SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1994 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission File No. 1-6033
UAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-2675207
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Location: 1200 Algonquin Road, Elk Grove Township, Illinois 60007
Mailing Address: P. O. Box 66919, Chicago, Illinois 60666
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (708) 952-4000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock ($.01 par value) New York, Chicago and
Pacific Stock Exchanges
Preferred Stock Purchase Rights New York, Chicago and
Pacific Stock Exchanges
Depositary Shares representing
interests in Registrant's Series
B Preferred Stock, without par value New York Stock Exchange
6-3/8% Convertible Subordinated
Debentures due 2025 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.[ ]
The number of shares of common stock outstanding as of March 1, 1995
was 12,434,865. The aggregate market value of voting stock held by
non-affiliates of the Registrant was $1,178,423,998 as of
March 1, 1995.
Part III information shall be incorporated by reference from the
Registrant's definitive proxy statement for its 1995 Annual Meeting
of Shareholders or shall be added hereto by an amendment to this Form
10-K, in either case within the time required by the instructions to
Form 10-K.
PART I
ITEM 1. BUSINESS.
Introduction
UAL Corporation ("UAL" or the "Company") was incorporated
under the laws of the State of Delaware on December 30, 1968.
The world headquarters of the Company are located at 1200
Algonquin Road, Elk Grove Township, Illinois 60007. The
Company's mailing address is P.O. Box 66919, Chicago, Illinois
60666. The telephone number for the Company is (708) 952-4000.
The Company is a holding company and its principal
subsidiary is United Air Lines, Inc., a Delaware corporation
("United"), which is wholly-owned. United accounted for
virtually all of the Company's revenues and expenses in 1994.
United is a major commercial air transportation company.
Employee Investment Transaction and Recapitalization
On July 12, 1994, the stockholders of the Company approved
and adopted the Amended and Restated Agreement and Plan of
Recapitalization, dated as of March 25, 1994, among UAL, the Air
Line Pilots Association, International and the International
Association of Machinists and Aerospace Workers (the
"Recapitalization"), that provides an approximately 55% equity
and voting interest in the Company to certain employees of United
in exchange for wage concessions and work-rule changes. The
employees' equity interest will be allocated to individual
employee accounts through the year 2000 under Employee Stock
Ownership Plans ("ESOPs") which were created as a part of the
Recapitalization. The entire 55% ESOP voting interest generally
will be voted by the ESOP trustee at the direction of, and on
behalf of, the employees participating in the ESOPs. In
connection with the Recapitalization, holders of the Company's
old common stock received approximately $2.1 billion in cash and
the remaining 45% of the equity in the form of Common Stock.
Each share of old common stock was converted into one-half share
of Common Stock and cash in lieu of fractional shares plus a cash
payment of $84.81. In connection with the Recapitalization,
United issued $370 million of 10.67% debentures due in 2004 and
$371 million of 11.21% debentures due 2014 and the Company issued
Series B 12-1/4% preferred stock with an aggregate liquidation
preference of $410 million. In addition, in connection with the
consummation of the plan of Recapitalization, the Rights
Agreement was amended to provide, among other things, for one
right to purchase shares of the Company's Series C Junior
Participating Preferred Stock to be attached to and issued with
each share of Common Stock, including shares of Common Stock into
which the preferred stock held in the ESOPs is convertible.
Airline Operations
United has been engaged in the air transportation of per-
sons, property and mail since 1934, and certain of its
predecessors began operations as early as 1926. United is the
world's largest employee-owned airline and one of the world's
largest airlines as measured by operating revenues, revenue
passengers and revenue passenger miles flown. At the end of
1994, United served 152 airports in the United States and 29
foreign countries. During 1994, United averaged 2,004 departures
daily, flew a total of 108 billion revenue passenger miles, and
carried an average of 203,400 passengers per day.
United provides its domestic and international service
principally through a system of hub airports at major cities.
Each hub provides United flights to a network of spoke
destinations as well as flights to the other United hubs. This
arrangement permits travelers to fly from point of origin to more
destinations without changing carriers. Currently, United flies
from four U.S. hubs - Chicago-O'Hare International, Denver
International, San Francisco International, and Dulles
International near Washington, D.C. - and is the principal
carrier at each of these hubs. United also has a Pacific hub
operation at Tokyo Narita Airport. During the last several
years, United has strengthened the revenue-generating capability
of the hub airports by: (1) adding new spokes (routes to new
cities and airports); (2) adding frequency on previously operated
route segments; and (3) entering into marketing agreements with
smaller U.S. air carriers which serve less populated destinations
and with foreign carriers which serve destinations that United
could not serve itself for economic or regulatory reasons.
United has developed a route system covering North America,
Asia, the South Pacific, Europe and Latin America.
Within North America, East-West traffic is served by nonstop
transcontinental flights and by the hubs at Chicago O'Hare and
Denver, while North-South traffic on the West Coast is served by
the San Francisco hub.
In October 1994, United launched a new service designed to
be cost competitive on routes under 750 miles. Named "Shuttle by
United", this service achieves lower costs through special work
rules and wage rates for pilots, high station and aircraft
utilization and minimal service amenities. As of February 1995,
Shuttle by United was operating daily 342 flights on 15 routes
between 10 West Coast cities and, as of April 1995, expects to be
operating 378 flights on 16 routes between 11 cities.
United has a marketing program in North America with
selected independent regional air carriers, known as the United
Express program, which allows United to increase the number of
destinations served by its hub-and-spoke network. Six regional
carriers currently participate in the United Express marketing
program providing connecting schedules to ten major cities also
served by United.
United also has marketing agreements that provide for
sharing of the "UA" code on certain routes with three other
independent domestic air carriers. Code-sharing allows an
airline to expand the marketing of its service brand by using its
two-letter designator code in computer reservations systems on a
connecting flight operated by another airline on the itinerary.
Also, North American traffic is served by code-sharing agreements
United has with two independent Caribbean air carriers.
Asian traffic is served from six U.S. cities via the Tokyo
hub and with nonstop flights from San Francisco to Hong Kong,
Osaka, Seoul and Taipei; from Honolulu to Osaka; and from Los
Angeles to Hong Kong and Osaka. South Pacific traffic to Sydney
is served from Los Angeles and San Francisco, while traffic to
Auckland and Melbourne is served from Los Angeles. In December
1994, service began from Guam and Saipan to Osaka and from Guam
to Saipan, further strengthening United's presence at Osaka's new
Kansai International Airport which opened September 4, 1994. In
addition, United plans to initiate service between the U.S. and
Ho Chi Minh City via an intermediate point as soon as government
approvals are received. United also has code-sharing agreements
with two independent South Pacific air carriers. Based on
reports filed with the Department of Transportation, United was
the leading U.S. carrier in the Pacific in 1994 in terms of
revenue passenger miles and available seat miles. During 1994,
United's Pacific Division accounted for 22% of United's revenues.
Service between the U.S. and Europe is provided by: flights
from six U.S. cities (five after Seattle service is discontinued
in April 1995) to London, with connecting service at
London to Amsterdam and Brussels; flights from four U.S. cities
to Paris; nonstop service from Dulles to Amsterdam, Brussels,
Frankfurt, Madrid, Milan/Rome and Zurich; and nonstop service
from Chicago to Frankfurt. European traffic is also served by
United's code-sharing agreements with three independent air
carriers, including Germany's flag carrier, Lufthansa.
United's comprehensive marketing agreement with Lufthansa
began during 1994. This worldwide alliance involves, among other
things, coordination of scheduling, ground handling, frequent
flyer programs and other passenger services, and allows, among
other things, code-sharing between the two airlines on
Transatlantic route segments, and permits United to code-share on
Lufthansa flights in certain markets beyond Lufthansa's European
gateways. Similarly, the agreement permits Lufthansa to code-
share on United flights to certain cities in the U.S. As of
February 1995, the list of markets includes 43 city pairs in
which United places its code on flight segments operated by
Lufthansa and Lufthansa places its code on 30 flight segments
operated by United. Code-share segments include North America,
Europe, Africa and the Middle East.
Service between the U.S. and Latin America is provided by
flights to eleven Latin American cities in nine countries from a
number of cities in the U.S. Eight Latin American cities are
served nonstop from Miami, two nonstop from Los Angeles, and
three from New York-Kennedy. In addition, United expects to
commence daily nonstop service in the summer of 1995 to Belo
Horizonte, Brazil from Miami. United has code-sharing agreements
with two independent air carriers in this region.
Operating revenues attributed to United's foreign operations
were approximately $4.9 billion in 1994, $4.5 billion in 1993 and
$3.9 billion in 1992.
Selected Operating Statistics
The following table sets forth certain selected operating
data for United:
Year Ended December 31
1994 1993 1992 1991 1990
Revenue Aircraft Miles
(millions)(a) 776 756 695 635 597
Revenue Aircraft
Departures 731,284 746,665 721,504 691,402 654,555
Available Seat Miles
(millions)(b) 152,193 150,728 137,491 124,100 114,995
Revenue Passenger Miles
(millions)(c) 108,299 101,258 92,690 82,290 76,137
Revenue Passengers
(thousands) 74,241 69,814 66,692 62,003 57,598
Average Passenger Journey
(miles) 1,459 1,450 1,390 1,327 1,322
Average Flight Length
(miles) 1,062 1,013 964 918 912
Passenger Load Factor(d) 71.2% 67.2% 67.4% 66.3% 66.2%
Break-even Load Factor(e) 68.2% 65.5% 70.6% 69.7% 66.5%
Average Yield Per Revenue
Passenger Mile
(in cents)(f) 11.3 11.6 11.3 11.5 11.8
Cost Per Available Seat
Mile (in cents)(g) 8.8 8.5 8.9 9.0 9.0
Average Fare Per Revenue
Passenger $165.61 $169.00 $157.17 $153.17 $156.12
Average Daily Utilization
of each Aircraft
(hours:minutes)(h) 8:28 8:30 8:19 8:13 8:14
(a) "Revenue aircraft miles" means the number of miles flown in
revenue producing service.
(b) "Available seat miles" represents the number of seats
available for passengers multiplied by the number of miles those
seats are flown.
(c) "Revenue passenger miles" represents the number of miles
flown by revenue passengers.
(d) "Passenger load factor" represents revenue passenger miles
divided by available seat miles.
(e) "Break-even load factor" represents the number of revenue
passenger miles at which operating earnings would have been zero
(based on the actual average yield) divided by available seat
miles.
(f) "Average yield per revenue passenger mile" represents the
average revenue received for each mile a revenue passenger is
carried.
(g) "Cost per available seat mile" represents operating expenses
divided by available seat miles.
(h) "Average daily utilization of each aircraft" means the
average air hours flown in service per day per aircraft for the
total fleet of aircraft.
Industry Conditions
Seasonal and Other Factors. The Company's results of
operations for interim periods are not necessarily indicative of
those for an entire year, since the air travel business is
subject to seasonal fluctuations. United's first and fourth
quarter results normally are affected by reduced travel demand in
the fall and winter, and United's operations, particularly at its
O'Hare and Denver hubs, are often affected adversely by winter
weather. In the past, these fluctuations have generally resulted
in better operating results for United and, thus, the Company, in
the second and third quarters. See Item 8, "Financial Statements
and Supplementary Data," for summarized unaudited financial data
for the four quarters of 1994 and 1993.
The results of operations in the air travel business have
also fluctuated significantly in the past in response to general
economic conditions. In addition, the airline business is
characterized by a high degree of operating leverage. As a
result, the economic environment and small fluctuations in
United's yield per revenue passenger mile and cost per available
seat mile can have a significant impact on operating results.
The Company anticipates that seasonal factors and general
economic conditions, in addition to industrywide fare levels,
labor and fuel costs, the competition from other airlines,
international government policies, and other factors, will
continue to impact United's operations.
Competition and Fares. The airline industry is highly
competitive. In domestic markets, new and existing carriers are
free to initiate service on any route. United faces competition
from other carriers on virtually every route it serves. In
United's domestic markets, these competitors include all of the
other major U.S. airlines as well as smaller carriers.
United's marketing strategy is driven by four principal
competitive factors: schedule convenience, overall customer
service, frequent flyer programs and price. United seeks to
attract travelers through convenient scheduling, high quality
service, frequent flyer programs designed to reward customer
loyalty, and competitive pricing.
During the past few years, certain domestic carriers
reorganized their operating cost structures. These carriers,
together with more recent entrants to the airline business, and a
select number of established domestic carriers, have had cost
structures which were significantly lower than United's, and
therefore may have been able to operate profitably at lower fare
levels. Furthermore, certain carriers in the short haul domestic
markets have been able to compete against major air carriers,
including United, by operating without as great a reliance upon a
hub-and-spoke system. These airlines operate efficiently through
strategies such as rapid turnaround of flights on a point-to-
point basis. United's response to these competitive pressures
has been the consummation of the employee investment transaction
which allowed United to lower its labor costs and to introduce
the Shuttle by United, a low cost point-to-point service
operating in the West Coast.
From time to time, excess aircraft capacity and other
factors such as the cash needs of financially distressed carriers
induce airlines to engage in "fare wars." Such factors can have
a material adverse impact on the Company's revenues. The Company
maintains yield and inventory management programs designed to
manage the number of seats offered in various fare categories in
order to enhance the effectiveness of fare promotions and
maximize revenue production on each flight.
In its international markets, United competes with major
U.S. carriers as well as investor-owned, government-subsidized
and national flag carriers of foreign countries. Competition in
certain international markets is subject to varying degrees of
governmental regulation (see "Government Regulation"), and in
certain instances United's foreign competitors enjoy subsidies
and other forms of governmental support which are not available
to U.S. carriers.
United and other U.S. carriers have certain advantages over
foreign air carriers in their ability to generate U.S.-origin-
destination traffic from their integrated domestic route systems.
In addition, foreign carriers are prohibited by law from carrying
local passengers between two points in the United States.
However, the U.S. carriers are in many cases constrained
from carrying passengers to points beyond designated gateway
cities in foreign countries due to limitations in the bilateral
air service agreements with such countries or restrictions
imposed unilaterally by the foreign governments. To the extent
that foreign competitors can offer more connecting services to
points beyond these gateway cities, they have an advantage in
attracting traffic moving between these foreign points and in
attracting traffic moving between such cities and points in the
United States. Also, several foreign air carriers have sought
and obtained access to the U.S. domestic market through
substantial equity investments and code sharing arrangements with
U.S. airlines. The comprehensive marketing agreement with
Lufthansa has enhanced the Company's competitive position in
international markets.
To improve profitability, in late 1994 United announced
discontinuation of all service to 15 destinations. This included
three European, seven domestic and five Latin America
destinations.
No material part of the business of United, or of the
Company and its subsidiaries, is dependent upon a single customer
or very few customers. Consequently, the loss of the few largest
customers of United, or of the Company, would not have a material
adverse effect on the Company.
Airport Access. United's operations at its principal
domestic hub, Chicago-O'Hare International Airport ("O'Hare"), as
well as at three other airports, Kennedy, New York LaGuardia
("LaGuardia"), and Washington National ("National"), are limited
by the "high density traffic airports rule" administered by the
Federal Aviation Administration ("FAA"). Under this rule, take-
off and landing rights ("slots") required for the conduct of
domestic flight operations may be bought, sold or traded. As of
December 31, 1994, United held 754 domestic air carrier slots at
O'Hare, 34 at National, 62 at LaGuardia and 11 at Kennedy. In
addition, Air Wisconsin, Inc., an indirect wholly-owned
subsidiary of the Company, held or owned the beneficial interest
in 38 air carrier slots and 118 commuter slots at O'Hare which
are either operated by United or leased to United Express
carriers serving O'Hare. Under the high density rule carriers
are required to relinquish slots to the FAA for reallocation if
they fail to meet certain minimum use standards.
Slots for international services at O'Hare are allocated by
the FAA seasonally to both U.S. and foreign carriers based upon
the carriers' historic operations and requests for additional
capacity. The FAA holds a certain number of slots in reserve for
this purpose. Slots over that number are provided through the
withdrawal of domestic slots from carriers at O'Hare and the
reallocation of those slots for international operations of
requesting carriers. The FAA prohibits domestic carriers with
more than 100 slots from using another carrier's slots for its
own international operations. United has lost as many as 33
daily slots - that is, slots that were being used by United three
days or more per week - during a single operating season.
Congress capped for fiscal year 1995 the number of slots
that could be withdrawn from U.S. carriers for allocation to
international operations. United currently has a sufficient
number and distribution of slots it holds at airports subject to
the high density rule to support its current operations. There
can be no assurance, however, that additional slots sufficient to
accommodate otherwise desirable service expansions will be
available to United on satisfactory terms in the future. The FAA
is preparing a comprehensive review of its slot rules, and
rulemaking proceedings proposing changes to the rules are
expected to follow. If an alternative to the current system were
to be adopted, no assurance can be given that such alternative
would preserve United's investment in slots already acquired or
that slots adequate for future operations would be available.
United currently has a sufficient number of leased gates and
other airport facilities at the cities it serves to meet its
current and near term needs. From time to time, expansion by
United at certain airports may be constrained by insufficient
availability of gates on attractive terms. United's ability to
expand its international operations in Asia, the South Pacific,
Europe and Latin America is subject to restrictions at many of
the airports in these regions, including noise curfews, slot
controls and absence of adequate airport facilities.
Mileage Plus Program. United operates a frequent flyer
marketing program known as "Mileage Plus" wherein credits are
earned by flying on United or using the services of one of the
other airlines, credit card companies, car rental agencies and
hotels (the "Partners") participating in the Mileage Plus
program. Mileage Plus, Inc., a wholly-owned subsidiary of the
Company, administers frequent flyer bonus programs for United.
The program is designed to enable United to retain and increase
the business of frequent travelers. Credits earned under the
program may be exchanged at certain plateaus for free travel or
service upgrades on United or for use with one or more of the
Partners.
In November 1994, United implemented a new marketing
program, "Mileage Plus Reward Miles", that can be used by
companies as incentives for their employees or customers. Reward
Miles certificates can be purchased in three denominations: 60
certificates good for 500 miles each for $600; 30 certificates
good for 1,000 miles each for $600; and 15 certificates good for
5,000 miles each for $1,500, subject to a minimum purchase
requirement and processing fee. Recipients of Reward Miles can
generally have the certificates credited to their Mileage Plus
personal accounts.
When an award level is attained, a liability is recorded for
the incremental costs of accrued credits under the Mileage Plus
program based on the expected redemptions. United's incremental
costs include the costs of providing service for an otherwise
vacant seat including fuel, meals, certain incremental personnel
and ticketing costs. The incremental costs do not include any
contribution to overhead or profit. Awards earned after July
1989 have an expiration date three years from date earned. The
program also contains certain restrictive provisions, including
blackout dates and capacity controlled bookings, which
substantially limit the use of the awards on certain flights.
Effective February 10, 1995, United increased the mileage
levels for Mileage Plus domestic award travel on a prospective
basis requiring 25,000 miles, instead of the previous level,
20,000 miles, for award tickets issued for economy class travel
within the continental United States. In addition, United made
certain other mileage award level changes as well as a change to
a bank-account type of system to track mileage.
Lawsuits challenging these changes are pending in Illinois.
United believes that it has the right to make the aforementioned
changes to its program and is defending itself vigorously in the
pending litigation. However, an adverse court decision could
restrict United's ability to alter award levels now or in the
future.
At December 31, 1994 and 1993, it was estimated that the
total number of outstanding awards was approximately 7.8 million
and 7.7 million, respectively. United estimated that 5.8 million
and 5.8 million, respectively, of such awards could be expected
to be redeemed and, accordingly, had recorded a liability
amounting to $195 million and $205 million, respectively, at
December 31, 1994 and 1993. The difference between the awards
expected to be redeemed and the total awards outstanding is the
estimate, based on historical data, of awards (1) which will
never be redeemed, (2) which will be redeemed for other than free
trips, or (3) which will be redeemed on Partner carriers.
The number of awards used on United were 1.9 million, 1.6
million and 1.4 million for the years 1994, 1993 and 1992,
respectively. Such awards represented 9.1%, 7.5% and 6.7% of
United's total revenue passenger miles for each period, res
pectively. With these percentages, seat availability and
restrictions on the use of free travel awards, the displacement,
if any, of revenue passengers by users of Mileage Plus awards is
minimal.
United has agreements with certain air carriers and other
parties to utilize the Mileage Plus program and receives and
makes payments based on the earning and redemption of awards by
Mileage Plus participants with such parties.
Computer Reservations Systems. Travel agents account for a
substantial percentage of United's sales. The complexity of the
various schedules and fares offered by air carriers has fostered
the development of electronic distribution systems that display
information relating the fares and schedules of United and other
airlines to travel agents and others. The use of such systems
has been a key factor in the marketing and distribution of
airlines' products and has been subject to regulation by the
Department of Justice. See "Government Regulation - General".
Before September 1993, United had an ownership interest in
two entities which owned and marketed computer reservation system
("CRS") products and services. In September 1993, The Covia
Partnership ("Covia"), a 50%-owned affiliate of United, and The
Galileo Company Limited, a 25.6%-owned affiliate of United,
combined. In the combination Covia was renamed as Galileo
International Partnership ("Galileo"), and a second entity, the
Apollo Travel Services Partnership ("ATS"), was formed. These
two general partnerships are owned 38% and 77%, respectively, by
United through a wholly-owned subsidiary.
Galileo owns the Apollo and Galileo CRSs and markets CRS
services worldwide through a system of national distribution
companies. ATS, directly or through its wholly-owned
subsidiaries, is responsible for marketing, sales and support of
Apollo CRS products and services in the United States, Mexico and
the Caribbean.
Competition among CRS vendors is intense, and services
similar to those offered by ATS and Galileo are marketed by
several air carriers and other concerns, both in the United
States and worldwide. In the European and Pacific CRS market,
various consortia of foreign carriers have formed CRSs to be
marketed in countries in which the owning carriers have a
substantial presence.
In February 1995, United announced that it is introducing a
new travel agency commission payment plan that offers a maximum
of $50 for round-trip or multiple stopover domestic tickets and a
maximum of $25 for one-way domestic tickets.
Lawsuits have been filed challenging the reductions by
United and other carriers in the commissions paid to travel
agencies for ticketing of air transportation alleging, among
other things, a conspiracy to restrain trade among the carriers
in violation of antitrust laws. United believes it has the right
to make the aforementioned changes to such commissions, and will
defend itself vigorously in the pending litigation.
Government Regulation
General. All carriers engaged in air transportation in the
United States, including United, are subject to regulation by the
Department of Transportation ("DOT") and the Federal Aviation
Administration ("FAA") under federal aviation laws. The DOT has
authority to regulate certain economic and consumer protection
aspects of air transportation. It is empowered to issue
certificates of public convenience and necessity for domestic air
transportation upon a carrier's showing of fitness; to authorize
the provision of foreign air transportation by U.S. carriers; to
prohibit unjust discrimination; to prescribe forms of accounts
and require reports from air carriers; to regulate methods of
competition, including the provision and use of computerized
reservation systems; and to administer regulations providing for
consumer protection, including regulations governing the
accessibility of air transportation facilities for handicapped
individuals. United's operations require certificates of public
convenience and necessity issued by the DOT (or specific
exemptions therefrom), and an air carrier operating certificate
and related operations specifications issued by the FAA.
United's operations also require licenses issued by the
aviation authorities of the foreign countries United serves.
Foreign aviation authorities may from time to time impose a
greater degree of economic regulation than exists with respect to
United domestic operations.
In international markets, United competes against foreign
and U.S. carriers that have been granted authority to provide
scheduled passenger and freight service between points in the
United States and various overseas destinations. In connection
with its international services, United is required to file with
the DOT and observe tariffs establishing the fares and rates
charged and the rules governing the transportation provided. In
certain cases, fares, rates and schedules require the approval of
the DOT and the relevant foreign governments.
In addition, United's operating authorities in international
markets are governed by the aviation agreements between the
United States and foreign countries. United's expansion into
many foreign markets is presently precluded by lack of an
aviation agreement allowing such service. United continually
urges the U.S. Government to negotiate increased access to such
restricted markets.
Shifts in United States or foreign government aviation
policies can lead to the alteration or termination of existing
air service agreements that the U.S. has with other governments,
which could diminish the value of United's international route
authority. While such events are generally the subject of inter-
governmental negotiations, there are no assurances that United's
operating rights under the bilateral aviation agreements and DOT-
issued certificates of public convenience and necessity can be
preserved in such cases.
The DOT and the U.S. Congress have engaged from time to time
in various regulatory and legislative initiatives, respectively,
with respect to CRS activities and issues, such as the level of
booking fees, host versus non-host functionality, mandatory
dehosting, travel agency connection of third-party hardware and
software to a CRS, terms of the contracts between CRS vendors and
travel agencies, continued airline ownership of CRS vendors, and
the ability to access multiple CRS systems from a single computer
terminal. New regulatory or legislative initiatives in many of
these areas, if enacted, could have a material adverse effect
upon CRS vendors in general and ATS and United in particular.
Safety. The FAA has regulatory jurisdiction over flight
operations generally, including equipment, ground facilities,
maintenance, communications and other matters. In order to
ensure compliance with its operational and safety standards, the
FAA requires air carriers to obtain operating, airworthiness and
other certificates.
United's aircraft and engines are maintained in accordance
with the standards and procedures recommended and approved by the
manufacturers and the FAA. For all of its engines, United
utilizes a "condition monitoring" maintenance program so that the
schedule for engine removals and overhauls is based on
performance trend monitoring of engine operating data. In
addition, all engines contain time-limited components, each of
which has a maximum amount of time (measured by operating hours)
or a maximum number of operating cycles (measured by takeoffs and
landings) after which the component must be removed from the
engine assembly and overhauled or scrapped. Similarly, United's
FAA-approved maintenance program specifies the number of hours or
operating cycles between inspections and overhauls of the
airframes and their component parts. The nature and extent of
each inspection and overhaul is specifically prescribed by the
approved maintenance program.
From time to time, the FAA issues airworthiness directives
("ADs") which require air carriers to undertake inspections and
to make unscheduled modifications and improvements on aircraft,
engines and related components and parts. The ADs sometimes
cause United to incur substantial, unplanned expense and
occasionally aircraft or engines must be removed from service
prematurely in order to undergo mandated inspections or
modifications on an accelerated basis. The issuance of any
particular AD may have a greater or lesser impact on United
compared to its competitors depending upon the equipment covered
by the directive.
Since 1988 the airlines, in cooperation with the FAA, have
been engaged in an in-depth review of the adequacy of existing
maintenance procedures applicable to older versions of most of
the aircraft types in general use in the airline industry. These
include certain of the Boeing and Douglas aircraft used by
United. As a part of this program, the FAA has issued ADs
requiring interim inspections and remedial maintenance
procedures. While certain of these aging aircraft ADs have
necessitated unscheduled removals from service and increased
maintenance costs, compliance is not expected to have a material
adverse impact on United's costs or operations.
Both the DOT and the FAA have authority to institute
administrative and judicial proceedings to enforce federal
aviation laws and their own regulations, rules and orders. Both
civil and criminal sanctions may be assessed for violations.
Environmental Regulations. The Airport Noise and Capacity
Act of 1990 ("ANCA") requires the phase-out by December 31, 1999
of Stage 2 aircraft operations, subject to certain waivers. The
FAA has issued final regulations which would require carriers to
modify or reduce the number of Stage 2 aircraft operated by 25%
by December 31, 1994, 50% by December 31, 1996, 75% by December
31, 1998 and 100% by December 31, 1999. Alternatively, a carrier
could satisfy compliance requirements by operating a fleet that
is at least 55% Stage 3 by December 31, 1994, 65% Stage 3 by
December 31, 1996, 75% Stage 3 by December 31, 1998 and 100%
Stage 3 by December 31, 1999. At December 31, 1994, United
operated 374 Stage 3 aircraft representing 69% of United's total
operating fleet, and thus is in compliance with these
regulations.
The ANCA recognizes the rights of operators of airports with
noise problems to implement local noise abatement procedures so
long as such procedures do not interfere unreasonably with inter
state or foreign commerce or the national air transportation
system. ANCA generally requires FAA approval of local noise
restrictions on Stage 3 aircraft first effective after October
1990, and establishes a regulatory notice and review process for
local restrictions on Stage 2 aircraft first proposed after
October 1990. While United has had sufficient scheduling
flexibility to accommodate local noise restrictions imposed to
the present, United's operations could be adversely affected if
locally-imposed regulations become more restrictive or
widespread.
Federal Aviation Regulation Part 150, which was issued
pursuant to Title I of the Aviation Safety and Noise Abatement
Act of 1979, provides limited funding to airport operators to
formulate noise compatibility programs, and established
procedures through which such programs may be approved by the
FAA. This rule may encourage the consideration of additional
local aircraft and airport usage restrictions.
The Environmental Protection Agency regulates operations,
including air carrier operations, which affect the quality of air
in the United States. United has made all necessary
modifications to its operating fleet to meet emission standards
issued by the Environmental Protection Agency ("EPA").
Federal and state environmental laws require that
underground storage tanks (USTs) be upgraded to new construction
standards and equipped with leak detection by December 22, 1998.
These requirements are phased into effect based on the age,
construction and use of existing tanks. United operates a number
of underground and above ground storage tanks throughout its
system, primarily used for the storage of fuels and deicing
fluids. A program for the removal or upgrading of USTs and
remediation of any related contamination has been ongoing since
1987. Compliance with these federal and state UST regulations is
not expected to have a material adverse effect on United's
financial condition.
United has been identified by the EPA as a potentially
responsible party with respect to Superfund sites involving soil
and groundwater contamination at the Bay Area Drum Site in San
Francisco, California, the Chemsol, Inc. Site in Piscataway, New
Jersey, the Petrochem/Ekotek Site in Salt Lake City, Utah, the
Monterey Park Site at Monterey Park, California, the West Contra
Costa Sanitary Landfill Site in Richmond, California, and the
Douglasville Site in Berks County, Pennsylvania. Because of the
limited nature of the volume of pollutants allegedly contributed
by United to the above Superfund sites, the outcome of these
matters is not expected to have a material adverse effect on
United's financial condition.
United is aware of soil and groundwater contamination
present on its leaseholds at several U.S. airports, with the most
significant locations being San Francisco International Airport,
John F. Kennedy International Airport in New York, Seattle Tacoma
International Airport and Stapleton International Airport in
Denver (which closed on February 28, 1995). United is
investigating these sites, assessing its obligations under
applicable environmental regulations and lease agreements and,
where appropriate, remediating these sites. Remediation of these
sites, for which United may be responsible, is not expected to
have a material adverse effect on United's financial condition.
Other Government Matters. Besides the DOT and the FAA,
other federal agencies with jurisdiction over certain aspects of
United's operations are the Department of Justice (Antitrust
Division and Immigration and Naturalization Service), the Equal
Employment Opportunity Commission, the Occupational Safety and
Health Administration, the Department of Labor (the Office of
Federal Contract Compliance Programs of the Employment Standards
Administration), the National Labor Relations Board, the National
Mediation Board, the National Transportation Safety Board, the
Treasury Department (U.S. Customs Service), the Federal
Communications Commission (due to use of radio facilities by
aircraft), and the United States Postal Service (carriage of
domestic and international mail). In connection with its service
to cities in other countries, United is subject to varying
degrees of regulation by foreign governments.
In time of war or during an unlimited national emergency or
civil defense emergency declared by the President or the Congress
of the United States, or in a situation short of this if approved
by the Director of the Office of Emergency Preparedness, the
Commander in Chief, Military Airlift Command, or any official
designated by the President to coordinate all civil and defense
mobilization activities, United may be required to provide
airlift services to the Military Airlift Command under the Civil
Reserve Air Fleet Program. As of February 1, 1995, up to 34 B747
and 12 DC-10 aircraft operated, or to be operated by United could
be subject to such requirements.
Fuel
United's results of operations are significantly affected by
the price and availability of jet fuel. Based on 1994 fuel
consumption, every $.01 change in the average annual
price-per-gallon of jet fuel caused a change of approximately $27
million in United's annual fuel costs. The table below shows
United's fuel expenses, fuel consumption, average price per
gallon and fuel as a percent of total operating expenses for
annual periods from 1990 through 1994:
1994 1993 1992 1991 1990
Fuel expense,
including tax
(in millions) $1,585 $1,718 $1,679 $1,674 $1,811
Gallons consumed
(in millions) 2,697 2,699 2,529 2,338 2,253
Average cost per
gallon (in cents) 58.8 63.6 66.4 71.6 80.4
% of total
operating 12% 13% 14% 15% 18%
expenses
United's average fuel cost per gallon in 1994 was 7.5% lower
than in 1993. Changes in fuel prices are industry-wide
occurrences that benefit or harm United's competitors as well as
United. Accordingly, lower fuel prices may be offset by
increased price competition and lower revenues for all air
carriers, including United. There can be no assurance that
United will be able to increase its fares in response to any
increases in fuel prices in the future.
In order to assure adequate supplies of fuel and to provide
a measure of control over fuel costs, United ships fuel on major
pipelines, maintains fuel storage facilities, and trades fuel to
locations where it is needed. In 1994, almost all of United's
fuel was purchased under contracts with major U.S. and
international oil companies. Most of these contracts are
terminable by United on short notice. United also purchases
minor volumes of fuel on the spot market at some domestic
locations. In addition, United purchases foreign fuel on a spot
basis from the Middle East, Caribbean and Far East and delivers
this to the West Coast. Although United has not experienced any
problem with fuel availability in the past few years and does not
anticipate any in the near future, it is impossible to predict
the future availability of jet fuel. If there were major
reductions in the availability of jet fuel, United's business
would be adversely affected.
The Omnibus Budget Reconciliation Act of 1993 imposes a 4.3
cent per gallon tax on commercial aviation jet fuel purchased for
use in domestic operations. This new fuel tax is scheduled to
become effective October 1, 1995 and continue until October 1,
1998. United, through the Air Transportation Association, is
actively lobbying for repeal of this tax.
Insurance
United carries liability insurance of a type customary in
the air transportation industry, in amounts which it deems
adequate, covering passenger liability, public liability and
property damage liability. Insurance is subject to price
fluctuations from time to time. The amount recoverable by United
under aircraft hull insurance covering all damage to its aircraft
is not subject to any deductible amount in the event of a total
loss. In the event of a partial loss, however, such recovery is
subject to a per-occurrence deductible of $1,000,000 for B747s,
B757s, B767s and DC10s, $750,000 for B737-300s, B737-500s, and
A320s, and $500,000 for all other aircraft.
Employees - Labor Matters
On December 31, 1994, the Company and its subsidiaries had
approximately 77,900 employees, of which 76,068 were employed by
United (approximately ten percent of whom are part-time
employees) and 1,160 were employed by ATS. Approximately 62% of
United's employees were represented by various labor
organizations.
The employee groups, number of employees, labor organization
and current contract status for each of United's major collective
bargaining groups as of December 31, 1994 are as follows:
Number of Contract Open
Employee Group Employees Union For Amendment
Mechanics, ramp
servicemen & other
ground employees 22,464 IAM July 12, 2000
Flight
attendants 16,906 AFA April 1, 1996
Pilots 7,708 ALPA April 12, 2000 *
* However, certain provisions regarding Shuttle by United
become amendable at a later date.
United's relations with these labor organizations are
governed by the Railway Labor Act. Under this Act, collective
bargaining agreements between United and these organizations
become amendable upon the expiration of their stated term. If
either party wishes to modify the terms of any such agreement, it
must notify the other party before the contract becomes
amendable. After receipt of such notice, the parties must meet
for direct negotiations and, if no agreement is reached, either
party may request that a mediator be appointed. If no agreement
is reached, the National Mediation Board may determine, at any
time, that an impasse exists and may proffer arbitration. Either
party may decline to submit to arbitration. If arbitration is
rejected, a 30-day "cooling off" period commences, following
which the labor organization may strike and the airline may
resort to "self-help," including the imposition of its proposed
amendments and the hiring of replacement workers.
ITEM 2. PROPERTIES.
Flight Equipment
As of December 31, 1994, United's operating aircraft fleet
totaled 543 jet aircraft, of which 228 were owned and 315 were
leased. These aircraft are listed below:
Average Average
Aircraft Type No. of Seats Owned Leased* Total Age (Years)
A320-200 144 -- 21 21 1
B727-222A 147 50 25 75 16
B737-200 109 45 -- 45 26
B737-200A 109 -- 24 24 15
B737-300 126 10 91 101 6
B737-500 108 27 30 57 3
B747-100 393 18 -- 18 23
B747-200 352 2 7 9 16
B747-400 400 3 21 24 3
B757-200 188 33 55 88 3
B767-200 168 19 -- 19 12
B767-300ER 211 3 20 23 2
DC10-10 287 18 13 31 19
DC10-30 298 -- 8 8 15
TOTAL OPERATING
FLEET 228 315 543 10
=== === === ==
* United' s aircraft leases have initial terms of 4 to 26
years, and expiration dates range from 1996 through 2018.
Under the terms of leases for 306 of the aircraft in the
operating fleet, United has the right to purchase the
aircraft at the end of the lease term, in some cases at fair
market value and in others at fair market value or a
percentage of cost.
As of December 31, 1994, 73 of the 228 aircraft owned by
United were encumbered under transaction agreements.
In 1994 United took delivery of 18 new aircraft. United
acquired two B747-400s and sixteen A320-200s.
In addition, United retired nineteen widebody aircraft in
1994, ten DC10-10s and nine B747-SPs.
As of December 31, 1994, United had taken delivery of all
aircraft on order, with the exception of 34 B777-200 aircraft,
which are scheduled to be delivered between 1995 and 1999, and
United has arrangements with Airbus and A320 engine manufacturer
International Aero Engines to lease an additional 29 A320-200
aircraft, which are scheduled for delivery through 1998. The
following table sets forth United's firm aircraft orders, options
and expected delivery schedules as of December 31, 1994:
Order Status Aircraft Type Number To Be Delivered Delivery Rate
Firm Orders B777-200 34 1995-1999 0-3 per month
Total-Firms 34*
Options** A320-200 50 1996-2001 0-3 per month
B737*** 162 1997-2002 0-5 per month
B747-400 49 1997-2003 0-2 per year
B757-200 39 1997-1999 0-2 per month
B767-300ER 8 1997-1999 0-1 per month
B777-200 34 1998-2000 0-1 per month
Total-Options 342
* In addition, United has agreed to lease an additional 29
A320-200 aircraft. Deliveries of these aircraft are
expected to occur between 1995 and 1998.
** Rate of deliveries with respect to option aircraft assumes
that all options are exercised and that all orders subject
to reconfirmation are confirmed by United.
*** Models 300, 400 and 500, at United's discretion.
Ground Facilities
In the vicinity of O'Hare, United owns a 106 acre complex
consisting of over one million square feet of office space for
its world headquarters, a computer facility and a training
center. United operates reservation centers in or near eight
U.S. cities - Chicago, Denver, Detroit, Honolulu, Los Angeles,
San Francisco, Seattle and Washington, D.C. United also operates
140 city ticket offices in the U.S., plus offices in the Pacific
and European countries served by United.
United's Maintenance Operation Center ("MOC") at San
Francisco International Airport occupies 144 acres of land, three
million square feet of floor space and 12 aircraft hangar docks,
under leases expiring in 2013. Most major aircraft and component
maintenance for United's fleet occurs at the MOC, including
aircraft acceptance and flight testing, and the installation,
testing and repairing of engines, electronics, and interior
fittings. United also has a major facility at the Oakland,
California airport which is dedicated to airframe maintenance and
which includes a hangar with sufficient space to accommodate
maintenance work on four wide-bodied aircraft simultaneously. As
of December 31, 1994, United employed more than 11,000 mechanics,
inspectors, engineers, and maintenance support personnel at the
MOC and over 1,600 at the Oakland facility. United also has line
aircraft maintenance employees and facilities at 62 domestic and
international locations.
In March 1994, United opened a new major aircraft
maintenance and overhaul facility in Indianapolis, operating
under a lease with the Indianapolis Airport Authority which
expires November 30, 2031. Initially, the Indianapolis
Maintenance Center ("IMC") is being used for maintenance of
Boeing 737 aircraft. In December 1994, United announced that it
will significantly expand its operations at IMC by maintaining
its fleets of Boeing 757 and 767 aircraft at the facility in the
future. Construction of certain Boeing 737 airframe facilities
is still in process and construction of facilities for the other
fleet types will begin in 1995. In connection with incentives
received, United has agreed to reach an $800 million capital
spending target and employ at least 7,500 individuals.
On February 28, 1995, United relocated its Denver hub
operations to the new Denver International Airport. Under a new
30-year lease and use agreement, expiring in 2023, United
eventually will occupy 44 gates and over one million square feet
of exclusive terminal building space. The new airport is located
northeast of Stapleton International Airport and approximately 25
miles from downtown Denver. Upon the opening of the new airport,
Stapleton will be closed to all aircraft operations. United's
flight training center will continue to be located near Stapleton
and is under lease, including options to extend, until 2018.
This flight training center consists of four buildings with a
total of 300,000 square feet located on 22 acres of land
adjoining Stapleton. The flight training center accommodates 26
flight simulators and over 90 computer-based training stations,
as well as cockpit procedures trainers, autoflight system
trainers and emergency evacuation trainers.
United has entered into various leases relating to its use
of airport landing areas, gates, hangar sites, terminal buildings
and other airport facilities in most of the municipalities it
serves. Major leases expire at O'Hare in 2018, San Francisco in
2011 and Washington Dulles in 2015. In many cases United has
constructed, at its expense, the buildings it occupies on its
leased properties. In general, buildings and fixtures
constructed by United on leased land are the property of the
lessor upon the expiration of such leases. United also has
leased and improved ticketing, sales and general office space in
the downtown and outlying areas of most of the larger cities in
its system. United believes its facilities are suitable and
adequate for its current requirements. United will continue to
acquire equipment and facilities as necessary to support its
airline operations.
Transfers of Assets
In October 1994, UAL announced an agreement to sell for $119
million ten Dash 8 aircraft and spare parts owned by Air
Wisconsin, Inc. to Mesa Airlines, and United agreed to a ten year
extension of its United Express marketing agreement with Mesa
Airlines. Two of the sales were completed in January 1995, four
more of the sales were completed in February 1995, and the rest
should take place by the end of the first quarter of 1995.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved from time to time in legal
proceedings incidental to the ordinary course of its business.
Such proceedings include claims brought by and against the
Company or its subsidiaries including claims seeking substantial
compensatory and punitive damages. Such claims arise from
routine commercial disputes as well as incidents resulting in
bodily injury and damage to property. The Company believes that
the potential liabilities in all of the bodily injury and
property damage actions are adequately insured and none of the
other actions are expected to have any material adverse effect on
the Company or its subsidiaries.
Shareholder Suits
1. Fry, et al. v. UAL Corp. -- On February 21, 1990, a class
action complaint was filed in the U.S. District Court for the
Northern District of Illinois, Eastern Division, by several UAL
shareholders, on behalf of the class of UAL shareholders who sold
puts or common stock from October 29, 1987 through December 8,
1987. The complaint alleges that UAL committed common law fraud
and violated Section 10(b) of the Exchange Act and Rule 10b-5
promulgated thereunder and the Illinois Deceptive Trade Practices
Act by falsely announcing that it intended to distribute proceeds
of the sales of non-core businesses as a special dividend, when
in fact it was negotiating a cash tender offer for the buyback of
shares. Plaintiffs seek unspecified damages, plus fees and other
costs. UAL filed a motion for summary judgment which is fully
briefed. No trial date has been set.
2. Kaufman v. UAL Corporation and Krasner, et al. v. UAL --
The Company, together with certain officers and directors of the
Company and the Air Line Pilots Association, International and
the International Association of Machinists and Aerospace
Workers, are parties to two stockholder actions filed in the
Court of Chancery of the State of Delaware, New Castle County,
captioned Kaufman v. Wolf, C.A. No. 13312, and Krasner v. UAL
Corp., C.A. No. 13316 (the "Shareholder Actions"). On June 17,
1994, plaintiffs in these two actions jointly filed an Amended
Complaint. The Amended Complaint alleged, among other things,
that the Proxy Statement issued by the Company in connection with
the proposed plan of Recapitalization of the Company, on which
common stockholders voted on July 12, 1994, was false and
misleading, and further alleged that the proposed plan of
Recapitalization failed to maximize shareholder value. The
Amended Complaint sought, among other things, a preliminary and
permanent injunction against consummation of the Plan of
Recapitalization.
On June 21, 1994, plaintiffs filed a motion for preliminary
injunction to enjoin consummation of the Recapitalization. On
July 1, 1994, the Company and the plaintiffs entered into a
memorandum of understanding relating to a settlement of the
Shareholder Actions. On January 24, 1995, following due notice
to class member shareholders, the court, after a fairness hearing
approved the settlement, dismissed the complaint and awarded
plaintiffs' counsel $5.1 million in costs and attorneys' fees.
Noise Proceedings
United may be affected by legal proceedings brought by
owners of property located near certain airports. Plaintiffs
generally seek to enjoin certain aircraft operations and/or to
obtain damages against airport operators and air carriers as a
result of alleged aircraft noise or air pollution. Any liability
or injunctive relief imposed against airport operations or air
carriers could result in higher costs to United and other air
carriers.
The ultimate disposition of the matters discussed in Item 3
hereof, and other claims affecting the Company, are not expected
to have a material adverse effect on the Company's financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders of the
Company during the fourth quarter of 1994.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the executive officers of the Company is as
follows:
Office
Held
Name Age Since Position and Office
Gerald Greenwald 59 1994 Chairman and Chief
Executive Officer
John A. Edwardson 45 1994 President
Stuart I. Oran 44 1994 Executive Vice
President - Corporate
Affairs and General Counsel
Joseph R. O'Gorman, Jr. 51 1991 Executive Vice President
James M. Guyette 50 1988 Executive Vice President
Paul G. George 43 1988 Senior Vice President -
People of United Air Lines,
Inc. ("United")
Douglas A. Hacker 39 1994 Senior Vice President - Finance
Mr. Greenwald has been Chairman and Chief Executive Officer
of the Company and United since July 12, 1994. He previously
served as Chairman of Tatra Truck Company, Czech Republic
(a truck manufacturer) from March 1993 until July 1994.
Mr. Greenwald served as Vice Chairman of the Chrysler Corporation
(an automotive manufacturer) from 1989 to 1990. Prior thereto,
he 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 Corp. 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. (an investment
banking firm) in 1991 and as president of Olympia & York
Developments Limited (a real estate development company that was
in the process of a financial restructuring at the time Mr.
Greenwald agreed to serve as president and certain subsidiaries
of which filed for protection under federal bankruptcy laws in
connection with such restructuring) from April 1992 until March
1993.
Mr. Edwardson has been President of the Company and United
and a member of the board of directors since July 12, 1994.
Prior to joining the Company, he served as Executive Vice
President and Chief Financial Officer of Ameritech Corporation
(a telecommunications company) from June 1991 to July 1994.
In July 1990, Mr. Edwardson was elected to serve as Chief Financial
Officer of United Employee Acquisition Corp. in connection with
the proposed 1990 employee acquisition of the Company. Previously,
he served as Executive Vice President and Chief Financial Officer of
Imcera Group, Inc. (a chemical and mineral company), where he was
responsible for strategic planning, human resources, and legal
and financial functions from November 1988 to July 1990.
Mr. Edwardson also served as Executive Vice President and
Chief Financial Officer of Northwest Airlines, Inc. (an air carrier)
from 1985 to 1988.
Mr. Oran has been Executive Vice President - Corporate
Affairs and General Counsel of the Company and United since July
12, 1994. Prior to joining the Company, he was a corporate
partner with Paul, Weiss, Rifkind, Wharton and Garrison, a law
firm he joined in 1974.
Mr. O'Gorman has been Executive Vice President of the
Company since February 18, 1991. He has been Executive Vice
President - Operations of United since 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 of USAir Group (an air carrier)
from August 1990 until February 1991. He served as United's Senior
Vice President - Maintenance Operations from June 1988 to August 1990.
Mr. Guyette has been Executive Vice President of the Company
since January 28, 1988. He has been Executive Vice President -
Marketing and Planning of United since April 30, 1992.
Mr. George has been Senior Vice President - People of United
since April 11, 1988.
Mr. Hacker has been Senior Vice President - Finance and
chief financial officer of the Company since July 12, 1994. He
has been Senior Vice President - Finance of United since March 8,
1993. Prior to joining United, Mr. Hacker served in various
senior management positions at American Airlines, Inc. (an air carrier)
since July 1987 including Vice President - Corporate and Fleet Planning,
Vice President - Corporate Services, Vice President and Treasurer
and Vice President - Corporate Finance and Development.
There are no family relationships among the executive
officers of the Company. The executive officers of the Company
serve at the discretion of the board of directors.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock, is traded principally on the New
York Stock Exchange (the "NYSE") under the symbol UAL, and are
also listed on the Chicago Stock Exchange and the Pacific Stock
Exchange. The following sets forth for the periods indicated the
high and low sales prices per share of the Company's old common
stock outstanding immediately prior to the Recapitalization and
of the Common Stock on the NYSE Composite Tape.
OLD COMMON STOCK:
High Low
1993:
1st quarter $132 1/4 $110 3/4
2nd quarter 149 3/4 118
3rd quarter 150 1/2 121 5/8
4th quarter 155 1/2 135 7/8
1994:
1st quarter 150 123 3/4
2nd quarter 130 1/2 115 1/8
3rd quarter 130 1/2 125 1/2
(through July 12)
COMMON STOCK:
1994:
3rd quarter 105 86 3/4
(from July 13)
4th quarter 96 7/8 83 1/8
The Recapitalization was consummated on July 12, 1994. In
connection with the Recapitalization, holders of the Company's
old common stock received one-half of a share of Common Stock and
$84.81 for each share of old common stock. As a result of the
foregoing, the price per share of old common stock is not
comparable to the price per share of the Common Stock.
No dividends have been declared on the Company's common
stock since 1987. The payment of any future dividends on the
Common Stock and the amount thereof will be determined by the
Board of Directors of the Company in light of earnings, the
financial condition of the Company and other relevant factors.
At March 1, 1995, based on reports by the Company's transfer
agent for the Company's Common Stock, there were 15,779 common
stockholders of record (which includes 4,949 holders of
record of the Company's old common stock, $5 par value, who have
not tendered their stock certificates as the result of the
Recapitalization).
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31
1994 1993 1992 1991 1990
(In Millions, Except Per Share)
Operating revenues $13,950 $13,325 $11,853 $10,706 $10,296
Earnings (loss) before
extraordinary item and
cumulative effect of
accounting changes 77 (31) (417) (332) 94
Extraordinary loss on early
extinguishment of debt,
net of tax - (19) - - -
Cumulative effect of
accounting changes (26) - (540) - -
Net earnings (loss) 51 (50) (957) (332) 94
Per share amounts:
Earnings (loss) before
extraordinary item and
cumulative effect of
accounting changes 0.76 (2.64) (17.34) (14.31) 4.33
Extraordinary loss on early
extinguishment of debt - (0.76) - - -
Cumulative effect of
accounting changes (1.37) - (22.41) - -
Net earnings (loss) (0.61) (3.40) (39.75) (14.31) 4.33
Total assets at year end 11,764 12,840 12,257 9,876 7,983
Long-term debt and capital
lease obligations, including
current portion, and
redeemable preferred stock
at year end 4,077 3,735 3,783 2,533 1,329
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EMPLOYEE INVESTMENT TRANSACTION AND RECAPITALIZATION
On July 12, 1994, the shareholders of UAL Corporation ("UAL") approved
a plan of recapitalization that provides an approximately 55% equity and
voting interest in UAL to certain employees of United Air Lines, Inc.
("United") in exchange for wage concessions and work-rule changes. The
employees' equity interest will be allocated to individual employee accounts
through the year 2000 under Employee Stock Ownership Plans ("ESOPs") which
were created as a part of the recapitalization. Since the ESOP shares will
be allocated over time, the current ownership interest held by employees is
substantially less than 55%. The entire 55% ESOP voting interest is
currently exercisable, which generally will be voted by the ESOP trustee at
the direction of, and on behalf of, the employees participating in the
ESOPs. The employee interest may increase to up to 63%, depending on the
average market value of UAL common stock in the year after the transaction
closed. Based on the average market value of UAL common stock through
February 23, 1995, the market value of UAL common stock for the remainder of
the measuring period would have to average at least $204 for any adjustment
to be made in the ESOP percentage interest. Pursuant to the terms of the
plan of recapitalization, holders of old UAL common stock received
approximately $2.1 billion in cash and the remaining 45% (subject to a
possible reduction to not less than 37%) of the equity in the form of new
common stock. The conversion of certain convertible securities and the
exercise of certain stock options could result in additional cash
distributions of up to $428 million. Distributions on account of stock
option exercises would be reduced by cash proceeds received on the exercise
of the options. In connection with the recapitalization, United issued $370
million of 10.67% debentures due in 2004 and $371 million of 11.21%
debentures due in 2014 and UAL issued Series B 12 1/4% preferred stock with
an aggregate liquidation preference of $410 million. Approximately $169
million of pretax costs were incurred in connection with the
recapitalization, including transaction costs and severance payments to
certain former United employees.
The employee investment transaction has put in place a lower cost
structure which allows United to compete more effectively against low-cost
carriers and improve UAL's long-term financial viability. The transaction
also facilitated the creation of a low-cost short-haul operation, Shuttle by
United ("Shuttle"), which began operating on October 1, 1994. This service
achieves lower costs through special work rules and wage rates for pilots,
high station and aircraft utilization and minimal service amenities. Based
on its initial operations, the Shuttle has been well accepted by the
marketplace and its costs are within expectations. As a result, United
expects the Shuttle will be able to sustain a competitive presence in the
short-haul markets against low cost competitors.
As a result of the recapitalization, UAL's capital structure became
more highly leveraged, as UAL's equity decreased by approximately $1.7
billion and debt increased $741 million at the time of the transaction.
With the increase in debt and reduction in equity resulting from the
recapitalization, UAL's exposure to certain industry risks could be greater
than might have been the case prior to the recapitalization. In addition,
the transaction resulted in new labor agreements for certain employee groups
and a new corporate governance structure, which was designed to achieve
balance between the various employee-owner groups and public shareholders.
The new labor agreements and governance structure could inhibit management's
ability to alter strategy in a volatile, competitive industry by restricting
certain operating and financing activities, including the sale of assets and
the issuance of equity securities and the ability to furlough employees.
UAL's ability to react to competition may be hampered further by the fixed
long-term nature of these various agreements. The success of the
recapitalization is dependent upon a number of factors, including the state
of the competitive environment in the airline industry, competitive
responses to United's efforts, United's ability to achieve enduring cost
savings through productivity improvements and the renegotiation of labor
agreements at the end of the investment period.
The employee investment transaction and recapitalization had an
initial adverse effect on UAL's cash position as a result of the cash
consideration paid to holders of old UAL common stock and certain other
recapitalization costs. However, the transaction is expected to result in
an improvement to cash flow through the term of the employee investment.
This improvement is expected to result from the employee concessions which
reduce cash expenses, partially offset by the additional interest expense on
the debentures, dividends on the preferred stock and foregone interest on
the cash consideration distributed to holders of old UAL common stock.
The employee investment transaction will reduce UAL's cash operating
expenses due to wage and benefit reductions and work-rule changes. These
cash expense reductions will be offset by non-cash compensation charges for
stock periodically committed to be released to employees under the ESOPs,
additional interest expense on the debentures and foregone interest on the
cash distributed to shareholders. The amount of the non-cash compensation
expense cannot be predicted, because it is based on the future fair value of
UAL's stock.
The ESOPs consist of two tax-qualified plans, as defined under the
Internal Revenue Code, and one plan that is not tax qualified. Tax
deductions related to the ESOPs are partially based on factors unrelated to
the future fair value of UAL's stock. Accordingly, it is anticipated that
tax provisions (credits) in future periods could be impacted by permanent
differences between tax deductions and book expenses related to the ESOPs.
Additionally, timing differences between tax deductions and book expenses
related to the ESOPs could impact the balance of the net deferred tax asset
in the future.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity -
UAL's total of cash and cash equivalents and short-term investments
was $1.532 billion at December 31, 1994, compared to $1.828 billion at
December 31, 1993. Cash flows during the year were considerable. The most
significant was the distribution of $2.1 billion to holders of old UAL
common stock under the recapitalization, which was partially funded by net
proceeds of $735 million on the issuance of debentures and $400 million on
the issuance of Series B preferred stock. Subsequent to issuance, UAL
repurchased $87 million of the Series B preferred stock to be held in
treasury. Other financing activities included principal payments under debt
and capital lease obligations of $305 million and $87 million, respectively,
and a $46 million reduction of short-term borrowings. Cash flows from
operating activities amounted to $1.334 billion. Investing activities
resulted in cash flows of $198 million.
In 1994, United took delivery of 16 A320 aircraft and two B747
aircraft. With the exception of one B747, these aircraft were acquired
under operating leases. Property additions, including the B747 and spare
parts, amounted to $636 million. Property dispositions, including the sale
and leaseback of the B747 aircraft purchased in 1994, five B737 aircraft and
one B757 aircraft, resulted in proceeds of $432 million.
As of December 31, 1994, UAL had a working capital deficit of $1.714
billion as compared to $1.183 billion at December 31, 1993. Historically,
UAL has operated with a working capital deficit and, as in the past, UAL
expects to meet all of its obligations as they become due.
During 1993, UAL's balance of cash and cash equivalents decreased $85
million while short-term investments increased $430 million. Operating
activities resulted in cash flows of $858 million, which more than offset
cash used for net property additions and financing activities. Investing
activities, including the short-term investment increase and net property
additions, used $740 million. Property additions amounted to $1.496
billion, including the purchase of 34 aircraft, and property dispositions
resulted in proceeds of $1.165 billion, including the sale and leaseback of
18 aircraft. In all, 10 B737 aircraft, 16 B757 aircraft, four B747
aircraft, eight B767 aircraft and five A320 aircraft were acquired,
including purchases and leases. Financing activities used $203 million.
Reductions in short-term borrowings, capital lease obligations and long-term
debt, including the early extinguishment of $500 million of senior
subordinated notes, more than offset cash proceeds from the issuance of
Series A preferred stock and long-term debt.
Operating activities in 1992 generated cash flows of $575 million,
which more than offset cash used for net additions to property, resulting in
a $306 million increase in cash, cash equivalents and short-term
investments. During 1992, $2.519 billion was spent on property
additions, principally aircraft. United acquired 25 B737 aircraft, 25 B757
aircraft, 10 B767 aircraft and six B747 aircraft in 1992. Of these, 18
aircraft were purchased, 38 were purchased and then sold and leased back and
10 were acquired in capital lease transactions. Property dispositions
provided cash proceeds of $2.367 billion. In 1992, United also acquired
certain Latin American route authorities and other related assets from Pan
American World Airways, Inc.
Capital Commitments -
At December 31, 1994, commitments for the purchase of property and
equipment, principally aircraft, approximated $3.9 billion, after deducting
advance payments. An estimated $1.2 billion will be spent in 1995, $0.7
billion in 1996, $1.3 billion in 1997, $0.5 billion in 1998 and $0.2 billion
in 1999 and thereafter. The major commitments are for the purchase of
thirty-four B777 aircraft which are expected to be delivered between 1995
and 1999.
In addition to the B777 order, United has arrangements with Airbus
Industrie and International Aero Engines to lease 29 A320 aircraft, which
are scheduled for delivery through 1998. At December 31, 1994, United also
had options for an additional 162 B737 aircraft, 39 B757 aircraft, 34 B777
aircraft, 49 B747 aircraft, 8 B767 aircraft and 50 A320 aircraft. Under the
terms of certain of these options which are exercisable during the period
1995 through 1997, United would forfeit significant deposits on such options
it does not exercise. United continually reviews its fleet to determine
whether aircraft acquisitions will be used to expand the fleet or to replace
older aircraft, depending on market and regulatory conditions at the time of
delivery.
Capital Resources -
Funds necessary to finance aircraft acquisitions are expected to be
obtained from internally generated funds, irrevocable external financing
arrangements or other external sources.
At December 31, 1994, UAL and United had an effective shelf
registration statement on file with the Securities and Exchange Commission
to offer up to $1.035 billion of securities, including secured and unsecured
debt, equipment trust and pass through certificates, equity or a combination
thereof. UAL's ability to issue equity securities is limited by its
certificate of incorporation, which was restated in connection with the
recapitalization.
United's senior unsecured debt is rated BB by Standard and Poor's ("S
& P") and Baa3 by Moody's Investors Service Inc. ("Moody's"). UAL's Series
A and Series B preferred stocks are rated B+ by S & P and ba3 by Moody's.
On February 3, 1995, UAL filed a registration statement with the
Securities and Exchange Commission offering to exchange up to $600 million
aggregate principal amount of convertible subordinated debentures, due 2025,
for up to all shares of the outstanding Series A cumulative 6.25%
convertible preferred stock. Each $1,000 principal amount of debentures
issued would be convertible into a combination of cash in the amount of
$541.90 and approximately 3.192 shares of UAL common stock (equivalent to a
conversion price of $143.50 per share of common stock). To the extent that
shares of Series A preferred stock are exchanged for the debentures, UAL's
shareholders' equity will be reduced on a net basis by the aggregate fair
value of the debentures issued. A reduction in shareholders' equity will
reduce surplus as defined under Delaware General Corporation Law ("DGCL").
DGCL requires that dividends on outstanding capital stock may only be made
from surplus or the net profits of the Company for the fiscal year in which
the dividend is declared and/or the preceding fiscal year.
RESULTS OF OPERATIONS
The results of operations in the airline business historically
fluctuate significantly in response to general economic conditions. This is
because small fluctuations in yield (passenger revenue per revenue passenger
mile) and cost per available seat mile can have a significant effect on
operating results. UAL anticipates industrywide fare levels, increasing
low-cost competition, general economic conditions, fuel costs, international
governmental policies and other factors will continue to affect its
operating results.
Summary of Results and Impact of Recapitalization -
UAL's results of operations improved in 1994 as compared to 1993. In
1994, UAL recorded net earnings of $51 million, representing a loss per
share of $0.61 after preferred stock dividends, compared to a 1993 net loss
of $50 million, or $3.40 per share after preferred stock dividends.
Included in 1994 were $169 million of pretax expenses incurred in connection
with the recapitalization, of which $48 million were recorded in operating
expenses. The 1994 results also include an after tax charge of $26 million
($1.37 per share) for the cumulative effect of adopting Statement of
Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits," which UAL adopted effective January 1, 1994. The
1993 results include an extraordinary loss of $19 million, $0.76 per share,
on the early extinguishment of debt.
In connection with the recapitalization, each share of old common
stock was converted to one half share of new common stock (and cash in lieu
of fractional shares) and $84.81 in cash. As a result, the number of
outstanding shares was reduced proportionately. Accordingly, the weighted
average shares in the earnings per share calculations are based on the
number of old common shares outstanding prior to the recapitalization and
the reduced number of new common shares outstanding subsequent to the
transaction. Thus, a direct comparison of the earnings per share in 1994
versus 1993 is not meaningful. The earnings per share calculations
subsequent to the transaction also include those ESOP shares which have been
committed to be released to employees, if doing so is dilutive.
Management believes that a more complete understanding of UAL's
results can be gained by viewing them on a pro forma, "fully distributed"
basis. This approach considers all ESOP shares which will ultimately be
distributed to employees throughout the ESOP (rather than just the shares
committed to be released) to be immediately outstanding and thus fully
distributed. Consistent with this method, the ESOP compensation expense and
the one-time costs associated with the completion of the transaction, are
excluded from fully distributed expenses. On a fully distributed basis,
UAL's net earnings for the 1994 third and fourth quarters would have been
$233 million ($6.86 per share) and $67 million ($1.47 per share),
respectively. UAL's net earnings for the 1994 third and fourth quarters, as
reported under generally accepted accounting principles, were $82 million
($4.21 per share fully diluted) and $11 million (loss of $0.98 per share),
respectively.
Other Factors Affecting Comparability -
In 1994, United began recording certain air transportation price
adjustments, which were previously recorded as commissions, as adjustments
to revenue. Operating revenue and expense amounts and related operating
statistics for 1993 and prior periods have been adjusted to conform with the
current presentation.
Prior to the September 1993 merger of the Covia Partnership ("Covia")
and Galileo Ltd., United's investments in these companies were carried on
the equity basis. United now owns 77% of Apollo Travel Services Partnership
("ATS"), one of the companies formed in the merger, and its accounts are
consolidated with those of United. As a result, United's consolidated
operating revenues and expenses have increased. In 1993, UAL also
transferred the operations of Air Wisconsin, Inc. to other parties, the
effect of which was to reduce UAL's gross operating revenues and expenses.
In addition, the sales of flight kitchen assets in late 1993 and early 1994
had the effect of reducing United's salaries and related costs and
increasing, to a lesser degree, food and beverage expense. These changes
have affected the 1994 comparisons to 1993 as indicated in the discussion
which follows.
1994 Compared with 1993 -
Operating Revenues. Operating revenues increased $625 million (5%).
United's revenue per available seat mile increased 4% to 9.12 cents.
Passenger revenues increased $337 million (3%) due primarily to a 7%
increase in United's revenue passenger miles, partially offset by a 3%
decrease in yield to 11.31 cents. Domestic revenue passenger miles
increased by 4.1 billion (7%) while international increased by 2.9 billion
(8%). Available seat miles increased 1% systemwide, as increases of 6% in
the Pacific and 2% in the Atlantic were partially offset by decreases of 1%
on domestic routes and 3% in Latin America. As a result, United's system
passenger load factor increased 4.0 points to 71.2%. In addition, Air
Wisconsin, Inc., which accounted for $159 million of passenger revenues in
1993, accounted for no passenger revenue in 1994 as previously discussed.
Cargo revenues increased $26 million (4%), due to increased freight
revenues partially offset by decreased mail revenues. Freight and mail
revenue ton miles increased 3%; however, freight yield increased 5% while
mail yield decreased 8%. Other operating revenues increased $262 million
(37%) primarily as a result of the consolidation of ATS, revenues resulting
from the lease of Air Wisconsin, Inc. assets to other parties and an
increase in fuel sales.
Operating Expenses. Operating expenses increased $367 million (3%).
United's cost per available seat mile also increased 3% from 8.54 cents to
8.79 cents, which includes certain one-time costs relating to the
recapitalization and ESOP compensation expense. Without these costs,
United's cost per available seat mile would have been 8.64 cents. Food and
beverage costs increased $162 million (51%) due to the new catering
arrangements resulting from the flight kitchen sales as discussed above.
Commissions increased $96 million (7%) due principally to increased
commissionable revenues. An increase of $50 million (3%) in rentals and
landing fees reflects rent associated with a higher number of aircraft on
operating leases, including new aircraft acquired in the past year. Aircraft
maintenance increased $25 million (6%) as a result of increased
vendor-provided maintenance due to the timing of maintenance cycles. Other
operating expenses increased $169 million (20%) due to the consolidation of
ATS, depreciation in 1994 on Air Wisconsin, Inc. assets leased to others and
higher fuel sales.
Aircraft fuel expense decreased $148 million (9%), due to an 8%
decrease in United's average price per gallon of fuel to 58.8 cents and a
slight decrease in United's consumption. Salaries and related costs
decreased $81 million (2%) primarily due to lower wage rates for employees
participating in the ESOPs and a lower number of employees as a result of
the flight kitchen sales, partially offset by higher average wage rates for
other employee groups, higher costs associated with medical benefits and $48
million of one-time costs related to the recapitalization. Depreciation and
amortization decreased $39 million (5%) due principally to the transfer of
Air Wisconsin, Inc. assets to other parties and the subsequent
classification of depreciation on those assets in other expenses. Purchased
services decreased $36 million (4%), as certain services, principally
computer reservations and communications, have been provided by ATS since
the time of the merger.
Other Income and Expense. Other expense amounted to $350 million in
1994 compared to $310 million in 1993. Interest expense increased $14
million (4%) due to higher average interest rates resulting from the
debentures issued in July 1994, partially offset by the benefit of the
extinguishment of $500 million of subordinated debt in 1993. Interest
capitalized decreased $10 million (20%) as a result of lower average advance
payments on new aircraft and lower capitalized interest rates. Interest
income decreased $13 million (13%) due primarily to interest received in
1993 in connection with the final settlement of certain pension benefits.
United's equity in results of affiliates changed from a loss of $30 million
in 1993 to earnings of $20 million in 1994 due primarily to a charge
recorded by Galileo International in 1993 for the cost of eliminating
duplicate facilities and operations after the merger of Covia and Galileo
Ltd. Included in "Miscellaneous, net" in 1994 were charges of $121 million
for fees and costs incurred in connection with the employee investment
transaction and recapitalization, a $22 million charge for minority
interests in ATS and foreign exchange gains of $15 million. Included in
1993 was a $59 million charge to reduce the net book value of 15 DC-10
aircraft to estimated realizable value, a $17 million gain resulting from
the final settlement of certain pension benefits and foreign exchange losses
of $20 million.
Income Tax Provision. The income tax provision for 1994 was
significantly impacted by the nondeductibility of certain recapitalization
costs and the statutory change in the deductibility of other expenses.
1993 Compared with 1992 -
Operating Revenues. Operating revenues increased $1.472 billion
(12%). Passenger revenues increased $1.280 billion (12%) due to a 9%
increase in United's revenue passenger miles and a 3% increase in yield to
11.61 cents. United's domestic revenue passenger miles increased 6% on an
increase of 8% in domestic available seat miles, resulting in a decrease of
1.0 point in domestic passenger load factor to 65.2%. International revenue
passenger miles increased 14%. Passenger traffic increased in substantially
all international markets, especially in Latin America, where United began
service in the first quarter of 1992. Passenger load factors increased in
Latin America, the Atlantic and the Pacific. On a system basis, United's
available seat miles increased 10% and passenger load factor decreased 0.2
points to 67.2%.
Cargo revenues increased $54 million (9%), due to increases of $31
million in freight revenues and $23 million in mail revenues. The freight
revenue increase reflects volume increases largely attributable to increased
international operations. Contract services and other revenues increased
$138 million (24%) primarily as a result of revenues generated by ATS in the
1993 period subsequent to the merger.
Operating Expenses. Operating expenses increased $671 million (5%).
United's cost per available seat mile decreased 4% to 8.54 cents. The
decrease in unit cost was largely due to the implementation of a cost
reduction program in early 1993. Salaries and related costs increased $198
million (4%) primarily due to higher average wage rates and higher costs
associated with pensions and health insurance. Rentals and landing fees
increased $163 million (12%) primarily reflecting rent associated with a
larger number of aircraft on operating leases. Commissions increased $136
million (11%) due to increased revenues and slightly higher cargo commission
rates. Aircraft maintenance increased $55 million (17%) due principally to
higher outside maintenance costs. Purchased services increased $47 million
(5%) due principally to higher computer reservations fees and higher costs
associated with international operations, such as communications, navigation
charges and security. Depreciation and amortization increased $38 million
(5%) due principally to newly acquired aircraft. Aircraft fuel expense
increased $34 million, as a 7% increase in fuel consumption was partially
offset by a 4% decrease in the average price per gallon of fuel to 63.6
cents. Other operating expenses increased $85 million (11%) due principally
to the consolidation of ATS after the merger. Advertising and promotion
decreased $52 million (24%) and food and beverages decreased $25 million
(7%) due to cost reduction efforts.
Other Income and Expense. Other expense amounted to $310 million in
1993 compared to $118 million in 1992. Interest expense increased $30
million due primarily to increased debt and capital lease obligations
incurred in connection with aircraft financings. Interest capitalized
decreased $41 million (45%) due to lower advance payments on new aircraft.
United's equity in the results of affiliates shifted from income of $42
million in 1992, representing United's share of Covia earnings, to losses of
$30 million in 1993, primarily due to a charge recorded by Galileo
International for the cost of eliminating duplicate facilities and
operations after the merger of Covia and Galileo Ltd. Included in
"Miscellaneous, net" were foreign exchange losses of $20 million in 1993
compared to gains of $2 million in 1992. Also included in 1993 was a charge
of $59 million to reduce the net book value of 15 DC-10 aircraft to
estimated net realizable value and a $17 million gain resulting from the
final settlement for overpayment of annuities purchased in 1985 to cover
certain vested pension benefits. Interest income increased $29 million due
principally to interest received in connection with the same settlement. In
1992, "Miscellaneous, net" also included gains on disposition of property of
$32 million, a charge of $13 million to record the cash settlement of class
action claims resulting from litigation relating to the use of airline fare
data and charges of $8 million related to other litigation.
OTHER INFORMATION
Deferred Tax Asset -
UAL's consolidated balance sheet at December 31, 1994 includes a net
cumulative deferred tax asset of $631 million, compared to $714 million at
December 31, 1993. The net deferred tax asset is composed of approximately
$1.9 billion of deferred tax assets and approximately $1.3 billion of
deferred tax liabilities. The deferred tax assets include, among other
things, $537 million related to obligations for postretirement and other
employee benefits, $472 million related to gains on sales and leasebacks,
$262 million related to alternative minimum tax ("AMT") credit carryforwards
and $58 million of federal and state net operating loss ("NOL")
carryforwards. The AMT credit carryforwards do not expire; the federal NOL
carryforwards begin to expire in 2006 if not utilized prior to that time.
The majority of the deferred tax assets will be realized through
reversals of existing deferred tax liabilities with similar reversal
patterns. To realize the benefits of the remaining deferred tax assets
relating to temporary differences, UAL needs to generate approximately $1.2
billion in future taxable income.
Although United experienced book and tax losses in both 1993 and 1992,
1994 resulted in book and taxable income.
Following is a summary of UAL's pretax book income and taxable income, and
the significant differences between them, for the last three years (in
millions):
1994 1993 1992
Pretax book income (loss) $ 171 $ (47) $(656)
Gains on sale and leasebacks 79 15 304
Depreciation, capitalized interest
and transfers of tax benefits (300) (348) (319)
Rent expense 122 142 127
Nondeductible employee meals 57 22 22
Pension expense (46) (156) (95)
Other employee benefits 91 37 36
Gains on asset dispositions (4) (34) (3)
ESOP transaction costs 55 - -
Other, net 19 54 33
Taxable income (loss) $ 244 $(315) $(551)
While the losses in 1992 and 1993 were largely attributable to events
beyond management's control, including the unanticipated duration of the
recession in both the U. S. and other areas of the world and the
proliferation of numerous low-cost air carriers, UAL has taken several steps
to reduce costs and improve profitability. Most notably, the employee
investment transaction and recapitalization was partially responsible for
UAL's improved operating results in 1994 versus 1993, and is expected to
continue to improve the financial stability and profitability of the
company. The recapitalization put in place a lower cost structure which is
designed to allow United to compete effectively against low-cost carriers.
The transaction also facilitated the creation of a low-cost short-haul
operation, Shuttle by United, the benefits of which are expected to increase
as it expands into additional markets. Other actions taken by UAL to
improve profitability include the discontinuance of service at 15
unprofitable domestic and international stations and the planned reduction
of capacity in 1995 on certain unprofitable routes such as those to Hawaii.
Resources are expected to be re-allocated to areas that currently benefit
the company the most - the Shuttle and the expanding Denver hub.
Severe competition in the airline industry, particularly by new entry
and low-fare carriers, and the general economic outlook could continue to
negatively affect United's operating results. However, the benefits
expected to be derived from the recapitalization and the new era of employee
ownership, should further improve UAL's financial results.
UAL's ability to generate sufficient amounts of taxable income from
future operations is dependent upon numerous factors, including general
economic conditions, inflation, oil prices, the state of the industry and
other factors beyond management's control. There can be no assurances that
UAL will meet its expectation of future taxable income. However, based on
the above factors, including the extended period over which postretirement
benefits will be recognized, and the indefinite carryforward period for AMT
credits, management believes it is more likely than not that future taxable
income will be sufficient to utilize the cumulative deferred tax assets at
December 31, 1994.
Contingencies -
United has been named as a Potentially Responsible Party at certain
Environmental Protection Agency ("EPA") cleanup sites which have been
designated as Superfund Sites. At sites where the EPA has commenced
remedial litigation, potential liability is joint and several. United's
alleged proportionate contributions at the sites are minimal. Additionally,
United has participated and is participating in remediation actions at
certain other sites, primarily airports. The estimated cost of these
actions is accrued when it is determined that it is probable that United is
liable. Such accruals have not been material. Environmental regulations
and remediation processes are subject to future change, and determining the
actual cost of remediation will require further investigation and
remediation experience. Therefore, the ultimate cost cannot be determined
at this time. However, while such cost may vary from United's current
estimate, United believes the difference between its accrued reserve and the
ultimate liability will not be material.
UAL has certain other contingencies resulting from litigation and
claims incident to the ordinary course of business. Management believes,
after considering a number of factors, including (but not limited to) the
views of legal counsel, the nature of such contingencies and prior
experience, that the ultimate disposition of these contingencies is not
likely to materially affect UAL's financial condition, operating results or
liquidity.
Energy Tax -
The Omnibus Budget Reconciliation Act of 1993 signed into law on August
10, 1993, imposes a 4.3 cent per gallon tax on commercial aviation jet fuel
purchased for use in domestic operations. This new fuel tax is scheduled to
become effective October 1, 1995, and continue until October 1, 1998. Based
on United's 1994 domestic fuel consumption of 1.7 billion gallons, the new
fuel tax, when effective, is expected to increase United's operating
expenses by approximately $75 million annually. United, through the Air
Transportation Association, is actively lobbying for repeal of this tax.
Foreign Currency Transactions -
United generates revenues and incurs expenses in numerous foreign
currencies; however, United mitigates its exposure to foreign exchange rate
fluctuations by converting excess local currencies generated to U.S.
dollars. In addition, United has exposure to transaction gains and losses
resulting from rate fluctuation. The foreign exchange gains and losses
recorded by UAL result from the impact of exchange rate changes on foreign
currency-denominated assets and liabilities, primarily Japanese
yen-denominated balances. To the extent such balances are predictable,
United attempts to minimize transaction gains and losses by investing in
yen-denominated time deposits to offset the impact of rate changes on
certain liabilities. In addition, United entered into a foreign currency
swap contract in 1994 to reduce exposure to currency fluctuations in
connection with other long-term yen-denominated obligations. Foreign
currency gains and losses on the swap contract are included in income
currently, exactly offsetting the foreign currency losses and gains on the
obligations being hedged.
Changes Expected to Impact 1995 -
In October 1994, United announced that it will discontinue service to
15 unprofitable destinations by early 1995 and will reallocate resources
elsewhere, including the Shuttle. United will incur certain route
restructuring costs, which are expected to be immaterial. However, this
restructuring is expected to result in improvements to operating earnings of
approximately $25 million annually. Also in October 1994, UAL announced an
agreement to sell for $119 million ten Dash 8 aircraft and spare parts owned
by Air Wisconsin, Inc. to Mesa Airlines, and United agreed to a ten year
extension of its United Express marketing agreement with Mesa Airlines. The
sales are expected to take place in the first quarter of 1995. In addition,
increased rent associated with new airport facilities in Denver and Osaka is
expected to increase 1995 operating expenses by approximately $140 million.
In February 1995, United announced that it would put in place a new
travel agency commission payment plan that offers a maximum of $50 for
round-trip domestic tickets and a maximum of $25 for one-way domestic
tickets. The new commission plan will be implemented in the first quarter
of 1995, and will apply to all tickets issued by U. S. travel agents for
travel within and between the continental United States, Alaska, Hawaii,
Puerto Rico and the U. S. Virgin Islands. Litigation has been initiated
challenging this payment plan.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors,
UAL Corporation:
We have audited the accompanying statement of consolidated financial
position of UAL Corporation (a Delaware corporation) and subsidiary
companies as of December 31, 1994 and 1993, and the related statements of
consolidated operations, consolidated cash flows and consolidated
shareholders' equity for each of the three years in the period ended
December 31, 1994. These financial statements and the schedule referred
to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
UAL Corporation and subsidiary companies as of December 31, 1994 and 1993,
and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles.
As discussed in notes 7 and 16 to the consolidated financial
statements, effective January 1, 1992, the Company changed its methods of
accounting for income taxes and postretirement benefits other than
pensions.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule referenced in
Item 14(a)(2) herein is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in
our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial
statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 23, 1995
UAL CORPORATION AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED OPERATIONS
(In Millions, Except Per Share)
Year Ended December 31
1994 1993 1992
Operating revenues:
Passenger $12,295 $11,958 $10,678
Cargo 685 659 605
Other operating revenues 970 708 570
13,950 13,325 11,853
Operating expenses:
Salaries and related costs 4,679 4,760 4,562
ESOP compensation expense 182 - -
Aircraft fuel 1,585 1,733 1,699
Rentals and landing fees 1,555 1,505 1,342
Commissions 1,426 1,330 1,194
Purchased services 947 983 936
Depreciation and amortization 725 764 726
Food and beverages 479 317 342
Aircraft maintenance 410 385 330
Personnel expenses 248 263 271
Advertising and promotion 165 163 215
Other operating expenses 1,028 859 774
13,429 13,062 12,391
Earnings (loss) from operations 521 263 (538)
Other income (expense):
Interest expense (372) (358) (328)
Interest capitalized 41 51 92
Interest income 85 98 69
Equity in earnings (loss) of affiliates 20 (30) 42
Miscellaneous, net (124) (71) 7
(350) (310) (118)
Earnings (loss) before income taxes,
extraordinary item and cumulative
effect of accounting changes 171 (47) (656)
Provision (credit) for income taxes 94 (16) (239)
Earnings (loss) before extraordinary item and
cumulative effect of accounting changes 77 (31) (417)
Extraordinary loss on early
extinguishment of debt, net of tax - (19) -
Cumulative effect of accounting changes (26) - (540)
Net earnings (loss) $ 51 $ (50) $ (957)
Per share:
Earnings (loss) before extraordinary
item and cumulative effect of
accounting changes $ 0.76 $ (2.64) $(17.34)
Extraordinary loss on early
extinguishment of debt, net of tax - (0.76) -
Cumulative effect of accounting changes (1.37) - (22.41)
Net loss $ (0.61) $ (3.40) $(39.75)
The accompanying notes to consolidated financial
statements are an integral part of these statements.
UAL CORPORATION AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(In Millions)
December 31
Assets 1994 1993
Current assets:
Cash and cash equivalents $ 500 $ 437
Short-term investments 1,032 1,391
Receivables, less allowance for doubtful
accounts (1994 - $22; 1993 - $22) 889 1,095
Aircraft fuel, spare parts and supplies, less
obsolescence allowance (1994 - $44;
1993 - $70) 285 278
Refundable income taxes - 26
Deferred income taxes 151 124
Prepaid expenses 335 362
3,192 3,713
Operating property and equipment:
Owned -
Flight equipment 7,480 7,899
Advances on flight equipment 713 589
Other property and equipment 2,631 2,673
10,824 11,161
Less - Accumulated depreciation and amortization 4,786 4,691
6,038 6,470
Capital leases -
Flight equipment 1,028 1,027
Other property and equipment 104 104
1,132 1,131
Less - Accumulated amortization 447 395
685 736
6,723 7,206
Other assets:
Intangibles, less accumulated amortization
(1994 - $267; 1993 - $213) 814 866
Deferred income taxes 480 590
Other 555 465
1,849 1,921
$11,764 $12,840
The accompanying notes to consolidated financial
statements are an integral part of these statements.
UAL CORPORATION AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(In Millions, Except Share Data)
December 31
Liabilities and Shareholders' Equity 1994 1993
Current liabilities:
Short-term borrowings $ 269 $ 315
Long-term debt maturing within one year 384 144
Current obligations under capital leases 76 62
Advance ticket sales 1,020 1,036
Accounts payable 651 599
Accrued salaries, wages and benefits 843 943
Accrued aircraft rent 825 893
Other accrued liabilities 838 904
4,906 4,896
Long-term debt 2,887 2,702
Long-term obligations under capital leases 730 827
Other liabilities and deferred credits:
Deferred pension liability 520 571
Postretirement benefit liability 1,148 1,058
Deferred gains 1,363 1,400
Other 477 148
3,508 3,177
Minority interest 49 35
Shareholders' equity:
Preferred stock (Note 12) -
Series A convertible preferred stock,
$600 million aggregate liquidation value - 30
Series B preferred stock, $327 million
aggregate liquidation value - -
Class 1 ESOP convertible preferred stock,
$227 million aggregate liquidation value - -
Common stock, $0.01 par value in 1994 and $5 par
value in 1993; authorized, 100,000,000 shares;
issued, 13,013,217 shares in 1994 and
25,489,745 shares in 1993 - 127
Additional capital invested 1,287 932
Retained earnings (deficit) (1,335) 249
Unearned ESOP preferred stock (83) -
Stock held in treasury-
Preferred (Note 12) (87) -
Common, 574,111 shares in 1994 and 920,808
shares in 1993 (74) (65)
Other (24) (70)
(316) 1,203
Commitments and contingent liabilities (Note 19)
$11,764 $12,840
The accompanying notes to consolidated financial
statements are an integral part of these statements.
UAL CORPORATION AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In Millions)
Year Ended December 31
1994 1993 1992
Cash and cash equivalents at beginning of year $ 437 $ 522 $ 449
Cash flows from operating activities:
Net earnings (loss) 51 (50) (957)
Adjustments to reconcile to net cash provided by
operating activities -
ESOP compensation expense 182 - -
Cumulative effect of accounting change 26 - 540
Extraordinary loss on debt extinguishment - 19 -
Deferred pension expense 276 242 165
Deferred postretirement benefit expense 145 89 75
Depreciation and amortization 725 764 726
Provision (credit) for deferred income taxes 78 (67) (146)
Undistributed (earnings) losses of affiliates (19) 42 (27)
Decrease (increase) in receivables 207 11 (133)
Decrease (increase) in other current assets 40 24 (67)
Increase (decrease) in advance ticket sales (16) (31) 183
Increase (decrease) in accrued income taxes (11) 8 164
Increase (decrease) in accounts payable
and accrued liabilities (389) (163) 142
Amortization of deferred gains (85) (83) (82)
Other, net 124 53 (8)
1,334 858 575
Cash flows from investing activities:
Additions to property and equipment (636) (1,496) (2,519)
Proceeds on disposition of property and equipment 432 1,165 2,367
Decrease (increase) in short-term investments 376 (414) (238)
Acquisition of intangibles - - (150)
Other, net 26 5 3
198 (740) (537)
Cash flows from financing activities:
Issuance of preferred stock 400 591 -
Reacquisition of preferred stock (87) - -
Proceeds from issuance of long-term debt 735 99 198
Repayment of long-term debt (305) (695) (115)
Principal payments under capital leases (87) (55) (50)
Recapitalization distribution (2,070) - -
Increase (decrease) in short-term borrowings (46) (135) 1
Cash dividends (53) (27) -
Other, net 44 19 1
(1,469) (203) 35
Increase (decrease) in cash and cash equivalents
during the year 63 (85) 73
Cash and cash equivalents at end of year $ 500 $ 437 $ 522
The accompanying notes to consolidated financial
statements are an integral part of these statements.
UAL CORPORATION AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
(In Millions, Except Per Share)
Unearned
Additional ESOP
Preferred Common Capital Retained Preferred Treasury
Stock Stock Invested Earnings Stock Stock Other Total
Balance at December 31, 1991 $ - $126 $ 304 $ 1,289 $ - $(105) $(17) $ 1,597
Year ended December 31, 1992:
Net loss - - - (957) - - - (957)
Exercises of stock options - - 5 - - - - 5
Issuance of treasury stock pursuant
to Air Wis acquisition - - 33 - - 31 - 64
Pension liability adjustment - - - - - - (8) (8)
Other - - (1) - - - 6 5
Balance at December 31, 1992 - 126 341 332 - (74) (19) 706
Year ended December 31, 1993:
Net loss - - - (50) - - - (50)
Cash dividends declared on preferred
stock ($5.54 per share) - - - (33) - - - (33)
Issuance of Series A preferred stock 30 - 561 - - - - 591
Exercises of stock options - 1 25 - - - - 26
Issuance of treasury stock
under restricted stock plan - - 6 - - 10 (16) -
Pension liability adjustment - - - - - - (45) (45)
Other - - (1) - - (1) 10 8
Balance at December 31, 1993 30 127 932 249 - (65) (70) 1,203
Year ended December 31, 1994:
Net earnings - - - 51 - - - 51
Cash dividends declared on preferred
stock ($6.25 per Series A share,
$1.44 per Series B share) - - - (59) - - - (59)
Change in Series A stated value (30) - 30 - - - - -
Issuance of ESOP preferred stock - - 227 - (227) - - -
Issuance of Series B preferred stock - - 400 - - - - 400
Exercises of stock options - 1 46 - - - - 47
Issuance of treasury stock
under restricted stock plan - - (7) - - 17 (10) -
Acquisition of treasury shares - - - - - (113) - (113)
Amortization of unearned compensation
under ESOPs and restricted stock plan - - 38 - 144 - 21 203
Recapitalization - (128) (378) (1,576) - - - (2,082)
Pension liability adjustment - - - - - - 37 37
Other - - (1) - - - (2) (3)
Balance at December 31, 1994 $ - $ - $1,287 $(1,335) $ (83) $(161) $(24) $ (316)
The accompanying notes to consolidated financial statements are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation-
UAL Corporation ("UAL") is a holding company whose principal
subsidiary is United Air Lines, Inc. ("United"). The consolidated financial
statements include the accounts of UAL and all of its subsidiaries
(collectively "the Company"). All significant intercompany transactions are
eliminated. Investments in affiliates are carried on the equity basis.
(b) Accounting Changes-
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 112, "Employers' Accounting for
Postemployment Benefits," resulting in a cumulative after-tax charge of $26
million (see Note 16) and SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" (see Note 17).
Effective January 1, 1992, the Company adopted SFAS No. 106,
"Employers Accounting for Postretirement Benefits Other Than Pensions" (see
Note 16) and SFAS No. 109, "Accounting for Income Taxes" (see Note 7).
(c) Reclassification-
In 1994, United began recording certain air transportation price
adjustments, which were previously recorded as commissions, as adjustments
to revenue. Certain amounts in the Statements of Consolidated Operations
for 1993 and 1992 and these Notes to Consolidated Financial Statements have
been reclassified to conform with the current presentation.
(d) Airline Revenues-
Passenger fares and cargo revenues are recorded as operating revenues
when the transportation is furnished. The value of unused passenger tickets
is included in current liabilities.
(e) Foreign Currency Transactions-
Monetary assets and liabilities denominated in foreign currencies are
converted at exchange rates in effect at the balance sheet date. The
resulting foreign exchange gains and losses are charged or credited directly
to income. United has entered into a foreign currency swap contract to
reduce exposure to certain currency fluctuations. Foreign currency gains
and losses on the contract are included in income currently, exactly
offsetting the foreign currency losses and gains on the obligations.
Foreign exchange gains and losses on foreign currency call options which
were previously used to hedge foreign currency obligations were also charged
or credited directly to income.
(f) Cash and Cash Equivalents and Short-term Investments-
Cash in excess of operating requirements is invested in short-term,
highly liquid, income-producing investments. Investments with an original
maturity of three months or less on their acquisition date are classified as
cash and cash equivalents. Other investments are classified as short-term
investments.
(g) Aircraft Fuel, Spare Parts and Supplies-
Aircraft fuel and maintenance and operating supplies are stated at
average cost. Flight equipment spare parts are stated at average cost less
an obsolescence allowance.
(h) Operating Property and Equipment-
Owned operating property and equipment is stated at cost. Property
under capital leases, and the related obligation for future minimum lease
payments, are initially recorded at an amount equal to the then present
value of those lease payments.
Depreciation and amortization of owned depreciable assets is based on
the straight-line method over their estimated service lives. Leasehold
improvements are amortized over the remaining period of the lease or the
estimated service life of the related asset, whichever is less. Aircraft
are depreciated to estimated salvage values, generally over lives of 10 to
25 years; buildings are depreciated over lives of 25 to 45 years; and other
property and equipment are depreciated over lives of three to 15 years.
Properties under capital leases are amortized on the straight-line
method over the life of the lease, or in the case of certain aircraft, over
their estimated service lives. Lease terms are 10 to 19 years for aircraft
and flight simulators and 25 years to 40 years for buildings. Amortization
of capital leases is included in depreciation and amortization expense.
Maintenance and repairs, including the cost of minor replacements, are
charged to maintenance expense accounts. Costs of additions to and renewals
of units of property are charged to property and equipment accounts.
(i) Intangibles-
Intangibles consist primarily of route acquisition costs, slots and
intangible pension assets (see Note 15). Route acquisition costs and slots
are amortized over 40 years and 5 years, respectively.
(j) Mileage Plus Awards-
United accrues the estimated incremental cost of providing free travel
awards earned under its Mileage Plus frequent flyer program when such award
levels are reached.
(k) Deferred Gains-
Gains on aircraft sale and leaseback transactions are deferred and
amortized over the lives of the leases as a reduction of rental expense.
(l) Interest Rate Swap Agreements-
United enters into interest rate swap agreements to hedge interest
rate exposure on certain obligations. The differential to be paid or
received under the swap agreements is charged or credited to interest
expense or rental expense depending on the obligation.
(2) Employee Investment Transaction and Recapitalization
On July 12, 1994, the shareholders of UAL approved a plan of
recapitalization to provide an approximately 55% equity interest in UAL to
certain employees of United in exchange for wage concessions and work-rule
changes. The employees' equity interest will be allocated to individual
employees through the year 2000 under Employee Stock Ownership Plans
("ESOPs") which were created as a part of the recapitalization. The
employee interest may increase to up to 63%, depending on the average market
value of UAL common stock in the year after the transaction closed. Based
on the average market value of UAL common stock through February 23, 1995,
the market value of UAL common stock for the remainder of the measuring
period would have to average at least $204 for any adjustment to be made in
the ESOP percentage interest. Pursuant to the terms of the plan of
recapitalization, holders of old UAL common stock received approximately
$2.1 billion in cash and the remaining 45% (subject to decrease down to 37%)
of the equity in the form of new common stock, which was issued at the rate
of one half share of new common stock for each share of old common stock.
The cash distribution was recorded as a $1.6 billion reduction in retained
earnings, a $0.4 billion reduction in additional capital invested and a $0.1
billion reduction in common stock. In connection with the recapitalization,
United issued $370 million of 10.67% debentures due in 2004 and $371 million
of 11.21% debentures due in 2014 and UAL issued Series B 12 1/4% preferred
stock with an aggregate liquidation preference of $410 million. Pretax
costs of $169 million were incurred in connection with the recapitalization,
including transaction costs and severance payments to certain former United
employees. Of these costs, $48 million were recorded as operating expenses
while the remaining $121 million were recorded in "Miscellaneous, net."
(3) Employee Stock Ownership Plans
The ESOPs established as part of the recapitalization cover the
pilots, U.S. management and salaried employees, and U.S. union ground
employees. The ESOPs include a "Leveraged ESOP", a "Non-Leveraged ESOP" and
a "Supplemental ESOP". Both the Leveraged ESOP and the Non-Leveraged ESOP
are tax qualified plans while the Supplemental ESOP is not a tax qualified
plan. The purpose of having the three ESOPs is to deliver the agreed-upon
shares to employees in a manner which utilizes the tax incentives available
to tax qualified ESOPs to the greatest degree possible. Accordingly, shares
are delivered to employees primarily through the Leveraged ESOP, secondly,
through the Non-Leveraged ESOP, and lastly, through the Supplemental ESOP.
The equity interests are being delivered to employees through two
classes of preferred stock (Class 1 and Class 2 ESOP Preferred Stock,
collectively "ESOP Preferred Stock") and the voting interests are being
delivered through three separate classes of preferred stocks (Class P, M and
S Voting Preferred Stock, collectively "Voting Preferred Stock"). The Class
1 ESOP Preferred Stock will be issued to an ESOP trust in seven separate
sales through January 1, 2000 under the Leveraged ESOP, one of which took
place at the time of the recapitalization. Based on Internal Revenue Code
limitations, shares of the Class 2 ESOP Preferred Stock will either be
contributed to the Non-Leveraged ESOP or allocated as "book-entry shares" to
the Supplemental ESOP, annually through the year 2000. The classes of
preferred stock are described more fully in Note 12, Preferred Stock.
The Leveraged ESOP and Non-Leveraged ESOP are being accounted for
under AICPA Statement of Position 93-6, "Employers' Accounting for Employee
Stock Ownership Plans" ("SOP"). For the Leveraged ESOP, as shares of the
Class 1 ESOP Preferred Stock are sold to an ESOP trust, the Company reports
the issuance as a credit to additional capital invested and a corresponding
charge to unearned ESOP preferred stock. As the shares are earned by
employees in exchange for services performed, the shares are committed to be
released. ESOP compensation expense is recorded for the average fair value
of the shares committed to be released during the period with a
corresponding credit to unearned ESOP preferred stock for the cost of the
shares. Any difference between the fair value of the shares and the cost of
the shares is charged or credited to additional capital invested. For the
Non-Leveraged ESOP, the Class 2 ESOP Preferred Stock is recorded as
additional capital invested as the shares are committed to be contributed in
exchange for employee services, with the offsetting entry to ESOP
compensation expense. The ESOP compensation expense is based on the average
fair value of the shares committed to be contributed, in accordance with the
SOP. The Supplemental ESOP is being accounted for under Accounting
Principle Board Opinion 25, "Accounting for Stock Issued to Employees."
For the Class 2 ESOP Preferred Stock committed to be contributed to
employees under the Supplemental ESOP, employees can elect to receive their
"book entry" shares in cash upon termination of employment. The fair value
of such shares at December 31, 1994 was insignificant.
Shares of ESOP Preferred Stock are legally released or allocated to
employee accounts as of year end. Dividends on the ESOP Preferred Stock are
also paid at the end of the year. Dividends on unallocated shares are used
by the ESOP to pay down the loan from UAL and are not considered dividends
for financial reporting purposes. Dividends on allocated shares are
satisfied by releasing shares from the ESOP's suspense account to the
employee accounts and are charged to equity.
During 1994, the Company recorded $182 million of ESOP compensation
expense for the period July 13 through December 31, 1994. At December 31,
1994, the year-end allocation of Class 1 ESOP Preferred Stock to employee
accounts had not yet been completed. There were 1,131,912 shares of Class 1
ESOP Preferred Stock committed to be released and 657,673 shares held in
suspense by the ESOP as of December 31, 1994. For the Class 2 ESOP
Preferred Stock, 316,472 shares were committed to be contributed to
employees at December 31, 1994. The fair value of the unearned ESOP shares
recorded on the balance sheet at December 31, 1994 was $79 million.
(4) Affiliates
United owns 38% of the Galileo International Partnership ("Galileo")
through a wholly-owned subsidiary. United's investment in Galileo, which
owns the Apollo and Galileo computer reservations systems, is carried on the
equity basis. United also owns 77% of the Apollo Travel Services
Partnership ("ATS"), which markets the Apollo computer reservations systems
to travel agencies in the U. S. and Mexico, and its accounts are
consolidated. Prior to a September 1993 merger, United owned 50% of the
Covia Partnership ("Covia") and 25.6% of Galileo Ltd., Galileo's and ATS's
predecessor companies, which were accounted for on the equity basis. The
consolidation of ATS resulted in non-cash increases of $78 million in
assets, $46 million in liabilities and $34 million in minority interests as
of the date of the merger.
Under operating agreements with Covia prior to the merger, United
provided certain computer support services for, and purchased computer
reservation services, communications and other information from, Covia.
Revenues derived from the sale of services to Covia amounted to
approximately $21 million in 1993 and $22 million in 1992. The cost to
United of services purchased from Covia amounted to approximately $168
million in 1993 and $219 million in 1992. Under operating agreements with
Galileo subsequent to the merger, United purchases computer reservation
services from Galileo and provides marketing, sales and communication
services to Galileo. Revenues derived from the sale of services to Galileo
amounted to approximately $233 million in 1994 and $58 million in 1993. The
cost to United of services purchased from Galileo amounted to approximately
$94 million in 1994 and $47 million in 1993.
Summarized financial information of Galileo follows (in millions):
December 31,
1994 1993
Current assets $134 $141
Non-current assets 421 467
Total assets 555 608
Current liabilities 195 173
Long-term liabilities 321 440
Total liabilities 516 613
Net assets $ 39 $ (5)
Period From
Twelve Months September 16,
Ended 1993 Through
December 31, December 31,
1994 1993
Services revenues $801 $ 186
Costs and expenses 752 327
Net earnings (loss) $ 49 $(141)
During 1993, Galileo recorded $114 million of charges which included the
cost of eliminating duplicate facilities and operations.
(5) Other Income (Expense) - Miscellaneous
Other income (expense) - miscellaneous, net consisted of the following:
1994 1993 1992
(In Millions)
Foreign exchange gains or losses $ 15 $(20) $ 2
Amortization of hedge
transaction costs (6) (6) (5)
Net gains on disposition of property
or rights 10 3 41
Minority interests (22) (1) -
Recapitalization transaction costs (121) - -
Write down of aircraft to
net realizable value - (59) -
Gain on settlement of 1985
annuity purchases - 17 -
Settlement of class action claims
regarding airline fare data - - (13)
Other - (5) (18)
$(124) $(71) $ 7
(6) Per Share Amounts
Per share amounts were based on weighted average common shares
outstanding - 18,791,587 in 1994, 24,345,857 in 1993 and 24,069,786 in
1992. Common stock equivalents, including ESOP shares committed to be
released, were not included in the computations as they did not have a
dilutive effect. Per share amounts were calculated after providing for
preferred stock dividends of $59 million in 1994 and $33 million in 1993.
Earnings available to common stockholders were also reduced by $3 million
in 1994 for the excess of amounts paid to reacquire UAL preferred stock
over the liquidation preference of such stock.
In connection with the July 1994 recapitalization, each old common
share was exchanged for one half new common share. As required under
generally accepted accounting principles for transactions of this type,
the historical weighted average shares outstanding have not been restated.
Thus, direct comparisons between 1994 and prior years' per share amounts
are not meaningful.
(7) Income Taxes
In 1994, the Company was subject to the alternative minimum tax
("AMT"). The federal income tax liability is the greater of the tax
computed using the regular tax system or the tax under the AMT system.
Certain preferences, mainly depreciation adjustments, have caused
alternative minimum taxable income and the resulting AMT liability to
exceed regular taxable income and the regular tax liability. The excess
of the AMT liability over the regular tax liability produces AMT credits
which are carried forward indefinitely.
The provision (credit) for income taxes is summarized as follows:
1994 1993 1992
(In Millions)
Current-
Federal $ 12 $ 52 $ (90)
State 4 (1) (3)
16 51 (93)
Deferred-
Federal 73 (75) (129)
State 5 8 (17)
78 (67) (146)
$ 94 $ (16) $(239)
The income tax provision (credit) differed from amounts computed at the
statutory federal income tax rate, as follows:
1994 1993 1992
(In Millions)
Income tax provision (credit)
at statutory rate $ 60 $ (17) $(223)
State income taxes, net of
federal income tax benefit 6 5 (13)
Nondeductible employee meals 22 8 8
Nondeductible ESOP transaction costs 21 - -
Foreign sales corporation benefit (1) (1) (6)
Foreign tax credits (3) (3) (2)
Rate change effect (14) (9) -
Other, net 3 1 (3)
Income tax provision (credit)
as reported $ 94 $ (16) $(239)
The Company adopted SFAS No. 109 "Accounting for Income Taxes,"
effective January 1, 1992. This statement provides for an asset and
liability approach to accounting for income taxes. The Company recognized
a tax benefit of $40 million for the cumulative effect of adopting SFAS
No. 109. Deferred income taxes (credit) reflect the impact of "temporary
differences" between amounts of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws. These
temporary differences are determined in accordance with SFAS No. 109 and
are more inclusive in nature than "timing differences" as determined under
previously applicable accounting principles.
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities for 1994 and 1993 are as
follows:
1994 1993
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
(In Millions)
Employee benefits, including
postretirement medical $ 537 $ 13 $ 599 $ 31
Prepaid commissions - 52 - 49
Depreciation, capitalized
interest and transfers of
tax benefits - 1,074 - 1,119
Gains on sale and leasebacks 472 - 480 -
Rent expense 254 - 207 -
AMT credit carryforward 262 - 195 -
Foreign exchange
gains and losses 98 - 84 -
Frequent flyer accrual 70 - 72 -
Net operating loss
carryforwards 58 - 74 -
Other 134 115 272 70
$1,885 $1,254 $1,983 $1,269
The Company has determined, based on its history of operating
earnings and expectations of future taxable income, that it is more likely
than not that the deferred tax assets at December 31, 1994 will be
realized.
At December 31, 1994, UAL and its subsidiaries had $262 million of
federal AMT credit carryforwards available for an indefinite period, $4
million of general business credit carryforwards which expire between 2004
and 2009, $40 million of state tax benefit from net operating loss
carryforwards expiring between 1997 and 2009 and $18 million of federal
tax benefit from net operating loss carryforwards expiring between 2006
and 2009.
(8) Short-Term Borrowings
At December 31, 1994 and 1993, United had outstanding $269 million
and $315 million, respectively, in short-term borrowings, bearing average
interest rates of 5.63% and 3.34%, respectively. Receivables amounting to
$426 million at December 31, 1994 and $367 million at December 31, 1993
were pledged by United to secure repayment of such outstanding borrowings.
The maximum available amount of borrowings under this arrangement is $360
million.
(9) Long-Term Debt
A summary of long-term debt, excluding current maturities, as of
December 31 is as follows (interest rates are as of December 31, 1994):
1994 1993
(In Millions)
Secured notes, 5.525% to 11.54%, averaging
8.38%, due through 2014 $ 1,087 $ 1,462
Debentures, 6.75% to 11.21%, averaging 10.03%,
due 1997 to 2021 1,591 1,000
Deferred purchase certificates, Japanese yen-
denominated, 7.75%, due through 1998 169 178
Convertible debentures, 7.75%, due 2000
through 2010 26 36
Promissory notes, 5.75% to 6.82%, averaging
6.03%, due through 1998 34 41
2,907 2,717
Unamortized discount on debt (20) (15)
$ 2,887 $ 2,702
In connection with the July 1994 recapitalization, United issued
$370 million of 10.67% debentures due in 2004 and $371 million of 11.21%
debentures due in 2014. The debentures are unsecured obligations.
In the second quarter of 1993, United retired $500 million of senior
subordinated notes. The notes were scheduled to mature in 1995 ($150
million) and 1998 ($350 million). An extraordinary loss of $19 million,
after tax benefits of $9 million, was recorded in the first quarter of
1993, based on United's stated intention to retire the notes.
The convertible debentures, which are obligations of Air Wis
Services, Inc. ("Air Wis"), are convertible into shares of old UAL common
stock, at the conversion price of $259.08 (equivalent to approximately
$348.54 per share of new UAL common stock). In addition, $4 million of
these debentures and $3 million of similar debentures with a conversion
price of $198.02 (equivalent to approximately $226.42 per share of new UAL
common stock) are classified in current maturities. In 1994, Air Wis
reacquired $3 million of these debentures, resulting in an insignificant
loss.
In addition to scheduled principal payments, in 1994 the Company
repaid secured notes in the principal amount of $218 million. In January
and February 1995, United repaid an additional $101 million in principal
amount of secured notes and $150 million in principal amount of
debentures, respectively, resulting in an insignificant loss. At December
31, 1994, United had outstanding a total of $316 million of long-term debt
bearing interest at rates 85 to 128 basis points over the London interbank
offered rate ("LIBOR"). In connection with certain of these debt
financings, United has entered interest rate swap agreements to
effectively fix interest rates at December 31, 1994 between 8.554% and
8.6% on $71 million of notional amount (See Note 18).
Maturities of long-term debt for each of the four years after 1995
are: 1996 -- $119 million; 1997 -- $220 million; 1998 -- $188 million;
and 1999 -- $48 million. Various assets, principally aircraft, having an
aggregate book value of $1.409 billion at December 31, 1994, were pledged
under various loan agreements.
At December 31, 1994, UAL and United had an effective shelf
registration statement on file with the Securities and Exchange Commission
to offer up to $1.035 billion of securities, including secured and
unsecured debt, equipment trust and pass through certificates, equity or a
combination thereof. UAL's ability to issue equity securities is limited
by its certificate of incorporation, which was restated in connection with
the recapitalization.
(10) Lease Obligations
The Company leases aircraft, airport passenger terminal space,
aircraft hangars and related maintenance facilities, cargo terminals,
other airport facilities, real estate, office and computer equipment and
vehicles.
Future minimum lease payments as of December 31, 1994, under capital
leases and operating leases having initial or remaining noncancelable
lease terms of more than one year are as follows:
Operating Capital
Leases Leases
(In Millions)
Payable during-
1995 $ 1,337 $ 142
1996 1,358 144
1997 1,343 139
1998 1,377 144
1999 1,199 119
After 1999 20,099 558
Total minimum lease payments $26,713 1,246
Imputed interest (at rates of 5.3%
to 12.2%) (440)
Present value of minimum lease payments 806
Current portion (76)
Long-term obligations under capital leases $ 730
As of December 31, 1994, United leased 315 aircraft, 45 of which
were under capital leases. These leases have terms of four to 26 years,
and expiration dates range from 1996 through 2018. Under the terms of
leases for 306 of the aircraft, United has the right of first refusal to
purchase, at the end of the lease term, certain aircraft at fair market
value and others at either fair market value or a percentage of cost.
United has 21 Airbus A320-200 aircraft under 24-year operating leases
which are cancelable upon eleven months notice during the initial 10 years
of the leases.
Amounts charged to rent expense, net of minor amounts of sublease
rentals, were $1.222 billion in 1994, $1.208 billion in 1993, and $1.060
billion in 1992. Included in rent expense were insignificant amounts of
contingent rentals, resulting from changes in interest rates for operating
leases under which the rent payments are based on variable interest rates.
In connection with certain of these leases, United has entered interest
rate swap agreements (See Note 18).
(11) Foreign Operations
United conducts operations in various foreign countries, principally
in the Pacific, Europe and Latin America. Operating revenues from foreign
operations were approximately $4.920 billion in 1994, $4.500 billion in
1993 and $3.890 billion in 1992.
(12) Preferred Stock
UAL is authorized to issue up to 16,000,000 shares of serial
preferred stock, 25,000,000 shares each of Class 1 and Class 2 ESOP
Preferred Stock, and an aggregate 25,100,000 shares of Class P, M, and S
Voting Preferred Stock.
At December 31, 1994, there were outstanding 5,999,900 shares of
Series A cumulative 6.25% convertible preferred stock. Effective March
31, 1994, UAL changed the stated capital of the Series A preferred stock
from $30 million ($5.00 per preferred share) to $60,000 ($0.01 per
preferred share), with the difference being attributed to additional
capital invested. Subsequent to the recapitalization, each share of
Series A preferred stock is convertible into $54.19 in cash and
approximately 0.3195 shares of UAL common stock (equivalent to a
conversion price of $143.38 per common share). In December 1994, 100
shares of Series A preferred stock were converted, resulting in the
issuance of 31 shares of UAL common stock. Under its terms, any portion
of the convertible preferred stock is redeemable after April 30, 1996, at
UAL's option, at $100 per share plus a premium which begins at 4.375%
declining to zero ratably over seven years. The Series A shares have an
aggregate liquidation preference of $600 million, or $100 per share.
On February 3, 1995, the Company filed a registration statement with
the Securities and Exchange Commission offering to exchange up to $600
million aggregate principal amount of convertible subordinated debentures,
due 2025, for up to all shares of the outstanding Series A cumulative
6.25% convertible preferred stock. Each $1,000 principal amount of
debentures issued would be convertible into a combination of cash in the
amount of $541.90 and approximately 3.192 shares of new UAL common stock
(equivalent to a conversion price of $143.50 per share of new common
stock). To the extent that shares of Series A preferred stock are
exchanged for the debentures, the Company's shareholders' equity will be
reduced on a net basis by the aggregate fair value of the debentures
issued. A reduction in shareholders' equity will reduce surplus as
defined under Delaware General Corporation Law ("DGCL"). DGCL requires
that dividends on outstanding capital stock may only be made from surplus
or the net profits of the Company for the fiscal year in which the
dividend is declared and/or the preceding fiscal year.
In connection with the July 1994 recapitalization, UAL issued
16,416,000 depositary shares, each representing 1/1000 of one share of
Series B 12 1/4% preferred stock, resulting in net proceeds of $400
million, which was recorded as additional capital invested. The shares
issued had an aggregate liquidation preference of $410 million, or $25 per
depositary share ($25,000 per Series B preferred share), and a stated
capital of $164 ($0.01 per Series B preferred share). Under its terms,
any portion of the Series B preferred stock or the depositary shares is
redeemable for cash after July 11, 2004, at UAL's option, at the
equivalent of $25 per depositary share, plus accrued dividends. The
Series B preferred stock is not convertible into any other securities, has
no stated maturity and is not subject to mandatory redemption. In the
fourth quarter of 1994, UAL repurchased 3,336,400 depositary shares,
representing 3,336.4 shares of Series B preferred stock, at an aggregate
cost of $87 million to be held in treasury. At December 31, 1994, there
were outstanding 13,079,600 depositary shares representing 13,079.6 shares
of Series B preferred stock.
The Series A and B preferred stocks rank senior to all other
preferred and common stocks as to receipt of dividends and amounts
distributed upon liquidation. The Series A and B preferred stocks have
voting rights only to the extent required by law and with respect to
charter amendments that adversely affect the preferred stock or the
creation or issuance of any security ranking senior to the preferred
stock. Additionally, if dividends are not paid for six cumulative
quarters, the Series A and Series B preferred shareholders together are
entitled to elect two additional members to the UAL Board of Directors
until all dividends are paid in full.
At December 31, 1994, 1,789,585 shares of Class 1 ESOP Preferred
Stock and no shares of Class 2 ESOP Preferred Stock were issued. An
aggregate of 17,675,345 shares of Class 1 and Class 2 ESOP Preferred Stock
will be issued in connection with the recapitalization and establishment
of the ESOPs (see notes 2 and 3). Each share of ESOP Preferred Stock is
convertible into one share of UAL common stock, subject to adjustment
under certain conditions. The stock has a par value of $0.01 per share,
is nonvoting, and has a liquidation value of $126.96 per share plus all
accrued and unpaid dividends. The Class 1 ESOP Preferred Stock provides a
fixed annual dividend of $8.8872 per share, which ceases on March 31,
2000; the Class 2 does not pay a fixed dividend.
Class P, M, and S Voting Preferred Stocks were established to
provide the voting power to the employee groups participating in the
ESOPs. As of December 31, 1994, one share each of Class P, M and S Voting
Preferred Stock were outstanding. Additional Voting Preferred Stock will
be issued as shares of the Class 1 and Class 2 ESOP Preferred Stock are
allocated to employees. In the aggregate, 17,675,345 shares of Voting
Preferred Stock will be issued through the year 2000. The Voting
Preferred Stock at any time outstanding commands voting power for
approximately 55% (subject to increase to up to 63%) of the vote of all
classes of capital stock in all matters requiring a shareholder vote,
other than for the election of members of the Board of Directors. The
Voting Preferred Stock will generally continue to represent approximately
55% (subject to increase to up to 63%) of the aggregate voting power until
the "Sunset". The "Sunset" will occur when the common shares issuable
upon conversion of the outstanding Class 1 and Class 2 ESOP Preferred
Stock, plus any common equity and available unissued ESOP shares held in
the ESOPs or any other employee benefit plans sponsored by the Company for
the benefit of its employees, represent, in the aggregate less than 20% of
the common equity and available unissued ESOP shares of the Company.
Under current actuarial assumptions, the Company estimates that the
"Sunset" will occur in the year 2016 if no additional purchases are made
by eligible employee retirement plans. The Voting Preferred Stock has a
par value and liquidation preference of $0.01 per share. The stock is not
entitled to receive any dividends and is convertible into one
ten-thousandth of a share of UAL common stock.
(13) Common Shareholders' Equity
In connection with the July 1994 recapitalization, each share of old
common stock was converted to one half share of new common stock (and cash
in lieu of fractional shares) and $84.81 in cash. As a result, the number
of outstanding shares was reduced proportionately.
Changes in the number of shares of UAL common stock outstanding during the
years ended December 31 were as follows:
1994 1993 1992
Old shares -
Shares outstanding at
beginning of year 24,568,937 24,238,482 23,758,106
Shares issued in connection
with Air Wis merger - - 443,593
Stock options exercised 79,764 205,075 40,464
Shares issued from treasury
under compensation arrangements 1,100 142,003 3,165
Shares acquired for treasury (88,261) (7,623) (346)
Forfeiture of restricted stock (9,800) (9,000) (6,500)
Other (379) - -
24,551,361 24,568,937 24,238,482
Effect of recapitalization (12,275,680) - -
New shares -
Stock options exercised 237,505 - -
Shares issued from treasury under
compensation arrangements 112,767 - -
Shares acquired for treasury (186,898) - -
Other 51 - -
Shares outstanding at end of year 12,439,106 24,568,937 24,238,482
At December 31, 1994 and 1993, UAL held 574,111 and 920,808 shares,
respectively, of common stock in treasury.
There is a preferred share purchase right associated with each share
of outstanding UAL common stock. As long as the rights are associated
with the shares of UAL common stock, each new share of common stock issued
by UAL, including shares of common stock into which the ESOP convertible
preferred stock and the Series A preferred stock are convertible, will
include one right. Upon the occurrence of certain events, each right will
entitle its holder to purchase one one-hundredth of a share of Series C
junior participating preferred stock, without par value, for $185 (subject
to antidilution provisions). The rights will become exercisable ten
business days after any person or group announces its beneficial ownership
of 15% or more of UAL common stock, or announces an offer for 30% or more
of UAL common stock. If any person or group acquires 15% or more of UAL
common stock (other than the ESOP trustee, ALPA, the IAM and the
beneficial owners of UAL common stock eligible to report and reporting on
Schedule 13G under the Securities Exchange Act of 1934), each right will
entitle its holder (except the acquiring party) to buy common stock of UAL
having a market value of three times the exercise price of the right. If,
after the rights become exercisable, UAL is involved in a merger or sells
more than 50% of its assets or earning power, each right will entitle its
holder to buy common stock of the surviving entity having a market value
of three times the exercise price of the right. UAL has the right to
redeem the rights for $0.05 per right prior to the time they become
exercisable. The rights expire on December 31, 1996. The rights
agreement provides that the transactions associated with the
recapitalization did not and will not cause the rights to become
exercisable as a result thereof.
(14) Stock Options and Awards
The Company has granted options to purchase common stock to various
officers and employees. The option price for all stock options is at
least 100% of the fair market value of UAL common stock at the date of
grant. Options generally vest and become exercisable in up to five equal,
annual installments beginning one year after the date of grant, and
generally expire in 10 years.
Prior to 1992, stock appreciation rights ("SARs") were granted in
tandem with certain stock options. On exercise of these SARs, holders
would receive, in cash, 100% of the appreciation in fair market value of
the shares subject to the SAR. The estimated payment value of SARs, net
of market value adjustments, was charged to earnings over the vesting
period. In 1992, all active officers relinquished their SARs but retained
the tandem stock options. As a result of the 1994 recapitalization, all
outstanding options became fully vested at the time of the transaction and
the holders of such options became eligible to exercise the cashless
exercise features of stock options. Under a cashless exercise, the
Company withholds, at the election of the optionee, from shares that would
otherwise be issued upon exercise that number of shares having a fair
market value equal to the exercise price and related income taxes. For
outstanding options eligible for cashless exercise, changes in the market
price of the stock are charged to earnings currently. At December 31,
1994, 12,927 SARs were outstanding with an average exercise price of
$75.70 per old share and option holders were eligible for cashless
exercise in connection with 1,068,173 outstanding options with an average
exercise price of $133.76 per old share. The expense (credit) recorded
for SARs and cashless exercises was $15 million in 1994, $1 million in
1993 and $(1) million in 1992.
Stock options which were outstanding at the time of the
recapitalization are exercisable for shares of old common stock, each of
which is in turn converted into one half share of new common stock and
$84.81 in cash upon exercise. Subsequent to the recapitalization, the
Company granted stock options which are exercisable for shares of new
common stock.
Stock option activity for the past three years was as follows:
New Share
Options Old Share Options
1994 1994 1993 1992
Outstanding at beginning
of year - 1,673,782 1,864,555 1,318,603
Granted 959,500 - 65,750 686,500
Exercised - (554,771) (205,075) (40,464)
Surrendered upon
exercise of SARs - (1,000) (16,198) (8,334)
Terminated (13,500) (36,911) (35,250) (91,750)
Outstanding at end
of year 946,000 1,081,100 1,673,782 1,864,555
Exercisable at
end of year 150,000 1,081,100 733,782 603,180
Reserved for future
grants at end of year 454,000 - 300,111 330,611
Average option price:
Per old share -
Exercised N/A $ 95.32 $ 87.61 $ 88.16
Outstanding at end of year N/A $ 132.77 $ 120.21 $ 116.11
Per new share -
Exercised - $ 21.02 (1) N/A N/A
Outstanding at end of year $ 90.36 $ 95.92 (1) N/A N/A
(1) Represents the new share equivalent of the old share options.
The expiration dates for options outstanding as of December 31, 1994
ranged from January 12, 1995 to December 15, 2004. At December 31, 1994,
outstanding options were held by 199 officers and key employees.
The Company has also awarded shares of restricted stock to key officers
and employees. These restricted shares generally vest over a five-year
period. Unvested shares are subject to certain transfer restrictions and
forfeiture under certain circumstances. Unearned compensation, representing
the fair market value of the stock on the date of award, is amortized to
salaries and related costs over the vesting period. During 1993, 138,500
restricted shares were issued from treasury stock and awarded to employees.
No restricted shares were issued during 1992. In 1994, 1993 and 1992, 9,800,
9,000 and 6,500 shares, respectively, were forfeited and returned to treasury
stock. As a result of the 1994 recapitalization, all outstanding restricted
shares became vested at the time of the transaction and $12 million of
compensation expense was recorded for the remaining balance of unearned
compensation attributable to the outstanding shares. In 1994, subsequent to
the recapitalization, 112,767 restricted shares of new common stock were
issued from treasury, of which 66,500 were still restricted as of December
31, 1994. Additionally, 29,733 shares were reserved for future award.
(15) Retirement Plans
The Company has various retirement plans which cover substantially all
employees. Defined benefit plans covering certain employees (primarily union
ground employees) provide a stated benefit for specified periods of service,
while defined benefit plans for other employees provide benefits based on
employees' years of service and average compensation for a specified period
of time before retirement. Pension costs are funded to at least the minimum
level required by the Employee Retirement Income Security Act of 1974. The
company also provides several defined contribution plans which cover
substantially all U. S. employees who have completed one year of service.
For certain groups of employees (primarily pilots), the company contributes
an annual amount on behalf of each participant, calculated as a percentage of
the participants' earnings or a percentage of the participants' contributions.
The following table sets forth the defined benefit plans' funded status
and amounts recognized in the statement of consolidated financial position as
of December 31:
1994 1993
Accumulated Accumulated
Benefits Benefits
Exceed Exceed
Assets Assets
(In Millions)
Actuarial present value of
accumulated benefit obligation $4,191 $4,200
Actuarial present value of
projected benefit obligation $4,577 $5,025
Plan assets at fair value 3,785 3,589
Projected benefit obligation
in excess of plan assets 792 1,436
Unrecognized net gain (loss) (13) (624)
Prior service cost not yet recognized
in net periodic pension cost (523) (455)
Remaining unrecognized net asset (3) 16
Adjustment required to
recognize minimum liability 302 346
Pension liability recognized in the
statement of consolidated financial
position $ 555 $ 719
For the valuation of pension obligations as of December 31, 1994 and
1993, the weighted average discount rates used were 8.75% and 7.5%,
respectively, and the rates of increase in compensation were 3.15% and
4.0%, respectively. Substantially all of the accumulated benefit
obligation is vested.
Total pension expense for all retirement plans (including defined
contribution plans) was $350 million in 1994, $346 million in 1993, and
$324 million in 1992.
Plan assets are invested primarily in governmental and corporate
debt instruments and corporate equity securities. The expected average
long-term rate of return on plan assets at December 31 was 9.75% for 1994,
9.75% for 1993 and 10.25% for 1992.
The net periodic pension cost of defined benefit plans included the
following components:
1994 1993 1992
(In Millions)
Service cost - benefits earned
during the year $ 216 $ 186 $ 180
Interest cost on projected
benefit obligation 379 356 320
Actual (return) loss on
plan assets 28 (310) (289)
Net amortization and deferral (351) 19 24
Net periodic pension cost $ 272 $ 251 $ 235
(16) Other Employee Benefits
The Company provides certain health care benefits, primarily in the
U. S., to retirees and eligible dependents. Benefits are generally funded
from company assets on a current basis, although amounts sufficient to pay
claims incurred, but not yet paid, are held in trust. Certain plan
benefits are subject to co-payments, deductibles and other limits
described in the plans and the benefits are reduced once a retiree becomes
eligible for Medicare. The Company also provides certain life insurance
benefits to retirees. The assets to fund retiree life insurance benefits
are being held in a deposit trust administration fund with a major
insurance company. The Company has reserved the right, subject to
collective bargaining agreements, to modify or terminate the health care
and life insurance benefits for both current and future retirees.
Effective January 1, 1992, the Company adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions".
This standard requires that the expected cost of postretirement benefits
be charged to expense during the years in which employees render service.
Upon adoption, the Company recorded a one-time pretax charge of $925
million ($580 million after tax) as the cumulative effect of accounting
change.
Information on the plans' funded status, on an aggregate basis at
December 31, follows (in millions):
1994 1993
Accumulated postretirement
benefit obligation:
Retirees $ 383 $ 416
Other fully eligible participants 183 236
Other active participants 590 679
Total accumulated postretirement
benefit obligation 1,156 1,331
Unrecognized net gain (loss) 138 (149)
Fair value of plan assets (95) (91)
Accrued postretirement benefit obligation $1,199 $1,091
Net postretirement benefit costs included the following components (in
millions):
1994 1993 1992
Service cost - benefits attributed to
service during the period $ 46 $ 38 $ 28
Amortization of unrecognized net loss 3 3 -
Interest cost on benefit obligation 95 92 83
Net postretirement benefit costs $144 $133 $111
The discount rate used to estimate the accumulated postretirement
benefit obligation as of December 31, 1994 and 1993 was 8.75% and 7.5%,
respectively. The assumed health care cost trend rate was 10% and 11% for
1994 and 1993, respectively, declining annually to a rate of 4% by the year
2001 and remaining level thereafter. The effect of a 1% increase in the
assumed health care cost trend rate would increase the accumulated
postretirement benefit obligation at December 31, 1994, by $150 million and
the aggregate of the service and interest cost components of net
postretirement benefit cost for 1994 by $22 million.
The Company adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits," effective January 1, 1994. SFAS No. 112 requires
recognition of the liability for postemployment benefits during the period
of employment. Such benefits include company paid continuation of group
life insurance and medical and dental coverage for certain employees after
employment but before retirement. The effect of adopting SFAS No. 112 was a
cumulative charge for recognition of the transition liability of $42
million, before tax benefits of $16 million. The ongoing expenses related
to postemployment benefits will vary based on actual claims experience.
(17) Investments in Debt Securities
The Company adopted SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," effective January 1, 1994. The Company's
investments in such securities are included in "Cash and cash equivalents"
and "Short-term investments." The following information pertains to the
Company's investments in such securities at December 31, 1994 (in millions):
Gross
Aggregate Unrealized Average
Fair Holding Cost Maturity
Value Losses Basis (Months)
Available-for-sale:
U.S. government agency
debt securities $ 334 $ 2 $ 336 9
Corporate debt securities $ 341 $ 2 $ 343 10
Other debt securities $ 146 $ 1 $ 147 8
Held-to-maturity:
U.S. government agency
debt securities $ 97 $ - $ 97 6
Corporate debt securities $ 222 $ - $ 222 4
Other debt securities $ 384 $ - $ 384 2
The net unrealized holding loss on available-for-sale securities
of $5 million has been recorded as a component of shareholders' equity,
net of related tax benefits. The proceeds from sales of
available-for-sale securities were $255 million in 1994. Such sales
resulted in insignificant gross realized gains and losses, based on the
cost of the specific securities sold. These gains and losses were
included in interest income for the year.
(18) Financial Instruments and Off-Balance-Sheet Risk
Balance Sheet Financial Instruments: Fair Values
The carrying amounts reported in the consolidated balance sheets
for cash and cash equivalents, short-term investments classified as
"held-to-maturity", and short-term borrowings approximate fair value due
to the immediate or short-term maturities of these financial
instruments. Investments in debt securities classified as
"available-for-sale" are stated at fair value based on the quoted market
prices for the securities (see note 17).
The fair value of long term debt, including debt due within one
year, is primarily based on the quoted market prices for the same or
similar issues or on the then current rates offered for debt with
similar terms and maturities. The fair value of long-term debt,
including debt due within one year, at December 31, 1994 and 1993 was
$2.983 billion and $3.041 billion, respectively, compared with carrying
values of $3.271 billion and $2.846 billion.
Off Balance Sheet Financial Instruments: Risks and Fair Values
United has entered interest rate swap agreements in order to
manage the interest rate exposure associated with certain variable rate
debt and leases. The swap agreements have remaining terms averaging 16
years, corresponding to the terms of the related debt or lease
obligations. Under the agreements, United makes payments to
counterparties at fixed rates and in return receives payments based on
LIBOR. United's theoretical risk in the swaps is the cost of replacing
the contracts at current market interest rates in the event of default
by any of the counterparties; however, United does not anticipate such
default since the counterparties are major financial institutions with
investment grade ratings by all rating agencies. In addition, the risk
of such default is mitigated by provisions in the contracts which
require either party to post increasing amounts of collateral as the
value of the contract moves against them. Counterparty credit risk is
further minimized by periodic settlements throughout the duration of the
contract. At December 31, 1994, a notional amount of $479 million of
interest rate swap agreements effectively fixed interest rates between
8.02% and 8.65% on such obligations. The fair values to United of
interest rate swap agreements at December 31, 1994 and 1993 were $26
million and $(8) million, respectively, taking into account interest
rates in effect at the time.
In the first quarter of 1994, United entered into a ten-year
foreign currency swap contract to reduce exposure to currency
fluctuations in connection with 29 billion of Japanese yen-denominated
obligations. The currency swap contract, which was designated as a
hedge, effectively fixed, at then current exchange rates, future
principal, interest and lease payments. The currency swap contract
exactly matches the cash flows and maturities of the obligations it
hedges. At December 31, 1994, the swap contract had a notional amount
of $293 million, which will reduce periodically as payments are made.
The fair value of the currency swap contract to United at December 31,
1994 was approximately $23 million based on the reduction in the yen to
dollar exchange rate since United entered into the contract.
United's theoretical risk in the currency swap is the cost of
replacing the contract at current market rates in the event of default
by the counterparty; however, United does not anticipate such default
since the counterparty is a major money center bank with an investment
grade rating by all rating agencies. Furthermore, the risk of such
default is mitigated by provisions in the contract which require either
party to post increasing amounts of collateral as either their credit
rating deteriorates or the value of the contract moves against them.
Counterparty credit risk is minimal since currency is exchanged
simultaneously throughout the duration of the contract.
The currency swap replaced short-term foreign currency call
options and forward contracts which expired under their own terms,
resulting in an insignificant loss that was included in income,
offsetting the insignificant gain recorded from the related obligations
that were being hedged. In October 1994, United terminated the portion
of the foreign currency swap contract hedging future interest payments
in connection with the Japanese yen-denominated obligations. While this
portion of the contract was in effect, foreign currency gains and losses
on it were deferred and included in interest as it accrued. The gain
resulting from the contract termination, net of losses previously
deferred in connection with the interest payments, is being deferred and
amortized over the remaining life of the obligations.
Financial Guarantees
As of December 31, 1994, United had guaranteed $77 million of
indebtedness of affiliates.
Special facility revenue bonds have been issued by certain
municipalities to build or improve airport facilities leased by United.
Under the lease agreements, United is required to make rental payments
in amounts sufficient to pay the maturing principal and interest
payments on the bonds. At December 31, 1994, $860 million principal
amount of such bonds was outstanding. As of December 31, 1994, UAL and
United had jointly guaranteed $35 million of such bonds and United had
guaranteed $834 million of such bonds, including accrued interest.
Included in this amount are bonds issued by the City of Denver in
connection with the construction of certain United facilities at Denver
International Airport, which will replace Stapleton International
Airport in 1995.
Transfers of the tax benefits of accelerated depreciation and
investment tax credits associated with the acquisition of certain
equipment have been made previously by United to various tax lessors
through tax lease transactions. Proceeds from tax benefit transfers
were recognized as income in the year the lease transactions were
consummated. The subject equipment is being depreciated for book
purposes. United has agreed to indemnify (guaranteed in some cases by
UAL) the tax lessors against loss of such benefits in certain
circumstances and has agreed to indemnify others for loss of tax
benefits in limited circumstances for certain used aircraft purchased by
United subject to previous tax lease transactions. Certain tax lessors
have required that letters of credit be issued in their favor by
financial institutions as security for United's indemnity obligations
under the leases. The outstanding balance of such letters of credit
totaled $58 million at December 31, 1994. At that date, United had
granted mortgages on aircraft and engines having a total book value of
$238 million as security for indemnity obligations under tax leases and
letters of credit.
Concentration of Credit Risk
The Company does not believe it is subject to any significant
concentration of credit risk. Most of the Company's receivables result
from sales of tickets to individuals through travel agents, company
outlets or other airlines, often through the use of major credit cards.
These receivables are short term, generally being settled shortly after
the sale.
(19) Commitments and Contingent Liabilities
The Company has certain contingencies resulting from litigation
and claims (including environmental issues) incident to the ordinary
course of business. Management believes, after considering a number of
factors, including (but not limited to) the views of legal counsel, the
nature of contingencies to which the Company is subject and its prior
experience, that the ultimate disposition of these contingencies is not
expected to materially affect UAL's consolidated financial position or
results of operations.
At December 31, 1994, commitments for the purchase of property and
equipment, principally aircraft, approximated $3.9 billion after
deducting advance payments. An estimated $1.2 billion is expected to be
expended during 1995, $0.7 billion in 1996, $1.3 billion in 1997, $0.5
billion in 1998 and $0.2 billion in 1999 and thereafter. The major
commitments are for the purchase of thirty-four B777 aircraft, which are
expected to be delivered between 1995 and 1999.
In addition to the B777 order, United has arrangements with Airbus
and International Aero Engines to lease an additional 29 A320 aircraft,
which are scheduled for delivery through 1998. Under the agreement,
United is making advance payments through 1998 which are refundable upon
delivery of each aircraft.
At December 31, 1994, United also had purchase options for 162
B737 aircraft, 39 B757 aircraft, 34 B777 aircraft, 49 B747 aircraft, 8
B767 aircraft and 50 A320 aircraft. Under the terms of certain of these
options which are exercisable during the period 1995 through 1997,
United would forfeit significant deposits on such options it does not
exercise. Consistent with its revised capital spending plan, United has
recently cancelled options on certain aircraft.
United's Indianapolis Maintenance Center began operation in March
1994, initially performing maintenance on B737 aircraft. In December
1994, the UAL Board of Directors approved the relocation of B757 and
B767 airframe maintenance to the Indianapolis Maintenance Center.
Construction of certain B737 airframe facilities is still in process and
construction of facilities for the other fleet types will begin in 1995.
The facilities are being financed primarily with tax-exempt bonds and
other capital sources. In connection with incentives received, United
has agreed to reach an $800 million capital spending target and employ
at least 7,500 individuals.
(20) Statement of Consolidated Cash Flows - Supplemental Disclosures
Supplemental disclosures of cash flow information and non-cash
investing and financing activities were as follows:
1994 1993 1992
(In Millions)
Cash paid during the year for:
Interest (net of amounts
capitalized) $302 $330 $200
Income taxes $ 69 $135 $ 30
Non-cash transactions:
Capital lease obligations
incurred $ - $ 70 $276
Long-term debt incurred in
connection with additions
to equipment $ 21 $487 $755
Increase in pension intangible $ 13 $ 19 $ 8
Net unrealized loss on investments $ 3 $ - $ -
Issuance of treasury stock in
exchange for Air Wis common
stock $ - $ - 64
(21) Other Matters
In April 1993, UAL transferred the Air Wisconsin, Inc. operations at
Dulles to Atlantic Coast Airlines. In September 1993, UAL transferred
certain Air Wisconsin, Inc. operations at O'Hare to United Feeder
Services. In December 1993, UAL transferred the jet operations of Air
Wisconsin, Inc. to CJT Holdings. These operations are being conducted by
the counterparties in these agreements under the United Express trade
name. In October 1994, UAL announced an agreement to sell for $119
million ten Dash 8 aircraft and spare parts owned by Air Wisconsin, Inc.
to Mesa Airlines, and United agreed to a ten year extension of its United
Express marketing agreement with Mesa Airlines. The sales will take place
in the first quarter of 1995.
In 1993, United reached agreements to sell assets related to the
operation of 16 of its flight kitchens to Dobbs International Services,
Inc. and Caterair International Corp. for $119 million. These asset sales
were completed by June 1994 and resulted in an insignificant gain. Under
the agreements, the purchasers are providing catering services for United
at the airports served by the flight kitchens for seven years.
(22) Selected Quarterly Financial Data (Unaudited)
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Year
(In Millions)
1994:
Operating revenues $3,195 $3,502 $3,814 $3,439 $13,950
Earnings (loss) from
operations (36) 167 312 78 521
Earnings (loss) before
cumulative effect of
accounting changes (71) 55 82 11 77
Cumulative effect of
accounting changes (26) - - - (26)
Net earnings (loss) $ (97) $ 55 $ 82 $ 11 $ 51
Per share amounts, primary:
Earnings (loss) before
cumulative effect of
accounting changes $(3.31) $ 1.89 $ 4.24 $(0.98) $ 0.76
Cumulative effect of
accounting changes (1.06) - - - (1.37)
Net earnings (loss) $(4.37) $ 1.89 $ 4.24 $(0.98) $ (0.61)
Net earnings (loss)
per share, fully diluted $(4.37) $ 1.89 $ 4.21 $(0.98) $ (0.61)
1993:
Operating revenues $3,053 $3,296 $3,629 $3,347 $13,325
Earnings (loss) from
operations (121) 84 281 19 263
Earnings (loss) before
extraordinary item (138) 22 149 (64) (31)
Extraordinary loss on
early extinguishment
of debt (19) - - - (19)
Net earnings (loss) $ (157) $ 22 $ 149 $ (64) $ (50)
Per share amounts, primary:
Earnings (loss) before
extraordinary item $(5.92) $ 0.54 $ 5.74 $(3.02) $ (2.64)
Extraordinary loss on
early extinguishment
of debt (0.77) - - - (0.76)
Net earnings (loss) $(6.69) $ 0.54 $ 5.74 $(3.02) $ (3.40)
Net earnings (loss)
per share, fully diluted $(6.69) $ 0.54 $ 5.21 $(3.02) $ (3.40)
In 1994, United began recording certain air transportation price
adjustments, which were previously recorded as commissions, as adjustments
to revenue. The revenue amounts for 1993 above have been reclassified to
conform with the current presentation.
The Company adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits," effective January 1, 1994. The effect of
adopting SFAS No. 112 was a cumulative charge for recognition of the
transition liability of $42 million, before tax benefits of $16 million.
In connection with the July 1994 recapitalization, the Company
incurred pretax costs of $19 million, $22 million and $128 million in the
first, second and third quarters, respectively, including transaction
costs and severance payments to certain former United employees. Of these
costs, $48 million were recorded as operating expenses in the third
quarter, while the remaining costs were recorded in "Miscellaneous, net."
In the second quarter of 1993, United retired $500 million of senior
subordinated notes. An extraordinary loss of $19 million, net of tax
benefits of $8 million, was recorded in the first quarter of 1993, based
on United's stated intention to retire the notes.
In the third quarter of 1993, United recorded a charge of $59
million to reduce the net book value of 15 DC-10 aircraft to estimated net
realizable value. In addition, third quarter earnings included a $17
million gain and interest income of $27 million resulting from the final
settlement for overpayment of annuities purchased in 1985 to cover certain
vested pension benefits. The 1993 fourth quarter included $53 million of
equity in the loss of Galileo, which primarily reflects United's share of
a charge recorded by Galileo for the cost of eliminating duplicate
facilities and operations.
Earnings per share were calculated after providing for the following
preferred stock dividend requirements (in millions):
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Year
1994 $ 9 $ 9 $20 $21 $59
1993 $ 6 $ 9 $ 9 $ 9 $33
Earnings available to common stockholders were also reduced by $3
million in the 1994 fourth quarter and twelve-month period for the excess
of amounts paid to reacquire UAL preferred stock over the liquidation
preference of such stock. In the 1994 and 1993 third quarters, primary
per share amounts were based on weighted average common shares and common
equivalents outstanding, including ESOP shares committed to be released.
Fully diluted per share amounts assume the exercise of stock options and
vesting of restricted stock at the beginning of the periods and, for the
1993 third quarter, the conversion of convertible preferred stock and
elimination of related dividends. The fully diluted per share amount for
the 1994 third quarter does not assume conversion of convertible preferred
stock since the effect is antidilutive. In the computations for the 1994
and 1993 first, second and fourth quarters and year, common stock
equivalents were not included as they did not have a dilutive effect.
In connection with the July 1994 recapitalization, each old common
share was exchanged for one half new common share. As required under
generally accepted accounting principles for transactions of this type,
the historical weighted average shares outstanding have not been restated.
Thus, direct comparisons between 1994 and 1993 per share amounts are not
meaningful.
The sum of quarterly earnings per share amounts is not the same as
annual earnings per share amounts because of changing numbers of shares
outstanding.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
No reportable event has occurred.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding the directors of the Company
and the information required by Item 405 of Regulation S-K shall be
incorporated by reference from the Company's definitive proxy
statement for its 1995 Annual Meeting of Stockholders or shall be
added hereto by an amendment to this Form 10-K, in either case
within the time required by the instructions to Form 10-K.
Information regarding the executive officers of the Company is
included in Part I of this Form 10-K under the caption "Executive
Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding this Item shall be incorporated by
reference from the Company's definitive proxy statement for its
1995 Annual Meeting of Stockholders or shall be added hereto by an
amendment to this Form 10-K, in either case within the time
required by the instructions to Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
Information regarding this Item shall be incorporated by
reference from the Company's definitive proxy statement for its
1995 Annual Meeting of Stockholders or shall be added hereto by an
amendment to this Form 10-K, in either case within the time
required by the instructions to Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding this Item shall be incorporated by
reference from the Company's definitive proxy statement for its
1995 Annual Meeting of Stockholders or shall be added hereto by an
amendment to this Form 10-K, in either case within the time
required by the instructions to Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.
(a) 1. The financial statements required
by this item are listed in Item 8, "Financial
Statements and Supplementary Data" herein.
2. The financial statement schedule required by
this item is listed below:
For the years ended December 31, 1994, 1993 and 1992:
II--Valuation and qualifying accounts
All other schedules are omitted because they are
not applicable, not required or the required
information is shown in the consolidated financial
statements or notes thereto.
3. The exhibits required by this item are listed in
"Index to Exhibits" herein.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the fourth quarter
of 1994.
UAL Corporation and Subsidiary Companies
Schedule II--Valuation and Qualifying Accounts
For the Year Ended December 31, 1994
Balance at Additions Charged to Balance at
Beginning Costs and Other End of
Description of Year Expenses Accounts Deductions Year
(In Millions)
Reserve deducted from asset to which it applies:
Allowance for doubtful accounts $ 22 $ 25 $ - $ 25(1) $ 22
Obsolescence allowance -
Flight equipment spare parts $ 70 $ 12 $ 4 $ 42(2) $ 44
(1) Deduction from reserve for purpose for which reserve was created.
(2) Includes deduction from reserve for parts dispositions and write-offs and $22 million of reserves transferred in
connection with parts transferred to fixed asset accounts.
UAL Corporation and Subsidiary Companies
Schedule II--Valuation and Qualifying Accounts
For the Year Ended December 31, 1993
Balance at Additions Charged to Balance at
Beginning Costs and Other End of
Description of Year Expenses Accounts Deductions Year
(In Millions)
Reserve deducted from asset to which it applies:
Allowance for doubtful accounts $ 12 $ 19 $ 7 $ 16(1) $ 22
Obsolescence allowance -
Flight equipment spare parts $ 46 $ 12 $27 $ 15(1) $ 70
(1) Deduction from reserve for purpose for which reserve was created.
UAL Corporation and Subsidiary Companies
Schedule II--Valuation and Qualifying Accounts
For the Year Ended December 31, 1992
Balance at Additions Charged to Balance at
Beginning Costs and Other End of
Description of Year Expenses Accounts Deductions Year
(In Millions)
Reserve deducted from asset to which it applies:
Allowance for doubtful accounts $ 13 $18 $ - $ 19(1) $ 12
Obsolescence allowance -
Flight equipment spare parts $ 67 $12 $ 2 $ 35(2) $ 46
(1) Deduction from reserve for purpose for which reserve was created.
(2) Includes deduction from reserve for parts dispositions and write-offs and $15 million of reserves transferred in
connection with parts transferred to non-operating property.
INDEX TO EXHIBITS
Exhibit Number Description
3.1 Restated Certificate of Incorporation as
filed in Delaware on July 12, 1994, as
corrected on February 2, 1995 (filed as
Exhibit 3.1 to Registrant's Form S-4
Registration Statement (Registration No. 33-
57579 and incorporated herein by reference).
3.2 By-laws, as amended on July 12, 1994 (filed
as Exhibit 3.2 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1994 and incorporated herein by
reference).
4.1 Rights Agreement dated as of December 11,
1986 between Registrant and First Chicago
Trust Company of New York, as Rights Agent,
as amended.
4.2 Deposit Agreement dated as of July 12, 1994
between UAL Corporation and holders from time
to time of Depositary Receipts described
herein (filed as Exhibit 4.2 to Registrant's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1994 and incorporated herein
by reference).
Registrant's indebtedness under any single
instrument does not exceed 10% of
Registrant's total assets on a consolidated
basis. Copies of such instruments will be
furnished to the Securities and Exchange
Commission upon request.
10.1 Amended and Restated Agreement and Plan of
Recapitalization, dated as of March 25, 1994
(the "Recapitalization Agreement"), as
amended, among UAL Corporation, the Air Line
Pilots Association, International and the
International Association of Machinists and
Aerospace Workers (filed as Exhibit A to
Exhibit 10.1 of UAL Corporation's (File No. 1-
6033) Form 8-K dated June 2, 1994 and
incorporated herein by reference; amendment
thereto filed as Exhibit 10.1 of UAL
Corporation's (File 1-6033) Form 8-K dated
June 29, 1994 and incorporated herein by
reference).
10.2 Waiver and Agreement, dated as of December
23, 1994, to the Recapitalization Agreement
among UAL Corporation, the Air Line Pilots
Association, International and the
International Association of Machinists and
Aerospace Workers.
10.3 Third Amendment, dated as of March 15, 1995,
to the Recapitalization Agreement among UAL
Corporation, the Air Line Pilots Association,
International and the International
Association of Machinists and Aerospace
Workers.
10.4 UAL Corporation Employee Stock Ownership
Plan, effective as of July 12, 1994 (filed as
Exhibit 10.1 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended September
30, 1994 and incorporated herein by
reference).
10.5 UAL Corporation Employee Stock Ownership Plan
Trust Agreement between UAL Corporation and
State Street Bank and Trust Company,
effective July 12, 1994 (filed as Exhibit
10.2 to Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1994
and incorporated herein by reference).
10.6 UAL Corporation Supplemental ESOP, effective
as of July 12, 1994 (filed as Exhibit 10.3 to
Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994 and
incorporated herein by reference).
10.7 UAL Corporation Supplemental ESOP Trust
Agreement between UAL Corporation and State
Street Bank and Trust Company, effective July
12, 1994 (filed as Exhibit 10.4 to
Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994 and
incorporated herein by reference).
10.8 Preferred Stock Purchase Agreement, dated as
of March 25, 1994, between UAL Corporation
and State Street Bank and Trust Company
(filed as Exhibit 10.5 to Registrant's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1994 and incorporated
herein by reference).
10.9 Amendment No. 1 to Preferred Stock Purchase
Agreement, dated as of June 2, 1994, between
UAL Corporation and State Street Bank and
Trust Company (filed as Exhibit 10.6 to
Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994 and
incorporated herein by reference).
10.10 Class I Junior Preferred Stockholders'
Agreement dated as of June 12, 1994 (filed as
Exhibit 10.12 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended
September 30, 1994 and incorporated herein by
reference).
10.11 Class SAM Preferred Stockholders' Agreement
dated as of July 12, 1994 (filed as Exhibit
10.13 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30,
1994 and incorporated herein by reference).
10.12 First Refusal Agreement dated as of July 12,
1994, as amended by First Amendment dated as
of February 24, 1995.
10.13 UAL Corporation 1981 Incentive Stock Plan, as
amended.
10.14 UAL Corporation 1988 Restricted Stock Plan,
as amended.
10.15 UAL Corporation Incentive Compensation Plan,
as amended.
10.16 UAL Corporation Retirement Plan for Outside
Directors, as amended (filed as Exhibit 10.1
to Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1994 and
incorporated herein by reference).
10.17 Description of Complimentary Travel and Cargo
Carriage Benefits for UAL Directors (filed as
Exhibit 10.1 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended March 31,
1994 and incorporated herein by reference).
10.18 UAL Corporation 1992 Stock Plan for Outside
Directors, as amended on December 15, 1994.
10.19 UAL Corporation 1995 Directors Plan.
10.20 Employment Agreement between UAL Corporation
and Gerald Greenwald (filed as Exhibit 10.5
to Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994 and
incorporated herein by reference).
10.21 Amendment No. 1 to Employment Agreement
between UAL Corporation and Gerald Greenwald
(filed as Exhibit 10.6 to Registrant's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1994 and incorporated herein
by reference).
10.22 Restricted Stock Deposit Agreement between
UAL Corporation and Gerald Greenwald (filed
as Exhibit 10.7 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1994 and incorporated herein by
reference).
10.23 1988 Restricted Stock Plan Deposit Agreement
between UAL Corporation and Gerald Greenwald
(filed as Exhibit 10.8 to Registrant's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1994 and incorporated herein
by reference).
10.24 Non-Qualified Stock Option Agreement between
UAL Corporation and Gerald Greenwald (filed
as Exhibit 10.9 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1994 and incorporated herein by
reference).
10.25 Restricted Stock Deposit Agreement between
UAL Corporation and John A. Edwardson
(filed as Exhibit 10.10 to Registrant's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1994 and incorporated herein
by reference).
10.26 Restricted Stock Deposit Agreement between
UAL Corporation and Stuart I. Oran (filed as
Exhibit 10.12 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1994 and incorporated herein by
reference).
10.27 Letter Agreement No. 6-1162-JCM-500 dated
December 9, 1994 to Agreement dated December
18, 1990 between The Boeing Company, as
seller, and United Air Lines, Inc., and
United Worldwide Corporation, as buyer, for
the acquisition of Boeing 777-200 aircraft
(as previously amended and supplemented, "777-
200 Purchase Agreement" (filed as Exhibit
10.7 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1990 and
incorporated herein by reference; supplements
thereto filed as (i) Exhibits 10.1, 10.2 and
10.22 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30,
1993, (ii) Exhibit 10.2 to Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1993, and (iii) Exhibit 10.14 to
Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994, and
incorporated herein by reference)). (Exhibit
10.27 hereto is filed with a request for
confidential treatment of certain portions.)
10.28 Letter Agreement 6-1171-FT-831 dated February
22, 1995 to 777-200 Purchase Agreement.
(Exhibit 10.28 hereto is filed with a request
for confidential treatment of certain
portions.)
10.29 Letter Agreements dated January 31, 1995 to
Agreement dated December 18, 1990 between The
Boeing Company, as seller, and United Air
Lines, Inc., and United Worldwide
Corporation, as buyer, for the acquisition of
Boeing 747-400 aircraft (as previously
amended and supplemented, "747-400 Purchase
Agreement" (filed as Exhibit 10.8 to
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1990, and
incorporated herein by reference; supplements
thereto filed as (i) Exhibits 10.4 and 10.5
to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1991, (ii)
Exhibits 10.3, 10.4, 10.5, 10.6 and 10.22 to
Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1993, (iii)
Exhibit 10.3 to Registrant's Annual Report on
Form 10-K for the year ended December 31,
1993, and (iv) Exhibit 10.14 to Registrant's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1994, and incorporated herein
by reference)). (Exhibit 10.29 hereto is
filed with a request for confidential
treatment of certain portions.)
10.30 Letter Agreement dated February 28, 1995 to
747-400 Purchase Agreement. (Exhibit 10.30
hereto is filed with a request for
confidential treatment of certain portions.)
10.31 Letter Agreement dated February 10, 1995 to
A320 Purchase Agreement dated August 10, 1992
between AVSA, S.A.R.L., as seller, and United
Air Lines, Inc., as buyer, for the
acquisition of Airbus Industrie A320-200
model aircraft (as previously amended and
supplemented, "A320-200 Purchase Agreement"
(filed as Exhibit 10.14 to Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1992, and incorporated herein by
reference; supplements thereto filed as (i)
Exhibits 10.4 and 10.5 to Registrant's Annual
Report on Form 10-K for the year ended
December 31, 1993, and (ii) Exhibits 10.15
and 10.16 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30,
1994, and incorporated herein by reference)).
(Exhibit 10.31 hereto is filed with a request
for confidential treatment of certain
portions.)
10.32 Agreement dated March 1, 1990 between The
Boeing Company and United Air Lines, Inc., as
amended and supplemented, for the acquisition
of Boeing 767-300ER aircraft (filed as
Exhibit (10)L to Registrant's Annual Report
on Form 10-K for the year ended December 31,
1989, and incorporated herein by reference;
supplements thereto filed as (i) Exhibits
10.7, 10.8, 10.9 and 10.10 to Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1991, (ii) Exhibits 10.7, 10.8,
10.9, 10.10, 10.11, 10.12, 10.13 and 10.22 to
Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1993, and
(iii) Exhibit 10.14 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1994, and incorporated herein by
reference).
10.33 Agreement dated April 26, 1989 between The
Boeing Company and United Air Lines, Inc., as
amended and supplemented, for the acquisition
of Boeing 757-200 and 737 aircraft (filed as
Exhibit (10)K to Registrant's Annual Report
on Form 10-K for the year ended December 31,
1989, and incorporated herein by reference;
supplements thereto filed as (i) Exhibits
10.12 and 10.13 to Registrant's Annual Report
on Form 10-K for the year ended December 31,
1991, (ii) Exhibits 10.14, 10.15, 10.16,
10.17, 10.18, 10.19 and 10.22 to Registrant's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1993, and (iii) Exhibit 10.14
to Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994, and
incorporated herein by reference).
10.34 An amended and restated agreement, dated
March 19, 1992, between The Boeing Company
and United Air Lines, Inc., for the
acquisition of Boeing 737 aircraft (filed as
Exhibit 10.15 to Registrant's Annual Report
on Form 10-K for the year ended December 31,
1992, and incorporated herein by reference;
supplements thereto filed as (i) Exhibits 10.20,
10.21 and 10.22 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1993, and (ii) Exhibit 10.14 to
Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994, and
incorporated herein by reference).
10.35 Letter Agreement among the State of Indiana,
the City of Indianapolis, the Indianapolis
Airport Authority and United Air Lines, Inc.
dated as of December 1, 1994, amending the
Agreement among the State of Indiana, the
City of Indianapolis, the Indianapolis
Airport Authority and United Air Lines, Inc.
dated November 21, 1991, concerning United's
aircraft maintenance facility (filed as
Exhibit 10.29 to Registrant's Annual Report
on Form 10-K for the year ended December 31,
1991, and incorporated herein by reference;
supplements thereto filed as Exhibits 10.9
and 10.10 to Registrant's Annual Report on
Form 10-K for the year ended December 31,
1993, and incorporated herein by reference).
10.36 United Supplemental Retirement Plan (filed as
Exhibit 10.42 to Registrant's Annual Report
on Form 10-K for the year ended December 31,
1992, and incorporated herein by reference).
10.37 Description of Officer Benefits.
10.38 Form of Severance Agreement between UAL
Corporation and certain officers of United
Air Lines, Inc. (filed as Exhibit 10.27 to
Registrant's Form 10-Q for the quarter ended
June 30, 1993 and incorporated herein by
reference).
11 Calculation of fully diluted net earnings
per share.
12.1 Computation of Ratio of Earnings to Fixed
Charges.
12.2 Computation of Ratio of Earnings to Fixed
Charges and Preferred Stock Dividend
Requirements.
21 List of Registrant's subsidiaries.
23.1 Consent of Independent Public Accountants.
24 Power of Attorney (included as a part of the
signature page of the Registrant's report on
Form 10-K for the year ended December 31,
1994 and incorporated herein by reference).
27 Financial Data Schedule.
99.1 Annual Report on Form 11-K for Employees'
Stock Purchase Plan of UAL Corporation.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
UAL CORPORATION
By: /s/ Gerald Greenwald
Gerald Greenwald
Chairman and Chief Executive
Officer and a Director
(Principal Executive Officer)
By: /s/ Douglas A. Hacker
Douglas A. Hacker
Senior Vice President - Finance
(Principal Financial Officer
and Principal Accounting Officer)
March 8, 1995
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant as Directors as of March 8,
1995. Each person whose signature appears below constitutes and
appoints Gerald Greenwald and Douglas A. Hacker, and each of
them, the true and lawful attorneys-in-fact and agents of the
undersigned, with full power of substitution and resubstitution,
for and in the name, place and stead of the undersigned, in any
and all capacities, to sign any and all amendments to this
report, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and
Exchange Commission, and hereby grant to such attorneys-in-fact
and agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done, as fully to all intents and purposes as the undersigned
might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
/s/ Gerald Greenwald /s/ Harlow Osteboe
Gerald Greenwald Harlow Osteboe
/s/ John A. Edwardson /s/ John F. Peterpaul
John A. Edwardson John F. Peterpaul
/s/ Duane D. Fitzgerald /s/ Paul E. Tierney, Jr.
Duane D. Fitzgerald Paul E. Tierney, Jr.
/s/ Richard D. McCormick /s/ John K. Van de Kamp
Richard D. McCormick John K. Van de Kamp
/s/ John F. McGillicuddy /s/ Joseph V. Vittoria
John F. McGillicuddy Joeseph V. Vittoria
/s/ James J. O'Connor /s/ Paul A. Volcker
James J. O'Connor Paul A. Volcker