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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 27, 1994
REGISTRATION NO. 33-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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UNITED AIR LINES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 36-2675206
(I.R.S. EMPLOYER
(STATE OR OTHER IDENTIFICATION NUMBER)
JURISDICTION OF
INCORPORATION OR 1200 EAST ALGONQUIN ROAD
ORGANIZATION) ELK GROVE TOWNSHIP, ILLINOIS 60007
(708) 952-4000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
Copies to: Copies to:
LAWRENCE M. NAGIN, PETER ALLAN ATKINS, ROHAN S. WEERASINGHE,
ESQ. ESQ. ESQ.
UAL CORPORATION THOMAS H. KENNEDY, SHEARMAN & STERLING
P.O. BOX 66100 ESQ. 599 LEXINGTON AVENUE
CHICAGO, ILLINOIS ERIC L. COCHRAN, ESQ. NEW YORK, NEW YORK
60666 SKADDEN, ARPS, SLATE, 10022
(708) 952-4000 MEAGHER & FLOM
(NAME, ADDRESS, 919 THIRD AVENUE
INCLUDING ZIP CODE, NEW YORK, NEW YORK
AND TELEPHONE NUMBER, 10022
INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered in this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES TO BE AGGREGATE PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE FEE
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<S> <C> <C> <C> <C>
Series A Debentures due
2004.................. $382,500,000 $1,000 $382,500,000 $131,896.55(1)
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Series B Debentures due
2014.................. $382,500,000 $1,000 $382,500,000 $131,896.55(1)
</TABLE>
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(1) Fee paid in connection with Registration Statement No. 33-53107.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED MAY 27, 1994
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS
$765,000,000
LOGO UNITED AIRLINES
$382,500,000 OF % SERIES A DEBENTURES DUE 2004
$382,500,000 OF % SERIES B DEBENTURES DUE 2014
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INTEREST PAYABLE 1, AND 1
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Interest on the % Series A Debentures due 2004 (the "Series A Debentures")
and the % 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 1 and 1 of
each year, commencing , 1994. The Series A Debentures will mature on ,
2004, and the Series B Debentures will mature on , 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 Debt
Offering"), UAL Corporation (the "Company"), United's corporate parent, is
offering to sell (the "UAL Preferred Offering" and, together with the United
Debt Offering, the "Offerings") 30,600,000 depositary shares (the "Depositary
Shares"), each representing an interest in $25 liquidation preference of the
Company's % 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
Offering is conditioned on, and subject to, the consummation of the other
Offering. In addition, the Offerings are 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."
[Application will be made to list the Debentures on the New York Stock
Exchange.]
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING
AN INVESTMENT IN THE DEBENTURES, SEE "CERTAIN RISK FACTORS."
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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.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) UNITED(3)
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<S> <C> <C> <C>
Per Series A Debenture...................... % % %
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Total....................................... $ $ $
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Per Series B Debenture...................... % % %
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Total....................................... $ $ $
</TABLE>
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(1) Plus accrued interest, if any, from , 1994 to the date of delivery.
(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 $ .
-----------
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 , 1994.
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The date of this Prospectus is , 1994.
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE DEBENTURES AT A
LEVEL 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.
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 March 29, 1994 (two
reports), April 21, 1994,April 28, 1994 and May 3, 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.
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PROSPECTUS SUMMARY
The following summary should be read in conjunction with the information
appearing elsewhere in this Prospectus and is qualified in its entirety by
reference thereto.
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 trans-Atlantic, the trans-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 (the "Company") 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, Inc. ("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 at least 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 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 45%
of the common equity of the Company and 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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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 for the benefit of its employees hold more than 20% of the common
equity of the Company, including certain "phantom shares" of ESOP Preferred
Stock (as defined) that have not been issued but have been allocated to
individual accounts (the "Book-Entry Shares"), which event is referred to
herein as the Sunset (as defined). In addition, subject to the rights of
holders of Series A Preferred Stock 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 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 a majority of the holders of the Company's current common stock ("Old
Shares") 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 , 1994. The Offerings are 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."
THE OFFERING
Securities Offered.......... $382,500,000 principal amount of % Series A
Debentures due 2004 and $382,500,000 principal
amount of % Series B Debentures due 2014.
Maturity Date............... The Series A Debentures will mature on ,
2004, and the Series B Debentures will mature on
, 2014.
Interest Payment Dates...... and , commencing , 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.
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."
[Listing.................... Application will be made to list the Debentures
on the New York Stock Exchange.]
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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 trans-Atlantic, the trans-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.
COST REDUCTION INITIATIVES
During 1993, United pursued an aggressive 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 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 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. 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 to eliminate certain unprofitable non-
stop flights and replaced them with connecting service through its
international hubs and to add 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, and its long-haul flights. United also eliminated
several unprofitable routes and stations. For example, at 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 premier European gateway at that location as well
as operating successful domestic long-haul operations. The airline now serves
11 trans-Atlantic destinations and Mexico City from Washington. An aggressive
build-
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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.
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 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
comprehensive 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 carrier 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 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.
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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 B767-300ER aircraft, which is used in European and Latin American
markets. The B777 aircraft, which is scheduled to arrive in 1995, will have
even more cargo space than the B747-400.
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 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
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 Plan of
Recapitalization is qualified in its entirety by reference to the complete
text of the Plan of Recapitalization, a copy of which is filed as an exhibit
to the Registration Statement of which this Prospectus is a part and which 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.
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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 IAM rejected such request. ALPA 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.
On April 19, 1993, 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 Plan of
Recapitalization was executed on March 25, 1994.
The purpose of the Recapitalization is to recapitalize the Company and
thereby provide the holders of 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
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 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.
At the Effective Time, if the Offerings 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 Series E Redeemable Preferred Stock that will be
redeemed immediately after issuance for cash in an amount equal to the sum of
(a) $25.80, (b) the proceeds (before deducting underwriting discounts and other
costs) from the sale by United of $15.55 principal amount of its Series A
Debentures and $15.55 principal amount of its Series B Debentures pursuant to
the United Debt Offering and (c) the proceeds (before deducting underwriting
discounts and other costs) from the sale by the Company of Depositary Shares
representing an interest in $31.10 liquidation preference of the Series B
Preferred Stock pursuant to the UAL Preferred Offering. The New Shares to be
issued in the Recapitalization will represent 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.
If the Offerings are not consummated and the Recapitalization is approved,
Debentures and Depositary Shares 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 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
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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) including,
until the Sunset, a voting interest on all matters presented to holders of New
Shares other than the election of Public Directors (as defined below),
although the percentage may be increased to up to a maximum of 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 continue to represent 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
following the Recapitalization until the Sunset.
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. The Public Directors will be elected by the
holders of Old 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 approval of supermajority votes of the Board of Directors or 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 the common stock, securities that can be exercised for and converted
into shares of common stock and Book-Entry Shares but 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 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.
IMPLEMENTATION OF THE "AIRLINE-WITHIN-AN-AIRLINE " (U2)
Background
In recent years, low-cost carriers, especially Southwest, 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
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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
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.
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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.
B737 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.
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 $3.354 billion of long-term debt and a deficit of approximately
$272 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 $8 million for the year ended December 31, 1993 and a loss from
continuing operations of approximately $62 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 $63
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 $102 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
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not result in disputes or inability to achieve results that are in the best
interests of the Company or holders of its common stock.
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 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 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.
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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 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, 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
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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 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.
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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.
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.
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
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aircraft larger than a B737-300 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 B-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 from the Effective Time through 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, 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.
18
<PAGE>
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 ESOP Preferred Stock that has been "committed to be released" is
considered to be outstanding in the if-converted earnings per share calculation
for primary and fully diluted earnings per share if the effect is dilutive. 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.
Possible Cancellation of Facility
United is a party to a $500 million commercial paper facility through
agreements with United Airlines First Funding Corporation ("First Funding") and
certain banks. As of the date of this Prospectus, approximately $270 million of
commercial paper is outstanding thereunder. As a result of provisions in the
Second Amended and Restated Credit Agreement, dated as of September 20, 1993
(the "Credit Agreement"), among First Funding, Union Bank as agent and certain
other banks, a "change in control" may be deemed to occur as a result of the
Recapitalization, and First Funding may be restricted from issuing new
commercial paper under the Credit Agreement. If the banks elect to restrict the
issuance of new commercial paper, United will need to renegotiate the Credit
Agreement, obtain a replacement facility or rely on its internal resources.
Although United does not expect it to be the case, United may not be able to
renegotiate the Credit Agreement or obtain a replacement facility; however,
United believes its internal resources would be adequate.
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 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.
19
<PAGE>
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.
American Appraisal also indicated that it believed the excess of total assets
over pro forma liabilities was approximately $2.5 billion at December 31, 1993,
compared to approximately $1.203 billion in stockholders' equity as of such
date, determined according to generally accepted accounting principles, so
that, giving effect to the Recapitalization, the indicated excess assets of the
Company for purposes of Delaware law exceeded $1 billion.
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. If the Recapitalization is consummated and the Offerings are
not consummated, Debentures and Depositary Shares representing an interest in
the Series B Preferred Stock 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.
20
<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 UAL's Class 1 ESOP Preferred Stock to the ESOP Trustee for
the Qualified ESOP and the related charge for unearned ESOP Preferred Stock.
The table should be read in conjunction with the Pro Forma Condensed Statement
of Consolidated Financial Position included elsewhere in this document.
<TABLE>
<CAPTION>
MARCH 31, 1994
-----------------
(IN MILLIONS)
PRO
HISTORICAL FORMA
---------- ------
(UNAUDITED)
<S> <C> <C>
Short-term borrowings, long-
term debt maturing within one
year and current obligations $ 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 1,765
Promissory notes............ 29 29
Unamortized discount on (15) (22)
debt....................... ------ ------
2,596 3,354
Long-term obligations under 774 774
capital leases............... ------ ------
Total long-term debt and 3,370 4,128
capital lease obligations.. ------ ------
Shareholder's equity:
Common stock, $5 par value.. -- --
Additional capital invested. 839 91
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 (272)
ty....................... ------ ------
Total capitalization.... $4,406 $4,322
====== ======
</TABLE>
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
The following consolidated financial information has been derived from
United's consolidated financial statements, for each of the fiscal years in the
five year period ended December 31, 1993, which statements have been audited by
Arthur Andersen & Co., independent public accountants, as indicated in their
reports incorporated by reference herein. Reference is made to said reports for
the years 1993 and 1992 which include an explanatory paragraph with respect to
the changes in methods of accounting for income taxes and postretirement
benefits other than pensions as discussed in the notes to the consolidated
financial statements for such years. The consolidated financial information for
the three months ended March 31, 1994 and 1993 is unaudited but in the opinion
of management includes all adjustments necessary for a fair presentation. The
table also sets forth certain information on a pro forma basis giving effect to
the Recapitalization and the Offerings. The following should be read in
conjunction with the unaudited pro forma financial statements and notes related
thereto included elsewhere herein and the Consolidated Financial Statements,
the related notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in United's Annual
Report on Form 10-K for the year ended December 31, 1993, and Quarterly Report
on Form 10-Q for the quarter ended March 31, 1994, incorporated by reference
herein.
<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(e) 295 (496) (491) (41) 464
Earnings (loss) before
extraordinary item and
cumulative effect of
accounting changes.... (8) (17) (386) (335) 96 358
Net earnings (loss).... N.A. (36) (933) (335) 96 358
STATEMENT OF
CONSOLIDATED FINANCIAL
POSITION DATA (at end
of period):
Total assets........... (b) $12,153 $12,067 $ 9,907 $ 8,001 $ 7,217
Total long-term debt
and capital lease
obligations, including
current portion....... (b) 3,614 3,628 2,531 1,326 1,404
Shareholders' equity... (b) 674 738 1,613 1,769 1,665
OTHER DATA:
Ratio of earnings to
fixed charges......... (c) (e) (e) (e) 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>
22
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
(UNAUDITED)
-----------------------------
1994
PRO FORMA 1994 1993
--------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
STATEMENT OF CONSOLIDATED OPERATIONS DATA:
Operating revenues(a)...................... $ 3,171 $ 3,173 $ 3,001
Loss from operations....................... (16)(e) (44) (107)
Loss before extraordinary item and
cumulative effect of accounting changes... (62) (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.... 4,325 3,567 3,864
Shareholders' equity....................... (272) 570 592
OTHER DATA:
Ratio of earnings to fixed charges......... (d) (d) (d)
UNITED OPERATING DATA:
Revenue passengers (millions).............. 16 16 16
Average length of a passenger trip in
miles..................................... 1,471 1,471 1,433
Revenue passenger miles (millions)......... 23,289 23,289 22,443
Available seat miles (millions)............ 35,598 35,598 35,220
Passenger load factor...................... 65.4% 65.4% 63.7%
Break even passenger load factor........... 65.8% 66.5% 66.3%
Revenue per passenger mile................. 11.9c 11.9c 12.0c
Cost per available seat mile............... 9.0c 9.0c 8.8c
Average price per gallon of jet fuel....... 58.6c 58.6c 65.9c
</TABLE>
- --------
(a) In the first quarter of 1994, United began recording certain air
transportation price adjustments, which were previously recorded as
commission expense, as adjustments to revenue. Historical operating revenue
amounts and certain operating statistics for periods prior to 1994 have been
adjusted to conform with the current presentation.
(b) The Pro Forma Statement of Consolidated Financial Position assumes the
transaction occurred at March 31, 1994. Therefore, pro forma information at
December 31, 1993 is not applicable.
(c) Earnings were inadequate to cover fixed charges by $77 million in 1993, by
$694 million in 1992 and by $604 million in 1991. On a pro forma basis,
earnings were inadequate to cover fixed charges by $63 million in 1993.
(d) Earnings were inadequate to cover fixed charges by $130 million and $211
million for the three month periods ended March 31, 1994 and 1993,
respectively. On a pro forma basis, earnings were inadequate to cover fixed
charges by $102 million for the three months ended March 31, 1994.
(e) The loss from operations includes an ESOP accounting charge which is
dependent on the fair market value of the ESOP Preferred Stock during the
period. The pro forma amount is based on an assumed fair value of $120 per
share. See note 4 to the Pro Forma Condensed Statement of Consolidated
Operations for both the year ended December 31, 1993 and the three months
ended March 31, 1994 for the effects of different fair value assumptions on
the ESOP accounting charge.
23
<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 UAL
Class 1 ESOP Preferred Stock, (ii) the offering of Debentures and distribution
of proceeds to UAL, (iii) the recognition of the employee stock ownership plan
accounting charge, (iv) the reduction in salaries and related cost for the
anticipated impact of the wage and benefit reductions and certain work rule
changes and (v) the recognition of the anticipated benefits of the agreement
to sell the U.S. flight kitchens. The unaudited Pro Forma Condensed Statements
of Consolidated Operations were prepared as if the Recapitalization had
occurred on January 1, 1993. The unaudited Pro Forma Condensed Statement of
Consolidated Financial Position was prepared as if the Recapitalization
occurred on March 31, 1994.
The 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").
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 actual purchase
price for the Class 1 ESOP Preferred Stock at the Effective Time will be based
on a market price-based formula. These sets of unaudited Pro Forma Financial
Information do not purport to be indicative of the results of operations or
financial position that may be obtained in the future or that would actually
have been obtained had the Recapitalization occurred on the dates indicated.
In addition, there can be no assurance as to the purchase price of the Class 1
ESOP Preferred Stock.
The pro forma statements assume the Recapitalization is not accounted for as
an acquisition or merger and, accordingly, United's assets and liabilities
have not been revalued. The distribution to UAL of proceeds from the Offering
of Debentures is charged to additional capital invested.
The ESOPs are being accounted for in accordance with the American Institute
of Certified Public Accountants Statement of Position 93-6, "Employers'
Accounting for Employee Stock Ownership Plans" ("SOP"). The ESOPs consist of a
leveraged ESOP (the "Leveraged ESOP"), a non-leveraged qualified ESOP (the
"Non-Leveraged Qualified ESOP") and the supplemental ESOP (the "Supplemental
ESOP"). 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 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 beginning at the Effective Time, thirteen
months following the Effective Time, annually thereafter for four years with a
final ESOP Tranche on January 1, 2000. As the Shares are issued to the
Leverage ESOP, United will report the issuance of shares as a credit to ESOP
capital based on the fair value of the Class 1 ESOP Preferred Stock when such
issuance occurs and report a corresponding charge to unearned ESOP Preferred
Stock. As shares of ESOP Preferred 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 and
the Supplemental 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 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
24
<PAGE>
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."
UNITED AIR LINES, INC. AND SUBSIDIARY COMPANIES
PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED OPERATIONS
YEAR ENDED DECEMBER 31, 1993
(IN MILLIONS)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Operating revenues........................ $13,168(8) $(28)(1) $13,140
Operating expenses:
Salaries and related costs............... 4,695 (428)(2)(3)
(191)(1) 4,076
Employee stock ownership plan accounting
charge.................................. 369 (4) 369
Other.................................... 8,178(8) 131 (1) 8,309
------- ---- -------
12,873 (119) 12,754
------- ---- -------
Earnings (loss) from operations........... 295 91 386
------- ---- -------
Other income (expense):
Interest, net............................ (221) (77)(5) (298)
Other, net............................... (100) (100)
------- ---- -------
(321) (77) (398)
------- ---- -------
Loss from continuing operations
before income taxes...................... (26) 14 (12)
Provision (credit) for income taxes....... (9) 5 (6) (4)
------- ---- -------
Loss from continuing operations........... $ (17) $ 9 (7) $ (8)
======= ==== =======
</TABLE>
See accompanying notes to Pro Forma Condensed Statement of Consolidated
Operations.
25
<PAGE>
UNITED AIR LINES, INC. AND SUBSIDIARY COMPANIES
NOTES TO PRO FORMA CONDENSED
STATEMENT OF CONSOLIDATED OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
(1) United entered into an agreement to sell its U.S. flight kitchens over a
period of months beginning in December 1993 through June 1994, and an
agreement to acquire catering services for a seven year period. This
adjustment eliminates $28 million of sales revenues and $191 million of
compensation costs recorded in 1993 relating to the U.S. flight kitchens
that were sold, and adds estimated incremental catering costs of $131
million.
(2) To adjust compensation expense for the pro forma effect of wage and
benefit reductions and certain work-rule changes resulting from the
employee investment that provide for wage and other compensation savings
during the approximately six year period beginning at the Effective Time.
The pro forma adjustment represents the estimated savings in the 12 months
assuming that such savings had commenced at the beginning of the period.
The pro forma adjustment does not include any savings related to U2.
(3) The following reconciles the labor cost savings included in the Pro Forma
Condensed Statement of Consolidated Operations to the value of the
employee investments:
<TABLE>
<CAPTION>
(MILLIONS)
<S> <C>
Pro Forma adjustment based on 1993 salaries.................... $428
Estimated compensation savings based on 1994 salaries.......... 68
Estimated benefits of U2 during the first year................. 64
Estimated additional severance for flight kitchen employees
during the first year......................................... (36)
----
Estimated 1994 investments................................... $524
====
Estimated six months of investments included in 1994 analy-
sis......................................................... $262
====
</TABLE>
(4) To record non-cash compensation for shares of ESOP Preferred Stock
committed to be released to employees during the period based on the
average fair value of such ESOP Preferred Stock. The average fair value of
the ESOP Preferred Stock is based on two components: (1) the average fair
value of the New Shares into which the ESOP Preferred Stock is convertible
plus (2) a premium attributable to the dividend paying feature of the ESOP
Preferred Stock. For purposes of the pro forma adjustment, the average
fair value of the ESOP Preferred Stock was assumed to be the initial
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 it 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 month after the Effective Date, additional
26
<PAGE>
shares of ESOP Preferred Stock will be issued to the Qualified Trust or
reserved for issuance to the Non-Qualified Plan to increase the ESOP's
ownership from 55% to 63%. Future expense is also affected by the premium
associated with the dividend paying feature which shrinks over time as the
dividend paying period is reduced.
Following is a summary of the impact to the employee stock ownership plan
accounting charge of a range of fair market values;
<TABLE>
<CAPTION>
AVERAGE ESOP ESOP ACCOUNTING
PREFERRED STOCK CHARGE*
FAIR VALUE (MILLIONS)
--------------- ---------------
<S> <C>
$110 $338
120 369
130 400
140 430
</TABLE>
- --------
*Assumes 3.07 million shares committed to be released in the pro forma
period and no shares used to satisfy dividends payable since shares are not
allocated to participants until December 31. In later years shares will be
used to satisfy dividends on allocated shares, which will reduce the ESOP
accounting charge.
The following illustrates the impact to the ESOP accounting charge if the
average value of the New Shares in the first 12 months exceeds $136 per
share.
<TABLE>
<CAPTION>
SHARES TO
BE INCREASE IN
AVERAGE AVERAGE ESOP ADDITIONAL RELEASED ESOP ACCOUNTING
NEW SHARE PREFERRED STOCK SHARES TO FOR FIRST CHARGE****
PRICE FAIR VALUE* BE ISSUED** YEAR*** (MILLIONS)
--------- --------------- ----------- --------- ---------------
<S> <C> <C> <C> <C>
$136 $168 0 0 $ 0
140 172 2,260,410 393,115 68
150 182 6,949,234 1,208,562 220
</TABLE>
- --------
*Assumes a dividend premium of $32 per share.
**To achieve the maximum increase in ownership, the price of a New Share
must average at least $149.10 during the first 12 months after the
Effective Date. If the average price of a New Share is less than or equal
to $136, no additional shares of ESOP Preferred Stock will be issued.
***The additional shares will be released in a level fashion over the 69
months of the ESOP.
****Represents the first year increase; subsequent increases are dependent
on changes in the fair value of ESOP Preferred Stock.
(5)To record interest expense of $72 million on the Series A Debentures at
an annual estimated interest rate of 9.0% and on the Series B Debentures at
an annual estimated interest rate of 9.7%, and to record amortization of
the underwriting discount. The pro forma adjustment also includes foregone
interest income due to the reduction in United's average investment balance
resulting from the transaction. For purposes of the pro forma adjustment,
the interest rates on the Debentures are based on the Initial Pricing. The
actual rates will be reset prior to Closing and the reset is limited to an
additional 112.5 basis points. If the reset results in the actual rate
being at the maximum interest rate, interest expense would increase by an
additional $9 million for the year. Further, if the Unions request prior to
the Announcement Date that the Debentures contain a call provision, the
actual rates could increase above the cap.
27
<PAGE>
The underwriting agreements for the Offerings are expected to provide that
if the Offerings are consummated, the interest rates may be set above the
cap to permit the Debentures to be sold at or closer to par, but if this
is done, the principal amount of the Debentures will be reduced so that
the interest payable will not exceed the stated maximum which was
calculated based upon the interest rate cap. If the Offerings are not
consummated, the interest rates are subject to the cap.
(6) To adjust the provision (credit) for income taxes to reflect the tax
effect of changes to pretax income at the statutory rate in effect during
1993. For purposes of the pro forma adjustment, the book and tax employee
stock ownership plan compensation charge are assumed to be the same.
(7) If the Recapitalization is consummated, United expects to recognize
nonrecurring charges of approximately $44 million relating to additional
severance benefits for employees terminated as a result of the sale of the
flight kitchens, up to $49.15 million of transaction fees and expenses
incurred by ALPA, the IAM and certain advisors in connection with the
structuring and establishment of the ESOPs, $30 million for United's
transaction fees and expenses, $17 million of compensation expense
relating to vesting the unvested restricted stock as a result of the
change in control, $21 million of payments and benefits to Mr. Greenwald
and officers who are retiring at the Effective Time, and $13 million of
compensation expense (based on an assumed Old Share price of approximately
$131 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
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.
(8) In the first quarter of 1994, United began recording certain air
transportation price adjustments, which were previously recorded as
commission expense, as adjustments to revenue. Historical operating
revenue and expense amounts have been adjusted to conform with the current
presentation.
28
<PAGE>
UNITED AIR LINES, INC. AND SUBSIDIARY COMPANIES
PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED OPERATIONS
FOR THE THREE MONTHS MARCH 31, 1994
(IN MILLIONS)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Operating revenues........................ $3,173 $ (2)(1) $3,171
Operating expenses:
Salaries and related costs............... 1,202 (111)(2)(3)
(27)(1) 1,064
Employee stock ownership plan accounting
charge.................................. 86 (4) 86
Other.................................... 2,015 22 (1) 2,037
------ ----- ------
3,217 (30) 3,187
------ ----- ------
Earnings (loss) from operations........... (44) 28 (16)
------ ----- ------
Other income (expense):
Interest, net............................ (60) (19)(5) (79)
Other, net............................... (16) 19 (6) 3
------ ----- ------
(76) -- (76)
------ ----- ------
Loss from continuing operations
before income taxes...................... (120) 28 (92)
Provision (credit) for income taxes....... (41) 11 (7) (30)
------ ----- ------
Loss from continuing operations........... $ (79) $ 17 $ (62)
====== ===== ======
</TABLE>
See accompanying notes to Pro Forma Condensed Statement of Consolidated
Operations.
29
<PAGE>
UNITED AIR LINES, INC. AND SUBSIDIARY COMPANIES
NOTES TO PRO FORMA CONDENSED
STATEMENT OF CONSOLIDATED OPERATIONS
THREE MONTHS ENDED MARCH 31, 1994
(1) United entered into an agreement to sell its U.S. flight kitchens over a
period of months beginning in December 1993 through June 1994, and an
agreement to acquire catering services for a seven year period. This
adjustment eliminates $2 million of sales revenues and $27 million of
compensation costs recorded in the first quarter of 1994 relating to the
U.S. flight kitchens that were sold, and adds estimated incremental
catering costs of $22 million.
(2) To adjust compensation expense for the pro forma effect of wage and benefit
reductions and certain work-rule changes resulting from the employee
investment that provide for wage and other compensation savings during the
approximately six year period beginning at the Effective Time. The pro
forma adjustment represents the estimated savings in the first quarter of
1994 assuming that such savings had commenced at the beginning of the prior
year. The pro forma adjustment does not include any savings related to U2.
(3) The following reconciles the labor cost savings included in the Pro Forma
Condensed Statement of Consolidated Operations to the value of the employee
investments:
<TABLE>
<CAPTION>
(MILLIONS)
<S> <C>
Pro Forma adjustment........................................... $111
Estimated compensation savings based on foregone 1994 raises... 13
Estimated benefits of U2 for three months...................... 16
Estimated additional severance for flight kitchen employees for
three months.................................................. (9)
----
Estimated three months of investments........................ $131
====
Estimated six months of investments included in 1994 analy-
sis......................................................... $262
====
</TABLE>
(4) To record non-cash compensation for shares of ESOP Preferred Stock
committed to be released to employees during the period based on the
average fair value of the ESOP Preferred Stock. For purposes of the pro
forma adjustment, the average fair value of the ESOP Preferred Stock was
assumed to be the initial 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, it 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 month after the Effective Date, additional shares of
ESOP Preferred Stock will be issued to the Qualified Trust or reserved for
issuance to the Non-Qualified Plan. 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.
30
<PAGE>
Following is a summary of the impact to the employee stock ownership plan
accounting charge of a range of fair market values:
<TABLE>
<CAPTION>
Average ESOP ESOP Accounting
Preferred Stock Charge*
Fair Value (millions)
--------------- ---------------
<S> <C>
$110 $ 79
120 86
130 93
140 100
</TABLE>
--------
* Assumes 768,000 shares committed to be released in the pro forma period
and approximately 54,000 shares used for dividends which are charged to
retained earnings. As additional shares are allocated in later years,
the ESOP accounting charge will be reduced.
The following illustrates the impact to the ESOP 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 Date. If the average price of a New Share is less
than or equal to $136, no additional shares of ESOP Preferred Stock
will be issued.
*** The additional shares will be released in a level fashion over the 69
months of the ESOP.
****Represents the increase for the quarter; subsequent increases are
dependent on changes in the fair value of the ESOP Preferred Stock.
(5) To record interest expense of $18 million on the Series A Debentures at an
annual estimated interest rate of 9.0% and on the Series B Debentures at an
annual estimated interest rate of 9.7%, and to record amortization of the
underwriting discount. The pro forma adjustment also includes foregone
interest income due to the reduction in United's average investment balance
resulting from the transaction. For purposes of the pro forma adjustment,
the interest rates on the Debentures are based on the rates set in the Plan
of Recapitalization. The actual rates will be reset prior to Closing and
any upward reset is limited to an additional 112.5 basis points. If the
reset results in the actual rate being at the maximum interest rate,
interest expense would increase by an additional $2 million for the
quarter. Further, if the Unions request prior to the date before the
Meeting on which the Reset rates are announced that the Debentures contain
a call provision, the actual rates may increase above the maximum.
(6) To reverse $19 million of nonrecurring fees and expenses relating to the
Recapitalization which were recorded in the first quarter of 1994.
(7) To adjust the provision (credit) for income taxes to reflect the tax effect
of changes to pretax income at the statutory rate in effect during the
first quarter of 1994. For purposes of the pro forma adjustment the book
and tax employee stock ownership plan compensation charge are assumed to be
the same.
31
<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) $
758 (3)
(765)(3)
8 (9) 527
Short-term investments..................... 542 542
Other...................................... 2,241 44 (2) 2,285
------- ----- -------
3,449 (95) 3,354
------- ----- -------
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 1,700
------- ----- -------
$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............................... 2,596 758 (3) 3,354
------- ----- -------
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 (765)(3)
13 (5)
4 (6) 91
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 (842) (272)
------- ----- -------
$12,196 $ (95) $12,101
======= ===== =======
</TABLE>
See the accompanying notes to Pro Forma Condensed Statement of Consolidated
Financial Position.
32
<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 offering of $382.5 million of Series A Debentures and $382.5
million of Series B Debentures and to record the distribution of proceeds
to UAL. The Debentures are being recorded at their face amount based on the
assumption that they will be priced to trade at par, less the underwriting
discount of $7 million. The actual rate on the Debentures will be reset
prior to the Effective Time and the Debentures are subject to a maximum
interest rate of 112.5 basis points above the Initial Pricing. The
underwriting agreements are expected to provide that if the offering is
consummated, the interest rate may be set above the cap in order for the
Debentures to be sold at or close to par, in which case the principal
amount of the Debentures will be reduced so that the annual interest
expense will not exceed the stated maximum which was calculated based upon
the rate cap. If the offering is not consummated and the interest rate
exceeds the cap, the 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 Qualified Trust 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. UAL 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. The actual price per share for the first ESOP Tranche
will be 1.38 times the average price of a New Share at the Effective Time.
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 average closing price of the New Shares.
Six additional ESOP Tranches will be issued to the Leveraged ESOP during the
69 months subsequent to the Effective Time, with the total shares of Class 1
ESOP Preferred Stock issued in the seven ESOP Tranches aggregating
approximately 14,000,000 shares (subject to increase, see "THE PLAN OF
RECAPITALIZATION--Establishment of ESOPs--Additional Shares). The price for
the subsequent ESOP Tranches will be as agreed between the Company and the
ESOP Trustee at the time of each sale. As the subsequent ESOP Tranches are
issued, the shares will be reported as a credit to additional capital
invested based on the fair value of the stock when such issuances occur with
a corresponding charge to "Unearned ESOP Preferred Stock."
The Unearned ESOP Preferred Stock recorded in the pro forma adjustment
together with the Unearned ESOP Preferred Stock recorded from subsequent
ESOP Tranches will be recognized as compensation expense over the
approximately six year investment period as the shares are committed to be
released. The difference between the compensation expense recorded, which
is based on the fair value of the stock during an accounting period, and
the recorded cost of the unearned ESOP Preferred Stock will be recorded to
ESOP capital.
ESOP capital will also be recorded over the approximately six year
investment period as the shares of UAL's Class 2 ESOP Preferred Stock are
committed to be contributed to the Non-Leveraged Qualified ESOP and
credited to employees pursuant to the Supplemental ESOP with the offsetting
entry being to
33
<PAGE>
compensation expense. The number of shares of Class 2 ESOP Preferred Stock
that will be issued will be equal to 17,675,345 less the number of shares
of Class 1 ESOP Preferred Stock that will be sold to the Qualified ESOP.
(5) To account for the cashless exercise of options in the event of the
Recapitalization. (Amount of the entry is based on an assumed Old Share
price at the Effective Time of approximately $131 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).
34
<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 limited 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.
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.
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.
ROGER D. HALL, 55 (ALPA DIRECTOR). Chairman, United Airlines Pilots Master
Executive Council, Air Line Pilots Association, International and Captain B
737-200, 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 B 737-200
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.
35
<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). Vice President, International Association
of Machinists and Aerospace Workers. Mr. Peterpaul has not previously served on
the Board. Mr. Peterpaul will retire 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 Executive Officer, and Lawrence M. Nagin, Executive Vice
President--Corporate Affairs and General Counsel, have 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
36
<PAGE>
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.
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.
The term of office for all officers will expire at the 1994 Annual Meeting of
Stockholders.
37
<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 this Prospectus is
a part. The summary of terms of the Debentures contained in this Prospectus
does not purport to be complete and is subject to, and is qualified in its
entirety by, the provisions of the Indenture, including the definitions
therein of certain capitalized terms used in this Prospectus. 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. [Although United intends to apply to list the Debentures on the
New York Stock Exchange, there can be no assurance that the application to
list the Debentures will be granted or, if listed, that any trading market in
the Debentures will develop.]
Interest on the Debentures will be paid semi-annually on each and
beginning in , 1994 to holders of record on the record date for
such payment on and , respectively, at the rates shown on the cover
of this Prospectus. The Series A Debentures will mature on , 2004. The
Series B Debentures will mature on , 2014. The Debentures will bear
interest from the date of their original issuance or the most recent interest
payment date from which interest has been paid.
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. As of March 31, 1994, senior indebtedness of
United on a consolidated basis aggregated approximately $3.7 billion.
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 either or both 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.)
38
<PAGE>
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.)
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.)
39
<PAGE>
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 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
40
<PAGE>
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 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.
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.
41
<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 the Underwriters
named below, and each of the Underwriters, for whom ,
, and are acting as
representatives (the "Representatives"), 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
DEBENTURES DEBENTURES
UNDERWRITER ---------------- ----------------
<S> <C> <C>
$ $
--------- --------
Total..................................... $ $
========= ========
</TABLE>
In the Purchase Agreement, the several Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all the Debentures
offered hereby if any of the Debentures are purchased. 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 Representatives of the Underwriters have advised United that they propose
initially to offer the Debentures to the public at the public offering price
set forth on the cover page of this Prospectus, and to certain dealers at such
price less a concession not in excess of % of the principal amount thereof,
provided, however, that such concession shall not be in excess of % of the
principal amount thereof to certain institutions. The Underwriters may allow,
and such dealers may reallow, a discount not in excess of % of the principal
amount thereof on sales to certain other dealers, provided, however, that such
discount shall not be in excess of % of the principal amount thereof for
sales to certain institutions. After the initial public offering, the public
offering price, concession and discount 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 of their affiliates have engaged, and may in the future engage, in
transactions with United.
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 report with respect
thereto, and are incorporated by reference herein in reliance upon the
authority of said firm as experts in giving said report. Reference is made to
said report 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.
42
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY UNITED OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE DEBENTURES IN ANY JU-
RISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS 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 OR IN THE AF-
FAIRS OF UNITED SINCE THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information...................................................... 4
Incorporation of Certain Documents by Reference............................ 4
Prospectus Summary......................................................... 5
The Company................................................................ 7
The Recapitalization....................................................... 9
Certain Risk Factors....................................................... 13
Use of Proceeds............................................................ 20
Capitalization............................................................. 21
Selected Consolidated Financial and Operating Information.................. 22
Unaudited Pro Forma Financial Information.................................. 23
Management................................................................. 29
Description of Securities.................................................. 32
Underwriting............................................................... 36
Experts.................................................................... 36
Legal Opinions............................................................. 36
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$765,000,000
LOGO UNITED AIRLINES
$382,500,000
% SERIES A DEBENTURES DUE 2004
$382,500,000
% SERIES B DEBENTURES DUE 2014
---------------
PROSPECTUS
---------------
, 1994
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14 OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of Delaware empowers the
Registrant to indemnify, subject to the standards herein prescribed, any person
in connection with any action, suit or proceeding brought or threatened by
reason of the fact that such person is or was a director, officer, employee or
agent of the Registrant or was serving as such with respect to another
corporation or other entity at the request of the Registrant. Article Sixth (b)
of the Registrant's Restated Certificate of Incorporation provides that each
person who was or is made a party to (or is threatened to be made a party to)
or is otherwise involved in any action, suit or proceeding by reason of the
fact that such person is or was a director or officer of the Registrant shall
be indemnified and held harmless by the Registrant to the fullest extent
authorized by the General Corporation Law of Delaware against all expense,
liability and loss (including, without limitation, attorneys' fees, judgments,
fines, ERISA excise taxes or penalties and amounts paid or to be paid in
settlement) reasonably incurred by such person in connection therewith. The
rights conferred by Article Sixth (b) are contractual rights and include the
right to be paid by the Registrant the expenses incurred in defending such
action, suit or proceeding in advance of the final disposition thereof.
Article SIXTH (a) of the Registrant's Restated Certificate of Incorporation
provides that the Registrant's directors will not be personally liable to the
Registrant or its stockholders for monetary damages resulting from breaches of
their fiduciary duty as directors except for liability (a) for any breach of
the duty of loyalty to the Registrant or its stockholders, (b) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) under Section 174 of the General Corporation Law
of Delaware, which makes directors liable for unlawful dividends or unlawful
stock repurchases or redemptions or (d) for any transaction from which
directors derive improper personal benefit.
The Registrant maintains directors and officers liability insurance covering
all directors and officers of the Registrants against claims arising out of the
performance of their duties.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*1.1 Form of Purchase Agreement
2.1 Agreement and Plan of Recapitalization dated as of March 25, 1994,
among UAL, Air Line Pilots Association, International UAL-MEC and
the International Association of Machinists and Aerospace Workers,
including all schedules and exhibits thereto (filed as Exhibit
10.1 to UAL's Form 8-K dated March 28, 1994 and incorporated
herein by reference).
2.2 Letter agreement dated as of March 25, 1994, among UAL, Air Line
Pilots Association, International UAL-MEC and the International
Association of Machinists and Aerospace Workers (filed as Exhibit
10.2 to UAL's Form 8-K dated March 28, 1994 and incorporated
herein by reference).
2.3 Letter agreement dated as of March 25, 1994, between UAL and State
Street Bank and Trust Company (filed as Exhibit 10.3 to UAL's Form
8-K dated March 28, 1994 and incorporated herein by reference).
4.1 Indenture dated as of July 1, 1991 between United and The Bank of
New York providing for the Issuance of Senior Debt Securities in
Series (filed as Exhibit 4(a) to United's Registration Statement
on Form S-3 (No. 33-57192) and incorporated herein by reference).
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
4.2 Form of Officer's Certificate relating to United's Series A
Debentures due 2004 and Series B Debentures due 2014 (filed as
Schedule 1.3 to Exhibit 10.1 of UAL's Form 8-K dated March 28, 1994
and incorporated herein by reference).
*5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom as to the legality
of the Securities dated as of June , 1994.
*8.1 Tax Opinion of Skadden, Arps, Slate, Meagher & Flom dated as of June
, 1994.
12.1 United's Calculation of Pro Forma Ratio of Earnings to Fixed
Charges.
23.1 Consent of Arthur Andersen & Co. dated as of May 27, 1994.
23.2 Consent of KPMG Peat Marwick dated as of May 26, 1994.
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom, included as part of
Exhibit 5.1.
23.4 Consent of John F. McGillicuddy.
23.5 Consent of James J. O'Connor.
23.6 Consent of Paul E. Tierney.
23.7 Consent of Gerald Greenwald.
23.8 Consent of Duane D. Fitzgerald.
23.9 Consent of Richard D. McCormick.
23.10 Consent of John K. Van de Kamp.
23.11 Consent of Paul A. Volcker.
23.12 Consent of Joseph V. Vittoria.
*23.13 Consent of John Peterpaul.
23.14 Consent of Roger D. Hall.
23.15 Consent of American Appraisal Associates, Inc.
25.1 Form of T-1 Statement of Eligibility under the Trust Indenture Act
of 1939 of The Bank of New York with respect to the Series A
Debentures (filed as Exhibit 25.1 to Amendment No. 2 to UAL's and
United's Registration Statement on Form S-4 (No. 33-53107) and
incorporated herein by reference).
25.2 Form of T-1 Statement of Eligibility under the Trust Indenture Act
of 1939 of The Bank of New York with respect to the Series B
Debentures (filed as Exhibit 25.2 to Amendment No. 2 to UAL's and
United's Registration Statement on Form S-4 (No. 33-53107) and
incorporated herein by reference).
99.1 Opinion of American Appraisal Associates, Inc. dated as of March 14,
1994 (filed as schedule 5.9 to Exhibit 10.1 to UAL's Form 8-K dated
March 28, 1994 and incorporated herein by reference).
</TABLE>
* To be filed by amendment.
II-2
<PAGE>
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the Registration Statement shall be deemed to be a
new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT CERTIFIES
THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE REQUIREMENTS
FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN ELK
GROVE TOWNSHIP, ILLINOIS, ON THE 26TH DAY OF MAY, 1994.
United Air Lines, Inc.
/s/ John C. Pope
By___________________________________
JOHN C. POPE PRESIDENT AND CHIEF
OPERATING OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES NOTED AND
ON THE DATES INDICATED.
THE UNDERSIGNED DIRECTORS AND OFFICERS OF UNITED AIR LINES, INC. HEREBY
APPOINT STEPHEN M. WOLF AND JOHN C. POPE, EACH OF THEM, AS ATTORNEYS FOR THE
UNDERSIGNED, WITH FULL POWER OF SUBSTITUTION FOR AND IN THE NAME, PLACE AND
STEAD OF THE UNDERSIGNED, TO SIGN AND FILE WITH THE COMMISSION ANY AND ALL
AMENDMENTS AND EXHIBITS TO THIS REGISTRATION STATEMENT ON FORM S-3, WITH FULL
POWER AND AUTHORITY TO DO AND PERFORM ANY AND ALL ACTS AND THINGS WHATSOEVER
REQUISITE AND NECESSARY OR DESIRABLE IN CONNECTION THEREWITH.
SIGNATURE TITLE DATE
/s/ Stephen M. Wolf Director, and May 26, 1994
- ------------------------------------- Chairman and Chief
STEPHEN M. WOLF Executive Officer
(principal
executive officer)
/s/ John C. Pope Director, President May 26, 1994
- ------------------------------------- and Chief Operating
JOHN C. POPE Officer (principal
financial officer)
/s/ Lawrence M. Nagin Director, and May 26, 1994
- ------------------------------------- Executive Vice
LAWRENCE M. NAGIN President--
Corporate Affairs
and General Counsel
/s/ James M. Guyette Director, and May 26, 1994
- ------------------------------------- Executive Vice
JAMES M. GUYETTE President--
Marketing and
Planning
/s/ Paul G. George Director, and Senior May 26, 1994
- ------------------------------------- Vice President--
PAUL G. GEORGE Human Resources
/s/ Joseph R. O'Gorman, Jr. Director, and May 26, 1994
- ------------------------------------- Executive Vice
JOSEPH R. O'GORMAN, JR. President--
Operations
/s/ Frederic F. Brace Vice President-- May 26, 1994
- ------------------------------------- Corporate
FREDERIC F. BRACE Development and
Controller
(principal
accounting officer)
II-4
<PAGE>
GRAPHICS APPENDIX LIST
PAGE WHERE
GRAPHIC
APPEARS DESCRIPTION OF GRAPHIC OR CROSS REFERENCE
- --------------------------------------------------------------------------------
TX-2 United Airlines route map.
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
*1.1 Purchase Agreement
2.1 Agreement and Plan of Recapitalization dated as of March 25,
1994, among UAL, Air Line Pilots Association, International
UAL-MEC and the International Association of Machinists and
Aerospace Workers, including all schedules and exhibits
thereto (filed as Exhibit 10.1 to UAL's Form 8-K dated March
28, 1994 and incorporated herein by reference).
2.2 Letter agreement dated as of March 25, 1994, among UAL, Air
Line Pilots Association, International UAL-MEC and the
International Association of Machinists and Aerospace Workers
(filed as Exhibit 10.2 to UAL's Form 8-K dated March 28, 1994
and incorporated herein by reference).
2.3 Letter agreement dated as of March 25, 1994, between UAL and
State Street Bank and Trust Company (filed as Exhibit 10.3 to
UAL's Form 8-K dated March 28, 1994 and incorporated herein by
reference).
4.1 Indenture dated as of July 1, 1991 between United and The Bank
of New York providing for the Issuance of Senior Debt
Securities in Series (filed as Exhibit 4(a) to United's
Registration Statement on Form S-3 (No. 33-57192) and
incorporated herein by reference).
4.2 Form of Officers' Certificate relating to United's Series A
Debentures due 2004 and Series B Debentures due 2014 (filed as
Schedule 1.3 to Exhibit 10.1 of UAL's Form 8-K dated March 28,
1994 and incorporated herein by reference).
*5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom as to the
legality of the Securities dated as of June , 1994.
*8.1 Tax Opinion of Skadden, Arps, Slate, Meagher & Flom dated as of
June , 1994.
12.1 United's Calculation of Pro Forma Ratio of Earnings to Fixed
Charges.
23.1 Consent of Arthur Andersen & Co. dated as of May 27, 1994.
23.2 Consent of KPMG Peat Marwick dated as of May 26, 1994.
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom, included as
part of Exhibit 5.1.
23.4 Consent of John F. McGillicuddy.
23.5 Consent of James T. O'Connor.
23.6 Consent of Paul E. Tierney.
23.7 Consent of Gerald Greenwald.
23.8 Consent of Duane D. Fitzgerald.
23.9 Consent of Richard D. McCormick.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
23.10 Consent of John K. Van de Kamp.
23.11 Consent of Paul A. Volcker.
23.12 Consent of Joseph V. Vittoria.
*23.13 Consent of John Peterpaul.
23.14 Consent of Roger D. Hall
23.15 Consent of American Appraisal Associates, Inc.
25.1 Form of T-1 Statement of Eligibility under the Trust Indenture
Act of 1939 of The Bank of New York with respect to the Series
A Debentures (filed as Exhibit 25.1 to Amendment No. 2 to
UAL's and United's Registration Statement on Form S-4 (No. 33-
53107) and incorporated herein by reference).
25.2 Form of T-1 Statement of Eligibility under the Trust Indenture
Act of 1939 of The Bank of New York with respect to the Series
B Debentures (filed as Exhibit 25.2 to Amendment No. 2 to
UAL's and United's Registration Statement on Form S-4 (No. 33-
53107) and incorporated herein by reference).
99.1 Opinion of American Appraisal Associates, Inc. dated as of
March 14, 1994 (filed as Schedule 5.9 to Exhibit 10.1 to UAL's
Form 8-K dated March 28, 1994 and incorporated herein by
reference).
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
EXHIBIT 12.1
UNITED AIR LINES, INC. AND SUBSIDIARY COMPANIES
CALCULATION OF PRO FORMA RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
TWELVE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, 1993 MARCH 31, 1994
------------------- ------------------
<S> <C> <C>
Earnings:
Earnings (loss) before income taxes... $ (12) $(92)
Fixed charges, from below............. 1,145 272
Interest capitalized.................. (51) (10)
------ ----
Earnings............................ $1,082 $170
====== ====
Fixed Charges:
Interest expense...................... $ 420 $ 99
Portion of rental expense
representative of the interest
factor............................... 725 173
------ ----
Fixed charges....................... $1,145 $272
====== ====
Pro forma ratio of earnings to fixed
charges................................ (a) (a)
====== ====
</TABLE>
- --------
(a) Earnings were inadequate to cover fixed charges by $63 million for the
twelve months ended December 31, 1993 and $102 million for the three months
ended March 31, 1994.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated February 23, 1994,
included in the United Air Lines, Inc. Form 10-K for the year ended December
31, 1993, and to all references to our firm included in this registration
statement.
Arthur Andersen & Co.
Chicago, Illinois
May 27, 1994
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
THE BOARD OF DIRECTORS
GALILEO INTERNATIONAL PARTNERSHIP:
We consent to incorporation by reference in this registration statement on
Form S-3 of United Air Lines, Inc. of our reports dated February 23, 1994 on
Covia Partnership for the period January 1, 1993 to September 15, 1993 and
Galileo International Partnership for the period September 16, 1993 to December
31, 1993, which reports appears in the December 31, 1993 annual report on Form
10-K of United Air Lines, Inc.
KPMG Peat Marwick
Chicago, Illinois
May 26, 1994
<PAGE>
EXHIBIT 23.4
CONSENT
I consent to being named in the registration statements and amendments
thereto being filed with the Securities and Exchange Commission by UAL
Corporation and United Air Lines, Inc. in connection with the Employee
Investment Transaction as a person about to become a director of UAL
Corporation.
/s/ John F. McGillicuddy
____________________________________
John F. McGillicuddy
Dated: May 25, 1994
<PAGE>
EXHIBIT 23.5
CONSENT
I consent to being named in the registration statements and amendments
thereto being filed with the Securities and Exchange Commission by UAL
Corporation and United Air Lines, Inc. in connection with the Employee
Investment Transaction as a person about to become a director of UAL
Corporation.
/s/ James J. O'Connor
____________________________________
James J. O'Connor
Dated: May 24, 1994
<PAGE>
EXHIBIT 23.6
CONSENT
I consent to being named in the registration statements and amendments
thereto being filed with the Securities and Exchange Commission by UAL
Corporation and United Air Lines, Inc. in connection with the Employee
Investment Transaction as a person about to become a director of UAL
Corporation.
/s/ Paul E. Tierney
____________________________________
Paul E. Tierney
Dated: May 24, 1994
<PAGE>
EXHIBIT 23.7
CONSENT
I consent to being named in the registration statements and amendments
thereto being filed with the Securities and Exchange Commission by UAL
Corporation and United Air Lines, Inc. in connection with the Employee
Investment Transaction as a person about to become a director of UAL
Corporation.
/s/ Gerald Greenwald
____________________________________
Gerald Greenwald
Dated: May 24, 1994
<PAGE>
EXHIBIT 23.8
CONSENT
I consent to being named in the registration statements and amendments
thereto being filed with the Securities and Exchange Commission by UAL
Corporation and United Air Lines, Inc. in connection with the Employee
Investment Transaction as a person about to become a director of UAL
Corporation.
/s/ Duane D. Fitzgerald
____________________________________
Duane D. Fitzgerald
Dated: May 24 , 1994
<PAGE>
EXHIBIT 23.9
CONSENT
I consent to being named in the registration statements and amendments
thereto being filed with the Securities and Exchange Commission by UAL
Corporation and United Air Lines, Inc. in connection with the Employee
Investment Transaction as a person about to become a director of UAL
Corporation.
/s/ Richard D. McCormick
____________________________________
Richard D. McCormick
Dated: May 24, 1994
<PAGE>
EXHIBIT 23.10
CONSENT
I consent to being named in the registration statements and amendments
thereto being filed with the Securities and Exchange Commission by UAL
Corporation and United Air Lines, Inc. in connection with the Employee
Investment Transaction as a person about to become a director of UAL
Corporation.
/s/ John K. Van de Kamp
____________________________________
John K. Van de Kamp
Dated: May 24, 1994
<PAGE>
EXHIBIT 23.11
CONSENT
I consent to being named in the registration statements and amendments
thereto being filed with the Securities and Exchange Commission by UAL
Corporation and United Air Lines, Inc. in connection with the Employee
Investment Transaction as a person about to become a director of UAL
Corporation.
/s/ Paul A. Volcker
____________________________________
Paul A. Volcker
Dated: May 24, 1994
<PAGE>
EXHIBIT 23.12
CONSENT
I consent to being named in the registration statements and amendments
thereto being filed with the Securities and Exchange Commission by UAL
Corporation and United Air Lines, Inc. in connection with the Employee
Investment Transaction as a person about to become a director of UAL
Corporation.
/s/ Joseph V. Vittoria
____________________________________
Joseph V. Vittoria
Dated: May 24, 1994
<PAGE>
EXHIBIT 23.14
CONSENT
I consent to being named in the registration statements and amendments
thereto being filed with the Securities and Exchange Commission by UAL
Corporation and United Air Lines, Inc. in connection with the Employee
Investment Transaction as a person about to become a director of UAL
Corporation.
/s/ Roger D. Hall
____________________________________
Roger D. Hall
Dated: May 25, 1994
<PAGE>
EXHIBIT 23.15
CONSENT OF APPRAISER
We hereby consent to the references made to us by United Air Lines, Inc.,
under the caption "CERTAIN RISK FACTORS--Fraudulent Conveyance" in the
Prospectus constituting a part of this Registration Statement on Form S-3. In
addition, we consent to the filing of our appraisal report referred to therein
as an exhibit to the Registration Statement. In giving such consent, we do not
thereby admit that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the
rules and regulations of the Securities and Exchange Commission thereunder.
AMERICAN APPRAISAL ASSOCIATES, INC.
Ronald M. Goergen
By: _____________________________
Name: Ronald M. Goergen
Title: President
Milwaukee, Wisconsin
Date: May 26, 1994
