookings, limiting the use of the awards on certain flights.
When an award level is attained, liability is recorded for the
incremental costs of accrued credits based on expected redemptions.
United's incremental costs include the additional costs of providing
service for what would otherwise be a vacant seat, such as fuel,
meal, personnel and ticketing costs. The incremental costs do not
include any contribution to overhead or profit.
At December 31, 1997, the estimated number of outstanding awards
was approximately 6.2 million, as compared with 6.1 million at the
end of the prior year. United estimates that 4.7 million of such
awards will ultimately be redeemed and, accordingly, has recorded a
liability amounting to $195 million, which is unchanged from the
previous year. Based on historical data, the difference between the
awards expected to be redeemed and the total awards outstanding
arises because: (1) some awards will never be redeemed, (2) some
will be redeemed for non-travel benefits, and (3) some will be
redeemed on partner carriers.
The number of Mileage Plus awards used on United in 1997 was 1.8
million, compared to 1.5 million in 1996 and 1.8 million in 1995.
Such awards represented 8% of United's total revenue passenger miles
in 1997, 7% in 1996 and 8% in 1995. These low percentages, as well
as seat availability restrictions on the use of travel awards, keep
displacement, if any, of revenue passengers by users of Mileage Plus
awards to a minimum.
Industry Conditions
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Seasonality. Air travel business is subject to seasonal
fluctuations. United's first- and fourth-quarter results normally
are affected by reduced travel demand in the fall and winter, and
United's operations are often affected adversely by winter weather.
Thus, operating results for the Company are generally better in the
second and third quarters.
Competition. The airline industry is highly competitive. In
domestic markets, new and existing carriers are free to initiate
service on any route. United's domestic competitors include all of
the other major U.S. airlines as well as regional carriers, some of
which have lower cost structures than United.
In its international service, United competes not only with U.S.
carriers but also with national flag carriers of foreign countries,
which in certain instances enjoy forms of governmental support not
available to U.S. carriers. Competition on certain international
routes is subject to varying degrees of governmental regulations (see
"Government Regulation"). United has advantages over foreign air
carriers because of its ability to generate U.S. origin-destination
traffic from its integrated domestic route systems, and because
foreign carriers are prohibited by U.S. law from carrying local
passengers between two points in the United States. On the other
hand, U.S. carriers in many cases are constrained from carrying
passengers to points beyond designated international gateway cities
due to limitations in air service agreements or restrictions imposed
unilaterally by foreign governments. To compensate for these
structural limitations, U.S. and foreign carriers have entered into
alliances and marketing arrangements which allow the carriers to
provide feed to each other's flights. (See "Airline Operations -
Alliances and Marketing Arrangements").
Distribution Channels. Travel agents account for a substantial
percentage of United's sales. In September 1997, as part of its
ongoing effort to control costs, United reduced the base travel
agency commission rate to 8% for tickets sold within the U.S., and
imposed a cap of $50.
The use of electronic distribution systems is also an important
cost control initiative of United. In 1997, United expanded the
capabilities of its web site by offering Internet ticketing. The
U.S. government and the European Commission are considering placing
restrictions on the Internet products offered directly by the
airlines as they review the larger issue of additional restrictions
on the industry of computer reservation systems.
Government Regulation
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General. All carriers engaged in air transportation in the
United States are subject to regulation by the U.S. Department of
Transportation ("DOT"). The DOT has authority to: issue
certificates of public convenience and necessity for domestic air
transportation and, through the Federal Aviation Administration
("FAA"), air-carrier operating certificates; authorize the provision
of foreign air transportation by U.S. carriers; prohibit unjust
discrimination; prescribe forms of accounts and require reports from
air carriers; regulate methods of competition, including the
provision and use of computerized reservation systems; and administer
regulations providing for consumer protection, including regulations
governing the accessibility of air transportation facilities for
handicapped individuals. United holds certificates of public
convenience and necessity, as well as air-carrier operating
certificates, and therefore is subject to DOT regulations. The FAA
administers the U.S. air traffic control system and oversees aviation
safety issues.
United's operations also require licenses issued by the aviation
authorities of the foreign countries United serves. Foreign aviation
authorities may from time to time impose a greater degree of economic
regulation than exists with respect to United's domestic operations.
United's ability to serve some foreign markets and its expansion in
many foreign markets is presently restricted by lack of aviation
agreements allowing such service or, in some cases, by the
restrictive terms of such agreements.
In connection with its international services, United is
required to file with the DOT and to observe tariffs establishing the
fares charged and the rules governing the transportation provided.
In certain cases, fares and schedules require the approval of the
relevant foreign governments. Shifts in United States or foreign
government aviation policies can lead to the alteration or
termination of existing air service agreements between the U.S. and
other governments, and could diminish the value of United's
international route authority. United's operating rights under the
air services agreements may not be preservable in such cases.
Airport Access. Take-off and landing rights ("slots") at
Chicago O'Hare International Airport, New York John F. Kennedy
International, New York LaGuardia and Reagan National airports, are
limited by the "high density traffic rule." Under this rule, slots
may be bought, sold or traded. The DOT, however, can require
carriers to relinquish slots for reallocation if they fail to meet
certain minimum-use standards.
For the past few years, the DOT has been confiscating slots from
incumbent carriers at Chicago O'Hare, including United, to provide
more opportunities for foreign carriers. In 1997, the DOT began
creating slots at certain slot-controlled airports to allow the entry
of start-up carriers. United has petitioned the DOT for the return
of United's confiscated O'Hare slots under the theory that
confiscation is no longer necessary if the DOT has the ability to
create new slots. United holds a sufficient number of slots at
airports subject to the high-density rule, but its ability to expand
could be constrained if sufficient additional slots are not available
on satisfactory terms.
United currently has a sufficient number of leased gates and
other airport facilities, but expansion by United may be constrained
at certain airports by insufficient availability of gates on
attractive terms or other factors, for example, noise restrictions.
Safety. The FAA has regulatory jurisdiction over flight
operations generally, including equipment, ground facilities,
maintenance, communications and other matters. United's aircraft and
engines are maintained in accordance with the standards and
procedures recommended and approved by the manufacturers and the FAA.
From time to time, the FAA issues airworthiness directives
("ADs") which require air carriers to undertake inspections and to
make unscheduled modifications and improvements on aircraft, engines
and related components and parts. The ADs sometimes cause United to
incur substantial, unplanned expense when aircraft or engines are
removed from service prematurely in order to undergo mandated
inspections or modifications. The issuance of any particular AD may
have a greater or lesser impact on United, compared to its
competitors, depending upon the equipment covered by the directive.
Civil and criminal sanctions may be assessed for not complying with
the ADs.
Environmental Regulations. The Airport Noise and Capacity Act
of 1990 ("ANCA") requires the phase-out by December 31, 1999 of Stage
2 aircraft operations, subject to certain waivers. The "Stage 2" and
"Stage 3" terminology is industry vernacular referring to permissible
noise levels under various aircraft operating conditions. The
specific noise limitations are technical, but in general, Stage 3
aircraft will produce less overall noise than Stage 2 aircraft. By
the year 2000, all commercial aircraft within the United States must
meet the stricter Stage 3 noise requirements or be grounded. United
will generally meet Stage 3 requirements by retiring Stage 2 aircraft
and replacing them with newer Stage 3 aircraft, and by retrofitting
the remaining Stage 2 aircraft with special equipment (known in the
industry as "hushkits"). Most of the hushkits will be acquired
through a swap of retired or retiring DC10-10 aircraft. The cost of
acquiring the remaining hushkits is included in the Company's capital
commitments disclosed under "Liquidity and Capital Resources" of Item 7.
Federal and state environmental laws require that underground
storage tanks (USTs) be upgraded to new construction standards and
equipped with leak detection by December 22, 1998. These
requirements are phased in based on the age, construction and use of
existing tanks. United operates a number of underground and above-
ground storage tanks throughout its system. They are used for the
storage of fuels and deicing fluids. A program for the removal or
upgrading of USTs and remediation of any related contamination has
been ongoing since 1987. In 1998, United will complete the upgrades.
United has been identified as a potentially responsible party in
state and federal recovery actions involving soil and groundwater
contamination. United estimates the total cost of remediation to
range from $20 million to $40 million.
United meets EPA emissions standards by replacing older aircraft
with newer models and by upgrading to newer engines which have more
efficient fuel burn.
Other Government Matters. Other federal agencies with
jurisdiction over certain aspects of United's operations include the
Department of Justice (Antitrust Division and Immigration and
Naturalization Service); the Equal Employment Opportunity Commission;
the Department of Labor (Occupational Safety and Health
Administration, and Office of Federal Contract Compliance Programs of
the Employment Standards Administration); the National Mediation
Board; the National Transportation Safety Board; the Treasury
Department (U.S. Customs Service); the Federal Communications
Commission (use of radio facilities by aircraft); and the United
States Postal Service (carriage of domestic and international mail).
United is also subject to varying degrees of regulation by foreign
governments. In time of war or certain other national emergencies,
the U.S. government may require United to provide airlift services
under the Civil Reserve Air Fleet Program.
Fuel
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United's results of operations are significantly affected by the
price and availability of jet fuel. It is estimated that every $.01
change in the average annual price-per-gallon of jet fuel causes a
change of approximately $30 million in United's annual fuel costs.
The average price per gallon of jet fuel in 1997 declined 3.7%.
Changes in fuel prices are industry-wide occurrences that benefit or
harm United's competitors as well as United, although fuel-hedging
activities may affect the degree to which fuel-price changes affect
individual companies. To assure adequate supplies of fuel and to
provide a measure of control over fuel costs, United ships fuel on
major pipelines and stores fuel close to its major hub locations.
Insurance
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United carries liability insurance of a type customary in the
air transportation industry, in amounts which it deems adequate,
covering passenger liability, public liability and property damage
liability. The amount recoverable by United under aircraft-hull
insurance covering all damage to its aircraft is not subject to any
deductible amount in the event of a total loss.
Employees - Labor Matters
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UAL is the world's largest majority employee-owned company. At
December 31, 1997, the Company and its subsidiaries had more than
91,700 employees. Approximately 61% of United's employees are
represented by various labor organizations.
The employee groups, number of employees, labor organization and
current contract status for each of United's major collective
bargaining groups as of December 31, 1997 are as follows:
Number of Contract Open
Employee Group Employees Union For Amendment
-------------- --------- ----- -------------
Mechanics, ramp
service & other
ground employees 25,653 IAM July 22, 2000
Flight attendants 21,283 AFA March 1, 2006
Pilots 9,087 ALPA April 12, 2000
___________________________
In October 1997, the flight attendants ratified a new ten-year
collective bargaining agreement with the Company.
ITEM 2. PROPERTIES.
Flight Equipment
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As of December 31, 1997, United's operating aircraft fleet
totaled 575 jet aircraft, of which 271 were owned and 304 were
leased. These aircraft are listed below:
Average Average
Aircraft Type No. of Seats Owned Leased* Total Age (Years)
------------- ------------ ----- ------- ----- -----------
A319-100 126 0 4 4 0
A320-200 144 8 33 41 3
B727-200 147 59 16 75 19
B737-200 109 28 0 28 29
B737-200A 109 24 0 24 18
B737-300 129 10 91 101 9
B737-500 112 27 30 57 6
B747-100 444 9 0 9 26
B747-200 347 2 7 9 19
B747-400 384 10 21 31 5
B757-200 188 39 55 94 6
B767-200 168 19 0 19 15
B767-300 206 5 18 23 5
B777-200 292 13 17 30 1
DC10-10 288 15 7 22 21
DC10-30 298 1 3 4 19
DC10-30F N/A 2 2 4 18
TOTAL OPERATING
FLEET 271 304 575 11
=== === === ==
* United's aircraft leases have initial terms of 4 to 26 years,
and expiration dates range from 1998 through 2020. Under the
terms of leases for 297 of the aircraft in the operating fleet,
United has the right to purchase the aircraft at the end of the
lease term, in some cases at fair market value and in others at
fair market value or a percentage of cost.
As of December 31, 1997, 68 of the 271 aircraft owned by United
were encumbered under debt agreements.
In 1997 United took delivery of 30 new aircraft: four A319-100s,
five A320-200s, five B747-400s, two B757-200s, and fourteen B777-
200s. United also retired 19 aircraft: ten B737-200s, five B747-100s
and four DC10-10s.
As of December 31, 1997, United had on order twenty-four A319-
100s, twelve A320-200s, nineteen B747-400s, four B757-200s, eight
B767-300s, and six B777-200s, all of which are scheduled for delivery
between 1998 and 2002. The following table sets forth United's firm
aircraft orders and expected delivery schedules as of December 31, 1997:
Aircraft Type Number To Be Delivered Delivery Rate
------------- ------ --------------- -------------
A319-100 24 1998-1999 0-3 per month
A320-200 12 1998-1999 0-3 per month
B747-400 19 1998-2002 0-2 per month
B757-200 4 1998-1999 0-1 per month
B767-300 8 1998-2000 0-1 per month
B777-200 6 1998-1999 0-2 per month
Total 73
On February 26, 1998, the UAL board of directors approved an order
for 30 new Airbus aircraft, which are not included in the above schedule.
For further discussion, see "Liquidity and Capital Resources - Capital
Commitments" of Item 7.
Ground Facilities and Equipment
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United has entered into various leases relating to its use of
airport-landing areas, gates, hangar sites, terminal buildings and
other airport facilities in most of the municipalities it serves.
Major leases expire at Chicago O'Hare in 2018, San Francisco in 2011,
Washington Dulles in 2014 and Los Angeles in 2021. United also has
leased ticketing, sales and general office space in the downtown and
outlying areas of most of the larger cities in its system. In
suburban Chicago, United owns a 106-acre complex consisting of more
than one-million square feet of office space for its world
headquarters, a computer facility and a training center.
United's Maintenance Operation Center ("MOC") at San Francisco
International Airport occupies 129 acres of land, three-million
square feet of floor space and 12 aircraft hangar docks under lease
expiring in 2007, with an option to extend for 10 years. United also
has a major facility at the Oakland, California airport, dedicated to
airframe maintenance.
United's Indianapolis Maintenance Center ("IMC") is operated
under a lease with the Indianapolis Airport Authority that expires in
2031. IMC is a major aircraft maintenance and overhaul facility and
is being used for maintenance of Boeing B737, B757 and B767 aircraft.
United is expanding its operations at IMC to maintain its fleet of
Airbus A320 aircraft at the facility beginning in 1998.
At Denver International Airport, United operates under a lease
and use agreement expiring in 2025, and occupies 44 gates and more
than one million square feet of exclusive or preferential use
terminal building space. United's flight training center, located at
the former Stapleton International Airport, was purchased by United
from the City and County of Denver in January, 1997 and will
accommodate 36 flight simulators and more than 90 computer-based
training stations.
ITEM 3. LEGAL PROCEEDINGS.
No material legal actions pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders of the
Company during the fourth quarter of 1997.
Executive Officers of the Registrant
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Information regarding the executive officers of the Company is
as follows:
Gerald Greenwald. Age 62. Mr. Greenwald has been Chairman and
Chief Executive Officer of the Company and United since July 12,
1994. Prior to joining the Company, he served as Chairman of Tatra
Truck Company, Czech Republic (a truck manufacturer) from March 1993
until July 1994. Mr. Greenwald previously served as President of
Olympia & York Developments Limited (a real estate development
company in the process of restructuring at the time Mr. Greenwald
agreed to serve as president and certain subsidiaries of which filed
for protection under federal bankruptcy laws in connection with such
restructuring) from 1992 until March of 1993.
John A. Edwardson. Age 48. Mr. Edwardson has been President
and a member of the Board of Directors of the Company since July 12,
1994, and Chief Operating Officer of the Company and United since
March 30, 1995. Prior to joining the Company, he served as Executive
Vice President and Chief Financial Officer of Ameritech Corporation
(a telecommunications company) from 1991 to July 1994.
Stuart I. Oran. Age 47. Mr. Oran has been Executive Vice
President of the Company and Executive Vice President - Corporate
Affairs of United since July 12, 1994. Prior to joining the Company,
he was a corporate partner with Paul, Weiss, Rifkind, Wharton and
Garrison, a law firm he joined in 1974.
Douglas A. Hacker. Age 42. Mr. Hacker has been Senior Vice
President and Chief Financial Officer of the Company and United since
July 12, 1994 and had served previously as Senior Vice President -
Finance of United. From 1991 until joining United in 1993, Mr.
Hacker served as Vice President - Corporate and Fleet Planning at
American Airlines, Inc. (an air carrier).
Christopher D. Bowers. Age 50. Mr. Bowers has been Senior Vice
President - International of United since April 1, 1995. From 1988
until assuming his current position, Mr. Bowers was Vice President
and General Sales Manager of the sales division.
David Coltman. Age 55. Mr. Coltman has been Senior Vice
President - Marketing of United since April 1, 1995. From 1989 until
assuming his current position, Mr. Coltman served as Vice President -
Atlantic Division.
Rono Dutta. Age 46. Mr. Dutta has been Senior Vice President -
Planning of United since November 7, 1994 and became an executive
officer of United on April 1, 1995. From 1991 until assuming his
current position, Mr. Dutta held other vice president positions at
United, overseeing cargo, information systems, and maintenance.
James E. Goodwin. Age 53. Mr. Goodwin has been Senior Vice
President - North America of United since April 1, 1995. From 1992
until assuming his current position, Mr. Goodwin served as Senior
Vice President - International of United.
William P. Hobgood. Age 59. Mr. Hobgood has been Senior Vice
President - People of United since March 1, 1997. From 1981 until
joining United, he was in private practice as an attorney
specializing in mediation and arbitration, including labor-management
issues.
Andrew P. Studdert. Age 41. Mr. Studdert has been Senior Vice
President - Fleet Operations for United since September 1997.
Previously he served as Senior Vice President and Chief Information
Officer of United from April 1995 to September 1997. Prior to
joining United, he was an independent information systems consultant
from July 1994 to March 1995, Executive Vice President of First
Interstate Bancorp (banking) from February 1994 until June 1994, and
President of First Interstate of Southern Nevada Bank (a banking
corporation) from July 1991 to January 1994.
There are no family relationships among the executive officers
of the Company. The executive officers of the Company serve at the
discretion of the Board of Directors.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock, $.01 par value (the "Common Stock"),
is traded principally on the New York Stock Exchange (the "NYSE")
under the symbol UAL, and is also listed on the Chicago Stock
Exchange and the Pacific Stock Exchange. The following sets forth
for the periods indicated the high and low sales prices per share of
the Company's Common Stock on the NYSE Composite Tape.
High Low
---- ---
1997:
1st quarter $ 71 1/2 $ 55 3/8
2nd quarter 81 3/8 63
3rd quarter 87 7/8 71 1/2
4th quarter 101 3/4 80 1/2
1996:
1st quarter $ 53 11/16 $ 38 9/16
2nd quarter 60 1/8 50 1/4
3rd quarter 56 5/8 41 1/2
4th quarter 64 3/4 43 1/4
On May 6, 1996 UAL's Common Stock split four-for-one in the form
of a 300% stock dividend to holders of record at the close of
business on that date. The per-share prices above have been adjusted
for the stock split.
No dividends have been declared on the Company's common stock
during the past five years. The payment of any future dividends on
the Common Stock and the amount thereof will be determined by the
Board of Directors of the Company based on earnings, the financial
condition of the Company and other relevant factors. The Company has
no immediate plans to pay cash dividends. At February 26, 1998,
based on reports by the Company's transfer agent for the Common
Stock, there were 13,155 common stockholders of record. In addition,
there were 3,567 holders of record of the Company's old common stock,
$5 par value, who have not tendered their stock certificates as a
result of the employee stock ownership transaction.
Item 6. Selected Financial Data and Operating Statistics
- ----------------------------------------------------------
<TABLE>
<CAPTION>
(In Millions, Except Year Ended December 31
Per Share and Rates)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating revenues $17,378 $16,362 $14,943 $13,950 $13,325
Earnings (loss) before
extraordinary item and
cumulative effect of
accounting changes 958 600 378 77 (31)
Extraordinary loss on early
extinguishment of debt,
net of tax (9) (67) (29) - (19)
Cumulative effect of accounting
changes, net of tax - - - (26) -
Net earnings (loss) 949 533 349 51 (50)
Per share amounts, diluted:
Earnings (loss) before
extraordinary item and
cumulative effect of
accounting changes 9.04 5.85 5.23 0.19 (0.66)
Extraordinary loss on early
extinguishment of debt (0.09) (0.79) (0.41) - (0.19)
Cumulative effect of
accounting changes - - - (0.34) -
Net earnings (loss) 8.95 5.06 4.82 (0.15) (0.85)
Total assets at year-end 15,803 12,677 11,641 11,764 12,840
Long-term debt and capital
lease obligations, including
current portion, and
redeemable preferred stock 4,278 3,385 4,102 4,077 3,735
Revenue passengers 84 82 79 74 70
Revenue passenger miles 121,426 116,697 111,811 108,299 101,258
Available seat miles 169,110 162,843 158,569 152,193 150,728
Passenger load factor 71.8% 71.7% 70.5% 71.2% 67.2%
Breakeven passenger load
factor 66.0% 66.0% 66.1% 68.2% 65.5%
Passenger revenue per
passenger mile (in cents) 12.6 12.4 11.8 11.3 11.6
Operating revenue per
available seat mile (in cents) 10.3 10.0 9.4 9.1 8.7
Operating expense per
available seat mile (in cents) 9.5 9.3 8.9 8.8 8.5
Operating expense per available
seat mile excluding ESOP
charges (in cents) 8.9 8.9 8.6 8.6 -
Fuel gallons consumed 2,964 2,883 2,822 2,697 2,699
Average price per gallon
of jet fuel (in cents) 69.5 72.2 59.5 58.8 63.6
</TABLE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
- -----------------------------------------------------------
This section contains forward-looking statements which
are identified with an asterisk (*). Factors that
could significantly impact the expected results
referenced in the forward-looking statements are listed
in the last paragraph of the section, "Outlook for
1998."
On July 12, 1994, the stockholders 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 is being allocated to individual
employee accounts through the year 2000 under Employee Stock
Ownership Plans ("ESOPs") which were created as part of the
recapitalization. Since the ESOP shares are being allocated
over time, the current ownership interest held by employees
is substantially less than 55%. The entire ESOP voting
interest is currently exercisable, which is voted by the
ESOP trustee at the direction of, and on behalf of, the
employees participating in the ESOPs.
Liquidity and Capital Resources
- -------------------------------
Liquidity -
UAL's total of cash and cash equivalents and short-
term investments was $845 million at December 31, 1997,
compared to $697 million at December 31, 1996. Operating
activities during the year generated $2.567 billion and the
Company's sale of its interest in the Apollo Travel Services
Partnership provided $539 million in cash proceeds (see
"Sale of Affiliate"). Cash was used primarily to fund net
additions to property and equipment and to repurchase common
stock.
Property additions, including aircraft, aircraft spare
parts, facilities and ground equipment, amounted to $2.812
billion, while property dispositions resulted in proceeds of
$83 million. In 1997, United took delivery of fourteen
B777, five B747, two B757, five A320 and four A319 aircraft.
Twenty-four of these aircraft were purchased and six were
acquired under capital leases. Three of the aircraft
purchased during the year were later sold and then leased
back. Additionally, United acquired two B767 and one DC10-
10 off-lease during 1997.
Consistent with a plan announced early in the year,
the Company made payments of $250 million for the repurchase
of 2.9 million shares of common stock. Financing activities
also included the early extinguishment of $151 million in
principal amount of various debt securities, mandatory
repayments of long-term debt totaling $136 million, payments
under capital lease obligations of $147 million, deposits of
an equivalent $112 million in Japanese yen, German marks and
French francs with certain banks in connection with the
financing of certain aircraft acquired under capital lease
transactions, as well as the issuance of $597 million of
enhanced pass through certificates.
Included in cash and cash equivalents at December 31,
1997 were $111 million of securities held by third parties
under securities lending agreements, as well as collateral
in the amount of 102% of the value of the securities lent.
United is obligated to reacquire the securities from the
borrower at the end of the contract.
As of December 31, 1997, UAL had a working capital
deficit of $2.300 billion as compared to $2.321 billion at
December 31, 1996. 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. In
addition, UAL may from time to time repurchase on the open
market, in privately negotiated purchases or otherwise,
debentures or preferred stock.
United has available a $750 million revolving credit
facility, as well as a separate $227 million short-term
borrowing facility, as described in Note 7 "Short-Term
Borrowings" in the Notes to Consolidated Financial
Statements.
Prior Years. Operating activities in 1996 generated
cash flows of $2.453 billion. Cash was used primarily to
repay long-term debt and to fund net additions to property
and equipment. In addition to the early extinguishment of
$641 million in principal amount of various debt securities,
UAL made mandatory repayments of long-term debt totaling
$150 million and payments under capital lease obligations of
$112 million during the year. Financing activities also
included payments of $324 million for conversions of all of
UAL's outstanding 6 3/8% convertible debentures, $84 million
for repurchases of UAL's Series B preferred stock and
deposits of an equivalent $110 million in Japanese yen with
certain banks in connection with the financing of certain
capital lease transactions. Property additions amounted to
$1.538 billion, while property dispositions resulted in
proceeds of $55 million.
Operating activities in 1995 generated cash flows of
$1.624 billion. Cash was used primarily to repay long-term
debt, reacquire preferred stock, reduce short-term
borrowings and to fund net additions to property and
equipment. In addition to the early extinguishment of $750
million in principal amount of various debt securities, UAL
made mandatory repayments of long-term debt totaling $102
million. Payments under capital lease obligations amounted
to $80 million during the year and short-term borrowings
were reduced by $269 million. In addition, UAL spent $131
million to repurchase Series B preferred stock to be held in
treasury. Property additions, including the acquisition of
39 previously leased aircraft, amounted to $1.111 billion.
Property dispositions resulted in proceeds of $578 million.
Capital Commitments -
At December 31, 1997, commitments for the purchase of
property and equipment, principally aircraft, approximated
$5.6 billion, after deducting advance payments. Of this
amount an estimated $2.6 billion is due to be spent in 1998.
These amounts do not include a recent order with Airbus
Industrie for an additional 10 A319 and 20 A320 aircraft to
be delivered through 2001. The aircraft included in this
latest order are expected to be used to satisfy growth
opportunities, and thus, the Company now expects its
passenger fleet to grow by at least 30 aircraft by the year
2002. For further details, see Note 18 "Commitments,
Contingent Liabilities and Uncertainties" in the Notes to
Consolidated Financial Statements.
Capital Resources -
Funds necessary to finance aircraft acquisitions are
expected to be obtained from internally generated funds,
external financing arrangements or other external sources.
At December 31, 1997, United's senior unsecured debt
was rated BB+ by Standard and Poor's ("S & P") and Baa3 by
Moody's Investors Service Inc. ("Moody's"). UAL's Series B
preferred stock and redeemable preferred securities were
rated BB- by S & P and Ba3 by Moody's. In December 1997, S
& P affirmed its ratings and revised its outlook to positive
from stable on UAL and United.
Results of Operations
- ---------------------
Summary of Results -
UAL's earnings from operations were $1.259 billion in
1997, compared to operating earnings of $1.123 billion in
1996. UAL's net earnings in 1997 were $949 million ($14.83
per share, basic; $8.95 per share, diluted), compared to net
earnings of $533 million in 1996 ($7.57 per share, basic;
$5.06 per share, diluted).
These earnings include extraordinary losses of $9
million and $67 million, after tax, on early extinguishment
of debt, in 1997 and 1996, respectively. In addition, 1997
includes an after-tax gain on the ATS/Galileo transaction
(see "Sale of Affiliate") of $235 million ($3.99 per share,
basic and $2.40 per share, diluted). The per share amounts
for 1996 include the effects on equity of preferred stock
transactions (see Note 4 "Per Share Amounts" in the Notes to
Consolidated Financial Statements).
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 period (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 is excluded from
Fully Distributed net earnings, and ESOP convertible
preferred stock dividends are not deducted from earnings
attributable to common stockholders. No adjustments are
made to Fully Distributed earnings to reflect future salary
increases. A comparison of results reported on a Fully
Distributed basis to results reported under generally
accepted accounting principles (GAAP) is as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
GAAP Fully GAAP Fully
(diluted) Distributed (diluted) Distributed
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Net Income $ 949 $ 1,546 $ 533 $ 960
----- ------- ----- ------
Per Share:
Earnings before preferred
stock transactions, gains
on sales and extraordinary
loss $ 6.64 $ 9.97 $ 6.42 $ 7.71
Gains on sales of
ATS/Galileo, net 2.40 1.79 - -
Preferred stock
transactions, net - - (0.57) (0.37)
Extraordinary loss, net (0.09) (0.07) (0.79) (0.51)
----- ------ ----- ------
$ 8.95 $ 11.69 $ 5.06 $ 6.83
===== ====== ===== ======
</TABLE>
1997 Compared with 1996 -
- -----------------------
Operating Revenues. Operating revenues increased
$1.016 billion (6%) and United's revenue per available seat
mile (unit revenue) increased 2% to 10.25 cents. Passenger
revenues increased $877 million (6%) due to a 4% increase in
United's revenue passenger miles and a 2% increase in yield
to 12.55 cents. Available seat miles across the system were
up 4% year over year resulting in a slight increase to
system passenger load factor of 0.1 points to 71.8%. The
following analysis by market is based on information
reported to the U.S. Department of Transportation ("DOT"):
Latin American revenue passenger miles increased 2%,
despite no increase in capacity. Strengthening economies in
Latin American countries as well as an improved mix of high-
yield passengers helped produce an 8% increase in yield.
Atlantic revenue passenger miles increased 20% on 19% higher
capacity reflecting increased frequencies and the
utilization of larger B777 aircraft. Strong U.S. and
European economies provided a positive pricing environment
resulting in a 3% increase in Atlantic yield. Pacific
revenue passenger miles and yield remained flat despite 3%
higher capacity reflecting a weak Japanese economy and a
stronger U.S. dollar. Domestic revenue passenger miles
increased 3% on 2% higher capacity. Domestic yield
increased 1%, despite the fact that the U.S. airline ticket
tax was in effect for only four months of 1996 versus ten
months of 1997. New legislation, effective October 1, 1997,
includes a gradual reduction in the 10% U.S. airline ticket
tax to 7.5% by the year 2002, a phasing in of a $3 "head
tax" per domestic flight segment over the same period, an
increase in round-trip international departure and arrival
taxes from $6 to $24 per passenger and a tax on the purchase
of frequent flyer miles. The Company expects that the new
legislation will increase United's annual tax burden by
approximately $80 million, but is unable to determine how
much of this increase it will be able to pass on to its
customers.
Cargo revenues increased $119 million (15%) on
increases of 24% in freight ton miles and 6% in mail ton
miles, as a result of a new dedicated freighter operation
utilizing four DC10-30s and the introduction of long-range
B777-200B aircraft. A 5% lower freight yield was only
partially offset by a 2% higher mail yield for an overall
decrease in cargo yield of 4%.
Other operating revenues increased $20 million (2%)
due to increases in frequent flyer program partner related
revenues and fuel sales to third parties, partially offset
by the loss of ATS revenues resulting from its sale in July
1997 (see "Sale of Affiliate").
Operating Expenses. Operating expenses increased $880
million (6%) and United's cost per available seat mile
increased 2% from 9.33 to 9.53 cents, including ESOP
compensation expense. Without the ESOP compensation
expense, United's 1997 cost per available seat mile would
have been 8.94 cents, an increase of less than 1% from 1996.
ESOP compensation expense increased $302 million (44%),
reflecting the increase in the estimated average fair value
of ESOP stock committed to be released to employees as a
result of UAL's higher common stock price. Salaries and
related costs increased $299 million (6%) as a result of
increased staffing in certain customer-contact positions, as
well as mid-term wage adjustments which took effect July 1.
Commissions increased $42 million (3%) due to increased
commissionable revenues, partially offset by the change in
the commission structure which United implemented in the
third quarter of 1997. United lowered the base commission
paid to travel agents from 10% to 8% (up to a maximum of
$50) on all tickets purchased in the U.S. and Canada for
both domestic and international travel. This action is
expected to save approximately $100 million annually in
commission costs. Purchased services increased $98 million
(8%) due principally to volume-related increases in computer
reservations fees, credit card discounts and communication
charges. Aircraft maintenance increased $154 million (34%)
due to increased purchased maintenance as well as the timing
of maintenance cycles. Depreciation and amortization
decreased $35 million (5%) despite the acquisition of new
aircraft, due to lower depreciation on DC10-10 aircraft
which are scheduled for retirement, gains on asset sales of
$23 million in 1997 compared to $11 million in 1996, and a
$30 million charge in 1996 to reduce the carrying value of
aircraft seats being replaced. Aircraft fuel decreased $21
million (1%) despite a 3% increase in consumption, due to a
4% decrease in the price of fuel from 72.2 cents to 69.5
cents a gallon.
Other Income and Expense. Other income (expense)
amounted to $265 million in income in 1997 compared to $153
million in expense in 1996. Interest capitalized, primarily
on aircraft advance payments, increased $27 million (35%).
Interest expense decreased $9 million (3%) due to the
prepayment of long-term debt in 1996. Interest income
decreased $5 million (9%) due to lower average interest
rates. In addition, 1997 included a $275 million gain on
the sale of ATS and a $103 million gain on the initial
public offering of Galileo stock. 1996 included a $20
million charge for the settlement of litigation related to
the travel agency commission cap implemented by the Company
in February 1995.
1996 Compared with 1995 -
- -----------------------
Operating Revenues. Operating revenues increased
$1.419 billion (10%). United's revenue per available seat
mile increased 7% to 10.02 cents. Passenger revenues
increased $1.238 billion (9%) due to a 4% increase in
United's revenue passenger miles and a 5% increase in yield
to 12.35 cents. The following analysis by market is based
on information reported to the DOT:
Yield increases in the domestic (7%), Atlantic (7%)
and Latin American (4%) markets were partially offset by a
4% decrease in Pacific yield. Domestic yield increased as a
result of a larger proportion of high yield business traffic
and fare levels influenced by the expiration of the Federal
passenger excise tax from January through August. A weaker
Japanese yen versus the dollar had a significant negative
impact on 1996 Pacific yield. Both domestic and
international revenue passenger miles increased by 4%.
Available seat miles increased 3% for the system, reflecting
increases of 4% in the Pacific and Latin American and 3% in
domestic markets. Atlantic available seat miles remained
unchanged. As a result, system passenger load factor
increased 1.2 points to 71.7%.
Cargo revenues increased $16 million (2%). Freight
ton miles increased 6% and mail ton miles increased 5%. A
6% lower freight yield was only partially offset by a 3%
higher mail yield for an overall decrease in cargo yield of
3%.
Other operating revenues increased $165 million (17%)
due to increases in frequent flyer program partner related
revenues, contract maintenance and fuel sales to third
parties.
Operating Expenses. Operating expenses increased
$1.125 billion (8%). United's cost per available seat mile
increased 5% from 8.87 cents to 9.32 cents. ESOP
compensation expense increased $181 million (36%),
reflecting the increase in the estimated average fair value
of ESOP stock committed to be released to employees as a
result of UAL's higher common stock price. Aircraft fuel
increased $402 million (24%) due to a 2% increase in
consumption and a 21% increase in the average price per
gallon of fuel from 59.5 cents to 72.2 cents. Without the
increases in ESOP compensation expense and aircraft fuel,
United's cost per available seat mile would have increased
2%. Salaries and related costs increased $193 million (4%)
due principally to increased staffing in certain customer-
contact positions. Other expenses increased $166 million
(9%) due principally to costs associated with sales to third
parties of fuel, contract maintenance and other work.
Purchased services increased $125 million (12%) due
principally to volume-related increases in computer
reservations fees, credit card discounts and communication
charges. Aircraft maintenance increased $42 million (10%)
due to increased purchased maintenance, as well as the
timing of maintenance cycles. Depreciation and amortization
increased $95 million (14%) due principally to a $30 million
charge to reduce the carrying value of aircraft seats and to
a $41 million gain recorded in 1995 on the disposition of
certain aircraft. Commissions were flat year over year
despite an increase in commissionable revenues due to lower
average commission rates. These lower rates were partially
attributable to the full year effects of a new travel agent
commission plan introduced in 1995. Aircraft rent decreased
$57 million (6%) due to the acquisition of 39 aircraft off-
lease in the second half of 1995.
Other Income and Expense. Other expense amounted to
$153 million in 1996 compared to $208 million in 1995.
Interest capitalized, primarily on aircraft advance
payments, increased $35 million (83%). Interest expense
decreased $104 million (26%) due to the prepayment of long-
term debt in 1995 and 1996 and the conversion of convertible
debentures in the second quarter of 1996. Interest income
decreased $41 million (42%) due to lower investment
balances. Equity in earnings of affiliates increased $16
million (33%) due to higher earnings from Galileo
International resulting from increased booking revenues.
Included in other expense for 1996 is a $20 million charge
for the settlement of litigation related to the travel
agency commission cap implemented by the Company in 1995.
Other Information
- -----------------
Sale of Affiliate -
In July 1997, United completed the sale of its
interest in the Apollo Travel Services Partnership ("ATS"),
a 77% owned affiliate whose accounts were consolidated, to
Galileo International, Inc. ("Galileo"), heretofore a 38%
owned affiliate accounted for under the equity method, for
$539 million in cash. This transaction resulted in a pre-
tax gain of approximately $405 million. Of this amount,
$275 million was recognized during the third quarter and the
balance will be recognized over the next 25 years, the
estimated remaining life of the assets acquired by Galileo.
Galileo raised a portion of the proceeds used to
purchase ATS through the completion of an initial public
offering of 16,799,700 shares of its common stock,
representing 16.0% of its economic interest, at $24.50 per
share for net proceeds of approximately $390 million. This
transaction resulted in a reduction of the Company's
ownership in Galileo from 38% to 32%. In accordance with
the Company's policy of recognizing gains or losses on the
sale of a subsidiary's stock, based on the difference
between the offering price and the Company's carrying amount
of such stock, the Company recognized a pre-tax gain of $103
million during the third quarter. Pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 109, the Company
also recorded $40 million of deferred taxes related to this
gain.
In connection with the sale, United entered into an
additional services agreement under which the Company will
provide certain marketing and other services designed to
increase the competitiveness of Galileo's business and to
generate additional bookings and revenues for Galileo.
Under this agreement, United could receive up to $154
million (on a present value basis) in the sixth year
following the sale, based on specified improvements in air
booking revenues over a five-year period.
United continues to account for Galileo under the
equity method and will continue to purchase computer
reservations services under its existing services agreement
with Galileo.
Labor Agreements and Wage Adjustments -
The 1994 recapitalization 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
stockholders. The 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, the issuance of equity securities and the ability to
furlough employees.
Consistent with the various agreements supporting the
July 1994 recapitalization, in 1997 employees represented by
the Air Line Pilots' Association, International ("ALPA") and
the International Association of Machinists and Aerospace
Workers ("IAM") ratified mid-term wage adjustments providing
for 5% increases in wage rates in July 1997 and 1998.
Further, the agreement with ALPA calls for a corresponding
5% increase in both 1997 and 1998 to "book rates" (book
rates are used to compute certain other employee benefits),
and the agreement with the IAM provided for lump sum
payments for all IAM employees and increases in hourly
license premium and skill pay for mechanics. These
agreements also provide for restoration of wage rates for
the two groups in the year 2000 to levels that existed prior
to the recapitalization in July 1994, as well as restoration
of the Company's contribution to the pilots' defined
contribution plan from its current rate of 1% to its pre-
ESOP rate of 9% in the year 2000.
Also during the year, the Company announced the
details of the mid-term wage adjustments for United States
salaried and management employees. Salaried employees
received a 5% increase in July 1997, as well as a lump-sum
payment, and will receive an additional 5% increase in July
1998. Management employees received a 4% increase in July
1997, and will receive an additional 4% increase in July
1998. Also, management employees not participating in the
Company's Incentive Compensation Plan will participate in a
three-year profit-sharing plan that could pay an additional
amount in 1999 and 2000, if the Company meets specific pre-
tax earnings objectives in 1998 and 1999, respectively.
These employees already received the maximum annual profit
sharing payout, 3.75% of annual wages, in February 1998,
based on 1997's financial performance.
On October 1, 1997, the Association of Flight
Attendants ("AFA") ratified a new contract which will remain
in effect through March 1, 2006. Included in the contract
was a lump sum payment of 7% in December 1997 and future
lump sum payments of 4% in December 1998 and 1999 and 5% in
2001, 2003 and 2005; as well as minimum 2% wage increases in
2000, 2002 and 2004. Additionally, the contract includes a
series of arbitrations beginning in 2001 which can award
additional compensation increases, subject to meeting Vision
2000 goals as discussed below. The agreement also provides
for benefits and work rule changes and a number of service
quality and productivity enhancements designed to help the
Company achieve its customer satisfaction objectives.
The wage, benefit and work-rule adjustments outlined
above are consistent with the Company's objective, known as
Vision 2000, to put employee compensation on a competitive
level with peer group compensation at the conclusion of the
agreements outlined above. The ultimate cost to the Company
of Vision 2000, particularly given that peer group
compensation is subject to change between now and the
conclusion of the agreements, is not determinable. However,
as a result of these changes, the Company expects that its
annual Salaries and related costs will increase at a faster
rate than its major competitors from now through the year
2000.
Foreign Operations -
United generates revenues and incurs expenses in
numerous foreign currencies. These expenses include
aircraft leases, commissions, catering, personnel costs,
reservation and ticket office services, customer service
expenses and aircraft maintenance. Changes in foreign
currency exchange rates impact operating income through
changes in foreign currency-denominated operating revenues
and expenses. Despite the adverse (favorable) effects a
strengthening (weakening) foreign currency may have on U.S.
originating traffic, a strengthening (weakening) of foreign
currencies tends to increase (decrease) reported revenue and
operating income because United's foreign currency-
denominated operating revenue generally exceeds its foreign
currency-denominated operating expense for each currency.
By carrying passengers and cargo in both directions
between the U.S. and almost every major economic region in
the world and by selling its services in each local country,
United attempts to mitigate its exposure to fluctuations in
any single foreign currency. The Company's biggest net
exposures are typically for Japanese yen, Hong Kong dollars
and Australian dollars. During 1997, yen-denominated
operating revenue net of yen-denominated operating expense
was approximately 62 billion yen (approximately $541
million), Hong Kong dollar-denominated operating revenue net
of Hong Kong dollar-denominated operating expense was
approximately 1,692 million Hong Kong dollars (approximately
$219 million) and Australian dollar-denominated operating
revenue net of Australian dollar-denominated operating
expense was approximately 218 million Australian dollars
(approximately $161 million). United hedges some of the
risk of exchange rate volatility on its anticipated future
net yen and net Hong Kong dollar cash flows by purchasing
put options for each respective currency. To reduce some of
the costs of this hedging program, the Company also sells
call options in each currency from time to time. United
attempts to reduce its exposure to transaction gains and
losses by converting excess local currencies generated to
U.S. dollars and by entering into currency forward or
exchange contracts. The total notional amount of
outstanding currency options and forward exchange contracts,
and their respective fair market values as of December 31,
1997, are summarized in Item 7A. Quantitative and
Qualitative Disclosures About Market Risk.
United's foreign operations involve insignificant
amounts of physical assets; however, there are sizable
intangible assets related to acquisitions of foreign route
authorities. Operating authorities in international markets
are governed by bilateral aviation agreements between the
United States and foreign countries. Changes in U.S. or
foreign government aviation policies can lead to the
alteration or termination of existing air service agreements
that could adversely impact the value of United's
international route authority. Significant changes in such
policies could also have a material impact on UAL's
operating revenues and results of operations.
In January 1998, the governments of Japan and the
United States announced details of a new four-year aviation
agreement which liberalizes the aviation market between the
U.S. and Japan. Under the accord, United has been
designated an "incumbent carrier" and as such, will be
permitted to offer service between any points in the U.S.
and any points in Japan and will also be entitled to fly
beyond Japan to other points in Asia without restriction.
Further, United will be able to code-share flights with
Japanese, third country or other U.S. airlines if it
chooses. While these rights give more flexibility to the
Company than it had under the previous U.S.-Japan aviation
agreement, many of United's competitors also received
benefits in the form of greater access to the U.S.-Japan
market. Further, access to Tokyo's Narita airport is
constrained by current capacity limitations on takeoff and
landing slots. Thus, while supportive of the new agreement,
the Company is unable to predict what overall effect, if
any, the new agreement will have on its future financial
results as long as the current capacity limitations at
Narita are in existence. However, upon completion of a
second runway at Narita, the Company expects the current
capacity limitations to be relaxed and believes it will be
able to realize significant financial benefits as a result
of the flexibility received under the new U.S.-Japan
aviation agreement.*
Deferred Tax Assets -
UAL's consolidated balance sheet at December 31, 1997
includes a net deferred tax asset of $165 million, compared
to $359 million at December 31, 1996. The net deferred tax
asset is composed of approximately $2.257 billion of
deferred tax assets and $2.092 billion of deferred tax
liabilities. The deferred tax assets include, among other
things, $918 million related to obligations for
postretirement and other employee benefits, $398 million
related to gains on sales and leasebacks, $382 million
related to rent expense and $137 million related to
alternative minimum tax ("AMT") credit carryforwards.
Management believes it is more likely than not that future
taxable income will be sufficient to utilize the deferred
tax assets at December 31, 1997.*
Airport Rents and Landing Fees -
United is charged facility rental and landing fees at
virtually every airport at which it operates. In recent
years, many airports have increased or sought to increase
rates charged to airlines as a means of compensating for
increasing demands upon airport revenues. Airlines have
challenged certain of these increases through litigation and
in some cases have not been successful. The Federal
Aviation Administration ("FAA") and the DOT have instituted
an administrative hearing process to judge whether rate
increases are legal and valid. However, to the extent the
limitations on such charges are relaxed or the ability of
airlines to challenge such charges is restricted, the rates
charged by airports may increase substantially. Management
cannot predict the magnitude of any such increase.
Year 2000 Compliance -
Over the next two years, most large companies will face
a potentially serious business problem because many software
applications and computer equipment developed in the past
may not properly recognize calendar dates beginning in the
year 2000. This problem could cause computers to either
shut down or provide incorrect data. United began taking
measures to address this problem in late 1995 and has
created a Year 2000 Project office, headed by a senior
officer of the Company, to manage and coordinate the
Company's efforts to identify and fix critical date-
sensitive systems. The scope of the Company's efforts is
divided into two major phases, review of internally used
software as well as review of other potential operational
impacts and relationships with key business partners. The
status of the Company's efforts in each of these areas is as
follows:
The Company has completed its assessment of over 40,000
mainframe-based and network-based programs used internally
in connection with key business applications, and has
estimated that it will cost approximately $15 million to
modify these programs to make them Year 2000 compliant.
Through December 31, 1997, $4 million has been spent and
recognized as expense in the Company's results of
operations. The Company's plan is to have all applications
not compliant as of December 31, 1997 modified and tested by
December 31, 1998.
United has not yet completed its assessment of the
impact of Year 2000 on operational systems such as aircraft
avionics, flight simulators and airport operations as well
as relationships with key business partners, including the
FAA, other governmental agencies and suppliers. This
assessment involves a five stage process: Identification,
Assessment of Impacts, Development of Remediation Approach,
Prioritization of Efforts, and Testing and Implementation of
Remediation Approach. The Company will carry out this task
through a company-wide effort, assisted by consultants, to
address internal issues, and jointly with industry trade
groups, to address issues related to key business partners
which are common to other air carriers. The Company has not
completed the development of the remediation approach for
all affected areas. As a result, the Company cannot
estimate what the total cost will be to implement
remediation efforts for all critical operational systems but
it is possible that such costs will be material. The
Company expects to complete the assessment and development
stages of this plan by September 1998, at which time it
expects to be able to make a reasonable cost estimate.
Implementation of all remediation efforts is scheduled to be
completed by March 31, 1999.
The Company has started an ongoing program to review
the status of key supplier Year 2000 compliance efforts.
While the Company believes it is taking all appropriate
steps to assure Year 2000 compliance, it is dependent on key
business partner compliance to some extent. The Year 2000
problem is pervasive and complex as virtually every computer
operation will be affected in some way. Consequently, no
assurance can be given that Year 2000 compliance can be
achieved without costs that might affect future financial
results or cause reported financial information not to be
necessarily indicative of future operating results or future
financial condition.
Environmental and Legal 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.
United's alleged proportionate contributions at the sites
are minimal; however, at sites where the EPA has commenced
litigation, potential liability is joint and several.
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
this and other 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.*
New Accounting Pronouncements -
The Financial Accounting Standards Board ("FASB") has
issued SFAS No. 130, "Reporting Comprehensive Income" which
establishes standards for displaying comprehensive income
and its components in a full set of general purpose
financial statements; SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" which
establishes standards for reporting information about
operating segments in financial statements; and SFAS No.
132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" which revises disclosure
requirements for pension and other postretirement benefit
plans. Each of these statements are effective for fiscal
years beginning after December 15, 1997, and are not
expected to have a material impact on the Company's
financial position or results of operations.
Outlook for 1998 -
The recent economic downturn in Asia, where currency
devaluations and debt crises have negatively affected growth
through most of the region and pushed some countries into
recession, has caused a fall-off in Pacific revenue passenger
miles through the first two months of the year. As a result,
the Company expects full-year system revenues to be lower than
originally planned when it released 1998 revenue and cost
guidance last December. In keeping with the Company's contingency
planning, United is taking steps to respond to and offset the
effects on profits from the weakness of the Asian market. These
measures include the reallocation of capacity and the revision
of discretionary spending plans. Furthermore, some costs,
such as fuel, are expected to be below earlier estimates,
resulting in lower than previously anticipated full-year expenses.
All factors considered, the Company anticipates continued
strong performance in 1998. Real Gross Domestic Product in the
U.S. is assumed to continue to grow moderately at a rate of about
2.5% and the system capacity of U.S. airlines is expected to grow
at around 3% in 1998, approximately the same as its 1997 growth
rate. United's available seat miles are expected to increase 2.5%,
with 3.5% growth domestically and 1.5% growth internationally.
Revenue per available seat mile is forecast to be up
approximately 1%. Costs per available seat mile excluding
ESOP charges are expected to increase approximately 1%.
For the first quarter, United expects total system
revenue per available seat mile to decrease by 3.5% versus
the same period last year, on 2.5% higher capacity. Costs per
available seat mile excluding ESOP charges are expected to
decrease approximately 3% over the first quarter of 1997. The
Company's outlook is consistent with the current First Call
consensus earnings estimate of $1.55 per fully distributed
share for the first quarter.
The information included in the above outlook section,
as well as certain statements made throughout the
Management's Discussion and Analysis of Financial Condition
and Results of Operations that are identified by an asterisk
(*), is forward-looking and involves risks and uncertainties
that could result in actual results differing materially
from expected results. It is not reasonably possible to
itemize all of the many factors and specific events that
could affect the outlook of an airline operating in the
global economy. Some factors that could significantly
impact expected capacity, unit revenues, fully distributed
unit costs and fully distributed earnings per share include
the airline pricing environment, industry capacity decisions,
willingness of customers to travel, the success of the Company's
cost control efforts, fuel cost, costs of safety and security
measures, actions of the U.S., foreign and local governments,
the effect of the U.S. excise tax on travel, foreign currency
exchange rate fluctuations, the Asian economic environment and
travel patterns, the economic environment of the airline industry,
the general economic environment and other factors discussed herein.
With respect to the forward-looking statement set forth in
the "Environmental and Legal Contingencies" section, some of
the factors that could affect the ultimate disposition of
these contingencies are changes in applicable laws, the
development of facts in individual cases, settlement
opportunities and the actions of plaintiffs, judges and
juries.
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk
- --------------------------------------------------------
Interest Rate Risk - United's exposure to market risk
associated with changes in interest rates relates primarily
to its debt obligations and short-term investments. United
does not use derivative financial instruments in its
investments portfolio. United's policy is to manage
interest rate risk through a combination of fixed and
floating rate debt and entering into swap agreements,
depending upon market conditions. A portion of the
borrowings are denominated in foreign currencies which
exposes the Company to risks associated with changes in
foreign exchange rates. In addition, the Company has placed
foreign currency deposits (primarily for Japanese yen,
French francs and German marks) to meet foreign currency
lease obligations designated in the respective currencies.
The unrealized mark-to-market gains or losses on the foreign
currency obligations are offset by the losses or gains on
the foreign currency deposits.
<TABLE>
<CAPTION>
(In millions) Expected Maturity Dates
Fair
1998 1999 2000 2001 2002 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash equivalents
Fixed rate $ 295 $ - $ - $ - $ - $ - $ 295 $ 295
Avg. interest rate 6.00% - - - - - 6.00%
Short term investments
Fixed rate $ 460 $ - $ - $ - $ - $ - $ 460 $ 460
Avg. interest rate 5.87% - - - - - 5.87%
Variable rate $ 90 - - - - - $ 90 $ 90
Avg. interest rate 5.90% - - - - - 5.90%
Foreign currency deposits
Fixed rate-yen deposits $ - $ - $ - $ - $ - $ 254 $ 254 $ 281
Avg. interest rate - - - - - 3.23% 3.23%
Fixed rate-FF deposits $ - $ - $ - $ - $ - $ 4 $ 4 $ 4
Avg. interest rate - - - - - 5.82% 5.82%
Fixed rate-DM deposits $ 2 $ 2 $ 2 $ 2 $ 2 $ 50 $ 60 $ 60
Avg. interest rate 6.86% 6.86% 6.86% 6.86% 6.86% 6.86% 6.86%
LONG TERM DEBT
U.S. Dollar denominated
Fixed rate debt $ 22 $ 24 $ 25 $ 27 $ 30 $1,373 $1,501 $1,725
Avg interest rate 8.54% 8.54% 8.49% 8.45% 8.45% 8.92% 8.88%
Variable rate debt $ 190 $ 19 $ 19 $ 19 $ 534 $ 32 $ 813 $ 813
Avg interest rate 6.42% 6.19% 6.19% 6.20% 6.15% 6.64% 6.23%
Japanese Yen denominated
Fixed rate debt $ 8 $ 9 $ 9 $ - $ - $ - $ 26 $ 27
Avg interest rate 7.90% 7.90% 7.90% - - - 7.90%
</TABLE>
Foreign Currency Risk - United has established a
foreign currency hedging program using currency forwards and
currency options (purchasing put options or selling call
options) to hedge exposure to the Japanese yen and Hong Kong
dollar. The goal of the hedging program is to effectively
manage risk associated with fluctuations in the value of the
foreign currency, thereby making financial results more
stable and predictable. United does not use currency
forwards or currency options for trading purposes.
<TABLE>
<CAPTION>
(In millions, except Notional Average Estimated
average contract rates) Amount Contract Rate Fair Value
------ ------------- ----------
<S> <C> <C> <C>
Forward exchange contracts
Japanese Yen $ 122 97.53 $ (29)
Currency options
Japanese Yen - Put options $ 200 120.35 $ 14
- Call options $ 132 112.42 $ (1)
Hong Kong Dollar - Put options $ 44 8.11 $ -
- Call options $ 46 7.88 $ (1)
</TABLE>
Price Risk (Aircraft Fuel) - At December 31, 1997, the
Company had contracted to purchase approximately 6% of the
Company's 1998 fuel requirements at an average fixed price
of $0.52 per gallon. To hedge a portion of the remaining
risk associated with changes in the price of aircraft fuel,
United has entered into certain fuel option contracts. The
option contracts, which involve either purchasing call
options and simultaneously selling put options (collar
strategy) or purchasing call options, are designed to
provide protection against sharp increases in the price of
aircraft fuel. In addition, to a limited extent United
trades short-term heating oil futures and option contracts,
which are immaterial.
<TABLE>
<CAPTION>
(In millions, except Notional Average Estimated
average contract rates) Amount Contract Rate Fair Value
------ ------------- ----------
<S> <C> <C> <C>
Purchased call contracts - Crude oil $ 458 $19.95/bbl $ 10
- Heating oil $ 206 $ 0.54/gal $ 3
Sold put contracts - Crude oil $ 403 $19.24/bbl $ (28)
- Heating oil $ 200 $ 0.53/gal $ (13)
</TABLE>
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of UAL Corporation:
We have audited the accompanying statements of consolidated
financial position of UAL Corporation (a Delaware
corporation) and subsidiary companies as of December 31,
1997 and 1996, and the related statements of consolidated
operations, consolidated cash flows and consolidated
stockholders' equity for each of the three years in the
period ended December 31, 1997. These financial statements
and the schedule referred to below 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, 1997 and 1996, and the results
of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion
on the basic financial statements taken as a whole. The
schedule referenced in Item 14(a)2 herein is presented for
purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set
forth therein in relation to the basic financial statements
taken as a whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 26, 1998
<TABLE>
<CAPTION>
UAL Corporation and Subsidiary Companies
Statements of Consolidated Operations
(In Millions, Except Per Share)
Year Ended December 31
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating revenues:
Passenger $15,342 $14,465 $13,227
Cargo 892 773 757
Other operating revenues 1,144 1,124 959
------ ------ ------
17,378 16,362 14,943
------ ------ ------
Operating expenses:
Salaries and related costs 5,018 4,719 4,526
ESOP compensation expense 987 685 504
Aircraft fuel 2,061 2,082 1,680
Commissions 1,508 1,466 1,471
Purchased services 1,285 1,187 1,062
Aircraft rent 942 952 1,009
Landing fees and other rent 863 846 803
Depreciation and amortization 724 759 664
Aircraft maintenance 603 449 407
Other operating expenses 2,128 2,094 1,928
------ ------ ------
16,119 15,239 14,054
------ ------ ------
Earnings from operations 1,259 1,123 889
Other income (expense):
Interest expense (286) (295) (399)
Interest capitalized 104 77 42
Interest income 52 57 98
Equity in earnings of affiliates 66 64 48
Gain on sale of partnership
interest 275 - -
Gain on sale of affiliate's
stock 103 - -
Miscellaneous, net (49) (56) (57)
------ ------ ------
265 (153) (268)
------ ------ ------
Earnings before income taxes,
distributions on preferred
securities and extraordinary item 1,524 970 621
Provision for income taxes 561 370 243
------ ------ ------
Earnings before distributions on
preferred securities and
extraordinary item 963 600 378
Distributions on preferred
securities, net (5) - -
Extraordinary loss on early
extinguishment of debt, net (9) (67) (29)
------ ------ ------
Net earnings $ 949 $ 533 $ 349
====== ====== ======
Per share, basic:
Earnings before extraordinary
item $14.98 $ 8.76 $ 6.98
Extraordinary loss on early
extinguishment of debt, net (0.15) (1.19) (0.59)
------ ------ ------
Net earnings $14.83 $ 7.57 $ 6.39
====== ====== ======
Per share, diluted:
Earnings before extraordinary
item $ 9.04 $ 5.85 $ 5.23
Extraordinary loss on early
extinguishment of debt, net (0.09) (0.79) (0.41)
------ ------ ------
Net earnings $ 8.95 $ 5.06 $ 4.82
====== ====== ======
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
UAL Corporation and Subsidiary Companies
Statements of Consolidated Financial Position
(In Millions)
December 31
Assets 1997 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 295 $ 229
Short-term investments 550 468
Receivables, less allowance for doubtful
accounts (1997 - $15; 1996 - $24) 1,051 962
Aircraft fuel, spare parts and
supplies, less obsolescence
allowance (1997 - $29; 1996 - $31) 355 369
Deferred income taxes 244 227
Prepaid expenses and other 453 427
------ ------
2,948 2,682
Operating property and equipment:
Owned -
Flight equipment 10,382 8,393
Advances on flight equipment 972 943
Other property and equipment 2,842 2,989
------ ------
14,196 12,325
Less - Accumulated depreciation
and amortization 5,116 5,380
------ ------
9,080 6,945
------ ------
Capital leases -
Flight equipment 2,221 1,775
Other property and equipment 98 106
------ ------
2,319 1,881
Less - Accumulated amortization 625 583
------ ------
1,694 1,298
------ ------
10,774 8,243
------ ------
Other assets:
Investments in affiliates 223 103
Intangibles, less accumulated
amortization (1997 - $374; 1996 - $353) 703 524
Deferred income taxes - 132
Aircraft lease deposits 318 168
Other 837 825
------ ------
2,081 1,752
------ ------
$15,803 $12,677
====== ======
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
UAL Corporation and Subsidiary Companies
Statements of Consolidated Financial Position
(In Millions)
December 31
Liabilities and Stockholders' Equity 1997 1996
---- ----
<S> <C> <C>
Current liabilities:
Long-term debt maturing within one year $ 235 $ 165
Current obligations under capital leases 171 132
Advance ticket sales 1,267 1,189
Accounts payable 1,030 994
Accrued salaries, wages and benefits 869 906
Accrued aircraft rent 830 800
Other accrued liabilities 846 817
------ ------
5,248 5,003
------ ------
Long-term debt 2,092 1,661
------ ------
Long-term obligations under
capital leases 1,679 1,325
------ ------
Other liabilities and deferred credits:
Deferred pension liability 364 178
Postretirement benefit liability 1,361 1,290
Deferred gains 1,210 1,151
Accrued aircraft rent 368 328
Deferred income taxes 79 -
Other 450 448
------ ------
3,832 3,395
------ ------
Company-obligated mandatorily redeemable
preferred securities of a subsidiary trust 101 102
------ ------
Minority interest - 31
------ ------
Preferred stock committed to
Supplemental ESOP 514 165
------ ------
Stockholders' equity:
Serial preferred stock (Note 11) - -
ESOP preferred stock (Note 12) - -
Common stock at par, $0.01 par value;
authorized 200,000,000 shares; issued
61,288,039 shares at December 31, 1997
and 59,519,096 shares at December
31, 1996 1 1
Additional capital invested 2,876 2,160
Retained earnings (deficit) 309 (566)
Unearned ESOP preferred stock (177) (202)
Stock held in treasury, at cost -
Preferred, 10,149,129 depositary
shares at December 31, 1997
and 1996 (Note 11) (302) (302)
Common, 3,967,553 shares at December
31, 1997 and 701,616 shares at
December 31, 1996 (361) (83)
Other (9) (13)
------ ------
2,337 995
------ ------
Commitments and contingent
liabilities (Note 18) ------ ------
$15,803 $12,677
====== ======
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
UAL Corporation and Subsidiary Companies
Statements of Consolidated Cash Flows
(In Millions)
Year Ended December 31
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash and cash equivalents at
beginning of year $ 229 $ 194 $ 500
----- ----- -----
Cash flows from operating activities:
Net earnings 949 533 349
Adjustments to reconcile to net
cash provided by operating activities -
ESOP compensation expense 987 685 504
Extraordinary loss on debt
extinguishment, net of tax 9 67 29
Gain on sale of partnership interest (275) - -
Gain on sale of affiliate's stock (103) - -
Pension funding less than
(greater than) expense 43 (279) (275)
Deferred postretirement benefit expense 139 130 125
Depreciation and amortization 724 759 664
Provision for deferred income taxes 194 69 214
Undistributed earnings of affiliates (16) (49) (38)
Increase in receivables (222) (10) (62)
Increase in other current assets - (105) (109)
Increase in advance ticket sales 78 89 80
Increase (decrease) in accrued
income taxes 20 84 (52)
Increase in accounts payable and
accrued liabilities 16 294 79
Amortization of deferred gains (64) (63) (79)
Other, net 88 249 195
------ ------ ------
2,567 2,453 1,624
------ ------ ------
Cash flows from investing activities:
Additions to property and equipment (2,812) (1,538) (1,111)
Proceeds on disposition of
property and equipment 83 55 578
Proceeds on disposition of
partnership interest 539 - -
Decrease (increase) in short-term
investments (82) 482 83
Other, net (29) 18 (28)
------ ------ ------
(2,301) (983) (478)
------ ------ ------
Cash flows from financing activities:
Reacquisition of preferred stock - (84) (131)
Repurchase of common stock (250) - -
Proceeds from issuance of
long-term debt 597 - -
Repayment of long-term debt (301) (791) (852)
Principal payments under
capital leases (147) (112) (80)
Conversion of subordinated debentures - (324) -
Decrease in short-term borrowings - - (269)
Aircraft lease deposits (112) (110) (77)
Cash dividends (10) (22) (49)
Other, net 23 8 6
------ ------ ------
(200) (1,435) (1,452)
------ ------ ------
Increase (decrease) in cash and cash
equivalents during the year 66 35 (306)
------ ------ ------
Cash and cash equivalents at end of year $ 295 $ 229 $ 194
====== ====== ======
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
UAL Corporation and Subsidiary Companies
Statements of Consolidated Stockholders' Equity
(In Millions, Except Per Share)
Unearned
Additional Retained ESOP
Preferred Common Capital Earnings Preferred Treasury
Stock Stock Invested (Deficit) Stock Stock Other Total
----- ----- -------- ------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1994 $ - $ - $1,287 $(1,335) $ (83) $(161) $ (24) $ (316)
---- ---- ----- ------ ---- ---- ---- -----
Year ended December 31, 1995:
Net earnings - - - 349 - - - 349
Cash dividends on preferred
stock ($6.25 per Series A;
$1.44 per Series B) - - - (40) - - - (40)
Exchange of Series A
debentures - - (546) - - - - (546)
Issuance and amortization of
ESOP preferred stock - - 604 - (100) - - 504
Reacquisition of Series B
preferred stock - - - - - (131) - (131)
ESOP dividend
($8.89 per share) - - 5 (13) 8 - - -
Preferred stock committed
to Supplemental ESOP - - (59) - - - - (59)
Pension liability
adjustment - - - - - - (60) (60)
Other - - 62 - - 10 (12) 60
Balance at ---- ---- ----- ----- ----- ----- ---- -----
December 31, 1995 - - 1,353 (1,039) (175) (282) (96) (239)
---- ---- ----- ----- ----- ----- ---- -----
Year ended December 31, 1996:
Net earnings - - - 533 - - - 533
Cash dividends on preferred
stock ($1.44 per
Series B) - - - (20) - - - (20)
Conversion of Series A
debentures - - 217 - - - - 217
Exchange of Series B
preferred stock - - (102) - - - - (102)
Issuance and amortization
of ESOP preferred stock - - 735 - (50) - - 685
Reacquisition of Series B
preferred stock - - - - - (84) - (84)
ESOP dividend
($8.89 per share) - - 17 (40) 23 - - -
Preferred stock committed
to Supplemental ESOP - - (106) - - - - (106)
Pension liability
adjustment - - - - - - 76 76
Other - 1 46 - - (19) 7 35
Balance at ---- ---- ----- ----- ---- ---- ---- -----
December 31, 1996 - 1 2,160 (566) (202) (385) (13) 995
---- ---- ----- ----- ---- ---- ---- -----
Year ended December 31, 1997:
Net earnings - - - 949 - - - 949
Cash dividends on preferred
stock ($1.44 per
Series B) - - - (10) - - - (10)
Common stock repurchases - - - - - (250) - (250)
Issuance and amortization of
ESOP preferred stock - - 993 - (6) - - 987
ESOP dividend
($8.89 per share) - - 36 (67) 31 - - -
Preferred stock committed
to Supplemental ESOP - - (349) - - - - (349)
Other - - 36 3 - (28) 4 15
---- ---- ----- ----- ---- ---- ---- ----
Balance at
December 31, 1997 - 1 2,876 309 (177) (663) (9) 2,337
==== ==== ===== ===== ==== ==== ==== =====
See accompanying notes to consolidated financial 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 majority-owned
affiliates (collectively "the Company"). All significant
intercompany transactions are eliminated. Investments in
affiliates are carried on the equity basis. Certain prior-
year financial statement items have been reclassified to
conform to the current year's presentation.
(b) Use of Estimates - The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(c) 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.
(d) 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 a 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.
From time to time, United lends certain of its
securities classified as cash and cash equivalents and short-
term investments to third parties. United requires collateral
in an amount exceeding the value of the securities and is
obligated to reacquire the securities at the end of the
contract. United accounts for these transactions as secured
lendings rather than sales, and so does not remove the
securities from the balance sheet.
At December 31, 1997 and 1996, $440 million and $418
million, respectively, of investments in debt securities
included in cash and cash equivalents and short-term
investments were classified as available-for-sale, and $287
million and $232 million, respectively, were classified as
held-to-maturity. Investments in debt securities classified
as available-for-sale are stated at fair value based on the
quoted market prices for the securities, which does not differ
significantly from their cost basis. Investments classified
as held-to-maturity are stated at cost which approximates
market due to their short-term maturities. The proceeds from
sales of available-for-sale securities are included in
interest income for each respective year.
(e) Derivative Financial Instruments -
Foreign Currency - United may, from time to time, enter into
Japanese yen forward exchange contracts to minimize gains and
losses on the revaluation of short-term yen-denominated
liabilities. The yen forwards typically have a 30-day
maturity and are marked to fair value at the end of each
accounting period. The unrealized mark-to-market gains and
losses generally offset the losses and gains recorded on the
liabilities.
United has also entered into forwards and swaps to reduce
exposure to currency fluctuations on yen-denominated capital
lease obligations. The cash flows of the forwards and swaps mirror
those of the capital leases. The premiums on the forwards and
swaps, as measured at inception, are being amortized over
their respective lives as components of interest expense. Any
gains or losses realized upon early termination of these
forwards and swaps are deferred and recognized in income over
the remaining life of the underlying exposure.
Finally, the Company hedges some of the risks of exchange
rate volatility on its anticipated future net yen and net Hong
Kong dollar cash flows by purchasing put options for each
respective currency with little or no intrinsic value. The
amount and duration of these options are synchronized with
specific expected inflows, and thus, the put options have been
designated as a hedge. The Company also sells call options in
each of these currencies from time to time. The premiums on
purchased option contracts are amortized over the lives of the
contracts. Unrealized gains on purchased put option contracts
are deferred until contract expiration and then recognized as
a component of passenger revenue, and unrealized losses on
written call options are recorded in "Miscellaneous, net" at
the end of each accounting period.
Interest Rates - United may from time to time enter into
swaps to reduce exposure to interest rate fluctuations in
connection with certain debt, capital leases and operating
leases. The cash flows of the swaps mirror those of the underlying
exposures. The premiums on the swaps, as measured at
inception, are amortized over their respective lives as
components of interest expense. Any gains or losses realized
upon the early termination of these swaps are deferred and
recognized in income over the remaining life of the underlying
exposure.
Aircraft Fuel - United uses a collar option strategy to
hedge a portion of its price risk related to future aircraft
fuel purchases. The collars, which have been designated as a
hedge, involve the purchase of fuel call options with the
simultaneous sale of fuel put options with identical
expiration dates. Premiums on fuel collar option contracts
are deferred and amortized over the life of the contract.
Gains or losses recognized upon contract expiration are
recorded as a component of aircraft fuel expense. In
addition, to a limited extent, United trades short-term
heating oil futures and options contracts. Unrealized losses
on these contracts are recorded currently in income while
unrealized gains are deferred until contract expiration. Both
gains and losses are recorded as a component of aircraft fuel
expense.
(f) 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.
(g) 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 30 years; buildings are depreciated over lives of 25
to 45 years; and other property and equipment are depreciated
over lives of 3 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 30 years for aircraft and flight
simulators and 25 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.
(h) Intangibles - Intangibles consist primarily of route
acquisition costs and intangible pension assets (see Note 15).
Route acquisition costs are amortized over 40 years.
(i) Mileage Plus Awards - United accrues the estimated
incremental cost of providing free travel awards earned under
its Mileage Plus frequent flyer program (including awards
earned from mileage credits sold) when such award levels are
reached. United, through its wholly-owned subsidiary, Mileage
Plus Holdings, Inc., sells mileage credits to participating
partners in the Mileage Plus program. The resulting revenue
is recorded in other operating revenues during the period in
which the credits are sold.
(j) 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.
(k) Advertising Costs - Advertising costs, which are
included in other operating expenses, are expensed as
incurred. Advertising expense was $190 million, $184 million
and $194 million in 1997, 1996 and 1995, respectively.
(2) Employee Stock Ownership Plans and Recapitalization
- --------------------------------------------------------
On July 12, 1994, the stockholders 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 is being allocated to individual employees through
the year 2000 under Employee Stock Ownership Plans ("ESOPs")
which were created as a part of the recapitalization.
The ESOPs cover employees represented by the Air Line
Pilots' Association, International, the International
Association of Machinists and Aerospace Workers and U.S.
management and salaried 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 is being delivered to an ESOP
trust in seven separate sales through January 1, 2000 under
the Leveraged ESOP, four of which have already taken place.
Based on Internal Revenue Code Limitations, shares of the
Class 2 ESOP Preferred Stock are either 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, ESOP 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 Class 1 ESOP
Preferred Stock are sold to an ESOP trust, the Company reports
the issuance as a credit to additional capital invested and
records a corresponding charge to unearned ESOP preferred
stock. Shares are committed to be released to employees on a
pro rata basis through April 12, 2000. ESOP compensation
expense is recorded for the average market 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 market 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, 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 Principles Board Opinion 25,
"Accounting for Stock Issued to Employees."
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.
ESOP compensation expense was $987 million, $685 million
and $504 million in 1997, 1996 and 1995, respectively. During
1997, 2,345,745 shares of Class 1 ESOP Preferred Stock,
190,307 shares of Class 2 ESOP Preferred Stock and 2,534,687
shares of Voting Preferred Stock were allocated to employee
accounts, and another 537,917 shares of Class 2 ESOP Preferred
Stock were allocated in the form of "book entry" shares,
effective December 31, 1996. Another 48,982 shares of Class 2
ESOP Preferred Stock previously allocated in book entry form
were issued and either contributed to the qualified plan or
converted and sold on behalf of terminating employees. At
December 31, 1997, the year-end allocation of Class 1 ESOP
Preferred Stock to employee accounts had not yet been
completed. There were 2,087,535 shares of Class 1 ESOP
Preferred Stock committed to be released and 888,386 shares
held in suspense by the ESOP as of December 31, 1997. For the
Class 2 ESOP Preferred Stock, 986,438 shares were committed to
be contributed to employees at December 31, 1997. The market
value of the unearned ESOP shares recorded on the balance
sheet at December 31, 1997 and 1996 was $344 million and $309
million, respectively.
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 estimated market
value of such shares at December 31, 1997 and 1996 was $679
million and $206 million, respectively.
(3) Other Income (Expense) - Miscellaneous
- -------------------------------------------
Other income (expense) - "miscellaneous, net" consisted
of the following:
<TABLE>
<CAPTION>
(In Millions) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Foreign exchange gains (losses) $ (19) $ (8) $ (20)
Minority interests (15) (21) (23)
Travel agency litigation settlement - (20) -
Other (15) (7) (14)
---- ---- ----
$ (49) $ (56) $ (57)
==== ==== ====
</TABLE>
(4) Per Share Amounts
- ----------------------
In 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share,"
effective December 31, 1997. As a result, the Company's
reported earnings per share for 1996 and 1995 have been
restated.
Basic earnings per share were computed by dividing net
income by the weighted average number of shares of common
stock outstanding during the year. In addition, diluted
earnings per share amounts include potential common shares
including ESOP shares committed to be released, and assume the
conversion of convertible debentures (for periods not actually
converted) and elimination of related interest.
<TABLE>
<CAPTION>
Earnings Attributable to Common
Stockholders (Millions) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Income $ 949 $ 533 $ 349
Preferred stock dividends (77) (60) (53)
Preferred stock transactions(1) - (48) 20
---- ---- ----
Earnings attributable to common
stockholders (Basic) $ 872 $ 425 $ 316
Interest on convertible debentures,
net of tax - 2 23
Other - 1 4
---- ---- ----
Earnings attributable to common
stockholders (Diluted $ 872 428 343
==== ==== ====
Shares (Millions)
Weighted average shares
outstanding (Basic) 58.8 56.1 49.6
Convertible ESOP preferred stock 35.9 24.0 11.9
Incremental shares related to
convertible debentures and other 2.7 4.5 9.7
---- ---- ----
Weighted average number of
shares (Diluted) 97.4 84.6 71.2
==== ==== ====
Earnings Per Share
Basic $14.83 $7.57 $6.39
Diluted $ 8.95 $5.06 $4.82
</TABLE>
(1) In April 1995, UAL issued convertible subordinated debentures in
exchange for Series A preferred stock and recorded a non-cash increase
of $45 million in additional capital invested representing the excess
of the carrying value of the preferred stock exchanged over the fair
value of the debentures. In December 1996, a UAL-controlled trust
issued trust-originated preferred securities in exchange for shares of
Series B preferred stock and recorded a non-cash decrease of $27
million in additional capital invested representing the excess of
the fair value of the new securities over the carrying value of
Series B. Also, during 1996 and 1995, the Company repurchased shares
of its Series B preferred stock, resulting in decreases to additional
capital invested representing the excess of amounts pair to reaquire
the preferred stock over the liquidation preference of such stock.
These transactions had no effect on earnings; however, their net impact
on UAL's equity is included in the computation of earnings per share.
(5) Affiliates
- ---------------
United owns 32% of Galileo International, Inc.
("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.
Included in the Company's retained earnings is approximately
$161 million of undistributed earnings of Galileo and its
predecessor companies. The market value of United's
investment in Galileo at December 31, 1997 was $924 million.
In July 1997, United completed the sale of its interest
in the Apollo Travel Services Partnership ("ATS"), a 77% owned
affiliate whose accounts were consolidated, to Galileo for
$539 million in cash. See Other Information, "Sale of
Affiliate" in Management's Discussion and Analysis of
Financial Condition and Results of Operations for further
details on the transaction.
Under operating agreements with Galileo, United purchases
computer reservations services from Galileo and provides
marketing, sales and communication services to Galileo.
Revenues derived from the sale of services to Galileo amounted
to approximately $159 million in 1997, $249 million in 1996
and $238 million in 1995. The cost to United of services
purchased from Galileo amounted to approximately $134 million
in 1997, $114 million in 1996 and $104 million in 1995. In
connection with the sale of ATS, United entered into an
additional services agreement with Galileo under which the
Company will provide certain marketing and other services
designed to increase the competitiveness of Galileo's business
and to generate additional bookings and revenues for Galileo.
Under this agreement, United could receive up to $154 million
(on a present value basis) in the sixth year following the
sale, based on specified improvements in air booking revenues
over a five-year period.
Prior to the sale to Galileo, ATS contributed the
following amounts to the Company's consolidated results, net
of intercompany eliminations and minority interests:
<TABLE>
<CAPTION>
(In Millions) Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating revenues $ 147 $ 239 $ 237
Operating income $ 63 $ 86 $ 90
Earnings before income taxes $ 50 $ 70 $ 76
</TABLE>
(6) Income Taxes
- -----------------
In 1997, the regular tax liability of the Company
exceeded the alternative minimum tax ("AMT") liability
resulting in a utilization of AMT credits. The federal income
tax liability is the greater of the tax computed using the
regular tax system or the tax under the AMT system. However,
if the regular tax liability exceeds the AMT liability and AMT
credits are available, the AMT credits are used to reduce the
net tax liability to the amount of the AMT liability. During
1997, UAL utilized $94 million of AMT credits.
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
(In Millions) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current -
Federal $ 312 $ 281 $ 29
State 55 20 -
---- ---- ----
367 301 29
---- ---- ----
Deferred -
Federal 178 47 187
State 16 22 27
194 69 214
---- ---- ----
$ 561 $ 370 $ 243
==== ==== ====
</TABLE>
The income tax provision differed from amounts computed
at the statutory federal income tax rate, as follows:
<TABLE>
<CAPTION>
(In Millions) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income tax provision at
statutory rate $ 533 $ 339 $ 217
State income taxes, net of
federal income tax benefit 46 28 18
ESOP dividends (25) (13) (5)
Nondeductible employee meals 26 25 23
Foreign tax credits (2) (2) (2)
Other, net (17) (7) (8)
---- ---- ----
$ 561 $ 370 $ 243
==== ==== ====
</TABLE>
Temporary differences and carryforwards which give rise
to a significant portion of deferred tax assets and
liabilities for 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
(In Millions) 1997 1996
Deferred Tax Deferred Tax Deferred Tax Deferred Tax
Assets Liabilities Assets Liabilities
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Employee benefits,
including postretirement
medical and ESOP $ 918 $ 156 $ 644 $ 93
Depreciation, capitalized
interest and transfers
of tax benefits - 1,466 - 1,172
Gains on sale and
leasebacks 398 - 428 -
Rent expense 382 - 351 -
AMT credit carryforwards 137 - 231 -
Other 422 470 274 304
----- ----- ----- -----
$2,257 $2,092 $1,928 $1,569
===== ===== ===== =====
</TABLE>
At December 31, 1997, UAL and its subsidiaries had $137
million of federal AMT credit carryforwards available for an
indefinite period. Management believes it is more likely than
not that future taxable income will be sufficient to utilize
the deferred tax assets at December 31, 1997.
(7) Short-Term Borrowings
- --------------------------
United has an agreement with a syndicate of banks for a
$750 million revolving credit facility expiring in 2002.
Interest on drawn amounts under the facility is calculated at
floating rates based on the London interbank offered rate
("LIBOR") plus a margin which is subject to adjustment based
on certain changes in the credit ratings of United's long-term
senior unsecured debt. Among other restrictions, the credit
facility contains a covenant which restricts United's ability
to grant liens on or otherwise encumber certain identified
assets with a market value of approximately $1.1 billion.
In addition, United has a separate short-term borrowing
facility with a maximum available borrowing amount of $227
million which expires in October 1998.
(8) Long-Term Debt
- -------------------
A summary of long-term debt, including current
maturities, as of December 31 is as follows (interest rates
are as of December 31, 1997):
<TABLE>
<CAPTION>
(In Millions) 1997 1996
---- ----
<S> <C> <C>
Secured notes, 6.13% to 8.90%,
averaging 7.16%, due through 2014 $ 1,295 $ 819
Debentures, 9.00% to 11.21%, averaging
9.97%, due through 2021 785 936
Convertible debentures, 7.75%, due 2010 - 16
Promissory notes, 6.33% to 11.00%,
averaging 6.51%, due through 2000 70 64
Special facility bonds, 5.625%, due 2034 190 -
----- -----
2,340 1,835
----- -----
Less: Unamortized discount on debt (13) (9)
Current maturities (235) (165)
----- -----
$ 2,092 $ 1,661
===== =====
</TABLE>
In addition to scheduled principal payments, in 1997 and
1996 the Company repaid $84 million and $149 million,
respectively, in principal amount of secured notes and $51
million and $492 million, respectively, in principal amount of
debentures prior to maturity. These obligations were
scheduled to mature at various times from 2000 through 2021.
Extraordinary losses of $9 million and $67 million,
respectively, net of tax benefits of $5 million and $40
million, respectively, were recorded, reflecting amounts paid
in excess of the debt carrying value.
On April 8, 1997, Air Wis Services, Inc. ("Air Wis"), a
wholly owned subsidiary of UAL, redeemed all $16 million of
its outstanding 7 3/4% convertible debentures at 100% of the
principal amount plus accrued interest.
During 1997, United issued $674 million in enhanced pass
through certificates to refinance certain owned aircraft and
aircraft under operating leases. Net proceeds after
refinancing the operating leases was $597 million.
Also in 1997, the California Statewide Communities
Development Authority (the "Authority") issued $190 million in
special facilities revenue bonds to finance the acquisition
and construction of certain facilities at the Los Angeles
International Airport ("LAX") which United guarantees payment
of under a payment agreement with the Authority. The bond
proceeds are restricted to expenditures on the LAX facilities
and unspent amounts are classified as other assets in the
balance sheet.
At December 31, 1997, United had outstanding a total of
$733 million of long-term debt bearing interest rates at 22 to
90 basis points over LIBOR.
Maturities of long-term debt for each of the four years
after 1998 are: 1999 - $51; 2000 - $53 million; 2001 - $46
million; and 2002 - $563 million. Various assets, principally
aircraft, having an aggregate book value of $1.457 billion at
December 31, 1997, were pledged as security under various loan
agreements.
(9) 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, 1997,
under capital leases (substantially all of which are for
aircraft) and operating leases having initial or remaining
noncancelable lease terms of more than one year are as
follows:
<TABLE>
<CAPTION>
(In Millions) Operating Leases Capital
Aircraft Non-aircraft Leases
-------- ------------ ------
<S> <C> <C> <C>
Payable during -
1998 $ 946 $ 473 $ 288
1999 937 458 262
2000 955 447 241
2001 939 441 314
2002 928 429 277
After 2002 12,458 7,104 1,321
------ ------ ------
Total minimum leases
payments $17,163 $ 9,352 $ 2,703
====== ====== ======
Imputed interest (at rates
of 5.3% to 12.2%) (853)
------
Present value of minimum lease payments 1,850
Current portion (171)
------
Long-term obligations under capital leases $ 1,679
======
</TABLE>
As of December 31, 1997, United leased 304 aircraft, 62
of which were under capital leases. These leases have terms
of 4 to 26 years, and expiration dates range from 1998 through
2020.
In connection with the financing of certain aircraft
accounted for as capital leases, United had on deposit at
December 31, 1997 an aggregate 33 billion yen ($254 million),
107 million German marks ($60 million) and 27 million French
francs ($4 million) in certain banks and had pledged an
irrevocable security interest in such deposits to the aircraft
lessors. These deposits will be used to pay off an equivalent
amount of recorded capital lease obligations.
Amounts charged to rent expense, net of minor amounts of
sublease rentals, were $1.416 billion in 1997, $1.424 billion
in 1996 and $1.439 billion in 1995. Included in 1997 rental
expense was $16 million in contingent rentals, resulting from
changes in interest rates for operating leases under which the
rent payments are based on variable interest rates.
(10) Company-Obligated Mandatorily Redeemable Preferred
Securities of a Subsidiary Trust
--------------------------------------------------
In December 1996, UAL Corporation Capital Trust I (the
"Trust") issued $75 million of its 13 1/4% Trust Originated
Preferred Securities (the "Preferred Securities") in exchange
for 2,999,304 depositary shares, each representing 1/1000 of
one share of Series B 12 1/4% preferred stock (see Note 11).
Concurrent with the issuance of the Preferred Securities and
the related purchase by UAL of the Trust's common securities,
the Company issued to the Trust $77 million aggregate
principal amount of its 13 1/4% Junior Subordinated Debentures
(the "Debentures") due 2026. The Debentures are and will be
the sole assets of the Trust. The interest and other payment
dates on the Debentures correspond to the distribution and
other payment dates on the Preferred Securities. Upon
maturity or redemption of the Debentures, the Preferred
Securities will be mandatorily redeemed. The Debentures are
redeemable at UAL's option, in whole or in part, on or after
July 12, 2004, at a redemption price equal to 100% of the
principal amount to be redeemed, plus accrued and unpaid
interest to the redemption date. Upon the repayment of the
Debentures, whether at maturity, upon redemption or otherwise,
the proceeds thereof will be applied to redeem the Preferred
Securities.
There is a full and unconditional guarantee by UAL of the
Trust's obligations under the securities issued by the Trust.
However, the Company's obligations are subordinate and junior
in right of payment to certain other of its indebtedness. UAL
has the right to defer payments of interest on the Debentures
by extending the interest payment period, at any time, for up
to 20 consecutive quarters. If interest payments on the
Debentures are so deferred, distributions on the Preferred
Securities will also be deferred. During any deferral,
distributions will continue to accrue with interest thereon.
In addition, during any such deferral, UAL may not declare or
pay any dividend or other distribution on, or redeem or
purchase, any of its capital stock.
The transaction resulted in a reduction of approximately
$102 million to paid in capital as the fair value of the
Preferred Securities issued exceeded the carrying value ($75
million) of the exchanged Series B preferred stock. The
difference between the assigned value of the Preferred
Securities and their redemption value ($27 million) will be
amortized against distributions on the Preferred Securities
over their term. The fair value of the Preferred Securities
at December 31, 1997 was $106 million.
(11) Serial Preferred Stock
- ----------------------------
At December 31, 1997, UAL had outstanding 3,267,477
depositary shares, each representing 1/1000 of one share of
Series B 12 1/4% preferred stock, with a liquidation
preference of $25 per depositary share ($25,000 per Series B
preferred share) and a stated capital of $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.
The Series B preferred stock ranks senior to all other
preferred and common stock, except the Preferred Securities,
as to receipt of dividends and amounts distributed upon
liquidation. The Series B preferred stock has 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 B preferred stockholders
are entitled to elect two additional members to the UAL Board
of Directors until all dividends are paid in full. Pursuant
to UAL's restated certificate of incorporation, UAL is
authorized to issue a total of 50,000 shares of Series B
preferred stock.
As discussed in Note 10, in December 1996, UAL
Corporation Capital Trust I, a Delaware statutory business
trust controlled by UAL, exchanged mandatorily redeemable
preferred securities of the subsidiary trust for 2,999,304
depositary shares of Series B preferred stock of UAL.
During 1996 and 1995, UAL repurchased 2,553,110 and
4,259,709 depositary shares, respectively, at an aggregate
cost of $84 million and $131 million, respectively, to be held
in treasury. In February 1998, UAL repurchased 64,300
depositary shares at an aggregate cost of $2 million to be
held in treasury.
UAL is authorized to issue up to 15,986,584 additional
shares of serial preferred stock.
(12) ESOP Preferred Stock
- --------------------------
The following activity related to UAL's outstanding ESOP
preferred stocks (see Note 2 for a description of the ESOPs):
<TABLE>
<CAPTION>
Class 1 Class 2 ESOP
ESOP ESOP Voting
---- ---- ------
<S> <C> <C> <C>
Balance December 31, 1994 1,789,585 - 3
--------- ------- ---------
Shares issued 2,850,103 304,882 1,448,384
Converted to common (7,183) (2,811) (9,994)
--------- ------- ---------
Balance December 31, 1995 4,632,505 302,071 1,438,393
--------- ------- ---------
Shares issued 2,367,575 381,044 3,073,970
Converted to common (49,618) (38,605) (89,927)
--------- ------- ---------
Balance December 31, 1996 6,950,462 644,510 4,422,436
--------- ------- ---------
Shares issued 1,848,629 242,877 3,073,969
Converted to common (146,473) (81,127) (229,999)
--------- ------- ---------
Balance December 31, 1997 8,652,618 806,260 7,266,406
========= ======= =========
</TABLE>
An aggregate of 17,675,345 shares of Class 1 and Class 2
ESOP Preferred Stock will be issued to employees under the
ESOPs. Each share of ESOP Preferred Stock is convertible into
four shares of UAL common stock and shares are converted to
common as employees retire or otherwise leave the Company.
The stock has a par value of $0.01 per share and is nonvoting.
The Class 1 ESOP Preferred Stock has a liquidation value of
$126.96 per share plus all accrued and unpaid dividends; the
Class 2 does not have a liquidation value. 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. Additional Voting Preferred Stock
is 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 outstanding
at any time commands voting power for approximately 55% of the
vote of all classes of capital stock in all matters requiring
a stockholder vote, other than for the election of members of
the Board of Directors. The Voting Preferred Stock will
generally continue to represent approximately 55% 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 (generally common stock issued or issuable at
the time of the recapitalization) 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. For
purposes of defining the "Sunset" employee ownership is
approximately 62% at December 31, 1997. 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 .0004 shares of UAL common stock.
Class Pilot MEC, IAM, SAM and I junior preferred stock
(collectively "Director Preferred Stocks") were established to
effectuate the election of one or more members to UAL's Board
of Directors. One share each of Class Pilot MEC and Class IAM
junior preferred stock is authorized and issued. The Company
is authorized to issue ten shares each of Class SAM and Class
I junior preferred stock. There are three shares of Class SAM
and four shares of Class I issued. Each of the Director
Preferred Stocks has a par value and liquidation preference of
$0.01 per share. The stock is not entitled to receive any
dividends and Class I will be redeemed automatically upon the
transfer of the shares to any person not elected to the Board
of Directors or upon the occurrence of the "Sunset."
(13) Common Stockholders' Equity
- ---------------------------------
Changes in the number of shares of UAL common stock
outstanding during the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Shares outstanding at
beginning of year 58,817,480 50,718,424 49,756,424
Stock options exercised 840,100 500,174 722,744
Shares issued from treasury under
compensation arrangements 28,224 25,949 932,584
Shares acquired for treasury (3,269,393) (180,565) (504,444)
Forfeiture of restricted stock (25,120) (70,488) (43,000)
Conversion of Series A debentures - 7,623,092 38,304
Conversion of ESOP preferred
stock 911,300 352,929 39,976
Other 17,895 (152,035) (224,164)
---------- ---------- ----------
Shares outstanding at end
of year 57,320,486 58,817,480 50,718,424
========== ========== ==========
</TABLE>
During 1997, the Company repurchased 2,881,092 shares of
common stock for a total purchase price of $250 million.
(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 four equal, annual installments
beginning one year after the date of grant, and generally
expire in ten years.
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 utilize 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/or related income taxes. For
outstanding options eligible for cashless exercise, changes in
the market price of the stock are charged to earnings
currently. The expense recorded for such eligible options was
$14 million for 1997, $15 million in 1996 and $27 million in
1995.
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 two shares 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.
The Company has also awarded shares of restricted stock
to officers and key employees. These shares generally vest
over a five-year period and are subject to certain transfer
restrictions and forfeiture under certain circumstances prior
to vesting. Unearned compensation, representing the fair
market value of the stock at the measurement date for the
award, is amortized to salaries and related costs over the
vesting period. During 1995, 892,852 shares of restricted
stock were issued from treasury. No shares were issued in
1996 and 5,000 shares were issued in 1997. As of December 31,
1997, 434,220 shares were restricted and still nonvested.
Additionally, 309,120 shares were reserved for future awards
under the plan. In 1997, 1996 and 1995, 25,120, 70,488 and
43,000 shares, respectively, were forfeited and returned to
treasury stock.
In October 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123
establishes a fair value based method of accounting for stock
options. The Company has elected to continue using the
intrinsic value based method of accounting prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," as permitted by SFAS No. 123. Had
compensation cost for awards been determined based on the fair
value at the grant dates consistent with the method of SFAS
No. 123, the Company's net income and earnings per share would
have instead been reported as the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income (millions) As reported $ 949 $ 533 $ 349
Pro forma $ 944 $ 531 $ 350
Basic earnings
per share As reported $14.83 $7.57 $6.39
Pro forma $14.75 $7.55 $6.42
Diluted earnings
per share As reported $ 8.95 $5.06 $4.82
Pro forma $ 8.94 $5.07 $4.84
</TABLE>
The weighted-average grant date fair value of restricted
shares issued was $87.44 and $28.88 for shares issued in 1997
and 1995, respectively. The fair value of each option grant
was estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 6.4% 6.4% 6.0%
Dividend yield 0.0% 0.0% 0.0%
Volatility 32.0% 32.0% 30.0%
Expected life (years) 4.0 4.0 4.0
</TABLE>
Stock option activity for the past three years was as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Old Share Options: Wtd Avg Wtd Avg Wtd Avg
Shares Exer Price Shares Exer Price Shares Exer Price
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 356,118 $ 120.80 480,610 $ 119.95 1,081,100 $ 132.77
Exercised (187,725) $ 120.03 (124,117) $ 117.49 (295,671) $ 113.61
Surrendered upon
exercise of SARs - - - - (12,927) $ 75.68
Terminated - - (375) $ 124.00 (291,892) $ 175.24
------- ------- --------
Outstanding at
end of year 168,393 $ 121.65 356,118 $ 120.80 480,610 $ 119.95
Options exercisable
at year-end 168,393 $ 121.65 356,118 $ 120.80 480,610 $ 119.95
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
New Share Options: Wtd Avg Wtd Avg Wtd Avg
Shares Exer Price Shares Exer Price Shares Exer Price
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 4,828,990 $ 31.64 3,767,624 $ 23.47 3,784,000 $ 22.59
Granted 449,100 $ 77.86 1,319,800 $ 53.46 344,000 $ 32.40
Exercised (464,650) $ 25.58 (251,934) $ 23.52 (136,376) $ 22.61
Terminated (37,875) $ 60.17 (6,500) $ 32.03 (224,000) $ 22.91
--------- --------- ---------
Outstanding at
end of year 4,775,565 $ 36.37 4,828,990 $ 31.64 3,767,624 $ 23.47
Options exercisable
at year-end 2,518,238 $ 26.63 1,881,686 $ 22.89 1,133,140 $ 22.55
Reserved for future
grants at year-end 4,371,475 4,782,700 1,696,000
Wtd avg fair value
of options granted
during the year $ 27.40 $ 18.94 $ 10.84
</TABLE>
The following information related to stock options
outstanding as of December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-Average
Range of Outstanding at Remaining Weighted-Average Exercisable at Weighted-Average
Exercise Prices December 31, 1997 Contractual Life Exercise Price December 31, 1997 Exercise Price
--------------- ----------------- ---------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
Old Share Options:
$91 to 177 168,393 4.9 years $121.65 168,393 $121.65
New Share Options:
$20 to 29 2,962,390 6.6 years $ 22.77 2,177,638 $ 22.66
$37 to 57 1,379,950 8.3 years $ 52.47 339,600 $ 51.95
$60 to 88 433,225 9.5 years $ 78.03 1,000 $ 60.19
--------- ---------
4,775,565 2,518,238
</TABLE>
(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 before retirement. The Company's goal is to
fully fund the estimated present value of its accumulated
benefit obligation under the plans. 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, salaried
employees hired after February 1, 1994 and employees of
Mileage Plus, Inc.), 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.
The following table sets forth the defined benefit plans'
funded status and amounts recognized in the statements of
financial position as of December 31:
<TABLE>
<CAPTION>
(In Millions) 1997 1996
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Accumulated Benefits
Benefits Exceed Assets Benefits Exceed Assets
-------- ------------- -------- -------------
<S> <C> <C> <C> <C>
Actuarial present value of
accumulated benefit
obligation $ (5,263) $ (1,273) $ (5,344) $ (235)
Actuarial present value of
projected benefit
obligation $ (5,792) $ (1,481) $ (5,812) $ (335)
Plan assets at fair value 5,950 908 5,850 60
------ ------ ------ -----
Projected benefit obligation
in excess of plan assets 158 (573) 38 (275)
Unrecognized net (gain) loss 22 (10) 138 (70)
Prior service cost not yet
recognized in net periodic
pension cost 159 489 230 216
Remaining unrecognized
net asset (1) 19 (16) 37
Adjustment required to
recognize minimum liability - (289) - (86)
------ ------ ------ -----
Pension asset (liability)
recognized in the statement
of consolidated
financial position $ 338 $ (364) $ 390 $ (178)
====== ====== ====== =====
Actuarial assumptions:
Weighted average
discount rate 7.25% 7.75%
Rate of increase in
compensation 3.85% 3.15%
</TABLE>
Total pension expense for all retirement plans (including
defined contribution plans) was $229 million in 1997, $252
million in 1996 and $193 million in 1995.
Plan assets are invested primarily in governmental and
corporate debt instruments and corporate equity securities.
The net periodic pension cost of defined benefit plans
included the following components:
<TABLE>
<CAPTION>
(In Millions) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost - benefits
earned during the year $ 232 $ 237 $ 173
Interest cost on projected
benefit obligation 477 440 396
Actual return on plan assets (1,078) (703) (934)
Net amortization and deferral 585 268 545
----- ----- -----
Net periodic pension cost $ 216 $ 242 $ 180
===== ===== =====
Expected average long-term
rate of return 9.75% 9.75% 9.75%
</TABLE>
Changes in interest rates or rates of inflation may
impact the assumptions used in the valuation of pension
obligations, including discount rates and rates of increase in
compensation, resulting in increases or decreases in United's
pension liability and net periodic pension cost.
(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 at year-end. 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.
Information on the plans' funded status, on an aggregate
basis at December 31, follows:
<TABLE>
<CAPTION>
(In Millions) 1997 1996
---- ----
<S> <C> <C>
Accumulated postretirement
benefit obligation:
Retirees $ 606 $ 498
Other fully eligible participants 254 193
Other active participants 846 648
----- -----
Total accumulated postretirement
benefit obligation 1,706 1,339
Unrecognized net gain (loss) (183) 109
Fair value of plan assets (107) (103)
----- -----
Accrued postretirement
benefit obligation $1,416 $1,345
===== =====
Discount rate 7.25% 7.75%
</TABLE>
Net postretirement benefit costs included the following
components:
<TABLE>
<CAPTION>
(In Millions) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost - benefits
attributed to service during
the period $ 44 $ 44 $ 37
Amortization of unrecognized
net gain (6) (5) (5)
Actual return on assets (7) (7) (7)
Interest cost on benefit
obligation 107 98 100
---- ---- ----
Net postretirement benefit costs $ 138 $ 130 $ 125
==== ==== ====
</TABLE>
The assumed health care cost trend rates for net paid
claims were 6.9% and 7.4% for 1997 and 1996, respectively,
declining annually to a rate of 4.0% by the year 2001 and
remaining level thereafter. These rates were driven by
assumed health care cost trend rates for gross covered charges
of 5.5% and 6.0% for 1997 and 1996, respectively, declining
annually to a rate of 4.0% by the year 1999 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, 1997 by $234
million and the aggregate of the service and interest cost
components of net postretirement benefit cost for 1997 by $25
million.
Changes in interest rates or rates of inflation may
impact the assumptions used in the valuation of postretirement
and postemployment obligations, including discount rates,
resulting in increases or decreases in United's liability and
net periodic cost.
(17) Financial Instruments and Risk Management
- -----------------------------------------------
See Other Information "Foreign Operations" in
Management's Discussion and Analysis of Financial Condition
and Results of Operations and Item 7A. Quantitative and
Qualitative Disclosures About Market Risk ("Item 7A") for a
discussion of the Company's foreign currency and fuel price
risk management activities, and the fair value of all
significant financial instruments.
Credit Exposures of Derivatives
The Company's theoretical risk in the derivative
financial instruments described in Item 7A is the cost of
replacing the contracts at current market rates in the event
of default by any of the counterparties. However, the Company
does not anticipate such default as counterparties are
selected based on credit ratings and the relative market
positions with each counterparty are monitored. Furthermore,
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, subject to certain thresholds, or through the
use of mutual put options where contracts are terminated at
certain predefined intervals. Counterparty credit risk is
further minimized by settlements throughout the duration of
the contract.
Financial Guarantees
Special facility revenue bonds have been issued by
certain municipalities to build or improve airport and
maintenance 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, 1997, $1.239 billion
principal amount of such bonds was outstanding. As of
December 31, 1997, UAL and United had jointly guaranteed $35
million of such bonds and United had guaranteed $1.221 billion
of such bonds, including accrued interest. The payments
required to satisfy these obligations are included in the
future minimum lease payments disclosed in Note 9 "Lease
Obligations".
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 $35 million at
December 31, 1997. At that date, United had granted mortgages
on aircraft and engines having a total book value of $165
million as security for indemnity obligations under tax leases
and letters of credit.
Concentrations 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 geographically dispersed 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.
(18) Commitments, Contingent Liabilities and Uncertainties
- -----------------------------------------------------------
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. UAL
records liabilities for legal and environmental claims against
it in accordance with generally accepted accounting
principles. These amounts are recorded based on the Company's
assessments of the likelihood of their eventual settlements.
The amounts of these liabilities could increase in the near
term, based on revisions to estimates relating to the various
claims.
At December 31, 1997, commitments for the purchase of
property and equipment, principally aircraft, approximated
$5.6 billion, after deducting advance payments. An estimated
$2.6 billion will be spent in 1998, $1.6 billion in 1999, $0.6
billion in 2000 and $0.8 billion in 2001 and thereafter. The
major commitments are for the purchase of B777, B747, B767,
B757, A320 and A319 aircraft, which are scheduled to be
delivered through 2002. The above amounts do not include a
recent order with Airbus Industrie for an additional 10 A319
and 20 A320 aircraft to be delivered through 2001. The
aircraft included in this latest order are expected to be used
to satisfy growth opportunities, and thus, the Company now
expects its passenger fleet to grow by at lease 30 aircraft by
the year 2002.
During the fourth quarter, The Boeing Company ("Boeing")
notified United that production problems would delay aircraft
scheduled to be delivered between fourth quarter 1997 and mid-
1999. Specifically, deliveries on nine B747s, three B757s and
four B767s scheduled for delivery from the fourth quarter of
1997 through mid-1999 will be delayed from one to two months.
United expects to receive compensation from Boeing and also
expects to make schedule adjustments and take other possible
actions to offset the effects of the delays. As a result, the
Company expects the impact of the announced delivery delays to
be minimal.
In connection with the construction of the Indianapolis
Maintenance Center, United agreed to spend an aggregate $800
million on capital investments by the year 2001 and employ at
least 7,500 individuals by the year 2004. In the event such
targets are not reached, United may be required to make
certain payments to the city of Indianapolis and state of
Indiana.
Approximately 61% of United's employees are represented
by various labor organizations. In connection with the 1994
employee investment transaction, members of the Air Line
Pilots' Association and the International Association of
Machinists and Aerospace Workers entered into labor contracts
with United which become amendable in 2000. In October 1997,
the Association of Flight Attendants ("AFA") ratified a new
contract, which will remain in effect through 2006. See Other
Information, "Labor Agreements and Wage Adjustments" in
Management's Discussion and Analysis of Financial Condition
and Results of Operations for details.
(19) Foreign Operations
- ------------------------
Operating authorities in international markets are
governed by bilateral aviation agreements between the U.S. and
foreign countries. Under generally accepted accounting
principles, ("GAAP"), foreign operations are defined as
operations that exist outside the U.S. United derives an
insignificant amount of its operating revenues and operating
income from such operations. However, the Company's results
are significantly impacted by revenue produced from
international flights between the U.S. and foreign
destinations. Based on allocation guidelines provided by the
U.S. Department of Transportation ("DOT"), which classifies
flights between the U.S. and foreign destinations as part of
each respective foreign entity, and thus, differs from the
definition of foreign operations under GAAP, United reported
the following results by geographic entity to the DOT for each
of the last three years:
<TABLE>
<CAPTION>
(In Millions) 1997 1996 1995
Operating Operating Operating Operating Operating Operating
Entity Revenue Income Revenue Income Revenue Income
- ------ ------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Domestic $ 11,214 $ 652 $ 10,717 $ 738 $ 9,586 $ 460
Pacific 3,552 267 3,438 288 3,336 348
Atlantic 1,745 238 1,412 86 1,287 10
Latin America 824 69 750 18 686 14
------- ----- ------- ----- ------- -----
Total $ 17,335 $1,226 $ 16,317 $1,130 $ 14,895 $ 832
======= ===== ======= ===== ======= =====
</TABLE>
Additionally, United has sizable intangible assets
related to acquisitions of foreign route authorities. Changes
in U.S. or foreign government aviation policies can lead to
the alteration or termination of existing air service
agreements that could diminish the value of United's
international route authority.
(20) Statement of Consolidated Cash Flows - Supplemental
Disclosures
---------------------------------------------------
Supplemental disclosures of cash flow information and non-
cash investing and financing activities were as follows:
<TABLE>
<CAPTION>
(In Millions) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash paid during the year for:
Interest (net of amounts
capitalized) $ 152 $ 244 $ 346
Income taxes 362 242 65
Non-cash transactions:
Capital lease obligations
incurred 643 503 376
Long-term debt incurred in
connection with additions to
equipment 185 82 26
Note receivables recorded in
connection with the sale of
equipment and leasehold
improvements 61 - -
Long-term debt issued in connection
with the exchange of Series A
convertible preferred stock - - 546
Increase (decrease) in
pension intangible 200 (191) 2
Increase in additional capital
invested in connection with the
conversion of subordinated
debentures to common stock - 217 1
Decrease in additional capital
invested in connection with the
conversion of subordinated
debentures to mandatorily
redeemable preferred securities - (102) -
</TABLE>
(21) Selected Quarterly Financial Data (Unaudited)
- ---------------------------------------------------
<TABLE>
<CAPTION>
(In Millions) 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
<S> <C> <C> <C> <C> <C>
1997:
Operating revenues $ 4,121 $ 4,382 $ 4,640 $ 4,235 $17,378
Earnings from operations 194 412 563 91 1,259
Earnings before
extraordinary item 105 242 579 32 958
Extraordinary loss on early
extinguishment of debt - - - (9) (9)
Net earnings $ 105 $ 242 $ 579 $ 23 $ 949
Per share amounts, basic:
Earnings before
extraordinary item $ 1.45 $ 3.77 $ 9.39 $ 0.21 $ 14.98
Extraordinary loss on early
extinguishment of debt - - - (0.15) (0.15)
Net earnings $ 1.45 $ 3.77 $ 9.39 $ 0.06 $ 14.83
Net earnings per share,
diluted $ 0.92 $ 2.31 $ 5.61 $ 0.04 $ 8.95
1996:
Operating revenues $ 3,735 $ 4,164 $ 4,488 $ 3,976 $16,362
Earnings from operations 62 398 610 53 1,123
Earnings before
extraordinary item 6 226 347 20 600
Extraordinary loss on early
extinguishment of debt (29) (30) (7) (1) (67)
Net earnings (loss) $ (23) $ 196 $ 340 $ 19 $ 533
Per share amounts, basic:
Earnings (loss) before
extraordinary item $ (0.32) $ 3.41 $ 5.71 $ (0.35) $ 8.76
Extraordinary loss on early
extinguishment of debt (0.58) (0.52) (0.11) (0.01) (1.19)
Net earnings (loss) $ (0.90) $ 2.89 $ 5.60 $ (0.36) $ 7.57
Net earnings (loss) per
share, diluted $ (0.90) $ 1.99 $ 3.77 $ (0.36) $ 5.06
</TABLE>
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.
During the third quarter of 1997, UAL recognized a pre-
tax gain of $275 million of the sale of its interest in the
Apollo Travel Services Partnership (see Other Information,
"Sale of Affiliate" in Management's Discussion and Analysis of
Financial Condition and Results of Operations).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required by this item is incorporated by
reference from the Company's definitive proxy statement for its
1998 Annual Meeting of Stockholders. Information regarding the
executive officers is included in Part I of this Form 10-K under
the caption "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
Information required by this item is incorporated by
reference from the Company's definitive proxy statement for its
1998 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
Information required by this item is incorporated by
reference from the Company's definitive proxy statement for its
1998 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this item is incorporated by
reference from the Company's definitive proxy statement for its
1998 Annual Meeting of Stockholders.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.
(a) 1. Financial Statements. The financial statements
required by this item are listed in Item 8, "Financial Statements
and Supplementary Data" herein.
2. Financial Statement Schedules. The financial statement
schedule required by this item is listed below and included in
this report after the signature page hereto.
Schedule II - Valuation and Qualifying Accounts for the
years ended December 31, 1997, 1996 and 1995.
All other schedules are omitted because they are not
applicable, not required or the required information is
shown in the consolidated financial statements or notes
thereto.
3. Exhibits. The exhibits required by this item are
listed in the Exhibit Index which immediately precedes the
exhibits filed with this Form 10-K, and is incorporated herein by
this reference. Each of Exhibits 10.29 through 10.39 and Exhibits
10.41 and 10.42 listed in the Exhibit Index is a management contract
or compensatory plan or arrangement required to be filed as an exhibit
pursuant to Item 14(c) of Form 10-K.
(b) Reports on Form 8-K.
Form 8-K dated October 28, 1997 to report a cautionary
statement for purposes of the "Safe Harbor for Forward Looking
Statements" provision of the Private Securities Litigation Reform
Act.
Form 8-K dated December 15, 1997 to report a cautionary
statement for purposes of the "Safe Harbor for Forward Looking
Statements" provision of the Private Securities Litigation Reform
Act.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 26th day of February, 1998.
UAL CORPORATION
By: /s/ Gerald Greenwald
--------------------
Gerald Greenwald
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below on the 26th day of
February, 1998 by the following persons on behalf of the
registrant and in the capacities indicated.
/s/ Gerald Greenwald /s/ James J. O'Connor
- -------------------- ---------------------
Gerald Greenwald James J. O'Connor
Chairman of the Board and Chief Director
Executive Officer (principal
executive officer)
/s/ John A. Edwardson /s/ Deval L. Patrick
- --------------------- --------------------
John A. Edwardson Deval L. Patrick
Director Director
/s/ Duane D. Fitzgerald /s/ John F. Peterpaul
- ----------------------- ---------------------
Duane D. Fitzgerald John F. Peterpaul
Director Director
/s/ Michael H. Glawe /s/ Paul E. Tierney, Jr.
- -------------------- ------------------------
Michael H. Glawe Paul E. Tierney, Jr.
Director Director
/s/ Richard D. McCormick /s/ John K. Van de Kamp
- ------------------------ -----------------------
Richard D. McCormick John K. Van de Kamp
Director Director
/s/ John F. McGillicuddy /s/ Paul A. Volcker
- ------------------------ -------------------
John F. McGillicuddy Paul A. Volcker
Director Director
/s/ Douglas A. Hacker
- ---------------------
Douglas A. Hacker
Senior Vice President and Chief
Financial Officer (principal
financial and accounting officer)
<TABLE>
<CAPTION>
UAL Corporation and Subsidiary Companies
Schedule II - Valuation and Qualifying Accounts
For the Year Ended December 31, 1997
(In Millions) Balance at Additions Charged to Balance at
Beginning Costs and Other End of
Description of Year Expenses Accounts Deductions Year
----------- --------- -------- -------- ---------- ----
<S> <C> <C> <C> <C> <C>
Reserve deducted from asset to
which it applies:
Allowance for
doubtful accounts $ 24 $ 17 $ - $ 261(1) $ 15
==== ==== === ==== ===
Obsolescence allowance -
Flight equipment spare parts $ 31 $ 26 $ 5 $ 332(2) $ 29
==== ==== === ==== ===
(1) Includes deduction from reserve due to the sale of the Apollo Travel Services Partnership.
(2) Deduction from reserve for purpose for which reserve was created.
F-1
</TABLE>
<TABLE>
<CAPTION>
UAL Corporation and Subsidiary Companies
Schedule II - Valuation and Qualifying Accounts
For the Year Ended December 31, 1996
(In Millions) Balance at Additions Charged to Balance at
Beginning Costs and Other End of
Description of Year Expenses Accounts Deductions Year
----------- ------- -------- -------- ---------- ----
<S> <C> <C> <C> <C> <C>
Reserve deducted from asset to
which it applies:
Allowance for
doubtful accounts $ 19 $ 23 $ - $ 181(1) $ 24
==== ==== === ==== ====
Obsolescence allowance -
Flight equipment spare parts $ 38 $ 14 $ 2 $ 231(1) $ 31
==== ==== === ==== ====
(1) Deduction from reserve for purpose for which reserve was created.
F-2
</TABLE>
<TABLE>
<CAPTION>
UAL Corporation and Subsidiary Companies
Schedule II - Valuation and Qualifying Accounts
For the Year Ended December 31, 1995
(In Millions) Balance at Additions Charged to Balance
Beginning Costs and Other End of
Description of Year Expenses Accounts Deductions Year
----------- ------- -------- -------- ---------- ----
<S> <C> <C> <C> <C> <C>
Reserve deducted from asset to
which it applies:
Allowance for
doubtful accounts $ 22 $ 20 $ - $ 231(1) $ 19
==== ==== === ==== ===
Obsolescence allowance -
Flight equipment spare parts $ 44 $ 14 $ 3 $ 23(1) $ 38
==== ==== === ==== ===
(1) Deduction from reserve for purpose for which reserve was created.
F-3
</TABLE>
EXHIBIT INDEX
-------------
3.1 Restated Certificate of Incorporation of UAL Corporation
("UAL"), as amended (filed as Exhibit 3.1 to UAL's Form
10-K for the year ended December 31, 1996 and
incorporated herein by reference).
3.2 By-laws (filed as Exhibit 3.2 to UAL's Form 10-Q for the
quarter ended June 30, 1994 and incorporated herein by
reference).
4.1 Deposit Agreement dated as of July 12, 1994 between UAL
Corporation and holders from time to time of Depository
Receipts described herein (filed as Exhibit 4.2 to UAL's
Form 10-Q for the quarter ended June 30, 1994 and
incorporated herein by reference).
4.2 Indenture dated as of December 20, 1996 between UAL
Corporation and The First National Bank of Chicago, as
Trustee (filed as Exhibit 4.2 to UAL's Form 10-K for the
year ended December 31, 1996 and incorporated herein by
reference).
4.3 Officer's Certificate relating to UAL's 13-1/4% Junior
Subordinated Debentures due 2026 (filed as Exhibit 4.3
to UAL's Form 10-K for the year ended December 31, 1996
and incorporated herein by reference).
4.4 Form of UAL's 13-1/4% Junior Subordinated Debenture due
2026 (filed as Exhibit 4.4 to UAL's Form 10-K for the
year ended December 31, 1996 and incorporated herein by
reference).
4.5 Guarantee Agreement dated as of December 30, 1996 with
respect to the 13-1/4% Trust Originated Preferred
Securities of UAL Corporation Capital Trust I (filed as
Exhibit 4.5 to UAL's Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference).
4.6 Amended and Restated Declaration of Trust of UAL
Corporation Capital Trust I dated as of December 30,
1996 (filed as Exhibit 4.6 to UAL's Form 10-K for year
ended December 31, 1996 and incorporated herein by
reference).
UAL's indebtedness under any single instrument does not
exceed 10% of UAL's total assets on a consolidated
basis. Copies of such instruments will be furnished to
the Securities and Exchange Commission upon request.
10.1 Amended and Restated Agreement and Plan of
Recapitalization, dated as of March 25, 1994 (the
"Recapitalization Agreement"), as amended, among UAL
Corporation, the Air Line Pilots Association,
International ("ALPA") and the International Association
of Machinists and Aerospace Workers ("IAM") (filed as
Exhibit A to Exhibit 10.1 of UAL's Form 8-K dated June
2, 1994 and incorporated herein by reference; amendment
thereto filed as Exhibit 10.1 of UAL's Form 8-K dated
June 29, 1994 and incorporated herein by reference).
10.2 Waiver and Agreement, dated as of December 23, 1994, to
the Recapitalization Agreement among UAL, ALPA and IAM
(filed as Exhibit 10.2 to UAL's Form 10-K for the year
ended December 31, 1994, as amended, and incorporated
herein by reference).
10.3 Third Amendment, dated as of March 15, 1995, to the
Recapitalization Agreement among UAL, ALPA and IAM
(filed as Exhibit 10.3 to UAL's Form 10-K for the year
ended December 31, 1994, as amended, and incorporated
herein by reference).
10.4 Agreement, dated as of July 16, 1996, pursuant to
Section 1.6(q) of the Recapitalization Agreement among
UAL, ALPA and IAM (filed as Exhibit 10.3 to UAL's Form
10-Q for the quarter ended June 30, 1996 and
incorporated herein by reference).
10.5 UAL Corporation Employee Stock Ownership Plan, effective
as of July 12, 1994 (filed as Exhibit 10.1 to UAL's Form
10-Q for the quarter ended September 30, 1994 and
incorporated herein by reference).
10.6 First Amendment to UAL Corporation Employee Stock
Ownership Plan, dated December 28, 1994 (filed as
Exhibit 10.39 to UAL's Form 10-K for the year ended
December 31, 1994, as amended, and incorporated herein
by reference).
10.7 Second Amendment to UAL Corporation Employee Stock
Ownership Plan, dated as of August 17, 1995 (filed as
Exhibit 10.1 to UAL's Form 10-Q for the quarter ended
September 30, 1995 and incorporated herein by
reference).
10.8 Third Amendment to UAL Corporation Employee Stock
Ownership Plan, dated as of December 28, 1995 (filed as
Exhibit 10.7 to UAL's Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference).
10.9 Fourth Amendment to UAL Corporation Employee Stock
Ownership Plan, dated as of July 16, 1996 (filed as
Exhibit 10.1 to UAL's Form 10-Q for the quarter ended
June 30, 1996 and incorporated herein by reference).
10.10 Fifth Amendment to UAL Corporation Employee Stock
Ownership Plan, dated as of December 31, 1996 (filed as
Exhibit 10.10 of UAL's Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference).
10.11 Sixth Amendment to UAL Corporation Employee Stock
Ownership Plan, dated as of August 11, 1997 (filed as
Exhibit 10.3 to UAL's Form 10-Q for the quarter ended
September 30, 1997, as amended, and incorporated herein
by reference).
10.12 UAL Corporation Employee Stock Ownership Plan Trust
Agreement between UAL Corporation and State Street Bank
and Trust Company ("State Street"), effective July 12,
1994 (filed as Exhibit 10.2 to UAL's Form 10-Q for the
quarter ended September 30, 1994 and incorporated herein
by reference).
10.13 UAL Corporation Supplemental ESOP, effective as of July
12, 1994 (filed as Exhibit 10.3 to UAL's Form 10-Q for
the quarter ended September 30, 1994 and incorporated
herein by reference).
10.14 First Amendment to UAL Corporation Supplemental ESOP,
dated February 22, 1995 (filed as Exhibit 10.1 to UAL's
Form 10-Q for the quarter ended March 31, 1995, as
amended, and incorporated herein by reference).
10.15 Second Amendment to UAL Corporation Supplemental ESOP,
dated as of August 17, 1995 (filed as Exhibit 10.2 to
UAL's Form 10-Q for the quarter ended September 30, 1995
and incorporated herein by reference).
10.16 Third Amendment to UAL Corporation Supplemental ESOP,
dated as of December 28, 1995 (filed as Exhibit 10.12 to
UAL's Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference).
10.17 Fourth Amendment to UAL Corporation Supplemental ESOP,
dated as of July 16, 1996 (filed as Exhibit 10.2 to
UAL's Form 10-Q for the quarter ended June 30, 1996 and
incorporated herein by reference).
10.18 Fifth Amendment to UAL Corporation Supplemental ESOP,
dated as of December 31, 1996 (filed as Exhibit 10.17 to
UAL's Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference).
10.19 Sixth Amendment to UAL Corporation Supplemental ESOP,
dated as of August 11, 1997 (filed as Exhibit 10.4 of
UAL's Form 10-Q for the quarter ended September 30,
1997, as amended, and incorporated herein by reference).
10.20 UAL Corporation Supplemental ESOP Trust Agreement
between UAL Corporation and State Street, effective July
12, 1994 (filed as Exhibit 10.4 to UAL's Form 10-Q for
the quarter ended September 30, 1994 and incorporated
herein by reference).
10.21 Preferred Stock Purchase Agreement, dated as of March
25, 1994, between UAL Corporation and State Street
(filed as Exhibit 10.5 to UAL's Form 10-Q for the
quarter ended September 30, 1994 and incorporated herein
by reference).
10.22 Amendment No. 1 to Preferred Stock Purchase Agreement,
dated as of June 2, 1994, between UAL Corporation and
State Street (filed as Exhibit 10.6 to UAL's Form 10-Q
for the quarter ended September 30, 1994 and
incorporated herein by reference).
10.23 Preferred Stock Purchase Agreement, dated as of August
11, 1995, between UAL Corporation and State Street
(filed as Exhibit 10.16 to UAL's Form 10-K for the year
ended December 31, 1995 and incorporated herein by
reference).
10.24 Preferred Stock Purchase Agreement, dated as of August
12, 1996, between UAL Corporation and State Street
(filed as Exhibit 10.22 to UAL's Form 10-K for the year
ended December 31, 1996 and incorporated herein by
reference).
10.25 Preferred Stock Purchase Agreement, dated as of August
12, 1997, between UAL Corporation and State Street Bank
and Trust Company.
10.26 Class I Junior Preferred Stockholders' Agreement, dated
as of June 12, 1994 (filed as Exhibit 10.12 to UAL's
Form 10-Q for the quarter ended September 30, 1994 and
incorporated herein by reference).
10.27 Class SAM Preferred Stockholders' Agreement, dated as of
July 12, 1994 (filed as Exhibit 10.13 to UAL's Form 10-Q
for the quarter ended September 30, 1994 and
incorporated herein by reference).
10.28 First Refusal Agreement, dated as of July 12, 1994, as
amended (filed as Exhibit 10.25 to UAL's Form 10-K for
the year ended December 31, 1996 and incorporated herein
by reference).
10.29 UAL Corporation 1981 Incentive Stock Plan (filed as
Exhibit 10.1 to UAL's Form 10-Q for the quarter ended
March 31, 1996 and incorporated herein by reference).
10.30 UAL Corporation 1988 Restricted Stock Plan (filed as
Exhibit 10.22 to UAL's Form 10-K for the year ended
December 31, 1995 and incorporated herein by reference).
10.31 UAL Corporation Incentive Compensation Plan, as amended
September 30, 1994 (filed as Exhibit 10.2 to UAL's Form
10-Q/A for the quarter ended September 30, 1997 and
incorporated herein by reference).
10.32 Description of Complimentary Travel and Cargo Carriage
Benefits for UAL Directors (filed as Exhibit 10.29 to
UAL's Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference).
10.33 UAL Corporation 1995 Directors Plan, as amended June 26,
1997 (filed as Exhibit 10.1 of UAL's Form 10-Q for the
quarter ended September 30, 1997, as amended, and
incorporated herein by reference).
10.34 Employment Agreement between UAL Corporation and Gerald
Greenwald (filed as Exhibit 10.5 to UAL's Form 10-Q for
the quarter ended June 30, 1994 and incorporated herein
by reference).
10.35 Amendment No. 1 to Employment Agreement between UAL
Corporation and Gerald Greenwald (filed as Exhibit 10.6
to UAL's Form 10-Q for the quarter ended June 30, 1994
and incorporated herein by reference).
10.36 Restricted Stock Deposit Agreement between UAL
Corporation and Gerald Greenwald (filed as Exhibit 10.7
to UAL's Form 10-Q for the quarter ended June 30, 1994
and incorporated herein by reference).
10.37 Non-Qualified Stock Option Agreement between UAL
Corporation and Gerald Greenwald (filed as Exhibit 10.9
to UAL's Form 10-Q for the quarter ended June 30, 1994
and incorporated herein by reference).
10.38 Restricted Stock Deposit Agreement between UAL
Corporation and John A. Edwardson (filed as Exhibit
10.10 to UAL's Form 10-Q for the quarter ended June 30,
1994 and incorporated herein by reference).
10.39 Restricted Stock Deposit Agreement between UAL
Corporation and Stuart I. Oran (filed as Exhibit 10.12
to UAL's Form 10-Q for the quarter ended June 30, 1994
and incorporated herein by reference).
10.40 United Supplemental Retirement Plan (filed as Exhibit
10.42 to UAL's Form 10-K for the year ended December 31,
1992, and incorporated herein by reference).
10.41 Description of Officer Benefits.
10.42 Agreement, dated as of March 1, 1997, between United Air
Lines, Inc. and William P. Hobgood.
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.
21 List of Registrant's subsidiaries (filed as Exhibit 21
to UAL's Form 10-K for the year ended December 31, 1996
and incorporated herein by reference).
23 Consent of Independent Public Accountants.
27 Financial Data Schedule.
Exhibit 10.25
-------------
PREFERRED STOCK PURCHASE AGREEMENT
----------------------------------
PREFERRED STOCK PURCHASE AGREEMENT dated as of August
12, 1997, between UAL Corporation, a Delaware corporation
("UAL"), and State Street Bank and Trust Company, a Massachusetts
trust company, acting solely in its capacity as trustee under the
Plan defined below and not in its individual capacity (the
"Trustee").
W I T N E S S E T H:
WHEREAS, on July 12, 1994, certain transactions
contemplated by the Agreement and Plan of Recapitalization dated
March 25, 1994 by and among UAL and the unions representing
certain of the employees of United Air Lines, Inc., as amended,
(the "Recapitalization Agreement") were consummated. (The
recapitalization of UAL, as more fully described in the
Recapitalization Agreement, shall hereinafter be referred to as
the "Transaction");
WHEREAS, in connection with the Transaction, UAL
established the UAL Corporation Employee Stock Ownership Plan
(the "Plan"), which consists of an employee stock ownership plan
and a stock bonus plan; and
WHEREAS, a portion of the employee stock ownership plan
(Part A thereof) forms part of the stock bonus plan, includes a
money purchase pension plan and is intended to qualify as an
employee stock ownership plan under Section 4975(e)(7) of the
Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, UAL appointed the Trustee as the trustee of
the UAL Corporation Employee Stock Ownership Plan Trust (the
"Trust"), which was established to hold the assets of the Plan
pursuant to the terms of the Trust Agreement, by and between UAL
and the Trustee (the "Trust Agreement"); and
WHEREAS, Part A of the Plan and Trust Agreement provide
that the assets of the trust created thereunder attributable to
the Plan shall be invested primarily in shares of "employer
securities" of UAL within the meaning of Section 409(l) of the
Code; and
WHEREAS, UAL created a new class of securities
designated as the Class 1 ESOP Convertible Preferred Stock, par
value ($0.01) (the "Class 1 ESOP Convertible Preferred Stock" or
the "ESOP Preferred Stock"); and
WHEREAS, the Recapitalization Agreement provided for,
among other things, the transfer to the Trust of 13,813,282
shares of the Class 1 ESOP Convertible Preferred Stock in a
series of transactions which shall occur during the 69 months
immediately following the Effective Time (as defined in the
Recapitalization Agreement); and
WHEREAS, the parties to the Recapitalization Agreement
have agreed to reduce the number of shares of Class 1 ESOP
Convertible Preferred Stock to be transferred to the Trust so
that the Plan may continue to satisfy Code Section 415; and
WHEREAS, the parties to the Recapitalization Agreement
have agreed to a corresponding increase in the number of shares
of Class 2 ESOP Convertible Preferred Stock to be issued; and
WHEREAS, UAL now wishes to sell and the Trustee now
wishes to purchase 1,848,629 shares of the Class 1 ESOP
Convertible Preferred Stock from UAL, in the amount, at the
purchase price and subject to the other terms and conditions as
set forth in this Agreement;
NOW, THEREFORE, in consideration of these premises and
the mutual promises contained herein, the parties hereto,
intending to be legally bound, hereby agree as follows:
1. Purchase; Purchase Price. Subject to the terms
------------------------
and conditions of this Agreement, the Trustee shall purchase on
behalf of the Plan (the "Purchase") from UAL, and UAL shall issue
and sell to the Trustee an aggregate of 1,848,629 shares of Class
1 ESOP Convertible Preferred Stock (the "Shares") for an
aggregate purchase price (the "Purchase Price") of $633,007,542.18.
2. Closing; Payment. The Purchase shall be
----------------
consummated (the "Closing") at or about August 13, 1997 at the
offices of UAL, or at such time, date or place as shall be fixed
by an agreement of UAL and the Trustee. The date of the Closing
shall hereinafter be referred to as the "Closing Date." At the
Closing, UAL shall deliver to the Trustee a certificate or
certificates representing the Shares, which shall be registered
in the name of the Trustee, as trustee under the Trust, or in the
name of its nominee, against delivery to UAL by the Trustee of a
check for a dollar amount equal to the par value per Share times
the number of Shares described in Section 1 above (the "Cash
Amount"), representing the aggregate par value of the Shares and
a promissory note of the Trust (the "ESOP Note") substantially in
the form set forth in Exhibit A hereto, in an amount equal to the
difference between the Purchase Price and a dollar amount equal
to the par value per Share times the number of Shares described
in Section 1 above. Notwithstanding the foregoing, UAL may, with
the consent of the Trustee, accomplish the transfer of shares to
the Trustee by book entry, in which event a cross receipt in the
form set forth in Exhibit B hereto shall be executed by the
parties. UAL shall pay all stamp and other transfer taxes, if
any, that may be payable in respect of the issuance, sale and
delivery of the Shares and shall be entitled to any refund
thereof, and shall present the Trustee with evidence that such
transfer taxes either have been paid or are not due.
3. Representations and Warranties of UAL. UAL
-------------------------------------
hereby represents and warrants to the Trustee as follows:
3.1 UAL has been duly incorporated and is
validly existing as a corporation in good standing under the laws
of the State of Delaware with corporate power and authority,
including governmental licenses, authorizations, consents and
approvals, to own, lease and operate its properties and conduct
its business except for licenses, authorizations, consents and
approvals the absence of which will not have a Material Adverse
Effect. For the purposes of this Agreement, "Material Adverse
Effect" shall mean any change or effect the consequence of which
is materially adverse to the condition (financial or otherwise),
business, assets or results of operations of UAL and its
Subsidiaries (as defined below) taken as a whole. UAL is duly
qualified as a foreign corporation to transact business and is in
good standing in each jurisdiction where its ownership or leasing
of properties or the conduct of its business requires such
qualification, except for the jurisdictions where the failure to
be so qualified would not have a Material Adverse Effect.
3.2 Except as set forth in Schedule 3.2
hereto, the execution, delivery and performance of this Agreement
and all other documents or instruments to be executed or
delivered by UAL in connection with this Agreement are within
UAL's powers and have been duly authorized by all necessary
corporate action. This Agreement and all other documents or
instruments to be executed or delivered by UAL in connection with
this Agreement are, assuming due authorization, execution and
delivery by the Trustee, valid and binding upon UAL and
enforceable against UAL in accordance with their respective terms
except as the enforceability thereof may be limited by the effect
of any applicable bankruptcy, insolvency, fraudulent-conveyance,
reorganization, moratorium and similar laws affecting creditors'
rights generally, ERISA and by general principles of equity
(regardless of whether considered in a proceeding at law or in
equity).
3.3 Except as set forth in Schedule 3.3
hereto, the execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby will
not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under (i) the Certificate
of Incorporation or Bylaws, each as amended, of UAL or any of its
Subsidiaries (as hereinafter defined), or (ii) except as set
forth in Schedule 3.3(ii) hereto, any provision of any indenture,
mortgage, deed of trust, agreement, instrument, order,
arbitration award, judgment or decree to which UAL or any of its
Subsidiaries is a party or by which any of their respective
assets are bound, or (iii) any material statute, material rule or
material regulation applicable to UAL or any of its Subsidiaries
of any court, bureau, board, agency or other governmental body
having jurisdiction.
3.4 As of the Closing Date, the authorized,
issued and outstanding capital stock of UAL shall be as set forth
in Schedule 3.4 hereto, and UAL shall have no obligations to
issue any additional shares pursuant to any options, warrants,
conversion rights or other arrangements except as set forth in
Schedule 3.4 hereto, and all shares of issued and outstanding
capital stock of UAL shall have been duly authorized and are
fully paid and nonassessable.
3.5 Each Subsidiary is a corporation or
partnership duly incorporated or formed, validly existing and in
good standing under the laws of its jurisdiction of incorporation
or formation, has all requisite power and authority including all
governmental licenses, authorizations, consents and approvals
required to own, lease and operate its properties (except those
the absence of which would not have a Material Adverse Effect)
and to conduct its business and is in good standing in each
jurisdiction where the character of the property owned or leased
by it or the nature of its activities make such qualification
necessary, except for those jurisdictions where failure to be so
qualified would not, individually or in the aggregate, have a
Material Adverse Effect. For purposes of this Agreement,
"Subsidiary" means any entity of which securities or other
ownership interests having ordinary voting power to elect a
majority of the board of directors or other persons performing
similar functions are directly or indirectly owned by UAL prior
to the Closing Date. All Subsidiaries and their respective
jurisdictions of incorporation or formation are identified on
Schedule 3.5 hereto.
Except as otherwise disclosed on Schedule 3.5, all
of the outstanding capital stock of, or other ownership interests
in, each Subsidiary, is owned by UAL, directly or indirectly,
free and clear of any liens, claims, charges and encumbrances
(collectively "Liens") and free of any other limitation or
restriction (including any restriction on the right to vote, sell
or otherwise dispose of such capital stock or other ownership
interests). Except as disclosed on Schedule 3.5, there are
outstanding (i) no securities of UAL or any Subsidiary
convertible into or exchangeable for shares of capital stock or
other voting securities or ownership interests in any Subsidiary,
and (ii) no options, subscriptions, warrants or other rights,
agreements, arrangements or commitments of any character to
acquire from UAL or any Subsidiary, and no other obligation of
UAL or any Subsidiary to issue, any capital stock, voting
securities or other ownership interests in, or any securities
convertible into or exchangeable or exercisable for any capital
stock, voting securities or ownership interest in, any Subsidiary
(the items in clauses (i) and (ii) being referred to collectively
as the "Subsidiary Securities"). There are no outstanding
obligations of UAL or any Subsidiary to repurchase, redeem or
otherwise acquire any outstanding Subsidiary Securities.
3.6 As of the Closing Date, the Shares (i)
shall have the rights, preferences and qualifications set forth
in the restated Certificate of Incorporation of UAL Corporation,
(a copy of which is attached hereto as Exhibit C), (ii) shall
have been duly and validly authorized and (iii) when issued and
delivered to the Trustee in exchange for the Cash Amount and the
ESOP Note, will be in proper form, validly issued, fully paid and
nonassessable. As of the Closing Date, UAL shall have full right
and authority to issue, sell, transfer, and deliver the Shares
and will effectively transfer to the Trustee, on the Closing
Date, the full right, title and interest therein and thereto,
free and clear of all Liens, except for (A) beneficial interests
accruing to participants in the Plan and their beneficiaries and
(B) any Liens created or imposed by the Trustee on behalf of the
Trust.
3.7 As of the Closing Date, the shares of
Common Stock (as hereinafter defined) into which the Shares are
convertible, shall be duly and validly authorized and reserved
for issuance and, when issued upon such conversion, will be
validly issued, fully paid and nonassessable and upon delivery to
the Trustee, the Trust will acquire full right, title and
interest to such shares of Common Stock free and clear of all
Liens, except for (i) beneficial interests accruing to the
participants in the Plan and their beneficiaries and (ii) any
Liens created or imposed by the Trustee on behalf of the Trust.
3.8 No authorization, approval or consent of,
or filing with, any governmental authority or agency or other
third party, is required in connection with the sale of the
Shares by UAL hereunder or the conversion of the Shares into
Common Stock except for (i) any of such as shall have been made
or obtained prior to the Closing, (ii) any of such relating to
the listing on any securities exchange of any shares of UAL
common stock, par value $.0l per share (the "Common Stock"), to
be delivered upon conversion of Shares and (iii) filings with
and/or approvals of the Internal Revenue Service. The Shares are
being issued pursuant to a valid exemption from registration
under the Securities Act of 1933, as amended (the "Securities
Act"), and applicable state securities laws.
3.9 UAL's filings with the Securities and
Exchange Commission ("Commission") for the years 1994, 1995 and
1996, respectively, at the time they were filed with the
Commission, (i) complied in all material respects with the
requirements of the Securities Act, or the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), as appropriate, and
the Rules and Regulations of the Commission respectively
promulgated thereunder, (ii) in the case of filings under the
Exchange Act, did not contain an untrue statement of a material
fact or omit to state a material fact necessary in order to make
the statements made therein, in light of the circumstances under
which they were made, not misleading and (iii) no registration
statement, as amended or supplemented, if applicable, filed
pursuant to the Securities Act as of the date such statement,
amendment or supplement became effective contained any untrue
statement of a material fact or omitted to state any material
fact required to be stated therein or necessary to make the
statements therein not misleading.
3.10 The consolidated financial statements of
UAL, together with related notes, schedules and reports thereon
of independent public accountants for the years 1994, 1995 and
1996, respectively (collectively, the "Financial Statements"),
included in UAL's Annual Reports on Form 10-K and Quarterly
Reports on Form 10-Q ("Reports") for the years ended December 31,
1994, 1995 and 1996, respectively, all of which Reports
previously have been delivered to the Trustee, present fairly
(except as may be indicated in the notes thereto and subject to
normal immaterial year-end audit adjustments in the case of any
unaudited interim Financial Statements) the consolidated
financial position and the consolidated results of operation of
UAL and its consolidated Subsidiaries at the indicated dates and
for the indicated periods. The Financial Statements have been
prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved
except as otherwise noted therein. UAL and its Subsidiaries
considered as one enterprise have no material liabilities or
obligations, contingent or otherwise, that are not fully
disclosed in the Financial Statements or the Reports.
3.11 Except as disclosed on Schedule 3.11
hereto, since December 31, 1996, (i) there has been no event, and
no state of circumstances has existed, that has had or will, or
could reasonably be expected to, have a Material Adverse Effect,
(ii) there has not been any material transaction entered into by
UAL or any of its Subsidiaries, other than transactions in the
ordinary course of business or other than the transactions
contemplated in this Agreement or the Transaction, and (iii)
except for regular dividends on shares of its outstanding common
stock and preferred stock, there has been no dividend or
distribution of any kind declared, paid or made by UAL on any
class of its capital stock other than the distributions
contemplated by the Transaction.
3.12 Except as set forth in Schedule 3.12
there is no action, suit or proceeding before or by any court or
government or administrative agency or body, domestic or foreign,
now pending or, to the best knowledge of UAL, threatened against
or affecting UAL or any of its Subsidiaries, which might have a
Material Adverse Effect.
3.13 UAL and its Subsidiaries hold all
certificates, authorizations or permits issued by the appropriate
state, federal or foreign regulatory agencies or bodies necessary
to conduct the business now operated by them the absence of
which, individually or in the aggregate, would have a Material
Adverse Effect, and neither UAL nor any of its Subsidiaries has
received any notice of proceedings relating to the revocation or
modification of any such certificate, authority or permit which,
individually or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a Material
Adverse Effect. UAL and its Subsidiaries are in compliance with
all rules, laws and regulations related to the operation of the
business of UAL and its Subsidiaries, except for instances of
noncompliance which, individually or in the aggregate, would not
have a Material Adverse Effect.
3.14 The Plan has been duly authorized by all
corporate action and Part A constitutes an employee stock
ownership plan within the meaning of Section 4975(e)(7) of the
Code and Section 407(d)(6) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), Part B (that portion
of the stock bonus plan which does not constitute an employee
stock ownership plan) constitutes a stock bonus plan under the
Code and the Plan will qualify under Section 401(a) of the Code
taking into account amendments which may be reasonably requested
by the Internal Revenue Service, but no representation or
warranty is made as to the compliance of the Plan in operation
under the referenced Code and ERISA sections; the Trust Agreement
has been duly authorized by all necessary corporate action on the
part of UAL; all contributions by UAL to the Plan and all
dividends paid on the ESOP Preferred Stock which are used by the
Trust to make the required principal and interest payments with
respect to the ESOP Note will be deductible by UAL or its
Subsidiaries for federal income tax purposes under Section 404 of
the Code (as in effect on the date of the Closing), except to the
extent there are insufficient "earnings and profits" under the
Code for the dividends to be deductible; and the ESOP Preferred
Stock constitutes "employer securities" within the meaning of
Section 409(l) of the Code.
3.15 There is no investment banker, broker or
finder which has been retained by or is authorized to act on
behalf of UAL or any Subsidiary or, to the knowledge of UAL, any
CRS Company who might be entitled to a fee or commission from
UAL, either Union or any affiliate of either of them upon
consummation of the transactions contemplated by this Agreement,
based upon arrangements made by or on behalf of UAL. For the
purposes of this Section 3.15, "CRS Company" and "Union" shall
have the respective meanings assigned to such terms in the
Recapitalization Agreement.
4. Representations and Warranties of The Trustee,
----------------------------------------------
as Trustee. The Trustee, in its capacity as such, represents and
- ----------
warrants as follows;
4.1 The Trustee (i) is a duly organized and
validly existing trust company in good standing and with full
authority to act as Trustee and exercise trust powers under the
laws of the Commonwealth of Massachusetts and (ii) has full
corporate power and authority to execute and deliver the Trust
Agreement and to carry out the transactions contemplated thereby.
4.2 The execution, delivery and performance of
this Agreement will not violate (i) the Trustee's Charter or
Bylaws, each as amended or restated to date, (ii) any provision
of any indenture, mortgage, deed of trust, agreement, instrument,
order, arbitration award, Judgment or decree to which the Trustee
or the Trust is a party or by which it or the Trust or any of
their respective assets are bound, or (iii) any statute, rule or
regulation applicable to the Trustee or the Trust of any court,
bureau, board, agency or other governmental body having
jurisdiction, which conflict, breach or default might have a
material adverse effect.
4.3 This Agreement and the Trust Agreement
have been duly executed and delivered by the Trustee on behalf of
the Trust and, assuming due authorization, execution and delivery
by UAL, each constitutes the legal, valid and binding obligation
of the Trust enforceable against the Trustee in accordance with
their respective terms, except as the enforceability thereof may
be limited by the effect of any applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and
similar laws affecting creditors rights generally, ERISA and by
general principles of equity (regardless of whether considered in
a proceeding at law or in equity).
4.4 The Trustee is acquiring the shares on
behalf of the Plan pursuant to the Trust Agreement and the Plan
solely for investment purposes and not with a view toward, or for
sale in connection with, any public distribution thereof;
provided, however, nothing herein shall prohibit the Trustee from
- -------- -------
disposing of any or all of the Shares.
4.5 No authorization, approval or consent of
any governmental authority or agency is necessary to be obtained
by the Trustee or the Plan in connection with the purchase of the
Shares by the Trustee on behalf of the Plan hereunder.
4.6 The Trustee, at the expense of UAL, has
retained independent legal counsel knowledgeable in matters
regarding ERISA and Code fiduciary responsibilities and has
retained an independent financial advisor to advise the Trustee
regarding the transactions contemplated by this Agreement.
4.7 The Trustee has not employed any broker,
finder or agent, or agreed to pay or incurred any brokerage fee,
finder's fee, commission or other similar form of compensation in
connection with this Agreement or the transactions contemplated
hereby.
4.8 Trustee has received an opinion of
Houlihan, Lokey, Howard and Zukin, Inc., financial advisor to the
Trustee, to the effect that (i) the Purchase Price is not greater
than fair market value, (ii) the Transaction is fair to the Plan
from a financial point of view, (iii) the conversion price with
respect to the Shares is reasonable and (iv) the interest rate on
the ESOP Note is not unreasonable.
5. Conditions to Closing.
---------------------
5.1 Conditions to the Trustee Is Obligation at
------------------------------------------
Closing. The obligations of the Trustee hereunder are subject to
- -------
the fulfillment at or before the Closing of each of the following
conditions:
(a) The representations and warranties
contained in Section 3 hereof shall be true on and as of the
Closing Date and, the Trustee shall have been furnished with a
certificate, dated the Closing Date, to such effect, signed by an
authorized officer of UAL.
(b) The Trustee shall have received a
cash contribution to the Plan at least equal to the Cash Amount.
(c) No order of any court or
administrative agency shall be in effect which restrains or
prohibits the transactions contemplated by this Agreement, and no
suit, action or other proceedings by any governmental body or
other person shall have been instituted which questions the
validity or legality of the transactions contemplated by this
Agreement which suit, action or proceeding the Trustee reasonably
determines, upon advice of counsel, is more likely than not to
successfully challenge the validity or legality of the
transactions contemplated by this Agreement or otherwise result
in a Material Adverse Effect.
(d) Neither the Trustee nor UAL shall
have determined in good faith that the purchase of the Shares
would result in a "prohibited transaction" under ERISA or
otherwise violate the provisions of applicable law.
(e) The Trustee shall have received UAL's
most recent annual report on form 10-K and any subsequently filed
Quarterly Reports on Form 10-Q.
(f) The Trustee shall have received from
Kirkpatrick & Lockhart, counsel to the Trustee, an opinion in
substantially the form set forth in Schedule 5.1(f) hereto.
(g) The Trustee shall have received from
Francesca M. Maher, Vice President-Law and Corporate Secretary,
the opinion in substantially the form set forth in Schedule
5.1(g) hereto.
(h) The Trustee shall have received an
opinion of its financial advisor, in substantially the form set
forth in Schedule 5.1(h) hereto.
(i) The Trustee shall have made a good
faith determination that the purchase of the Shares contemplated
hereunder and the consummation of all other transactions
contemplated by the Agreement are prudent and in the best
interests of the Plan participants. In the event the Trustee is
unable to consummate the purchase of the Shares described in
Section 1 hereof at the Purchase Price by reason of the failure
of one or more of the conditions set forth in Sections 5.1(d),
(h) and (i) hereof, the Trustee agrees to negotiate in good faith
with UAL in an attempt to arrive at a purchase price for the
Shares at which the Trustee would consummate the purchase of
Shares contemplated by this Agreement.
(j) UAL shall have certified to the
Trustee that it has determined that it is reasonably likely to
have sufficient earnings and profits such that dividends paid on
the Class 1 ESOP Convertible Preferred Stock are reasonably
likely to be deductible under Section 404 of the Code.
5.2 Conditions to UAL's obligations at
----------------------------------
Closing. The obligations of UAL hereunder are subject to the
- -------
fulfillment at or before the Closing of each of the following
conditions:
(a) The representations and warranties
contained in Section 4 hereof shall be true on and as of the
Closing and, UAL shall have been furnished with a certificate
dated the Closing Date to such effect, signed by an authorized
officer of the Trustee.
(b) No order of any court or
administrative agency shall be in effect which restrains or
prohibits the transactions contemplated by this Agreement, and no
suit, action or other proceedings by any governmental body or
other person shall have been instituted which questions the
validity or legality of the transactions contemplated by this
Agreement which suit, action or proceeding UAL reasonably
determines, upon advice of counsel, is more likely than not to
successfully challenge the validity or legality of the
transactions contemplated by this Agreement or otherwise result
in a Material Adverse Effect.
(c) Neither the Trustee nor UAL shall
have determined in good faith that the purchase of the Shares
would result in a "prohibited transaction" under ERISA or
otherwise violate the provisions of applicable law.
(d) UAL shall have received an opinion of
Kirkpatrick & Lockhart, counsel to the Trustee, in the form set
forth in Schedule 5.2(d) hereto.
(e) The Trustee shall have delivered to
UAL a certification that the conditions set forth in section
5.1(d) and section 5.1(i) have been satisfied.
6. Covenants of Trustee. The Trustee hereby
--------------------
covenants and agrees as follows:
(a) Except as otherwise provided in the
ESOP, all cash contributions (including any earnings on such
contributions) that are received by the Trust and cash dividends
(including any earnings on such dividends) that are received by
the Trust with respect to the Class 1 ESOP Convertible Preferred
Stock or Common Stock issued upon conversion thereof will be, to
the extent permitted by law, applied solely for the purpose of
making principal and interest payments on the ESOP Note.
(b) The Trustee shall not transfer or
otherwise dispose of any shares of Common Stock issued upon
conversion of the Class 1 ESOP Convertible Preferred Stock unless
such securities have been registered under the Securities Act of
1933, as amended, and any applicable state securities laws or
pursuant to an exemption or exemptions from such registration.
(c) The Trustee agrees that UAL may (with
the consent of the Air Line Pilots Association, International and
the International Association of Machinists and Aerospace Workers
if and to the extent such consent is required by the Plan) extend
the maturity of the ESOP Note for up to four (4) years, provided
that the interest rate on the ESOP Note, as extended, is
determined by the Trustee to be reasonable at the time of
extension.
7. Covenants of UAL. UAL hereby covenants and agrees as follows:
----------------
(a) So long as any principal or interest
amount of the ESOP Note or any note representing a refinancing of
the ESOP Note remains unpaid, UAL shall use reasonable efforts to
cause Part A of the Plan to maintain its qualification as an
employee stock ownership plan within the meaning of Section
4975(e)(7) of the Code.
(b) So long as any principal or interest
amount of the ESOP Note or any note representing a refinancing of
the ESOP Note remains unpaid, UAL and its Subsidiaries shall make
contributions to the Plan which, when combined with any dividends
received by the Plan that can be used for the payment of such
debt, are sufficient to allow the Trustee to make, in a timely
fashion all scheduled principal and interest payments with
respect to the ESOP Note or any note representing a refinancing
of the ESOP Note; provided, however, that any contribution to the
Plan shall be limited to the extent that such contribution would
cause the aggregate contributions made by UAL and its
Subsidiaries for the relevant Plan year to exceed the limitations
set forth in Sections 404 or 415 of the Code. Any contributions
limited or not made in a timely fashion pursuant to the preceding
sentence shall be (i) carried over and paid to the Plan as soon
as is practicable in connection with contributions to the Plan
and (ii) increased by an amount sufficient for the Trustee to pay
any increased interest or other costs arising under the ESOP Note
from the failure to make any payment thereunder when due. The
Trustee shall be entitled to reimbursement upon demand for
reasonable attorney fees and other reasonable costs of collection
in enforcing the provisions of this Section 7(b).
(c) Registration of the Common Stock. As
--------------------------------
and if required by applicable securities laws, UAL shall at all
times maintain an effective registration statement under the
Securities Act and timely comply with the reporting requirements
under the Exchange Act with respect to the shares of Common Stock
into which the Shares are convertible. The Trustee will provide
UAL with any information about the Trustee or such proposed sale
required to be included in such registration statement. The
Trustee will, upon receipt of notice from UAL that any such
registration statement includes an untrue statement of a material
fact or omits to state a material fact required to be stated
therein or necessary to make any statement therein not
misleading, discontinue the distribution of Common Stock
thereunder until such misstatement or omission is eliminated.
The Trustee further agrees not to effect any public sale or
distribution of Common Stock without the consent of UAL during
the seven days prior to or ninety days after any registration
statement relating to an underwritten sale of securities of UAL
has become effective. UAL shall obtain any other federal, state
or local approvals as may be necessary from time to time to
enable the Trust to consummate any desired conversion or
disposition of the shares of Common Stock into which the Shares
are convertible.
8. Restrictive Legend. The Trustee understands that
------------------
the certificates representing the Shares, when issued, will bear
the following legend and that a notation restricting their
transfer will be made on the stock transfer books of UAL:
"The shares of stock represented by this
certificate have not been registered under the
Securities Act of 1933, as amended. Such shares may
not be sold, assigned, pledged or otherwise transferred
in the absence of an effective registration statement
under said Securities Act covering the transfer or an
opinion of counsel satisfactory to the issuer that
registration under said Securities Act is not required.
Notice
------
The shares, of stock represented by this
certificate are subject to a security interest in favor
of UAL Corporation."
9. Expenses. Whether or not the transactions
--------
contemplated by this Agreement shall be consummated, UAL shall,
as provided for in the applicable engagement letter between UAL
and the Trustee (the "Engagement Letter"), pay the expenses
incurred by the Trustee in connection with the authorization,
preparation, negotiation, execution and performance of this
Agreement and related transactions.
10. Integration Amendment. This Agreement
---------------------
(including the documents delivered pursuant hereto), together
with the Plan, Trust Agreement and Engagement Letter, constitutes
the entire agreement and understanding between the parties hereto
relating to the purchase of the shares of ESOP Preferred Stock
and supersedes any prior agreement or understanding relating in
any way to the transaction contemplated hereby. This Agreement
may be modified or amended only by a written instrument executed
by or on behalf of the parties hereto. The headings and captions
contained herein are solely for convenience of reference and do
not constitute a part of this Agreement or affect in any way its
meaning or construction.
11. Savings Clause. The invalidity, illegality or
--------------
enforceability of any one or more of the provisions of this
Agreement shall in no way affect or impair the validity and
enforceability of the remaining provisions hereof. In the event
any such provision shall be so declared unenforceable due to its
scope or breadth, it shall be narrowed to the scope or breadth
permitted by law.
12. Counterparts. This Agreement may be executed
------------
in one or more counterparts, each of which shall be deemed an
original and all of which together shall constitute one and the
same instrument. It shall not be necessary that any single
counterpart hereof be executed by all parties so long as each
party executed at least one counterpart.
13. Governing Law. This Agreement shall be
-------------
construed and enforced in accordance with the laws of Illinois
without regard to any principles of conflicts of law.
14. Survival of Representations, Warranties and
-------------------------------------------
Covenants. All covenants contained in this Agreement (including
- ---------
in any certificates delivered hereunder) shall survive the
Closing or, in the case of Section 9, Section 13 and Section 14
hereof, the sooner termination of this Agreement.
Notwithstanding the Closing, or the sooner termination of this
Agreement or any investigation at any time made by or on behalf
of either party, UAL or the Trustee shall be liable for damages
arising from its breaches of representations or warranties under
this Agreement (including in any certificates delivered
hereunder) which breaches shall not be considered waived by
consummation of the transactions contemplated hereby, provided,
however, that UAL and the Trustee shall be liable only to the
extent that notice therefor is asserted by the other in writing
and delivered prior to the expiration of forty-two (42) months
from the Closing or sooner termination of this Agreement.
15. Notices. Any notice or other communication
-------
required or permitted hereunder shall be in writing, either
delivered by hand, by mail, or by telex, telefax or telegram
(charges prepaid), and any such notice shall be effective when
received at the address specified below (or, if by mail, three
business days after deposited in the U.S. mails, registered or
certified mail, postage prepaid and return receipt requested):
By Mail
-------
If to UAL: UAL Corporation
- --------- P. O. Box #66919
Chicago, IL 60666
Attn: Corporate Secretary
By Courier
----------
UAL Corporation
1200 Algonquin Road
Elk Grove Township, IL 60007
Attn: Corporate Secretary
If to the Trustee: State Street Bank and Trust Company
- ----------------- Retirement Investment Services
Batterymarch Park III
Three Pine Hill Drive
Quincy, MA 02169
Attn: UAL ESOP Administration
With a copy to: Kirkpatrick & Lockhart
1500 Oliver Building
Pittsburgh, PA 15222
Attn: Charles R. Smith, Esquire
Addresses may be changed by written notice given pursuant to this
Section. Any notice given hereunder may be given on behalf of
any party by his counsel or other authorized representatives.
16. Successors and Assigns: Assignability. This
--------------------------------------
Agreement shall be binding upon and inure to the benefit of and
be enforceable by the parties hereto, and their respective legal
representatives, successors and assigns. This Agreement (i)
shall not confer upon any person other than the parties hereto
and their respective successors and assigns any rights or
remedies hereunder and (ii) shall not be assignable by operation
of law or otherwise by any party hereto.
17. Further Assurances. Subject to the terms and
------------------
conditions herein provided, each of the parties hereto shall use
all reasonable efforts to take, or cause to be taken, all action
and to do, or cause to be done, all things necessary, proper or
advisable to consummate and make effective the transactions
contemplated by this Agreement.
18. Certain Limitations. The execution and
-------------------
delivery of this Agreement and the performance by the Trustee of
this Agreement have been, or will be, effected by the Trustee
solely in its capacity as Trustee and not individually.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the parties hereof have duly
executed and delivered this Agreement as of the date first above
written.
UAL CORPORATION
By: /s/ Douglas A. Hacker
---------------------
Name: Douglas A. Hacker
-----------------
Title: Senior Vice President and
Chief Financial Officer
-------------------------
State Street Bank and Trust Company,
solely in its capacity as Trustee under
the UAL Corporation Employee Stock
Ownership Plan Trust and not individually
By: /s/ James S. Phalen
-------------------
Name: James S. Phalen
---------------
Title: Executive Vice President
------------------------
Exhibit 10.41
-------------
Officer Benefits
UAL Corporation and United Air Lines, Inc.
------------------------------------------
Travel Benefits
- ---------------
Positive-space travel is provided on United for active and
retired officers of UAL and United and their eligible dependents,
and cash payments are made to federal and state tax authorities
on behalf of each active officer to cover tax liability on up to
$12,000 in value of travel benefits, and for retired officers on
up to $6,000 in value of travel benefits. This benefit includes
admission to United's Red Carpet Club. For purposes of this
policy, officers who are also directors of UAL receive the
benefits provided to directors.
Financial Advisory Services
- ---------------------------
Financial advisory services are provided to designated officers
of UAL and United. Reimbursement is limited to $7,000 in the
first year the officer is admitted to the program, and to $4,000
per year thereafter. Unused reimbursements may be carried over
and used in succeeding years.
Club Memberships
- ----------------
Payment is made by United for the cost of social club memberships
for designated officers. The Company does not pay dues for clubs
which discriminate on the basis of race, sex, religion or
national origin. Such memberships are authorized by the Chairman
consistent with long-standing company policies.
Welfare Benefits
- ----------------
All officers of UAL and United may elect "Split-Dollar" life
insurance. Under the split-dollar program, officers receive
whole life coverage equal to approximately three times base
salary less $50,000. United and the officer share the
responsibility for the premiums. United recovers its payments
from the cash value of the policy. Officers also receive 24-Hour
Accidental Death and Dismemberment (AD&D) insurance coverage
which pays up to a $250,000 benefit upon the accidental death or
dismemberment of the insured.
Officers are covered by a self-insured supplemental long term
disability plan which provides a supplement to the Company's
disability benefit for certain management employees equal to 50%
of monthly pay in excess of $20,000.
Company Cars
- ------------
The Chairman, President and five other senior officers are
entitled to the use of cars owned or leased by United.
Exhibit 10.42
-------------
AGREEMENT
---------
THIS AGREEMENT (the "Agreement") is made and entered into as
of March 1, 1997 (the "Effective Date") between United Air Lines,
Inc. ("United") and William P. Hobgood ("Employee") and is
intended to set forth the parties' understanding regarding
certain compensation opportunities if and only if Employee is
employed by United on March 1, 2000.
1. Elections. Not later than each of February 1, 2000,
2001 and 2002 (each such date, an "Election Date"), Employee
shall elect either the following Option 1 or Option 2 for the
calendar year in which the Election Date occurs (a "Calculation
Year") by written notice to United:
(a) Option 1: Employee may elect to forego any
Supplemental Payment (as defined below), in which case he
shall be entitled (subject to subsequent elections made
under this Agreement) to retain his vested options granted
on or after the Effective Date under the 1981 Incentive
Stock Plan (the "1981 Plan") of UAL Corporation ("UAL"), and
exercise them in accordance with their terms.
(b) Option 2: (i) Employee may elect to receive a payment
("Supplemental Payment"), if any, from United for such
Calculation Year which when added to the "aggregate value of
Employee's options" (as defined below) on the Valuation Date
(as defined in the table below) for the Calculation Year
will equal the Target Amount (as defined below) for such
Calculation Year. If Employee makes this election in any
Calendar Year he must exercise all options that vest on or
prior to the applicable Valuation Date ("Vested Options")
not later than the fifth business day following such
Valuation Date. In no event will the Supplemental Payment
in any Calculation Year exceed the Target Amount for such
year, and no Supplemental Payment shall be owed if the
calculation in the first sentence yields a result of $0 or
less.
Calendar Year Election Date Valuation Date Target Amount
------------- ------------- -------------- -------------
2000 February 1, 2000 March 1, 2000 $333,333
2001 February 1, 2001 March 1, 2001 $666,667 *
2002 February 1, 2002 March 1, 2002 $1,000,000 *
* To determine the Target Amount for the second and third
Calculation Year, subtract from the amount in the Table, the
Target Amount for each preceding Calculation Year, if any,
in which (x) Option 2 was elected and (y) a Supplemental
Payment was actually owed.
(ii) The "aggregate value of Employee's options" for each
Calculation Year shall mean the sum of (A) (x) the market
value of UAL common stock on the Valuation Date multiplied
by the total number of Vested Options, whether or not
exercised, less (y) the aggregate exercise prices paid or
payable upon exercise of all Vested Options plus (B) for any
Vested Option that was exercised on or prior to the
Valuation Date, the incremental gross proceeds, if any,
realized by Employee upon the exercise of such option in
excess of the amount determined pursuant to the preceding
clause (A) with respect to such Vested Options.
Notwithstanding the foregoing, if Employee elects Option 2
in the first or second Calculation Year and a Supplemental
Payment is actually owed, then for purposes of the preceding
equation in any subsequent Calculation Year, the aggregate
value of Employee's options shall not include the value of
Vested Options included in the calculation that resulted in
the Supplemental Payment being owed.
Supplemental Payments shall not be counted as Earnings for
any retirement program sponsored by United or UAL. Any
Supplemental Payment award shall be paid by United to Employee
promptly after the exercise of any remaining Vested Options as
required by subparagraph (i) above.
The right of Employee to elect Option 2 in any Calculation
Year shall terminate if Employee becomes employed by an airline
competitor, as determined by United or UAL, or if Employee's
employment with United is terminated for cause after the first
Election Date and on or before the last Election Date. If no
election is made on or before the Election Date in any
Calculation Year, Employee shall be deemed to have elected Option
1 for such Calculation Year.
2. Consideration. Employee acknowledges that his
employment on March 1, 1997, constitutes consideration for this
agreement.
3. Non-Assignability; Assignment in the Event of
Acquisition or Merger. This Agreement and the benefits hereunder
may not be assigned or transferred, by operation of law or
otherwise, except that the rights and obligations of United under
this Agreement shall automatically be deemed to be assigned by
United to any corporation or entity into which United may be
merged or consolidated or to any other successor corporation of
United.
4. Severability. If any provision of this Agreement or the
application thereof is held invalid, the invalidity shall not
affect other provisions or applications of this Agreement which
can be given effect without the invalid provisions or application
in accordance with the essential intent of this Agreement, and to
this end the provisions of this Agreement are declared to be
severable.
5. Superseded Prior Agreement(s). This Agreement
supersedes and voids any prior oral or written agreement relating
in any way to the subject matter hereof which may have been
entered into between the parties hereto, but excluding stock
option agreements entered into between Employee and UAL under the
1981 Plan. Any change to this Agreement after the Effective Date
shall be in writing and shall be executed by Employee and United.
6. Retirement; Expiration of this Agreement. For purposes
of the definition of "Retirement" in Section 5 of any and all
options granted to Employee under the 1981 Plan, Employee shall
be deemed to have retired if cessation of employment occurs on or
after the first Election Date, regardless of whether Employee was
eligible for early or normal retirement under United's retirement
plan.
This Agreement shall expire on the earliest to occur of (i)
Employee's cessation of employment from United for any reason, if
such cessation occurs prior to the first Election Date,
(ii) Employee's death, and (iii) satisfaction of United's payment
obligations pursuant to Section 1 hereof.
7. Applicable Law; Arbitration. This Agreement shall be
construed in accordance with the laws of the State of Illinois
and the rights and obligations of the parties hereunder shall be
construed and enforced in accordance with, and governed by the
laws of the State of Illinois, without regard to the principles
of conflicts of laws. Any dispute or controversy arising under
or in connection with this Agreement shall be settled exclusively
by arbitration in Chicago, Illinois in accordance with the rules
of the American Arbitration Association then in effect. Judgment
may be entered on the arbitrator's award in any court having
jurisdiction. The prevailing party in such arbitration shall be
awarded reasonable legal fees and costs as determined by the
arbitrator.
United and Employee, having read and understood this
Agreement and, having consulted with others as appropriate,
hereby agree to be bound by its terms.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of March 1, 1997 at the World Headquarters of United Air
Lines, Inc., 1200 East Algonquin Road, Elk Grove Township,
Illinois 60007.
UNITED AIR LINES, INC.
By: /s/ Gerald Greenwald /s/ William P. Hobgood
-------------------- ----------------------
Its: Chairman and Chief William P. Hobgood
Executive Officer
<TABLE>
<CAPTION>
Exhibit 11
UAL Corporation and Subsidiary Companies
Calculation of Diluted Net Earnings Per Share
(In Millions, Except Per Share)
Year Ended December 31
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Earnings or loss:
Earnings before
extraordinary item $ 958 $ 600 $ 378
Preferred stock dividends (77) (60) (50)
Preferred stock transactions - (48) 20
Interest on convertible
debentures, net of tax and other - 3 24
----- ----- -----
Earnings before extraordinary
item for diluted calculation 881 495 372
Extraordinary loss on early
extinguishment of debt,
net of tax (9) (67) (29)
----- ----- -----
Net earnings for diluted
calculation $ 872 $ 428 $ 343
===== ===== =====
Shares:
Average number of shares
of common stock outstanding
during the year 58.8 56.1 49.6
Average number of shares of
ESOP preferred stock
outstanding during the year 35.9 24.0 11.9
Additional shares assumed
issued at the beginning of the
year for conversion of
convertible debentures - 2.1 7.9
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) 2.7 2.4 1.8
----- ----- -----
Average number of shares
for diluted calculation 97.4 84.6 71.2
===== ===== =====
Diluted per share amounts:
Earnings before
extraordinary item $ 9.04 $ 5.85 $ 5.23
Extraordinary loss on early
extinguishment of debt (0.09) (0.79) (0.41)
----- ----- -----
Net earnings $ 8.95 $ 5.06 $ 4.82
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Exhibit 12.1
UAL Corporation and Subsidiary Companies
Computation of Ratio of Earnings to Fixed Charges
Year Ended December 31
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Earnings: (In Millions)
<S> <C> <C> <C> <C> <C>
Earnings (loss) before
income taxes and
extraordinary items $1,524 $ 970 $ 621 $ 171 $ (47)
Undistributed earnings
of affiliate (16) (49) (38) (19) -
Fixed charges, from below 991 1,112 1,239 1,052 1,109
Interest capitalized (104) (77) (42) (41) (51)
----- ----- ----- ----- -----
Earnings $2,395 $1,956 $1,780 $1,163 $1,011
===== ===== ===== ===== =====
Fixed charges:
Interest expense $ 286 $ 295 $ 399 $ 372 $ 358
Interest expense on
affiliate's guaranteed debt - - - - 5
Portion of rental expense
representative of the
interest factor 705 817 840 680 746
----- ----- ----- ----- -----
Fixed charges $ 991 $1,112 $1,239 $1,052 $1,109
===== ===== ===== ===== =====
Ratio of earnings to
fixed charges 2.42 1.76 1.44 1.10 (a)
===== ===== ===== ===== =====
_____________
(a) Earnings were inadequate to cover fixed charges by $98
million in 1993.
</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
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Earnings: (In Millions)
<S> <C> <C> <C> <C> <C>
Earnings (loss) before
income taxes and
extraordinary items $1,524 $ 970 $ 621 $ 171 $ (47)
Undistributed earnings
of affiliate (16) (49) (38) (19) -
Fixed charges and preferred
stock dividend requirements,
from below 1,116 1,209 1,326 1,184 1,159
Interest capitalized (104) (77) (42) (41) (51)
----- ----- ----- ----- -----
Earnings $2,520 $2,053 $1,867 $1,295 $1,061
===== ===== ===== ===== =====
Fixed charges:
Interest expense $ 286 $ 295 $ 399 $ 372 $ 358
Interest expense on
affiliate's guaranteed debt - - - - 5
Preferred stock dividend
requirements 125 97 87 132 50
Portion of rental
expense representative
of the interest factor 705 817 840 680 746
----- ----- ----- ----- -----
Fixed charges $1,116 $1,209 $1,326 $1,184 $1,159
===== ===== ===== ===== =====
Ratio of earnings to
fixed charges 2.26 1.70 1.41 1.09 (a)
===== ===== ===== ===== =====
_____________
(a) Earnings were inadequate to cover fixed charges by $98
million in 1993.
</TABLE>
Exhibit 23
Consent of Independent Public Accountants
-----------------------------------------
As independent public accountants, we hereby consent to the
incorporation of our report included in the UAL Corporation Form
10-K for the year ended December 31, 1997, into the company's
previously filed Post-Effective Amendment No. 1 to Form S-8 (File
No. 2-67368) and Post-Effective Amendment No. 2 to Form S-8 (File
No. 33-37613) for the Employees' Stock Purchase Plan of UAL
Corporation; Post-Effective Amendment No. 1 to Form S-8 (File No.
33-38613) for the United Air Lines, Inc. Management and Salaried
Employees' 401(k) Retirement Savings Plan; Post-Effective
Amendment No. 1 to Form S-8 (File No. 33-44552), Form S-8 (File
No. 33-57331), and Form S-8 (File No. 333-03041) for the United
Air Lines, Inc. Ground Employees' 401(k) Retirement Savings Plan;
Post-Effective Amendment No. 1 to Form S-8 (File No. 33-44553)
and Form S-8 (File No. 33-62749) for the United Air Lines, Inc.
Flight Attendant Employees' 401(k) Retirement Savings Plan; Post-
Effective Amendment No. 1 to Form S-8 (File No. 33-59950) and
Form S-8 (File No. 333-03039) for the United Air Lines, Inc.
Pilots' Directed Account Retirement Income Plan; Post-Effective
Amendment No. 2 to Form S-8 (File No. 33-41968), Form S-8 (File
No. 33-10206), Form S-8 (File No. 33-61007), and Form S-8 (File
No. 333-03043) for the UAL Corporation 1981 Incentive Stock Plan;
Form S-8 and Post-Effective Amendment No. 1 to Form S-8 (File No.
33-60675) for Directors Fees Taken in Stock Under UAL Corporation
1995 Directors Plan; and Form S-3 (File No. 33-57192), as amended.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Chicago, Illinois
March 6, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM UAL CORPORATION'S STATEMENT OF CONSOLIDATED OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND STATEMENT OF
CONSOLIDATED FINANCIAL POSITION AS OF DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
<MULTIPLIER> 1,000,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<PERIOD-TYPE> 12-MOS
<CASH> 295
<SECURITIES> 550
<RECEIVABLES> 1,051
<ALLOWANCES> 15
<INVENTORY> 355
<CURRENT-ASSETS> 2,948
<PP&E> 16,515
<DEPRECIATION> 5,741
<TOTAL-ASSETS> 15,803
<CURRENT-LIABILITIES> 5,248
<BONDS> 3,771
101
0
<COMMON> 1
<OTHER-SE> 2,336
<TOTAL-LIABILITY-AND-EQUITY> 15,803
<SALES> 0
<TOTAL-REVENUES> 17,378
<CGS> 0
<TOTAL-COSTS> 16,119
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 286
<INCOME-PRETAX> 1,524
<INCOME-TAX> 561
<INCOME-CONTINUING> 958
<DISCONTINUED> 0
<EXTRAORDINARY> (9)
<CHANGES> 0
<NET-INCOME> 949
<EPS-PRIMARY> 14.83
<EPS-DILUTED> 8.95
</TABLE>
