<PAGE>
Pursuant To Rule 424(b)(5)
Registration No. 33-53891
PROSPECTUS SUPPLEMENT
(To Prospectus dated June 30, 1994)
$741,200,000
[LOGO OF UNITED AIRLINES APPEARS HERE]
$370,200,000 OF 10.67% SERIES A DEBENTURES DUE 2004
$371,000,000 OF 11.21% SERIES B DEBENTURES DUE 2014
---------------
INTEREST PAYABLE MAY 1 AND NOVEMBER 1
---------------
Interest on the 10.67% Series A Debentures due 2004 (the "Series A
Debentures") and the 11.21% Series B Debentures due 2014 (the "Series B
Debentures" and, together with the Series A Debentures, the "Debentures") of
United Air Lines, Inc. ("United") will be payable semi-annually in arrears on
May 1 and November 1 of each year, commencing November 1, 1994. The Series A
Debentures will mature on May 1, 2004, and the Series B Debentures will mature
on May 1, 2014. The Debentures may not be redeemed prior to maturity and are
not subject to any sinking fund.
Concurrently with the offering of the Debentures (the "United Series A
Debenture Offering" and the "United Series B Debenture Offering" and,
collectively, the "United Debt Offerings"), UAL Corporation (the "Company"),
United's corporate parent, is offering to sell (the "UAL Preferred Offering"
and, together with the United Debt Offerings, the "Offerings") 16,416,000
depositary shares (the "Depositary Shares"), each representing an interest in
$25 liquidation preference of the Company's 12 1/4% Series B Preferred Stock (
the "Series B Preferred Stock"). The proceeds of the Offerings will be used to
fund a portion of the cash payment to be made to the holders of common stock
of the Company in connection with the proposed recapitalization of the Company
(the "Recapitalization"). Each of the Offerings is conditioned on, and subject
to, the consummation of the Recapitalization, which is, in turn, subject to
the vote of the Company's stockholders and to certain other conditions. See
"The Recapitalization" in the accompanying Prospectus.
After giving pro forma effect to the Recapitalization as if it had occurred
on March 31, 1994, United would have had outstanding as of such date,
including the Debentures, approximately $3.5 billion aggregate principal
amount of indebtedness that would rank pari passu with the Debentures offered
hereby, of which approximately $1.7 billion would have been secured.
The Debentures have been approved for listing on the New York Stock Exchange
subject to official notice of issuance.
FOR CERTAIN FACTORS THAT SHOULD BE CONSIDERED BEFORE INVESTING IN THE
DEBENTURES, SEE "CERTAIN RISK FACTORS" IN THE ACCOMPANYING PROSPECTUS.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THE PROSPECTUS OR THIS PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) UNITED(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Series A Debenture.................. 100% .75% 99.25%
- --------------------------------------------------------------------------------
Total................................... $370,200,000 $2,776,500 $367,423,500
- --------------------------------------------------------------------------------
Per Series B Debenture.................. 100% 1% 99%
- --------------------------------------------------------------------------------
Total................................... $371,000,000 $3,710,000 $367,290,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from July 12, 1994.
(2) United has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by United estimated at $566,000.
---------------
The Debentures are offered by the several Underwriters, subject to prior
sale, when, as and if issued to and accepted by them, subject to approval of
certain legal matters by counsel for the Underwriters, consummation of the
Recapitalization and certain other conditions. The Underwriters reserve the
right to withdraw, cancel or modify such offers and reject orders in whole or
in part. It is expected that delivery of the Debentures will be made in New
York, New York on or about July 12, 1994.
---------------
MERRILL LYNCH & CO.
CS FIRST BOSTON
GOLDMAN, SACHS & CO.
SALOMON BROTHERS INC
---------------
The date of this Prospectus Supplement is June 30, 1994.
<PAGE>
[INSERT AIRPLANE PICTURE]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE DEBENTURES AT
LEVELS ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-
COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
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<PAGE>
[INSERT INTERNATIONAL ROUTE MAP]
<PAGE>
[INSERT INTERNATIONAL ROUTE MAP]
<PAGE>
SUMMARY
The following summary should be read in conjunction with the information
appearing elsewhere in this Prospectus Supplement and the accompanying
Prospectus and is qualified in its entirety by reference thereto.
UNITED AND THE COMPANY
United is one of the largest airlines in the world as measured by operating
revenues, revenue passengers and revenue passenger miles flown. At December 31,
1993, United served 159 airports in 33 countries with a fleet of 544 jet
aircraft. United has domestic hubs at Chicago's O'Hare Airport, Denver, San
Francisco and Washington's Dulles Airport. United has a substantial presence in
the Atlantic, the Pacific and the Latin American markets with hubs at London's
Heathrow Airport and Tokyo's Narita Airport. United also conducts significant
cargo operations along its route system. United is wholly-owned by UAL
Corporation and is the Company's principal subsidiary.
THE RECAPITALIZATION
Under an Amended and Restated Agreement and Plan of Recapitalization, dated
as of March 25, 1994 (the "Plan of Recapitalization"), among the Company, the
Air Line Pilots Association, International ("ALPA"), the union representing the
pilots employed by United, and the International Association of Machinists and
Aerospace Workers (the "IAM" and, together with ALPA, the "Unions"), the union
representing the mechanics, related employees, ramp and stores employees, food
service employees, dispatchers and security officers employed by United, the
Company has agreed to provide the employees represented by the Unions, as well
as United's salaried and management employees, with a majority equity interest
in the Company in exchange for wage concessions and work-rule changes. This
transaction will occur in connection with a recapitalization of the common
stock of the Company. Such transactions are referred to collectively herein as
the "Recapitalization."
In recent years, the Company has noted a fundamental shift in consumer
behavior, with an increased focus on the price/value relationship. Travel
preference has continued to shift to low-cost travel as provided by carriers
such as Southwest Airlines Co. ("Southwest"). The Company believed that this
trend was long-term and would continue even if the weak economic conditions of
the early 1990s improved. The Company determined that its ability to be
competitive in such an environment required a substantial reduction of its
operating costs. As a result of considering the various alternatives presented
to the Company's Board of Directors over the past several years and realizing
that, in order to achieve a long-term cost reduction program, the employees of
the Company must be involved in any major restructuring of the Company, the
Company's management concluded that long-term stockholder value would be
maximized through the proposed Recapitalization.
In the Recapitalization, employee stock ownership plans (the "ESOPs") will be
created to provide United employees represented by the Unions and United's
salaried and management employees with a common equity interest in the Company
of approximately 55% (determined on the basis described in the Plan of
Recapitalization) in exchange for wage concessions and work-rule changes. The
employee interest may increase to up to approximately 63%, depending on the
average market value of the Company's common stock during the year after the
Recapitalization closes. The current stockholders of the Company will receive
the remaining approximately 45% of the common equity of the Company and, if the
Offerings are consummated, cash for their shares in the Recapitalization. The
work-rule changes effected by the Recapitalization also permit the Company to
create, and, if the Recapitalization is consummated, the Company expects to
establish, a new low-cost, short-haul "airline-within-an-airline," referred to
as "U2," to compete in domestic markets. This short-haul operation, in
combination with the wage and work-rule concessions, is expected to increase
the Company's operating earnings and cash flow from operating activities.
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<PAGE>
The consummation of the Plan of Recapitalization is expected to result in
significant cost savings for the Company through employee investments made by
ALPA, the IAM and United's salaried and management employees. The basic
features of the employee investments to be implemented by amendments to ALPA's
and the IAM's respective collective bargaining agreements with the Company and
the establishment of a salaried and management employees cost reduction program
consist of reductions in wage rates (to be partially offset by a potential wage
increase in the fourth and fifth years following the Recapitalization under an
arbitrated settlement based on the Company's profitability, industry wage
trends and wages at specified comparable carriers), elimination of a five
percent pay raise for IAM employees previously scheduled for May 1, 1994,
elimination of pay raises during the first three years following the
Recapitalization (other than existing seniority and promotion increases) and
work-rule and policy changes specific to each employee group that are expected
to improve productivity and competitiveness. ALPA's investment will continue
for five years, nine months with an additional investment applicable solely to
those pilots in the U2 operation that will remain in force for 12 years. In
addition to the basic investments outlined above, ALPA has agreed to a
reduction in the Company's contribution to its retirement plan. The IAM's
investment will remain in force for six years and the work-rule changes agreed
to by the IAM include giving the Company the ability to outsource up to 20% of
maintenance work. The investment by the salaried and management employees, to
remain in force for five years, nine months, also includes a reduction in force
of 127 management positions and work-rule changes relating to, among other
things, reductions in (i) medical, vacation and leave benefits, (ii)
reimbursement for certain management relocations and (iii) salary guarantees
for part-time employees. See "Certain Risk Factors--Uncertainty of Cost Savings
and Productivity Improvements" in the accompanying Prospectus.
The Recapitalization also contemplates a restructuring of the corporate
governance of the Company. Following the consummation of the Recapitalization,
the ESOPs will hold more than 50% of the voting power of the Company's capital
stock and such majority voting power will be preserved so long as such ESOPs
and any other employee benefit plans approved by the Company or any of its
subsidiaries hold more than 20% of the common equity of the Company which event
is referred to herein as the Sunset (as defined in the accompanying
Prospectus). In addition, subject to the rights of holders of preferred stock,
including the Series A Preferred Stock (as defined below) and the Series B
Preferred Stock to elect a total of two directors in the event of certain
dividend arrearages, following the Recapitalization the Board of Directors of
the Company will consist of 12 directors, who will include (i) five directors
(including the Chief Executive Officer and another senior executive officer of
the Company) elected by the public holders of the new common stock issued in
the Recapitalization ("New Shares"), (ii) three directors elected by employees
of United, one each by ALPA, the IAM and representatives of the salaried and
management employees and (iii) four independent directors. Following the
Recapitalization, the Company's certificate of incorporation will contain
provisions that may prevent the Company from acting on certain matters without
the consent of one or both members of the Board elected by ALPA and the IAM or
a 75% vote of the Company's voting stock.
The consummation of the Recapitalization is subject to the affirmative vote
of the holders of a majority of the Company's current common stock ("Old
Shares") outstanding on June 9, 1994, and to certain other conditions. A
meeting of the holders of the Old Shares to vote on the Plan of
Recapitalization and related matters (the "Meeting") has been scheduled for
July 12, 1994. Each of the Offerings is conditioned on, and subject to, the
consummation of the Recapitalization. It is contemplated that the
Recapitalization and the Offerings will be consummated simultaneously, as
promptly as practical following the approval of the Plan of Recapitalization
and related matters at the Meeting. The date and time when the Recapitalization
is consummated is referred to herein as the "Effective Time."
See "Recapitalization" in the accompanying Prospectus.
S-4
<PAGE>
THE OFFERING
Securities Offered.......... $370,200,000 principal amount of 10.67% Series A
Debentures due 2004 and $371,000,000 principal
amount of 11.21% Series B Debentures due 2014.
Maturity Date............... The Series A Debentures will mature on May 1,
2004, and the Series B Debentures will mature on
May 1, 2014.
Interest Payment Dates...... May 1 and November 1, commencing November 1,
1994.
Redemption and Sinking Fund
Provisions................. None.
Ranking..................... The Debentures will be senior, unsecured
obligations of United, ranking pari passu with
all existing and future senior indebtedness of
United and senior to subordinated indebtedness.
After giving pro forma effect to the
Recapitalization as if it had occurred on March
31, 1994, United would have had outstanding as of
such date, including the Debentures,
approximately $3.5 billion aggregate principal
amount of indebtedness that would rank pari passu
with the Debentures offered hereby, of which
approximately $1.7 billion would have been
secured. The Indenture pursuant to which the
Debentures will be issued does not limit the
right of United to incur additional senior
indebtedness that may rank pari passu with the
Debentures.
Use of Proceeds............. The proceeds of the Offerings will be used to
fund a portion of the cash payment to be made to
the holders of the Old Shares in connection with
the Recapitalization.
Certain Risk Factors........ For a discussion of certain factors that should
be considered in evaluating an investment in the
Debentures, see "Certain Risk Factors" in the
accompanying Prospectus.
Listing..................... The Debentures have been approved for listing on
the New York Stock Exchange subject to official
notice of issuance.
S-5
<PAGE>
DESCRIPTION OF SECURITIES
The Series A Debentures and the Series B Debentures will be issued under an
Indenture dated as of July 1, 1991 between United, as issuer, and The Bank of
New York, as Trustee (the "Indenture Trustee") and an officers' certificate
that sets forth certain terms of the Debentures (collectively, the
"Indenture"). Copies of the Indenture and the related documentation have been
filed as an exhibit to the Registration Statement of which the accompanying
Prospectus is a part and are incorporated herein by reference. The summary of
terms of the Debentures contained in this Prospectus does not purport to be
complete. Where the summaries do not make a distinction between the Series A
Debentures and the Series B Debentures, such summaries refer to either series.
Whenever particular Sections or defined terms of the Indenture are referred to
herein, such sections or defined terms are incorporated herein by reference.
General
The Debentures will be issued only in fully registered form, without
coupons, in denominations of $1,000 principal amount and integral multiples
thereof. The Debentures will bear interest at the rates shown on the cover of
this prospectus. The Debentures have been approved for listing on the New York
Stock Exchange subject to official notice of issuance.
Interest on the Debentures will be paid semi-annually in arrears on May 1
and November 1 of each year commencing November 1, 1994 to holders of record
on the record date for such payment on April 15 and October 15, respectively,
at the rates shown on the cover of this Prospectus Supplement. The Series A
Debentures will mature on May 1, 2004. The Series B Debentures will mature on
May 1, 2014. The Debentures will bear interest from July 12, 1994 or the most
recent interest payment date from which interest has been paid.
The Indenture does not contain any covenants or provisions that provide
protection to the holders of Debentures in the event of a highly leveraged
transaction or a change of control.
The Debentures will be unsecured and unsubordinated obligations of United
and will rank on a parity with all other unsecured and unsubordinated
indebtedness of United. As of March 31, 1994, United had outstanding
approximately $2.7 billion aggregate principal amount of indebtedness that
would have ranked pari passu with the Debentures offered hereby, of which
approximately $1.7 billion was secured and approximately $1.0 billion was
unsecured. The Indenture does not limit the right of United to incur
additional senior indebtedness that may rank pari passu with the Debentures.
As of March 31, 1994, United had outstanding approximately $3.6 billion
principal amount of indebtedness and capital lease obligations.
Redemption
The Debentures will not be subject to any sinking fund or other obligation
of United to redeem or retire the Debentures. The Debentures may not be called
for redemption prior to their respective final stated maturities. The Plan of
Recapitalization provides that if either or both series of Debentures are
issued other than pursuant to the United Debt Offerings, such series of
Debentures may be made redeemable at the option of United prior to their
respective final stated maturities if the Unions so request not less than
seven days prior to the Announcement Date.
Payment, Registration, Transfer and Exchange
Payments in respect of the Debentures will be made at the office or agency
of United maintained for that purpose as United may designate from time to
time, except that, at the option of United, interest payments, if any, on the
Debentures may be made by checks mailed by the Indenture Trustee to the
holders of Debentures entitled thereto at their registered addresses.
(Sections 3.7(a) and 9.2 of the Indenture.) Payment of any installment of
interest on the Debentures will be made to the persons in whose names such
Debentures are registered at the close of business on the regular record date
for such interest. (Sections 3.7(a) of the Indenture.)
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<PAGE>
Debentures will be transferable or exchangeable at the agency of United
maintained for such purpose as designated by United from time to time.
(Sections 3.5 and 9.2 of the Indenture.) Debentures may be transferred or
exchanged without service charge, other than any tax or other governmental
charge imposed in connection therewith. (Section 3.5 of the Indenture.)
Consolidation, Merger or Sale by United
The Indenture provides that United may merge or consolidate with or into any
other corporation or sell, convey, transfer or otherwise dispose of all or
substantially all of its assets to any person, firm or corporation, if (i)(a)
in the case of a merger or consolidation, United is the surviving corporation
or (b) in the case of a merger or consolidation where United is not the
surviving corporation and in the case of such a sale, conveyance or other
disposition, the successor or acquiring corporation is a corporation organized
and existing under the laws of the United States of America or a State thereof
and such corporation expressly assumes by supplemental indenture all the
obligations of United under the Debentures and the Indenture, (ii) immediately
after giving effect to such merger or consolidation, or such sale, conveyance,
transfer or other disposition, no Default or Event of Default has occurred and
is continuing and (iii) certain other conditions are met. In the event a
successor corporation assumes the obligations of United, such successor
corporation will succeed to and be substituted for United under the Indenture
and under the Debentures and all obligations of United will terminate.
(Section 7.1 of the Indenture.)
Events of Default, Notice and Certain Rights on Default
The Indenture provides that, if an Event of Default occurs with respect to
the Debentures of either series and is continuing, the Indenture Trustee for
such series or the holders of at least 25% in aggregate principal amount of
all of the outstanding Debentures of that series, by written notice to United
(and to the Indenture Trustee for such series, if notice is given by such
holders of Debentures), may declare the principal of all the Debentures of
that series to be due and payable. (Section 5.2 of the Indenture.)
Events of Default with respect to Debentures of either series are defined in
the Indenture as being: (i) default for 30 days in payment of interest on any
Debentures of that series when due, (ii) default for 10 days in payment of
principal, premium, if any, at its maturity or on redemption or otherwise, of
any Debentures of that series when due, (iii) default for 60 days after notice
to United by the Indenture Trustee for such series, or to United and the
Indenture Trustee by the holders of at least 25% in aggregate principal amount
of the Debentures of such series then outstanding, in the performance of any
other agreement in the Debentures of that series, in the Indenture or in any
supplemental indenture, (iv) default resulting in acceleration of other
indebtedness of United for borrowed money where the aggregate principal amount
so accelerated exceeds $100 million and such acceleration is not rescinded or
annulled within 10 days after the written notice thereof to United by the
Indenture Trustee or to United and the Indenture Trustee by the holders of at
least 25% in aggregate principal amount of the Debentures of such series then
outstanding, provided that such Event of Default will be cured or waived if
the default that resulted in the acceleration of such other indebtedness is
cured or waived, and (v) certain events of bankruptcy, insolvency or
reorganization of United. (Section 5.1 of the Indenture.)
An Event of Default under the Indenture with respect to the Debentures could
cause an event of default with respect to certain other existing indebtedness
of United, as described below. A payment default with respect to the
Debentures that continues to exist after the termination of grace periods and
waivers would cause an event of default under six financing leases covering
six aircraft if the Event of Default under the Indenture would have a material
adverse effect on the financial condition of United. An event of default would
also occur under these six financing leases and two other financing leases
covering four aircraft if the maturity of the Debentures was accelerated as a
result of an Event of Default and if such acceleration would have a material
adverse effect on the financial condition of United. An event of default would
occur under a ninth financing lease covering twenty-five aircraft if the
maturity of the Debentures was accelerated as a result of a payment default
under the Indenture or if the maturity of 80% of all of United's senior funded
indebtedness
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were accelerated as a result of any other default under the Indenture. If an
Event of Default occurred under the Indenture and the maturity of more than
$100 million principal amount of the Debentures was accelerated and not
rescinded within specified grace periods, an event of default would occur under
$1.0 billion principal amount of United's indebtedness and, in addition, United
would not be able to make new borrowings under its commercial paper facility.
There can be no assurance that United will not grant a cross-default remedy to
one or more of its creditors in the future.
The Indenture provides that the Indenture Trustee for either series of
Debentures will, within 90 days after the occurrence of a Default with respect
to Debentures of that series, give to the holder of the Debentures of that
series notice of all uncured Defaults known to it; provided that, except in the
case of default in payment on the Debentures of that series, the Indenture
Trustee may withhold the notice if and so long as a committee of its
responsible officers in good faith determines that withholding such notice is
in the interest of the holders of the Debentures of that series. (Section 6.6
of the Indenture.) "Default" means any event that is, or, after notice or
passage of time or both, would be, an Event of Default. (Section 1.1 of the
Indenture.)
The Indenture provides that the holders of a majority in aggregate principal
amount of the Debentures of each series affected (with each such series voting
as a class) may direct the time, method and place of conducting any proceeding
for any remedy available to the Indenture Trustee for such series or exercising
any trust or power conferred on such Indenture Trustee. (Section 5.8 of the
Indenture.)
The Indenture includes a covenant that United will file annually with the
Indenture Trustee a certificate as to United's compliance with all conditions
and covenants of the Indenture. (Section 9.7 of the Indenture.)
The holders of a majority in aggregate principal amount of either series of
Debentures by notice to the Indenture Trustee for such series may waive, on
behalf of the holders of all Debentures of such series, any past Default or
Event of Default with respect to that series and its consequences except a
Default or Event of Default in the payment of the principal of, premium, if
any, or interest on any Debenture and certain other defaults. (Section 5.7 of
the Indenture.)
Modification of the Indenture
The Indenture contains provisions permitting United and the Indenture Trustee
to enter into one or more supplemental indentures without the consent of the
holders of any of the Debentures (i) to evidence the succession of another
corporation to United and the assumption of the covenants of United by a
successor to United, (ii) to add to the covenants of United for the benefit of
either series of Debentures or surrender any right or power of United, (iii) to
add additional Events of Default with respect to any series, (iv) to secure the
Debentures, (v) to evidence and provide for successor Indenture Trustees, (vi)
to correct or supplement any inconsistent provisions or to make any other
provisions with respect to matters or questions arising under the Indenture,
provided that such action does not adversely affect the interests of any holder
of Debentures of any series issued under the Indenture, or (vii) to cure any
ambiguity or correct any mistake. (Section 8.1 of the Indenture.)
The Indenture also contains provisions permitting United and the Indenture
Trustee, with the consent of the holders of a majority in aggregate principal
amount of the outstanding Debentures of each series affected by a supplemental
indenture, to execute such supplemental indenture to add any provisions to or
to change or to eliminate any of the provisions of the Indenture or any
supplemental indenture or to modify the rights of the holders of Debentures of
such series, except that no such supplemental indenture may, without the
consent of the holder of each Debenture so affected, (i) change the time for
payment of principal or interest on any Debenture, (ii) reduce the principal
of, or any installment of interest on, any Debenture, (iii) reduce the amount
of premium, if any, payable upon the redemption of any Debenture, (iv) change
the coin or currency in which any Debenture or any premium or interest thereon
is payable, (v) impair the right to institute suit for the enforcement of any
payment on or with respect to any Debenture, (vi) reduce the percentage in
principal amount of the outstanding Debentures of any series the consent of
whose holders is
S-8
<PAGE>
required for modification or amendment of the Indenture or for waiver of
compliance with certain provisions of the Indenture or for waiver of certain
defaults, (vii) change the obligation of United to maintain an office or agency
in the places and for the purposes specified in the Indenture or (viii) modify
the provisions relating to waiver of certain defaults or any of the foregoing
provisions. (Section 8.2 of the Indenture.)
Defeasance and Covenant Defeasance
United may elect either (i) to defease and be discharged from any and all
obligations with respect to the Debentures of any series (except as described
below) ("defeasance") or (ii) to be released from its obligations with respect
to certain covenants applicable to the Debentures of any series ("covenant
defeasance"), upon the deposit with the Indenture Trustee for such series (or
other qualifying trustee), in trust for such purpose, of money and/or
Government Obligations (as defined below) that through the payment of principal
and interest in accordance with their terms will provide money in the amount
sufficient to pay the principal of, premium, if any, and interest on such
Debentures to their respective final stated maturity or redemption, as the case
may be. Upon the occurrence of a defeasance, United will be deemed to have paid
and discharged the entire indebtedness represented by such Debentures and to
have satisfied all of its other obligations under such Debentures (except for
(i) the rights of holders of such Debentures to receive, solely from the trust
funds deposited to defease such Debentures, payments in respect of the
principal of, premium, if any, and interest on such Debentures when such
payments are due and (ii) certain other obligations as provided in the
Indenture). Upon the occurrence of a covenant defeasance, United will be
released only from its obligations to comply with certain covenants contained
in the Indenture relating to such Debentures, will continue to be obligated in
all other respects under such Debentures and will continue to be contingently
liable with respect to the payment of principal, premium, if any, and interest
with respect to such Debentures.
The conditions to both defeasance and covenant defeasance are as follows: (i)
such defeasance or covenant defeasance must not result in a breach or violation
of, or constitute a Default or Event of Default under, the Indenture, or result
in a breach or violation of, or constitute a default under, any other material
agreement or instrument of United, (ii) certain bankruptcy related Defaults or
Events of Default with respect to United must not have occurred and be
continuing during the period commencing on the date of the deposit of the trust
funds to defease such Debentures and ending on the 91st day after such date,
(iii) United must deliver to the Indenture Trustee an Opinion of Counsel to the
effect that the holders of such Debentures will not recognize income, gain or
loss for Federal income tax purposes as a result of such defeasance or covenant
defeasance and will be subject to Federal income tax on the same amounts and in
the same manner and at all the same times as would have been the case if such
defeasance or covenant defeasance had not occurred (such Opinion of Counsel, in
the case of defeasance, must refer to and be based upon a ruling of the IRS or
a change in applicable Federal income tax law occurring after the date of the
Indenture) and (iv) United must deliver to the Indenture Trustee an Officers'
Certificate and an Opinion of Counsel with respect to compliance with the
conditions precedent to such defeasance or covenant defeasance and with respect
to certain registration requirements under the Investment Company Act of 1940,
as amended. (Article 4 of the Indenture.) The Indenture requires that a
nationally recognized firm of independent public accountants deliver to the
Indenture Trustee a written certification as to the sufficiency of the trust
funds deposited for the defeasance or covenant defeasance of such Debentures.
The Indenture does not provide the holders of such Debentures with recourse
against such firm. In the event that Government Obligations deposited with the
Indenture Trustee for the defeasance of such Debentures decrease in value or
default subsequent to their being deposited, United will have no further
obligation, and the holders of such Debentures will have no additional recourse
against United, as a result of such decrease in value or default. As described
above, in the event of a covenant defeasance, United remains contingently
liable with respect to the payment of principal, premium, if any, and interest
with respect to such Debentures.
United may exercise its defeasance option with respect to such Debentures
notwithstanding its prior exercise of its covenant defeasance option. If United
exercises its defeasance option, payment of such Debentures may not be
accelerated because of a Default or an Event of Default. If United exercises
its
S-9
<PAGE>
covenant defeasance option, payment of such Debentures may not be accelerated
by reason of a Default or an Event of Default with respect to the covenants to
which such covenant defeasance is applicable. However, if such acceleration
were to occur, the realizable value at the acceleration date of the money and
Government Obligations in the defeasance trust could be less than the principal
and interest then due on such Debentures, in that the required deposit in the
defeasance trust is based upon scheduled cash flow rather than market value,
which will vary depending upon interest rates and other factors.
"Government Obligations" means securities which are (i) direct obligations of
the United States, for the payment of which its full faith and credit is
pledged or (ii) obligations of a Person controlled or supervised by and acting
as an agency or instrumentality of the United States, the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States, which, in either case, are not callable or redeemable at the option of
the issuer thereof, and shall also include a depositary receipt issued by a
bank or trust company as custodian with respect to any such Government
Obligation or a specific payment of interest on or principal of any such
Government Obligation held by such custodian for the account of the holder of a
depositary receipt, provided that (except as required by law) such custodian is
not authorized to make any deduction from the amount payable to the holder of
such depositary receipt from any amount received by the custodian in respect of
the Government Obligation evidenced by such depositary receipt.
The Indenture Trustee
The Bank of New York is the Indenture Trustee under the Indenture. United and
the Company also maintain banking and other commercial relationships with The
Bank of New York and its affiliates in the ordinary course of business and The
Bank of New York acts as trustee under several indentures for United and the
Company.
LITIGATION
The Company, together with certain officers and directors of the Company and
the Unions, are parties to two shareholder actions pending in the Court of
Chancery of the State of Delaware, New Castle County, captioned Kaufman v.
Wolf, C.A. No. 13312, and Krasner v. UAL Corp., C.A. No. 13316 (the
"Shareholder Actions"). On June 17, 1994, plaintiffs in these two actions
jointly filed an Amended Complaint. The Amended Complaint alleged, among other
things, that the Proxy Statement issued by the Company in connection with the
proposed Recapitalization of the Company, on which common stockholders of the
Company are scheduled to vote on July 12, 1994, was false and misleading, and
further alleged that the proposed Recapitalization failed to maximize
shareholder value. The Amended Complaint seeks, among other things, a
preliminary and permanent injunction against consummation of the
Recapitalization.
On June 21, 1994, plaintiffs moved for a preliminary injunction to enjoin
consummation of the Recapitalization. The Court has scheduled a hearing on this
motion for July 7, 1994. On June 29, 1994, the Company and the plaintiffs
reached a tentative understanding to settle the Shareholder Actions, on the
basis of changes to the Plan of Recapitalization (which changes are consistent
with those made in connection with the Amendment dated June 29, 1994 to the
Plan of Recapitalization), and certain supplemental disclosures, if
appropriate. The settlement is subject to definitive documentation and court
approval.
In addition, the Company has become aware of an action pending in the United
States District Court for the Northern District of Illinois, Eastern Division,
captioned Wiley v. International Association of Machinists and Aerospace
Workers, No. 94C 3958, filed on June 29, 1994. The Complaint in the Wiley
action alleges that the ratification of the Recapitalization by District Lodge
141 of the IAM was defective and invalid because, among other things, certain
members of the IAM were allegedly treated preferentially and certain
information allegedly was not disclosed to members. The Complaint seeks, among
other things, an order enjoining implementation of the Recapitalization unless
and until it is ratified by the plaintiff's District Lodge. The Company is not
a party to this action.
UNION ORGANIZING ACTIVITY
On June 9, 1994, the Aircraft Mechanics Fraternal Association ("AMFA") filed
an application with the National Mediation Board seeking authorization to
represent the craft or class of mechanics and related employees at United who
constitute approximately 50% of the IAM's current membership at United. AMFA's
actions or future actions may affect the achievement of estimated labor savings
and harmonious labor relations within the Company.
S-10
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement"), United has agreed to sell to each of Merrill Lynch,
Pierce, Fenner & Smith Incorporated, CS First Boston Corporation, Goldman,
Sachs & Co. and Salomon Brothers Inc (the "Underwriters") and each of the
Underwriters has severally agreed to purchase the principal amount of the
Debentures set forth opposite its name below.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT PRINCIPAL AMOUNT
OF SERIES A OF SERIES B
UNDERWRITER DEBENTURES DEBENTURES
----------- ---------------- ----------------
<S> <C> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................ $ 92,550,000 $ 92,750,000
CS First Boston Corporation.................. 92,550,000 92,750,000
Goldman, Sachs & Co. ........................ 92,550,000 92,750,000
Salomon Brothers Inc......................... 92,550,000 92,750,000
------------ ------------
Total................................... $370,200,000 $371,000,000
============ ============
</TABLE>
In the Purchase Agreement, the several Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all the Debentures of
a series offered hereby if any of the Debentures of such series are purchased.
The offering of the Series A Debentures and the offering of the Series B
Debentures are not conditioned upon each other. In the event of default by an
Underwriter, the Purchase Agreement provides that, in certain circumstances,
purchase commitments of the nondefaulting Underwriters may be increased or the
Purchase Agreement may be terminated.
The Underwriters have advised United that they propose initially to offer
the Debentures to the public at the public offering prices set forth on the
cover page of this Prospectus Supplement, and to certain dealers at such
prices less a concession not in excess of .45 % of the principal amount of the
Series A Debentures and .6 % of the principal amount of the Series B
Debentures. The Underwriters may allow, and such dealers may reallow, a
discount not in excess of .25 % of the principal amount of the Series A
Debentures and .25 % of the principal amount of the Series B Debentures on
sales to certain other dealers. After the initial public offering, the public
offering prices, concessions and discounts may be changed.
United has agreed to indemnify the Underwriters against certain civil
liabilities which may be incurred in connection with this offering, including
certain liabilities under the Securities Act of 1933, as amended.
In the ordinary course of their respective businesses, certain of the
Underwriters or their affiliates have engaged, and may in the future engage,
in transactions with United and the Company. CS First Boston Corporation ("CS
First Boston") is acting as financial advisor to the Company, including the
delivery of certain fairness opinions, in connection with the
Recapitalization. CS First Boston will receive fees in the aggregate amount of
$5,000,000 plus certain expenses for these services. The Company has also
retained Salomon Brothers Inc ("Salomon") as the deadlock pricing advisor with
respect to the mechanism for establishing the rates for the Debentures and the
Series B Preferred Stock in connection with the Recapitalization and
accordingly, Salomon may receive fees in the aggregate amount of $450,000 for
such services.
The Debentures have been approved for listing on the New York Stock
Exchange, subject to official notice of issuance.
United and the Company have agreed that they will not, directly or
indirectly, without the prior written consent of Merrill Lynch, Pierce, Fenner
& Smith Incorporated, offer, sell or enter into any agreement to sell in an
offering registered under the Securities Act of 1933, as amended, or pursuant
to Rule 144A thereunder, any debt securities, secured or unsecured, other than
the Debentures, prior to 45 days after the closing date of the United Debt
Offerings.
S-11
<PAGE>
[LOGO OF UNITED AIRLINES APPEARS HERE]
DEBENTURES
---------------
United Air Lines, Inc. ("United") may offer from time to time one or more
series of its unsecured debentures (the "Debentures") at an aggregate initial
offering price not to exceed $765,000,000. The Debentures may be offered as
separate series in amounts, at prices and on terms to be determined in light
of market conditions at the time of sale and set forth in a supplement to this
Prospectus (the "Prospectus Supplement").
The Prospectus Supplement for the Debentures will set forth the terms of
each series of Debentures, including, where applicable, the specific
designation; aggregate principal amount; authorized denominations; maturity;
rate or rates and time or times of payment of any interest; any terms for
optional or mandatory redemption or payment of additional amounts or any
sinking fund provisions; any initial public offering price; the proceeds to
United and any other specific terms in connection with the offering and sale
of such securities.
SEE "CERTAIN RISK FACTORS" FOR A DESCRIPTION OF CERTAIN FACTORS THAT SHOULD
BE CONSIDERED BY PURCHASERS OF THE DEBENTURES.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
---------------
The Debentures may be sold (i) through underwriting syndicates represented
by managing underwriters or by underwriters without a syndicate; (ii) through
agents designated from time to time; or (iii) directly. The names of any
underwriters or agents of United involved in the sale of the Debentures in
respect of which this Prospectus is being delivered and any applicable
commissions or discounts are set forth in the Prospectus Supplement. The net
proceeds to United from such sale are also set forth in the Prospectus
Supplement.
---------------
The date of this Prospectus is June 30, 1994.
<PAGE>
AVAILABLE INFORMATION
United is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed by United with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Regional Offices of the Commission at Seven World Trade Center, 13th Floor,
New York, New York 10048 and at Northwestern Atrium Center, 500 West Madison
Street, Chicago, Illinois 60661. Copies of such material also can be obtained
by mail from the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates.
United has filed with the Commission a Registration Statement under the
Securities Act, with respect to the Debentures. This Prospectus does not
contain all the information set forth or incorporated by reference in the
Registration Statement and the exhibits and schedules relating thereto, certain
portions of which have been omitted as permitted by the rules and regulations
of the Commission. For further information, reference is made to the
Registration Statement and the exhibits filed or incorporated as a part
thereof, which are on file at the offices of the Commission and may be obtained
upon payment of the fee prescribed by the Commission, or may be examined
without charge at the offices of the Commission. Statements contained in this
Prospectus, or in any document incorporated in this Prospectus by reference, as
to the contents of any contract or other document referred to herein or therein
are not necessarily complete, and in each instance reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement or such other document, and each such statement is qualified in all
respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by United pursuant to the
Exchange Act are incorporated by reference in this Prospectus:
1. United's Annual Report on Form 10-K for the year ended December 31,
1993.
2. United's Quarterly Report on Form 10-Q for the period ended March 31,
1994, as amended.
3. United's Current Reports on Form 8-K dated February 4, 1994, March 29,
1994 (two reports), April 21, 1994, April 28, 1994, May 3, 1994, June
2, 1994, June 10, 1994 and June 30, 1994.
All documents and reports subsequently filed by United pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus
and prior to the termination of the offering of the Debentures shall be deemed
to be incorporated by reference in this Prospectus and to be a part hereof from
the date of filing of such documents or reports. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM
UAL CORPORATION, P.O. BOX 66919, CHICAGO, ILLINOIS 60666 (TELEPHONE NUMBER
(708) 952-4000), ATTENTION: FRANCESCA M. MAHER, SECRETARY.
----------------
Like many other carriers, United overflies Cuba in order to serve other
destinations in Central and South America and the Caribbean and is required by
the Cuban government to pay fees for such overflights which United does
pursuant to a license which it has obtained from the U.S. government. This
information is accurate as of the date of this Prospectus and current
information concerning business dealings of United with the government of Cuba
or with any person or affiliate located in Cuba may be obtained from the
Florida Department of Banking and Finance, Plaza Level, The Capitol,
Tallahassee, Florida 32399-0350, telephone number (904) 488-9530.
2
<PAGE>
UNITED AND THE COMPANY
United is one of the largest airlines in the world as measured by operating
revenues, revenue passengers and revenue passenger miles flown. At December 31,
1993, United served 159 airports in 33 countries with a fleet of 544 jet
aircraft. United has domestic hubs at Chicago's O'Hare Airport, Denver, San
Francisco and Washington's Dulles Airport. United has a substantial presence in
the Atlantic, the Pacific and the Latin American markets with hubs at London's
Heathrow Airport and Tokyo's Narita Airport. United also conducts significant
cargo operations along its route system. United is a wholly-owned subsidiary of
UAL Corporation (the "Company").
COST REDUCTION INITIATIVES
During 1993, United pursued a plan to reduce costs in an effort to stem
financial losses and put United on a path to sustained profitability. A key
element of the plan was a $400 million cost-reduction program. The plan
included the furlough of 2,800 employees, elimination of 1,900 open positions
that were to be filled during the year, as well as sizable budget reductions,
consistent with safety and operational integrity, in virtually every area of
United. Additionally, more than 500 vendors agreed to decreases in their prices
for 1993, producing a savings for United of more than $100 million on an
annualized basis. United also turned to outside suppliers to handle certain
functions traditionally performed in-house. In the largest such arrangement,
United agreed to sell 16 of its 17 U.S. flight kitchens to Dobbs International
Services and Caterair International for $119 million in cash. Through seven-
year catering agreements with Dobbs and Caterair at the respective kitchens,
United estimates it will avoid capital expenditures of $70 million and realize
catering service savings of more than $320 million over the contract term.
ROUTE STRUCTURE
During the past 12 months, United has been refocusing its flying to better
take advantage of its strong route structure with the aircraft currently in its
fleet. United has taken a number of steps, including eliminating certain
unprofitable service, expanding in markets with growth potential, retiming of
domestic flights to offer better connections to international flights and
initiating marketing agreements with other carriers to feed United flights.
The strategy United adopted several years ago to focus a greater portion of
new capacity on the fast-growing and potentially more profitable international
markets continued to pay off in 1993 as overcapacity weakened the U.S. domestic
market and low-cost carriers pushed yields lower. In 1993, United operated 36%
of its total capacity in international markets, which produced 39% of its total
revenues. International capacity in 1993 rose 13% over 1992, while domestic
markets showed an 8% increase. United's traffic in international markets
increased 14% year-over-year as compared to an increase of 6% in domestic
markets. United also realigned its international flying by eliminating certain
unprofitable non-stop flights and replacing them with connecting service
through its international hubs and by adding service to other international
destinations. At year end 1993, United's international route structure included
47 destinations in 32 foreign countries.
The most sweeping changes occurred in the United States, where growing
competition from low-cost carriers prompted a restructuring of United's U.S.
route system. United built on its strengths: its well-positioned hubs in
Chicago, Denver, San Francisco and Washington, D.C. (Dulles), where United
remains the largest carrier in each location, and its long-haul flights. United
also eliminated several unprofitable routes and stations. For example, in
Washington, D.C., where most local residents prefer National Airport for East
Coast travel, United downsized its domestic north-south operations at the
Dulles hub and focused instead on creating a European gateway at that location
as well as operating domestic long-haul operations. The airline now serves 11
trans-Atlantic destinations and Mexico City from Washington. In addition, a
build-up at the Denver hub has made a significant contribution to revenue
improvement. Daily departures from Denver increased to 257 from 212 a year
earlier and flight times were modified to serve the local market better, while
a new bank of flights was created to accommodate connecting traffic. United
also increased capacity in the long-haul transcontinental markets by 11% in
1993 compared with the prior year.
3
<PAGE>
MARKETING AGREEMENTS
New marketing partnerships with other airlines in 1993 provided more
opportunities for United to serve new markets around the globe and gain
increased passenger and cargo feed without incurring the related capital
expense.
The most significant of the new marketing agreements is the global alliance
between United and Lufthansa German Airlines, announced in October 1993.
Subject to government approval, the two carriers will join forces in a number
of areas, including code-sharing, coordinated baggage handling and ground
services, shared facilities and joint promotions. Two elements of the program--
joint frequent flier program participation and reciprocal use of airport
lounges--do not require government approval and became effective in January
1994.
United currently has more than 30 marketing agreements of varying degrees,
including many with code-share provisions. In 1993 alone, United announced
code-share agreements with nine carriers in addition to Lufthansa: Aeromar, ALM
Antillean Airlines, Aloha Airlines, Emirates Airlines, Sunaire Express, Thai
Airways, TransBrasil, Trans World Express and USAir. During the year, United
also expanded its code-sharing agreements with British Midland and Ansett
Airlines.
UNITED EXPRESS
The United Express partnership remains a central component of United's
domestic U.S. service. In 1993, United saw strong growth in feeder traffic
provided through its commuter partners. The number of average daily departures
operated by the United Express carriers rose from 1,464 in 1992 to 1,775 in
1993. At year end 1993, United's six United Express partners served 189
locations throughout the United States.
FLEET
Through the addition of 43 new aircraft and the retirement of 35 older jets
in 1993, United decreased its average fleet age to 9.6 years at year end 1993
from 10.3 years at year end 1992. In 1994, United is expected to take delivery
of 18 new aircraft: 16 Airbus A320s, a technologically advanced airplane that
combines added space and passenger comfort with increased fuel efficiency and
lower maintenance costs, and 2 Boeing 747-400s. Nineteen aircraft are scheduled
for retirement in 1994. In 1995, United is scheduled to be the launch customer
for the Boeing 777, a large capacity, long-range twin engine jet.
In early 1993, United revised its capital spending plan based on reductions
in its capacity requirements for the next several years. United reached
agreement with The Boeing Company ("Boeing") to convert 49 aircraft originally
scheduled for delivery between 1993 and 1996 into options for the 1996-1999
period. Under the terms of the agreement, if United does not elect to confirm
the delivery of these option aircraft before 1998, it will forfeit significant
deposits. United also announced an agreement with Airbus Industrie ("Airbus")
to delay from 1995 and 1996 to 1997 and 1998 delivery of 14 leased A320
aircraft.
CARGO OPERATIONS
United is the world's largest carrier of air cargo among airlines without
dedicated freighter aircraft, having flown 2.0 billion cargo ton miles in 1993,
up 16% from 1992. Cargo revenues increased year-over-year to a record $962
million. Growth in 1993 was particularly strong in Pacific and Latin American
markets.
United's fleet is well-configured for cargo. The Boeing 747-400, used
extensively in trans-Pacific markets, can carry a high volume of freight, as
can the Boeing 767-300ER aircraft, which is used in European and Latin American
markets. The Boeing 777 aircraft, which is scheduled to arrive in 1995, will
have even more cargo space than the Boeing 747-400.
SERVICE
Business and international travelers are key to revenue improvement for
airlines. In 1993, United developed more programs to attract these passengers.
United expanded to eight the number of Business One
4
<PAGE>
destinations that are served from Chicago O'Hare. The service includes such
features as close-in gates at O'Hare and ticketing at the gate. United also
introduced a number of enhancements to its international First Class service
that give customers greater control over their time as they travel.
Enhancements include advance preparation of travel documents presented to
passengers upon check-in and offering passengers greater ability to choose the
timing and presentation of meal services. During 1993, United received six
awards for its inflight entertainment.
COMPUTER RESERVATIONS SYSTEM
In September 1993, the Covia and Galileo computer reservations systems
(CRS), both owned in part by United, combined to create the world's largest
CRS company, Galileo International. The merger strengthened United's worldwide
computer reservations capability and provided cost savings by eliminating
certain redundancies of the two systems.
EXECUTIVE OFFICES
The address of the principal executive offices of the Company and United is
1200 East Algonquin Road, Elk Grove Township, Illinois 60007, their telephone
number at such address is (708) 952-4000 and the mailing address of the
Company and United is P.O. Box 66919, Chicago, Illinois 60666.
THE RECAPITALIZATION
The information contained in this Prospectus with respect to the
Recapitalization (as defined below) does not purport to be complete. A copy of
the Plan of Recapitalization (as defined below) that sets forth the terms of
the Recapitalization has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part and is incorporated herein by
reference.
BACKGROUND AND PURPOSE OF THE RECAPITALIZATION
In recent years, the Company has noted the emergence of a fundamental shift
in consumer behavior, with an increased focus on the price/value relationship.
Travel preference (of both business and leisure travelers) has continued to
shift to low-cost travel as provided by carriers such as Southwest, Morris Air
and Reno Air. The Company believed that this trend was long-term and would
continue even if the weak economic conditions of the early 1990s improved. The
Company determined that its ability to be competitive in such an environment
required a substantial reduction of its operating costs.
Thus, on January 6, 1993, the Company, while recognizing that it had put in
place progressively leaner operating budgets over the prior few years,
nevertheless announced a further $400 million cost reduction program,
including the subcontracting of skycaps and certain janitorial services and
the furlough of 2,800 employees. Additionally, the Company restructured its
fleet plan and aircraft purchase commitments, converting firm orders for 49
Boeing aircraft to options, deferring acceptance of 14 Airbus aircraft and
accelerating the retirement of 25 older aircraft. The net effect of these
changes was to reduce the Company's planned capital spending through 1996 by
over $6.2 billion and reduce the size of the planned 1996 year-end fleet size
by over 85 aircraft.
The Company determined that even with these changes it would be necessary to
reduce its single largest expense--labor costs--to be competitive in the
changed environment of the 1990s. Thus, in addition to the subcontracting,
furloughs and the implementation of a 5% salary reduction program for certain
management employees, the Company requested concessions from its three
principal unions in January 1993. The Association of Flight Attendants ("AFA")
and the International Association of Machinists and Aerospace Workers (the
"IAM") rejected such request. The Air Line Pilots Association, International
("ALPA" and, together with the IAM, the "Unions") indicated that it desired to
conduct a financial review of the Company.
In light of the unwillingness of the Company's unions to participate in the
Company's cost-cutting efforts, the Company thereafter announced its intention
to undertake various other cost-cutting actions.
5
<PAGE>
On April 19, 1993, the Company's Board of Directors (the "Board") received a
letter from the United Airlines Union Coalition (the "Coalition"), a group then
composed of ALPA, the IAM and AFA, expressing concern over asset sales and
extensive restructuring. In response, the Company sent a letter to the
Coalition inviting a "shared solution" to the Company's need to reduce
operating costs. On June 2, 1993, representatives of the Company met with
representatives of the Coalition. Over the ensuing months, the Coalition
formulated several proposals that were considered by the Board. The Board
retained CS First Boston Corporation and Lazard Freres & Co. to assist it in
its evaluation of the proposals. In September 1993, AFA ceased to participate
in the negotiation, which continued with ALPA and the IAM. Discussions
concerning such proposals culminated in an Agreement in Principle, which was
executed on December 22, 1993. The definitive Agreement and Plan of
Recapitalization, dated as of March 25, 1994 among the Company, ALPA and the
IAM (as amended and restated, the "Plan of Recapitalization") was executed on
March 25, 1994. The transactions contemplated by the Plan of Recapitalization
are referred to herein as the "Recapitalization."
The purpose of the Recapitalization is to recapitalize the Company and
thereby provide the holders of shares of the Company's currently outstanding
Common Stock (the "Old Shares") with an opportunity to receive either cash or
cash, debt securities and preferred stock for a portion of their Old Shares,
while permitting the holders of Old Shares to retain, in the form of shares of
a new Common Stock to be issued in the Recapitalization (the "New Shares"), a
significant ongoing equity interest in the Company, which is expected to have a
lower cost structure and be more competitive, and to provide performance
incentives to the Company's employees by providing them with significant equity
participation in the Company through employee stock ownership plans (the
"ESOPs"). The Recapitalization is being effected at the present time because
the Board believes that it is the best available alternative to maximize value
to the Company's stockholders while achieving significant wage concessions and
work-rule changes that the Board believes are necessary to position United to
compete in the aviation marketplace.
TERMS OF THE RECAPITALIZATION
The Plan of Recapitalization provides for the reclassification of Old Shares
and other amendments of the Company's certificate of incorporation and bylaws.
On the date and at the time when the Recapitalization is consummated (the
"Effective Time"), if the offering by the Company of its Series B Preferred
Stock (the "UAL Preferred Offering") and the concurrent offering by United (the
"United Debt Offerings" and, together with the UAL Preferred Offering, the
"Offerings") of $370,200,000 of its Series A Debentures due 2004 (the "Series A
Debentures") and $371,000,000 of its Series B Debentures due 2014 (the "Series
B Debentures" and, together with the Series A Debentures, the "Debentures") are
consummated, each Old Share will be reclassified as, and converted into (i) one
half of a New Share and (ii) one one-thousandth of a share of the Company's
Series D Redeemable Preferred Stock (the "Redeemable Preferred Stock") that
will be redeemed immediately after issuance for cash in an amount equal to the
sum of (a) $38.00 in cash from the Company's existing cash reserves, (b) $30.13
in cash from the proceeds (without deducting underwriting discounts and other
costs) from the sale by United of its Series A Debentures and its Series B
Debentures pursuant to the United Debt Offerings and (c) $16.68 in cash from
the proceeds (without deducting underwriting discounts and other costs) from
the sale by the Company of Depositary Shares representing an interest in the
Series B Preferred Stock pursuant to the UAL Preferred Offering. The New Shares
to be issued in the Recapitalization will represent in the aggregate
approximately 45% (determined on the basis described in the Plan of
Recapitalization) of the common equity interest in the Company, subject to
reduction to a minimum of 37% under certain circumstances. The Recapitalization
is subject to the vote of the holders of Old Shares and certain other
conditions. If the Recapitalization is approved, the Effective Time is expected
to occur promptly after the meeting (the "Meeting") at which such holders vote.
If any of the Offerings is not consummated and the Recapitalization is
approved, the securities that were subject to such Offering will be issued to
holders of Old Shares in lieu of a portion of the cash payment to be made in
connection with the Recapitalization. In that case, the aggregate amount of
Depositary Shares, Series A Debentures and/or Series B Debentures issued to
holders of Old Shares, and to holders of options and convertible securities,
could exceed the amount of such securities that would have been issued pursuant
to the Offerings.
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In addition, pursuant to the Plan of Recapitalization, the Company will issue
non-voting ESOP Convertible Preferred Stock (the "ESOP Preferred Stock") to the
trustee (the "ESOP Trustee") for the ESOPs that will be established for the
benefit of the employee groups that will be making wage, salary and benefits
investments and allowing other work-rule changes in connection with the
Recapitalization. In addition, the Company will issue to the ESOP Trustee three
classes of voting preferred stock (the "Voting Preferred Stock"). The ESOP
Preferred Stock and the Voting Preferred Stock together will represent
initially an equity interest of approximately 55% (determined on the basis
described in the Plan of Recapitalization), although the percentage may be
increased to up to approximately 63%, if the Average Closing Price (as defined)
of the New Shares during the year following the Effective Time exceeds $136 per
share. The holders of the Voting Preferred Stock will represent approximately
55% (unless the percentage is increased as provided in the prior sentence) of
the voting power of the New Shares and the Voting Preferred Stock voting
together as a single class (voting on all matters presented to holders of the
New Shares other than the election of directors) following the Recapitalization
until the Sunset.
Pursuant to the Plan of Recapitalization, the Company will also issue (a)
Class I Junior Preferred Stock ("Class I Preferred Stock") to the initial
Independent Directors (as defined below) who will vote their shares to elect
future Independent Directors, (b) Class Pilot MEC Junior Preferred Stock (the
"Class Pilot MEC Preferred Stock") to the United Airlines Pilots Master
Executive Council of ALPA (the "ALPA MEC"), which will have the right to elect
a director to the Board, (c) Class IAM Junior Preferred Stock ("Class IAM
Preferred Stock") to the IAM or a designee, which will have the right to elect
a director to the Board and (d) Class SAM Junior Preferred Stock (the "Class
SAM Preferred Stock" and, together with the Class I Preferred Stock, the Class
Pilot MEC Preferred Stock and the Class IAM Preferred Stock, the "Director
Preferred Stock") to the person nominated to serve as the salaried and
management employees' director and to an additional designated stockholder.
Until the Sunset, the Board of Directors will consist of 12 directors. Five
directors, designated the "Public Directors," will consist of three individuals
who do not have any prior or current business or professional relation with the
Company other than as a director, plus the CEO and another senior executive of
the Company. Four initial Public Directors, including the Chief Executive
Officer, will be elected at the Meeting. A fifth Public Director will be
designated after the Meeting. Future Public Directors will be elected by the
holders of the New Shares. The Voting Preferred Stock held by the ESOPs will
not vote to elect directors prior to the Sunset. Four directors, designated as
"Independent Directors," will consist of four individuals who do not have any
prior or current business or professional relationships with the Company other
than as a director and who are not officers of any labor organization. ALPA and
the IAM will have identified all the initial Independent Directors. Future
Independent Directors will be nominated by a Nominating Committee of the Board
of Directors that will consist of the Independent Directors and the Employee
Directors (as defined below). The three remaining directors, designated as
"Employee Directors," are selected respectively by ALPA, the IAM and
representatives of the salaried and management employees of United.
The Company's certificate of incorporation, as proposed to be amended in
connection with the Recapitalization (the "Restated Certificate"), provides
that, until the Sunset, certain corporate actions enumerated therein require
the consent of one or both members of the Board elected by ALPA and the IAM or
the approval of a supermajority vote of the stockholders.
The "Sunset" will occur when the ESOPs and any other employee benefit plans
sponsored by the Company or any of its subsidiaries for the benefit of its
employees own less than 20% of the common equity of the Company, which includes
(i) the common stock, (ii) securities that can be exercised for and converted
into shares of common stock, (iii) "phantom shares" of ESOP Preferred Stock
that have not been issued but have been allocated to individual accounts
("Book-Entry Shares") and (iv) other shares of ESOP Preferred Stock that are
unissued but committed to be transferred to the ESOPs, but such shares may not
include certain securities issued after the Effective Time. Following the
Sunset, the Voting Preferred Stock will cast only the number of votes that is
equal to the number of New Shares into the which the ESOP Preferred Stock is
then convertible, and nine of the 12 members of the Board of Directors will be
elected by the holders
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of the New Shares and the Voting Preferred Stock voting together as a single
class. The Employee Directors will continue to be appointed by the respective
employee representatives until occurrence of events specified in the Restated
Certificate.
EMPLOYEE INVESTMENT
The consummation of the Plan of Recapitalization is expected to result in
significant cost savings for the Company through employee investments made by
ALPA, the IAM and United's salaried and management employees.
ALPA Investment
The ALPA investment consists of savings that are system-wide in nature and
that will continue for five years, nine months, as well as an additional
investment applicable solely to those pilots in the proposed new low-cost,
short-haul "airline-within-an airline" referred to as "U2" and that will remain
in force for twelve years.
The base investment includes the following features:
. Reduction in hourly wages for all pilots of 15.7%
. Reduction in the Company contribution to the defined contribution
retirement plan from current 9% of wages (ordinary earnings,
excluding expense reimbursements) to 1% of post-transaction (reduced)
wages
. No pay raise during first three years other than existing seniority
and promotion increases
An additional investment that should assist United in competing against low-
cost carriers on short-haul routes includes:
. Further reduction of approximately 7.1% in hourly wage rates for
Boeing 737 pilots in the U2 operation
. Adjustments in work-rules for U2 pilots to increase productivity vis-
a-vis the mainline United operation
Partially offsetting these investments were changes to the following contract
features:
. Increased hourly rates for pilots flying the Airbus 320 aircraft
. Potential increase in per diem and potential increase in wages in
years 4 and 5 under an arbitrated settlement based on the Company's
profitability, industry wage trends and wages at specified comparable
carriers
In addition, pilot benefits under the Company's defined benefit pension plan,
disability plan and life insurance plan will continue to be based on pre-
transaction "book" rates without regard to the 15.7% wage rate reduction.
IAM Investment
The IAM base investment will remain in force for six years. In lieu of
creating a separate U2 workforce, the IAM made additional system-wide work-rule
changes to improve productivity and competitiveness in all areas.
The base investment includes the following features:
. Reduction in hourly wage rates for all IAM employees of 9.7%
. Elimination of the contractually provided May 1, 1994 wage increase
of 5%
. No pay raise during first three years other than existing seniority
and promotion increases
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Additional work-rule changes that will remain in place for twelve years:
. Elimination of the half-hour paid lunch period
. Elimination of allowance for paid lunch period on overtime
. Provide United with the ability to outsource up to 20% of maintenance
work
Partially offsetting these investments were:
. Potential wage increase in years 4 and 5 under an arbitrated
settlement based on the Company's profitability, industry wage trends
and wages at specified comparable carriers
. Improved severance package for IAM employees affected by the flight
kitchen sale, including reemployment incentives
. Increase in pension benefits
. Inefficiencies due to the impact of job security provisions on
functions with variable workloads
. Reimbursement for relocations caused by involuntary transfers
. Subject to certain conditions and exceptions, provide IAM
representation for ramp employees at stations with greater than 40
daily departures
Salaried and Management Investment
The salaried and management employee investment remains in force for five
years, nine months and consists of salary reductions and work-rule and policy
changes. In lieu of creating a separate U2 workforce, the salaried and
management employee investment includes the introduction of a "market-based"
new hire program.
The base investment includes the following features:
. Reduction in wage rates of 8.25%
. No pay raise during first three years other than promotion and
existing progression increases
. Reduction in force of 127 management positions
Additional work-rule changes include:
. Elimination of the half-hour paid lunch period on overtime
. Reduced eligibility for shift differential pay
. Reduction of compensation for extended medical leave
. Reduced reimbursement for certain management relocations
. Four holidays changed to "floating" status to eliminate premium pay
for such holidays worked
. Reduce salary guarantee for part-time employees
The market-based new-hire program includes the following features:
. Maximum compensation levels reduced to market rates at other
comparable employers (40-55% reduction)
. Requirement of 25% employee copayment on medical coverage
. Reductions in vacation, sick leave and dental insurance benefits
Partially offsetting these investments was:
. Potential wage increase in years 4 and 5, based on similar factors to
those for the ALPA and IAM-represented employees and taking into
account wage increases, if any, for such represented employees
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In addition, salaried and management employee benefits under the Company's
defined benefit pension plan, disability plan and life insurance plan will be
based on each employee's pre-transaction hourly rate of pay (without regard to
the 8.25% wage rate reduction) until such time as such employee's actual
hourly rate exceeds that amount or until such employee is demoted, at which
time in either case such employee's actual hourly rate will be used from that
point forward.
See "Certain Risk Factors--Uncertainty of Cost-Savings and Productivity
Improvements."
IMPLEMENTATION OF THE "AIRLINE-WITHIN-AN-AIRLINE " (U2)
Background
In recent years, low-cost carriers, especially Southwest Airlines Co., have
grown rapidly. These carriers offer the consumer air travel service with
frequent departures, minimal inflight service, and simplified fares that are
substantially below standard industry pricing. The consumer acceptance of such
carriers has been especially strong in short-haul markets (markets under 750
miles) in which consumers readily opt for reliable, low-priced air
transportation over the full service product (typically at higher prices)
traditionally offered by carriers.
Operations and Route Systems
Key operational elements of U2 are expected to be as follows:
Short-haul missions. U2 will operate within the contiguous United States in
non-stop city pairs of up to 750 nautical miles in "stage length," other than
flying between United's hubs and/or international gateway cities (except for
Los Angeles basin to San Francisco bay area service which may be flown by U2).
At least 10% of U2 flying must be in city pairs that United has not served for
24 months prior to the introduction of U2 service into that city pair.
High frequency. One of the key characteristics of an efficient short-haul
operation is high frequency scheduling within a market. United intends to
schedule U2 to average approximately ten frequencies per day in most markets.
Rapid turn-arounds. United intends to reduce aircraft turn-around time in
the U2 operation to 20 minutes as compared to United's current 40 to 45
minutes. The rapid turn-around time is expected to be achieved through product
simplification (e.g., reduced food service deliveries) and the streamlining of
customer and ramp service procedures.
Increased utilization. By combining high frequency with faster turn-arounds,
utilization of aircraft, facilities and other equipment is expected to
increase, thereby lowering unit costs. As compared with United's fleet, the
utilization goal of the U2 fleet is anticipated to improve 16% to 11.0 hours
per day from 9.5 hours per day. The increased utilization should allow more
trips to be flown by the same fleet of aircraft.
Product
U2 is expected to be marketed as a branded product of United with its own
distinct name (such as "Business One" and "Connoisseur Class" are today).
Travel between U2 and United should appear seamless to the consumer. U2
flights are expected to feed United long-haul domestic and international
flights and connect with United Express flights.
U2 is expected to offer a simplified, lower-frills product as compared to
mainline United service and will be cost competitive with other low-cost
carriers. Key product features that will differentiate U2 from the mainline
product are:
. Reduced food service
. Reduced onboard amenities
. Expedited customer airport check-in
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While the U2 product clearly should be different from mainline United, it is
also expected to be distinguishable from other low-cost carriers.
. Unlike some short-haul carriers, U2 currently plans to offer added value
to the consumer by providing seat assignments
. To help retain high yield connecting traffic to mainline United, U2
currently plans to offer first class seating
. Capitalizing on United's marketing strength and global route network, U2
consumers will be able to participate in one of the industry's highest
rated frequent flyer programs--United's Mileage Plus program. While the
program may be adjusted somewhat for U2 travel, the program's benefits
are expected to help to generate a U2 revenue premium over the
competition.
Fare Structure
In most markets in which U2 is expected to compete, fares have already been
reduced by other low-cost carriers, and United's fares have been reduced to
competitive levels. U2 intends to maintain United's current pricing practice of
matching competitors' low fares, although U2 intends to promote low fare levels
heavily. The objective in maintaining and promoting the low fares is to build
customer trust so that when they purchase a ticket on a U2 flight, they know
they are obtaining competitive value in the market and do not need to shop the
fare.
Roll-out
The Company expects that U2 will be rolled out no later than four to six
months after the Effective Time and will be implemented in the short-haul
markets as quickly as possible. It is currently expected that within five
years, U2 will operate approximately 130 aircraft and represent approximately
20% of system "block hours". Block hours is a measure of the time an aircraft
is in motion (i.e., from the time it pushes back from the gate at the departing
airport until it pulls up to the gate upon arrival). Factors affecting the rate
of roll-out include market conditions, pilot attrition, growth of the airline
and changes in the fleet plan.
Boeing 737 aircraft are expected to be utilized in the U2 operations. To
maximize fleet efficiency and to have the flexibility of swapping aircraft
between the U2 and United fleet, no changes are expected to be made to livery
or interior configuration.
See "Certain Risk Factors--Implementation of U2" for a description of certain
limitations of U2.
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CERTAIN RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be considered in evaluating an investment in the
Debentures.
Financial Effects of the Recapitalization.
The Recapitalization will immediately change United's capitalization to one
that is more highly leveraged. On a pro forma book basis at March 31, 1994,
United would have had approximately $3.330 billion of long-term debt and a
deficit of approximately $248 million of shareholder's equity as compared to
the approximately $2.596 billion of long-term debt and approximately $570
million of shareholder's equity that was shown on United's historical balance
sheet on such date. In addition, if the Recapitalization had occurred as of
January 1, 1993, United would have reported, on a pro forma basis, a loss from
continuing operations of approximately $20 million for the year ended December
31, 1993 and a loss from continuing operations of approximately $65 million for
the three months ended March 31, 1994 as compared to losses from continuing
operations of $17 million for the year ended December 31, 1993 and $79 million
for the three months ended March 31, 1994 that were reported for each period.
See "Unaudited Pro Forma Financial Information." Given the more leveraged
financial structure of United following the Recapitalization, certain industry
risks could have a greater adverse impact on United after the Recapitalization
than might have been the case prior to the Recapitalization.
United's earnings were inadequate to cover fixed charges by $77 million in
1993, by $694 million in 1992 and by $604 million in 1991. On a pro forma
basis, United's earnings in 1993 were inadequate to cover fixed charges by $82
million. In addition, United's earnings were inadequate to cover fixed charges
for the three month period ended March 31, 1994 by $130 million, and, on a pro
forma basis, they were inadequate by $107 million. Non-cash depreciation and
amortization are deducted in computing earnings before fixed charges. Such non-
cash charges do not significantly affect the ability of United to fund
operations, service debt, or provide funds to service the Company's preferred
stock dividends. Depreciation and amortization of United were $722 million in
1993, $695 million in 1992, $604 million in 1991 and $178 million for the three
month period ended March 31, 1994.
Governance Structure; Employee Ownership Influence
Although the Company has attempted to achieve a balanced approach to its
corporate governance structure after the Recapitalization, such structure is
very unusual in the management of a large, complex public corporation, and it
is not certain that the actual operation of the corporate governance process
will not result in disputes or inability to achieve results that are in the
best interests of the Company or its stockholders.
Following consummation of the Recapitalization and until the Sunset, the
Board will be comprised of twelve members elected as follows, (i) five Public
Directors elected by holders of the New Shares including (a) three members of
the existing Board or other individuals who previously had no material contact
with the Company other than as directors and (b) two substantially full-time
employees of the Company intended to be the CEO and an additional senior
executive of the Company, (ii) four Independent Directors elected by the
initial Independent Directors intended to be a quasi self-perpetuating body,
(iii) three Employee Directors, each representing an employee group, who are
elected or designated to election by one of the Unions or a designee thereof or
by other representatives of salaried and management employees. Generally,
approval of ordinary Board actions will require a majority vote of the votes
present at a meeting at which a quorum is present and approval of certain
extraordinary matters will require, subject to certain exceptions, approval of
either three-quarters of the Board (including the concurrence of one Union
designated Director) or three-quarters of the shares present and voting at a
stockholder meeting at which a quorum is present. In addition, certain
extraordinary matters will require approval of the Public Directors, the
Independent Directors or a majority of shares not held by the ESOPs. The
following Committees will be constituted: the Audit Committee, the Competitive
Action Plan ("CAP") Committee, the Compensation Committee, the
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Compensation Administration Committee, the Executive Committee, the Independent
Director Nomination Committee, the Labor Committee, the Outside Public Director
Nomination Committee and the Transaction Committee. Public Directors and
Independent Directors will be represented on all committees and the Employee
Directors will be represented on the Executive Committee, the CAP Committee,
the Independent Director Nomination Committee and the Compensation Committee.
Under the terms of the Restated Certificate, the participants in the ESOPs
(and in certain circumstances the holders of the capital stock that elect the
Employee Directors) will continue to hold more than 50% of the voting power of
the Company until the economic equity interest held by or credited to the ESOPs
and other employee benefit plans sponsored by the Company is less than 20% of
the common equity of the Company, all as more fully described in the Restated
Certificate. The termination of the right to exercise more than 50% of the
voting power of the Company is referred to herein as the "Sunset." Under
current actuarial assumptions, the Company estimates that this Sunset provision
will not become operative until 2016 if additional purchases are not made by
eligible employee benefit plans. However, such plans will have the right, and
may be expected, to make additional purchases, thereby delaying the occurrence
of the Sunset. In addition, the Restated Certificate contains many provisions
which may prevent the Company prior to the Sunset from taking certain specified
actions without the consent of one or both of the members of the Board elected
by ALPA and the IAM or a 75% vote of holders of New Shares and Voting Preferred
Stock.
No assurance can be given that the Company, which will be subject to
significant influence by employee groups (including through the right to voting
representation in excess of economic equity ownership, Board and Board
committee representation, the requirement of approval of certain matters by a
Union designated director or a 75% vote of the holders of the common stock and
Voting Preferred Stock, and participation by Union designated directors in the
nomination of the Independent Directors) might not take actions that are more
favorable to such employee groups than might be taken by a company that was not
subject to such influence. The corporate governance structure after the
Recapitalization will not, however, relieve the members of the Board of their
fiduciary obligations under the Delaware General Corporation Law.
Industry Risks
If the Recapitalization is accomplished, certain risks associated with the
aviation industry will continue to face the Company. Given the more leveraged
financial structure of the Company following the Recapitalization, certain of
these industry risks could have a greater adverse impact on the Company after
the Recapitalization than might have been the case prior to the
Recapitalization.
Industry Conditions and Competition. The airline industry is highly
competitive and susceptible to price discounting. United's competitors include
major domestic carriers such as American Airlines, Delta Airlines, and
Northwest Airlines, major international carriers such as British Airways and
Japan Air Lines, and domestic carriers such as Southwest, Continental and other
carriers with lower cost structures. Airline profit levels are highly sensitive
to, and during the last four years have been significantly impacted by, adverse
changes in fuel costs, average yield (fare levels) and passenger demand.
Passenger demand and yields have been adversely affected by, among other
things, the general state of the economy, the Persian Gulf War and actions
taken by carriers with respect to fares. As a result of this adverse operating
environment, from 1990 to 1993 the domestic airline industry incurred
unprecedented losses. During this period, Eastern Air Lines, Pan American World
Airways and Midway Airlines were liquidated, and Continental Airlines, America
West Airlines and Trans World Airlines filed for bankruptcy.
The emergence in recent years of several new carriers, typically with low
cost structures, has further increased the competitive pressures on the major
U.S. airlines. In some cases, the new entrants have initiated or triggered
price discounting. Aircraft, skilled labor and gates at most airports continue
to be readily available to start-up carriers. Although new entrant carriers
generally commence service with only a few city pairs and have a high rate of
failure, the commencement of service by new carriers on United's routes could
negatively impact United's operating results. In addition, certain existing
U.S. domestic carriers compete
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primarily by offering low-cost air service on route networks that do not employ
hub and spoke systems. These discount air carriers have significantly affected
the yields of major domestic carriers such as United and, in certain instances,
have made certain markets uneconomical for carriers such as United.
In the spring of 1992, American introduced a new fare structure followed by a
deeply discounted summer sale, steps that were generally matched by other U.S.
airlines (including United), resulting in substantially depressed industry
yields and significant 1992 losses at all major U.S. airlines (with one
exception). American and the rest of the domestic airline industry have
abandoned that pricing structure, and fare levels have increased in 1993 and
early 1994 from 1992 levels. Nonetheless, significant discounts continue to
exist and may be increased at any time. The introduction of broadly-available,
deeply discounted fares by a major U.S. airline would likely result in lower
yields for the entire industry and could have a material adverse effect on the
Company's operating results.
Aircraft Fuel. Since fuel costs constitute a significant portion of the
Company's operating costs (approximately 12% during 1993), significant changes
in fuel costs would materially affect the Company's operating results. Fuel
prices continue to be susceptible to, among other factors, political events,
and the Company cannot predict near- or longer-term fuel prices. In the event
of a fuel supply shortage resulting from a disruption of imports or otherwise,
higher fuel prices or curtailment of scheduled service could result. A one cent
change in the cost per gallon of fuel (based on 1993 consumption levels)
impacts operating expense by approximately $2.25 million per month.
In August 1993, the United States increased taxes on fuel, including aircraft
fuel, by 4.3c per gallon. Airlines are exempt from this tax increase until
October 1, 1995. When implemented, this new tax will increase the Company's
annual operating expenses by approximately $75 million based on United's 1993
domestic fuel consumption levels.
Regulatory Matters. In the last several years, the Federal Aviation
Administration (the "FAA") has issued a number of maintenance directives and
other regulations relating to, among other things, collision avoidance systems,
airborne windshear avoidance systems, noise abatement and increased inspection
requirements. The Company expects to continue incurring costs to comply with
the FAA's regulations.
Additional laws and regulations have been proposed from time to time that
could significantly increase the cost of airline operations by, for instance,
imposing additional requirements or restrictions on operations. Laws and
regulations have also been considered from time to time that would prohibit or
restrict the ownership and/or transfer of international airline routes or
takeoff and landing slots. Also, the award of international routes to U.S.
carriers (and their retention) is regulated by treaties and related agreements
between the United States and foreign governments, which are amended from time
to time. For example, there are significant aviation issues between the United
States and such foreign governments as Germany, Japan and the United Kingdom
that, depending on their resolution, may significantly impact the Company's
existing operations or curtail potential expansion opportunities in important
regions of the world. The Company cannot predict what laws and regulations will
be adopted or what changes to international air transportation treaties will be
effected, if any, or how they will affect United.
Uncertainty of Cost Savings and Productivity Improvements
Cost savings envisioned by the agreements with ALPA and the IAM and the
anticipated productivity increases could be difficult to achieve, and, even if
all proposed plans for employee investments are implemented, the value of the
reductions in wages and benefits and work-rule changes and anticipated
productivity increases may not be as significant as currently calculated.
Mandated job guarantees may make it difficult to achieve significant additional
productivity improvements, and, if additional reductions in wages and benefits
and work-rule changes become desirable in management's view, such reductions in
wages and benefits and work-rule changes may be more difficult to achieve in
light of the long-term nature of the revised
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collective bargaining agreement with ALPA and the IAM (the "Collective
Bargaining Agreements") that constitute elements of the Recapitalization.
There can be no assurance that the new management of the Company in the
future will not agree to further amend the Collective Bargaining Agreements
with ALPA and the IAM in a manner that reduces or eliminates the cost savings
that are the basis of the Recapitalization. However, any such amendment must be
approved by the Labor Committee of the Board (which will not include any
director designated by either of the Unions). In addition, at the end of the
period during which wage salary and benefit reductions and work- rule changes
are in effect, there can be no assurance that the Company's labor agreements
will be renegotiated in a manner that continues in subsequent periods the cost
savings that are being sought through the Recapitalization or that does not
reverse the effect of any cost savings that will have been obtained thereby.
Lack of Employee Consensus
Certain employee groups may not be in favor of the changes arising from the
Recapitalization and may react in a manner that does not facilitate achievement
of the desired results. For example, AFA has declined to participate in the
Recapitalization, certain other employees who will be participating in the wage
and benefit reductions and work-rule changes were not in favor of the
Recapitalization, and certain union organizing activity, based on opposition to
certain aspects of the Recapitalization, has occurred. This lack of consensus
may reduce the value of the increased employee commitments the Company expects
to achieve by virtue of the Recapitalization.
Management Change
The current Chairman and Chief Executive Officer of the Company, Mr. Stephen
M. Wolf, President, Mr. John C. Pope, and Executive Vice President--Corporate
Affairs and General Counsel, Mr. Lawrence M. Nagin, will retire at the
Effective Time. The new chief executive officer selected by ALPA and the IAM,
Mr. Gerald M. Greenwald, will be required to implement reductions in wages and
benefits and work-rule changes that he did not directly negotiate in an
industry in which he has not previously been engaged. In addition, it is
possible that the Company may face attrition by officers and other members of
management and that the Company's new senior management may face difficulties
in implementing strategies or attracting additional management employees. It is
expected that a Chief Operating Officer of the Company and United will not be
identified prior to the Meeting or the Effective Time. If this occurs, the
Company would expect that members of existing senior management would perform
the functions of the Chief Operating Officer after the Effective Time until
such a person is identified in accordance with the procedures specified in the
Restated Certificate.
Reduced Flexibility
The corporate governance structure and Collective Bargaining Agreements with
ALPA and the IAM may inhibit management's ability to alter strategy in a
volatile, competitive industry. Among the more significant constraints are (i)
a prohibition on domestic code sharing in excess of 1% of domestic block hours,
excluding several small existing agreements, without ALPA's consent, (ii) a no
layoff promise for all currently employed participating union employees during
the five- to six-year period during which wage, salary and benefit reductions
and work-rule changes are in effect and, for pilots, while U2 remains in
operation (which constraint is ameliorated as normal attrition reduces the
impact of the no-layoff promise), (iii) restrictions on international code
sharing, unless the Company can demonstrate that international code sharing
arrangements do not cause a reduction in international flying and as long as
the Company does not expand code sharing once the Company reduces international
flying below a certain level and (iv) an agreement not to sell the Company's
Denver pilot training facility and certain maintenance facilities. In addition,
the Restated Certificate contains restrictions on the ability of the Company
and United to sell assets and issue equity securities absent certain specified
Board or stockholder approvals. In most circumstances, the issuance of
additional equity securities would not be counted in determining whether the
Sunset has occurred.
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Limitations on asset sales and equity issuances included in the Company's
Restated Certificate might make it more difficult to raise cash, even if
management desired to do so to take advantage of a perceived opportunity.
The Company will continue in effect, or amend to include, certain provisions
of agreements with ALPA and the IAM that (i) provide certain rights in the
event of a change in control of the Company and (ii) prohibit furloughs,
within certain conditions, if the Company disposes of 25 percent or more of
its assets or assets which produce 25 percent or more of its block hours. The
revised Collective Bargaining Agreements obligate the Company to require any
carrier purchasing route authority or aircraft that produce 25 percent or more
of the Company's operating revenues or block hours to hire an appropriate
number of United employees with seniority credit.
Implementation of U2
Although the Company expects to develop U2 as an important component of its
competitive posture and has ascribed a significant portion of the value of the
Recapitalization to the ability to implement U2, no assurance can be given
that the Company will be able to do so effectively or to realize the financial
benefits expected to be received by the Company from the implementation of U2.
The success of U2 will be based not only upon the nature of the Company's
business plan but also upon the strategies and plans implemented by existing
low-cost competitors and by new entrants into the low-cost market. In
addition, even if the business concept of U2 is successful, (i) U2 will
comprise no more than 20% of United's system block hours up to two million
block hours systemwide and no more than 25% of the system block hours in
excess of two million, (ii) U2 can only operate in markets in the lower 48
states with stage lengths up to 750 nautical miles and cannot fly between
United's hub or international gateway cities except for Los Angeles basin--San
Francisco bay area service, which excludes U2 from such heavily traveled
routes as the transcontinental routes and New York/Chicago, Chicago/Denver and
Chicago/Washington Dulles, (iii) U2 cannot operate aircraft larger than a
Boeing 737-300 and (iv) for the first six years, U2 can only operate up to 90%
of monthly block hours in markets previously served (within 24 months) by
United. If United's systemwide widebody flying (i.e., flying performed in
Boeing 757 or larger aircraft) falls below (i) 95% of the widebody block hours
projected in the Company's October 1993 fleet plan for any twelve month period
between the Effective Time and 1999 or (ii) a certain minimum level for any
twelve month period between 2000 and 2006, the total flying performed in the
U2 operation must be reduced by the shortfall in widebody flying. Even if
implemented as planned, U2 will not have costs which are as low as those of
certain low-cost competitors. U2 must rely upon factors other than lowest cost
to secure market share and be successful.
Competitive Response
Even if the Company is able to achieve cost reductions and productivity
enhancements, the Company's higher cost competitors may be able to achieve
comparable agreements with their labor groups or otherwise reduce their
operating costs and the Company's low-cost competitors may modify their
operations in response to the competitive threat posed by U2 and, thus in each
case, may eliminate or reduce the competitive gain sought by the Company and
lead to reductions in fares and earnings. In this regard, for example,
Continental Airlines (which already has a low cost structure) has implemented
a low cost, short haul service which would be competitive with U2, and Delta
has announced its intent to lower its overall cost substantially. If the
Company's higher cost competitors were to achieve more significant reductions
in wages and benefits and work-rule changes than those achieved by the
Company, the Company's ability to respond to competition would be hampered by
the fixed long-term nature of the agreements that constitute elements of the
Recapitalization.
Possible Effect of Organization of Additional Employees
In the event any portion of the management and salaried employees that are
not currently represented by a union elects union representation pursuant to
the Railway Labor Act, the Company would be obligated to bargain with such
union over the terms and conditions of employment applicable to such
employees,
16
<PAGE>
including the terms, if any, of such employees' continuing participation in the
ESOPs. This obligation to bargain requires the Company to "exert every
reasonable effort" to reach an agreement but does not require it to agree to
any change or particular term or condition sought by the union. During the
period of negotiation, the Company would be entitled to maintain the then-
existing terms of such employees' participation in the ESOPs.
The ESOPs provide that if any group of employees that are not currently
represented by a union becomes covered by a new collective bargaining
agreement, such group of employees will not be covered under the ESOPs unless
the collective bargaining agreement so provides. Whether any new collective
bargaining agreement would provide for continuing participation in the ESOPs by
such group of employees is a matter that would be subject to mutual agreement
between the Company and the applicable union. The ESOPs provide, however, that
if the terms of any employee's employment no longer reflect all of the
reductions in wages and benefits and work-rule changes set forth in the Plan of
Recapitalization, then such employee shall cease to be covered by the ESOPs.
As a result, if any new collective bargaining agreement did not reflect the
reductions in wages and benefits and work-rule changes required by the Plan of
Recapitalization for particular employees, the Company could not agree, without
amending the ESOPs, to allow such employees to participate in the ESOPs. If any
currently unrepresented employees ceased to participate in the ESOPs under such
circumstances, the ESOPs provide that the unrepresented employees remaining in
the ESOPs would receive the shares previously intended for that newly-
represented group. The employment terms, except base pay, for the unrepresented
employees remaining in the ESOPs will be subject to change, at the Company's
discretion, so long as the net economic value of the unrepresented employees'
employment terms is not altered.
Tax Deductibility of Employee Stock Ownership Plan Contributions and Dividends
Although the Company has attempted to structure the ESOPs so that all amounts
contributed thereto and dividends paid with respect to the stock held
thereunder will be deductible to the Company for Federal income tax purposes,
there are no regulations governing the deductibility of dividends paid on the
ESOP Preferred Stock and there can be no assurance that one or more current or
future limitations under the Internal Revenue Code will not adversely impact
the deductibility of such amounts and dividends. The deductibility of such
amounts depends, to some extent, on the conclusions set forth in an opinion
rendered to the ESOP Trustee by its financial advisor and there can be no
assurance that the Internal Revenue Service (the "IRS") will agree with the
methodology set forth in such opinion.
Financial Reporting; Market Assessment
The accounting rules governing employers accounting for employee stock
ownership plans require that compensation expense be recorded for the ESOP
Preferred Stock "committed to be released" during an accounting period based on
the fair value of the ESOP Preferred Stock during such period. The difference
between the fair value and the initial recorded cost of the ESOP Preferred
Stock "committed to be released" is recorded as an adjustment to stockholders'
equity. The circular relationship between the employee stock ownership plan
accounting charges and the Company's stock price, coupled with the size of the
contemplated ESOPs, make future earnings difficult to forecast. In addition,
reported book earnings will be depressed in early years due to the mismatch
between the period during which wage, salary and benefit reductions and work-
rule changes are in effect (which increase earnings) of from five years, nine
months to twelve years and the shorter period of only six years over which
employee stock ownership plans accounting charges will occur.
Fraudulent Conveyance.
If a court in a lawsuit by an unpaid creditor or representative of creditors,
such as a trustee in bankruptcy, were to find that, at the time the Company
distributed to holders of Old Shares the cash that such holders are to receive
in the Recapitalization, the Company (i) was insolvent, (ii) was rendered
insolvent
17
<PAGE>
by reason of such distributions, (iii) was engaged in a business or transaction
for which the assets remaining with the Company constituted unreasonably small
capital to carry on its business or (iv) intended to incur, or believed that it
would incur, debts beyond its ability to pay as such debts matured, such court
may void the distributions to stockholders and require that such holders return
the same (or equivalent amounts) to the Company or to a fund for the benefit of
its creditors. If a court were to make similar findings about United's issuance
of the Debentures, such court could avoid United's obligations under the
Debentures or order the Debentures to be subordinated to all existing and
future indebtedness of United.
The measure of insolvency for purposes of the foregoing would vary depending
upon the law of the jurisdiction that was being applied. Generally, however,
the Company would be considered insolvent if at the time of the
Recapitalization the fair value of the Company's assets is less than the amount
of the Company's total debts and liabilities or if the Company has incurred
debt beyond its ability to repay as such debt matures.
The Board of Directors retained American Appraisal Associates, Inc. ("American
Appraisal") to advise it concerning the solvency of the Company as a result of
the Recapitalization. In the course of its review, American Appraisal valued
the assets of the Company (on a consolidated basis) and United (on a
consolidated basis), as going concerns, both immediately before and after, and
giving effect to, the Recapitalization. The valuation included the aggregate
assets of the business enterprise of each of the Company (on a consolidated
basis) and United (on a consolidated basis), or total invested capital as
represented by the total net working capital, tangible plant, property and
equipment and intangible assets of the respective business enterprises.
American Appraisal stated that it believed this to be a reasonable basis on
which to value the Company and United and that nothing has come to its
attention that caused it to believe that each of the Company (on a consolidated
basis) and United (on a consolidated basis), before and after the
Recapitalization, will not be going concerns.
In an opinion rendered to the Board of Directors, American Appraisal stated
that, based upon and subject to the conditions and assumptions contained
therein, (a) the fair value of the aggregate assets of each of the Company (on
a consolidated basis) and United (on a consolidated basis) will exceed their
total respective liabilities (including, without limitation, subordinated,
unmatured, unliquidated and contingent liabilities), (b) the present fair
salable value of the aggregate assets of each of the Company (on a consolidated
basis) and United (on a consolidated basis) will be greater than their
respective probable liabilities on their debts as such debts become absolute
and matured, (c) each of the Company (on a consolidated basis) and United (on a
consolidated basis) will be able to pay their respective debts and other
liabilities, including contingent liabilities and other commitments, as they
mature, (d) the capital remaining in each of the Company (on a consolidated
basis) and in United (on a consolidated basis) after consummation of the
Recapitalization will not be unreasonably small for the businesses in which the
Company and United are engaged, as management of the Company and United has
indicated such businesses are conducted and as management has indicated the
businesses are proposed to be conducted following the consummation of the
Recapitalization, and after giving due consideration to the prevailing
practices in the industry in which the Company and United will be engaged, (e)
the excess of the fair value of the total assets of the Company over the total
liabilities, including contingent liabilities, of the Company, is equal to or
exceeds the value of the consideration to be given to stockholders in the
Recapitalization plus the stated capital of the Company and (f) the excess of
the fair value of the total assets of United over the total liabilities,
including contingent liabilities, of United, is equal to or exceeds the value
of the stated capital of United.
USE OF PROCEEDS
The proceeds of the Offerings will be used to fund a portion of the cash
payment to be made to the holders of Old Shares in connection with the
Recapitalization. See "The Recapitalization."
18
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
United as of March 31, 1994 and as adjusted to give effect to the consummation
of the Recapitalization and the Offerings, including (i) the issuance of
Debentures and (ii) the ESOP capital recorded as a result of the issuance of
the first tranche of the Class 1 ESOP Preferred Stock to the ESOP Trustee and
the related charge for unearned ESOP Preferred Stock. The table should be read
in conjunction with the "Unaudited Pro Forma Financial Information" included
elsewhere in this document.
<TABLE>
<CAPTION>
MARCH 31, 1994
-----------------
(IN MILLIONS)
PRO
HISTORICAL FORMA
---------- ------
(UNAUDITED)
<S> <C> <C>
Short-term borrowings, long-
term debt maturing within one
year and current obligations $ 466 $ 466
under capital leases......... ------ ------
Long-term debt, excluding por-
tion due within one year:
Secured notes............... $1,388 $1,388
Deferred purchase certifi-
cates...................... 194 194
Debentures.................. 1,000 1,741
Promissory notes............ 29 29
Unamortized discount on (15) (22)
debt....................... ------ ------
2,596 3,330
Long-term obligations under 774 774
capital leases............... ------ ------
Total long-term debt and 3,370 4,104
capital lease obligations.. ------ ------
Shareholder's equity:
Common stock, $5 par value.. -- --
Additional capital invested. 839 115
Retained earnings (deficit). (200) (308)
ESOP capital................ 228
Unearned ESOP shares........ (228)
Pension liability adjust-
ment....................... (53) (53)
Unearned compensation....... (14) --
Unrealized loss on invest-
ments...................... (2) (2)
------ ------
Total shareholder's equi- 570 (248)
ty....................... ------ ------
Total capitalization.... $4,406 $4,322
====== ======
</TABLE>
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
The following selected consolidated financial information has been derived
from United's consolidated financial statements, for each of the fiscal years
in the five year period ended December 31, 1993, which statements have been
audited by Arthur Andersen & Co., independent public accountants. Reference is
made to said reports for the years 1993 and 1992 which include an explanatory
paragraph with respect to the changes in methods of accounting for income taxes
and postretirement benefits other than pensions as discussed in the notes to
the consolidated financial statements for such years. The consolidated
financial information for the three months ended March 31, 1994 and 1993 is
unaudited but in the opinion of management includes all adjustments necessary
for a fair presentation. The table also sets forth certain information on a pro
forma basis giving effect to the Recapitalization and the Offerings. The
following financial information should be read in conjunction with the
"Unaudited Pro Forma Financial Information" included elsewhere herein and the
Consolidated Financial Statements, the related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in United's Annual Report on Form 10-K for the year ended December 31,
1993, and Quarterly Report on Form 10-Q for the quarter ended March 31, 1994,
as amended, incorporated by reference herein, and United's Current Report on
Form 8-K dated May 3, 1994, incorporated herein by reference.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1993
PRO FORMA 1993 1992 1991 1990 1989
----------- ------- ------- ------- ------- -------
(UNAUDITED)
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF CONSOLI-
DATED OPERATIONS DATA:
Operating revenues(a).. $13,140 $13,168 $11,688 $10,703 $10,282 $ 9,267
Earnings (loss) from
operations............ 386(b) 295 (496) (491) (41) 464
Earnings (loss) before
extraordinary item and
cumulative effect of
accounting changes.... (20)(b) (17) (386) (335) 96 358
Net earnings (loss).... N.A. (36) (933) (335) 96 358
STATEMENT OF
CONSOLIDATED FINANCIAL
POSITION DATA (at end
of period):
Total assets........... (c) $12,153 $12,067 $ 9,907 $ 8,001 $ 7,217
Total long-term debt
and capital lease
obligations, including
current portion....... (c) 3,614 3,628 2,531 1,326 1,404
Shareholders' equity... (c) 674 738 1,613 1,769 1,665
OTHER DATA:
Ratio of earnings to
fixed charges......... (d) (d) (d) (d) 1.16 2.08
UNITED OPERATING DATA:
Revenue passengers
(millions)............ 70 70 67 62 58 55
Average length of a
passenger trip in
miles................. 1,450 1,450 1,390 1,327 1,322 1,269
Revenue passenger miles
(millions)............ 101,258 101,258 92,690 82,290 76,137 69,639
Available seat miles
(millions)............ 150,728 150,728 137,491 124,100 114,995 104,547
Passenger load factor.. 67.2% 67.2% 67.4% 66.3% 66.2% 66.6%
Break even passenger
load factor........... 65.0% 65.5% 70.6% 69.7% 66.5% 62.8%
Revenue per passenger
mile.................. 11.6c 11.6c 11.3c 11.5c 11.8c 11.6c
Cost per available seat
mile.................. 8.5c 8.5c 8.9c 9.0c 9.0c 8.4c
Average price per
gallon of jet fuel.... 63.6c 63.6c 66.4c 71.6c 80.4c 63.6c
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
(UNAUDITED)
-----------------------------
1994
PRO FORMA 1994 1993
--------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
STATEMENT OF CONSOLIDATED OPERATIONS DATA:
Operating revenues(a)...................... $ 3,171 $ 3,173 $ 3,001
Loss from operations....................... (16)(b) (44) (107)
Loss before extraordinary item and
cumulative effect of accounting changes... (65)(b) (79) (129)
Net Loss................................... N.A. (105) (148)
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
DATA
(at end of period):
Total assets............................... $12,101 $12,196 $12,515
Total long-term debt and capital lease
obligations, including current portion.... 4,301 3,567 3,864
Shareholders' equity....................... (248) 570 592
OTHER DATA:
Ratio of earnings to fixed charges......... (e) (e) (e)
UNITED OPERATING DATA:
Revenue passengers (millions).............. 16 16 16
Average length of a passenger trip in
miles..................................... 1,471 1,471 1,433
Revenue passenger miles (millions)......... 23,289 23,289 22,443
Available seat miles (millions)............ 35,598 35,598 35,220
Passenger load factor...................... 65.4% 65.4% 63.7%
Break even passenger load factor........... 65.8% 66.5% 66.3%
Revenue per passenger mile................. 11.9c 11.9c 12.0c
Cost per available seat mile............... 9.0c 9.0c 8.8c
Average price per gallon of jet fuel....... 58.6c 58.6c 65.9c
</TABLE>
- --------
(a) In the first quarter of 1994, United began recording certain air
transportation price adjustments, which were previously recorded as
commission expense, as adjustments to revenue. Operating revenue amounts
and certain operating statistics for periods prior to 1994 have been
adjusted to conform with the current presentation. See United's Current
Report on Form 8-K dated May 3, 1994, which is incorporated by reference
herein.
(b) The earnings (loss) from operations includes an employee stock ownership
plan accounting charge which is dependent on the fair market value of the
ESOP Preferred Stock during the period. The pro forma amount is based on an
assumed fair value of $120 per share. See note 3 to the Pro Forma Condensed
Statement of Consolidated Operations for both the year ended December 31,
1993 and the three months ended March 31, 1994 for the effects of different
fair value assumptions on the employee stock ownership plan accounting
charge.
(c) The Pro Forma Statement of Consolidated Financial Position assumes the
transaction occurred at March 31, 1994. Therefore, pro forma information at
December 31, 1993 is not applicable.
(d) Earnings were inadequate to cover fixed charges by $77 million in 1993, by
$694 million in 1992 and by $604 million in 1991. On a pro forma basis,
earnings were inadequate to cover fixed charges by $82 million in 1993.
(e) Earnings were inadequate to cover fixed charges by $130 million and $211
million for the three month periods ended March 31, 1994 and 1993,
respectively. On a pro forma basis, earnings were inadequate to cover fixed
charges by $107 million for the three months ended March 31, 1994.
21
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited Pro Forma Condensed Statements of Consolidated
Operations for the year ended December 31, 1993 and the three months ended
March 31, 1994, and the unaudited Pro Forma Condensed Statement of
Consolidated Financial Position as of March 31, 1994 for United and its
subsidiaries have been prepared to reflect the impact of the Recapitalization
on United, including: (i) the recognition of unearned ESOP Preferred Stock and
related ESOP capital as a result of the issuance of the first tranche of Class
1 ESOP Preferred Stock, (ii) the Offerings of Debentures and distribution of
proceeds to the Company, (iii) the recognition of the employee stock ownership
plan accounting charge, (iv) the reduction in salaries and related cost for
the anticipated impact of the wage and benefit reductions and certain work-
rule changes, (v) the recognition of the anticipated benefits of the agreement
to sell the U.S. flight kitchens and (vi) the intercompany loan to the
Company. The unaudited Pro Forma Condensed Statements of Consolidated
Operations were prepared as if the Recapitalization had occurred on January 1,
1993. The unaudited Pro Forma Condensed Statement of Consolidated Financial
Position was prepared as if the Recapitalization occurred on March 31, 1994.
These statements are based on an assumed purchase price for the Class 1 ESOP
Preferred Stock at the Effective Time of $120 per share. The $120 per share
assumed purchase price of Class 1 ESOP Preferred Stock is based on an assumed
market price of a New Share at the Effective Time of $87. The assumption is
based upon (i) an assumed market price of an Old Share at the Effective Time
of approximately $128.31 per share, (ii) a value of the non-New Share portion
of the consideration in the Recapitalization of $84.81 per Old Share and (iii)
a purchase price premium for the Class 1 ESOP Preferred Stock over the assumed
value of a New Share of 38%. The actual purchase price for the Class 1 ESOP
Preferred Stock at the Effective Time will be determined pursuant to the terms
of the purchase agreement with the ESOP Trustee, which provides for a purchase
price equal to 1.38 times the Closing Price (as defined in the ESOP Stock
Purchase Agreement) except that if the Closing Price is less than 98% of the
average of the Adjusted Old Share Price (as defined in the ESOP Purchase
Agreement) for the five trading days immediately preceding the Effective Time,
the purchase price shall be equal to the product of 1.38 and such average
price. There can be no assurance as to the actual purchase price of the Class
1 ESOP Preferred Stock; the Closing Price or the Adjusted Old Share Price. In
addition, these statements are based on the following assumptions: (i) the
interest rate on the Series A Debentures has been set at 10.67%, the interest
rate on the Series B Debentures has been set at 11.21%, and the dividend rate
on the Depositary Shares has been set at 12.25%, (ii) the size of the UAL
Preferred Offering has been reduced to $410 million from $765 million, and an
amount of cash equal to $300 million ($12.20 per Old Share) from Company funds
will be delivered to holders of Old Shares in the Recapitalization, as a
result of the Amendment dated June 29, 1994 to the Plan of Recapitalization
(the "Amendment") and the application of the interest rate cap provisions set
forth in the Plan of Recapitalization and (iii) shareholders are expected to
receive in the Recapitalization $84.81 per share in cash, consisting of $25.80
provided in the Plan of Recapitalization prior to the Amendment, $30.13 from
the proceeds of the underwriting of the Series A Debentures and Series B
Debentures, $12.20 in cash resulting from the Amendment and $16.68 from the
proceeds of the underwriting of the Depositary Shares. These statements do not
purport to be indicative of the financial position or results of operations
that may be obtained in the future or that would actually have been obtained
had the Recapitalization occurred on the dates indicated.
The pro forma statements assume the Recapitalization is not accounted for as
an acquisition or merger and, accordingly, United's assets and liabilities
have not been revalued. The distribution to the Company of proceeds from the
United Debt Offerings is charged to additional capital invested.
The ESOPs are being accounted for in accordance with the American Institute
of Certified Public Accountants Statement of Position 93-6, "Employers'
Accounting for Employee Stock Ownership Plans" ("SOP"). The ESOPs consist of a
leveraged ESOP (the "Leveraged ESOP"), a non-leveraged qualified ESOP (the
"Non-Leveraged Qualified ESOP" and, together with the Leveraged ESOP, the
"Qualified ESOP") and the supplemental ESOP (the "Supplemental ESOP"). The
ESOP Preferred Stock consists of Class 1 Convertible ESOP Preferred Stock (the
"Class 1 ESOP Preferred Stock") and Class 2 ESOP Convertible Preferred Stock
(the "Class 2 ESOP Preferred Stock"). Pursuant to the Plan of
Recapitalization, the ESOP Preferred Stock will be sold or transferred to the
ESOPs in seven transactions (referred to herein as the "ESOP
22
<PAGE>
Tranches") over the 69 months following the Effective Time. For the Leveraged
ESOP, the Company will issue Class 1 ESOP Preferred Stock through seven ESOP
Tranches at the Effective Time, approximately thirteen months following the
Effective Time, annually thereafter for four years and on January 1, 2000. As
the shares are issued to the Leveraged ESOP, United will report the issuance
of shares as a credit to ESOP capital based on the fair value of the stock
when such issuance occurs and report a corresponding charge to unearned ESOP
Preferred Stock. As shares of Class 1 ESOP Preferred Stock are earned or
committed to be released, compensation expense will be recognized equal to the
average fair value of the shares committed to be released with a corresponding
credit to unearned ESOP Preferred Stock. Any differences between the fair
value of the shares committed to be released and the cost of the shares to the
ESOP will be charged or credited to ESOP capital. For the Non-Leveraged
Qualified ESOP, the shares of Class 2 ESOP Preferred Stock will be recorded as
the shares are committed to be contributed to the ESOP, with the offsetting
entry to compensation expense. Compensation expense will be recorded based on
the fair value of the shares committed to be contributed to the ESOP, in
accordance with the SOP. The pro forma financial statements assume that the
Supplemental ESOP is accounted for the same as the Non-Leveraged Qualified
ESOP (i.e. pursuant to the SOP). It is possible that, because the Supplemental
ESOP is a non-qualified plan, the Company may account for it under Accounting
Principles Board Opinion 25, "Accounting for Stock Issued to Employees,"
instead. The Company would not expect this to result in a material difference.
The unearned ESOP Preferred Stock, ESOP capital and employee stock ownership
accounting charge will be recorded on United's books since participants in the
ESOP are employees of United.
The unaudited Pro Forma Condensed Statements of Consolidated Operations
include the recurring charges and credits which are directly attributable to
the Recapitalization, such as the interest expense arising from the
Debentures, the effects of the wage and benefit reductions and certain work-
rule changes resulting from the employee investment, and the employee stock
ownership plan accounting charge. No adjustments have been made to the pro
forma revenues and expenses to reflect the results of structural changes in
operations, such as U2, that might have been made had the changes been
consummated on the assumed effective dates for presenting pro forma results.
The pro forma adjustments are based upon available information and upon
certain assumptions that United believes are reasonable. In addition, this
information should be read in conjunction with United's Annual Report on Form
10-K for the year ended December 31, 1993, and United's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1994, which are incorporated by
reference herein and which include United's Consolidated Financial Statements,
the related notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and United's Current Report on
Form 8-K dated May 3, 1994, which is incorporated by reference herein.
23
<PAGE>
UNITED AIR LINES, INC. AND SUBSIDIARY COMPANIES
PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED OPERATIONS
YEAR ENDED DECEMBER 31, 1993
(IN MILLIONS)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Operating revenues........................... $13,168(7) $(28)(1) $13,140
Operating expenses:
Salaries and related costs.................. 4,695 (428)(2)
(191)(1) 4,076
Employee stock ownership plan accounting
charge..................................... 369 (3) 369
Other....................................... 8,178(7) 131 (1) 8,309
------- ---- -------
12,873 (119) 12,754
------- ---- -------
Earnings from operations..................... 295 91 386
------- ---- -------
Other income (expense):
Interest, net............................... (221) (96)(4) (317)
Other, net.................................. (100) (100)
------- ---- -------
(321) (96) (417)
------- ---- -------
Loss from continuing operations before income
taxes....................................... (26) (5) (31)
Provision (credit) for income taxes.......... (9) (2)(5) (11)
------- ---- -------
Loss from continuing operations.............. $ (17) $ (3)(6) $ (20)
======= ==== =======
</TABLE>
See accompanying notes to Pro Forma Condensed Statement of Consolidated
Operations.
24
<PAGE>
UNITED AIR LINES, INC. AND SUBSIDIARY COMPANIES
NOTES TO PRO FORMA CONDENSED
STATEMENT OF CONSOLIDATED OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
(1) United entered into an agreement to sell its U.S. flight kitchens over a
period of months beginning in December 1993 through June 1994, and an
agreement to acquire catering services for a seven year period. This
adjustment eliminates $28 million of sales revenues and $191 million of
compensation costs recorded in 1993 relating to the U.S. flight kitchens
that were sold, and adds estimated incremental catering costs of $131
million.
(2) To adjust compensation expense for the pro forma effect of wage and
benefit reductions and certain work-rule changes resulting from the
employee investment that provide for wage and other compensation savings
during the approximately six year period beginning at the Effective Time.
The pro forma adjustment represents the estimated savings in the 12 months
assuming that such savings had commenced at the beginning of the period.
The pro forma adjustment does not include any savings related to U2.
(3) To record non-cash compensation for shares of ESOP Preferred Stock
committed to be released to employees during the period based on the
average fair value of such ESOP Preferred Stock. The average fair value of
the ESOP Preferred Stock is based on two components: (1) the average fair
value of the New Shares into which the ESOP Preferred Stock is convertible
plus (2) a premium attributable to the dividend paying feature of the ESOP
Preferred Stock. For purposes of the pro forma adjustment, the average
fair value of the ESOP Preferred Stock was assumed to be the initial
purchase price of $120. In future years, it is anticipated that the ESOP
Preferred Stock price, for purposes of computing the employee stock
ownership plan accounting charge, will be determined by an independent
appraiser who will value both components. Additionally, in future years,
the shares committed to be released that are used to satisfy the dividends
payable on previously allocated shares will be charged to retained
earnings rather than compensation expense.
The shares of the ESOP Preferred Stock committed to be released are a
fraction of the original ESOP Preferred Stock shares. It is anticipated
the shares will be released in a level fashion over the 69 months of the
ESOP taking into account the partial period in 1994 and 2000. This would
result in approximately 3.07 million ESOP Preferred Stock shares committed
to be released in each full calendar year. Shares released in a partial
year would be pro rated.
Since future expense is dependent on the fair market value of the ESOP
Preferred Stock, such expense is difficult to forecast and may vary
significantly from the value in the pro forma adjustment. Changes in the
price of a New Share directly affect the determination of the value of an
ESOP Preferred Stock share. In addition, if the average value of a New
Share exceeds $136 during the first 12 months after the Effective Time,
additional shares of ESOP Preferred Stock will be issued to the Qualified
ESOP or reserved for issuance to the Supplemental ESOP to increase the
ESOP's ownership from approximately 55% up to a maximum of approximately
63%. Future expense is also affected by the premium associated with the
dividend paying feature which shrinks over time as the dividend paying
period is reduced.
Following is a summary of the impact to the employee stock ownership plan
accounting charge of a range of fair market values:
<TABLE>
<CAPTION>
AVERAGE ESOP ESOP ACCOUNTING
PREFERRED STOCK CHARGE*
FAIR VALUE (MILLIONS)
--------------- ---------------
<S> <C>
$110 $338
120 369
130 400
140 430
</TABLE>
25
<PAGE>
--------
*Assumes 3.07 million shares committed to be released in the pro forma
period and no shares used to satisfy dividends payable since shares are
not allocated to participants until December 31. In later years shares
will be used to satisfy dividends on allocated shares, which will reduce
the ESOP accounting charge.
The following illustrates the impact to the ESOP accounting charge if the
average value of the New Shares in the first 12 months exceeds $136 per
share.
<TABLE>
<CAPTION>
SHARES TO
BE INCREASE IN
AVERAGE AVERAGE ESOP ADDITIONAL RELEASED ESOP ACCOUNTING
NEW SHARE PREFERRED STOCK SHARES TO FOR FIRST CHARGE****
PRICE FAIR VALUE* BE ISSUED** YEAR*** (MILLIONS)
--------- --------------- ----------- --------- ---------------
<S> <C> <C> <C> <C>
$136 $168 0 0 $ 0
140 172 2,260,410 393,115 68
150 182 6,949,234 1,208,562 220
</TABLE>
--------
*Assumes a dividend premium of $32 per share.
**To achieve the maximum increase in ownership, the price of a New Share
must average at least $149.10 during the first 12 months after the
Effective Time. If the average price of a New Share is less than or
equal to $136, no additional shares of ESOP Preferred Stock will be
issued.
***The additional shares will be released in a level fashion over the 69
months of the ESOP.
****Represents the first year increase; subsequent increases are dependent
on changes in the fair value of ESOP Preferred Stock.
(4) To record interest expense of $81 million on the Debentures and to record
amortization of the underwriting discount. The pro forma adjustment also
includes approximately $15 million of foregone interest income due to the
reduction in United's average investment balance resulting from the
transaction. The pro forma calculations assume the United Debt Offerings
are consummated and are based on an interest rate on the Series A
Debentures of 10.67% and on the Series B Debentures of 11.21%. If the
United Debt Offerings are not consummated, the interest rates are subject
to the stated maximums under the Recapitalization of 10.125% for the
Series A Debentures and 10.825% for the Series B Debentures. This will not
impact the pro forma interest expense because even though the interest
rate on each series of Debentures exceeds the stated maximum, the
principal amount of each series of Debentures was reduced so that the
yield to maturity will not exceed the yield to maturity that would have
resulted if the par amount of each series of Debentures (based on the
stated maximum interest rate) was priced at a discount.
(5) To adjust the provision (credit) for income taxes to reflect the tax
effect of changes to pretax income at the statutory rate in effect during
1993. For purposes of the pro forma adjustment, the book and tax employee
stock ownership plan compensation charge are assumed to be the same.
(6) If the Recapitalization is consummated, United expects to recognize
nonrecurring charges of approximately $44 million relating to additional
severance benefits for employees terminated as a result of the sale of the
flight kitchens, up to $49.15 million of transaction fees and expenses
incurred by ALPA, the IAM and certain advisors in connection with the
structuring and establishment of the ESOPs, $30 million for United's
transaction fees and expenses, $17 million of compensation expense
relating to vesting the unvested restricted stock as a result of the
change in control, $21 million of payments and benefits to Mr. Greenwald
and officers who are retiring at the Effective Time, and $13 million of
compensation expense (based on an assumed Old Share price of approximately
$128.31 at the Effective Time) relating to the vesting of unvested stock
options (the "Options") and the implementation of a feature that provides
for cashless exercise of Options in the event of the Recapitalization.
(The existing Option holders are only entitled to utilize the cashless
exercise feature if the Recapitalization occurs. The pro forma financial
26
<PAGE>
information assumes all in-the-money Options are exercised at the
Effective Time and, since the cashless exercise results in variable plan
accounting, there is an initial nonrecurring charge for the cashless
exercise feature but no ongoing impact; however, if Option holders do not
exercise their Options at the Effective Time, there will be an ongoing
accounting impact for the changes in the fair market value of the
consideration distributed in respect of Old Shares pursuant to the
Recapitalization that is issuable upon exercise of such Options.) The
total after-tax effect of the nonrecurring charges is $122 million. Due to
the nonrecurring nature of these charges, they have been excluded from the
Pro Forma Condensed Statement of Consolidated Operations.
(7) In the first quarter of 1994, United began recording certain air
transportation price adjustments, which were previously recorded as
commission expense, as adjustments to revenue. Historical operating
revenue and expense amounts have been adjusted to conform with the current
presentation. See United's Current Report on Form 8-K dated May 3, 1994,
which is incorporated by reference herein.
27
<PAGE>
UNITED AIR LINES, INC. AND SUBSIDIARY COMPANIES
PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED OPERATIONS
FOR THE THREE MONTHS MARCH 31, 1994
(IN MILLIONS)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Operating revenues........................... $3,173 $ (2)(1) $3,171
Operating expenses:
Salaries and related costs.................. 1,202 (111)(2)
(27)(1) 1,064
Employee stock ownership plan accounting
charge..................................... 86 (3) 86
Other....................................... 2,015 22 (1) 2,037
------ ----- ------
3,217 (30) 3,187
------ ----- ------
Earnings (loss) from operations.............. (44) 28 (16)
------ ----- ------
Other income (expense):
Interest, net............................... (60) (24)(4) (84)
Other, net.................................. (16) 19 (5) 3
------ ----- ------
(76) (5) (81)
------ ----- ------
Loss from continuing operations
before income taxes......................... (120) 23 (97)
Provision (credit) for income taxes.......... (41) 9 (6) (32)
------ ----- ------
Loss from continuing operations.............. $ (79) $ 14 $ (65)
====== ===== ======
</TABLE>
See accompanying notes to Pro Forma Condensed Statement of Consolidated
Operations.
28
<PAGE>
UNITED AIR LINES, INC. AND SUBSIDIARY COMPANIES
NOTES TO PRO FORMA CONDENSED
STATEMENT OF CONSOLIDATED OPERATIONS
THREE MONTHS ENDED MARCH 31, 1994
(1) United entered into an agreement to sell its U.S. flight kitchens over a
period of months beginning in December 1993 through June 1994, and an
agreement to acquire catering services for a seven year period. This
adjustment eliminates $2 million of sales revenues and $27 million of
compensation costs recorded in the first quarter of 1994 relating to the
U.S. flight kitchens that were sold, and adds estimated incremental
catering costs of $22 million.
(2) To adjust compensation expense for the pro forma effect of wage and benefit
reductions and certain work-rule changes resulting from the employee
investment that provide for wage and other compensation savings during the
approximately six year period beginning at the Effective Time. The pro
forma adjustment represents the estimated savings in the first quarter of
1994 assuming that such savings had commenced at the beginning of the prior
year. The pro forma adjustment does not include any savings related to U2.
(3) To record non-cash compensation for shares of ESOP Preferred Stock
committed to be released to employees during the period based on the
average fair value of the ESOP Preferred Stock. For purposes of the pro
forma adjustment, the average fair value of the ESOP Preferred Stock was
assumed to be the initial assumed purchase price of $120. The pro forma
calculations assume that shares committed to be released in 1993 were
allocated to participant accounts at the end of 1993. Thus, the portion of
shares committed to be released in 1994 that will be used to satisfy
dividend payable on allocated shares is charged to retained earnings rather
than non-cash compensation expense. It is anticipated that in the first
quarter of 1994, approximately 768,000 shares of ESOP Preferred Stock will
be committed to be released, and that approximately 54,000 of these shares
will be used for dividends.
Since future expense is dependent on the fair market value of the ESOP
Preferred Stock, such expense is difficult to forecast and may vary
significantly from the value in the pro forma adjustment. Changes in the
price of a New Share directly affect the determination of the value of an
ESOP Preferred Stock share. In addition, if the average value of a New
Share exceeds $136 during the first 12 months after the Effective Time,
additional shares of ESOP Preferred Stock will be issued to the Qualified
ESOP or reserved for issuance to the Supplemental ESOP. Future expense is
also affected by the premium associated with the dividend paying feature
which shrinks over time as the dividend paying period is reduced.
Following is a summary of the impact to the employee stock ownership plan
accounting charge of a range of fair market values:
<TABLE>
<CAPTION>
Average ESOP ESOP Accounting
Preferred Stock Charge*
Fair Value (millions)
--------------- ---------------
<S> <C>
$110 $ 79
120 86
130 93
140 100
</TABLE>
--------
* Assumes 768,000 shares committed to be released in the pro forma period
and approximately 54,000 shares used for dividends which are charged to
retained earnings. As additional shares are allocated in later years,
the employee stock ownership plan accounting charge will be reduced.
29
<PAGE>
The following illustrates the impact to the employee stock ownership plan
accounting charge for the quarter if the average value of the New Shares in
the first 12 months exceeds $136 per share.
<TABLE>
<CAPTION>
Average ESOP Shares to be Increase in
Average Preferred Additional Released ESOP Accounting
New Share Stock Fair Shares to for the Charge****
Price Value* be Issued** Quarter*** (millions)
--------- ------------ ----------- ------------ ---------------
<S> <C> <C> <C> <C>
$136 $168 0 0 $ 0
140 172 2,260,410 98,279 16
150 182 6,949,239 302,141 51
</TABLE>
--------
*Assumes a dividend premium of $32.
**To achieve the maximum increase in additional shares, the price of a
New Share must average at least $149.10 during the first 12 months
after the Effective Time. If the average price of a New Share is less
than or equal to $136, no additional shares of ESOP Preferred Stock
will be issued.
***The additional shares will be released in a level fashion over the 69
months of the ESOP.
****Represents the increase for the quarter; subsequent increases are
dependent on changes in the fair value of the ESOP Preferred Stock.
(4) To record interest expense of $20 million on the Debentures and to record
amortization of the underwriting discount. The pro forma adjustment also
includes approximately $4 million of foregone interest income due to the
reduction in United's average investment balance resulting from the
transaction. The pro forma calculations assume the United Debt Offerings
are consummated and are based on an interest rate on the Series A
Debentures of 10.67% and on the Series B Debentures of 11.21%. If the
United Debt Offerings are not consummated, the interest rates are subject
to the stated maximums under the Recapitalization of 10.125% for the Series
A Debentures and 10.825% for the Series B Debentures. This will not impact
the pro forma interest expense because even though the interest rate on
each series of Debentures exceeds the stated maximum, the principal amount
of each series of Debentures was reduced so that the yield to maturity will
not exceed the yield to maturity that would have resulted if the par amount
of each series of Debentures (based on the stated maximum interest rate)
was priced at a discount.
(5) To reverse $19 million of nonrecurring fees and expenses relating to the
Recapitalization which were recorded in the first quarter of 1994.
(6) To adjust the provision (credit) for income taxes to reflect the tax effect
of changes to pretax income at the statutory rate in effect during the
first quarter of 1994. For purposes of the pro forma adjustment the book
and tax employee stock ownership plan compensation charge are assumed to be
the same.
30
<PAGE>
UNITED AIR LINES, INC. AND SUBSIDIARY COMPANIES
PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
MARCH 31, 1994
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS HISTORICAL ADJUSTMENTS PRO FORMA
------ ---------- ----------- ---------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................. $ 666 $(140)(1) $
734 (3)
(741)(3)
(300)(10)
8 (9) 227
Short-term investments.................... 542 542
Other..................................... 2,241 44 (2) 2,285
------- ----- -------
3,449 (395) 3,054
------- ----- -------
Operating property and equipment............ 12,211 12,211
Less: Accumulated depreciation
and amortization........................ (5,164) (5,164)
------- ----- -------
7,047 7,047
------- ----- -------
Other assets:
Other..................................... 1,700 300(10) 2,000
------- ----- -------
$12,196 $ (95) $12,101
======= ===== =======
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
<S> <C> <C> <C>
Current liabilities:
Short-term borrowings, long-term debt
maturing within one year and current
obligations under capital leases......... $ 466 $ $ 466
Other..................................... 4,473 (11)(9) 4,462
------- ----- -------
4,939 (11) 4,928
------- ----- -------
Long-term debt.............................. 2,596 734 (3) 3,330
------- ----- -------
Long-term obligations under capital leases.. 774 774
------- ----- -------
Other liabilities, deferred credits and
minority interest.......................... 3,317 3,317
------- ----- -------
Shareholder's equity:
Common stock, $5 par value; 1,000 shares
authorized; 200 shares outstanding....... -- --
Additional capital invested............... 839 (741)(3)
13 (5)
4 (6) 115
Retained earnings (deficit)............... (200) (108)(7) (308)
ESOP capital.............................. 228 (4) 228
Unearned ESOP Preferred Stock............. (228)(4) (228)
Unearned compensation..................... (14) 14 (8) --
Pension liability adjustment ............. (53) (53)
Unrealized loss of investments............ (2) (2)
------- ----- -------
570 (818) (248)
------- ----- -------
$12,196 $ (95) $12,101
======= ===== =======
</TABLE>
See the accompanying notes to Pro Forma Condensed Statement of Consolidated
Financial Position.
31
<PAGE>
UNITED AIR LINES, INC.
AND SUBSIDIARY COMPANIES NOTES TO PRO FORMA CONDENSED
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
MARCH 31, 1994
(1) To record the cash impact of the estimated fees and transaction expenses,
including expenses for United, ALPA and the IAM, severance payments to
terminated officers and flight kitchen employees, and payments relating to
the employment agreement with Mr. Greenwald.
(2) To record the tax effects relating to nonrecurring charges recognized as a
result of the transaction.
(3) To record the issuance of $370 million of principal amount of Series A
Debentures and $371 million of principal amount of Series B Debentures and
to record the distribution of proceeds to the Company. The pro forma
adjustment assumes that the United Debt Offerings are consummated and that
the interest rate is 10.67% for the Series A Debentures and 11.21% for the
Series B Debentures based on the pricing of the United Debt Offerings. The
Debentures are being recorded at their face amount on the assumption that
they are priced to trade at par, less the underwriting discount of $7
million.
If the underwritings are not consummated, $382.5 million of principal
amount of Series A Debentures and $382.5 million of principal amount of
Series B Debentures will be issued. In such case, the applicable rates on
the Debentures will be the applicable stated maximum rates of 10.125% for
the Series A Debentures and 10.825% for the Series B Debentures. If either
or both of the United Debt Offerings are not consummated and the then-
current market interest rate exceeds the applicable stated maximum, such
Debentures will be recorded at a discount.
(4) To record the ESOP capital as a result of the initial issuance of shares of
UAL's Class 1 ESOP Preferred Stock to the Leveraged ESOP for an aggregate
purchase price of $228 million and to record the related charge to unearned
ESOP Preferred Stock. The $228 million was determined based on (i)
1,899,059 shares of Class 1 ESOP Preferred Stock expected to be issued in
the first ESOP Tranche as of the Effective Time and (ii) an assumed
purchase price of $120 per share. The Company and the Unions may, prior to
the Effective Time, agree to increase or decrease the number of shares of
Class 1 ESOP Preferred Stock sold at the Effective Time. The agreement with
the ESOP Trustee provides that the number of shares of Class 1 ESOP
Preferred Stock sold at the Effective Time shall be no more than 2,088,965
and no fewer than 1,709,153, provided, however, that the number of shares
sold in the first ESOP Tranche will be adjusted if the Effective Time is
before or after July 1, 1994. In general, the actual price per share for
the first ESOP Tranche will be calculated as provided in the ESOP Stock
Purchase Agreement. Thus, the ultimate amount recorded at the Effective
Time will differ from the pro forma adjustment in order to reflect the
actual number of shares issued and the purchase price calculated under the
ESOP Stock Purchase Agreement.
Six additional ESOP Tranches will be issued to the Leveraged ESOP during
the 69 months subsequent to the Effective Time, with the total shares of
Class 1 ESOP Preferred Stock issued in the seven ESOP Tranches aggregating
approximately 14,000,000 shares (subject to increase). The price for the
subsequent ESOP Tranches will be as agreed between the Company and the ESOP
Trustee at the time of each sale. As the subsequent ESOP Tranches are
issued, the shares will be reported as a credit to additional capital
invested based on the fair value of the stock when such issuances occur
with a corresponding charge to "Unearned ESOP Preferred Stock."
The unearned ESOP Preferred Stock recorded in the pro forma adjustment
together with the unearned ESOP Preferred Stock recorded from subsequent
ESOP Tranches will be recognized as compensation expense over the
approximately six year investment period as the shares are committed to be
released. The difference between the compensation expense recorded, which
is based on the fair value of the stock during an accounting period, and
the recorded cost of the unearned ESOP Preferred Stock will be recorded to
ESOP capital.
32
<PAGE>
ESOP capital will also be recorded over the approximately six year
investment period as the shares of UAL's Class 2 ESOP Preferred Stock are
committed to be contributed to the Non-Leveraged Qualified ESOP and
credited to employees pursuant to the Supplemental ESOP with the
offsetting entry being to compensation expense. The number of shares of
Class 2 ESOP Preferred Stock that will be issued will be equal to
17,675,345 less the number of shares of Class 1 ESOP Preferred Stock that
will be sold to the Leveraged ESOP.
The ESOP Preferred Stock is convertible into New Shares at any time at the
election of the ESOP Trustee at a rate of one New Share for each share of
ESOP Preferred Stock (subject to adjustment). Primarily because of
limitations imposed by the Internal Revenue Code, the ESOP consists of
three major portions: the Leveraged ESOP, the Non-Leveraged Qualified
ESOP, and the Supplemental ESOP. Shares of ESOP Preferred Stock issued
under the Leveraged ESOP and the Non-Leveraged Qualified ESOP will be held
by the ESOP Trustee. Under the Supplemental ESOP, shares will be credited
as Book-Entry Shares when earned by employees, and will be issued to
employees as New Shares, generally upon termination of employment. ALPA
has the right to elect, at any time, before or after the Effective Time,
that the Supplemental ESOP be maintained by the actual issuance of Class 2
ESOP Preferred Stock to a non-qualified trust established under the
Supplemental Plan. In general, the Plan of Recapitalization is designed to
maximize the number of shares of ESOP Preferred Stock that may be sold to
the Qualified ESOP. However, because of certain limitations imposed by the
Internal Revenue Code, a portion of the equity interest to be obtained by
the ESOP Trustee may not be sold to the Qualified ESOP. The Class 1 ESOP
Preferred Stock contains a fixed dividend feature which is intended to
maximize the number of shares of Class 1 ESOP Preferred Stock that may be
sold to the Qualified ESOP consistent with the applicable provisions of
the Internal Revenue Code. To the extent the Qualified ESOP is unable to
purchase the Class 1 ESOP Preferred Stock, Class 2 ESOP Preferred Stock
will be issued, to the extent permitted by the limitations of the Internal
Revenue Code, to the ESOP Trustee pursuant to the Non-Leveraged Qualified
ESOP. Class 2 ESOP Preferred Stock will not contain a fixed dividend. To
the extent that Class 2 ESOP Preferred Stock cannot be issued to the ESOP
Trustee because of the limitations of the Internal Revenue Code, the
Company will credit Book-Entry Shares to accounts established for the
employees.
(5) To account for the cashless exercise of options in the event of the
Recapitalization. (Amount of the entry is based on an assumed Old Share
price at the Effective Time of approximately $128.31 per share.)
(6) To record 25,000 restricted shares to Mr. Greenwald that will vest at the
Effective Time.
(7) Represents the offset to entries (1), (2), (5), (6), (8) and (9).
(8) To record the vesting of the unvested restricted stock as a result of the
Recapitalization.
(9) To reverse $19 million of transaction fees and expenses recorded during the
first quarter of 1994 because these expenses are included in entry (1).
(10)To record an intercompany loan to UAL which will be used to pay a portion
of the Recapitalization Consideration to holders of Old Shares.
33
<PAGE>
MANAGEMENT
BOARD OF DIRECTORS
General
As described above, the Plan of Recapitalization was entered into to
implement a majority employee ownership transaction, and after consummation of
the Recapitalization, the ESOPs, which were established for the benefit of
United's employees, will have a common equity interest in the Company of at
least approximately 55% (determined on the basis described in the Plan of
Recapitalization). The corporate governance structure of the Company following
the Recapitalization will feature a twelve-member Board of Directors, only
three of whom will be appointed by the Unions and other representatives of
salaried and management employees. Of the remainder, five (including the CEO
and another senior executive officer) will be selected by the holders of the
New Shares and four will be designated as Independent Directors. Except for
certain exceptions, a majority vote of the Board is required for most Board
actions. See "Certain Risk Factors--Governance Structure; Employee Ownership
Influence."
The following information concerns the persons who have agreed to serve, or
who have been nominated for election, as members of the Board following the
Effective Time. Such information includes their names, ages, the class pursuant
to which they will serve, their principal occupations for the past five years
and their directorships with other corporations. Four initial Public Directors
will be elected at the Meeting. A fifth Public Director will be elected after
the Meeting.
GERALD GREENWALD, 58 (PUBLIC DIRECTOR). Chairman, Tatra Truck Company, Czech
Republic. Mr. Greenwald served as Vice Chairman of the Chrysler Corporation
from 1989 to 1990. Prior thereto, Mr. Greenwald was employed by Chrysler for
approximately 10 years in a number of senior executive positions. In 1990, Mr.
Greenwald was selected to serve as chief executive officer of United Employee
Acquisition Corporation in connection with the proposed 1990 employee
acquisition of the Company. Following the termination of that proposed
transaction, Mr. Greenwald served as a managing director of Dillon Read & Co.
Inc. (investment banking) in 1991 and as president of Olympia & York
Developments Limited (a real estate development company that was in the process
of a bankruptcy restructuring prior to Mr. Greenwald's agreeing to serve as
president) from April 1992 until March 1993. Mr. Greenwald currently serves as
a director of Aetna Life and Casualty Company, Honeywell Inc., Reynolds Metals
Company and is a trustee of Princeton University. Mr. Greenwald also serves as
chairman of the Tatra Truck Company and has served in such capacity since March
1993. Mr. Greenwald previously served for a number of years as a director of
GPA Group PLC (international aircraft financing and leasing). Mr. Greenwald has
not previously served on the Board.
DUANE D. FITZGERALD, 54 (INDEPENDENT DIRECTOR). Chairman, President and Chief
Executive Officer, Bath Iron Works Corporation (Shipbuilding). Mr. Fitzgerald
has not previously served on the Board. Mr. Fitzgerald served as Bath Iron
Works' President and Chief Operating Officer from December 1988 until September
1991 when he was appointed to his current positions. Mr. Fitzgerald is also a
director of the Shipbuilders Council of America and a trustee of the University
of Maine System and of Boston University.
ROGER D. HALL, 55 (ALPA DIRECTOR). Chairman, United Airlines Pilots Master
Executive Council, Air Line Pilots Association, International and Captain B737-
200, United Air Lines, Inc. Captain Hall has not previously served on the
Board. Captain Hall has been Chairman of the UAL-MEC since January, 1992. He
served as ALPA First Vice President from 1987 to 1990. He has been a B737-200
Captain since 1983. Captain Hall is also an Executive Board Member and
Executive Council Member of ALPA.
RICHARD D. MCCORMICK, 53 (INDEPENDENT DIRECTOR). Chairman of the Board,
President and Chief Executive Officer of US West, Inc. (telecommunications) Mr.
McCormick has not previously served on the Board. Mr. McCormick has been
Chairman of US West since May 1992 and President and Chief Executive Officer
since 1991. He served as President and Chief Operating Officer from 1986 to
1991. Mr. McCormick is also a director of Norwest Corporation and Super Valu
Stores, Inc.
34
<PAGE>
JOHN F. MCGILLICUDDY, 63 (PUBLIC DIRECTOR). Retired Chairman and Chief
Executive Officer, Chemical Banking Corporation (banking and finance). Director
since 1984. Mr. McGillicuddy served as Chairman and Chief Executive Officer of
Chemical Banking Corporation from 1992 until his retirement in December 1992,
and of Manufacturers Hanover Corporation and Manufacturers Hanover Trust
Company from 1979 until the merger of Manufacturers Hanover Corporation and
Chemical Banking Corporation on January 1, 1992. Mr. McGillicuddy is also a
director of Chemical Banking Corporation, The Continental Corporation and USX
Corporation.
JAMES J. O'CONNOR, 57 (PUBLIC DIRECTOR). Chairman and Chief Executive
Officer, Commonwealth Edison Company (electric power utility). Director since
1984. Mr. O'Connor is also a director of American National Can Company, Corning
Incorporated, First Chicago Corporation, the Chicago Stock Exchange, Scotsman
Industries, Inc. and The Tribune Company.
JOHN PETERPAUL, 58 (IAM DIRECTOR). Retired Vice President, International
Association of Machinists and Aerospace Workers. Mr. Peterpaul has not
previously served on the Board. Mr. Peterpaul retired from the IAM in May 1994.
He is a member of the Executive Board, General Council and Management Committee
of the International Transport Workers' Federation (ITF), headquartered in
London, England. He has served as Labor Chairman of the National Transportation
Apprenticeship and Training Conference, Chairman of the Railway Labor
Executives' Association and has served on numerous other labor and government
committees including the National Commission to Ensure a Strong Competitive
Airline Industry.
PAUL E. TIERNEY, JR., 51 (PUBLIC DIRECTOR). Managing Director, Gollust,
Tierney and Oliver, Inc. (investment banking). Director since October 18, 1990.
Mr. Tierney is also Chairman of the Board of Directors of Technoserve, Inc., a
director of the Argentine Investment Fund, the Straits Corporation and the
Overseas Development Council and a Governor of the United Nations Association.
JOHN K. VAN DE KAMP, 58 (INDEPENDENT DIRECTOR). Partner, Dewey Ballantine
(law firm). He has not previously served on the Board. Mr. Van de Kamp served
as Attorney General of the State of California from 1983 until January 1991. He
is also a member of the advisory board of Falcon Classic Cable Companies, Ltd.
and a director of Lawry's Restaurants, Inc. In addition, Mr. Van de Kamp serves
on the board of directors of the following non-profit organizations: Day One,
the Eisenhower World Affairs Institute, the Los Angeles Conservation Corps, the
Planning and Conservation League and the Rockefeller Center for Social Sciences
at Dartmouth College. He is also President of the Board of Governors of the
City Club of Bunker Hill.
JOSEPH V. VITTORIA, 58 (SALARIED AND MANAGEMENT DIRECTOR). Chairman and Chief
Executive Officer, Avis, Inc. since September 1987 (automobile renting and
leasing). Mr. Vittoria has not previously served on the Board.
PAUL A. VOLCKER, 66 (INDEPENDENT DIRECTOR). Chairman, James D. Wolfensohn
Inc. (investment banking) and Frederick H. Schultz Professor of International
Economic Policy, Princeton University. Mr. Volcker has not previously served on
the Board. Mr. Volcker is also a director of Nestle S.A., Municipal Bond
Assurance Corp. (MBIA), the American Stock Exchange and Prudential Insurance
Co. of America. He is Chairman of the North American Committee of the
Trilateral Commission, the Group of 30, the Advisory Boards of the Center for
Strategic and International Studies and the Arthritis Foundation; he is co-
chairman of the Bretton Woods Committee and the United States Hong Kong
Economic Cooperation Committee. Mr. Volcker is also associated as trustee or
member of the Board of Directors with the Council on Foreign Relations, the
Aspen Institute, the Japan Society, the American Council on Germany and the
American Assembly.
EXECUTIVE OFFICERS
Stephen M. Wolf, Chairman and Chief Executive Officer, John C. Pope,
President and Chief Operating Officer, and Lawrence M. Nagin, Executive Vice
President--Corporate Affairs and General Counsel, have
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agreed to retire effective immediately before the consummation of the
Recapitalization. Mr. Greenwald will become the CEO at that time. The Restated
Certificate provides that the holders of the New Shares will have a voice in
the selection of the CEO. The Restated Certificate contemplates that the CEO
will be a member of the Board. A CEO-designate who is not elected to the Board
must resign as CEO.
It is expected that a Chief Operating Officer of the Company and United will
not be identified prior to the Meeting or the Effective Time. If this occurs,
the Company would expect that members of existing senior management would
perform the functions of the Chief Operating Officer after the Effective Time
until such a person is identified in accordance with the procedures specified
in the Restated Certificate.
Following is information concerning the principal occupations for the past
five years for the other executive officers of the Company.
JOSEPH R. O'GORMAN, JR. was elected Executive Vice President of the Company
on February 28, 1991. He was elected Executive Vice President--Operations of
United on April 30, 1992. He had served as Executive Vice President--Flight
Services of United since February 25, 1991. Previously, Mr. O'Gorman served as
Executive Vice President--Operations at USAir from August 1990 until February
1991. He served as United's Senior Vice President--Maintenance Operations from
March 1988 to August 1990.
JAMES M. GUYETTE was elected Executive Vice President of the Company
effective January 28, 1988. He was elected Executive Vice President--Marketing
and Planning of United on April 30, 1992.
PAUL G. GEORGE was elected Senior Vice President--Human Resources of United
on April 11, 1988.
There are no family relationships among the executive officers of the
Company.
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<PAGE>
DESCRIPTION OF CERTAIN TERMS OF SECURITIES
The following is a description of certain general terms and provisions of the
Debentures. The particular terms of the Debentures will be described in the
Prospectus Supplement. If so indicated in the Prospectus Supplement, the terms
of such Debentures may differ from the terms set forth below.
The Series A Debentures and the Series B Debentures will be issued under an
Indenture dated as of July 1, 1991 between United, as issuer, and The Bank of
New York, as Trustee (the "Indenture Trustee") and an officers' certificate
that sets forth certain terms of the Debentures (collectively, the
"Indenture"). Copies of the Indenture and the related documentation have been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part and are incorporated herein by reference. The summary of terms of the
Debentures contained in this Prospectus does not purport to be complete. Where
the summaries do not make a distinction between the Series A Debentures and the
Series B Debentures, such summaries refer to either series. Whenever particular
Sections or defined terms of the Indenture are referred to herein, such
sections or defined terms are incorporated herein by reference.
General
The Debentures will be issued only in fully registered form without coupons
in denominations of $1,000 principal amount and integral multiples thereof. The
Debentures will bear interest at the rates shown on the cover of this
prospectus. The Debentures have been approved for listing on the New York Stock
Exchange subject to official notice of issuance.
Interest on the Debentures will be paid semi-annually on the dates specified
in the accompanying Prospectus Supplement to holders of record on the record
dates for such payments specified in the accompanying Prospectus Supplement at
the rates shown on the cover of such Prospectus Supplement. The Series A
Debentures and the Series B Debentures will mature on the respective dates
specified in the accompanying Prospectus Supplement. The Debentures will bear
interest from a date specified in the accompanying Prospectus Supplement or the
most recent interest payment date from which interest has been paid.
The Indenture does not contain any covenant or provisions that provide
protection to the holder of Debentures in the event of a highly leveraged
transaction or a change of control.
The Debentures will be unsecured and unsubordinated obligations of United and
will rank on a parity with all other unsecured and unsubordinated indebtedness
of United. As of March 31, 1994 United had outstanding approximately $2.8
billion aggregate principal amount of indebtedness that will rank pari passu
with the Debentures offered hereby, of which approximately $1.8 billion was
secured and approximately $1.0 billion was unsecured. The Indenture does not
limit the right of United to incur additional senior indebtedness, all of which
will value pari passu with the Debentures. As of March 31, 1994, United had
outstanding approximately $3.6 billion principal amount of indebtedness and
capital lease obligations.
Redemption
The Debentures will not be subject to any sinking fund or other obligation of
United to redeem or retire the Debentures. The Debentures may not be called for
redemption prior to their respective final stated maturities. The Plan of
Recapitalization provides that if either or both series of Debentures are
issued other than pursuant to the United Debt Offerings, such series of
Debentures may be made redeemable at the option of United prior to their
respective final stated maturities if the Unions so request not less than seven
days prior to the Announcement Date.
Payment, Registration, Transfer and Exchange
Payments in respect of the Debentures will be made at the office or agency of
United maintained for that purpose as United may designate from time to time,
except that, at the option of United, interest
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payments, if any, on the Debentures may be made by checks mailed by the
Indenture Trustee to the holders of Debentures entitled thereto at their
registered addresses. (Sections 3.7(a) and 9.2 of the Indenture.) Payment of
any installment of interest on Debentures will be made to the persons in whose
names such Debentures are registered at the close of business on the regular
record date for such interest. (Sections 3.7(a) of the Indenture.)
Debentures will be transferable or exchangeable at the agency of United
maintained for such purpose as designated by United from time to time.
(Sections 3.5 and 9.2 of the Indenture.) Debentures may be transferred or
exchanged without service charge, other than any tax or other governmental
charge imposed in connection therewith. (Section 3.5 of the Indenture.)
Consolidation, Merger or Sale by United
The Indenture provides that United may merge or consolidate with or into any
other corporation or sell, convey, transfer or otherwise dispose of all or
substantially all of its assets to any person, firm or corporation, if (i)(a)
in the case of a merger or consolidation, United is the surviving corporation
or (b) in the case of a merger or consolidation where United is not the
surviving corporation and in the case of such a sale, conveyance or other
disposition, the successor or acquiring corporation is a corporation organized
and existing under the laws of the United States of America or a State thereof
and such corporation expressly assumes by supplemental indenture all the
obligations of United under the Debentures and the Indenture, (ii) immediately
after giving effect to such merger or consolidation, or such sale, conveyance,
transfer or other disposition, no Default or Event of Default has occurred and
is continuing and (iii) certain other conditions are met. In the event a
successor corporation assumes the obligations of United, such successor
corporation will succeed to and be substituted for United under the Indenture
and under the Debentures and all obligations of United will terminate.
(Section 7.1 of the Indenture.)
Events of Default, Notice and Certain Rights on Default
The Indenture provides that, if an Event of Default occurs with respect to
the Debentures of either series and is continuing, the Indenture Trustee for
such series or the holders of at least 25% in aggregate principal amount of
all of the outstanding Debentures of that series, by written notice to United
(and to the Indenture Trustee for such series, if notice is given by such
holders of Debentures), may declare the principal of all the Debentures of
that series to be due and payable. (Section 5.2 of the Indenture.)
Events of Default with respect to Debentures of either series are defined in
the Indenture as being: (i) default for 30 days in payment of interest on any
Debentures of that series when due, (ii) default for 10 days in payment of
principal, premium, if any, at its maturity or on redemption or otherwise, of
any Debentures of that series when due, (iii) default for 60 days after notice
to United by the Indenture Trustee for such series, or to United and the
Indenture Trustee by the holders of at least 25% in aggregate principal amount
of the Debentures of such series then outstanding, in the performance of any
other agreement in the Debentures of that series, in the Indenture or in any
supplemental indenture, (iv) default resulting in acceleration of other
indebtedness of United for borrowed money where the aggregate principal amount
so accelerated exceeds $100 million and such acceleration is not rescinded or
annulled within 10 days after the written notice thereof to United by the
Indenture Trustee or to United and the Indenture Trustee by the holders of at
least 25% in aggregate principal amount of the Debentures of such series then
outstanding, provided that such Event of Default will be cured or waived if
the default that resulted in the acceleration of such other indebtedness is
cured or waived, and (v) certain events of bankruptcy, insolvency or
reorganization of United. (Section 5.1 of the Indenture.) An Event of Default
under the Indenture with respect to the Debentures could cause an event of
default with respect to certain other existing indebtedness of United. A
payment default with respect to the Debentures that continues to exist after
the termination of grace periods and waivers would cause an event of default
under six financing leases covering six aircraft if the Event of Default under
the Indenture would have a material adverse effect on the financial condition
of United. An event of default would also occur under these six financing
leases and two other financing leases covering four aircraft if the maturity
of the Debentures
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was accelerated as a result of an Event of Default and such acceleration would
have a material adverse effect on the financial condition of United. An event
of default would occur under a ninth financing lease covering twenty-five
aircraft if the maturity of the Debentures was accelerated as a result of a
payment default under the Indenture or if the maturity of 80% of all of
United's senior funded indebtedness were accelerated as a result of any other
default under the Indenture. If an Event of Default occurred under the
Indenture and the maturity of more than $100 million principal amount of the
Debentures was accelerated and not rescinded within specified grace periods,
an event of default would occur under $1.0 billion principal amount of
United's indebtedness and, in addition, United would not be able to make new
borrowings under a credit agreement that is associated with its commercial
paper facility. There can be no assurance that United will not grant a cross-
default remedy to one or more of its creditors in the future.
The Indenture provides that the Indenture Trustee for either series of
Debentures will, within 90 days after the occurrence of a Default with respect
to Debentures of that series, give to the holder of the Debentures of that
series notice of all uncured Defaults known to it; provided that, except in
the case of default in payment on the Debentures of that series, the Indenture
Trustee may withhold the notice if and so long as a committee of its
responsible officers in good faith determines that withholding such notice is
in the interest of the holders of the Debentures of that series. (Section 6.6
of the Indenture.) "Default" means any event that is, or, after notice or
passage of time or both, would be, an Event of Default. (Section 1.1 of the
Indenture.)
The Indenture provides that the holders of a majority in aggregate principal
amount of the Debentures of each series affected (with each such series voting
as a class) may direct the time, method and place of conducting any proceeding
for any remedy available to the Indenture Trustee for such series or
exercising any trust or power conferred on such Indenture Trustee. (Section
5.8 of the Indenture.)
The Indenture includes a covenant that United will file annually with the
Indenture Trustee a certificate as to United's compliance with all conditions
and covenants of the Indenture. (Section 9.7 of the Indenture.)
The holders of a majority in aggregate principal amount of either series of
Debentures by notice to the Indenture Trustee for such series may waive, on
behalf of the holders of all Debentures of such series, any past Default or
Event of Default with respect to that series and its consequences except a
Default or Event of Default in the payment of the principal of, premium, if
any, or interest on any Debenture and certain other defaults. (Section 5.7 of
the Indenture.)
Modification of the Indenture
The Indenture contains provisions permitting United and the Indenture
Trustee to enter into one or more supplemental indentures without the consent
of the holders of any of the Debentures (i) to evidence the succession of
another corporation to United and the assumption of the covenants of United by
a successor to United, (ii) to add to the covenants of United for the benefit
of either series of Debentures or surrender any right or power of United,
(iii) to add additional Events of Default with respect to any series, (iv) to
secure the Debentures, (v) to evidence and provide for successor Indenture
Trustees, (vi) to correct or supplement any inconsistent provisions or to make
any other provisions with respect to matters or questions arising under the
Indenture, provided that such action does not adversely affect the interests
of any holder of Debentures of any series issued under the Indenture, or (vii)
to cure any ambiguity or correct any mistake. (Section 8.1 of the Indenture.)
The Indenture also contains provisions permitting United and the Indenture
Trustee, with the consent of the holders of a majority in aggregate principal
amount of the outstanding Debentures of each series affected by a supplemental
indenture, to execute such supplemental indenture to add any provisions to or
to change or to eliminate any of the provisions of the Indenture or any
supplemental indenture or to modify the rights of the holders of Debentures of
such series, except that no such supplemental indenture may, without the
consent of the holder of each Debenture so affected, (i) change the time for
payment of principal or interest on any Debenture, (ii) reduce the principal
of, or any installment of interest on, any Debenture, (iii)
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<PAGE>
reduce the amount of premium, if any, payable upon the redemption of any
Debenture, (iv) change the coin or currency in which any Debenture or any
premium or interest thereon is payable, (v) impair the right to institute suit
for the enforcement of any payment on or with respect to any Debenture, (vi)
reduce the percentage in principal amount of the outstanding Debentures of any
series the consent of whose holders is required for modification or amendment
of the Indenture or for waiver of compliance with certain provisions of the
Indenture or for waiver of certain defaults, (vii) change the obligation of
United to maintain an office or agency in the places and for the purposes
specified in the Indenture or (viii) modify the provisions relating to waiver
of certain defaults or any of the foregoing provisions. (Section 8.2 of the
Indenture.)
Defeasance and Covenant Defeasance
United may elect either (i) to defease and be discharged from any and all
obligations with respect to the Debentures of any series (except as described
below) ("defeasance") or (ii) to be released from its obligations with respect
to certain covenants applicable to the Debentures of any series ("covenant
defeasance"), upon the deposit with the Indenture Trustee for such series (or
other qualifying trustee), in trust for such purpose, of money and/or
Government Obligations that through the payment of principal and interest in
accordance with their terms will provide money in the amount sufficient to pay
the principal of, premium, if any, and interest on such Debentures to their
respective final stated maturity or redemption, as the case may be. Upon the
occurrence of a defeasance, United will be deemed to have paid and discharged
the entire indebtedness represented by such Debentures and to have satisfied
all of its other obligations under such Debentures (except for (i) the rights
of holders of such Debentures to receive, solely from the trust funds deposited
to defease such Debentures, payments in respect of the principal of, premium,
if any, and interest on such Debentures when such payments are due and (ii)
certain other obligations as provided in the Indenture). Upon the occurrence of
a covenant defeasance, United will be released only from its obligations to
comply with certain covenants contained in the Indenture relating to such
Debentures, will continue to be obligated in all other respects under such
Debentures and will continue to be contingently liable with respect to the
payment of principal, premium, if any, and interest with respect to such
Debentures.
The conditions to both defeasance and covenant defeasance are as follows: (i)
such defeasance or covenant defeasance must not result in a breach or violation
of, or constitute a Default or Event of Default under, the Indenture, or result
in a breach or violation of, or constitute a default under, any other material
agreement or instrument of United, (ii) certain bankruptcy related Defaults or
Events of Default with respect to United must not have occurred and be
continuing during the period commencing on the date of the deposit of the trust
funds to defease such Debentures and ending on the 91st day after such date,
(iii) United must deliver to the Indenture Trustee an Opinion of Counsel to the
effect that the holders of such Debentures will not recognize income, gain or
loss for Federal income tax purposes as a result of such defeasance or covenant
defeasance and will be subject to Federal income tax on the same amounts and in
the same manner and at all the same times as would have been the case if such
defeasance or covenant defeasance had not occurred (such Opinion of Counsel, in
the case of defeasance, must refer to and be based upon a ruling of the IRS or
a change in applicable Federal income tax law occurring after the date of the
Indenture) and (iv) United must deliver to the Indenture Trustee an Officers'
Certificate and an Opinion of Counsel with respect to compliance with the
conditions precedent to such defeasance or covenant defeasance and with respect
to certain registration requirements under the Investment Company Act of 1940,
as amended. (Article 4 of the Indenture.) The Indenture requires that a
nationally recognized firm of independent public accountants deliver to the
Indenture Trustee a written certification as to the sufficiency of the trust
funds deposited for the defeasance or covenant defeasance of such Debentures.
The Indenture does not provide the holders of such Debentures with recourse
against such firm. In the event that Government Obligations deposited with the
Indenture Trustee for the defeasance of such Debentures decrease in value or
default subsequent to their being deposited, United will have no further
obligation, and the holders of such Debentures will have no additional recourse
against United, as a result of such decrease in value or default. As described
above, in the event of a covenant defeasance, United remains contingently
liable with respect to the payment of principal, premium, if any, and interest
with respect to such Debentures.
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United may exercise its defeasance option with respect to such Debentures
notwithstanding its prior exercise of its covenant defeasance option. If United
exercises its defeasance option, payment of such Debentures may not be
accelerated because of a Default or an Event of Default. If United exercises
its covenant defeasance option, payment of such Debentures may not be
accelerated by reason of a Default or an Event of Default with respect to the
covenants to which such covenant defeasance is applicable. However, if such
acceleration were to occur, the realizable value at the acceleration date of
the money and Government Obligations in the defeasance trust could be less than
the principal and interest then due on such Debentures, in that the required
deposit in the defeasance trust is based upon scheduled cash flow rather than
market value, which will vary depending upon interest rates and other factors.
"Government Obligations" means securities which are (i) direct obligations of
the United States, for the payment of which its full faith and credit is
pledged or (ii) obligations of a Person controlled or supervised by and acting
as an agency or instrumentality of the United States, the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States, which, in either case, are not callable or redeemable at the option of
the issuer thereof, and shall also include a depositary receipt issued by a
bank or trust company as custodian with respect to any such Government
Obligation or a specific payment of interest on or principal of any such
Government Obligation held by such custodian for the account of the holder of a
depositary receipt, provided that (except as required by law) such custodian is
not authorized to make any deduction from the amount payable to the holder of
such depositary receipt from any amount received by the custodian in respect of
the Government Obligation evidenced by such depositary receipt.
The Indenture Trustee
The Bank of New York is the Indenture Trustee under the Indenture. United and
the Company also maintain banking and other commercial relationships with The
Bank of New York and its affiliates in the ordinary course of business, and The
Bank of New York acts as trustee under several indentures for United and the
Company.
PLAN OF DISTRIBUTION
United may sell Debentures in any of three ways: (i) through underwriters;
(ii) through agents; or (iii) directly to a limited number of institutional
purchasers or to a single purchaser. The Prospectus Supplement will set forth
the terms of the offering of the Debentures, including the name or names of any
underwriters, the purchase price and the proceeds to United from such sale, any
underwriting discounts and other items constituting underwriters' compensation,
any initial public offering price and any discounts or concessions allowed or
reallowed or paid to dealers, and any securities exchanges on which the
Debentures may be listed.
If underwriters are used in the sale, the Debentures will be acquired by the
underwriters for their own account and may be resold from time to time in one
or more transactions, including negotiated transactions, at a fixed public
offering price or at varying prices determined at the time of sale. The
Debentures may be either offered to the public through underwriting syndicates
represented by managing underwriters or by underwriters without a syndicate.
Unless otherwise set forth in the Prospectus Supplement, the obligations of the
underwriters to purchase Debentures will be subject to certain conditions
precedent and the underwriters will be obligated to purchase all the Debentures
if any are purchased. Any initial public offering price and any discounts or
concessions allowed or reallowed or paid to dealers may be changed from time to
time.
Debentures may be sold directly by United or through agents designated by
United from time to time. Any agent involved in the offer or sale of the
Debentures in respect of which this Prospectus is delivered will be named, and
any commissions payable by United to such agent will be set forth in the
Prospectus Supplement. Unless otherwise indicated in the Prospectus Supplement,
any such agent will be acting on a best efforts basis for the period of its
appointment.
If so indicated in the Prospectus Supplement, United will authorize agents or
underwriters to solicit offers by certain types of institutions to purchase
Debentures from United at the public offering price set
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forth in the Prospectus Supplement pursuant to delayed delivery contracts
providing for payment and delivery on a specified date in the future. Such
contracts will be subject only to those conditions set forth in the Prospectus
Supplement, and the Prospectus Supplement will set forth the commissions
payable for solicitation of such contracts.
Agents and underwriters may be entitled under agreements entered into with
United to indemnification by United against certain civil liabilities under the
Securities Act of 1933, as amended, or to contribution with respect to payments
which the agents or underwriters may be required to make in respect thereof.
Agents and underwriters may engage in transactions with, or perform services
for, United in the ordinary course of business.
Each series of the Debentures will be a new issue of securities with no
established trading market. Any underwriters to whom Debentures are sold by
United for public offering and sale may make a market in such Debentures, but
such underwriters will not be obligated to do so and may discontinue any market
making at any time without notice. No assurance can be given as to the
liquidity of the trading market for any Debentures.
EXPERTS
The consolidated financial statements and related schedules of United as of
December 31, 1993 and 1992 and for each of the three years in the period ended
December 31, 1993, incorporated by reference in this Prospectus and elsewhere
in the Registration Statement have been audited by Arthur Andersen & Co.,
independent public accountants, as indicated in their reports with respect
thereto, and are incorporated by reference herein in reliance upon the
authority of said firm as experts in giving said reports. Reference is made to
said reports which includes an explanatory paragraph with respect to the
changes in methods of accounting for income taxes and postretirement benefits
other than pensions as discussed in the notes to the consolidated financial
statements.
LEGAL OPINIONS
The validity of the Debentures will be passed upon for United by Skadden,
Arps, Slate, Meagher & Flom and for the Underwriters by Shearman & Sterling.
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS SUPPLE-
MENT OR THE ACCOMPANYING PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY
THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY UNITED OR THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION
OF AN OFFER TO BUY, THE DEBENTURES IN ANY JURISDICTION WHERE, OR TO ANY PERSON
TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIV-
ERY OF THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE
HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS OR IN THE AFFAIRS OF UNITED SINCE THE DATE
HEREOF.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PROSPECTUS SUPPLEMENT
<S> <C>
Summary.................................................................... S-3
Description of Securities.................................................. S-6
Litigation................................................................. S-10
Union Organizing Activity.................................................. S-10
Underwriting............................................................... S-11
PROSPECTUS
Available Information...................................................... 2
Incorporation of Certain Documents by Reference............................ 2
United And The Company..................................................... 3
The Recapitalization....................................................... 5
Certain Risk Factors....................................................... 12
Use of Proceeds............................................................ 18
Capitalization............................................................. 19
Selected Consolidated Financial and Operating Information.................. 20
Unaudited Pro Forma Financial Information.................................. 22
Management................................................................. 34
Description of Certain Terms of Securities................................. 37
Plan of Distribution....................................................... 41
Experts.................................................................... 42
Legal Opinions............................................................. 42
</TABLE>
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$741,200,000
[LOGO OF UNITED AIRLINES APPEARS HERE]
$370,200,000
10.67% SERIES A DEBENTURES DUE 2004
$371,000,000
11.21% SERIES B DEBENTURES DUE 2014
---------------
PROSPECTUS SUPPLEMENT
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MERRILL LYNCH & CO.
CS FIRST BOSTON
GOLDMAN, SACHS & CO.
SALOMON BROTHERS INC
JUNE 30, 1994
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<PAGE>
GRAPHICS APPENDIX LIST
PAGE WHERE
GRAPHIC
APPEARS DESCRIPTION OF GRAPHIC OR CROSS REFERENCE
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STX]2 Picture of United Airlines Airplane.
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GATE]1-2 United Airlines International route map.
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