March XX, 1998 <DOCUMENT>

<TYPE> 10-K

<TEXT>

<HTML>
 
 


UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
 
 

FORM 10-K



(Mark One)

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2000

OR

[  ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from                to
 
 

Commission File No. 1-6033

                       UAL CORPORATION

(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 East 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     (847) 700-4000
 
 

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
   
Depositary Shares each representing  
1/1,000 of a share of Series B  
Preferred Stock, without par value New York Stock Exchange

 
 
 

Securities registered pursuant to Section  12 (g) of the Act:

   NONE



   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. [ X ]
 
 

The aggregate market value of voting stock held by non-affiliates of the Registrant was $1,997,225,062 as of February 28, 2001.  The number of shares of common stock outstanding as of February 28, 2001 was 52,773,342.
 
 

Documents Incorporated by Reference



Part III of this Form 10-K incorporates by reference certain information from the Registrant' s definitive Proxy Statement for its Annual Meeting of Stockholders to be held on May 17, 2001.





PART I



ITEM 1.  BUSINESS.
 
 

        UAL Corporation ("UAL" or the "Company") was incorporated under the laws of the State of Delaware on December 30, 1968. The world headquarters of the Company are located at 1200 East Algonquin Road, Elk Grove Township, Illinois 60007.  The Company' s mailing address is P.O. Box 66919, Chicago, Illinois 60666.  The telephone number for the Company is (847) 700-4000.
 
 

        The Company is a holding company and its principal subsidiary is United Air Lines, Inc., a Delaware corporation ("United"), which is wholly owned.  United accounted for virtually all of the Company' s revenues and expenses in 2000.  United is a major commercial air transportation company, engaged in the transportation of persons, property and mail throughout the U.S. and abroad.
 
 

Airline Operations
 
 

        During 2000, United carried, on average, more than 231,000 passengers per day and flew more than 126 billion revenue passenger miles.  It is the world' s largest airline as measured by revenue passenger miles flown, providing passenger service in 28 countries.  United' s network, supplemented with strategic airline alliances, provides comprehensive transportation service within its North America segment and to international destinations within its Pacific, Atlantic, and Latin America segments.  Operating revenues attributed to United' s North America segment were $13.1 billion in 2000, $12.5 billion in 1999 and $12.0 billion in 1998.  Operating revenues attributed to United' s international segments were $6.2 billion in 2000, $5.5 billion in 1999 and $5.5 billion in 1998.
 
 

        North America.  United operates hubs in Chicago, Denver, Los Angeles, San Francisco and Washington Dulles and has the most extensive U.S. route system of any airline, ranking first in capacity share in all of its U.S. hubs.  Within the North America segment, United also operates United Shuttle®, which is designed to provide high-frequency air service in competitive markets, as well as critical traffic feed to United' s mainline operations.  United Shuttle is principally concentrated on the West Coast and in Denver.  United Shuttle offers approximately 455 daily flights on 30 routes among 23 cities in the western U.S.  United' s North America operations accounted for 67.7% of United' s revenues in 2000.
 
 

        Pacific.  Via its Tokyo hub, United provides passenger service between its U.S. gateway cities (Chicago, Honolulu, Los Angeles, New York, San Francisco and Seattle) and the Asian cities of Bangkok, Hong Kong, Seoul, Shanghai and Singapore.  United also provides nonstop service between Hong Kong and each of Chicago, Los Angeles, San Francisco, and Singapore; between San Francisco and each of Beijing, Osaka, Seoul, Shanghai, Sydney and Taipei; and between Los Angeles and each of Auckland, Melbourne and Sydney.
 
 

        In November 2000, United received authority to fly two additional frequencies to China.  The new authority allows United to operate daily service between San Francisco and Shanghai.  Additionally, United plans to resume around-the-world service in April 2001, adding service between Delhi and each of London and Hong Kong.  Also during April 2001, United plans to add nonstop service between New York and Hong Kong.
 
 

        The air services agreement between the U.S. and Japan provides an unlimited number of frequencies to United and certain other carriers.  United also holds significant traffic rights beyond Japan.  These rights will allow United to add service from Japan to other Asian points as regulatory, competitive and economic conditions warrant.
 
 

        In 2000, United was the leading U.S carrier in the Pacific in terms of transpacific available seat miles and the most flights available.  United' s Pacific operations accounted for 16.4% of United' s revenues in 2000.
 
 

        Atlantic.  During 2000, Washington-Dulles served as United' s primary gateway to Europe, serving Amsterdam, Brussels, Frankfurt, London, Milan, Munich, and Paris.  Chicago has become United' s secondary European gateway, offering nonstop service in 2000 to each of Dusseldorf, Frankfurt, London and Paris.  United also provides nonstop service between: London and Boston, Los Angeles, Newark, New York and San Francisco; Paris and each of Los Angeles and San Francisco; and between Frankfurt and San Francisco.
 
 

        In February 2001, United inaugurated nonstop service between Chicago and Amsterdam.  In April 2001, United plans to discontinue service between London and each of Amsterdam and Brussels, concurrent with the resumption of service between London and Delhi.  In June 2001, United plans to add seasonal service between Denver and Frankfurt.  In 2000, United' s Atlantic operations accounted for 11.7% of United' s operating revenues.
 
 

        Latin America.  During 2000, United' s primary gateway to Latin America was Miami, providing passenger service between Miami and each of Buenos Aires, Caracas, Montevideo, Rio de Janeiro, Santiago and Sao Paolo.  United also provided service between Los Angeles and each of Guatemala City, Mexico City, and San Salvador; between New York and each of Buenos Aires, Sao Paolo, and San Juan; between Chicago and each of Aruba, Buenos Aires, Mexico City, San Juan, St. Thomas, and Sao Paolo; between Mexico City and each of San Francisco and Washington Dulles; and between Washington-Dulles and St. Thomas.  United also provides service between San Jose, Costa Rica and each of Mexico City and Guatemala City.
 
 

        The newly amended air services agreement between the U.S. and Argentina provides for additional capacity in the U.S.-Argentina market and enables United to operate any size aircraft on any or all of its 21 weekly flights to Argentina without restriction.  Prior to this amendment, United and American Airlines were the only U.S. passenger carriers operating between the U.S. and Argentina.  Under the new agreement, Delta and Continental have each been awarded access to Argentina and will respectively commence daily service in April and December 2001.  In 2000, United' s Latin America operations accounted for 4.2% of United' s revenues.
 
 

        Financial information relative to the Company' s operating segments can be found in Note 19 in the Notes to Consolidated Financial Statements in this Form 10-K.
 
 

        US Airways AcquisitionDuring 2000, UAL announced plans to acquire US Airways Group, Inc. in an all-cash transaction for $4.3 billion.  The Company expects that the new network created by the acquisition will make travel more convenient for passengers, connecting US Airways eastern U.S. markets with United' s extensive east-west and international networks, and create the nation' s most comprehensive airline network.  This transaction, which the Company anticipates closing in the second quarter of 2001, is still subject to regulatory clearance and other customary closing conditions.
 
 

        In addition, UAL and AMR Corporation announced in January 2001 the approval of a binding memorandum of understanding, under which American Airlines will provide competitive service on key hub-to-hub routes where United and US Airways currently are the only competitors with non-stop flights.  In addition, UAL will transfer assets that would have been surplus to the needs of the combined United/US Airways operations, consisting of gates, slots and up to 86 aircraft.  AMR will pay UAL approximately $1.2 billion in cash for this transaction and assume certain US Airways obligations.
 
 

        For more information on the US Airways acquisition, see "US Airways Acquisition" in Item 7. Management' s Discussion and Analysis of Financial Condition and Results of Operations.
 
 

        United Cargo®. United Cargo generated over $900 million in freight and mail revenue.  As a part of United' s decision to retire its remaining DC-10 passenger aircraft, United Cargo discontinued its international freighter operation on December 24, 2000.  With United' s growing fleet of cargo-friendly widebody aircraft, however, it is expected that revenues will continue to increase through time-sensitive delivery services, e-commerce initiatives and customer loyalty programs.
 
 

        United Cargo' s premium international time-definite service, TD.Guaranteed, was expanded to more U.S. destinations with intra-U.S. connections, which more than doubled TD.Guaranteed revenue since the product was introduced in 1999.  In addition, another time-sensitive product, United Sameday, was introduced in 2000 for the small package, door-to-door delivery service, which may be booked via a toll-free number or the Internet (www.unitedsameday.com).
 
 

        Fuel.  Changes in fuel prices are industry-wide occurrences that benefit or harm United' s competitors as well as United.  Fuel-hedging activities may affect the degree to which fuel-price changes affect individual companies.  To assure adequate supplies of fuel and to provide a measure of control over fuel costs, United ships fuel on major pipelines and stores fuel close to its major hub locations.
 
 

        United' s results of operations are significantly affected by the price and availability of jet fuel.  It is estimated that, absent hedging, every $.01 change in the average annual price-per-gallon of jet fuel causes a change of approximately $31 million in United' s annual fuel costs.  United' s average price per gallon of jet fuel in 2000 increased 40%, as compared to the previous year.  However, the average price of spot jet fuel in the U.S. Gulf Coast increased 71% during that same period.  United' s price in 2000 was mitigated by a fuel hedging program that was primarily an options-based strategy, through which the upside was retained while the downside was eliminated.
 
 

        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, property damage liability, and physical damage insurance on United' s aircraft and property.
 
 

Marketing Strategy
 
 

        Besides offering convenient scheduling throughout its domestic and international segments, United seeks to attract high yield customers and create customer preference by providing a comprehensive network, an attractive frequent-flyer program, and enhanced service initiatives.
 
 

        Alliances.  United has formed bilateral alliances with other airlines to provide its customers more choices and to participate worldwide in markets that it cannot serve directly for commercial or governmental reasons.  An alliance is a collaborative marketing arrangement between carriers, which can include joint frequent flyer participation, code-sharing of flight operations, coordination of reservations, baggage handling, and flight schedules, and other resource sharing activities.  "Code-sharing" is an agreement under which a carrier' s flights can be marketed under the two-letter airline designator code of another carrier.  Through an alliance, carriers can provide their customers a seamless global travel network under their own airline code.   United now participates in a multilateral alliance, the Star AllianceÔ .
 
 

        The Star Alliance is an integrated worldwide transport network, which provides customers with global recognition and a wide range of other benefits.  Collectively, the Star Alliance carriers served more than 815 destinations in over 130 countries during 2000.  The Star Alliance enables its member carriers to more effectively compete with other worldwide alliances.  Founded in 1997 by United and five other carriers, the Star Alliance has grown to fifteen carriers.  Besides United, the Star Alliance includes:  Air Canada, Air New Zealand, All Nippon Airways, Ansett Australia, Austrian Airlines, British Midland, Lauda Air, Lufthansa, Mexicana, SAS, Singapore Airways, Thai International Airways, Tyrolean and Varig.  United currently holds bilateral immunity with Air Canada and integrated antitrust immunity with Lufthansa, SAS, and the Austrian Group.
 
 

        United has also formed independent alliances with other air carriers.  Current agreements exist between United and each of Aeromar, ALM Antillean, Aloha, BWIA, Cayman Airways, Continental Connection, Emirates, Saudi Arabian Airlines, and Spanair.
 
 

        In addition, United has a marketing program in North America known as United Express®, under which independent regional carriers, utilizing turboprop equipment and regional jets, feed United' s major airports and international gateways.  The carriers in the United Express program serve small and medium-sized cities in the U.S., linking those cities to United' s hubs.  United Express carriers include Air Wisconsin Airlines Corporation, Atlantic Coast Airlines, Great Lakes Aviation and Sky West Airlines.  Effective May 1, 2001, Great Lakes Aviation will no longer be a United Express carrier, but will continue its relationship with United as an alliance carrier.
 
 

        Mileage Plus®United established the frequent flyer program to develop and retain passenger loyalty by offering awards and services to frequent travelers.  Over 40 million members have enrolled in Mileage Plus since it was started in 1981.  Mileage Plus members earn mileage credit for flights on United, United Shuttle, United Express, the Star Alliance carriers and certain other airlines which participate in the program.  Miles can also be earned by utilizing the goods and services of non-airline program participants, such as hotels, car rental companies, bank credit card issuers, and a variety of other businesses.  Mileage credits can be redeemed for free, discounted or upgrade travel awards on United and other participating airlines, or, to a limited extent, other travel and non-travel industry awards.
 
 

        Travel awards can be redeemed at the "Standard" level for any unsold seat on any United flight to every destination served by United.  Redemption at the "Saver" award level, however, is restricted with blackout dates and capacity controlled inventory, thereby limiting the use of Saver awards on certain flights.
 
 

        When a travel award level is attained, liability is recorded for the incremental costs of providing travel, based on expected redemptions.  United' s incremental costs include the additional costs of providing service to the award recipient, such as fuel, meal, personnel and ticketing costs, for what would otherwise be a vacant seat.  The incremental costs do not include any contribution to overhead or profit.  For mileage sold to other program participants prior to January 1, 2000, revenue was recognized when the miles were sold.  Beginning January 1, 2000, a portion of revenue from the sale of mileage is deferred and recognized when the transportation is provided. (See Item 8, Note 1(i) "Summary of Significant Accounting Policies - Mileage Plus Awards" in the Notes to Consolidated Financial Statements.)
 
 

        At December 31, 2000, the estimated number of outstanding awards was approximately 10.8 million, as compared with 7.0 million at the end of the prior year.  United estimates that 8.9 million of such awards will ultimately be redeemed and, accordingly, has recorded a liability amounting to $564 million, which includes the deferred revenue from the sale of miles to program participants.  Based on historical data, the difference between the awards expected to be redeemed and the total awards outstanding arises because:  (1) some awards will never be redeemed, (2) some will be redeemed for non-travel benefits, and (3) some will be redeemed on partner carriers.
 
 

        In 2000, 1.97 million Mileage Plus travel awards were used on United.  This number represents the number of awards for which travel was actually provided in 2000 and not the number of seats that were allocated to award travel.  In 1999, 2.24 million awards were used, while 2.13 million awards were used in 1998.  Such awards represented 7.2% of United' s total revenue passenger miles in 2000, 8.7% in 1999, and 8.6% in 1998.  Passenger preference for Saver awards, which have inventory controls, keep displacement of revenue passengers at a minimum.  Travel award seats flown on United represent 72% of the total awards issued, of which 87% are used for travel within the U.S. and Canada.  In addition to the awards issued for travel on United, approximately 10% of the total awards issued are used for travel on partner airlines.
 
 

        Economy Plus®.  In late 1999, United announced Economy Plus, which is a reconfiguration of the first six to eleven rows of the United Economy cabins on aircraft serving the North America market.  This reconfigured area provides four to five additional inches of legroom for United' s Premier® frequent-flyers and full-fare United Economy customers, many of whom often travel in the United Economy cabin.  United was the first U.S. airline to offer additional legroom on its North America flights and completed the seat reconfiguration in early 2000.
 
 

        In early 2001, United announced that it is reconfiguring its fleet of three-cabin international aircraft to create Economy Plus seating.  In doing so, United becomes the first U.S. airline to offer premium seating area in the front of its economy cabin on both its North America and international flights.  United also unveiled plans to enhance United Business class throughout its international fleet to offer customers an additional seven inches of legroom.
 
 

        Distribution Channels.  The overwhelming majority of United' s airline inventory continues to be distributed through the traditional channels of travel agencies and computer reservation systems (CRS).  United uses the Apollo reservation system, which is hosted by Galileo International, a CRS in which United holds approximately a 15% equity interest.  The hosting agreement with Galileo continues through 2004.
 
 

        Electronic Commerce.  Consumers are increasingly turning to online avenues to meet their travel needs.  United is using e-commerce capabilities to strengthen and enhance its market position, attract new customer segments, and reduce the overall costs of booking transportation.  Additionally, United is utilizing e-commerce capabilities in initiatives addressing opportunities in the areas of cargo, process improvement and customer connectivity.
 
 

        On October 3, 2000, UAL formed United NewVentures, a new subsidiary to provide innovative solutions for its customers, to strengthen United' s airline business and to create incremental value for UAL Corporation' s stockholders.  United NewVentures, Inc. is a wholly owned subsidiary of UAL.
 
 

        United NewVentures currently has two divisions, United NetVentures and United NetWorks.  United NetWorks incorporates the E-Commerce Division created in January, 2000.  The focus of United NetVentures is business development of non-United branded businesses, enhancing United' s e-commerce partnerships and identifying new e-commerce opportunities with strategic partners.  United' s involvement in projects such as Orbitz, Hotwire and Cordiem, a business-to-business Internet exchange, are managed by United NetVentures.
 
 

        United NetWorks is responsible for all United-branded e-commerce activities, such as strategy, operations, planning, and support of united.com, the airline' s web site, as well as wireless initiatives, such as proactive customer notification of flight information.  United NetWorks is also responsible for the Mileage Plus non-airline relationships, which currently include over ninety partners among car rental, hotel, telecommunications, shopping, dining and financial services companies.
 
 

        Our United Commitmentsm.  To renew its commitment to improve key areas of customer satisfaction and as part of an industry-wide, voluntary initiative, United implemented a comprehensive customer service plan, Our United Commitment, in late 1999 and fully deployed it in 2000.  Our United Commitment addresses issues identified by United' s frequent flyer customers as being most important to them, such as improved communication, increased information throughout the travel experience, more efficient baggage handling and greater responsiveness to customer inquiries.
 
 

        On February 13, 2001, the Inspector General of the U.S. Department of Transportation released its full-year report on the effectiveness of the airline industry' s voluntary initiatives.  Although the report found that progress had been made in some areas, it stressed that the industry continues to fall short in notifying passengers about flight delays and cancellations.  The report is based on a review of the voluntary programs of 17 carriers, including United.
 
 

        Over the past year, United introduced new services aimed at helping customers avoid delays, keeping customers informed when delays and cancellations occur, and minimizing the impact of cancellations and delays upon customers.  Examples of such new services include:
 
 

--Deploying an industry-leading proactive flight paging system;
 
 

--Installing United EasyCheck-Insm kiosks, allowing customers with E-tickets to bypass airport lines and check themselves in;
 
 

--Deploying state-of-the-art mobile "chariot" workstations in all hub airports, providing additional passenger check-in stations;
 
 

--Installing the United EasyInfosm digital electronic information display systems, which give real-time information; and
 
 

--Launching the customer advocate center, which proactively accommodates customers in anticipation of irregular operations.
 
 

        While the report identified where the airlines have been lacking, United received praise for measures that went beyond actions required by Our United Commitment.  The report stated that initiatives such as more legroom between seats, expansion of overhead baggage compartments and providing chariots to reduce lines were additional efforts to make the travel experience better.  Additionally, United was one of only three airlines to incorporate its customer service plan into its contract of carriage.
 
 

Industry Conditions
 
 

        Operating Environment.  The air travel business is subject to seasonal fluctuations.  United' s operations are often adversely impacted by winter weather and United' s first- and fourth-quarter results normally reflect reduced travel demand.  Operating results for the Company are generally better in the second and third quarters.  In addition to weather conditions, air traffic control limitations and concerted employee job actions may from time-to-time cause disruptions in operations.
 
 

        CompetitionThe airline industry is highly competitive.  In domestic markets, new and existing carriers are free to initiate service on any route.  United' s domestic competitors include all of the other major U.S. airlines as well as regional carriers, some of which have lower cost structures than United.
 
 

        In its international service, United competes not only with U.S. carriers but also with foreign carriers, including national flag carriers, which in certain instances enjoy forms of governmental support not available to U.S. carriers.  Competition on certain international routes is subject to varying degrees of governmental regulations (see "Government Regulation").  United has advantages over foreign air carriers in the U.S. because of its ability to generate U.S. origin-destination traffic from its integrated domestic route systems, and because foreign carriers are prohibited by U.S. law from carrying local passengers between two points in the U.S.  United experiences comparable restrictions in foreign countries.
 
 

        In addition, U.S. carriers are often constrained from carrying passengers to points beyond designated international gateway cities due to limitations in air service agreements or restrictions imposed unilaterally by foreign governments.  To compensate for these structural limitations, U.S. and foreign carriers have entered into alliances and marketing arrangements that allow the carriers to provide traffic feed to each other' s flights.  (See "Marketing Strategy - Alliances")
 
 

Government Regulation
 
 

        GeneralAll carriers engaged in air transportation in the U.S. are subject to regulation by the U.S. Department of Transportation ("DOT").  The DOT has authority to: issue certificates of public convenience and necessity for domestic air transportation and, through the Federal Aviation Administration ("FAA"), air-carrier operating certificates; authorize the provision of foreign air transportation by U.S. carriers; prohibit unjust discrimination; prescribe forms of accounts and require reports from air carriers; regulate methods of competition, including the provision and use of computerized reservation systems; and administer regulations providing for consumer protection, including regulations governing the accessibility of air transportation facilities for handicapped individuals.  United holds certificates of public convenience and necessity, as well as air-carrier operating certificates, and therefore is subject to DOT regulations.  The FAA also administers the U.S. air traffic control system and oversees aviation safety issues.
 
 

        United' s operations require licenses issued by the aviation authorities of the foreign countries that United serves.  Foreign aviation authorities may from time to time impose a greater degree of economic regulation than exists with respect to United' s North America operations.  United' s ability to serve some international markets and its expansion into many of these markets are presently restricted by a lack of aviation agreements to allow such service or, in some cases, by the restrictive terms of such agreements.
 
 

        In connection with its international services, United is required to make regular filings with the DOT and to observe tariffs establishing the fares charged and the rules governing the transportation provided.  In certain cases, fares and schedules require the approval of the relevant foreign governments.  Shifts in U.S. or foreign government aviation policies can lead to the alteration or termination of existing air service agreements between the U.S. and other governments, and could diminish the value of United' s international route authority.  United' s operating rights under the air services agreements might not be preserved in such cases.
 
 

        Airport Access.  Historically, take-off and landing rights ("slots") at Chicago O' Hare International, New York John F. Kennedy International, New York LaGuardia and Washington Reagan National airports have been limited by the "high density traffic rule."  Under this rule, slots may be bought, sold or traded.  In April 2000, the U.S. President signed the Wendell H. Ford Investment and Reform Act for the 21st Century ("AIR 21") which includes a phase-out of slots at Chicago' s O' Hare International Airport and New York' s LaGuardia and JFK airports.  Starting in May 2000, AIR 21 has allowed carriers to operate foreign air service at Chicago O' Hare without slots, thereby eliminating the government' s need to withdraw slots from incumbent carriers.
 
 

        As part of the phase-out of the high density traffic rule, slot exemptions were made available for new entrants, as well as for carriers providing service to small- to medium-sized and non-hub airports.  This exemption, however, led to a significant increase of flights into and out of LaGuardia that far exceeded that airport' s capacity.  As a result, all carriers operating at LaGuardia, including United, incurred a significant number of delays and cancellations during 2000.
 
 

        To reduce the resulting traffic congestion problems, the FAA implemented a slot lottery system for determining the additional carriers that may operate from LaGuardia.  The lottery system is currently in effect and has substantially reduced delays and cancellations.  The slot lottery was designed as a temporary remedy; the FAA is currently considering a number of capacity management alternatives at LaGuardia for long-term improvement, including making slot lotteries permanent.
 
 

        AIR 21 also provides that nearly $40 billion from the U.S. Aviation Trust Fund is to be invested in aviation facilities, equipment and training, examples of which could be radar modernization, airport construction projects, and the hiring and training of air traffic controllers.
 
 

        Across the Atlantic, the Commission of the European Union ("EU") has proposed a regulation that would, if enacted, dramatically alter the manner in which airport slots are held and allocated.  The centerpiece of the proposal is that a slot at major airports would have a life-span of only ten years, at which time it would automatically revert to the airport slot controller.  The proposal has been met with fierce opposition from airlines.  The Commission will likely re-evaluate its original proposal and consider a milder form of slot reform.
 
 

        United currently has a sufficient number of leased gates and other airport facilities, but expansion by United may be constrained at certain airports by insufficient availability of gates on attractive terms or other factors, such as noise restrictions.
 
 

        Safety.  The FAA has regulatory jurisdiction over flight operations generally, including equipment, ground facilities, maintenance, communications and other matters.  United' s aircraft and engines are maintained in accordance with the standards and procedures recommended and approved by the manufacturers and the FAA.
 
 

        From time to time, the FAA issues airworthiness directives ("ADs") which require air carriers to undertake inspections and to make unscheduled modifications and improvements on aircraft, engines and related components and parts.  The ADs sometimes cause United to incur substantial, unplanned expense when aircraft or engines are removed from service prematurely in order to undergo mandated inspections or modifications.  The issuance of any particular AD may have a greater or lesser impact on United, compared to its competitors, depending upon the equipment covered by the directive.  Civil and criminal sanctions may be assessed for not complying with the ADs.
 
 

        The Air Transport Association ("ATA"), an industry organization to which United belongs, and the Department of Defense ("DoD") have signed a memorandum of understanding, establishing procedures for auditing international code-share partners that carry DoD personnel.  Based on the DOT/FAA Safety Program Guidelines issued to all U.S. carriers, United has also established a safety review plan for Star Alliance and code-share airlines.  Audits are conducted on both prospective and existing code-share partners.  The FAA reviews audit reports and makes code-share approval recommendations to the DOT.
 
 
 
 

        Passenger Rights Legislation.  Following the February 2001 report of the DOT Inspector General, several pieces of legislation were introduced by members of the U.S. Congress to implement a variety of changes in the airline industry, such as: requiring airlines to disclose all available fares; allowing consumers to purchase any published fare from an airline or a travel agent; requiring airlines to disclose the number of seats available for frequent flyer travelers; and granting authority to the DOT to intervene and roll back fares in certain markets.
 
 

        In 2000, the EU' s transport commissioner proposed two legislative alternatives for limiting airlines'  use of overbooking as a revenue management device.  The first alternative would distinguish between an intention to fly and a confirmed booking.  If the passenger has only indicated an intention to fly, the passenger would be allowed to cancel without penalty and the airline would be allowed to give away the seat.  For a confirmed booking, however, an airline would have no choice but to provide a seat for a passenger with a confirmed booking.  The second alternative under consideration is to limit an airline' s ability to overbook.  The limitation would be combined with efforts to encourage airlines to stage auctions where the carrier improves its compensation offer until someone is tempted to surrender his or her seat.
 
 

        It is not clear what form that any of the U.S. or European legislation might ultimately take.
 
 

        Privacy Laws.  An initiative of significant impact within the EU and elsewhere is the introduction of privacy standards that apply to companies transmitting private information from the EU to countries abroad.  To comply with the privacy directives, the U.S. Commerce Department and the EU Commission have agreed to safe harbor principles.  Although the safe harbor principles are voluntary at this point, United plans to comply with them.  In mid-2001, the U.S. Commerce Department and the EU Commission will review the status of voluntary compliance.
 
 

        Canada, Argentina and Australia have enacted new privacy laws covering the collection and disclosure of personally identifiable information.  These laws have either gone into force or will go into force later this year, and may have an impact on the way United collects and transmits personal identifiable information in these jurisdictions.
 
 

        Environmental Regulations.  United operates a number of underground and above-ground storage tanks throughout its system.  They are used for the storage of fuels and deicing fluids.  United has been identified as a Potentially Responsible Party in some state and federal recovery actions involving soil and ground water contamination.  The Company has been working with the relevant government agencies to resolve the issues and believes they will be resolved without material adverse effect on the Company.
 
 

Employees - Labor Matters
 
 

        At December 31, 2000, the Company and its subsidiaries had more than 102,000 employees.  Approximately 80 % of United' s employees are represented by various labor organizations.
 
 

        Collective bargaining agreements are negotiated under the Railway Labor Act, which governs labor relations in the transportation industry, and typically do not contain an expiration date.  Instead, they specify a date called the amendable date, by which either party may notify the other of its desire to amend the agreement.  Upon reaching the amendable date, the contract is considered "open for amendment."  Prior to the amendable date, neither party is required to agree to modifications to the bargaining agreement.  Nevertheless, nothing prevents the parties from agreeing to start negotiations or to modify the agreement in advance of the amendable date.
 
 

        Contracts remain in effect while new agreements are negotiated.  During the negotiating period, both the Company and the negotiating union are required to maintain the status quo.  Recent operating disruptions suggest, however, that some members of the negotiating employee group may engage in activities designed to "slow down" the airline.  These slowdown tactics may involve refusal to work overtime, increased sick leave usage and other disruptive behavior that could have an adverse impact on operations.
 
 

        United' s collective bargaining agreements with the International Association of Machinists and Aerospace Workers ("IAM") became amendable on July 12, 2000.  United is currently in negotiations with the IAM, under the auspices of the National Mediation Board ("NMB").  Under the law, the parties are not allowed to resort to self-help, such as strikes or lock-outs, until they are released from mediation by the NMB, and then only after a 30 day cooling-off period.  However, the NMB can request the U.S. president to create a Presidential Emergency Board, the creation of which imposes an additional 60-day bar against self-help remedies.  If the parties fail to reach a resolution by the end of the 60 days, the U.S. Congress can impose a settlement.  The Company cannot predict when the current negotiations will be resolved.  For additional information on the status of negotiations, see "Labor Agreements" in Item 7. Management' s Discussion and Analysis of Financial Condition and Results of Operations.
 
 

        The employee groups, number of employees, labor organization and current contract status for each of United' s major collective bargaining groups in the U.S., as of December 31, 2000, are as follows:
 
 
 

  Number of   Contract Open
Employee Group Employees Union for Amendment
Pilots 10,045 ALPA Sept. 1, 2004
Flight Attendants 24,199 AFA March 1, 2006*
Mechanics/Ramp 15,706 IAM July 12, 2000
Passenger Service 31,606 IAM July 12, 2000

 

* The collective bargaining agreement between the Company and the AFA provides for mid-term wage adjustments.
 
 

Corporate Governance and the ESOPs
 
 

        Background.  In July 1994, the stockholders of UAL approved a plan of recapitalization that provided an approximately 55% equity and voting interest in UAL to certain employees of United, in exchange for wage concessions and work-rule changes.  The employees'  equity interest was allocated to individual employee accounts through the year 2000 under the Employee Stock Ownership Plans ("ESOPs") created as part of the recapitalization.  The entire ESOP voting interest is voted by the ESOP trustee at the direction of, and on behalf of, the employees participating in the ESOPs.
 
 

        As part of the recapitalization, the Company' s stockholders approved an elaborate governance structure, which is contained principally in the Company' s Restated Certificate of Incorporation ("UAL Charter") and the ESOPs.  Among other matters, the UAL Charter provides that the Company' s Board of Directors is to consist of five public directors, four independent directors, and three employee directors which are appointed by different classes of stockholders (see the Company' s Proxy Statement for its Annual Meeting of Stockholders for information concerning the processes for electing the directors and for Board committee requirements).  A number of special stockholder and Board voting requirements were also established, as summarized below.
 
 

        Special Voting.  In specified circumstances ("Extraordinary Matters"), actions by UAL or United Airlines require approval of either (a) 75% of the entire Board, including at least one union director, or (b) 75% of the voting stock present at a stockholder meeting.  "Extraordinary Matters" include certain business transactions outside the ordinary course of business, significant asset dispositions, and most issuances of equity securities.  Most issuances of equity securities are also subject to a first refusal agreement in favor of employees participating in the ESOPs.
 
 

        Other special voting requirements apply to amendments to the UAL Charter and certain bylaws, repurchases of common stock, stock sales to employee benefit plans, and business transactions with labor. The special voting rights referred to in the previous paragraph will continue until "Sunset" (defined below), at which time the corporate governance section will convert to a more traditional form, providing for nine public directors and three employee directors.
 
 

        In the case of a merger or Control Transaction (defined below) that involves an Uninstructed Trustee Action (defined below), any required stockholder approval must also include at least a majority of the votes represented by all outstanding shares of the Director Preferred Stocks (defined below), UAL common stock and such other classes and series of stock that vote together with the common stock as a single class ("Single Class Voting").
 
 

        "Sunset."  The Voting Preferred Stock (see Item 8, Note 13 of the Notes to Consolidated Financial Statements) outstanding at any time commands voting power for approximately 55% of the vote of all classes of capital stock in all matters requiring a stockholder vote, other than the election of members of the Board of Directors.  The Voting Preferred Stock will generally continue to represent approximately 55% of the aggregate voting power until Sunset, even though the common stock issuable upon conversion of the ESOP stock may represent more or less than 55% of the fully diluted common stock of UAL.  Sunset will occur when the common shares issuable upon conversion of Class 1 and Class 2 ESOP convertible preferred stock (see Item 8, Note 13 of the Notes to Consolidated Financial Statements), plus any common equity (generally common stock issued or issuable at the time of the recapitalization) held by any other Company sponsored employee benefit plans, plus any available unissued ESOP shares held in the ESOPs equal, in the aggregate, less than 20% of the common equity and available unissued ESOP shares of UAL.  For purposes of measuring the Sunset, employee ownership was approximately 63.84% at December 31, 2000.
 
 

        Control Transactions.  A "Control Transaction" is a tender or exchange offer, or other opportunity to dispose of or convert at least 3% of UAL common stock, Class 1 and Class 2 ESOP convertible preferred stock into common stock, and Voting Preferred Stocks, or any transaction or series of related transactions in which any person or group acquires or seeks to acquire control of UAL or of all or substantially all of the assets of UAL and its subsidiaries.  In a Control Transaction, ESOP participants are entitled to instruct the ESOP trustee as to whether to tender, sell, convert or otherwise dispose of shares allocated to their accounts under the ESOP, and current employees who are ESOP participants may give the same instructions for ESOP shares that have been issued, but not yet allocated to participants.  Shares held by the Supplemental ESOP will be tendered or directed by the Supplemental ESOP Committee.
 
 

        If a Control Transaction results in the sale or exchange of any shares held by the ESOPs, the proceeds will be used to acquire, to the extent possible, shares of common stock (or preferred stock which is convertible into common) that qualify as "employer securities" as defined in Internal Revenue Code Section 409(l).  If UAL shares do not qualify as "employer securities," then the shares must be "employer securities" of a public company having a Moody' s senior long-term debt rating at least as good as that of UAL and United at such time.  If such securities cannot be acquired, then UAL, ALPA and the IAM will make appropriate arrangements reasonably satisfactory to the unions to protect the interests of the participants.
 
 

        Uninstructed Trustee Actions.  An uninstructed trustee action refers to situations in which the ESOP trustee adopts a course of action without obtaining instructions from the ESOP participants, or disregards their instructions, including situations involving Control Transactions.  Under specific circumstances, this action can cause the Voting Preferred Stocks to be converted into UAL common stock, with the special voting rights of these shares transferring to the Director Preferred Stocks (defined as Class Pilot MEC, IAM, and SAM junior preferred stock -- see Item 8, Note 13 of the Notes to Consolidated Financial Statements) in the following approximate percentages: to the holder of the Class Pilot MEC Preferred Stock, 46.23%; to the holder of the Class IAM Preferred Stock, 37.13% ; and to the holders of the Class SAM Preferred Stock, 16.64%.  The Director Preferred Stocks will continue to hold the Single Class Voting Rights until Sunset, or if Sunset occurs because of, or within one year of, an uninstructed trustee action, July 12, 2010.
 
 

            Specific circumstances that give rise to a transfer of voting rights include:
 
 

            (1)   The ESOP trustee fails to solicit timely instructions or fails to act in accordance with such instructions (see below for reasons), with respect to the following:
 
                  (a)   But for the transfer of voting rights, a stockholders vote would have been sufficient to approve a merger or Control Transaction involving UAL or United, or if no vote is required, the ESOP trustee enters into a binding commitment in connection with a Control Transaction; or
 
 

                (b)   the ESOP trustee disposes of 10% or more of the common equity represented by the Class 1 and Class 2 ESOP Preferred Stock (other than in connection with the usual distribution or diversification under the ESOP).
 
 

            (2)   In addition, one of the following circumstances must be present:
 
 

                (a)   such transaction would not have been approved if the trustee had solicited and/or followed the instructions;
 
 

                (b)   no timely solicitation of instructions occurs, and the matter would not have been approved had the ESOP trustee cast all its votes against the matter, or
 
 

                (c)   a matter that does not require a stockholder vote to approve such transaction.
 
 

        An ESOP trustee' s disregard of instructions gives rise to an uninstructed trustee action only when the failure to follow the instructions is attributable to (1) the trustee' s conclusion that its fiduciary responsibilities require the trustee to not follow the instructions or (2) the ESOP provisions relating to soliciting are unenforceable.
 
 

        This section is intended as a general summary and is qualified in its entirety by reference to the UAL Charter, the Stockholders'  Agreements, the First Refusal Agreement, the ESOPs and the other exhibits to this Form 10-K.
 
 

ITEM 2.  PROPERTIES.
 
 

Flight Equipment
 
 

        As of December 31, 2000, United' s operating aircraft fleet totaled 604 jet aircraft, of which 289 were owned and 315 were leased.  These aircraft are listed below:
 
 
 

  Average       Average
Aircraft Type No. of Seats Owned Leased* Total Age (Years)
           
A319-100 120 14 18 32 2
A320-200 138 19 49 68 4
B727-200 141 67 8 75 22
B737-200 103 24 0 24 22
B737-300 120 10 91 101 12
B737-500 104 27 30 57 9
B747-400  368 23 21 44 6
B757-200 182 41 57 98 9
B767-200 168 19 0 19 18
B767-300 219 15 20 35 6
B777-200 288 30 18 48 3
DC10-30 298 0 3 3 23
           
TOTAL OPERATING   289 315 604 10
FLEET          

 
 
 

            *United' s aircraft leases have initial terms of 10 to 26 years, and expiration dates range from 2001 through 2020.  Under the terms of all leases, 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, 2000, 110 of the 289 aircraft owned by United were encumbered under debt agreements.
 
 

        On February 1, 2001, United exercised options to acquire 15 additional aircraft.  The following table sets forth United' s firm aircraft orders and expected delivery schedules as of December 31, 2000, plus the additional 15 aircraft:
 
 
 
 
 

Aircraft Type
Number
To Be Delivered
Delivery Rate
       
A319-100
44
2001-2003
0-2 per month
A320-200
48
2001-2003
0-2 per month
B767-300
2
2001
 
B777-200
13
2001-2002
0-1 per month
       
Total
107
   

 
 
 

Ground Facilities and Equipment
 
 

        United has entered into various leases relating to its use of airport-landing areas, gates, hangar sites, terminal buildings and other airport facilities in most of the municipalities it serves.  Major leases expire at Chicago O' Hare in 2018, Los Angeles in 2021, San Francisco in 2011, and Washington Dulles in 2014.  United also has leased ticketing, sales and general office space in the downtown and outlying areas of most of the larger cities in its system.  In suburban Chicago, United owns a 106-acre complex consisting of more than one million square feet of office space for its world headquarters, a computer facility and a training center.
 
 

        United' s Maintenance Operation Center ("MOC") at San Francisco International Airport occupies 129 acres of land, three-million square feet of floor space and 12 aircraft hangar docks under a lease expiring in 2003, with an option to extend for 10 years.  United' s Indianapolis Maintenance Center, a major aircraft maintenance and overhaul facility, is operated under a lease with the Indianapolis Airport Authority that expires in 2031.  United also has a major facility at the Oakland, California airport, dedicated to widebody airframe maintenance.
 
 

        At Denver International Airport, United operates under a lease and use agreement expiring in 2025, and occupies 52 gates and more than one million square feet of exclusive or preferential use terminal building space.  United' s flight training center, located in the City and County of Denver, can accommodate 36 flight simulators and more than 90 computer-based training stations.
 
 

        In connection with the Company' s planned acquisition of US Airways, the Company has announce plans to invest up to $160 million in constructing a 300,000 to 360,000 square foot maintenance complex in Pittsburgh.  The Commonwealth of Pennsylvania and Allegheny County have proposed to provide $60 million in incentive assistance based, in part, on a job retention program.
 
 
 
 
 
 

ITEM 3.  LEGAL PROCEEDINGS.
 
 

1.      Frank, et al. v. United; EEOC v. United
 
 

        As previously reported in our Form 10-Q for the quarter ended September 30, 2000, a class action lawsuit against United was filed February 7, 1992 in federal district court in California, alleging that United' s former flight attendant weight program, in effect from 1989 to 1994, unlawfully discriminated against flight attendants on the grounds of sex, age and other factors, and seeking monetary relief.  On April 29, 1994, the class was certified as to the sex and age claims.  Following extensive motion practice, on March 10, 1998, the district court dismissed all the claims against United.  Following an appeal to the Court of Appeals for the Ninth Circuit, a three judge panel of the Ninth Circuit, on June 21, 2000, overturned the ruling and held that United' s former weight program violated the law.  The court ruled that the plaintiffs were entitled to judgment as a matter of law on their claims for discrimination based on sex and that a trial was required for determination on their claims for age discrimination.  In addition, the appellate court reversed the dismissal of all individual class representative claims of discrimination and the case was remanded to the district court for further proceedings.  United' s petition for en banc review by an 11-judge panel was denied on August 11, 2000.  On December 8, 2000, United petitioned for a review of the Ninth Circuit decision by the U.S. Supreme Court, but that petition was denied on March 5, 2001.  In accordance with the appellate court ruling, the case will go back to the district court for further proceedings with respect to the age discrimination claims and for a determination of damages with respect to the sex discrimination claims.
 
 

2.     United v. Mesa Airlines, Inc. and WestAir Commuter Airlines, Inc.
 
 

        As previously reported in our Form 10-Q for the quarter ended September 30, 2000, United sued Mesa Airlines, Inc. and its subsidiary, WestAir Commuter Airlines, Inc., on June 23, 1997, in the U.S. District Court for the Northern District of Illinois, seeking an order declaring that United had the right to make certain market adjustments in markets served by WestAir' s United Express service in California.  On January 22, 1998, United notified Mesa that it was terminating Mesa' s United Express contract and United amended its complaint to add claims against Mesa for failure to fly and for monetary damages.  Mesa and WestAir filed claims against United alleging, among other things, wrongful termination of their contract and fraud, and seeking monetary damages.  On July 5, 2000, the Seventh Circuit Court of Appeals affirmed the dismissal of Mesa' s tort claims, including its claim alleging fraud on the ground that those claims are preempted by the Airline Deregulation Act.  Mesa filed a petition for certiorari with the U.S. Supreme Court.  That petition was denied, ending the appeals process for the tort claims.  On March 5, 2001, the parties agreed to a settlement and have since dismissed the remaining claims.
 
 
 
 

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 2000.
 
 

Executive Officers of the Registrant
 
 

        Information regarding the executive officers of the Company is as follows:
 
 

        James E. Goodwin.  Age 56.  Mr. Goodwin has been Chairman and Chief Executive Officer of the Company and United since July 1999.  Prior to his current position, he was President and Chief Operating Officer of the Company and United from September 1998; from April 1995 until September 1998, he served as Senior Vice President - North America of United.
 
 

        Rono Dutta.  Age 49.  Mr. Dutta has been President of the Company and United since July 1999.  Prior to his current position, he served as Senior Vice President - Planning of United.
 
 

        Douglas A. Hacker.  Age 45.  Mr. Hacker has been Executive Vice President and Chief Financial Officer of the Company and Executive Vice President - Finance & Planning and Chief Financial Officer of United since July 1999.  Prior to his current position, he had served as Senior Vice President and Chief Financial Officer for the Company and United.
 
 

        William P. Hobgood.  Age 62.  Mr. Hobgood has been Senior Vice President - People of United since March 1997 and Senior Vice President of the Company since September 1999.  Prior to joining United, he was in private practice as an attorney specializing in mediation and arbitration, including labor-management issues.
 
 

        Francesca M. Maher.  Age 43.  Ms. Maher has been Senior Vice President, General Counsel and Secretary of the Company and United since October 1998.  From June 1997 until October 1998, she was Vice President, General Counsel and Secretary of the Company and United.  Previously, she was Vice President - Law and Corporate Secretary of the Company and Vice President-Law, Deputy General Counsel and Corporate Secretary of United.
 
 

        Andrew P. Studdert.  Age 44.  Mr. Studdert has been Executive Vice President and Chief Operating Officer of the Company and of United since July 1999.  Prior to his current position, he served as Senior Vice President - Fleet Operations of United from September 1997.  He served as Senior Vice President and Chief Information Officer of United from April 1995 to September 1997.
 
 

        There are no family relationships among the executive officers of the Company.  The executive officers of the Company serve at the discretion of the Board of Directors.
 
 




PART II



ITEM 5.  MARKET FOR REGISTRANT' S COMMON EQUITY AND RELATED

                     STOCKHOLDER MATTERS.
 
 

        The Company' s Common Stock, $.01 par value (the "Common Stock"), is traded principally on the New York Stock Exchange (the "NYSE") under the symbol UAL, and is also listed on the Chicago Stock Exchange and the Pacific Stock Exchange.  The following sets forth for the periods indicated the high and low sales prices and dividends paid per share of the Company' s Common Stock on the NYSE Composite Tape.
 
 
 
 
 

    High Low Dividends Paid
         
2000:        
  1st quarter $ 79 $  45 3/4  
  2nd quarter   65 1/8    49 $0.3125
  3rd quarter   61 5/8    40 1/4 $0.3125
  4th quarter   43 15/16    34 1/16 $0.3125
         
1999:        
  1st quarter $ 80 1/4 $  57 9/16  
  2nd quarter   87 3/8    60 1/16  
  3rd quarter   69 3/8    58 3/16  
  4th quarter   78 3/4    60 1/8  
         

 

        The Company initiated a quarterly dividend during the second quarter of 2000.  The payment of any future dividends on the Common Stock and the amount thereof will be determined by the Board of Directors of the Company based on the financial condition of the Company and other relevant factors.
 
 

        On March 14, 2001, based on reports by the Company' s transfer agent for the Common Stock, there were 23,542 common stockholders of record.
 
 
 
 

Item 6.   Selected Financial Data and Operating Statistics
 
 
 

(In Millions, Except Per Share and Rates)
Year Ended December 31
 
2000
1999
1998
1997
1996
Income Statement Data:          
Operating revenues
$  19,352 
$  18,027 
$  17,561 
$  17,378 
$  16,362 
Earnings before extraordinary item          
   and cumulative effect
265 
1,238 
821 
958 
600 
Net earnings
50 
1,235 
821 
949 
533 
Per share amounts, diluted:          
   Earnings before extraordinary item          
      and cumulative effect
1.89 
9.97 
6.83 
9.04 
5.85 
   Net earnings
0.04 
9.94 
6.83 
8.95 
5.06 
Cash dividends declared per common share
1.25 
           
Pro Forma Income Statement Data1:          
Earnings before extraordinary item
na
$    1,209 
$    774 
$     931 
$      553
Net earnings
na
1,206 
774 
922 
486
Per share amounts, diluted:          
  Earnings before extraordinary item
na
9.71 
6.38 
8.76 
5.29
  Net earnings
na
9.68 
6.38 
8.67 
4.50
           
Other Information:          
Total assets at year-end
$ 24,355 
$ 20,963 
$ 18,559 
$ 15,464 
$ 12,677 
Long-term debt and capital lease          
   obligations, including current portion,          
   and redeemable preferred stock
7,487 
5,369 
5,345 
4,278 
3,385 
           
Revenue passengers 
85 
87 
87 
84 
82 
Revenue passenger miles 
126,933 
125,465 
124,609 
121,426 
116,697 
Available seat miles
175,485 
176,686 
174,008 
169,110 
162,843 
Passenger load factor
72.3%
71.0%
71.6%
71.8%
71.7%
Breakeven passenger load factor
69.4%
64.9%
64.9%
66.0%
66.0%
Passenger revenue per passenger mile (cents)
13.3 
12.5 
12.4 
12.6 
12.4 
Operating revenue per available seat mile (cents)
11.0 
10.2 
10.1 
10.3 
10.0 
Operating expense per available seat mile (cents)
10.6 
9.4 
9.2 
9.5 
9.3 
Fuel gallons consumed
3,101 
3,065 
3,029 
2,964 
2,883 
Average price per gallon of jet fuel (cents)
81.0 
57.9 
59.0 
69.5 
72.2 
           

1 The pro forma income statement amounts reflect adjustments to the historical income statement data assuming the Company had adopted the provisions of Staff Accounting Bulletin 101 ("SAB 101") in prior periods.  (See Note 1i "Summary of Significant Accounting Policies - Mileage Plus Awards" in the Notes to Consolidated Financial Statements.)
 
 
 
 

Item 7.   Management' s Discussion and Analysis of Financial Condition and

            Results of Operations
 
 

    This section contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are identified with an asterisk (*).  Forward-looking statements represent the Company' s expectations and beliefs concerning future events, based on information available to the Company on the date of the filing of this Form 10K.  The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  Factors that could significantly impact the expected results referenced in the forward-looking statements are listed in the last paragraph of the section, "Outlook for 2001."


US Airways Acquisition
 
 

        On May 24, 2000, UAL announced that it had entered into a definitive merger agreement with US Airways Group, Inc. ("US Airways") pursuant to which US Airways will be acquired by the Company in an all-cash transaction for $4.3 billion.  Additionally, UAL will assume approximately $1.7 billion in US Airways net debt and $6.3 billion in operating leases.  On October 12, 2000, the stockholders of US Airways approved the merger.  The transaction, which the Company anticipates closing in the second quarter of 2001, is still subject to regulatory clearance and other customary closing conditions.  Definitive financing arrangements have not yet been determined although UAL expects to incur approximately $4.5 billion in additional indebtedness, through a combination of bank and public financing, to cover the cost of the acquisition as well as additional costs related to the integration of the airlines.
 
 

        Subject to regulatory approval of the transaction and the successful outcome of negotiations with local authorities, the Company announced its intentions to expand US Airways'  maintenance facility in Pittsburgh at a total projected cost of $160 million.  Additionally, the Company recognizes that it will incur significant costs associated with the integration of US Airways in order to achieve the anticipated benefits to both the Company and the millions of passengers and hundreds of communities served by United throughout the United States.  The Company expects that the new network will make traveling more convenient for passengers, connecting US Airways'  eastern U.S. markets with United' s east-west and international markets, thereby creating the nation' s most comprehensive airline network.  However, the Company recognizes that it may encounter difficulties in achieving these significant benefits.  As part of the agreement with US Airways, UAL generally has agreed to pay US Airways a $50 million termination fee in the event the merger does not take place.
 
 

        In addition, UAL and US Airways entered into a binding memorandum of understanding with Robert Johnson, a member of the US Airways Group Board of Directors, under which Mr. Johnson would buy certain of US Airways'  assets and create a new airline, to be called DC Air, which would compete on numerous routes currently served by US Airways in the Washington D.C. area.
 
 

        In a transaction designed to enhance the competitive benefits of the proposed merger with US Airways and address regulatory concerns, UAL and AMR Corporation ("AMR") on January 9, 2001 announced the approval of a binding memorandum of understanding, under which AMR' s American Airlines subsidiary ("American") will provide competitive service on key hub-to-hub routes where United and US Airways currently are the only competitors with non-stop flights.  As part of the agreement, American will also enter into a 20-year joint venture with United to jointly provide service on routes currently served by the US Airways Shuttle between New York' s LaGuardia Airport, Washington, D.C.' s Reagan National Airport and Boston' s Logan Airport.  In addition, United will transfer a number of gates, slots and up to 86 aircraft acquired in its merger with US Airways to American deemed to be surplus to the combined United and US Airways entity.
 
 

        AMR will pay UAL up to $1.2 billion in cash for this transaction.  In addition, American will assume certain lease obligations and buy certain spare engines and other parts associated with the aircraft being transferred.  The transaction will provide financial benefits to UAL by reducing the debt requirements related to the acquisition of US Airways.
 
 

        On March 2, 2001, UAL announced that it had reached agreement with Atlantic Coast Airlines Holdings, Inc. ("ACAI"), for US Airways to sell its three wholly owned regional airlines to ACAI for an initial purchase price of $200 million.  UAL and ACAI will seek to agree upon the ultimate purchase price over an 18-month period.  If an ultimate purchase price is not agreed as to a carrier, then the transaction as to that carrier is subject to being unwound.  If ACAI is not the ultimate purchaser of at least one of the carriers, they will receive a fee of up to $10 million.  The transaction, which is contingent upon and will occur at the same time as closing of the proposed acquisition of US Airways, is subject to regulatory approvals and to certain termination rights by UAL.  In addition, at closing, the three carriers (Allegheny Airlines, Piedmont Airlines and PSA Airlines) are expected to execute agreements to provide feeder service to the combined United and US Airways network.
 
 

Results of Operations
 
 

        During 2000, the Company experienced significant operational disruptions, as a result of labor-related delays and cancellations, as well as weather and air traffic control limitations, which adversely affected both revenue and expense performance.  The Company attempted to mitigate the impact of these operational difficulties by reducing capacity, particularly in the domestic markets, where most of the problems were concentrated. The Company estimates the revenue shortfall arising from these disruptions and associated schedule reductions and cancellations to be somewhere between $700 and $750 million for the year.

Summary of Results -

        UAL' s earnings from operations were $654 million in 2000, compared to operating earnings of $1.4 billion in 1999.  UAL' s net earnings in 2000 were $50 million ($0.04 per share, diluted), compared to net earnings of $1.2 billion in 1999 ($9.94 per share, diluted).
 
 

        The 2000 earnings include an extraordinary loss of $6 million, after tax, on early extinguishment of debt and the cumulative effect of a change in accounting principle of $209 million, net of tax.  The 2000 earnings also include an impairment loss of $38 million, net of tax ($0.33 per share, diluted), related to the Company' s equity investment in Priceline.com, as well as a gain of $69 million, net of tax ($0.60 per share, diluted), on the sale of its investment in GetThere.com (see Note 6 "Investments" in the Notes to Consolidated Financial Statements).
 
 

        The 1999 earnings include an extraordinary loss of $3 million, after tax, on early extinguishment of debt and an after-tax gain of $468 million ($4.19 per share, diluted), on the sale of certain of the Company' s investments, as further described in Note 6 "Investments" in the Notes to Consolidated Financial Statements.
 
 

2000 Compared with 1999 -

        Operating Revenues.  Operating revenues increased $1.3 billion (7%) and United' s revenue per available seat mile (unit revenue) increased 8% to 11.02 cents.  Passenger revenues increased $1.1 billion (7%) primarily due to a 6% increase in yield to 13.25 cents.  United' s revenue passenger miles increased 1%, while available seat miles decreased 1%, resulting in a passenger load factor increase of 1.3 points to 72.3%.  The decrease in available seat miles reflects the Company' s response to the operational difficulties as well as the impact of Economy Plus.  The following analysis by market is based on information reported to the DOT:
 
 
 

 
Increase (Decrease)
 
Available Seat
Revenue Passenger Miles
Revenue Per Revenue
 
Miles (Capacity)
(Traffic)
Passenger Mile (Yield)
North America
    (4%)
   (3%)
7%
Pacific 
  10%
  11%
7%
Atlantic
    6%
    6%
8%
Latin America
    (10%)
    (1%)
4%
   System
    (1%)
    1%
6%

 

        Cargo revenues increased $25 million (3%) on increased freight ton miles of 3%, as freight yields remained constant and mail yields increased 1%.  Other operating revenues increased $152 million (19%) primarily due to increased fuel sales to third parties and additional revenues from operating agreements with Galileo International, Inc. ("Galileo"), offset by the decrease in other revenues related to the change in accounting for Mileage Plus sale of miles to third parties (see Note 1i "Summary of Significant Accounting Policies - Mileage Plus Awards" in the Notes to Consolidated Financial Statements).

        Operating Expenses.  Operating expenses increased $2.1 billion (12%) and United' s cost per available seat mile increased 13% from 9.41 to 10.63 cents.  Salaries and related costs increased $1.1 billion (19%) due to a new salary program implemented for non-contract employees, the impact of the new ALPA contract, and the estimated costs of IAM contracts which became amendable in July 2000 and are currently under negotiation.  ESOP compensation expense decreased $609 million (81%) as the Company discontinued recording ESOP compensation expense once the final ESOP shares were committed to be released in April 2000.  Aircraft fuel increased $735 million (41%) due to a 40% increase in the cost of fuel to 81.0 cents per gallon.  Commissions decreased $114 million (10%) due to a change in the commission structure implemented in the fourth quarter of 1999.  Purchased services increased $136 million (9%) due to increases in computer reservations fees and credit card discount fees.  Depreciation and amortization increased $138 million (16%) due to an increase in the number of owned aircraft and losses on disposition of aircraft and other equipment.  Cost of sales increased $436 million (72%) primarily due to costs associated with fuel sales to third parties.
 
 

        Other Income and ExpenseOther income (expense) amounted to $223 million in expense in 2000 compared to $551 million in income in 1999.   Interest expense increased $40 million (11%) due to increased debt issuances in 2000.  Interest income increased $33 million (49%) due to higher investment balances.  In addition, 2000 included a $109 million gain on the sale of GetThere.com stock and a $61 million investment impairment related to warrants held in Priceline.com, while 1999 included a $669 million gain on the sale of Galileo stock and a $62 million gain on the sale of Equant N.V. ("Equant") stock.
 
 

1999 Compared with 1998 -

        Operating Revenues.  Operating revenues increased $466 million (3%) and United' s revenue per available seat mile (unit revenue) increased 1% to 10.17 cents.  Passenger revenues increased $264 million (2%) due to a 1% increase in United' s revenue passenger miles and a 1% increase in yield to 12.48 cents.  Available seat miles across the system were up 2% year over year; however, passenger load factor decreased 0.6 points to 71.0% as traffic only increased 1% system-wide.  The following analysis by market is based on information reported to the DOT:
 
 
 

 
Increase (Decrease)
 
Available Seat
Revenue Passenger Miles
Revenue Per Revenue
 
Miles (Capacity)
(Traffic)
Passenger Mile (Yield)
North America
    4%
    2%
1%
Pacific 
  (12%)
  (11%)
3%
Atlantic
  14%
  14%
(7%)
Latin America
    (7%)
    (3%)
(3%)
   System
    2%
    1%
1%

 

        Cargo revenues decreased $7 million (1%) despite increased freight ton miles of 5%, as a 4% decline in freight yield combined with a 3% decline in mail yield.  Other operating revenues increased $209 million (19%) due to increases in frequent flyer program partner related revenues and fuel sales to third parties.
 
 

        Operating Expenses.  Operating expenses increased $553 million (3%) and United' s cost per available seat mile increased 2% from 9.24 to 9.41 cents.  ESOP compensation expense decreased $73 million (9%), reflecting the decrease in the estimated average fair value of ESOP stock committed to be released to employees as a result of UAL' s lower common stock price.  Salaries and related costs increased $329 million (6%) as a result of increased staffing in customer-contact positions, as well as salary increases for most labor groups which took effect July 1, 1998.  Commissions decreased $186 million (14%) due to a change in the commission structure implemented in the third quarter 1998 as well as a slight decrease in commissionable revenues.  In addition, in October 1999, the Company reduced the base commissions for tickets purchased in the U.S. and Canada to 5%, subject to roundtrip caps of $50 and $100 for domestic and international tickets, respectively.  Purchased services increased $70 million (5%) due to increases in computer reservations fees and year 2000-related expenses.  Depreciation and amortization increased $74 million (9%) due to an increase in the number of owned aircraft and losses on disposition of aircraft partially offset by changes in depreciable lives of certain aircraft.  In addition, United wrote-down two non-operating B747-200 aircraft to net realizable value.  Cost of sales increased $128 million (27%) primarily due to costs associated with fuel sales to third parties.  Aircraft maintenance increased $65 million (10%) due to an increase in heavy maintenance visits.
 
 

        Other Income and Expense.  Other income (expense) amounted to $551 million in income in 1999 compared to $222 million in expense in 1998.  Interest capitalized, primarily on aircraft advance payments, decreased $30 million (29%).  Interest income increased $9 million (15%) due to higher investment balances.  In addition, 1999 included a $669 million gain on the sale of Galileo stock and a $62 million gain on the sale of Equant stock.
 
 

Liquidity and Capital Resources
 
 

Liquidity -

        UAL' s total of cash and cash equivalents and short-term investments was $2.3 billion at December 31, 2000, compared to $689 million at December 31, 1999.  Operating activities during the year generated $2.5 billion.
 
 

        Property additions, including aircraft, aircraft spare parts, facilities and ground equipment, amounted to $2.5 billion, while property dispositions resulted in proceeds of $324 million.  In 2000, United took delivery of four A319, twelve A320, one B747, three B767 and eight B777 aircraft.  Twenty-six of these aircraft were purchased and two were acquired under capital leases.  Five of the aircraft purchased during the year were later sold and then leased back under capital leases.  In addition, United retired three DC10-10, four DC10-30F and seven B747 aircraft.
 
 

        During 2000, the Company made payments of $81 million for the repurchase of 1.3 million shares of common stock.  Financing activities included the issuance of $2.4 billion in equipment trust certificates, as well as principal payments under debt and capital lease obligations of $441 million and $283 million, respectively.  Included in the debt payments was the retirement of $116 million of long-term debt prior to maturity.  Additionally, UAL issued, and subsequently retired, $200 million in long-term debt during the period to finance the acquisition of aircraft.  UAL may also from time to time repurchase on the open market, in privately negotiated purchases or otherwise, its debt and equity securities.
 
 

        Included in cash and cash equivalents at December 31, 2000 were $39 million of securities held by third parties under securities lending agreements, as well as collateral in the amount of 102% of the value of the securities lent.  United is obligated to reacquire the securities at the end of the contract.
 
 

        As of December 31, 2000, UAL had a working capital deficit of $2.0 billion as compared to $2.5 billion at December 31, 1999.  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.
 
 

        Prior Years.  Operating activities in 1999 generated cash flows of $2.4 billion and the Company' s sale of part of its investments in Galileo and Equant provided $828 million in cash.  Cash was used primarily to fund net additions to property and equipment ($2.2 billion) and to repurchase common stock ($261 million).  Financing activities also included principal payments under debt and capital lease obligations of $513 million and $248 million, respectively.
 
 

        Operating activities in 1998 generated cash flows of $3.2 billion.  Cash was used primarily to fund net additions to property and equipment ($2.4 billion) and to repurchase common stock ($459 million).  Financing activities also included repayments of long-term debt totaling $271 million and payments under capital leases of $322 million, as well as aircraft lease deposits of $154 million.  Additionally, the Company issued $928 million in debt and used part of the proceeds to purchase $693 million in equipment certificates under Company operating leases.
 
 

Capital Commitments -

        At December 31, 2000, commitments for the purchase of property and equipment, principally aircraft, approximated $4.7 billion, after deducting advance payments.  Of this amount, an estimated $2.5 billion is due to be spent in 2001.  For further details, see Note 18 "Commitments, Contingent Liabilities and Uncertainties" in the Notes to Consolidated Financial Statements.
 
 

Capital Resources -

        Funds necessary to finance aircraft acquisitions are expected to be obtained from internally generated funds, external financing arrangements or other external sources.  Additionally, during 2001, UAL anticipates requiring additional financing for its planned acquisition of US Airways.
 
 

        At December 31, 2000, UAL and United had an effective shelf registration statement on file with the Securities and Exchange Commission to offer up to $2.5 billion of securities, including secured and unsecured debt, equipment trust and pass through certificates or a combination thereof.  United also has available approximately $1.7 billion in short-term revolving credit facilities, as well as a separate $227 million short-term borrowing facility, as described in Note 8 "Short-Term Borrowings" in the Notes to Consolidated Financial Statements.
 
 

        At December 31, 2000, United' s senior unsecured debt was rated BB+ by Standard and Poor' s ("S&P") and Baa3 by Moody' s Investors Service Inc. ("Moody' s").  UAL' s Series B preferred stock and redeemable preferred securities were rated B+ by S&P and Ba3 by Moody' s.  Immediately following UAL' s announcement of the planned acquisition of US Airways, S&P placed UAL and United securities on CreditWatch with negative implications.
 
 

Other Information
 
 

Labor Agreements -

        On April 12, 2000, the Company' s contract with ALPA became amendable and in October 2000, the parties signed a new contract.  The agreement, which will become amendable September 1, 2004, includes provisions for an immediate increase in wages of 21.5% to 28.7%, retroactive to April 12, as well as additional annual increases of 4.5% to 5.6% for the duration of the contract.  Additionally, the contract allows United Express carriers to increase the number of small jets beyond the current 65-jet limit up to an additional 150 immediately as replacements for existing turboprops, with additional increases in small jets as United' s fleet grows.  United may also share in profits and losses of revenues with foreign carriers with whom United has antitrust immunity, provided United gets its proportionate share of the flying.  In addition, the Company has reached agreement with ALPA to provide United pilots with protections that are realistically representative of their pre-merger expectations.
 
 

        On July 12, 2000, the Company' s contracts with the IAM became amendable.  The Company has been in negotiations with the IAM since January 2000 for new contracts.  Since September 2000, the negotiations have been conducted with the assistance of the National Mediation Board.  Under the terms of the Railway Labor Act, United' s current agreements with the IAM will remain in effect while negotiations continue.  The Company has agreed that wage increases under the new IAM contracts will be retroactive to July 12, 2000 and the estimated costs of those contracts have been included in the Company' s results for 2000.  The Company and the IAM had also initialed an agreement on December 12, 2000 that would have provided for job protection benefits to most mechanics, including relocation protection in the case of displacement due to the merger transaction.  The IAM has recently notified the Company that they consider that agreement to be rescinded.  Talks are ongoing and United hopes to reach agreement with the IAM on these issues.
 
 

        The Company' s contract with the AFA, which becomes amendable in 2006, provides for a mid-term wage conference in the first quarter of 2001.  However, in September 2000, United and the AFA began wage discussions unrelated to the contract that would have avoided the need for this wage conference.  The parties also began addressing integration issues related to United' s acquisition of US Airways at this time.  The Company and the AFA have not reached agreement on these issues to date and the Company began wage conference negotiations per the contract in February 2001.  The Company is continuing to seek to resolve all outstanding issues with the AFA, although arbitration may be required per the collective bargaining agreement, if an agreement cannot be reached on wages.  It is the Company' s desire through these discussions to avoid any AFA operational action that would significantly inconvenience its customers or disrupt schedules.  However, should such action occur, the Company will take appropriate steps to minimize the impact to the Company and its customers.
 
 

E-Commerce -

        In October 2000, UAL announced the formation of United NewVentures, Inc., a wholly owned subsidiary which will create businesses to provide innovative solutions for its customers, strengthen United' s airline business and create incremental value for UAL' s stockholders.  The subsidiary employs about 100 people, primarily from the Company' s former e-commerce organization and consists of two divisions, United NetWorks and United NetVentures.
 
 

        United NetWorks focuses on expanding United-branded e-commerce and wireless activities, including the recently redesigned united.com web site, as well as assuming responsibility for marketing the sale of Mileage Plus miles to third parties.  Gross air bookings on united.com in 2000 grew more than 101% over last year.  Total passenger revenue from sales over the Internet reached $755 million for the year compared to $400 million for 1999, an 89% increase.
 
 

        United NetVentures will manage United' s investments in other Internet ventures, including two new multi-airline travel-oriented web sites, Orbitz and Hotwire, and identify new business opportunities in e-commerce.
 
 

Foreign Operations -

        United generates revenues and incurs expenses in numerous foreign currencies.  These expenses include aircraft leases, commissions, catering, personnel expense, advertising and distribution costs, customer service expenses and aircraft maintenance.  Changes in foreign currency exchange rates impact operating income through changes in foreign currency-denominated operating revenues and expenses.  Despite the adverse (favorable) effects a strengthening (weakening) foreign currency may have on U.S. originating traffic, a strengthening (weakening) of foreign currencies tends to increase (decrease) reported revenue and operating income because United' s foreign currency-denominated operating revenue generally exceeds its foreign currency-denominated operating expense for each currency.
 
 

        With a worldwide network and significant sales and marketing efforts in the U.S. as well as every major economic region in the world, United is able to mitigate its exposure to fluctuations in any single foreign currency.  The Company' s biggest net exposures are typically for Japanese yen, Hong Kong dollars, Australian dollars, British pounds and the euro.  During 2000, yen-denominated operating revenue net of yen-denominated operating expense was approximately 21 billion yen (approximately $195 million), Hong Kong dollar-denominated operating revenue net of Hong Kong dollar-denominated operating expense was approximately 1,397 million Hong Kong dollars (approximately $179 million), British pound-denominated operating revenue net of British pound-denominated operating expense was approximately 97 million British pounds (approximately $142 million), Australian dollar-denominated operating revenue net of Australian dollar-denominated operating expense was approximately 154 million Australian dollars (approximately $90 million), and euro-denominated operating revenue net of euro-denominated operating expense was approximately 34 million euro (approximately $33 million).
 
 

        To reduce the impact of exchange rate fluctuations on United' s financial results, the Company hedged some of the risk of exchange rate volatility on its anticipated future foreign currency revenues by purchasing put options (consisting of Japanese yen, euro, Australian dollars and British pounds) and selling Hong Kong dollar forwards.  To reduce hedging costs, the Company sells a correlation option in the first four currencies referred to above.  United also attempts to reduce its exposure to transaction gains and losses by converting excess local currencies generated to U.S. dollars on a timely basis and by entering into currency forward or exchange contracts.  The total notional amount of outstanding currency options and forward exchange contracts, and their respective fair market values as of December 31, 2000, are summarized in Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.
 
 

        United' s foreign operations involve insignificant amounts of physical assets; however, the Company does have sizable intangible assets related to acquisitions of Atlantic and Latin America route authorities.  Operating authorities in international markets are governed by bilateral aviation agreements between the United States and foreign countries.  Changes in U.S. or foreign government aviation policies can lead to the alteration or termination of existing air service agreements that could adversely impact the value of United' s international route authority.  Significant changes in such policies could also have a material impact on UAL' s operating revenues and results of operations.  In addition, the Financial Accounting Standards Board ("FASB") has issued an Exposure Draft, "Business Combinations and Intangible Assets - Accounting for Goodwill," which could impact the Company' s accounting for these assets.  For further details, see "New Accounting Pronouncements" below.
 
 

Airport Rents and Landing Fees -

        United is charged facility rental and landing fees at virtually every airport at which it operates.  In recent years, many airports have increased or sought to increase rates charged to airlines as a means of compensating for increasing demands upon airport revenues.  Airlines have challenged certain of these increases through litigation and in some cases have not been successful.  The FAA and the DOT have instituted an administrative hearing process to judge whether rate increases are legal and valid.  However, to the extent the limitations on such charges are relaxed or the ability of airlines to challenge such charges is restricted, the rates charged by airports may increase substantially.  Management cannot predict either the likelihood or the magnitude of any such increase.
 
 

Environmental and Legal Contingencies -

        United has been named as a Potentially Responsible Party at certain Environmental Protection Agency ("EPA") cleanup sites which have been designated as Superfund Sites.  United' s alleged proportionate contributions at the sites are minimal; however, at sites where the EPA has commenced litigation, potential liability is joint and several.  Additionally, United has participated and is participating in remediation actions at certain other sites, primarily airports.  The estimated cost of these actions is accrued when it is determined that it is probable that United is liable.  Environmental regulations and remediation processes are subject to future change, and determining the actual cost of remediation will require further investigation and remediation experience.  Therefore, the ultimate cost cannot be determined at this time.  However, while such cost may vary from United' s current estimate, United believes the difference between its accrued reserve and the ultimate liability will not be material.*
 
 

        UAL has certain other contingencies resulting from this and other litigation and claims incident to the ordinary course of business.  Management believes, after considering a number of factors, including (but not limited to) the views of legal counsel, the nature of such contingencies and prior experience, that the ultimate disposition of these contingencies is not likely to materially affect UAL' s financial condition, operating results or liquidity.*
 
 

Common Stock Dividends -

        During 2000, UAL instituted an annual dividend of $1.25 per share on UAL common stock.  Accordingly, UAL paid $36 million ($0.3125 per share) in common dividends in each of the second, third and fourth quarters of 2000.  In addition, on December 14, UAL' s Board of Directors declared a dividend of $0.3125 per share payable on February 1, 2001 to stockholders of record January 16, 2001.

New Accounting Pronouncements -

        In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), which establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value.  SFAS No. 133 requires that changes in the derivative' s fair value be recognized currently in earnings unless specific hedge accounting criteria are met.  Special accounting for qualifying hedges allows a derivative' s gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting.
 
 

        The effective date of SFAS No. 133 was delayed one year, to fiscal years beginning after June 15, 2000.  The Company plans to adopt SFAS No. 133, which was subsequently amended by SFAS No. 138, in the first quarter of 2001.  United has reviewed its various contracts to determine which contracts meet the requirements of SFAS No. 133, as amended, and need to be reflected as derivatives under the standard and accounted for at fair value.  Accordingly, the Company will recognize a charge for the cumulative effect of a change in accounting principle of $8 million, net of tax, in the first quarter 2001.  In addition, the Company believes the adoption of SFAS 133 will increase volatility in earnings and other comprehensive income.
 
 

        On February 14, 2001, the FASB issued an Exposure Draft "Business Combinations and Intangible Assets - Accounting for Goodwill."  The Exposure Draft requires the use of a non-amortization approach to account for purchased goodwill and for separately recognized (non-goodwill) intangible assets that have an indefinite useful economic life.  Under this approach, goodwill and certain intangibles would not be amortized, but would be written down and expensed against earnings only in periods in which the recorded value is more than the fair value.  The Company has not yet quantified the impacts of adopting the new Exposure Draft, but it could result in significant changes to the classification and recording of intangibles and amortization expense currently on the books, as well as the accounting for the planned acquisition of US Airways.
 
 

Outlook for 2001*-

        The softening of the U.S. economy has had an industry-wide effect on business travel; as a result, the Company has experienced a decrease in high-yield near-term bookings.  In addition, passenger revenue performance is expected to be negatively impacted by the reduced capacity level put in place to improve operational reliability.  Given these weaker-than-anticipated revenues, combined with higher labor costs and fuel prices, the Company expects first-quarter results to be substantially below the current First Call consensus of $2.82 loss per share.
 
 

        The Company had previously provided full-year guidance, including the possible effects of its planned acquisition of US Airways, based on business plans prepared before the onset of the revenue deterioration.  With the weakening of the U.S. economic situation, the Company has taken steps to reduce planned 2001 spending by $200 million.  However, based on expectations that revenue weakness will continue, the Company now expects performance to be below plan levels for the full year.
 
 

        The uncertainty surrounding key factors affecting the Company' s financial performance, such as the breadth and length of the U.S. economic slowdown, the outcome of the planned United and US Airways merger and the outcome of labor negotiations and the cost of fuel, among other factors, precludes the Company from providing any specific estimates on results at this time.
 
 

        Information included in the above outlook section, as well as certain statements made throughout the Management' s Discussion and Analysis of Financial Condition and Results of Operations that are identified by an asterisk (*) is forward-looking and involves risks and uncertainties that could result in actual results differing materially from expected results.  Forward-looking statements represent the Company' s expectations and beliefs concerning future events, based on information available to the Company as of the date of this filing.  Some factors that could significantly impact revenues, expenses, unit costs, and the results and benefits of the pending merger between United and US Airways include, without limitation, the airline pricing environment; industry capacity decisions; competitors'  route decisions; obtaining regulatory approvals for the United and US Airways merger; successfully integrating the businesses of United and US Airways; costs related to the United and US Airways merger; achieving cost-cutting synergies resulting from the United and US Airways merger; labor integration issues; the ultimate outcome of existing litigation; the success of the Company' s cost-control efforts; the cost of crude oil and jet fuel; the results of union contract negotiations and their impact on labor costs; operational disruptions as a result of bad weather, air traffic control-related difficulties and labor issues; the growth of e-commerce and off-tariff distribution channels; the effective deployment of customer service tools and resources; actions of the U.S., foreign and local governments; foreign currency exchange rate fluctuations; the economic environment of the airline industry and the economic environment in general.
 
 

        Investors should not place undue reliance on the forward-looking information contained herein, which speaks only as of the date of this filing.  UAL disclaims any intent or obligation to update or alter any of the forward-looking statements whether in response to new information, unforeseen events, changed circumstances or otherwise.
 
 
 
 

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk
 
 

        Interest Rate Risk - United' s exposure to market risk associated with changes in interest rates relates primarily to its debt obligations and short-term investments.  United does not use derivative financial instruments in its investments portfolio.  United' s policy is to manage interest rate risk through a combination of fixed and floating rate debt and entering into swap agreements, depending upon market conditions.  A portion of the borrowings are denominated in foreign currencies which exposes the Company to risks associated with changes in foreign exchange rates.  To hedge against some of this risk, the Company has placed foreign currency deposits (primarily for Japanese yen, French francs, German marks and euros) to meet foreign currency lease obligations designated in the respective currencies.   Since unrealized mark-to-market gains or losses on the foreign currency deposits are offset by the losses or gains on the foreign currency obligations, the Company reduces its overall exposure to foreign currency exchange rate volatility.  The fair value of these deposits is determined based on the present value of future cash flows using an appropriate swap rate.  The fair value of long-term debt is based on the quoted market prices for the same or similar issues or the present value of future cash flows using a U.S. Treasury rate that matches the remaining life of the instrument, adjusted by a credit spread.
 
 

(In Millions)
Expected Maturity Dates
2000
1999
               
Fair
 
Fair
 
2001
2002
2003
2004
2005
Thereafter
Total
Value
Total
Value
ASSETS                    
Cash equivalents                    
Fixed rate
$1,674 
$    -
$    -
$    -
$    -
$    -
$1,674 
$1,674 
$  231
$  231
  Avg. interest rate
6.68%
-
-
-
-
-
6.68%
 
5.27%
 
Variable rate
$      5 
$    -
$    -
$    -
$    -
$    -
$     5
$     5
$    79
$    79
  Avg. interest rate
6.96%
-
-
-
-
-
6.96%
 
6.23%
 
Short term investments                    
Fixed rate
$  590 
$    -
$    -
$    -
$    -
$    -
$  590
$  590
$  298
$  298
   Avg. interest rate
6.96%
-
-
-
-
-
6.96%
 
5.96%
 
Variable rate
$    75 
$    -
$    -
$    -
$    -
$    -
$   75 
$    75 
$    81
$    81
  Avg. interest rate
6.77%
-
-
-
-
-
6.77%
 
6.42%
 
                     
Lease deposits                    
  Fixed rate - yen deposits
$  -
$  -
$  -
$  -
$  -
$  348
$  348
$  394
$ 378
$ 423
     Avg. interest rate
-
-
-
-
-
3.06%
3.06%
 
3.07%
 
  Fixed rate - FF deposits
$  -
$  -
$  -
$  -
$  -
$    10
$    10
$     9
$    10
$     9
    Avg. interest rate
-
-
-
-
-
5.61%
5.61%
 
5.61%
 
  Fixed rate - DM deposits
$ 2
$ 2
$ 2
$ 2
$ 2
$  304
$  314
$  354
$ 167
$  177
    Avg. interest rate
4.57%
4.53%
4.57%
4.60%
4.63%
6.79%
6.72%
 
6.49%
 
  Fixed rate - EUR deposits
$  -
$  -
$  -
$  -
$  -
$    26
$    26
$   24
$   27
$    23
    Avg. interest rate
-
-
-
-
-
4.14%
4.14%
 
4.14%
 
  Fixed rate- USD deposits
$  -
$  -
$  -
$  -
$  -
$    12
$    12
$   13
$   11
$    10
    Avg. interest rate
-
-
-
-
-
6.49%
6.49%
 
6.49%
 
                     
LONG-TERM DEBT                    
U. S. Dollar denominated                    
  Fixed rate debt
$   87
$   86
$  218
$  333
$   246
$   2,514
$3,484
$3,617
$1,433
$1,542
    Avg. interest rate
7.62%
7.63%
8.43%
9.85%
7.73%
7.64%
7.90%
 
8.26%
 
  Variable rate debt
$   83
$ 569
$  523
$    17
$    17
$      174
$1,383
$1,383
$1,307
$1,307
    Avg. interest rate
6.23%
5.91%
6.70%
6.34%
6.34%
6.43%
6.30%
 
6.26%
 
                     

 
 
 

        Foreign Currency Risk - United has established a foreign currency hedging program using currency forwards and options (purchasing put options and selling correlation options) to hedge exposure to the Japanese yen, Hong Kong dollar, British pound, Australian dollar and the euro.  The goal of the hedging program is to effectively manage risk associated with fluctuations in the value of the foreign currency, thereby making financial results more stable and predictable.  United does not use currency forwards or currency options for trading purposes.
 
 

 
December 31, 2000
(In millions, except average contract rates)
Notional
Average
Estimated
 
Amount
Contract Rate
Fair Value
Forward exchange contracts    
(Pay)/Receive*
Japanese Yen - Purchased forwards
$    141
112.33
$     (3)
                             - Sold forwards
$     66
114.71
$     - 
      Hong Kong Dollar - Sold forwards
$     23
7.79
$     - 
      French Franc - Purchased forwards
$     50
5.05
$     (5)
      Euro - Purchased forwards
$    140
1.30
$    (14)
       

 

        As of December 31, 1999, United had $144 million of Japanese yen purchased forwards outstanding with a fair value of $(1) million, $62 million yen sold forwards with a fair value of $0 and $402 million yen put options with a fair value of $7 million.
 
 

        Price Risk (Aircraft Fuel) - When market conditions indicate risk reduction is achievable, United enters into fuel option contracts to reduce its price risk exposure to jet fuel.  The option contracts are designed to provide protection against sharp increases in the price of aircraft fuel.  Based on current market conditions, United does not believe risk reduction is achievable and is no longer entering into new option contracts.  As market conditions change, so may United' s hedging program.  In addition, to a limited extent, United trades short-term heating oil futures and option contracts, which are immaterial.
 
 

        At December 31, 1999, United had $1.1 billion in purchased call option contracts for crude oil with an estimated fair value of $120 million.
 
 
 
 

*Estimated fair values represent the amount United would pay/receive on December 31, 2000 to terminate the contracts.



 
 

Item 8.  Financial Statements and Supplementary Data



REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Stockholders and

Board of Directors, UAL Corporation:
 
 

We have audited the accompanying statements of consolidated financial position of UAL Corporation (a Delaware corporation) and subsidiary companies as of December 31, 2000 and 1999, and the related statements of consolidated operations, consolidated cash flows and consolidated stockholders'  equity for each of the three years in the period ended December 31, 2000.  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 auditing standards generally accepted in the United States.  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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.
 
 

As explained in Note 1 of the Notes to Consolidated Financial Statements, effective January 1, 2000, the Company changed certain of its accounting principles for revenue recognition as a result of the adoption of Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements."
 
 

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 22, 2001

UAL Corporation and Subsidiary Companies

Statements of Consolidated Operations

(In millions, except per share)


 
 
Year Ended December 31
Operating revenues:
2000
1999
1998
    Passenger
$   16,932 
$   15,784 
$   15,520 
    Cargo
931 
906 
913 
    Other operating revenues
    1,489
    1,337
    1,128
 
  19,352
  18,027
  17,561
Operating expenses:      
    Salaries and related costs
6,730 
5,670 
5,341 
    ESOP compensation expense
147 
756 
829 
    Aircraft fuel
2,511 
1,776 
1,788 
    Commissions
1,025 
1,139 
1,325 
    Purchased services
1,711 
1,575 
1,505 
    Aircraft rent
919 
876 
893 
    Landing fees and other rent
959 
949 
881 
    Depreciation and amortization
1,058 
867 
793 
    Cost of sales
1,038 
602 
474 
    Aircraft maintenance
698 
689 
624 
    Other operating expenses
    1,902
    1,737
    1,630
 
  18,698
  16,636
  16,083
Earnings from operations
       654
    1,391
    1,478
Other income (expense):      
    Interest expense
(402)
(362)
(355)
    Interest capitalized
77 
75 
105 
    Interest income
101 
68 
59 
    Equity in earnings (losses) of affiliates
(12)
37 
72 
    Gain on sale of investments
109 
731 
    Investment impairment
(61)
    Miscellaneous, net
      (35)
          2
    (103)
 
    (223)
      551
    (222)
Earnings before income taxes, distributions on preferred       
   securities, extraordinary item and cumulative effect
431 
1,942 
1,256 
Provision for income taxes
     160
      699
     429
Earnings before distributions on preferred securities,      
   extraordinary item and cumulative effect
271 
1,243 
827 
Distributions on preferred securities, net of tax
       (6)
       (5)
       (6)
Earnings before extraordinary item and cumulative effect
     265 
  1,238 
     821 
Extraordinary loss on early extinguishment of debt, net of tax
        (6)
        (3)
          - 
Cumulative effect of accounting change, net of tax
   (209)
          -
          -
Net earnings 
$      50 
$  1,235 
$     821 
 
===== 
===== 
===== 
Per share, basic:      
  Earnings before extraordinary item and cumulative effect
$   4.29 
$  21.26 
$  12.71 
  Extraordinary loss on early extinguishment of debt, net of tax
   (0.13)
   (0.06)
          - 
  Cumulative effect of accounting change, net of tax
  (4.08)
          -
          -
  Net earnings
$    0.08 
$  21.20 
$  12.71 
 
===== 
===== 
===== 
Per share, diluted:      
  Earnings before extraordinary item and cumulative effect
$    1.89 
$    9.97 
$    6.83 
  Extraordinary loss on early extinguishment of debt, net of tax
   (0.06)
   (0.03)
          - 
  Cumulative effect of accounting change, net of tax
   (1.79)
          -
          -
  Net earnings
$    0.04 
$    9.94 
$    6.83 
 
=====
===== 
===== 

See accompanying Notes to Consolidated Financial Statements.
 
 

UAL Corporation and Subsidiary Companies

Statements of Consolidated Financial Position

(In Millions)



 

 
December 31
Assets
2000
1999
     
Current assets:    
   Cash and cash equivalents
$      1,679
$      310
   Short-term investments
665
379
   Receivables, less allowance for doubtful     
      accounts (2000 - $14; 1999 - $13)
1,216
1,284
   Aircraft fuel, spare parts and supplies, less    
      obsolescence allowance (2000 - $55; 1999 - $45)
424
340
   Income tax receivables
110
32
   Deferred income taxes
225
222
   Prepaid expenses and other
      460
      368
 
   4,779
   2,935
Operating property and equipment:    
  Owned -     
      Flight equipment
14,888
13,518
      Advances on flight equipment
810
809
      Other property and equipment
   3,714
   3,368
 
19,412
17,695
      Less - Accumulated depreciation and amortization
   5,583
   5,207
 
13,829
12,488
  Capital leases -     
      Flight equipment
3,055
2,929
      Other property and equipment
       99
       93
 
3,154
3,022
      Less - Accumulated amortization
     640
     645
 
   2,514
   2,377
 
16,343
14,865
Other assets:    
   Investments
435
750
   Intangibles, less accumulated amortization     
      (2000 - $306; 1999 - $279)
671
568
   Aircraft lease deposits
710
594
   Prepaid rent
567
585
   Other
     850
     666
 
  3,233
  3,163
     
 
$   24,355
$   20,963
 
=====
=====

 

See accompanying Notes to Consolidated Financial Statements.
 
 

UAL Corporation and Subsidiary Companies

Statements of Consolidated Financial Position

(In millions, except share data)


 
 
December 31
Liabilities and Stockholders'  Equity
2000
1999
Current liabilities:    
   Notes payable
$        - 
$      61 
   Long-term debt maturing within one year
170 
92 
   Current obligations under capital leases
269 
190 
   Advance ticket sales
1,454 
1,412 
   Accounts payable
1,188 
967 
   Accrued salaries, wages and benefits
1,508 
1,002 
   Accrued aircraft rent
840 
783 
   Other accrued liabilities
   1,352
      904
 
   6,781
   5,411
     
Long-term debt
   4,688
   2,650
Long-term obligations under capital leases
   2,261
   2,337
     
Other liabilities and deferred credits:    
   Deferred pension liability
136 
70 
   Postretirement benefit liability
1,557 
1,489 
   Deferred gains
912 
986 
   Accrued aircraft rent
408 
390 
   Deferred income taxes
1,241 
1,147 
   Other
      511
      339
 
   4,765
   4,421
Commitments and contingent liabilities  (Note 18)    
Company-obligated mandatorily redeemable     
   preferred securities of a subsidiary trust
        99
      100
Preferred stock committed to Supplemental ESOP
      571
      893
     
Stockholders'  equity:    
   Serial preferred stock  (Note 12)
   ESOP preferred stock  (Note 13)
   Common stock at par, $0.01 par value; authorized 200,000,000    
      shares; issued 68,834,167 shares at December 31, 2000 and    
      65,771,802 shares at December 31, 1999
   Additional capital invested
4,530 
4,099 
   Retained earnings 
1,998 
2,138 
   Unearned ESOP preferred stock
(28)
   Stock held in treasury, at cost -     
      Preferred, 10,213,519 depositary shares at December 31,     
         2000 and 1999  (Note 12)
(305)
(305)
      Common, 16,295,475 shares at December 31, 2000 and     
         14,995,219 shares at December 31, 1999
(1,179)
(1,097)
   Accumulated other comprehensive income
152 
352 
   Other
         (7)
         (9)
 
   5,190
    5,151
     
     
 
$  24,355 
$  20,963 
 
====== 
====== 

See accompanying Notes to Consolidated Financial Statements.

UAL Corporation and Subsidiary Companies

Statements of Consolidated Cash Flows

(In Millions)


 
 
Year Ended December 31
 
2000
1999
1998
Cash and cash equivalents at beginning of year
$     310
$     390
$     295
Cash flows from operating activities:      
   Net earnings
50 
1,235 
821 
   Adjustments to reconcile to net cash provided by       
      operating activities -      
       ESOP compensation expense
147 
756 
829 
       Cumulative effect of accounting change, net of tax
209 
       Extraordinary loss on debt extinguishment, net of tax
       Gain on sale of investments
(109)
(731)
       Investment impairment
61 
       Pension funding less than (greater than) expense
(21)
94 
101 
       Deferred postretirement benefit expense
153 
65 
149 
       Depreciation and amortization
1,058 
867 
793 
       Provision for deferred income taxes
317 
590 
307 
       Undistributed (earnings) losses of affiliates
13 
(20)
(62)
       Decrease (increase) in receivables
68 
(146)
(97)
       Decrease (increase) in other current assets
(208)
105 
       Increase (decrease) in advance ticket sales
42 
(17)
162 
       Increase (decrease) in accrued income taxes
(77)
(76)
38 
       Increase (decrease) in accounts payable      
         and accrued liabilities
761 
(86)
69 
       Amortization of deferred gains
(66)
(66)
(64)
       Other, net
       68
      (49)
      43
 
  2,472
  2,421
  3,194
Cash flows from investing activities:      
      Additions to property and equipment
(2,538)
(2,389)
(2,832)
      Proceeds on disposition of property and equipment
324 
154 
452 
      Proceeds on sale of investments
147 
828 
      Decrease (increase) in short-term investments
(286)
46 
125 
      Other, net
     (168)
     (263)
       (63)
 
  (2,521)
  (1,624)
  (2,318)
Cash flows from financing activities:      
      Reacquisition of preferred stock
(3)
      Repurchase of common stock
(81)
(261)
(459)
      Proceeds from issuance of long-term debt
2,515 
286 
928 
      Repayment of long-term debt
(441)
(513)
(271)
      Principal payments under capital leases
(283)
(248)
(322)
      Purchase of equipment certificates under Company leases
(208)
(47)
(693)
      Decrease in equipment certificates under Company leases
228 
33 
22 
      Increase (decrease) in short-term borrowings
(61)
(123)
184 
      Aircraft lease deposits
(138)
(20)
(154)
      Cash dividends
(118)
(10)
(10)
      Other, net
         5
       26
        (3)
 
   1,418
    (877)
    (781)
       
Increase (decrease) in cash and cash equivalents during the year
   1,369
      (80)
       95
       
Cash and cash equivalents at end of year
$  1,679 
$    310 
$     390 
 
===== 
===== 
===== 

See accompanying Notes to Consolidated Financial Statements.

UAL Corporation and Subsidiary Companies

Statements of Consolidated Stockholders'  Equity

(In millions, except per share)


 
         
Unearned
      Accumulated
 
     
Additional
 
ESOP
 
Other
   
 
Preferred
Common
Capital
Retained
Preferred
Treasury
Comp.
   
 
Stock
Stock
Invested
Earnings
Stock
Stock
Income
Other
Total
Balance at December 31, 1997
$      -
$     1
$ 2,876
$  309
$ (177)
$  (663)
$   (2)
$  (7)
$ 2,337
Year ended December 31, 1998:                  
  Net earnings
-
-
821 
821 
  Other comprehensive income, net:                  
    Unrealized gains on securities, net
-
-
    Minimum pension liability adj.
-
-
          -
     (1)
      (1)
  Total comprehensive income
-
-
     821
       -
   821
Cash dividends on preferred                  
   stock ($1.44 per Series B share)
-
-
(10)
(10)
Common stock repurchases
-
-
(459)
(459)
Issuance and amortization of                  
   ESOP preferred stock
-
-
823 
829 
ESOP dividend ($8.89 per share)
-
-
42 
(92)
50 
Preferred stock committed to                  
   Supplemental ESOP
-
-
(177)
(177)
Other
       -
        -
      (47)
         -
        - 
      (18)
      -
      5 
     (60)
Balance at December 31, 1998
       -
        1
  3,517
1,028
  (121)
(1,140)
    (2)
     (2)
3,281
Year ended December 31, 1999:                  
  Net earnings
-
-
1,235 
1,235 
  Other comprehensive income, net:                  
   Unrealized gains on securities, net
-
-
         -
  354
    354
  Total comprehensive income
-
-
1,235
  354
1,589
Cash dividends on preferred                  
   stock ($1.44 per Series B share)
-
-
(10)
(10)
Common stock repurchases
-
-
(261)
(261)
Issuance and amortization of                  
   ESOP preferred stock
-
-
740 
16 
756 
ESOP dividend ($8.89 per share)
-
-
38 
(115)
77 
Preferred stock committed to                  
   Supplemental ESOP
-
-
(201)
(201)
Other
        -
        -
         5
         -
         - 
        (1)
        -
     (7)
      (3)
Balance at December 31, 1999
        -
       1
4,099
2,138
   (28)
(1,402)
  352
     (9)
5,151
Year ended December 31, 2000:                  
  Net earnings
-
-
50 
50 
  Other comprehensive income, net:                  
    Unrealized losses on securities, net
-
-
(196)
(196)
    Minimum pension liability adj.
-
-
        -
     (4)
     (4)
  Total comprehensive income
-
-
      50
(200)
(150)
Cash dividends on preferred                  
    stock ($1.44 per Series B share)
-
-
(10)
(10)
  Cash dividends on common                  
    stock ($1.25 per share)
-
-
(144)
(144)
  Common stock repurchases
-
-
(81)
(81)
  Issuance and amortization of                  
     ESOP preferred stock
-
-
147 
147 
  ESOP dividend ($8.89 per share)
-
-
(36)
28 
  Preferred stock committed to                  
     Supplemental ESOP
-
-
322 
322 
  Other
        -
       -
     (46)
          -
       -
       (1)
        -
       2
   (45)
Balance at December 31, 2000
  $      -
$     1
$ 4,530 
$ 1,998 
$       - 
$(1,484)
$  152 
$    (7)
$ 5,190 
 
====
====
===== 
===== 
==== 
===== 
==== 
==== 
==== 

See accompanying Notes to Consolidated Financial 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 majority-owned affiliates (collectively "the Company").  All significant intercompany transactions are eliminated. Certain prior-year financial statement items have been reclassified to conform to the current year' s presentation.
 
 

        (b)  Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.
 
 

        (c)  Airline Revenues - Passenger fares and cargo revenues are recorded as operating revenues when the transportation is furnished.  The value of unused passenger tickets is included in current liabilities.
 
 

        (d)  Cash and Cash Equivalents and Short-term Investments - Cash in excess of operating requirements is invested in short-term, highly liquid, income-producing investments.  Investments with a maturity of three months or less on their acquisition date are classified as cash and cash equivalents.  Other investments are classified as short-term investments.
 
 

        From time to time, United lends certain of its securities classified as cash and cash equivalents and short-term investments to third parties.  United requires collateral in an amount exceeding the value of the securities and is obligated to reacquire the securities at the end of the contract.  United accounts for these transactions as secured borrowings rather than sales and does not remove the securities from the balance sheet.  At December 31, 2000, United was obligated to repurchase $39 million of securities lent to third parties.
 
 

        At December 31, 2000 and 1999, $598 million and $406 million, respectively, of investments in debt securities included in cash and cash equivalents and short-term investments were classified as available-for-sale, and $1.7 billion and $177 million, respectively, were classified as held-to-maturity.  Investments in debt securities classified as available-for-sale are stated at fair value based on the quoted market prices for the securities, which does not differ significantly from their cost basis.  Investments classified as held-to-maturity are stated at cost which approximates market due to their short-term maturities.  The gains or losses from sales of available-for-sale securities are included in interest income for each respective year.
 
 

        (e)  Derivative Financial Instruments -

        Foreign Currency - From time to time, United enters into Japanese yen forward exchange contracts to minimize gains and losses on the revaluation of short-term yen-denominated liabilities.  The yen forwards typically have short-term maturities and are marked to fair value at the end of each accounting period.  The unrealized mark-to-market gains and losses on the yen forwards generally offset the losses and gains recorded on the yen liabilities.

         United has also entered into forwards and swaps to reduce exposure to currency fluctuations on Japanese yen-, euro- and French franc-denominated capital lease obligations.  The cash flows of the forwards and swaps mirror those of the capital leases.  The premiums on the forwards and swaps, as measured at inception, are being amortized over their respective lives as components of interest expense.  Any gains or losses realized upon early termination of these forwards and swaps are deferred and recognized in income over the remaining life of the underlying exposure.
 
 

         The Company hedges some of the risks of exchange rate volatility on its anticipated future Japanese yen, euro, Australian dollar and British pound revenues by purchasing put options with little or no intrinsic value and on Hong Kong dollar revenues by entering into forward contracts.  The amount and duration of these options are synchronized with the expected revenues, and thus, the put options have been designated as a hedge.  The premiums on purchased option contracts are amortized over the lives of the contracts.  Unrealized gains on purchased put option contracts are deferred until contract expiration and then recognized as a component of passenger revenue.  To reduce hedging costs, the Company sells a correlation option in the first four currencies referred to above.  The unrealized mark-to-market gains and losses on the correlation options are included in Miscellaneous, net, net of premiums received.
 
 

         Interest Rates - United may from time to time, enter into swaps to reduce exposure to interest rate fluctuations in connection with certain debt, capital leases and operating leases.  The cash flows of the swaps mirror those of the underlying exposures.  The premiums on the swaps, as measured at inception, are amortized over their respective lives as components of interest expense.  Any gains or losses realized upon the early termination of these swaps are deferred and recognized in income over the remaining life of the underlying exposure.
 
 

         Aircraft Fuel - Under favorable market conditions, United uses purchased call options to hedge a portion of its price risk related to aircraft fuel purchases.  The purchased call options have been designated as a hedge.  Gains or losses on hedge positions, net of premiums paid, are recognized upon contract expiration as a component of aircraft fuel inventory.  In addition, to a limited extent, United trades short-term heating oil futures contracts.  Unrealized losses on these contracts are recorded currently in income while unrealized gains are deferred until contract expiration.  Both gains and losses are recorded as a component of aircraft fuel expense.
 
 

         (f)  Aircraft Fuel, Spare Parts and Supplies - Aircraft fuel and maintenance and operating supplies are stated at average cost.  Flight equipment spare parts are stated at average cost less an obsolescence allowance.
 
 

         (g)  Operating Property and Equipment - Owned operating property and equipment is stated at cost.  Property under capital leases, and the related obligation for future 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 4 to 30 years; buildings are depreciated over lives of 25 to 45 years; and other property and equipment are depreciated over lives of 3 to 15 years.
 
 

         Properties under capital leases are amortized on the straight-line method over the life of the lease, or in the case of certain aircraft, over their estimated service lives.  Lease terms are 10 to 30 years for aircraft and flight simulators and 25 years for buildings.  Amortization of capital leases is included in depreciation and amortization expense.
 
 

         Maintenance and repairs, including the cost of minor replacements, are charged to maintenance expense accounts.  Costs of additions to and renewals of units of property are charged to property and equipment accounts.
 
 

         (h)  Intangibles - Intangibles consist primarily of route acquisition costs and intangible pension assets (see Note 16 "Retirement and Postretirement Plans").  Route acquisition costs are amortized over 40 years.  During 2001, the FASB issued an Exposure Draft "Business Combinations and Intangible Assets - Accounting for Goodwill" which could impact the Company' s accounting for intangible assets.  See Other Information, "New Accounting Pronouncements" in Management' s Discussion and Analysis of Financial Condition and Results of Operations.
 
 

         (i)  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.  United, through its wholly owned subsidiary, Mileage Plus Holdings, Inc., sells mileage credits to participating partners in the Mileage Plus program.
 
 

         Effective January 1, 2000, the Company changed its method of accounting for the sale of mileage to participating partners in its Mileage Plus program, in accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements."  Under the new accounting method, a portion of revenue from the sale of mileage (previously recognized in other revenue) is deferred and recognized as passenger revenue when the transportation is provided.  Accordingly, UAL has recorded a charge of $209 million, net of tax, for the cumulative effect of a change in accounting principle to reflect the application of the accounting method to prior years.  This change resulted in a reduction to revenues of approximately $38 million for 2000 and would have reduced 1999 revenues by $45 million.
 
 

         The pro forma effect of the accounting change on net income and earnings per share as previously reported for 1999 and prior years is as follows:
 
 
 

   
1999
1998
1997
1996
1995
Earnings before extraordinary            
   items (in millions) As reported
$ 1,238
$   821
$  958
$  600
$  378
  Pro forma
$ 1,209
$   774
$  931
$  553
$  348
Earnings per share before            
   extraordinary items            
  Basic As reported
$ 21.26
$12.71
$14.98
$ 8.76
$  6.98
  Pro forma
$ 20.71
$11.87
$14.52
$ 7.92
$  6.37
  Diluted As reported
$   9.97
$  6.83
$  9.04
$ 5.85
$  5.23
  Pro forma
$   9.71
$  6.38
$  8.76
$ 5.29
$  4.81
             
Net earnings (in millions) As reported
$ 1,235
$   821
$   949
$  533
$   349
  Pro forma
$ 1,206
$   774
$   922
$  486
$   319
             
Net earnings per share            
Basic As reported
$ 21.20
$12.71
$14.83
$ 7.57
$  6.39
  Pro forma
$ 20.65
$11.87
$14.37
$ 6.73
$  5.78
Diluted As reported
$   9.94
$  6.83
$  8.95
$ 5.06
$  4.82
  Pro forma
$   9.68
$  6.38
$  8.67
$ 4.50
$  4.40

 

         (j)  Deferred Gains - Gains on aircraft sale and leaseback transactions are deferred and amortized over the lives of the leases as a reduction of rental expense.
 
 

           (k)  Advertising- Advertising costs, which are included in other operating expenses, are expensed as incurred.  Advertising expense was $269 million, $232 million and $213 million for the years ended December 31, 2000, 1999 and 1998, respectively.
 
 
 
 

(2)  Employee Stock Ownership Plans and Recapitalization
 
 

         On July 12, 1994, the stockholders of UAL approved a plan of recapitalization to provide an approximately 55% equity interest in UAL to certain employees of United in exchange for wage concessions and work-rule changes.  The employees'  equity interest was allocated to individual employees through the year 2000 under Employee Stock Ownership Plans ("ESOPs") which were created as a part of the recapitalization.
 
 

         The ESOPs cover employees represented by ALPA, the IAM and U.S. management and salaried employees.  The ESOPs include a "Leveraged ESOP," a "Non-Leveraged ESOP" and a "Supplemental ESOP."  Both the Leveraged ESOP and the Non-Leveraged ESOP are tax-qualified plans while the Supplemental ESOP is not a tax-qualified plan.  Shares are delivered to employees primarily through the Leveraged ESOP, then through the Non-Leveraged ESOP, and finally, through the Supplemental ESOP.
 
 

         The equity interests were 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 were 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 was delivered to an ESOP trust in seven separate sales under the Leveraged ESOP, the last of which occurred on January 5, 2000.  Based on Internal Revenue Code Limitations, shares of the Class 2 ESOP Preferred Stock are either contributed to the Non-Leveraged ESOP or allocated as "book entry" shares to the Supplemental ESOP annually through the year 2000.  The classes of preferred stock are described more fully in Note 13, "ESOP Preferred Stock."
 
 

         The Leveraged ESOP and Non-Leveraged ESOP are being accounted for under AICPA Statement of Position 93-6, "Employers'  Accounting for Employee Stock Ownership Plans."  For the Leveraged ESOP, as shares of Class 1 ESOP Preferred Stock are sold to an ESOP trust, the Company reports the issuance as a credit to additional capital invested and records a corresponding charge to unearned ESOP preferred stock.  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, with the offsetting charge to ESOP compensation expense.  The ESOP compensation expense is based on the average fair value of the shares committed to be contributed.  The Supplemental ESOP is being accounted for under Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25").
 
 

         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 2000, 2,390,931 shares of Class 1 ESOP Preferred Stock, 434,465 shares of Class 2 ESOP Preferred Stock and 2,819,479 shares of Voting Preferred Stock were allocated to employee accounts, and another 248,572 shares of Class 2 ESOP Preferred Stock were allocated in the form of "book entry" shares, effective December 31, 1999.  Another 198,629 shares of Class 2 ESOP Preferred Stock previously allocated in book entry form were issued and either contributed to the qualified plan or converted and sold on behalf of terminating employees.  At December 31, 2000, the year-end allocation of Class 1 ESOP Preferred Stock to employee accounts had not yet been completed; however, there were 669,820 shares of Class 1 ESOP Preferred Stock committed to be released.  For the Class 2 ESOP Preferred Stock, 187,276 shares were committed to be contributed to employees at December 31, 2000.  The fair value of the unearned ESOP shares recorded on the balance sheet at December 31, 1999 was $41 million.
 
 

         For the Class 2 ESOP Preferred Stock committed to be contributed to employees under the Supplemental ESOP, employees can elect to receive their "book entry" shares in cash upon termination of employment.  The estimated fair value of such shares at December 31, 2000 and 1999 was $304 million and $954 million, respectively.
 
 

(3)  Other Income (Expense) - Miscellaneous
 
 

        Included in Other income (expense) - "Miscellaneous, net" was $(22) million, $4 million and $(84) million in foreign exchange gains (losses) in 2000, 1999 and 1998, respectively.
 
 

(4) Other Comprehensive Income
 
 

        The following table presents the tax effect of those items included in other comprehensive income:
 
 
 

 
Year Ended December 31
(In Millions)
2000
1999
1998
   
Tax
Net of
 
Tax
Net of
 
Tax
Net of
 
Pre-Tax
Effect
Tax
Pre-Tax
Effect
Tax
Pre-Tax
Effect
Tax
  Unrealized holding gains (losses)                  
     arising during period
$(297) 
$101 
$(196) 
$ 547
$ (193)
$ 354
$    1 
$    -
$   1 
  Minimum pension liability
   (6)
    2
    (4)
    -
     -
     -
    (1)
     -
   (1)
Total other comprehensive income
$(303) 
$103 
$(200) 
$ 547
$ (193)
$ 354
$    - 
$    -
$  - 
 
=== 
===
=== 
===
=== 
===
=== 
===
=== 

 

        Unrealized gains (losses) on securities primarily represent gains (losses) on the Company' s investments in Galileo and Equant as discussed in Note 6 "Investments."
 
 

(5)  Per Share Amounts
 
 

        Basic earnings per share were computed by dividing net income before extraordinary item and cumulative effect by the weighted-average number of shares of common stock outstanding during the year.  In addition, diluted earnings per share amounts include potential common shares, including common shares issuable upon conversion of ESOP shares committed to be released.
 
 
 

Earnings Attributable to Common Stockholders (in millions)
2000
1999
1998
  Net income before extraordinary item and cumulative effect
$  265 
$1,238 
$   821 
  Preferred stock dividends
   (46)
(125)
(102)
  Earnings attributable to common stockholders (Basic and Diluted)
$  219 
$1,113 
$   719 
 
==== 
==== 
==== 
Shares (in millions)      
  Weighted average shares outstanding (Basic)
51.3 
52.3 
56.5 
  Convertible ESOP preferred stock
64.5 
58.0 
47.1 
  Other
    0.7
    1.3
    1.6
  Weighted average number of shares (Diluted)
116.5 
111.6 
105.2 
 
==== 
==== 
==== 
Earnings Per Share      
  Basic
$ 4.29 
$21.26 
$12.71 
  Diluted
$ 1.89 
$  9.97 
$  6.83 

 

        At December 31, 2000, stock options to purchase 5,646,557 shares of common stock were outstanding, but were not included in the computation of diluted earnings per share, because the exercise price of these options was greater than the average market price of the common shares.
 
 

(6)  Investments

        During 2000, UAL invested approximately $24 million in Orbitz, an entity which is developing an Internet travel web site.  UAL owns approximately 25% of Orbitz and accounts for this investment using the equity method of accounting.
 
 

        During 1998 and 1999, United invested approximately $51 million in GetThere.com (a leading provider of Internet-based travel planning products tailored to individual, corporate, travel supplier and travel agency customers) resulting in a 28% minority interest consisting of common stock, warrants and options.  United accounted for its investment in GetThere.com using the equity method of accounting.
 
 

        On October 6, 2000, Sabre Holdings Corporation acquired all of the outstanding common stock of GetThere.com for $17.75 per share.  Accordingly, after converting its options and warrants, United tendered all of its shares for net proceeds of $147 million, resulting in a gain of approximately $69 million, net of tax.
 
 

        During 2000, United recorded an impairment loss of $38 million, net of tax, related to its warrants held in Priceline.com.
 
 

        In June 1999, United sold 17,500,000 common shares of Galileo in a secondary offering for $766 million, resulting in a gain of approximately $428 million, net of tax.  This sale reduced United' s holdings in Galileo from 32 percent to approximately 15 percent, requiring United to discontinue the equity method of accounting for its investment in Galileo.  United has classified its remaining 15,940,000 shares of Galileo common stock as available-for-sale.  The market value of these shares at December 31, 2000 ($319 million) is reflected in investments on the balance sheet and the market value in excess of United' s investment is classified net-of-tax ($144 million) in accumulated other comprehensive income.  The market value of United' s investment in Galileo at December 31, 1999 was $477 million.  Included in the Company' s retained earnings is approximately $248 million of undistributed earnings of Galileo and its predecessor companies.
 
 

         United owns 1,391,791 depositary certificates in Equant, a provider of international data network services to multinational businesses and a single source for global desktop communications.  Each depositary certificate represents a beneficial interest in an Equant common share and the investment is classified as available-for-sale.  The market value in excess of United' s investment is classified net-of-tax ($24 million) in accumulated other comprehensive income.  In December 1999, United sold 709,000 shares of common stock in Equant in a secondary offering by Equant for $62 million.  At December 31, 2000 and 1999, the estimated fair value of United' s remaining investment in Equant was approximately $36 million and $156 million, respectively.

(7)  Income Taxes
 
 

         In 2000, UAL incurred both a regular and an alternative minimum tax ("AMT") loss.  The carryback of the regular tax loss to 1999 and 1998 and the carryback loss of the AMT loss to 1998 will produce both federal and state refunds and generate additional AMT credits.  The primary differences between UAL' s regular tax loss and AMT loss are the depreciation adjustments and preferences.
 
 

         The provision for income taxes is summarized as follows:
 
 
 

  (In Millions)
2000
1999
1998
  Current -       
    Federal
$  (133)
$    93
$   113
    State
    (24)
     16
       9
   
  (157)
   109
   122
  Deferred -       
    Federal
278 
536
270
    State
     39
     54
     37
   
   317
   590
   307
   
$  160 
$   699
$   429
   
====
====
====

 

         The income tax provision differed from amounts computed at the statutory federal income tax rate, as follows:
 
 
 

(In Millions)
2000
1999
1998
Income tax provision at statutory rate
$  151 
$   680 
$   440 
State income taxes, net of federal income      
   tax benefit
10 
46 
30 
ESOP dividends
(32)
(40)
(33)
Nondeductible employee meals
24 
24 
24 
Tax credits
(7)
Other, net
      7
    (11)
    (25)
 
$  160 
$   699 
$   429 
 
====
==== 
==== 

 

         Temporary differences and carryforwards that give rise to a significant portion of deferred tax assets and liabilities for 2000 and 1999 are as follows:
 
 
 

(In Millions)
2000
1999
 
Deferred Tax
Deferred Tax
Deferred Tax
Deferred Tax
 
Assets
Liabilities
Assets
Liabilities
Employee benefits, including        
   postretirement medical and ESOP
$ 1,076 
$     214
$     990
$     135
Depreciation, capitalized interest        
  and transfers of tax benefits
3,009
-
2,489
Gains on sale and leasebacks
307 
-
335
-
Rent expense
461 
-
435
-
AMT credit carryforwards
371 
-
210
-
Other
  1,012 
  1,020 
    758 
   1,029
 
$3,227 
$ 4,243 
$  2,728
$  3,653
 
===== 
=====
=====
=====

 

         At December 31, 2000, UAL and its subsidiaries had $371 million of federal AMT credits and $43 million of federal and state net operating losses which may be carried forward to reduce the tax liabilities of future years.
 
 

  1. Short-Term Borrowings

         United has an agreement with a syndicate of banks for a $750 million revolving credit facility expiring in 2002.  Interest on drawn amounts under the facility is calculated at floating rates based on the London interbank offered rate ("LIBOR") plus a margin which is subject to adjustment based on certain changes in the credit ratings of United' s long-term senior unsecured debt.  Among other restrictions, the credit facility contains a covenant that restricts United' s ability to grant liens on or otherwise encumber certain identified assets with a market value of approximately $1.1 billion.
 
 

         Additionally, United has available $900 million in short-term secured aircraft financing facilities.  Interest on drawn amounts under the facilities is calculated at floating rates based on LIBOR plus a margin.
 
 

         At December 31, 1999, United had outstanding $61 million under a separate short-term borrowing facility, bearing an average interest rate of 5.72%.  Receivables amounting to $233 million were pledged by United to secure repayment of such outstanding borrowings.  The maximum available borrowing amount under this arrangement is $227 million.  There were no borrowings outstanding under this arrangement at December 31, 2000.
 
 

(9)  Long-Term Debt
 
 

         A summary of long-term debt, including current maturities, as of December 31 is as follows (interest rates are as of December 31, 2000):
 
 
 

(In Millions)
2000
1999
Secured notes, 5.97% to 8.99%, averaging    
   7.33%, due through 2014
$  3,417 
$  1,229 
Debentures, 9.00% to 11.21%, averaging    
   9.89%, due through 2021
646 
762 
Promissory notes, 11.00%, due 2000
Commercial paper, 6.71%, due through 2003
549 
571 
Special facility bonds, 5.63% to 6.25%,     
  averaging 5.71%, due through 2034
     255
     190
 
  4,867
  2,753
Less:  Unamortized discount on debt
(9)
(11)
          Current maturities
   (170)
      (92)
 
$  4,688 
$  2,650 
 
===== 
=====
     

         See Item 7a "Quantitative and Qualitative Disclosures About Market Risk" for disclosures regarding the fair values of debt.
 
 

         In addition to scheduled principal payments, in 2000 and 1999 the Company repaid $116 million and $23 million, respectively, in principal amount of debentures prior to maturity.  The debentures were scheduled to mature at various times through 2021.  Extraordinary losses of $6 million and $3 million, respectively, net of tax benefits of $4 million and $2 million, respectively, was recorded reflecting amounts paid in excess of the debt carrying value.
 
 

         The Company, through a special-purpose financing entity that is consolidated, has issued commercial paper to refinance certain lease commitments.  Although the issued commercial paper has short maturities, the Company expects to continually rollover this obligation throughout the 5-year life of its supporting liquidity facility or bank standby facility.  As such, the commercial paper is classified as a long-term obligation in the Company' s statement of financial position.
 
 

         In July 2000, the Company issued $921 billion in enhanced equipment trust certificates to refinance certain owned aircraft and aircraft under operating leases.  Net proceeds after refinancing the operating leases was $622 million.  In December 2000, the Company issued an additional $1.5 billion in enhanced equipment trust certificates to refinance certain owned aircraft.
 
 

         At December 31, 2000, United had recorded $255 million in special facilities revenue bonds to finance the acquisition and construction of certain facilities at Los Angeles, San Francisco and Miami.  United guarantees the payment of these bonds under various payment and loan agreements.  The bond proceeds are restricted to expenditures on the facilities and unspent amounts are classified as other assets in the balance sheet.
 
 

         In February 2001, United recorded an additional $200 million in special facility bonds to finance the acquisition and construction of certain facilities at Chicago.
 
 

         At December 31, 2000, United had outstanding a total of $1.4 billion of long-term debt bearing interest rates at 22.5 to 60.0 basis points over LIBOR.
 
 

         Maturities of long-term debt for each of the four years after 2001 are:  2002 - $655 million; 2003 - $741 million; 2004 - $350 million; and 2005 - $264 million.  Various assets, principally aircraft, having an aggregate book value of $4.1 billion at December 31, 2000, were pledged as security under various loan agreements.
 
 

(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, 2000, under capital leases (substantially all of which are for aircraft) and operating leases having initial or remaining noncancelable lease terms of more than one year are as follows:
 
 
 

(In Millions)
Operating Leases
Capital
 
Aircraft
Non-aircraft
Leases
Payable during -      
   2001
$     941
$     612
$    472 
   2002
922
574
415 
   2003
972
541
316 
   2004
1,008
514
325 
   2005
1,022
504
293 
   After 2005
  9,445
  7,279
  1,867 
Total minimum lease payments
$14,310
$10,024
3,688 
Imputed interest (at rates of 5.3% to 12.2%)
======
=====
(1,158)
Present value of minimum lease payments    
2,530 
Current portion    
     (269)
Long-term obligations under capital leases    
$  2,261 
     
===== 

 

         As of December 31, 2000, United leased 315 aircraft, 82 of which were under capital leases.  These leases have terms of 10 to 26 years, and expiration dates range from 2001 through 2020.
 
 

        In connection with the financing of certain aircraft accounted for as capital leases, United had on deposit at December 31, 2000 an aggregate 40 billion yen ($348 million), 661 million German marks ($314 million), 67 million French francs ($10 million), 28 million Euro ($26 million) and $12 million in certain banks and had pledged an irrevocable security interest in such deposits to certain of the aircraft lessors.  These deposits will be used to pay off an equivalent amount of recorded capital lease obligations.
 
 

        Amounts charged to rent expense, net of minor amounts of sublease rentals, were $1.5 billion in 2000, $1.4 billion in 1999 and $1.4 billion in 1998.  Included in 2000 rental expense was $21 million in contingent rentals, resulting from changes in interest rates for operating leases under which the rent payments are based on variable interest rates.
 
 

(11)  Company-Obligated Mandatorily Redeemable Preferred Securities of a

         Subsidiary Trust
 
 

        In December 1996, UAL Corporation Capital Trust I (the "Trust") issued $75 million of its 13 1/4% Trust Originated Preferred Securities (the "Preferred Securities") in exchange for 2,999,304 depositary shares, each representing 1/1000 of one share of Series B 12 1/4% preferred stock (see Note 12 "Serial Preferred Stock").  Concurrent with the issuance of the Preferred Securities and the related purchase by UAL of the Trust' s common securities, the Company issued to the Trust $77 million aggregate principal amount of its 13 1/4% Junior Subordinated Debentures (the "Debentures") due 2026.  The Debentures are and will be the sole assets of the Trust.  The interest and other payment dates on the Debentures correspond to the distribution and other payment dates on the Preferred Securities.  Upon maturity or redemption of the Debentures, the Preferred Securities will be mandatorily redeemed.  The Debentures are redeemable at UAL' s option, in whole or in part, on or after July 12, 2004, at a redemption price equal to 100% of the principal amount to be redeemed, plus accrued and unpaid interest to the redemption date.  Upon the repayment of the Debentures, the proceeds thereof will be applied to redeem the Preferred Securities.
 
 

        There is a full and unconditional guarantee by UAL of the Trust' s obligations under the securities issued by the Trust.  However, the Company' s obligations are subordinate and junior in right of payment to certain other of its indebtedness.  UAL has the right to defer payments of interest on the Debentures by extending the interest payment period, at any time, for up to 20 consecutive quarters.  If interest payments on the Debentures are so deferred, distributions on the Preferred Securities will also be deferred.  During any deferral, distributions will continue to accrue with interest thereon.  In addition, during any such deferral, UAL may not declare or pay any dividend or other distribution on, or redeem or purchase, any of its capital stock.
 
 

        The fair value of the Preferred Securities at December 31, 2000 and 1999 was $85 million and $83 million, respectively.
 
 

(12)  Serial Preferred Stock
 
 

        At December 31, 2000, UAL had outstanding 3,203,177 depositary shares, each representing 1/1000 of one share of Series B 12 1/4% preferred stock, with a liquidation preference of $25 per depositary share ($25,000 per Series B preferred share) and a stated capital of $0.01 per Series B preferred share.  Under its terms, any portion of the Series B preferred stock or the depositary shares is redeemable for cash after July 11, 2004, at UAL' s option, at the equivalent of $25 per depositary share, plus accrued dividends.  The Series B preferred stock is not convertible into any other securities, has no stated maturity and is not subject to mandatory redemption.
 
 

        The Series B preferred stock ranks senior to all other preferred and common stock, except the Preferred Securities, as to receipt of dividends and amounts distributed upon liquidation.  The Series B preferred stock has voting rights only to the extent required by law and with respect to charter amendments that adversely affect the preferred stock or the creation or issuance of any security ranking senior to the preferred stock.  Additionally, if dividends are not paid for six cumulative quarters, the Series B preferred stockholders are entitled to elect two additional members to the UAL Board of Directors until all dividends are paid in full.  Pursuant to UAL' s restated certificate of incorporation, UAL is authorized to issue a total of 50,000 shares of Series B preferred stock.
 
 

        During 1998, UAL repurchased 64,300 depositary shares, at an aggregate cost of $3 million, to be held in treasury.
 
 

        UAL is authorized to issue up to 15,986,584 additional shares of serial preferred stock.
 
 

(13)  ESOP Preferred Stock
 
 

        The following activity related to UAL' s outstanding ESOP preferred stocks (see Note 2 for a description of the ESOPs):
 
 
 

 
Class 1 ESOP
Class 2 ESOP
ESOP Voting
Balance December 31, 1997
   8,652,618
     806,260
   7,266,406
  Shares issued
2,011,812 
177,166 
3,073,969 
  Converted to common
     (213,061)
    (116,104)
     (331,620)
Balance December 31, 1998
10,451,369
     867,322
10,008,755
  Shares issued
1,955,756 
227,689 
3,073,969 
  Converted to common 
     (306,662)
    (146,975)
    (457,401)
Balance December 31, 1999
  12,100,463
      948,036
12,625,323
  Shares issued
539,177 
855,998 
3,073,968 
  Converted to common
    (420,958)
    (283,428)
   (710,056)
Balance December 31, 2000
12,218,682 
1,520,606 
14,989,235 
 
======== 
======== 
======== 

 

        An aggregate of 17,675,345 shares of Class 1 and Class 2 ESOP Preferred Stock was issued to employees under the ESOPs.  Each share of ESOP Preferred Stock is convertible into four shares of UAL common stock.  Shares typically are converted to common as employees retire or otherwise leave the Company.  The stock has a par value of $0.01 per share and is nonvoting.  The Class 1 ESOP Preferred Stock has a liquidation value of $126.96 per share plus all accrued and unpaid dividends; the Class 2 does not have a liquidation value.  The Class 1 ESOP Preferred Stock provided a fixed annual dividend of $8.8872 per share, which ceased on March 31, 2000; the Class 2 does not pay a fixed dividend.
 
 

        Class P, M and S Voting Preferred Stocks were established to provide the voting power to the employee groups participating in the ESOPs.  Additional Voting Preferred Stock was issued as shares of the Class 1 and Class 2 ESOP Preferred Stock were allocated to employees.  In the aggregate, 17,675,345 shares of Voting Preferred Stock were issued through the year 2000.  The Voting Preferred Stock outstanding at any time commands voting power for approximately 55% of the vote of all classes of capital stock in all matters requiring a stockholder vote, other than for the election of members of the Board of Directors. The Voting Preferred Stock has a par value and liquidation preference of $0.01 per share.  The stock is not entitled to receive any dividends and is convertible into .0004 shares of UAL common stock.
 
 

        Class Pilot MEC, IAM, SAM and I junior preferred stock (collectively "Director Preferred Stocks") were established to effectuate the election of one or more members to UAL' s Board of Directors.  One share each of Class Pilot MEC and Class IAM junior preferred stock is authorized and issued.  The Company is authorized to issue ten shares each of Class SAM and Class I junior preferred stock.  There are three shares of Class SAM and four shares of Class I issued.  Each of the Director Preferred Stocks has a par value and liquidation preference of $0.01 per share.  The stock is not entitled to receive any dividends and Class I will be redeemed automatically upon the transfer of the shares to any person not elected to the Board of Directors or upon the occurrence of the "Sunset."  (See "Corporate Governance and the ESOPs" in Item 1.  Business.)
 
 

(14) Common Stockholders'  Equity
 
 

        Changes in the number of shares of UAL common stock outstanding during the years ended December 31 were as follows:
 

 
2000
1999
1998
Shares outstanding at beginning of year
50,776,583 
51,804,653 
57,320,486 
  Stock options exercised
187,400 
939,262 
382,136 
  Shares issued from treasury under      
     compensation arrangements
32,458 
89,745 
11,944 
  Shares acquired for treasury
(1,326,877)
(3,877,912)
(7,237,975)
  Forfeiture of restricted stock
(5,800)
(5,800)
(7,600)
  Conversion of ESOP preferred stock
2,817,829 
1,814,731 
1,316,786 
  Other
       57,099
       11,904
       18,876
Shares outstanding at end of year
52,538,692 
50,776,583 
51,804,653 
 
======== 
======== 
======== 

 

         During 2000, 1999 and 1998, the Company repurchased 1,258,263, 3,754,802 and 7,061,109 shares of common stock, respectively, at a total purchase price of $81 million, $261 million and $459 million, respectively.
 
 

(15) Stock Options and Awards
 
 

         The Company has granted options to purchase common stock to various officers and employees.  The option price for all stock options is at least 100% of the fair market value of UAL common stock at the date of grant.  Options generally vest and become exercisable in four equal, annual installments beginning one year after the date of grant, and generally expire in ten years.
 
 

         As a result of the 1994 recapitalization, all outstanding options became fully vested at the time of the transaction and those options are exercisable for shares of old common stock, each of which is in turn converted into two shares of new common stock and $84.81 in cash upon exercise.  Subsequent to the recapitalization, the Company granted stock options which are exercisable for shares of new common stock.
 
 

         The Company has also awarded shares of restricted stock to officers and key employees.  These shares generally vest over a five-year period and are subject to certain transfer restrictions and forfeiture under certain circumstances prior to vesting.  Unearned compensation, representing the fair market value of the stock at the measurement date for the award, is amortized to salaries and related costs over the vesting period.  During 2000 and 1999, respectively, 23,000 and 75,000 shares of restricted stock were issued from treasury.  No shares were issued in 1998.  As of December 31, 2000, 98,000 shares were restricted and still nonvested.   Additionally, 265,952 shares were reserved for future awards under the plan.
 
 

        Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") establishes a fair value based method of accounting for stock options.  The Company has elected to continue using the intrinsic value method of accounting prescribed in APB 25, as permitted by SFAS No. 123.  Had compensation cost for awards been determined based on the fair value at the grant dates consistent with the method of SFAS No. 123, the Company' s net income and earnings per share would have instead been reported as the pro forma amounts indicated below:
 
 
 

   
2000
1999
1998
Net income (in millions) As reported
$   50 
$  1,235
$   821
  Pro forma
$   33 
$  1,219
$   812
         
Basic net earnings per share As reported
$  0.08 
$ 21.20
$12.71
  Pro forma
$(0.24)
   $ 20.89
$12.55
         
Diluted net earnings per share As reported
$  0.04 
$  9.94
$  6.83
  Pro forma
$(0.10)
$  9.79
$  6.74
         

        The weighted-average grant date fair value of restricted shares issued was $51.83 for shares issued in 2000 and $69.51 for shares issued in 1999.  The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
 
 
 

 
2000
1999
1998
Risk-free interest rate
6.4%
5.2%
5.6%
Dividend yield
2.4%
0.0%
0.0%
Volatility
35.0%
34.0%
33.0%
Expected life (years)
4.0
4.0
4.0

 

        The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable.  In addition, option valuation models require the input of highly subjective assumptions including expected stock price volatility.  Because the Company' s stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management' s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.
 
 

        Stock option activity for the past three years was as follows:
 
 
 

 
2000
1999
1998
Old Share Options:  
Wtd Avg
 
Wtd Avg
 
Wtd Avg
 
Shares
Exer  Price
Shares
Exer Price
Shares
Exer Price
Outstanding at beginning of year
76,350 
$  116.74
118,475 
$  121.64
168,393 
$  121.65
   Exercised
(26,600)
$  102.73
(42,125)
$  130.53
(49,918)
$  121.67
Outstanding at end of year
49,750 
$  124.23
76,350 
$  116.74
118,475 
$  121.64
             
Options exercisable at year-end
49,750 
$  124.23
76,350 
$  116.74
118,475 
$  121.64
             

 
 
 
 
 
2000
1999
1998
New Share Options:  
Wtd Avg
 
Wtd Avg
 
Wtd Avg
 
Shares
Exer  Price
Shares
Exer Price
Shares
Exer Price
Outstanding at beginning of year
6,513,709 
$    53.27
5,411,836 
$    45.07
4,749,612 
$    36.27
   Granted
1,447,600 
$    53.24
2,081,600 
$    64.29
1,064,200 
$    81.40
   Exercised
(134,200)
$    29.91
(855,012)
$    25.67
(282,300)
$    28.79
   Terminated
    (261,912)
$    67.50
  (124,715)
$    70.74
  (119,676)
$    57.12
Outstanding at end of year
7,565,197 
$    53.19
6,513,709 
$    53.27
5,411,836 
$    45.07
             
Options exercisable at year-end
 4,101,248 
$    44.00 
3,240,210 
$    38.26
3,400,607 
$    29.97
             
Reserved for future grants at year-end
280,331 
 
1,466,019 
 
3,422,904 
 
             
Wtd avg fair value of options             
   granted during the year
$  17.80
$  22.31
$  27.95

 

        The following information related to stock options outstanding as of December 31, 2000:
 
 
 

 
Options Outstanding
Options Exercisable
   
Weighted-Average
     
Range of
Outstanding at
Remaining
Weighted-Average
Exercisable at
Weighted-Average
Exercise Prices
December 31, 2000
Contractual Life
Exercise Price
December 31, 2000
Exercise Price
Old Share Options:          
$ 117 to 153 
      49,750
1.4 years
$  124.23
    49,750
$  124.23
           
New Share Options:          
$ 20 to 29
1,836,040
3.6 years
$  22.82
1,836,040
$  22.82
$ 36 to 58
2,527,847
7.5 years
$  52.98
   1,116,647 
$  52.67
$ 60 to 69
1,819,525
8.1 years
$  62.41
    473,819
$  62.82
$ 70 to 88
1,381,785
7.3 years
$  81.30
   674,742
$  81.04
 
7,565,197
   
4,101,248
 

 

(16) Retirement and Postretirement Plans
 
 

        The Company has various retirement plans, both defined benefit and defined contribution, which cover substantially all employees.  The Company also provides certain health care benefits, primarily in the U.S., to retirees and eligible dependents, as well as certain life insurance benefits to retirees.  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.
 
 

        The following table sets forth the reconciliation of the beginning and ending balances of the benefit obligation and plan assets, the funded status and the amounts recognized in the statement of financial position for the defined benefit and other postretirement plans as of December 31:
 
 
 

(In Millions)    
Change in Benefit Obligation
Pension Benefits
Other Benefits
 
2000
1999
2000
1999
Benefit obligation at beginning of year
$  7,381 
$  8,038 
$   1,465 
$   1,626 
Service cost
269 
295 
47 
53 
Interest cost
629 
583 
120 
116 
Plan participants'  contributions
Amendments
260 
Actuarial (gain) loss
1,162 
(1,161)
164 
(254)
Foreign currency exchange rate changes
(15)
12 
Benefits paid
   (435)
    (388)
   (101)
     (83)
Benefit obligation at end of year
$  9,252 
$  7,381 
$  1,706 
$   1,465 
 
===== 
===== 
===== 
===== 
         
Change in Plan Assets        
 
2000
1999
2000
1999
Fair value of plan assets at beginning of year
$  8,701 
$   7,654 
$   113 
$   112 
Actual return on plan assets
21 
1,255 
Employer contributions
230 
175 
88 
71 
Plan participants'  contributions
Foreign currency exchange rate changes
(7)
Benefits paid
   (435)
    (388)
   (101)
    (83)
Fair value of plan assets at end of year
$  8,511 
$   8,701 
$    116
$   113 
 
===== 
===== 
===== 
===== 
         
Funded status
$  (741)
$   1,320 
$ (1,590) 
$  (1,352)
Unrecognized actuarial (gains) losses
14 
(1,870)
(54)
(229)
Unrecognized prior service costs
     806
     604
        2 
       -
Net amount recognized
$      79 
$        54 
$ (1,642)
$  (1,581)
 
===== 
===== 
===== 
===== 
         
Amounts recognized in the statement of        
  financial position consist of:
2000
1999
2000
1999
         
Prepaid (accrued) benefit cost
$     79 
$     54 
$ (1,642)
$  (1,581)
Accrued benefit liability
(266)
(151)
Intangible asset
255 
148 
Accumulated other comprehensive income
     11
       3
       - 
        -
Net amount recognized
$     79 
$     54 
$ (1,642)
$  (1,581)
 
===== 
===== 
===== 
===== 
         
Weighted-average assumptions
2000
1999
2000
1999
         
Discount rate
7.75%
8.25%
7.75%
8.25%
Expected return on plan assets
9.75%
9.75%
8.00%
8.00%
Rate of compensation increase
4.36%
4.10%
-
-

 

        The assumed health care cost trend rates for gross claims paid were 4.5% and 4.0% for 2000 and 1999, respectively.
 
 

        The net periodic benefit cost included the following components:
 
 
 

(In Millions)
Pension Benefits
Other Benefits
 
2000
1999
1998
2000
1999
1998
Service cost
$    269 
$    295 
$    276 
$   47 
$     53 
$     48 
Interest cost
629 
583 
533 
120 
116 
109 
Expected return on plan assets
(740)
(665)
(581)
(9)
(9)
(8)
Amortization of prior service cost            
  including transition obligation/(asset)
58 
57 
57 
Recognized actuarial (gain)/loss
     (7)
       1
      9
     (9)
      (5)
      (4)
Net period benefit costs
$    209 
$    271 
$   294 
$   149 
$   155 
$   145 
 
===== 
===== 
===== 
===== 
===== 
===== 

 

        Total pension expense for all retirement plans (including defined contribution plans) was $302 million in 2000, $285 million in 1999 and $304 million in 1998.
 
 

        The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the plans with accumulated benefit obligations in excess of plan assets were $1.0 billion, $632 million and $61 million, respectively, as of December 31, 2000 and $500 million and $444 million and $47 million, respectively, as of December 31, 1999.
 
 

        Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan.  A one-percentage-point change in assumed health care trend rate would have the following effects:
 
 
 

(In Millions)
1% Increase
1% Decrease
Effect on total service and interest cost
$    25
$    (20)
Effect on postretirement benefit obligation
$  211
$  (177)

 

        Changes in interest rates or rates of inflation may impact the assumptions used in the valuation of pension obligations and postretirement obligations including discount rates and rates of increase in compensation, resulting in increases or decreases in United' s pension and postretirement liabilities and pension and postretirement costs.
 
 

(17)  Financial Instruments and Risk Management
 
 

        See Item 7A. Quantitative and Qualitative Disclosures About Market Risk ("Item 7A") for a discussion of the Company' s foreign currency and fuel price risk management activities, and the fair value of all significant financial instruments.
 
 

Credit Exposures of Derivatives

        The Company' s theoretical risk in the derivative financial instruments described in Item 7A is the cost of replacing the contracts at current market rates in the event of default by any of the counterparties.  However, the Company does not anticipate such default as counterparties are selected based on credit ratings and the relative market positions with each counterparty are monitored.
 
 

Financial Guarantees

        Special facility revenue bonds have been issued by certain municipalities to build or improve airport and maintenance facilities leased by United.  Under the lease agreements, United is required to make rental payments in amounts sufficient to pay the maturing principal and interest payments on the bonds.  At December 31, 2000, $1.2 billion principal amount of such bonds was outstanding.  As of December 31, 2000, UAL and United had jointly guaranteed $35 million of such bonds and United had guaranteed $1.2 billion of such bonds, including accrued interest.  The payments required to satisfy these obligations are included in the future minimum lease payments disclosed in Note 10, "Lease Obligations."
 
 

Concentrations of Credit Risk

        The Company does not believe it is subject to any significant concentration of credit risk.  Most of the Company' s receivables result from sales of tickets to individuals through geographically dispersed travel agents, company outlets or other airlines, often through the use of major credit cards.  These receivables are short term, generally being settled shortly after the sale.
 
 

(18)  Commitments, Contingent Liabilities and Uncertainties
 
 

        The Company has certain contingencies resulting from litigation and claims (including environmental issues) incident to the ordinary course of business.  Management believes, after considering a number of factors, including (but not limited to) the views of legal counsel, the nature of contingencies to which the Company is subject and its prior experience, that the ultimate disposition of these contingencies is not expected to materially affect UAL' s consolidated financial position or results of operations.  UAL records liabilities for legal and environmental claims against it in accordance with generally accepted accounting principles.  These amounts are recorded based on the Company' s assessments of the likelihood of their eventual settlements.  The amounts of these liabilities could increase or decrease in the near term, based on revisions to estimates relating to the various claims.
 
 

        At December 31, 2000, commitments for the purchase of property and equipment, principally aircraft, approximated $4.7 billion, after deducting advance payments.  An estimated $2.5 billion will be spent in 2001, $1.7 billion in 2002 and $0.5 in 2003.   The major commitments are for the purchase of A319, A320, B767, and B777 aircraft, which are scheduled to be delivered through 2003.  The above numbers include a recent conversion of 15 option aircraft to firm orders to be delivered in 2003.
 
 

        In connection with the construction of the Indianapolis Maintenance Center, United agreed to spend an aggregate $800 million on capital investments by the year 2001 and employ at least 7,500 individuals by the year 2004.  In the event such targets are not reached, United may be required to make certain payments to the city of Indianapolis and state of Indiana.
 
 

        Approximately 80% of United' s employees are represented by various labor organizations.  The labor contracts with the IAM became amendable in July 2000.  The Company is currently in the process of negotiating these contracts.  The contracts with ALPA and the AFA become amendable in 2004 and 2006, respectively.  See Other Information, "Labor Agreements" in Management' s Discussion and Analysis of Financial Condition and Results of Operations for details.

(19)  Segment Information
 
 

        United has a global route network designed to transport passengers and cargo between destinations in North America, the Pacific, the Atlantic and Latin America.  These regions constitute United' s four reportable segments.  The accounting policies for each of these segments are the same as those described in Note 1, "Summary of Significant Accounting Policies," except that segment financial information has been prepared using a management approach which is consistent with how the Company' s management internally disaggregates financial information for the purpose of making internal operating decisions.  UAL evaluates performance based on United' s earnings before income taxes and gains on sales.  Revenues are attributed to each reportable segment based on the allocation guidelines provided by the U.S. Department of Transportation, which classifies flights between the U.S. and foreign designations as part of each respective region.  A reconciliation of the total amounts reported by reportable segments to the applicable amounts in the financial statements follows:
 
 
 

(In Millions)
Year Ended December 31, 2000
         
Reportable
   
 
North
   
Latin
Segment
 
Consolidated
  America
Pacific
Atlantic
America
Total
Other
Total
Revenue
$ 13,094 
$  3,161
$ 2,260 
$  816 
$ 19,331 
$   21 
$ 19,352 
Interest income
55 
23 
16 
5
99 
101 
Interest expense
234 
95 
66 
21
416 
(14)
402 
Equity in losses of affiliates
(5)
(2)
(1)
(8)
(4)
(12)
Depreciation and amortization
630 
176 
141 
43
990 
68 
1,058 
Earnings before income taxes,              
   investment impairment and              
   gains on sales
205 
60 
102 
10
377 
383 

 
 
(In Millions)
Year Ended December 31, 1999
         
Reportable
   
 
North
   
Latin
Segment
 
Consolidated
 
America
Pacific
Atlantic
America
Total
Other
Total
Revenue
$ 12,516
$  2,691
$ 1,973
$   787
$ 17,967
$    60 
$ 18,027
Interest income
40
14
10
4
68
68
Interest expense
217
79
55
21
372
(10)
362
Equity in earnings of affiliates
21
9
5
2
37
37
Depreciation and amortization
550
145
115
42
852
15 
867
Earnings before income taxes              
   and gains on sales
889
81
164
20
1,154
57 
1,211

 
 
(In Millions)
Year Ended December 31, 1998
         
Reportable
   
 
North
   
Latin
Segment
 
Consolidated
 
America
Pacific
Atlantic
America
Total
Other
Total
Revenue
$ 11,997
$  2,843 
$  1,846
$   832
$ 17,518
$     43 
$ 17,561
Interest income
33
14 
8
3
58
59
Interest expense
207
84 
49
22
362
(7)
355
Equity in earnings of affiliates
41
17 
10
4
72
72
Depreciation and amortization
520
145 
95
45
805
(12)
793
Earnings (loss) before              
  income taxes
1,118
(105)
185
22
1,220
36 
1,256

 
 
(In Millions)
2000
1999
1998
Total earnings for reportable segments
  $   377 
$  1,154
$  1,220
  Gains on sales
109 
731
-
  Investment impairment
(61)
-
-
  UAL subsidiary earnings
       6 
      57
      36
Total earnings before income taxes, distributions      
  on preferred securities, extraordinary item      
  and cumulative effect
$   431 
$  1,942
$  1,256
 
===== 
=====
=====

 

        UAL' s operations involve an insignificant level of dedicated revenue producing assets by reportable segment.  The overwhelming majority of UAL' s revenue producing assets can be deployed in any of the four reportable segments.  UAL has significant intangible assets related to the acquisition of its Atlantic and Latin America route authorities.
 
 

(20)  Statement of Consolidated Cash Flows - Supplemental Disclosures
 
 

        Supplemental disclosures of cash flow information and non-cash investing and financing activities were as follows:
 
 
 

(In Millions)
2000
1999
1998
Cash paid during the year for:      
  Interest (net of amounts capitalized)
$   298 
$    260 
$    234 
  Income taxes
23 
296 
160 
       
Non-cash transactions:      
  Capital lease obligations incurred
339 
482 
701 
  Long-term debt incurred in connection      
    with additions to equipment
32 
  Increase (decrease) in pension intangible assets
107 
(123)
(15)
  Net unrealized gain (loss) on investments 
(196)
354 

 

(21) Selected Quarterly Financial Data (Unaudited)
 
 
 

(In Millions, except per share data)
1st
2nd
3rd
4th
 
 
Quarter
Quarter
Quarter
Quarter
Year
2000:          
Operating revenues
$ 4,546 
$ 5,109 
$  4,905 
$  4,792 
$ 19,352 
Earnings (loss) from operations
252 
605 
(41)
(162)
654 
Earnings (loss) before extraordinary item           
  and cumulative effect
110 
336 
(110)
(71)
265 
Extraordinary loss on early          
  extinguishment of debt, net
(6)
(6)
Cumulative effect of accounting change, net
(209)
(209)
Net earnings (loss)
$    (99)
$    336 
$   (116)
$     (71)
$        50 
Per share amounts, basic:          
  Earnings before extraordinary item          
     and cumulative effect
$   1.42 
$   6.61 
$  (2.17)
$  (1.40)
$    4.29 
  Extraordinary loss on early          
     extinguishment of debt, net
(0.13)
(0.13)
  Cumulative effect of accounting change, net
(4.14)
(4.08)
  Net earnings
$ (2.72)
 $   6.61 
$  (2.30)
$  (1.40)
$    0.08 
Net earnings per share, diluted
$ (1.18)
$   2.86 
$  (2.30)
$  (1.40)
$    0.04 
           
1999:          
Operating revenues
$ 4,160 
$ 4,541 
$  4,845 
$  4,481 
$ 18,027 
Earnings from operations
146 
433 
619 
193 
1,391 
Earnings before extraordinary item
78 
672 
359 
129 
1,238 
Extraordinary loss on early          
  extinguishment of debt, net
(3)
(3)
Net earnings
$      78 
$    669 
$    359 
$    129 
$   1,235 
Per share amounts, basic:          
   Earnings before extraordinary item
$   0.91 
$ 12.26 
$   6.18 
$   1.85 
$   21.26 
   Extraordinary loss on early          
      extinguishment of debt, net
(0.05)
(0.06)
   Net earnings
$   0.91
$ 12.21 
$   6.18 
$   1.85 
$   21.20 
Net earnings per share, diluted
$   0.44 
$   5.78 
$   2.89 
$   0.84 
$     9.94 
           

 

        The sum of quarterly earnings per share amounts is not the same as annual earnings per share amounts because of changing numbers of shares outstanding.
 
 

        During the third quarter of 2000, UAL recorded an investment impairment of $61 million related to its warrants in Priceline.com.  Additionally, in the fourth quarter 2000, UAL recognized a pre-tax gain of $109 million on the sale of its investment in GetThere.com.  (See Note 6 "Investments".)
 
 

        During the second quarter of 1999, UAL recognized a pre-tax gain of $669 million on the sale of a portion of its investment in Galileo.  Additionally, in the fourth quarter 1999, UAL recognized a pre-tax gain of $62 million on the sale of a portion of its investment in Equant.  (See Note 6 "Investments".)
 
 
 
 

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON

                ACCOUNTING AND FINANCIAL DISCLOSURE.
 
 

         None.
 
 


PART III



ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
 
 

         Information required by this item is incorporated by reference from the Company' s definitive proxy statement for its 2001 Annual Meeting of Stockholders.  Information regarding the executive officers is included in Part I of this Form 10-K under the caption "Executive Officers of the Registrant."
 
 

ITEM 11.  EXECUTIVE COMPENSATION.
 
 

         Information required by this item is incorporated by reference from the Company' s definitive proxy statement for its 2001 Annual Meeting of Stockholders.
 
 

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

                AND MANAGEMENT.
 
 

         Information required by this item is incorporated by reference from the Company' s definitive proxy statement for its 2001 Annual Meeting of Stockholders.
 
 

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
 

         Information required by this item is incorporated by reference from the Company' s definitive proxy statement for its 2001 Annual Meeting of Stockholders.
 
 


PART IV



ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS

          ON FORM 8-K.
 
 

(a)     1.      Financial Statements.  The financial statements required by this item are listed in Item 8, "Financial Statements and Supplementary Data" herein.
 
 

        2.      Financial Statement Schedules.  The financial statement schedule required by this item is listed below and included in this report after the signature page hereto.
 
 

Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 2000, 1999 and 1998.
 
 

All other schedules are omitted because they are not applicable, not required or the required information is shown in the consolidated financial statements or notes thereto.
 
 

        3.      Exhibits.  The exhibits required by this item are listed in the Exhibit Index which immediately precedes the exhibits filed with this Form 10-K, and is incorporated herein by this reference.  Each of Exhibits 10.32 through 10.40 listed in the Exhibit Index is a management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
 
 

(b)     Reports on Form 8-K.
 
 

        Form 8-K dated October 19, 2000 to report a cautionary statement for purposes of the "Safe Harbor for Forward Looking Statements" provision of the Private Securities Litigation Reform Act.
 
 

        Form 8-K dated November 6, 2000 to report a cautionary statement for purposes of the "Safe Harbor for Forward Looking Statements" provision of the Private Securities Litigation Reform Act.
 
 




SIGNATURES



         Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 22nd day of February, 2001.
 
 

                                                 UAL CORPORATION
 
 
 
 

                                                   /s/ James E. Goodwin

                                                   James E. Goodwin

                                                   Chairman of the Board and Chief

                                                   Executive Officer
 
 

         Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the 22nd day of February 2001 by the following persons on behalf of the registrant and in the capacities indicated.
 
 
 
 
 
 
 

/s/ James E. Goodwin   /s/ Douglas A. Hacker
James E. Goodwin   Douglas A. Hacker
Chairman of the Board and Chief Executive Officer (principal executive officer)   Executive Vice President and Chief Financial Officer (principal financial and accounting officer)
     
/s/ Rono Dutta   /s/ Hazel R. O' Leary
Rono Dutta   Hazel R. O' Leary
President and Director   Director
     
/s/ John W. Creighton, Jr.   /s/ Deval L. Patrick
John W. Creighton, Jr.   Deval L. Patrick
Director   Director
     
/s/ Frederick C. Dubinsky   /s/ John F. Peterpaul
Frederick C. Dubinsky   John F. Peterpaul
Director   Director
     
/s/ Richard D. McCormick   /s/ Paul E. Tierney, Jr.
Richard D. McCormick   Paul E. Tierney, Jr.
Director   Director
     

/s/ John F. McGillicuddy

  /s/ John K. Van de Kamp
John F. McGillicuddy   John K. Van de Kamp
Director   Director
     
/s/ James J. O' Connor    
James J. O' Connor    
Director    
     

 
 
 

UAL Corporation and Subsidiary Companies
 
 

Schedule II - Valuation and Qualifying Accounts
 
 

For the Year Ended December 31, 2000


 
 
 
 
 
(In Millions)
Balance at
Additions Charged to
 
Balance at
 
Beginning
Costs and
Other
 
End of
Description
of Year
Expenses
Accounts
Deductions
Year
           
Reserve deducted from asset to which it applies:

 

       
   Allowance for doubtful accounts
$  13
$  15
$  -
$  141
$  14
 
===
===
===
===
===
   Obsolescence allowance -          
      Flight equipment spare parts
$  45
$  10
$  2
$   21
$  55
 
===
===
===
===
===
           
           
           

 
 
 
 
 

F-1

___________

1Deduction 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, 1999


 
 
 
 
 
(In Millions)
Balance at
Additions Charged to
 
Balance at
 
Beginning
Costs and
Other
 
End of
Description
of Year
Expenses
Accounts
Deductions
Year
           
Reserve deducted from asset to which it applies:

 

       
   Allowance for doubtful accounts
$  22
$  11
$  -
$  201
$  13
 
===
===
===
===
===
   Obsolescence allowance -          
      Flight equipment spare parts
$  39
$   4
$  1
$  (1)1
$  45
 
===
===
===
===
===
           
           
           

 
 
 
 
 

F-2





___________

1Deduction 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, 1998


 
 
 
 
 
(In Millions)
Balance at
Additions Charged to
 
Balance at
 
Beginning
Costs and
Other
 
End of
Description
of Year
Expenses
Accounts
Deductions
Year
           
Reserve deducted from asset to which it applies:

 

       
   Allowance for doubtful accounts
$  15
$  17
$  -
$  10
$  22
 
===
===
===
===
===
   Obsolescence allowance -          
      Flight equipment spare parts
$  29
$  36
$  4
$  301
$  39
 
===
===
===
===
===
           
           
           

 
 
 
 
 

F-3



___________

1Deduction from reserve for purpose for which reserve was created.
 
 
 
 

EXHIBIT INDEX



 
 

3.1 Restated Certificate of Incorporation of UAL Corporation ("UAL"), as amended (filed as Exhibit 3.1 to UAL' s Form 10-Q for the quarter ended June 30, 2000 and incorporated herein by reference).
   
3.2 By-laws (filed as Exhibit 3.2 to UAL' s Form 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference).
   
4.1 Deposit Agreement dated as of July 12, 1994 between UAL Corporation and holders from time to time of Depository Receipts described herein.
   
4.2 Indenture dated as of December 20, 1996 between UAL Corporation and The First National Bank of Chicago, as Trustee (filed as Exhibit 4.2 to UAL' s Form 10-K for the year ended December 31, 1996 and incorporated herein by reference).
   
4.3 Officer' s Certificate relating to UAL' s 13-1/4% Junior Subordinated Debentures due 2026 (filed as Exhibit 4.3 to UAL' s Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). 
   
4.4 Form of UAL' s 13-1/4% Junior Subordinated Debenture due 2026 (filed as Exhibit 4.4 to UAL' s Form 10-K for the year ended December 31, 1996 and incorporated herein by reference).
   
4.5 Guarantee Agreement dated as of December 30, 1996 with respect to the 13-1/4% Trust Originated Preferred Securities of UAL Corporation Capital Trust I (filed as Exhibit 4.5 to UAL' s Form 10-K for the year ended December 31, 1996 and incorporated herein by reference).
   
4.6 Amended and Restated Declaration of Trust of UAL Corporation Capital Trust I dated as of December 30, 1996 (filed as Exhibit 4.6 to UAL' s Form 10-K for year ended December 31, 1996 and incorporated herein by reference).
   
  UAL' s indebtedness under any single instrument does not exceed 10% of UAL' s total assets on a consolidated basis.  Copies of such instruments will be furnished to the Securities and Exchange Commission upon request.
   
10.1 Amended and Restated Agreement and Plan of Recapitalization, dated as of March 25, 1994 (the "Recapitalization Agreement"), as amended, among UAL Corporation, the Air Line Pilots Association, International ("ALPA") and the International Association of Machinists and Aerospace Workers ("IAM").
   
10.2 Second Amendment to the Agreement and Plan of Recapitalization, dated as of June 2, 1994, among UAL, ALPA and the IAM.
   
10.3 Agreement, dated as of July 16, 1996, pursuant to Section 1.6q of the Recapitalization Agreement among UAL, ALPA and IAM (filed as Exhibit 10.3 to UAL' s Form 10-Q for the quarter ended June 30, 1996 and incorporated herein by reference).
   
10.4 UAL Corporation Employee Stock Ownership Plan, effective as of July 12, 1994.
   
10.5 First Amendment to UAL Corporation Employee Stock Ownership Plan, dated December 28, 1994.
   
10.6 Second Amendment to UAL Corporation Employee Stock Ownership Plan, dated as of August 17, 1995.
   
10.7 Third Amendment to UAL Corporation Employee Stock Ownership Plan, dated as of December 28, 1995 (filed as Exhibit 10.7 to UAL' s Form 10-K for the year ended December 31, 1996 and incorporated herein by reference).
   
10.8 Fourth Amendment to UAL Corporation Employee Stock Ownership Plan, dated as of July 16, 1996 (filed as Exhibit 10.1 to UAL' s Form 10-Q for the quarter ended June 30, 1996 and incorporated herein by reference).
   
10.9 Fifth Amendment to UAL Corporation Employee Stock Ownership Plan, dated as of December 31, 1996 (filed as Exhibit 10.10 of UAL' s Form 10-K for the year ended December 31, 1996 and incorporated herein by reference).
   
10.10 Sixth Amendment to UAL Corporation Employee Stock Ownership Plan, dated as of August 11, 1997 (filed as Exhibit 10.3 to UAL' s Form 10-Q for the quarter ended September 30, 1997, as amended, and incorporated herein by reference).
   
10.11 Seventh Amendment to UAL Corporation Employee Stock Ownership Plan, dated as of May 19, 1999 (filed as Exhibit 10.10 to UAL' s Form 10-K for the year ended December 31, 2000 and incorporated herein by reference).
   
10.12 Eighth Amendment to UAL Corporation Employee Stock Ownership Plan, dated as of November 10, 1999 (filed as Exhibit 10.11 to UAL' s Form 10-K for the year ended December 31, 2000 and incorporated herein by reference).
   
10.13 Ninth Amendment to UAL Corporation Employee Stock Ownership Plan, dated as of October 29, 1999 (filed as Exhibit 10.12 to UAL' s Form 10-K for the year ended December 31, 2000 and incorporated herein by reference).
   
10.14 Tenth Amendment to UAL Corporation Employee Stock Ownership Plan, dated as of April 28, 2000 (filed as Exhibit 10.3 to UAL' s Form 10-Q for the quarter ended June 30, 2000 and incorporated herein by reference).
   
10.15 Eleventh Amendment to UAL Corporation Employee Stock Ownership Plan, dated as of December 29, 2000.
   
10.16 UAL Corporation Employee Stock Ownership Plan Trust Agreement between UAL Corporation and State Street Bank and Trust Company ("State Street"), effective July 12, 1994.
   
10.17 UAL Corporation Supplemental ESOP, effective as of July 12, 1994.
   
10.18 First Amendment to UAL Corporation Supplemental ESOP, dated February 22, 1995.
   
10.19 Second Amendment to UAL Corporation Supplemental ESOP, dated as of August 17, 1995.
   
10.20 Third Amendment to UAL Corporation Supplemental ESOP, dated as of December 28, 1995.
   
10.21 Fourth Amendment to UAL Corporation Supplemental ESOP, dated as of July 16, 1996 (filed as Exhibit 10.2 to UAL' s Form 10-Q for the quarter ended June 30, 1996 and incorporated herein by reference).
   
10.22 Fifth Amendment to UAL Corporation Supplemental ESOP, dated as of December 31, 1996 (filed as Exhibit 10.17 to UAL' s Form 10-K for the year ended December 31, 1996 and incorporated herein by reference).
   
10.23 Sixth Amendment to UAL Corporation Supplemental ESOP, dated as of August 11, 1997 (filed as Exhibit 10.4 of UAL' s Form 10-Q for the quarter ended September 30, 1997, as amended, and incorporated herein by reference).
   
10.24 Seventh Amendment to UAL Corporation Supplemental ESOP, dated as of May 19, 1999 (filed as Exhibit 10.21 to UAL' s Form 10-K for the year ended December 31, 2000 and incorporated herein by reference).
   
10.25 Eighth Amendment to UAL Corporation Supplemental ESOP, dated as of November 10, 1999 (filed as Exhibit 10.22 to UAL' s Form 10-K for the year ended December 31, 2000 and incorporated herein by reference).
   
10.26 Ninth Amendment to UAL Corporation Supplemental ESOP, dated as of October 29, 1999 (filed as Exhibit 10.23 to UAL' s Form 10-K for the year ended December 31, 2000 and incorporated herein by reference).
   
10.27 Eleventh Amendment to UAL Corporation Supplemental ESOP
   
10.28 UAL Corporation Supplemental ESOP Trust Agreement between UAL Corporation and State Street, effective July 12, 1994.
   
10.29 Class I Junior Preferred Stockholders'  Agreement, dated as of June 12, 1994.
   
10.30 Class SAM Preferred Stockholders'  Agreement, dated as of July 12, 1994.
   
10.31 First Refusal Agreement, dated as of July 12, 1994, as amended (filed as Exhibit 10.25 to UAL' s Form 10-K for the year ended December 31, 1996 and incorporated herein by reference).
   
10.32 UAL Corporation 2000 Incentive Stock Plan (filed as Exhibit 10.1 to UAL' s Form 10-Q for the quarter ended June 30, 2000 and incorporated herein by reference).
   
10.33 United Employees Performance Incentive Plan (filed as Exhibit 10.1 to UAL' s Form 10-Q for the quarter ended June 30, 2000 and incorporated herein by reference).
   
10.34 UAL Corporation 1998 Restricted Stock Plan (filed as Exhibit 10.1 to UAL' s Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference).
   
10.35 Summary Description of Compensation and Benefits for Directors (filed as Exhibit 10.34 to UAL' s Form 10-K for the year ended December 31, 1999 and incorporated herein by reference).
   
10.36 UAL Corporation 1995 Directors Plan, as amended June 26, 1997 (filed as Exhibit 10.1 of UAL' s Form 10-Q for the quarter ended September 30, 1997, as amended, and incorporated herein by reference).
   
10.37 United Supplemental Retirement Plan (filed as Exhibit 10.35 of UAL' s 10-K for the year ended December 31, 1998 and incorporated herein by reference).
   
10.38 Description of Officer Benefits (filed as Exhibit 10.36 of UAL' s 10-K for the year ended December 31, 1998 and incorporated herein by reference).
   
10.39 Employment Agreement, dated as of April 12, 1999, between UAL Corporation, United Air Lines, Inc. and James E. Goodwin (filed as Exhibit 10.1 of UAL' s Form 10-Q for the quarter ended June 30, 1999 and incorporated herein by reference).
   
10.40 Employment Agreement between William P. Hobgood and UAL and United, dated March 1, 2000 (filed as Exhibit 10.1 of UAL' s Form 10-Q for the quarter ended March 31, 2000 and incorporated herein by reference).
   
10.41 2000 Agreement between United Air Lines, Inc. and the Air Line Pilots in the service of United Air Lines, Inc. represented by the Air Line Pilots Association, International.
   
12 Computation of Ratio of Earnings to Fixed Charges.
   
12.1 Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividend Requirements.
   
21 List of UAL' s subsidiaries 
   
23 Consent of Independent Public Accountants
   
99 Annual Report on Form 11-K for Employees'  Stock Purchase Plan of UAL Corporation

 
 
 

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</TEXT>

</DOCUMENT
 
  Exhibit 4 <DOCUMENT>
<TYPE> EX-4.1
<TEXT>
<HTML>

Exhibit 4.1

 

UAL CORPORATION

FIRST CHICAGO TRUST COMPANY OF NEW YORK, As Depositary

AND

THE HOLDERS FROM TIME TO TIME OF
THE DEPOSITARY RECEIPTS DESCRIBED HEREIN
 

DEPOSIT AGREEMENT
 

Dated as of July 12, 1994
 
 
 
 

TABLE OF CONTENTS

ARTICLE I

Definitions

ARTICLE II

FORM OF RECEIPTS, DEPOSIT OF STOCK,EXECUTION AND DELIVERY, TRANSFER,SURRENDER AND REDEMPTION OF RECEIPTS

SECTION 2.1    Form and Transfer of Receipts
SECTION 2.2    Deposit of Stock; Execution and Delivery of Receipts in Respect Thereof
SECTION 2.3    Registration of Transfer of Receipts
SECTION 2.4    Split-ups and Combinations of Receipts; Surrender of  Receipts and Withdrawal of Stock
SECTION 2.5    Limitations on Execution and Delivery, Transfer, Surrender and Exchange of Receipts
SECTION 2.6    Lost Receipts, etc.
SECTION 2.7    Cancellation and Destruction of Surrendered Receipts
SECTION 2.8    Redemption of Stock

ARTICLE III

CERTAIN OBLIGATIONS OFHOLDERS OF RECEIPTS AND THE COMPANY

SECTION 3.1    Filing Proofs, Certificates and Other Information
SECTION 3.2    Payment of Taxes or Other Governmental Charges
SECTION 3.3    Warranty as to Stock

ARTICLE IV

THE DEPOSITED SECURITIES; NOTICES

SECTION 4.1    Cash Distributions
SECTION 4.2    Distributions Other than Cash, Rights, Preferences or Privileges
SECTION 4.3    Subscription Rights, Preferences or Privileges
SECTION 4.4    Notice of Dividends, etc.; Fixing Record Date for Holders of Receipts
SECTION 4.5    Voting Rights
SECTION 4.6    Changes Affecting Deposited Securities and Reclassifications, Recapitalizations, etc.
SECTION 4.7    Delivery of Reports
SECTION 4.8    List of Receipt Holders

ARTICLE V

THE DEPOSITARY, THE DEPOSITARY'SAGENTS, THE REGISTRAR AND THE COMPANY

SECTION 5.1    Maintenance of Offices, Agencies and Transfer Books by the Depositary; Registrar
SECTION 5.2    Prevention of or Delay in Performance by the Depositary, The Depositary's Agents, the Registrar or the Company
SECTION 5.3    Obligation of the Depositary, the Depositary's Agents, The Registrar and the Company
SECTION 5.4    Resignation and Removal of the Depositary; Appointment of Successor Depositary
SECTION 5.5    Corporate Notices and Reports
SECTION 5.6    Indemnification by the Company
SECTION 5.7    Charges and Expenses
SECTION 5.8    Deposit of Stock by the Company
SECTION 5.9    Tax Compliance

ARTICLE VI

AMENDMENT AND TERMINATION

SECTION 6.1    Amendment
SECTION 6.2    Termination

ARTICLE VII

MISCELLANEOUS

SECTION 7.1    Counterparts
SECTION 7.2    Exclusive Benefit of Parties
SECTION 7.3    Invalidity of Provisions
SECTION 7.4    Notices
SECTION 7.5    Appointment of Registrar
SECTION 7.6    Depositary's Agents
SECTION 7.7    Holders of Receipts Are Parties
SECTION 7.8    GOVERNING LAW
SECTION 7.9    Inspection of Deposit Agreement
SECTION 7.10   Headings

Annex A

DEPOSIT AGREEMENT, dated as of July 12, 1994,

among UAL CORPORATION, a Delaware corporation (the "Company"), FIRST CHICAGO TRUST COMPANY OF NEW YORK, a New York State trust Company (the "Depositary"), and the holders from time to time of the Receipts described herein.

WHEREAS, it is desired to provide, as hereinafter set forth in this Deposit Agreement, for the deposit of shares of Series B Preferred Stock of the Company with the Depositary for the purposes set forth in this Deposit Agreement and for the issuance hereunder of Receipts evidencing Depositary Shares in respect of the Stock so deposited; and

WHEREAS, the Receipts are to be substantially in the form of Exhibit A annexed hereto, with appropriate insertions, modifications and omissions, as hereinafter provided in this Deposit Agreement;

NOW, THEREFORE, in consideration of the promises contained herein, the parties hereto agree as follows:
  131: 138: 139: ARTICLE I


DEFINITIONS

The following definitions shall, for all purposes, unless otherwise indicated, apply to the respective terms used in this Deposit Agreement:

"Certificate" shall mean the Amended and Restated Certificate of Incorporation of the Company, filed with the Secretary of State of the State of Delaware, that, among other things, establishes the Stock as a series of preferred stock of the Company.

"Company" shall mean the party named as such in the first paragraph of this Deposit Agreement and any successor hereunder.

"Deposit Agreement" shall mean this Deposit Agreement, as amended or supplemented from time to time.

"Depositary" shall mean the person named as such in the first paragraph of this Deposit Agreement and any successor as Depositary hereunder.

"Depositary Shares" shall mean depositary shares, each representing one one-thousandth (1/1,000) of a share of Stock and evidenced by a Receipt.

"Depositary's Agent" shall mean an agent appointed by the Depositary pursuant to Section 5.1 and shall include the Registrar if such Registrar is not the Depositary.

"Depositary's Office" shall mean the principal office of the Depositary, at which at any particular time its depositary receipt business shall be administered.

"Receipt" shall mean one of the depositary receipts, substantially in the form set forth as Exhibit A hereto, issued hereunder, whether in definitive or temporary form and evidencing the number of Depositary Shares held of record by the record holder of such Depositary Shares.

"record holder" or "holder" as applied to a Receipt shall mean the person in whose name a Receipt is registered on the books of the Depositary maintained for such purpose.

"Registrar" shall mean the Depositary or such other bank or trust company that shall be appointed to register ownership and transfers of Receipts as herein provided.

"Securities Act" shall mean the Securities Act of 1933, as amended.

"Stock" shall mean shares of the Company's Series B Preferred Stock, without par value, $25,000 liquidation value per share.
 
 

ARTICLE II

FORM OF RECEIPTS, DEPOSIT OF STOCK, EXECUTION AND DELIVERY, TRANSFER, SURRENDER AND REDEMPTION OF RECEIPTS

    SECTION 2.1     Form and Transfer of Receipts. Definitive Receipts shall be engraved or printed or lithographed on steel-engraved borders, with appropriate insertions, modifications and omissions as hereinafter provided, if required by any securities exchange on which the Receipts are listed. Pending the preparation of definitive Receipts or if definitive Receipts are not required by any securities exchange on which the Receipts are listed, the Depositary, upon the written order of the Company or any holder of Stock, as the case may be, delivered in compliance with Section 2.2, shall execute and deliver temporary Receipts that are printed, lithographed, typewritten, mimeographed or otherwise substantially of the tenor of the definitive Receipts in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the persons executing such Receipts may determine, as evidenced by their execution of such Receipts. If temporary Receipts are issued, the Company and the Depositary shall cause definitive Receipts to be prepared without unreasonable delay. After the preparation of definitive Receipts, the temporary Receipts shall be exchangeable for definitive Receipts upon surrender of the temporary Receipts at the Depositary's Office or at such other place or places as the Depositary shall determine, without charge to the holder. Upon surrender for cancellation of any one or more temporary Receipts, the Depositary shall execute and deliver in exchange therefor definitive Receipts representing the same number of Depositary Shares as represented by the surrendered temporary Receipt or Receipts. Such exchange shall be made at the Company's expense and without any charge to the holder therefor. Until so exchanged, the temporary Receipts shall in all respects be entitled to the same benefits under this Agreement, and with respect to the Stock, as definitive Receipts.

Receipts shall be executed by the Depositary by the manual signature of a duly authorized officer of the Depositary; provided that such signature may be a facsimile if a Registrar for the Receipts (other than the Depositary) shall have been appointed and such Receipts are countersigned by a manual signature of a duly authorized officer of the Registrar. No Receipt shall be entitled to any benefits under this Deposit Agreement or be valid or obligatory for any purpose unless it shall have been executed manually by a duly authorized officer of the Depositary or, if a Registrar for the Receipts (other than the Depositary) shall have been appointed, by manual or facsimile signature of a duly authorized officer of the Depositary and countersigned manually by a duly authorized officer of such Registrar. The Depositary shall record on its books each Receipt so signed and delivered as hereinafter provided.

Receipts shall be in denominations of any number of whole Depositary Shares. The Company shall deliver to the Depositary from time to time such quantities of Receipts as the Depositary may request to enable the Depositary to perform its obligations under this Deposit Agreement.

Receipts may be endorsed with or have incorporated in the text thereof such legends or recitals or changes not inconsistent with the provisions of this Deposit Agreement as may be required by the Depositary or required to comply with any applicable law or any regulation thereunder or with the rules and regulations of any securities exchange upon which the Stock, the Depositary Shares or the Receipts may be listed or to conform with any usage with respect thereto, or to indicate any special limitations or restrictions to which any particular Receipts are subject.

Title to Depositary Shares evidenced by a Receipt, which is properly endorsed or accompanied by a properly executed instrument of transfer, shall be transferable by delivery with the same effect as in the case of a negotiable instrument; provided that until transfer of a Receipt shall be registered on the books of the Depositary as provided in Section 2.3, the Depositary may, notwithstanding any notice to the contrary, treat the record holder thereof at such time as the absolute owner thereof for the purpose of determining the person entitled to distributions of dividends or other distributions or to any notice provided for in this Deposit Agreement and for all other purposes.

On each date on which the Stock is initially issued by the Company, the Depositary, upon receipt of written instructions from the Company and a certificate or certificates for the Stock to be deposited under this Deposit Agreement in accordance with the provisions of this Section 2.1, shall execute and deliver a Receipt or Receipts for the number of Depositary Shares representing such deposited Stock to the person or persons stated in such instructions as provided in Section 2.2.

If required by the Depositary, Stock presented for deposit at any time, whether or not the register of stockholders of the Company is closed, shall also be accompanied by an agreement or assignment, or other instrument satisfactory to the Depositary, that shall provide for the prompt transfer to the Depositary or its assigns of any dividend or right to subscribe for additional Stock or to receive other property that any person in whose name the Stock is or has been registered may thereafter receive upon or in respect of such deposited Stock or, in lieu thereof, such agreement of indemnity or other agreement as shall be satisfactory to the Depositary.

    SECTION 2.2     Deposit of Stock; Execution and Delivery of Receipts in Respect Thereof. Subject to the terms and conditions of this Deposit Agreement, the Company or any holder of Stock may from time to time deposit shares of the Stock under this Deposit Agreement by delivering to the Depositary a certificate or certificates for the Stock to be deposited, properly endorsed or accompanied, if required by the Depositary, by a duly executed instrument of transfer or endorsement, in form satisfactory to the Depositary, together with all such certifications as may be required by the Depositary in accordance with the provisions of this Deposit Agreement, and together with a written order of the Company or such holder, as the case may be, directing the Depositary to execute and deliver to, or upon the written order of, the person or persons stated in such order a Receipt or Receipts for the number of Depositary Shares representing such deposited Stock.

Deposited Stock shall be held by the Depositary at the Depositary's Office or at such other place or places as the Depositary shall determine.

Upon receipt by the Depositary of a certificate or certificates for Stock deposited in accordance with the provisions of this Section, together with the other documents required as above specified, and upon recordation of the Stock on the books of the Company in the name of the Depositary or its nominee, the Depositary, subject to the terms and conditions of this Deposit Agreement, shall execute and deliver, to or upon the order of the person or persons named in the written order delivered to the Depositary referred to in the first paragraph of this Section, a Receipt or Receipts for the whole number of Depositary Shares representing the Stock so deposited and registered in such name or names as may be requested by such person or persons. The Depositary shall execute and deliver such Receipt or Receipts at the Depositary's Office or such other offices, if any, as the Depositary may designate. Delivery at other offices shall be at the risk and expense of the person requesting such delivery. In each case, delivery shall be made only upon payment as provided in Section 5.7 to the Depositary of all taxes and other governmental charges and any fees payable in connection with such deposit and transfer of the Stock.

    SECTION 2.3     Registration of Transfer of Receipts. Subject to the terms and conditions of this Deposit Agreement, the Depositary shall register on its books from time to time transfers of Receipts upon any surrender thereof by the holder in person or by duly authorized attorney, properly endorsed or accompanied by a properly executed instrument of transfer or endorsement together with evidence of the payment of any transfer taxes as may be required by law. Thereupon, the Depositary shall execute a new Receipt or Receipts evidencing the same aggregate number of Depositary Shares as those evidenced by the Receipt or Receipts surrendered and deliver such new Receipt or Receipts to or upon the order of the person entitled thereto.

    SECTION 2.4     Split-ups and Combinations of Receipts; Surrender of Receipts and Withdrawal of Stock. Upon surrender of a Receipt or Receipts at the Depositary's Office or at such other offices as it may designate for the purpose of effecting a split-up or combination of such Receipt or Receipts, and subject to the terms and conditions of this Deposit Agreement, the Depositary shall execute and deliver a new Receipt or Receipts in the authorized denomination or denominations requested, evidencing the aggregate number of Depositary Shares evidenced by the Receipt or Receipts surrendered, provided that the Depositary shall not issue any Receipt evidencing a fractional Depositary Share.

Any holder of a Receipt or Receipts representing any number of whole shares of Stock may (unless the related Depositary Shares have previously been called for redemption) withdraw the Stock and all money and other property, if any, represented thereby by surrendering such Receipt or Receipts, at the Depositary's Office or at such other offices as the Depositary may designate for such withdrawals. Thereafter, without unreasonable delay, the Depositary shall deliver to such holder, or to the person or persons designated by such holder as hereinafter provided, the number of whole shares of Stock and all money and other property, if any, represented by the Receipt or Receipts so surrendered for withdrawal, but holders of such whole shares of Stock shall not thereafter be entitled to deposit such Stock hereunder or to receive Depositary Shares therefor. If a Receipt delivered by the holder to the Depositary in connection with such withdrawal shall evidence a number of Depositary Shares in excess of the number of Depositary Shares representing the number of whole shares of Stock to be so withdrawn, the Depositary shall at the same time, in addition to such number of whole shares of Stock and such money and other property, if any, to be so withdrawn, deliver to such holder, or upon his order, a new Receipt evidencing such excess number of Depositary Shares, provided that the Depositary shall not issue any Receipt evidencing a fractional Depositary Share. Delivery of the Stock and money and other property being withdrawn may be made by the delivery of such certificates, documents of title and other instruments as the Depositary may deem appropriate, which, if required by the Depositary, shall be properly endorsed or accompanied by proper instruments of transfer.

If the Stock and the money and other property being withdrawn are to be delivered to a person or persons other than the record holder of the Receipt or Receipts being surrendered for withdrawal of Stock, such holders shall execute and deliver to the Depositary a written order so directing the Depositary and the Depositary may require that the Receipt or Receipts surrendered by such holder for withdrawal of such shares of Stock be properly endorsed in blank or accompanied by a properly executed instrument of transfer in blank.

Delivery of the Stock and the money and other property, if any, represented by Receipts surrendered for withdrawal shall be made by the Depositary at the Depositary's Office, except that, at the request, risk and expense of the holder surrendering such Receipt or Receipts and for the account of the holder thereof, such delivery may be made at such other place as may be designated by such holder.

    SECTION 2.5     Limitations on Execution and Delivery, Transfer, Surrender and Exchange of Receipts. As a condition precedent to the execution and delivery, registration of transfer, split-up, combination, surrender or exchange of any Receipt, the Depositary, the Registrar, any of the Depositary's Agents or the Company may require payment to it of a sum sufficient for the payment (or, if the Depositary or the Company shall have made such payment, the reimbursement to it) of any charges or expenses payable by the holder of a Receipt pursuant to Sections 3.2 and 5.7, may require the production of evidence satisfactory to it as to the identity and genuineness of any signature and may also require compliance with such regulations, if any, as the Depositary or the Company may establish consistent with the provisions of this Deposit Agreement.

The deposit of Stock may be refused, the delivery of Receipts against Stock may be suspended, the registration of transfer of Receipts may be refused and the registration of transfer, surrender or exchange of outstanding Receipts may be suspended (i) during any period when the register of stockholders of the Company is closed, (ii) if any such action is deemed necessary or advisable by the Depositary, the Registrar, any of the Depositary's Agents or the Company at any time or from time to time because of any requirement of law or of any government or governmental body or commission or under any provision of this Deposit Agreement or (iii) with the approval of the Company, for any other reason.

    SECTION 2.6     Lost Receipts, etc. If any receipt shall be mutilated, destroyed, lost or stolen, the Depositary in its discretion may execute and deliver a Receipt of like form and tenor in exchange and substitution for such mutilated Receipt, or in lieu of and in substitution for such destroyed, lost or stolen Receipt, upon (i) the filing by the holder thereof with the Depositary of evidence satisfactory to the Depositary of such destruction or loss or theft of such Receipt, of the authenticity thereof and of his or her ownership thereof, (ii) the furnishing of the Depositary with reasonable indemnification satisfactory to it and (iii) the payment of any expense (including fees, charges and expenses of the Depositary) in connection with such execution and delivery.

    SECTION 2.7     Cancellation and Destruction of Surrendered Receipts. All Receipts surrendered to the Depositary or any Depositary's Agent shall be cancelled by the Depositary and returned to the Company. Except as prohibited by applicable law or regulation, the Company is authorized to destroy all Receipts so cancelled.

    SECTION 2.8     Redemption of Stock. Whenever the Company shall be permitted and shall elect to redeem shares of Stock in accordance with the provisions of the Certificate, it shall (unless otherwise agreed to in writing with the Depositary) give or cause notice to be given to the Depositary not less than 30 days, but not more than 60 days, prior to the date of such proposed redemption of Stock and of the number of such shares held by the Depositary to be so redeemed and the applicable redemption price, as set forth in the Certificate, which notice shall be accompanied by a certificate from the Company stating that such redemption of Stock is in accordance with the provisions of the Certificate. On the date of such redemption, if the Company shall then have paid or caused to be paid in full to the Depositary the redemption price of the Stock to be redeemed, plus an amount equal to any accrued and unpaid dividends thereon to the date fixed for redemption, in accordance with the provisions of the Certificate, the Depositary shall redeem the number of Depositary Shares representing such Stock. The Depositary shall mail notice of the Company's redemption of Stock and the proposed simultaneous redemption of the number of Depositary Shares representing the Stock to be redeemed by first-class mail, postage prepaid, not less than 20 days, but not more than 50 days, prior to the date fixed for redemption of such Stock and Depositary Shares (the "Redemption Date") to the record holders of the Receipts evidencing the Depositary Shares to be so redeemed, at the address of such holders as they appear on the records of the Depositary; but neither failure to mail any such notice of redemption of Depositary Shares to one or more such holders nor any defect in any notice of redemption of Depositary Shares to one or more such holders shall affect the sufficiency of the proceedings for redemption as to the other holders. The Company shall provide the Depositary with the information necessary for the Depositary to prepare such notice and each such notice shall state: (i) the Redemption Date, (ii) the number of Depositary Shares to be redeemed and, if less than all the Depositary Shares held by any such holder are to be redeemed, the number of such Depositary Shares held by such holder to be so redeemed, (iii) the redemption price, (iv) the place or places where Receipts evidencing Depositary Shares are to be surrendered for payment of the redemption price, and (v) that dividends in respect of the Stock represented by the Depositary Shares to be redeemed shall cease to accrue on such Redemption Date. If less than all the outstanding Depositary Shares are to be redeemed, the Depositary Shares to be so redeemed shall be selected by the Depositary by lot or pro rata (as nearly as may be) or by any other method, in each case, as determined by the Depositary in its sole discretion to be equitable.

Notice having been mailed by the Depositary as aforesaid, from and after the Redemption Date (unless the Company shall have failed to provide the funds necessary to redeem the Stock evidenced by the Depositary Shares called for redemption) (i) dividends on the shares of Stock so called for redemption shall cease to accrue from and after such date, (ii) the Depositary Shares being redeemed from such proceeds shall be deemed no longer to be outstanding, (iii) all rights of the holders of Receipts evidencing such Depositary Shares (except the right to receive the redemption price) shall, to the extent of such Depositary Shares, cease and terminate, and (iv) upon surrender in accordance with such redemption notice of the Receipts evidencing any such Depositary Shares called for redemption (properly endorsed or assigned for transfer, if the Depositary or applicable law shall so require), such Depositary Shares shall be redeemed by the Depositary at a redemption price per Depositary Share equal to one one-thousandth (1/1,000) of the redemption price per share paid with respect to the shares of Stock plus all money and other property, if any, represented by such Depositary Shares, including all amounts paid by the Company in respect of dividends that on the Redemption Date have accumulated on the shares of Stock to be so redeemed and have not theretofore been paid.

If fewer than all of the Depositary Shares evidenced by a Receipt are called for redemption, the Depositary shall deliver to the holder of such Receipt upon its surrender to the Depositary, together with the redemption payment, a new Receipt evidencing the Depositary Shares evidenced by such prior Receipt and not called for redemption. The Depositary shall not be required (a) to issue, transfer or exchange any Receipts for a period beginning at the opening of business ten days next preceding any selection of Depositary Shares and Stock to be redeemed and ending at the close of business on the day of the mailing of notice of redemption of Depositary Shares or (b) to transfer or exchange for another Receipt any Receipt evidencing Depositary Shares called or being called for redemption in whole or in part, except as provided in the preceding paragraph of this Section 2.8.

ARTICLE III

CERTAIN OBLIGATIONS OF HOLDERS OF RECEIPTS AND THE COMPANY

    SECTION 3.1     Filing Proofs, Certificates and Other Information. Any holder of a Receipt may be required from time to time to file such proof of residence, or other matters or other information, to execute such certificates and to make such representations and warranties as the Depositary or the Company may reasonably deem necessary or proper. The Depositary or the Company may withhold the delivery, or delay the registration of transfer, redemption or exchange, of any Receipt or the withdrawal or conversion of the Stock represented by the Depositary Shares evidenced by any Receipt or the distribution of any dividend or other distribution or the sale of any rights or of the proceeds thereof until such proof or other information is filed or such certificates are executed or such representations and warranties are made.

    SECTION 3.2     Payment of Taxes or Other Governmental Charges. If any tax or other governmental charge shall become payable by or on behalf of the Depositary with respect to any Receipt, the Depositary Shares evidenced by the Receipts, the Stock (or any beneficial interest therein) or any transaction referred to in Section 4.6, such taxes or charges shall be payable by the holder of the Receipts. Holders of Receipts shall also be obligated to make payments to the Depositary of certain charges and expenses, as provided in Section 5.7. Registration of transfer of any Receipt or any withdrawal of Stock and all money or other property, if any, represented by the Depositary Shares evidenced by such Receipt may be refused until any such payment due is made, and any dividends or other distributions may be withheld or any part of or all the Stock or other property represented by the Depositary Shares evidenced by such Receipt and not theretofore sold may be sold for the account of the holder thereof (after attempting by reasonable means to notify such holder prior to such sale), and such dividends or other distributions or the proceeds of any such sale may be applied to any payment of such charges or expenses, the holder of such Receipt remaining liable for any deficiency.

    SECTION 3.3     Warranty as to Stock. The Company hereby represents and warrants and each person so depositing Stock under this Deposit Agreement shall be deemed thereby to represent and warrant that the Stock and each certificate therefor, when issued, shall be duly authorized, validly issued, fully paid and nonassessable. Such representation and warranty shall survive the deposit of the Stock and the issuance of Receipts.

ARTICLE IV

THE DEPOSITED SECURITIES; NOTICES

    SECTION 4.1     Cash Distributions. Whenever the Depositary shall receive any cash dividend or other cash distribution on Stock, the Depositary shall, subject to Section 3.1 and 3.2, distribute to record holders of Receipts on the record date fixed pursuant to Section 4.4 such amounts of such dividend or distribution as are, as nearly as practicable, in proportion to the respective numbers of Depositary Shares evidenced by the Receipts held by such holders; provided that, if the Company or the Depositary shall be required to withhold and shall withhold from any cash dividend or other cash distribution in respect of the Stock an amount on account of taxes or as otherwise required by law, regulation or court process, the amount made available for distribution or distributed in respect of Depositary Shares shall be reduced accordingly. If the calculation of any such cash dividend or other cash distribution to be paid to any record holder on the aggregate number of Receipts held by such holder results in an amount that is a fraction of a cent, the amount the Depositary shall distribute to such record holder shall be rounded to the next highest whole cent, and upon request of the Depositary, the Company shall pay the additional amount to the Depositary for distribution.

    SECTION 4.2     Distributions Other than Cash, Rights, Preferences or Privileges. Whenever the Depositary shall receive any distribution other than cash, rights, preferences or privileges upon the Stock, the Depositary shall, subject to Sections 3.1 and 3.2, distribute to record holders of Receipts on the record date fixed pursuant to Section 4.4 such amounts of the securities or property received by it as are, as nearly as practicable, in proportion to the respective numbers of Depositary Shares evidenced by the Receipts held by such holders, in any manner that the Depositary may deem equitable and practicable for accomplishing such distribution. If in the opinion of the Depositary such distribution cannot be made proportionately among such record holders, or if for any other reason (including any requirement that the Company or the Depositary withhold an amount on account of taxes or as otherwise required by law, regulation or court process) the Depositary deems such distribution not to be feasible, the Depositary may adopt such method as it deems equitable and practicable for the purpose of effecting such distribution, including the sale (at public or private sale) of the securities or property thus received, or any part thereof, at such place or places and upon such terms as it may deem proper. The net proceeds of any such sale shall, subject to Sections 3.1 and 3.2, be distributed or made available for distribution, as the case may be, by the Depositary to record holders of Receipts as provided by Section 4.1 in the case of a distribution received in cash.

    SECTION 4.3     Subscription Rights, Preferences or Privileges. If the Company shall at any time offer or cause to be offered to the persons in whose names Stock is recorded on the books of the Company any rights, preferences or privileges to subscribe for or to purchase any securities or any rights, preferences or privileges of any other nature, such rights, preferences or privileges shall in each such instance be made available by the Depositary to the record holders of Receipts in such manner as the Depositary may determine, either by the issuance to such record holders of warrants representing such rights, preferences or privileges or by such other method as may be approved by the Depositary in its discretion with the approval of the Company; provided that, (i) if at the time of issue or offer of any such rights, preferences or privileges the Depositary determines that it is not lawful or (after consultation with the Company) not feasible to make such rights, preferences or privileges available to holders of Receipts by the issue of warrants or otherwise or (ii) if and to the extent so instructed by holders of Receipts who do not desire to exercise such rights, preferences or privileges, then the Depositary, in its discretion (with approval of the Company, if the Depositary has determined that it is not feasible to make such rights, preferences or privileges available), may, if applicable laws or the terms of such rights, preferences or privileges so permit, sell such rights, preferences or privileges at public or private sale, at such place or places and upon such terms as it may deem proper. The net proceeds of any such sale shall, subject to Sections 3.1 and 3.2, be distributed by the Depositary to the record holders of Receipts entitled thereto as provided by Section 4.1 in the case of a distribution received in cash.

If the securities to which such rights, preferences or privileges relate must be registered under the Securities Act in order to be offered or sold to holders of Receipts, the Company shall file a registration statement under the Securities Act with respect to such rights, preferences or privileges and securities promptly and shall use its best efforts and take all steps available to it to cause such registration statement to become effective sufficiently in advance of the expiration of such rights, preferences or privileges to enable such holders to exercise such rights, preferences or privileges. In no event shall the Depositary make available to the holders of Receipts any right, preference or privilege to subscribe for or to purchase any securities unless and until it has received written notice from the Company that such registration statement has become effective or that the offer and sale of such securities to such holders are exempt from registration under the Securities Act and the Company shall have provided to the Depositary an opinion of counsel to such effect. If any other action under the laws of any jurisdiction or any governmental or administrative authorization, consent or permit is required to permit such rights, preferences or privileges to be made available to holders of Receipts, the Company shall use its reasonable best efforts to take such action or obtain such authorization, consent or permit sufficiently in advance of the expiration of such rights, preferences or privileges to enable such holders to exercise such rights, preferences or privileges.

    SECTION 4.4     Notice of Dividends, etc.; Fixing Record Date for Holders of Receipts. Whenever any cash dividend or other cash distribution shall become payable or any distribution other than cash shall be made, or if rights, preferences or privileges shall at any time be offered, with respect to the Stock, or whenever the Depositary shall receive notice of any meeting at which holders of Stock are entitled to vote or of which holders of Stock are entitled to notice, or whenever the Depositary and the Company shall decide that it is appropriate, the Depositary shall in each such instance fix a record date (which shall be the same date as the record date fixed by the Company with respect to or otherwise in accordance with the terms of the Stock) for determining which holders of Receipts shall be entitled to receive such dividend, distribution, rights, preferences or privileges or the net proceeds of the sale thereof, or to give instructions for the exercise of voting rights at any such meeting, or shall be entitled to notice of such meeting or for any other appropriate reasons.

    SECTION 4.5     Voting Rights. Upon receipt of notice of any meeting at which the holders of Stock are entitled to vote, the Depositary shall, as soon as practicable thereafter, mail to the record holders of Receipts a notice which shall be provided by the Company that shall contain (i) such information as is contained in such notice of meeting and (ii) a statement that the holders may, subject to any applicable restrictions, instruct the Depositary as to the exercise of the voting rights pertaining to the amount of Stock represented by their respective Depositary Shares (including an express indication that instructions may be given to the Depositary to give a discretionary proxy to a person designated by the Company) and a brief statement as to the manner in which such instructions may be given. Upon the written request of the holders of Receipts on the relevant record date, the Depositary shall endeavor insofar as practicable to cast or cause to be cast, in accordance with the instructions set forth in such requests, the number of votes in respect of the Stock represented by the Depositary Shares evidenced by Receipts as to which voting instructions are received. The Company hereby agrees to take all reasonable action that may be deemed necessary by the Depositary to enable the Depositary to cast such votes or cause such votes to be cast. In the absence of instructions from the holder of a Receipt, the Depositary shall not cast any vote (but, at its discretion, may appear at any meeting with respect to such Stock unless directed to the contrary by the holders of all the Receipts) in respect of the Stock represented by the Depositary Shares evidenced by such Receipt.

    SECTION 4.6     Changes Affecting Deposited Securities and Reclassifications, Recapitalizations, etc. Upon any change in par or stated value or liquidation preference, split-up, combination or any other reclassification of the Stock, or upon any recapitalization, reorganization, merger or consolidation affecting the Company or to which it is a party, the Depositary may in its discretion with the approval of, and shall upon the instructions of, the Company, and (in either case) in such manner as the Depositary may deem equitable, (i) make such adjustments as are certified by the Company in the fraction of an interest represented by one Depositary Share in one share of Stock as may be necessary fully to reflect the effects of such change in par or stated value or liquidation preference, split-up, combination or other reclassification of the Stock, or of such recapitalization, reorganization, merger or consolidation, and (ii) treat any securities that shall be received by the Depositary in exchange for or upon conversion of or in respect of the Stock as new deposited securities so received in exchange for or upon conversion or in respect of such Stock. In any such case the Depositary may in its discretion, with the approval of the Company, execute and deliver additional Receipts or may call for the surrender of all outstanding Receipts to be exchanged for new Receipts specifically describing such new deposited securities. Anything to the contrary herein notwithstanding, holders of Receipts shall have the right from and after the effective date of any such change in par or stated value or liquidation preference, split-up, combination or other reclassification of the Stock or any such recapitalization, reorganization, merger or consolidation to surrender such Receipts to the Depositary with instructions to convert, exchange or surrender the Stock represented thereby only into or for, as the case may be, the kind and amount of shares of stock and other securities and property and cash into which the Stock represented by such Receipts might have been converted or for which such Stock might have been exchanged or surrendered immediately prior to the effective date of such transaction.

    SECTION 4.7     Delivery of Reports. The Depositary shall, at the expense of the Company, furnish to holders of Receipts any reports and communications received from the Company that are received by the Depositary as the holder of Stock.

    SECTION 4.8     List of Receipt Holders. Promptly upon request from time to time by, and at the expense of, the Company, the Depositary shall furnish to it a list, as of the most recent practicable date, of the names, addresses and holdings of Depositary Shares of all record holders of Receipts. The Company shall be entitled to receive such list twice annually without charge.

ARTICLE V

THE DEPOSITARY, THE DEPOSITARY'S AGENTS, THE REGISTRAR AND THE COMPANY

    SECTION 5.1     Maintenance of Offices, Agencies and Transfer Books by the Depositary; Registrar. Upon execution of this Deposit Agreement, the Depositary shall maintain at the Depositary's Office, facilities for the execution and delivery, registration and registration of transfer, surrender and exchange of Receipts, and at the offices of the Depositary's Agents, if any, facilities for the delivery, registration of transfer, surrender and exchange of Receipts, all in accordance with the provisions of this Deposit Agreement.

The Depositary shall keep books at the Depositary's Office for the registration and registration of transfer of Receipts, which books during normal business hours shall be open for inspection by the record holders of Receipts, provided that any such holder requesting to exercise such right shall certify to the Depositary that such inspection shall be for a proper purpose reasonably related to such person's interest as an owner of Depositary Shares evidenced by the Receipts.

The Depositary may close such books, at any time or from time to time, when deemed necessary or appropriate by it in connection with the performance of its duties hereunder.

The Depositary may, with the approval of the Company, appoint a Registrar for registration of the Receipts or the Depositary Shares evidenced thereby. If the Receipts or the Depositary Shares evidenced thereby or the Stock represented by such Depositary Shares shall be listed on one or more national stock exchanges, the Depositary shall appoint a Registrar (acceptable to the Company) for registration of such Receipts or Depositary Shares in accordance with any requirements of such exchange. Such Registrar (which may be the Depositary if so permitted by the requirements of any such exchange) may be removed and a substitute registrar appointed by the Depositary upon the request or with the approval of the Company. If the Receipts, such Depositary Shares or such Stock are listed on one or more other stock exchanges, the Depositary shall, at the request and at the expense of the Company, arrange such facilities for the delivery, registration, registration of transfer, surrender and exchange of such Receipts, such Depositary Shares or such Stock as may be required by law or applicable stock exchange regulation.

The Depositary may from time to time appoint Depositary's Agents to act in any respect for the Depositary for the purposes of this Deposit Agreement and may at any time appoint additional Depositary's Agents and vary or terminate the appointment of such Depositary's Agents. The Depositary shall notify the Company of any such action.

    SECTION 5.2     Prevention of or Delay in Performance by the Depositary, the Depositary's Agents, the Registrar or the Company. Neither the Depositary nor any Depositary's Agent nor the Registrar nor the Company shall incur any liability to any holder of any Receipt if by reason of any provision of any present or future law, or regulation thereunder, of the United States of America or of any other governmental authority or, in the case of the Depositary, the Depositary's Agent or the Registrar, by reason of any provision, present or future, of the Certificate or by reason of any act of God or war or other circumstance beyond the reasonable control of the relevant party, the Depositary, the Depositary's Agent, the Registrar or the Company shall be prevented, delayed or forbidden from, or subjected to any penalty on account of, doing or performing any act or thing that the terms of this Deposit Agreement provide shall be done or performed; nor shall the Depositary, any Depositary's Agent, the Registrar or the Company incur liability to any holder of a Receipt (i) by reason of any nonperformance or delay, caused as aforesaid, in the performance of any act or thing that the terms of this Deposit Agreement shall provide shall or may be done or performed or (ii) by reason of any exercise of, or failure to exercise, any discretion provided for in this Deposit Agreement except, in the case of any such exercise or failure to exercise discretion not caused as aforesaid, if caused by the gross negligence, willful misconduct or bad faith of the party charged with such exercise or failure to exercise.

    SECTION 5.3     Obligation of the Depositary, the Depositary's Agents, the Registrar and the Company. Neither the Depositary nor any Depositary's Agent nor the Registrar nor the Company assumes any obligation or shall be subject to any liability under this Deposit Agreement or any Receipt to holders of Receipts other than for its gross negligence, willful misconduct or bad faith in performing such duties as are specifically set forth in this Deposit Agreement.

Neither the Depositary nor any Depositary's Agent nor the Registrar nor the Company shall be under any obligation to appear in, prosecute or defend any action, suit or other proceeding in respect of the Stock, the Depositary Shares or the Receipts that in its opinion may involve it in expense or liability unless indemnity satisfactory to it against all expense and liability be furnished as often as may be required.

Neither the Depositary nor any Depositary's Agent nor the Registrar nor the Company shall be liable for any action or any failure to act by it in reliance upon the written advice of legal counsel or accountants, or information from any person presenting Stock for deposit, any holder of a Receipt or any other person believed by it in good faith to be competent to give such information. The Depositary, any Depositary's Agent, the Registrar and the Company may each rely and shall each be protected in acting upon any written notice, request, direction or other document believed by it to be genuine and to have been signed or presented by the proper party or parties.

The Depositary shall not be responsible for any failure to carry out any instruction to vote any of the shares of Stock or for the manner or effect of any such vote made, as long as any such action or non-action is in good faith. The Depositary undertakes, and any Registrar shall be required to undertake, to perform such duties and only such duties as are specifically set forth in this Agreement, and no implied covenants or obligations shall be read into this Agreement against the Depositary or any Registrar. The Depositary shall indemnify the Company and hold it harmless from any loss, liability or expense (including the reasonable costs and expenses of defending itself) actually incurred or suffered arising from acts performed or omitted by the Depositary, including when such Depositary acts as Registrar, or the Depositary's Agents in connection with this Agreement directly related to its or their negligence, willful misconduct or bad faith. The indemnification obligations of the Depositary set forth in this Section 5.3 shall survive any termination of this Agreement and any succession of any Depositary.

The Depositary, its parent, affiliates and subsidiaries, the Depositary's Agents, and the Registrar may own, buy, sell and deal in any class of securities of the Company and its affiliates and in Receipts or Depositary Shares or become pecuniarily interested in any transaction in which the Company or its affiliates may be interested or contract with or lend money to or otherwise act as fully or as freely as if it were not the Depositary, its parent, affiliate or subsidiary or the Depositary's Agent or the Registrar hereunder. The Depositary may also act as trustee, transfer agent or registrar of any of the securities of the Company and its affiliates.

It is intended that none of the Depositary, any Depositary's Agent or the Registrar, acting as the Depositary, the Depositary's Agent or the Registrar, as the case may be, shall be deemed to be an "issuer" of the securities under the federal securities laws or applicable state securities laws, it being expressly understood and agreed that the Depositary, any Depositary's Agent and the Registrar are acting only in a ministerial capacity as Depositary or Registrar for the Stock.

Neither the Depositary (or its officers, directors, employees or agents) nor any Depositary's Agent nor the Registrar makes any representation or has any responsibility as to the validity of the registration statements pursuant to which the Depositary Shares are registered under the Securities Act, the Stock, the Depositary Shares or the Receipts (except for its counter-signatures thereon) or any instruments referred to therein or herein or as to the correctness of any statement made therein or herein. The Depositary assumes no responsibility for the correctness of the description that appears in the Receipts, which can be taken as a statement of the Company summarizing certain provisions of this Deposit Agreement. Notwithstanding any other provision herein or in the Receipts, the Depositary makes no warranties or representations as to the validity, genuineness or sufficiency of any Stock at any time deposited with the Depositary hereunder or of the Depositary Shares, as to the validity or sufficiency of this Deposit Agreement, as to the value of the Depositary Shares or as to any right, title or interest of the record holders of Receipts in and to the Depositary Shares. The Depositary shall not be accountable for the use or application by the Company of the Depositary Shares or the Receipts or the proceeds thereof.

    SECTION 5.4     Resignation and Removal of the Depositary; Appointment of Successor Depositary. The Depositary may at any time resign as Depositary hereunder by delivering notice of its election to do so to the Company, such resignation to take effect upon the appointment of a successor Depositary and acceptance of such appointment by such successor as hereinafter provided.

The Depositary may at any time be removed by the Company by notice of such removal delivered to the Depositary, such removal to take effect upon the appointment of a successor Depositary and acceptance of such appointment by such successor as hereinafter provided. If at any time the Depositary acting hereunder shall resign or be removed, the Company shall, within 60 days after the delivery of the notice of resignation or removal, as the case may be, appoint a successor Depositary, which shall be a bank or trust company having its principal office in the United States of America and having a combined capital and surplus of at least $50,000,000. If no successor Depositary shall have been so appointed and have accepted appointment within 60 days after delivery of such notice, the resigning or removed Depositary may petition any court of competent jurisdiction for the appointment of a successor Depositary. Every successor Depositary shall execute and deliver to its predecessor and to the Company an instrument in writing accepting its appointment hereunder, and thereupon such successor Depositary, without any further act or deed, shall become fully vested with all the rights, powers, duties and obligations of its predecessor and for all purposes shall be the Depositary under this Deposit Agreement, and such predecessor, upon payment of all sums due it and on the written request of the Company, shall execute and deliver an instrument transferring to such successor all rights and powers of such predecessor hereunder, shall duly assign, transfer and deliver all right, title and interest in the Stock and any moneys or property held hereunder to such successor and shall deliver to such successor a list of the record holders of all outstanding Receipts and such records, books and other information in its possession relating thereto. Any successor Depositary shall promptly mail notice of its appointment to the record holders of Receipts.

Any corporation into or with which the Depositary may be merged, consolidated or converted shall be the successor of such Depositary without the execution or filing of any document or any further act, and notice thereof shall not be required hereunder. Such successor Depositary may authenticate the Receipts in the name of the predecessor Depositary or in the name of the successor Depositary.

SECTION 5.5 Corporate Notices and Reports. The Company agrees that it shall deliver to the Depositary, and the Depositary shall, promptly after receipt thereof transmit to the record holders of Receipts, in each case at the addresses recorded in the Depositary's books, copies of all notices and reports (including without limitation financial statements) required by law or by the rules of any national securities exchange upon which the Stock, the Depositary Shares or the Receipts are listed, to be furnished to the record holders of Receipts or that the Company otherwise determines to furnish. Such transmission shall be at the Company's expense and the Company shall provide the Depositary with such number of copies of such documents as the Depositary may reasonably request.

    SECTION 5.6     Indemnification by the Company. The Company shall indemnify the Depositary, any Depositary's Agent and the Registrar against, and hold each of them harmless from, any loss, liability or expense (including the reasonable costs and expenses of defending itself) that may arise out of acts performed or omitted in connection with this Agreement and the Receipts by the Depositary, any Registrar or any of their respective agents (including any Depositary's Agent), except for any liability arising out of negligence, willful misconduct or bad faith on the respective parts of any such person or persons. The obligations of the Company set forth in this Section 5.6 shall survive termination of this Agreement and any succession of any Depositary or Depositary's Agent.

    SECTION 5.7     Charges and Expenses. The Company shall pay all transfer and other taxes and governmental charges arising solely from the existence of the depositary arrangements provided for herein. The Company shall pay all charges of the Depositary in connection with the initial deposit of the Stock and the initial issuance of the Depositary Shares, all withdrawals of shares of the Stock by owners of Depositary Shares, and any redemption or exchange of the Stock. All other transfer and other taxes and governmental charges shall be at the expense of holders of Depositary Shares. If, at the request of a holder of Receipts, the Depositary incurs charges or expenses for which it is not otherwise liable hereunder, such holder shall be liable for such charges and expenses. All other charges and expenses of the Depositary and any Depositary's Agent hereunder (including, in each case, reasonable fees and expenses of counsel) incident to the performance of their respective obligations hereunder shall be paid upon prior consultation and agreement between the Depositary and the Company as to the amount and nature of such charges and expenses. The Depositary shall present its statement for charges and expenses to the Company at such intervals as the Company and the Depositary may agree.

    SECTION 5.8.     Deposit of Stock by the Company. The Company agrees with the Depositary that neither the Company nor any company controlled by the Company shall at any time deposit any Stock if such Stock is required to be registered under the provisions of the Securities Act and no registration statement is at such time in effect as to such Stock.

    SECTION 5.9     Tax Compliance. The Depositary, on its own behalf and on behalf of the Company shall comply with all applicable certification, information reporting and withholding (including "backup" withholding) requirements imposed by applicable tax laws, regulations or administrative practice with respect to (i) any payments made with respect to the Depositary Shares or (ii) the issuance, delivery, holding, transfer, redemption or exercise of rights under the Receipts or the Depositary Shares. Such compliance shall include, without limitation, the preparation and timely filing of required returns and the timely payment of all amounts required to be withheld to the appropriate taxing authority or its designated agent. The Company shall fully cooperate with the Depositary in fulfilling any and all duties set forth in this Section 5.9.

The Depositary shall comply with directions received from the Company with respect to the application of such requirements to particular payments or holders or in other particular circumstances and may for purposes of this Agreement rely on any such direction in accordance with the provisions of Section 5.3 hereof.

The Depositary shall maintain all appropriate records documenting compliance with such requirements and shall make such records available on request to the Company or to its authorized representatives.

ARTICLE VI

AMENDMENT AND TERMINATION

    SECTION 6.1     Amendment. The form of the Receipts and any provisions of this Deposit Agreement may at any time and from time to time be amended by agreement between the Company and the Depositary in any respect that they may deem necessary or desirable, provided that no such amendment (other than any change in the fees of any Depositary or Registrar, which shall not go into effect sooner than 30 days after notice thereof to the holders of the Receipts) that materially and adversely alters the rights of the holders of Receipts shall become effective unless such amendment is approved by the holders of at least a majority of the Depositary Shares then outstanding. Every holder of an outstanding Receipt at the time any such amendment becomes effective shall be deemed, by continuing to hold such Receipt, to consent and agree to such amendment and to be bound by the Deposit Agreement as amended thereby.

    SECTION 6.2     Termination. This Agreement may be terminated by the Company or the Depositary only after (i) all outstanding Depositary Shares have been redeemed pursuant to Section 2.8 or (ii) there shall have been made a final distribution in respect of the Stock in connection with any liquidation, dissolution or winding up of the Company and such distribution shall have been distributed to the holders of Receipts pursuant to Sections 4.1 or 4.2, as applicable.

If any Receipts shall remain outstanding after the date of termination of this Deposit Agreement, the Depositary thereafter shall discontinue the transfer of Receipts, shall suspend the distribution of dividends to the holders thereof and shall not give any further notices (other than notice of such termination) or perform any further acts under this Deposit Agreement, except that the Depositary shall continue to collect dividends and other distributions pertaining to the Stock, shall sell rights, preferences or privileges as provided in this Deposit Agreement and shall continue to deliver the Stock and any money and other property represented by Receipts upon surrender thereof by the holders thereof. At any time after the expiration of two years from the date of termination, the Depositary may sell Stock then held hereunder at public or private sale, at such places and upon such terms as it deems proper and may thereafter hold the net proceeds of any such sale, together with any money and other property held by it hereunder, without liability for interest, for the benefit, pro rata in accordance with their holdings, of the holders of Receipts that have not theretofore been surrendered. After making such sale, the Depositary shall be discharged from all obligations under this Deposit Agreement except to account for such net proceeds and money and other property.

Upon the termination of this Deposit Agreement, the Company shall be discharged from all obligations under this Deposit Agreement except for its obligations to the Depositary, the Registrar and any Depositary's Agent under Sections 5.6 and 5.7.

ARTICLE VII

MISCELLANEOUS

    SECTION 7.1     Counterparts. This Deposit Agreement may be executed in any number of counterparts, and by each of the parties hereto on separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed an original, but all such counterparts taken together shall constitute one and the same instrument.

    SECTION 7.2     Exclusive Benefit of Parties. This Deposit Agreement is for the exclusive benefit of the parties hereto, and their respective successors hereunder, and shall not be deemed to give any legal or equitable right, remedy or claim to any other person whatsoever.

    SECTION 7.3     Invalidity of Provisions. If one or more of the provisions contained in this Deposit Agreement or in the Receipts should be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein or therein shall not be affected, prejudiced or disturbed thereby.

    SECTION 7.4     Notices. Any and all notices to be given to the Company hereunder or under the Receipts shall be in writing and shall be deemed to have been duly given if personally delivered or sent by mail, or by telegram or facsimile transmission confirmed by letter, addressed to the Company at:

                                        [if by mail]

                                        UAL Corporation
                                        P.O. Box 66100
                                        Chicago, Illinois 60666
                                        Attention: Corporate Secretary

or

                                        [other delivery]

                                        UAL Corporation
                                        1200 Algonquin Road
                                        Elk Grove Township, Illinois 60007
                                        Attention: Corporate Secretary
                                        Facsimile No.: (708) 952-4683

or at any other address of which the Company shall have notified the Depositary in writing.

Any and all notices to be given to the Depositary hereunder or under the Receipts shall be in writing and shall be deemed to have been duly given if personally delivered or sent by mail, or by telegram or facsimile transmission confirmed by letter, addressed to the Depositary at the Depositary's Office, at:

                                        [if by mail]

                                        First Chicago Trust Company of New York
                                        P.O. Box 2565
                                        Mail Suite 4660
                                        Jersey City, New Jersey 07303-2565

                                        [if by hand or courier]

                                        First Chicago Trust Company of New York
                                        14 Wall Street, 8th Floor
                                        Suite 4680
                                        New York, New York 10005

or at any other address of which the Depositary shall have notified the Company in writing.

Any and all notices to be given to any record holder of a Receipt hereunder or under the Receipts shall be in writing and shall be deemed to have been duly given if personally delivered or sent by mail, or by telegram or facsimile transmission confirmed by letter, addressed to such record holder at the address of such record holder as it appears on the books of the Depositary, or if such holder shall have filed with the Depositary a written request that notices intended for such holder be mailed to some other address, at the address designated in such request.

Delivery of a notice sent by mail or by telegram or facsimile transmission shall be deemed to be effected at the time when a duly addressed letter containing the same (or a confirmation thereof in the case of a telegram or facsimile transmission) is deposited, postage prepaid, in a post office letter box. The Depositary or the Company may act upon any telegram or facsimile transmission received by it from the other or from any holder of a Receipt, notwithstanding that such telegram or facsimile transmission shall not subsequently be confirmed by letter or as aforesaid.

    SECTION 7.5     Appointment of Registrar. The Company hereby also appoints the Depositary as Registrar in respect of the Receipts and the Depositary hereby accepts such appointment.

    SECTION 7.6.     Depositary's Agents. The Depositary may from time to time appoint Depositary's Agents to act in any respect for the Depositary for the purposes of this Deposit Agreement and may at any time appoint additional Depositary's Agents and vary or terminate the appointment of such Depositary's Agents. The Depositary shall notify the Company prior to any such action. It is understood and agreed that the Company is hereby appointed as a Depositary Agent and may perform any and all of the obligations of the Depositary under this Agreement, except that it may not hold Stock that is to be delivered to the Depositary.

    SECTION 7.7     Holders of Receipts Are Parties. The holders of Receipts from time to time shall be parties to this Deposit Agreement and shall be bound by all of the terms and conditions hereof and of the Receipts by acceptance of delivery thereof.

    SECTION 7.8     GOVERNING LAW. THIS DEPOSIT AGREEMENT AND THE RECEIPTS AND ALL RIGHTS HEREUNDER AND THEREUNDER AND PROVISIONS HEREOF AND THEREOF SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

    SECTION 7.9     Inspection of Deposit Agreement. Copies of this Deposit Agreement shall be filed with the Depositary and the Depositary's Agent and shall be open to inspection during business hours at the Depositary's Office or respective offices of the Depositary's Agent, if any, by any holder of a Receipt.

    SECTION 7.10     Headings. The headings of articles and sections in this Deposit Agreement and in the form of the Receipt set forth in Exhibit A hereto have been inserted for convenience only and are not to be regarded as a part of this Deposit Agreement or the Receipts or to have any bearing upon the meaning or interpretation of any provision contained herein or in the Receipts.

    IN WITNESS WHEREOF, the Company and the Depositary have duly executed this Agreement as of the day and year first above set forth, and all holders of Receipts shall become parties hereto by and upon acceptance by them of delivery of Receipts issued in accordance with the terms hereof.

Attested by                                                                                                                           UAL CORPORATION
/s/ Francesca M. Maher                                                                                                        By /s/ James M. Guyette
Name: Francesca M. Maher                                                                                                 Name: James M. Guyette
Title Vice President - Law                                                                                                    Title: Executive Vice President
        and Corporate Secretary

Attested by                                                                                                                         FIRST CHICAGO TRUST
                                                                                                                                           COMPANY OF NEW YORK
/s/ John Ruocco                                                                                                                  By /s/ Craig Bloomfield
Name: John Ruocco                                                                                                             Name: Craig Bloomfield
Title: Administrator                                                                                                               Title: Account Officer
 
 
 

ANNEX A
CERTIFICATE FOR                                                                                                                                                                                         CUSIP 902549 708

DEPOSITARY SHARES TRANSFERABLE DEPOSITARY RECEIPT. This Certificate is transferable in New York, New York.

SEE REVERSE FOR CERTAIN DEFINITIONS

THE DEPOSITARY SHARES REPRESENTED BY THIS RECEIPT ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF FIRST CHICAGO TRUST COMPANY OF NEW YORK, THE DEPOSITARY HEREUNDER, OR OF ANY BANK OR NON-BANK DEPOSITORY OF UAL CORPORATION AND ARE NOT INSURED BY THE SAVINGS ASSOCIATION INSURANCE FUND OR THE BANK INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION, OR ANY OTHER GOVERNMENT AGENCY

UAL CORPORATION
A CORPORATION INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE

First Chicago Trust Company of New York, as Depositary (the "Depositary"), hereby certifies that

is the registered owner of ____________ DEPOSITARY SHARES ("Depositary Shares"), each Depositary Share representing a one one-thousandth (1/1,000) interest in one share of 121/4% Series B Preferred Stock, without par value, $25,000 liquidation value per share (the "Stock"), of UAL Corporation, a Delaware corporation (the "Corporation"), on deposit with the Depositary, subject to the terms and entitled to the benefits of the Deposit Agreement dated as of July 12, 1994 (the "Deposit Agreement"), between the Corporation and the Depositary. By accepting this Depositary Receipt, the holder hereof becomes a party to and agrees to be bound by all the terms and conditions of the Deposit Agreement. This Depositary Receipt shall not be valid or obligatory for any purpose or be entitled to any benefits under the Deposit Agreement unless it shall have been executed by the Depositary by the manual signature of a duly authorized officer or, if executed in facsimile by the Depositary, countersigned by a Registrar in respect of the Depositary Receipts by a duly authorized officer thereof.

Dated: ____________

                                                                                                                                                         Countersigned

                                                                                                                                                         FIRST CHICAGO TRUST COMPANY OF NEW YORK
                                                                                                                                                          Depositary and Registrar By:_____________________
                                                                                                                                                                                                       Authorized Officer

UAL CORPORATION

UAL CORPORATION SHALL FURNISH WITHOUT CHARGE TO EACH RECEIPT HOLDER WHO SO REQUESTS A COPY OF THE DEPOSIT AGREEMENT AND A STATEMENT OR SUMMARY OF THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION THAT ESTABLISHES THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIFIED RIGHTS OF THE 121/4% SERIES B PREFERRED STOCK AND EACH OTHER CLASS OF PREFERRED STOCK OR SERIES THEREOF THAT THE CORPORATION IS AUTHORIZED TO ISSUE AND OF THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCE AND/OR RIGHTS. ANY SUCH REQUEST SHOULD BE ADDRESSED TO UAL CORPORATION, 1200 ALGONQUIN ROAD, ELK GROVE TOWNSHIP, ILLINOIS 60007, ATTENTION: CORPORATE SECRETARY.

ABBREVIATIONS

The following abbreviations, when used in the inscription on the face of this Depositary Receipt, shall be construed as though they were written out in full according to applicable laws or regulations:

            TEN COM - as tenants in common
            TEN ENT - as tenants by the entireties
            JT TEN - as joint tenants with right of survivorship and not as tenants in common

            UNIF GIFT MIN ACT - ______ Custodian _______
                                                     (Cust)                     (Minor)

                                                     under Uniform Gifts to Minors Act______________
                                                                                                                 (State)

            UNIF TRAN MIN ACT - _______ Custodian (until age __)
                                                       (Cust)
                                                       _______ under Uniform Transfers
                                                      (Minor)
                                                      to Minors Act___________________
                                                                                 (State)

Additional abbreviations may also be used though not in the above list. For value received, ________________________ hereby sell(s), assign(s) and transfer(s) unto

PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE

PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE

______________________________Depositary Shares represented by the within Depositary Receipt, and do(es) hereby irrevocably constitute and appoint ______________________________ Attorney to transfer the said Depositary Shares on the books of the within named Depositary with full power of substitution in the premises.

Dated:                                                                                               Signature: ______________________________

                                                                                                          NOTICE: The signature to this assignment must correspond with the name as written upon
                                                                                                          the face of this Depositary Receipt in every particular, without alteration or enlargement or any
                                                                                                          change whatever.

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</DOCUMENT> AMENDED AND RESTATED <DOCUMENT>
<TYPE> EX-10.1
<TEXT>
<HTML>

Exhibit 10.1

 
 
 
 
 

AMENDED AND RESTATED

AGREEMENT AND PLAN OF RECAPITALIZATION
 
 

dated as of
 
 

March 25, 1994
 
 

among


       UAL CORPORATION
    and  
AIR LINE PILOTS ASSOCIATION,

INTERNATIONAL


and  
INTERNATIONAL ASSOCIATION OF MACHINISTS

AND AEROSPACE WORKERS
 
 
 
 
 
 
 

TABLE OF CONTENTS



 
 
 
 
 

ARTICLE I THE RECAPITALIZATION
Page
Section 1.1  The Recapitalization
1
Section 1.2 Reclassification of Old Shares
1
Section 1.3 Redemption
2
Section 1.4 Pricing of Specified Securities
2
Section 1.5 Surrender and Exchange
4
Section 1.6 Other Issuances
7
Section 1.7 Stock Options
12
Section 1.8 Convertible Company Securities
13
Section 1.9 Form of Recapitalization Consideration
13
Section 1.10 Addition ESOP Shares
14
Section 1.11 Underwriting Alternative
15

 
 
 
 
ARTICLE II THE COMPANY AND UNITED
Page
Section 2.1 Certificate of Incorporation
16
Section 2.2 Bylaws
16
Section 2.3 Directors and Officers
17
Section 2.4 United
17

 
 
 
 
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Page
Section 3.1 Corporate Existence and Power
17
Section 3.2 Corporate Authorization
18
Section 3.3 Governmental Authorization
18
Section 3.4 Non-Contravention
19
Section 3.5 Capitalization
19
Section 3.6 Subsidiaries
20
Section 3.7 Securities and Exchange Commission ("SEC") Filings
21
Section 3.8 Financial Statements
21
Section 3.9 Disclosure Documents
21
Section 3.10 Absence of Certain Changes
22
Section 3.11 Finders' Fees
22
Section 3.12 Board Action
22
Section 3.13 Securities
22
Section 3.14 Opinion of Financial Advisers
22
Section 3.15 Vote Required
23
Section 3.16 Limitations
23
Section 3.17 Compliance with Status Quo
23
Section 3.18 Rights Agreement
23

 
 
 
 
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE UNIONS
Page
Section 4.1 Existence and Power
23
Section 4.2 Authorization
23
Section 4.3 Governmental Authorization
23
Section 4.4 Non-Contravention
24
Section 4.5 Disclosure Documents
24
Section 4.6 Finders' Fees
24
Section 4.7 Limitations
24

 
 
 
 
ARTICLE V COVENANTS OF THE COMPANY
Page
Section 5.1 Conduct of the Company
24
Section 5.2 Stockholder Meeting; proxy Material
26
Section 5.3 Access
26
Section 5.4 Other Potential Transactions
27
Section 5.5 Notices of Certain Events
27
Section 5.6 Amendment of Rights Agreement
27
Section 5.7 Employee Benefit Plans
28
Section 5.8 Labor Agreements
28
Section 5.9 Solvency Letter
29
Section 5.10 Other Transaction Documents
29
Section 5.11 Certain Agreements
29

 
 
 
 
ARTICLE VI COVENANTS OF EACH UNION
Page
Section 6.1 Confidentiality
30
Section 6.2 Labor Agreements
31
Section 6.3 No Public Director Nominations
31
Section 6.4 Independent Director Vacancies
31

 
 
 
 
ARTICLE VII COVENANTS OF EACH OF THE UNIONS AND THE COMPANY
Page
Section 7.1 Best Efforts
32
Section 7.2 Certain Filings
32
Section 7.3 Participation
32

 
 
 
 
ARTICLE VIII CONDITIONS TO THE RECAPITALIZATION
Page
Section 8.1 Conditions to the Obligations of Each Party
33
Section 8.2 Conditions to the Obligations of Each of the Unions
34
Section 8.3 Conditions to the Obligations of the Company
34

 
 
 
 
ARTICLE IX TERMINATION
Page
Section 9.1 Termination
35
Section 9.2 Termination of Status Quo
36
Section 9.3 Effect of Termination
36

 
 
 
 
ARTICLE X MISCELLANEOUS
Page
Section 10.1 Notices
37
Section 10.2 Survival
38
Section 10.3 Amendments; No Waivers
39
Section 10.4 Fees and Expenses; Indemnification
39
Section 10.5 Successors and Assigns
42
Section 10.6 Governing Law
42
Section 10.7 Counterparts; Effectiveness
42
Section 10.8 Parties in Interest
42
Section 10.9 Specific Performance
42
Section 10.10 Entire Agreement
43

 

SCHEDULES



 
 
 

Schedule 1.1 Restated Certificate of Incorporation of the Company
Schedule 1.3(a) Deposit Agreement
Schedule 1.3(b) Officers' Certificate Regarding Indenture for the Debentures
Schedule 1.6(a)(i) Trust Agreement for the ESOP Trust
Schedule 1.6(a)(ii) ESOP
Schedule 1.6(a)(iii) Supplemental ESOP
Schedule 1.6 (a)(iv) Trust Agreement for the Supplemental ESOP Trust
Schedule 1.6(d) ESOP Stock Purchase Agreement and Amendment
Schedule 1.6(m) Class I Preferred Stock Subscription Agreement
Schedule 1.6(n) Class Pilot MEC Preferred Stock Subscription Agreement
Schedule 1.6(o) Class IAM Preferred Stock Subscription Agreement
Schedule 1.6(p)(i) Class SAM Preferred Stock Subscription Agreement
Schedule 1.6(p)(ii) SAM Director Selection Process
Schedule 1.10 Adjusted Percentage Table
Schedule 2.2 Restated Bylaws of the Company
Schedule 2.3(i) Directors of the Company Resigning at Effective Time
Schedule 2.3(ii) New Directors of the Company
Schedule 2.4 Provision to be Inserted in United Air Lines, Inc. Certificate
Schedule 3.2(i) UAL 1981 Incentive Stock Program Amendment
Schedule 3.2(ii) UAL 1988 Restricted Stock Plan Amendment
Schedule 3.2(iii) UAL Incentive Compensation Plan Amendment
Schedule 3.4 Contraventions and Conflicts
Schedule 3.6(c) CRS Company Disclosure
Schedule 3.17 Status Quo Matters
Schedule 3.18 Rights Amendment
Schedule 5.1(i) Conduct of the Company
Schedule 5.1(ii) IAM Job Security Provisions
Schedule 5.1(iii) Existing Employee Stock Purchase Policies of the Company
Schedule 5.8(i) ALPA Collective Bargaining Agreement
Schedule 5.8(ii) IAM Collective Bargaining Agreement
Schedule 5.8(iii) Employment Terms for Employees Performing the Functions of the Company's Salaried and Management Employees
Schedule 5.9 Solvency Letter
Schedule 5.10(i) Class I Preferred Stock Shareholders Agreement
Schedule 5.10(ii) Class SAM Director Shareholders Agreement
Schedule 5.10(iii) First Refusal Agreement
Schedule 6.1 Confidentiality Statement

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

AMENDED AND RESTATED

AGREEMENT AND PLAN OF RECAPITALIZATION





AGREEMENT AND PLAN OF RECAPITALIZATION, dated as of March 25, 1994, as amended and restated (the "Agreement"), among UAL Corporation, a Delaware corporation (the "Company"), Air Line Pilots Association, International ("ALPA"), pursuant to its authority as the collective bargaining representative for the crafts or class of pilots employed by United Air Lines, Inc., a Delaware corporation and a wholly owned subsidiary of the Company ("United"), and International Association of Machinists and Aerospace Workers ("IAM" and, together with ALPA, the "Unions"), pursuant to its authority as the collective bargaining representative for the crafts or classes of mechanics and related employees, ramp and stores employees, food service employees, dispatchers and security officers employed by United.
 
 

In consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows:
 
 

ARTICLE I   THE RECAPITALIZATION   SECTION 1.1   The Recapitalization.   Pursuant to Section 242 of the General Corporation Law of the State of Delaware ("Delaware Law"), as soon as practicable after satisfaction or, to the extent permitted hereunder, waiver of all conditions set forth in Article VIII, the Company will file an amended and restated certificate of incorporation in form and substance as set forth on Schedule 1.1 (the "Restated Certificate") with the Secretary of State of the State of Delaware. Except as otherwise provided herein, the transactions contemplated by this Agreement (collectively, the "Recapitalization") shall become effective at such time as the Restated Certificate is duly filed with the Secretary of State of the State of Delaware or at such later time as may be mutually agreed upon by the Company and each of the Unions and as is specified in the Restated Certificate (the "Effective Time").
 
  SECTION 1.2    Reclassification of Old Shares. (a) At the Effective Time, subject to Section 1.5(f), each share of common stock, par value $5.00 per share, of the Company ("Common Stock") outstanding immediately prior to the Effective Time, including each share of vested and unvested restricted stock issued pursuant to the UAL 1988 Restricted Stock Plan, together with each share of Common Stock held by the Company as treasury stock or owned by any wholly-owned subsidiary of the Company which is not cancelled immediately prior to the Effective Time pursuant to Section 1.2(b) (each of the foregoing being referred to herein as an "Old Share"), shall, without any further action on the part of the holder thereof, be reclassified (the "Reclassification") as, and converted into:
 
  (i) 0.5 of a share of common stock, par value $0.01 per share, of the Company (the "New Shares") having the rights, powers and privileges described in the Restated Certificate; and
 
 

(ii) one one-thousandth of a share of Series D Redeemable Preferred Stock of the Company, without par value (the "Redeemable Preferred Stock"), having the rights, powers and privileges described in the Restated Certificate.
 
 

If the Underwriting Alternative (as defined in Section 1.11 hereof) has been elected and consummated with respect to the Depositary Shares (as defined), the Series A Debentures (as defined) and/or the Series B Debentures (as defined), the terms of the Redeemable Preferred Stock will be modified as provided in the Restated Certificate.
 
 

(b) Each Old Share held by the Company as treasury stock or owned by any wholly-owned subsidiary of the Company immediately prior to the Effective Time (the "Treasury Shares"), up to a maximum of 1,000,000 Treasury Shares (the "Retained Treasury Shares"), shall be reclassified and converted in accordance with Section 1.2(a), with all Treasury Shares in excess of 1,000,000 being surrendered for cancellation immediately prior to the Effective Time and no payment shall be made with respect thereto. Immediately following the Effective Time, the Company and each of its wholly owned Subsidiaries (as defined in Section 3.6) shall surrender for cancellation the Redeemable Preferred Stock received upon Reclassification of the Retained Treasury Shares and no payment shall be made in respect thereof.
 
 

SECTION 1.3   Redemption.   Following the Effective Time, all outstanding shares of Redeemable Preferred Stock shall, to the extent of funds legally available therefor and subject to the provisions of the Restated Certificate, be redeemed immediately after issuance according to the terms thereof (the "Redemption"). Pursuant to the Redemption, the holders of Redeemable Preferred Stock, if any, shall be entitled to receive, in respect of each one one-thousandth of a share of Redeemable Preferred Stock, subject to the terms thereof and Section 1.5(f):
 
 

(i) $25.80 in cash; (ii) either (a) depositary shares (the "Depositary Shares") representing interests in $31.10 liquidation preference of Series B Preferred Stock of the Company, without par value (the "Public Preferred Stock"), or (b) if the Underwriting Alternative with respect to the Depositary Shares is consummated, a cash payment equal to the Depositary Share Proceeds Amount (as defined);
 
 

(iii) either (a) $15.55 principal amount of Series A Senior Unsecured Debentures due 2004 of United issued as provided below (the "Series A Debentures") or (b) if the Underwriting Alternative with respect to the Series A Debentures is consummated, a cash payment equal to the Series A Debenture Proceeds Amount (as defined); and
 
 

(iv) either (a) $15.55 principal amount of Series B Senior Unsecured Debentures due 2014 of United issued as provided below (the "Series B Debentures" and, together with the Series A Debentures, collectively, the "Debentures") or (b) if the Underwriting Alternative with respect to the Series B Debentures is consummated, a cash payment equal to the Series B Debenture Proceeds Amount (as defined).
 
 

The Depositary Shares shall be issued pursuant to a Deposit Agreement substantially in the form set forth on Schedule 1.3(a) (the "Deposit Agreement"). The Depositary Shares shall be issued only in denominations of $25.00 of liquidation preference and integral multiples thereof. The Public Preferred Stock shall have the rights, powers and privileges described in the Restated Certificate, which shall include a per share liquidation preference of $25,000. The Debentures shall be issued pursuant to the Indenture, dated as of July 1, 1991, between United arid the Bank of New York, and the Officers' Certificate (the "Officers' Certificate") in form and substance as set forth on Schedule 1.3(b) (collectively, the "Indenture"). Such Indenture shall be qualified under the Trust Indenture Act of 1939, and the rules and regulations promulgated thereunder (the "TIA"). The Debentures shall be issued only in denominations of $100 and integral multiples thereof or, if the Underwriting Alternative with respect to either series of Debentures is consummated at or prior to the Effective Time and the Company so elects, denominations of $1,000 and integral multiple thereof, in which case conforming changes shall be made to this Agreement and the attachments hereto to take into account such greater denominations with respect to such series.
 
  SECTION 1.4   Pricing of Specified Securities. (a) The parties have agreed that the respective interest and dividend rates that would be required to be applied to the Debentures and the Public Preferred Stock, respectively, in order for the Debentures and the Depositary Shares to trade at 100% of aggregate principal amount (in the case of the Debentures) or at 100% of aggregate liquidation preference (in the case of the Depositary Shares) (collectively "par") as of the close of business, New York time, on the Trading Day (as defined below) immediately preceding the date hereof (assuming for such purpose that the Debentures and the Depositary Shares were fully distributed on such date) would be as follows (the "Initial Pricing"): Series A Dentures--9.00%, Series B Debentures,--9.70% and Public Preferred Stock-10.25%. Each of the Series A Debentures, the Series B Debentures and the Public Preferred Stock is referred to herein as a "Specified Security" and, collectively, as the "Specified Securities."
 
 

(b) On the Trading Day immediately preceding the Announcement Date, CS First Boston Corporation ("First Boston") (in consultation with Lazard Freres & Co. ("hazard")) on behalf of the Company and Keilin & Bloom (or such other investment banking firm as may be reasonably selected by the Unions) on behalf of the Unions (the "Primary Banking Firms") shall seek to mutually determine the interest or dividend rates, as applicable (the "Applicable Rate"), that each of the Specified Securities should bear in order for such Specified Security (in the case of the Debentures) or the Depositary Shares (in the case of the Public Preferred Stock) to trade at par as of the close of business, New York time, on the Trading Day immediately preceding the Announcement Date, assuming both that an Underwriting Alternative with respect thereto had and had not been elected and further assuming in each such case that such Specified Security or Depositary Shares, as the case may be, were fully distributed on such Trading Day. If the Primary Banking Firms agree on the Applicable Rate with respect to a Specified Security, such Specified Security shall bear such rate and such rate shall be the Applicable Rate with respect to such Specified Security. If the Primary Banking Firms are unable to agree on the Applicable Rate with respect to a Specified Security, then (i) Salomon Brothers Inc, or such other firm as agreed in writing by the Primary Banking Firms (the "Deadlock Firm"), shall render its opinion, on the Trading Day immediately preceding the Announcement Date, as to the Applicable Rate with respect to such Specified Security or Securities, and (ii) the Applicable Rate with respect to such Specified Security or Securities shall be the average of the two closest rates specified in the opinions of the Primary Banking Firms and the Deadlock Firm, rounded to the nearest one one-hundredth of a percent in the case of the interest rate for the Debentures and to the nearest one one-hundredth of a percent in the case of the dividend rate for the Public Preferred Stock; provided however, that, in no event shall the Applicable Rate with respect to the Specified Securities exceed (x) in the case of the Series A Debentures, 10.125%; (y) in the case of the Series B Debentures, 10.825%; and (z) in the case of the Public Preferred Stock, 11.375% (the "Maximum Pricing").
 
 

(c) On the Announcement Date, the Company shall issue a press release setting forth the Applicable Rate for each of the Specified Securities, which press release shall be distributed to major wire services and news agencies, and shall confirm that the Company Stockholder Meeting (as defined in Section 5.2) will be held as scheduled, and shall contain such other information as may be mutually agreed upon by the Company and the Unions.
 
 

(d) "Announcement Date" shall mean a Trading Day which shall be not fewer than five calendar days nor greater than ten calendar days preceding the date of the Company Stockholder Meeting, such date to be disclosed to the Unions not fewer than ten calendar days prior thereto. "Trading Day" shall mean a day on which the New York Stock Exchange. Inc. ("NYSE") is open for the transaction of business.
 
 

(e) The parties agree that the Initial Pricing of the Debentures (and the Maximum Pricing for the Debentures) was based on, and the Applicable Rates will be based on, the assumption that the Debentures will not be callable prior to their respective stated maturities. The parties further agree that the Unions may request, not less than seven days prior to the Announcement Date, that, in the event that the Underwriting Alternative is not consummated with respect to either or both series of Debentures, either or both of the series of Debentures shall be callable prior to stated maturity. If so requested, immediately following the establishment of the Applicable Rates and prior to the Announcement Date, an additional procedure (based on the procedure set forth in Section 1.4(b)) shall be implemented whereby the Primary Banking Firms shall establish the incremental increase in pricing resulting from the addition of the call feature on either or both of the series of Debentures, as the case may be, above the Applicable Rate, with any disagreement to be resolved in accordance with the procedures set forth in Section 1.4(b) involving the Deadlock Firm; provided however, that the Unions may withdraw the request for a call feature at any time up to the issuance of the press release in accordance with subsection 1.4(c).
 
 

(f) Notwithstanding any provision of this Agreement or the Schedules or Exhibits hereto to the contrary, if the Underwriting Alternative with respect to the Depositary Shares or either series of Debentures is consummated, (i) with respect to the securities that are subject to the Underwriting Alternative, the Company and United, in consultation with the underwriters, may set the record dates and payment dates (quarterly and semiannually, respectively) for the Public Preferred Stock (to which the Depositary Shares relate) and the Debentures, may select a regular interest payment date in the year 2004 as the maturity date for the Series A Debentures and may set a regular interest payment date in the year 2014 as the maturity date for the Series B Debentures and (ii) the following provisions of this subsection 1.4(f), with respect to the securities that are subject to the Underwriting Alternative, shall be null and void. If the Company causes a regular quarterly dividend to be paid on both the Public Preferred Stock and the Prior Preferred Stock (as defined below) in respect of any regular quarterly dividend payment date, then the Company shall cause the quarterly record date (and corresponding dividend payment date) for the payment of such dividend on the Public Preferred Stock to be the same as the quarterly record date (and corresponding dividend payment date) for the payment of such dividend on the Series A 6.25% Convertible Preferred Stock of the Company (the "Prior Preferred Stock"). With respect to a regular quarterly dividend payment date for the Public Preferred Stock and the Prior Preferred Stock that coincides with a regular semi-annual interest payment date for the Debentures, if the Company causes (i) a regular quarterly dividend to be paid on the Public Preferred Stock or the Prior Preferred Stock, or both, in respect of any such quarterly dividend payment date and (ii) a regular semi-annual installment of interest to be paid on the Debentures in respect of such regular semi-annual interest payment date, then the Company shall cause the semi-annual record date (and corresponding interest payment date) for such payment of interest on the Debentures to be the same as the quarterly record date (and corresponding dividend payment date) for the payment of such dividend on the Public Preferred Stock or the Prior Preferred Stock or both, as the case may be.
 
 

SECTION 1.5    Surrender and Exchange. (a) Prior to the Effective Time, the Company shall enter into an agreement (the "Exchange Agent Agreement") with First Chicago Trust Company of New York, as exchange agent (the "Exchange Agent"), for the purpose of exchanging certificates representing Old Shares for the Recapitalization Consideration (defined below). The Company will make available to the Exchange Agent, as needed, in trust for the benefit of holders of Old Shares, the Recapitalization Consideration (as defined herein) to be distributed in respect of the Old Shares (without regard to Section 1.5(f)). The cash portion of the Recapitalization Consideration shall be invested by the Exchange Agent as directed by the Company (so long as such directions do not impair the rights of holders of Old Shares), in direct obligations of the United States, obligations for which the full faith and credit of the United States is pledged to provide for the payment of principal and interest, commercial paper rated of the highest quality by Moody's Investors Services, Inc. and Standard & Poor's Corporation or certificates of deposit issued by a commercial bank having at least $10,000,000,000 in assets (collectively, "Permitted Securities"), and any net earnings with respect thereto shall be paid to the Company. The Exchange Agent shall, pursuant to irrevocable instructions, make the distributions referred to in Section 1.5(b) and the Recapitalization Consideration held by the Exchange Agent shall not be used for any other purpose. As soon as practicable after the Effective Time, the Company will send, or cause the Exchange Agent to send and otherwise make available, to each holder of Old Shares at the Effective Time a letter of transmittal, in form reasonably satisfactory to the Unions and the Company, for use in such exchange. Such letter of transmittal shall advise such holder of the effectiveness of the Recapitalization, whether or not any portion of the Underwriting Alternative has been consummated and, if consummated, the expected amount of the Proceeds Amount, and the procedures for surrendering to the Exchange Agent certificates representing Old Shares for exchange into Recapitalization Consideration and shall specify that the delivery shall be effected, and the risk of loss and title shall pass, only upon proper delivery of the certificates representing Old Shares to the Exchange Agent.
 
 

(b) Each holder of Old Shares that have been converted into New Shares and Redeemable Preferred Stock, upon surrender to the Exchange Agent of an Old Certificate or Certificates, together with a properly completed letter of transmittal covering such Old Shares, will be entitled to receive in respect of such Old Shares, subject to Section 1.5(f):
 
 

(i) a certificate or certificates representing 0.5 of a New Share for each Old Share formerly represented by such Old Certificate or Certificates in accordance with Section 1.2;
 
 

(ii) either (a) a depositary receipt or receipts representing Depositary Shares representing interests in $31.10 liquidation preference of Public Preferred Stock for each Old Share formerly represented by such Old Certificate or Certificates in respect of the Redemption or (b) if the Underwriting Alternative with respect to the Depositary Shares is consummated, a cash payment equal to the Depositary Share Proceeds Amount in respect of the Redemption;
 
 

(iii) either (a) $15.55 principal amount of Series A Debentures for each Old Share formerly represented by such Old Certificate or Certificates in respect of the Redemption or (b) if the Underwriting Alternative with respect to the Series A Debentures is consummated, a cash payment equal to the Series A Debenture Proceeds Amount in respect of the Redemption;
 
 

(iv) either (a) $15.55 principal amount of Series B Debentures for each Old Share formerly represented by such Old Certificate or Certificates in respect of the Redemption or (b) if the Underwriting Alternative with respect to the Series B Debentures is consummated, a cash payment equal to the Series B Debenture Proceeds Amount in respect of the Redemption; and
 
 

(v) a cash payment of $25.80 for each Old Share formerly represented by such Old Certificate or Certificates in respect of the Redemption (the cash and/or securities distributed pursuant to clauses (i) through (v), collectively, the "Recapitalization Consideration").
 
 

Until so surrendered, each Old Certificate or Certificates formerly representing Old Shares shall, after the Effective Time, represent for all purposes only the right to receive such Recapitalization Consideration.
 
 

(c) If any portion of the Recapitalization Consideration is to be paid to a person other than the registered holder of the Old Shares formerly represented by the Old Certificate or Certificates so surrendered in exchange therefor, it shall be a condition to such payment that the Old Certificate or Certificates so surrendered shall be properly endorsed or otherwise be iii proper form for transfer and that the person requesting such payment shall pay to the Exchange Agent any transfer or other taxes required as a result of such payment to a person other than the registered holder of such Old Shares or establish to the satisfaction of the Exchange Agent that such tax has been paid or is not payable.
 
 

(d) In the event any Old Certificate or Certificates shall have been lost, stolen or destroyed, upon the making of an affidavit to that fact by the person claiming such certificate to be lost, stolen or destroyed, the Company will issue in exchange for such lost, stolen or destroyed Old Certificate or Certificates the Recapitalization Consideration deliverable in respect thereof in accordance with this Article I. When authorizing such issue of the Recapitalization Consideration in exchange therefor, the Company may, in its discretion and as a condition precedent to the issuance there, require the person claiming ownership of such lost, stolen or destroyed Old Certificate or Certificates to give the Company a bond in such sum as it may direct, or otherwise indemnify the Company in a manner satisfactory to it, against any claim that may be made against the Company with respect to the Old Certificate or Certificates alleged to have been lost, stolen or destroyed.
 
 

(e) After the Effective Time, there shall be no further registration of transfers of Old Shares. If, after the Effective Time, Old Certificate or Certificates are presented to the Company or its transfer agent, such Old Certificate or Certificates shall be canceled and exchanged for the Recapitalization Consideration provided for, and in accordance with the procedures set forth, in this Article I. All Recapitalization Consideration to be distributed pursuant to this Section 1.5, if unclaimed on the first anniversary of the Effective Time, shall be released and paid by the Exchange Agent to the Company, after which time persons entitled thereto may look, subject to applicable escheat and other similar laws, only to the Company for payment thereof.
 
 

(f) Notwithstanding anything to the contrary contained in this Agreement:
 
 

(i) No certificates, debentures or scrip representing fractional New Shares, depositary receipts representing fractional Depositary Shares (based upon each whole Depositary Share representing interests in $25 liquidation preference of Public Preferred Stock) or fractional Debentures shall be issued as part of the Recapitalization, and such fractional interests will not entitle the beneficial or record owner thereof to any rights of a stockholder or creditor of the Company.
 
 

(ii) As promptly as practicable following the Effective Time, the Exchange Agent shall determine the excess of (x) the number of whole New Shares into which all of the Old Shares will be reclassified and converted pursuant to Section 1.2 over (y) the aggregate number of whole New Shares to be distributed to holders of Old Shares pursuant to Section 1.5 (such excess being referred to herein as the "Excess New Shares"); and if the Underwriting Alternative has not been elected with respect to the Depositary Shares, the Series A Debentures and/or the Series B Debentures, as the case may be, or, if elected has not been consummated for any reason at or prior to the Effective Time, the Exchange Agent shall also determine, as appropriate, (I) the excess of (a) the number of whole Depositary Shares representing interests in shares of Public Preferred Stock issuable upon Redemption in accordance with Article FOURTH, Part I.D, Section 6 of the Restated Certificate with respect to the Redeemable Preferred Stock into which the Old Shares will be reclassified and converted pursuant to Section 1.2(a) over (b) the aggregate number of whole Depositary Shares representing interests in shares of Public Preferred Stock to be distributed to holders of Old Shares pursuant to Section 1.5 (such excess being referred to herein as the "Excess Depositary Shares"); (II) the excess of (a) the number of whole Series A Debentures issuable upon Redemption in accordance with Article FOURTH, Part I.D, Section 6 of the Restated Certificate with respect to the Redeemable Preferred Stock into which the Old Shares will be reclassified and converted pursuant to Section 1.2(a) over (b) the aggregate number of whole Series A Debentures to be distributed to holders of Old Shares pursuant to Section 1.5 (such excess being referred to herein as the "Excess Series A Debentures"); and/or (III) the excess of (a) the number of whole Series B Debentures issuable upon Redemption in accordance with Article FOURTH, Part I.D, Section 6 of the Restated Certificate with respect to the Redeemable Preferred Stock into which the Old Shares will be reclassified and converted pursuant to Section 1.2(a) over (b) the aggregate number of whole Series B Debentures to be distributed to holders of Old Shares pursuant to Section 1.5 (such excess being referred to herein as the "Excess Series B Debentures" and, together with the Excess New Shares, the Excess Depositary Shares and/or the Excess Series A Debentures, as applicable, collectively, the "Excess Securities"). As soon after the Effective Time as practicable taking into account market conditions based on consultations with the Company, the Exchange Agent, as agent for the holders of Old Shares, shall sell the Excess Securities at then prevailing prices on the principal national securities exchange, automated quotation system or other trading market (the "Applicable Exchange") on which the relevant Excess Securities are listed or admitted for trading (which shall be the NYSE in the case of the New Shares), all in the manner provided in paragraph (iii) of this Section.
 
 

(iii) The sale of the Excess Securities by the Exchange Agent shall be executed on an Applicable Exchange through one or more member firms of such Applicable Exchange and shall be executed in round lots to the extent practicable. Until the net proceeds of such sale or sales have been distributed to the holders of Old Shares, the Exchange Agent will hold such proceeds in trust for the holders of Old Shares (the "Excess Securities Trust"). Until distributed as provided below, the Excess Securities Trust shall be invested, as directed by the Company, in Permitted Securities and any net earnings with respect thereto shall be paid to the Company. The Company shall pay all commissions, transfer taxes and other out-of-pocket transaction costs, including the expenses and compensation of the Exchange Agent, incurred in connection with such sale of the Excess Securities. The Exchange Agent shall determine the portion of the Excess Securities Trust to which each holder of Old Shares shall be entitled, if any, by (w) multiplying the amount of the aggregate net proceeds comprising the Excess Securities Trust attributable to the sale of Excess New Shares by a fraction, the numerator of which is the amount of the fractional New Share interest to which such holder of Old Shares would be entitled but for the application of Section 1.5(f)(i) and the denominator of which is the aggregate amount of fractional New Share interests to which all holders of Old Shares would be entitled but for the application of Section 1.5(f)(i); and if the Underwriting Alternative has not been elected with respect to the Depositary Shares, the Series A Debentures and/or the Series B Debentures, as the case may be, or, if elected has not been consummated for any reason at or prior to the Effective Time, as appropriate, by (x) multiplying the amount of the aggregate net proceeds comprising the Excess Securities Trust attributable to the sale of Excess Depositary Shares by a fraction, the numerator of which is the amount of the fractional Depositary Share interest to which such holder of Old Shares would be entitled but for the application of Section 1.5(t)(i) and the denominator of which is the aggregate amount of fractional Depositary Share interests to which all holders of Old Shares would be entitled but for the application of Section 1.5(f)(i); (y) multiplying the amount of the aggregate net proceeds comprising the Excess Securities Trust attributable to the sale of Excess Series A Debentures by a fraction, the numerator of which is the amount of the fractional Series A Debenture interest to which such holder of Old Shares would be entitled but for the application of Section 1.5(f)(i) and the denominator of which is the aggregate amount of fractional Series A Debenture interests to which all holders of Old Shares would be entitled but for the application of Section 1.5(f)(i); and (z) multiplying the amount of the aggregate net proceeds comprising the Excess Securities Trust attributable to the sale of Excess Series B Debentures by a fraction, the numerator of which is the amount of the fractional Series B Debenture interest to which such holder of Old Shares would be entitled but for the application of Section 1.5(f)(i) and the denominator of which is the aggregate amount of fractional Series B Debenture interests to which all holders of Old Shares would be entitled but for the application of Section 1.5(f)(i).
 
 

(iv) As soon as practicable after the determination of the total amount of cash, if any, to be paid to holders of Old Shares in lieu of any fractional New Share and, if applicable, Depositary Share interests, Series A Debenture interests and/or Series B Debenture interests, the Exchange Agent shall make available such amounts to such holders of Old Shares; provided, however, that such amounts shall be paid to each holder of Old Shares only upon surrender of such holder's Old Certificate or Certificates together with a properly completed and duly executed letter of transmittal and any other required documents. All cash in lieu of fractional interests to be paid pursuant to this Section 1.5(f), if unclaimed on the first anniversary of the Effective Time, shall be released and paid by the Exchange Agent to the Company, after which time persons entitled thereto may look, subject to applicable escheat and other similar laws, only to the Company for payment thereof.
 
 

(g) No interest shall be paid or accrued on any portion of the Recapitalization Consideration or cash in lieu of fractional interests. No dividends or other distributions declared or made after the Effective Time with respect to New Shares with a record date after the Effective Time shall be paid to the holder of any unsurrendered Old Certificate or Certificates with respect to the New Shares such holder is entitled to receive until the holder of such Old Certificate or Certificates shall surrender the same in accordance with this Section 1.5 and unless such holder is a record holder of such New Shares on such record date.
 
  Section 1.6    Other Issuances. In conjunction with the consummation of the Recapitalization, the Company shall issue the shares described in this Section 1.6.
 
 

(a) During the 69 months following the Effective Time, the "Final Number" (as defined in subsection (b)) of shares of convertible preferred stock described below (the "ESOP Convertible Preferred Stock") shall be (i) issued to State Street Bank and Trust Company, a Massachusetts business trust, as trustee (the "ESQP Trustee") under a trust to be created pursuant to the Employee Stock Ownership Trust Agreement between the Company and the ESOP Trustee in form and substance as set forth on Schedule 1.6(a) (i) (the "ESOP Trust") and to be established for the benefit of certain employees of the Company and its Subsidiaries participating in the UAL Corporation Employee Stock Ownership Plan in form and substance as set forth on Schedule 1.6(a) (ii) (the "ESOP") and, to the extent not so issued, (ii) credited as book entry credits to the accounts of certain employees of the Company and its Subsidiaries participating in the UAL Corporation Supplemental ESOP in form and substance as set forth on Schedule 1.6(a) (iii) (the "Supplemental ESOP" and together with the ESOP, collectively, the "ESOPs") and in certain circumstances issued to the ESOP Trustee under a trust (the "Supplemental ESOP Trust" and together with the ESOP Trust, collectively, the "ESOP Trusts") to be created pursuant to the Supplemental ESOP Trust Agreement between the Company and the ESOP Trustee in form and substance as set forth on Schedule 1.6(a)(iv).
 
 

(b) The number of shares of ESOP Convertible Preferred Stock to be so issued and credited as contemplated by subsection (a) shall initially be 17,675,345, which is equal to the product of (i) 0.5, (ii) 55/45ths, (iii) the "Fully Diluted Old Shares" immediately prior to the Effective Time, and (iv) 0.9999. The "Fully Diluted Old Shares" immediately prior to the Effective Time shall equal 28,926,185. The total number of shares of ESOP Convertible Preferred Stock to be so issued and credited is subject to increase (in accordance with Section 1.10) up to an amount equal to the sum of (i) 17,675,345 plus (ii) the Additional Shares (as defined in Section 1.10). Such total number of shares, including to the extent, if any, so increased, is referred to as the "Final Number."
 
 

(c) The ESOP Convertible Preferred Stock shall consist of (i) Class 1 ESOP Convertible Preferred Stock, par value $0.01 per share, of the Company, with a fixed dollar dividend in a dollar amount (the "Dollar Amount") that is equal to 7.00%, or such lesser percentage that may be agreed to by the Company and the ESOP Trustee prior to the Effective Time, of the per share price at which the Class 1 ESOP Preferred Stock is issued to the ESOP Trustee at the Effective Time (the "Initial Price"), and having the rights, powers and privileges set forth in the Restated Certificate (the "ESOP Preferred"), and (ii) Class 2 ESOP Convertible Preferred Stock, par value $0.01 per share, of the Company having the rights, powers and privileges set forth in the Restated Certificate (the "Supplemental ESOP Preferred").
 
 

(d) At the Effective Time, the Company shall issue to the ESOP Trustee in accordance with a stock purchase agreement and amendment in form and substance as.set forth on Schedule 1.6(d) (as so amended, the "ESOP Stock Purchase Agreement"), a number of shares of ESOP Preferred (the "Initial Shares") equal to the Year 1 Release Shares (as defined), divided by the Year 1 Decimal (as defined).
 
 

(i) The term "Year 1 Release Shares" shall mean the product of
 
  (x) 17,675,345, (y) a fraction (the "First Year Fraction") having a numerator equal to the number of days from the Effective Time to December 31, 1994 and a denominator equal to 2,099 (which approximates the number of days in the 69 months after the Effective Time), and
 
 

(z) 0.7815 (the "Class 1 Decimal").
 
 

(ii) The term "Year 1 Decimal" shall mean one minus the product of
 
 

(xx) the Dollar Amount as a percentage (expressed as a decimal) of the Initial Price and
 
 

(yy) 5.25.
 
 

The Year 1 Release Shares shall be released from the ESOP suspense account and allocated to the accounts of ESOP participants as of December 31, 1994. The balance of the Initial Shares (the "Year 1 Remaining Shares") shall be released from the ESOP suspense account and allocated to the accounts of ESOP participants in level installments for each full plan year (and prorated for the quarter ending March 31, 2000) in the period from January 1, 1995 through March 31, 2000.
 
 

As of December 31, 1994, there shall be credited to the accounts of Supplemental ESOP participants a number of shares of Supplemental ESOP Preferred equal to the product of
 
 

(aa) 17,675,345,
 
 

(bb) the First Year Fraction, and
 
 

(cc) one minus the Class 1 Decimal.
 
 

(e) At or about the 365th day following the Effective Time (the "Measuring Date") and at or about the next four following anniversaries of the Measuring Date (each a "Measuring Date Anniversary"), the Company shall negotiate in good faith with the ESOP Trustee to reach an agreement under which the Company shall issue to the ESOP Trustee shares of ESOP Preferred at an agreed-upon price per share (for each applicable plan year, the "Purchase Price"). If such agreement is reached within 30 days of the Measuring Date or within 30 days of any Measuring Date Anniversary, then, within five days thereafter, the Company shall sell to the ESOP Trustee, and the ESOP Trustee shall purchase from the Company, pursuant to an agreement substantially in the form of Exhibit B to the ESOP Stock Purchase Agreement, a number of shares of ESOP Preferred (with respect to each such year, the "Subsequent Shares"), which number of shares shall equal, for each such plan year, the Subsequent Year Release Shares (as defined) divided by the Subsequent Year Decimal (as defined).
 
  (i) The term "Subsequent Year Release Shares" shall mean, for each such plan year, the excess of
 
  (xx) the product of
 
  (A) 12/69ths of the Final Number and
 
 

(B) the Class 1 Decimal, over
 
 

(yy) the number of Year I Remaining Shares and Subsequent Year Remaining Shares (as defined below) (collectively, "Tail Shares") scheduled to be released in such plan year.
(ii) The term "Subsequent Year Decimal" shall be calculated separately for each such plan year and shall mean one minus the product of
 
  (yy) a fraction (expressed as a decimal) having a numerator equal to the Dollar Amount and a denominator equal to the Purchase Price for the plan year in question, and
 
 

(zz) the number of years and fractional years from the end of the plan year for which such shares are being issued to March 31, 2000.
 
 

The Subsequent Year Release Shares for each such plan year shall be released from the ESOP suspense account and allocated to the accounts of ESOP participants as of the end of such plan year. The balance of the Subsequent Shares for such plan year (the "Subsequent Year Remaining Shares") shall be released from the ESOP suspense account and allocated to the accounts of ESOP participants in level installments for each full plan year (and prorated for the quarter ending March 31, 2000) remaining in the period from the January 1 immediately following such plan year through March 31, 2000.
 
 

For each of the second through sixth plan years of the Supplemental ESOP, there shall be credited to the accounts of Supplemental ESOP participants shares of Supplemental ESOP Preferred equal to the product of (aa) tz/69ths of the Final Number and (bb) the decimal equal to one minus the Class 1 Decimal.
 
 

(f) Commencing not later than December 1, 1999, the Company shall negotiate in good faith with the ESOP Trustee to reach an agreement under which the Company shall issue to the ESOP Trustee shares of ESOP Preferred at an agreed.upon price (the "Purchase Price" for such year). If such agreement is reached, then on the first business day in the year 2000, the Company shall sell to the ESOP Trustee, and the ESOP Trustee shall purchase from the Company, pursuant to an agreement substantially in the form of Exhibit B to the ESOP Stock Purchase Agreement, a number of shares of ESOP Preferred ("Final Year Shares"), which number shall equal the excess of
 
 

(A) the product of
 
  (xx) the Final Number, (yy) a fraction (the "Final Fraction") equal to one minus the sum of 20/23rds and the First Year Fraction, and
 
  (zz) the Class 1 Decimal, over (B) the number of Tail Shares scheduled to be released in such plan year.
For the seventh plan year of the Supplemental ESOP, there shall be credited to the accounts of Supplemental ESOP participants shares of Supplemental ESOP Preferred equal; to the product of (aa) the Final Number, (bb) the Final Fraction and (cc) a decimal equal to one minus the Class 1 Decimal.
 
 

(g) The Company may, with the consent of the Unions, which shall not be unreasonably withheld, make all or any part of the sales of ESOP Preferred to the ESOP Trustee described above at any earlier date or dates, provided that the timing and amount of the release of such shares to the accounts of employees in the ESOPs contemplated by subsections (d), (e) and (f) above shall not be altered by the different date or dates of the sales. If any sale of Subsequent Shares or Final Year Shares is not consummated in accordance with subsection (e) or (f) above (if not earlier consummated pursuant to this subsection (g)), a number of shares of Supplemental ESOP Preferred as is equal to the number of shares of ESOP Preferred not so sold shall be contributed to the ESOP (Part B) or credited to the accounts of participants in the Supplemental ESOP, as applicable. Such contribution or crediting shall be at such time or times such that the release (or crediting) of shares to the accounts of employees contemplated by subsections (d), (e) and (f) above shall not be altered. Notwithstanding anything to the contrary herein (other than the provisions of this subsection (g) relating to "catch-up" dividends), the aggregate number of shares of ESOP Convertible Preferred Stock issued, credited, or contributed under this Section 1.6 and Section 1.10 shall not exceed, or be less than, the Final Shares. In the event that fixed dividends on the ESOP Preferred attributable to a particular acquisition loan are not paid when initially due because the Company lacks sufficient earnings and profits, and such earnings and profits later become available, it is possible that such dividends (the "skipped dividends") may then be paid on a catch-up basis, to the ESOP Trustee at a time when such catch-up dividends (when added to other fixed dividends payable on shares attributable to such loan) exceed the principal and interest then payable on the loan to which such dividends relate. In that event, compliance with the rules applicable to the ESOP may require a portion of such catch-up dividends to be used to purchase New Shares rather than pay principal or interest on such acquisition loan. If such purchase causes the New Shares and ESOP Preferred allocated to participants in that year to exceed the number of shares that would have been allocable absent payment of the catch-up dividend, then, notwithstanding the provisions of Section 1.6, the parties agree that they shall negotiate in good faith to determine whether there is a manner in which the ESOP and the Supplemental ESOP can be amended so that, in subsequent years, allocations to participants can be reduced in a manner that results in participants achieving the same economic position that would have resulted if no such skipped dividends had occurred; and if the result described in the preceding clause of this sentence can be achieved without material detriment to any participant (in relation to the econonuc position such participant would have enjoyed had the skipped dividend not occurred) and without interference with the general objectives of the ESOP program, then the Company may, with the consent of the Unions as to the satisfaction of the standards set forth in this sentence, which shall not be unreasonably withheld, adopt appropriate amendments to this Agreement, the ESOP and Supplemental ESOP to effectuate the intent of this sentence. Achievement of the goal described in the preceding sentence may require issuance of fewer shares of ESOP Convertible Preferred Stock in future periods than would have otherwise been the case (because of the ESOP's unexpected early acquisition of New Shares). All disputes concerning whether the Unions reasonably withheld a consent in accordance with the provisions of this subsection (g) shall be resolved in accordance with the arbitration procedures described in Section 11.2(b)(ii)(G)-(J) of the ESOP.
 
 

(h) In consideration of each issuance by the Company of the shares of ESOP Preferred to the ESOP Trust, the ESOP Trustee, on behalf of the ESOP Trust, shall (y) pay to the Company an amount of cash equal to the aggregate par value of the shares of ESOP Preferred so issued and (z) execute and deliver a promissory note, in the aggregate principal amount equal to the aggregate ,.purchase price for the ESOP Preferred so issued less the amount paid pursuant to clause (y), in substantially the form set forth on Exhibit A to the ESOP Stock Purchase Agreement (each, an "ESOP Note").
 
 

(i) In addition, the Company shall also issue and contribute to the ESOP Trust at the Effective Time:
 
 

(x) One (1) share of Class P ESOP Voting Junior Preferred Stock, par value 50.01 per share, of the Company having the rights, powers and privileges set forth in the Restated Certificate (the "Class P Voting Preferred");
 
 

(y) One (1) share of Class M ESOP Voting Junior Preferred Stock, par value $0.01 per share, of the Company having the rights, powers and privileges set forth in the Restated Certificate (the "Class M Voting Preferred"); and
 
 

(z) One (1) share of Class S ESOP Voting Junior Preferred Stock, par value $0.01 per share, of the Company having the rights, powers and privileges set forth in the Restated Certificate (the "Class S Voting Preferred" and, together with the Class P Voting Preferred and the Class M Voting Preferred, collectively, the "ESOP Voting Preferred Stocks").
 
 

In consideration of the issuance by the Company of the ESOP Voting Preferred Stocks to the ESOP Trust pursuant to this subsection (i) and (if and to the extent so issued to the ESOP Trustee and if required by Delaware law) the issuance by the Company of the Supplemental ESOP Preferred pursuant to subsections (d), (e) and (f) or (g) above, the ESOP Trustee, on behalf of the ESOP Trust, shall pay to the Company an amount of cash equal to the aggregate par value of the shares of ESOP Voting Preferred Stocks and Supplemental ESOP Preferred so issued.
 
 

(j) In addition, the Company shall also issue and contribute to the Supplemental ESOP Trust (together with the ESOP Trust, the "ESOP Trusts"), at the times provided for in the Supplemental ESOP, an aggregate (to give effect to the 0.5 Common Stock exchange ratio) of: .
 
 

(i) a number of shares of Class P Voting Preferred Stock equal to the product of (aa) 55/45ths, (bb) .4623, (cc) one half of the Fully Diluted Old Shares and (dd) .9999, minus one (1.0);
 
 

(ii) a number of shares of Class M Voting Preferred Stock equal to the product of (aa) 55/45ths, (bb) .3713, (cc) one half of the Fully Diluted Old Shares and (dd) .9999, minus one (1.0); and
 
 

(iii) a number of shares of Class S Voting Preferred Stock equal to the product of (aa) 55/45ths, (bb) .1664, (cc) one half of the Fully Diluted Old Shares and (dd) .9999, minus one (1.0).
 
 

If, pursuant to Section 1.10 and this Section 1.6, the Company is required to sell, contribute and/or credit on a book entry basis Additional Shares (as defined in Section 1.10(b)), then, ratably over the 69 months following the Effective Time, the Company shall also contribute to the ESOP Trust or the Supplemental ESOP Trust, as appropriate, an aggregate of:
 
  (aa) a number of shares of Class P Voting Preferred Stock equal to the product of .4623 and the number of such Additional Shares:
 
 

(bb) a number of shares of Class M Voting Preferred Stock equal to the product of .3713 and the number of Additional Shares; and
 
 

(cc) a number of shares of Class S Voting Preferred Stock equal to the product of .1664 and the number of Additional Shares.
 
 

(k) The Company shall not issue any shares of any class of ESOP Convertible Preferred Stock or ESOP Voting Preferred Stock (collectively the "ESOP Preferred Stocks" or "ESOP Preferred Stock") other than in accordance with the terms of Sections 1.6 and 1.10 hereof and the ESOPs.
 
 

(1) The ESOP program is designed to deliver equity ownership and voting power to the employee groups in pre-negotiated proportions and at a pre-negotiated pace. If and to the extent that, despite the best and cooperative efforts of the Unions and the Company, the tax qualified ESOP cannot be implemented in all material respects or the non-qualified Supplemental ESOP cannot be implemented in all material respects and without income tax (excluding the employee portion of FICA, FUTA and Medicare taxes) to participants prior to actual distributions being made, appropriate arrangements will be made to effectuate in all material respects the delivery of equity ownership and voting power in the agreed-upon proportions and at the agreed-upon pace and to accomplish the purposes contemplated by the ESOP program described in Schedules 1.6(a)(i)-(iv) and (d). As used herein, the phrase "appropriate arrangements" shall not (i) require the expenditure of any material amount of funds by the Company or the issuance of securities to the ESOP Trusts representing a greater proportion of the equity value or voting power of the Company than that contemplated by this Agreement or (ii) result in the diminution of the equity value or voting power of the New Shares held by the stockholders of the Company other than the ESOP Trusts.
 
 

(m) In accordance with subscription agreements in form and substance as set forth on Schedule 1.6(m) (the "Class I Preferred Stock Subscription Agreement"), the Company shall issue one (1) share of Class I Junior Preferred Stock, par value $0.01 per share, of the Company having the rights, powers and privileges set forth in the Restated Certificate (the "Class I Preferred") to each of the persons identified on Schedule 2.3(ii) as the initial "Independent Directors," provided that each initial Independent Director shall have paid to the Company an amount of cash equal to the par value of the share of Class I Preferred to be so issued.
 
 

(n) In accordance with a subscription agreement in form and substance as set forth on Schedule 1.6(n) (the "Class Pilot MEC Preferred Stock Subscription Agreement"), the Company shall issue one (1) share of Class Pilot MEC Junior Preferred Stock, par value $0.01 per share, of the Company having the rights, powers and privileges set forth in the Restated Certificate (the "Class Pilot MEC Preferred") to the United Air Lines Master Executive Council of ALPA (the "MEC"), provided that the MEC shall have paid to the Company an amount of cash equal to the aggregate par value of the share of Class Pilot MEC Preferred to be so issued.
 
 

(o) In accordance with a subscription agreement in form and substance as set forth on Schedule 1.6(o) (the "Class IAM Preferred Stock Subscription Agreement"), the Company shall issue one (1) share of Class IAM Junior Preferred Stock, par value $0.01 per share, of the Company having the rights, powers and privileges set forth in the Restated Certificate (the "Class IAM Preferred") to the IAM or its designee, provided that the IAM or such designee shall have paid to the Company an amount of cash equal to the aggregate par value of the share of Class IAM Preferred to be so issued.
 
 

(p) In accordance with a subscription agreement inform and substance asset forth on Schedule 1.6(p)(i) (the "Class SAM Preferred Stock Subscription Agreement"), the Company shall issue three (3) shares of Class SAM Junior Preferred Stock, par value $0.01 per share, of the Company having the rights, powers and privileges set forth in the Restated Certificate (the "Class SAM Preferred") as follows: (i) two (2) shares to the person identified as the Salaried and Management Director on Schedule 2.3(ii) or a replacement director identified in accordance with the nomination procedures in Schedule 1.6(p)(ii) (the "SAM Director), and (ii) one (1) share to an additional Class SAM stockholder, defined in Schedule 1.6(p)(i) as the Designated Stockholder, provided that such persons shall have paid to the Company an amount of cash equal to the aggregate par value of the shares of Class SAM Preferred to be so issued.
 
 

(q) If, due to limitations of Section 415 of the Internal Revenue Code or due to the issuance of Additional Shares, the respective Employee Groups (as defined in the ESOP) are prevented from reasonably achieving the contemplated allocations among and within their respective Employee Groups, the parties agree to cooperate to modify the Class 1 Decimal with respect to sales contemplated by Section 1.6(e) and Section 1.6(t) and to make appropriate conforming modifications to the ESOP, Supplemental ESOP and all related instruments if so requested by the Company, ALPA or the IAM. Such modifications shall maximize the Class 1 Decimal consistent with achieving with a high degree of certainty that the limits of the Internal Revenue Code Section 415(c)(6) shall not be exceeded (which condition regarding Section 415(c)(6) may be waived by ALPA).
 
 

SECTION 1.7    Stock Options.    Each employee stock option to purchase Old Shares granted under any employee stock option or compensation plan or arrangement of the Company outstanding immediately prior to the Effective Time (an "Option") shall remain outstanding upon and following consummation of the Recapitalization, and each such Option, whether or not then vested or exercisable immediately prior to the Effective Time, shall (i) if provided by the terms thereof (or if accelerated in accordance with the relevant plan) become fully vested and exercisable at the Effective Time and (ii) after the Effective Time represent the right to receive, until the expiration thereof and in accordance with its terms, in exchange for the aggregate exercise price for such Option, without interest, the Recapitalization Consideration with respect to each Old Share that such holder would have been entitled to receive had such holder exercised such Option in full immediately prior to the Effective Time. The Recapitalization Consideration issuable upon exercise of an Option shall be issued in the same proportion as holders of Old Shares would be entitled to receive their Recapitalization Consideration, but for fractional interests, among cash and New Shares and, if applicable, principal amount of Series A and Series B Debentures and Depositary Shares representing interests in the $25 liquidation preference of Public Preferred Stock, except that (i) if the Underwriting Alternative has not been consummated for any reason at of prior to the Effective Time with respect to the Depositary Shares, the Series A Debentures or the Series B Debentures, as the case may be, the total amount of each of Series A and Series B Debentures and Depositary Shares representing interests in the $25 liquidation preference of the Public Preferred Stock to be issued upon exercise of each such Option shall be rounded upwards to the nearest integral multiple of $100, $100 and $25, respectively (collectively, the "Option Adjustment"), and the amount of cash payable shall be reduced by a corresponding amount so that the holder does not receive fractional Depositary Shares, fractional Series A Debentures or fractional Series B Debentures (provided, however, if upon exercise of an Option the amount of cash to be received is less than the Option Adjustment, the total amount of each of Series A and Series B Debentures and Depositary Shares representing interests in the $25 liquidation preference of Public Preferred Stock shall be rounded downwards to the nearest integral multiple of $100, $100 and $25, respectively, and the amount of cash payable shall be increased by a corresponding amount so that the holder does not receive fractional Depositary Shares, fractional Series A Debentures or fractional Series B Debentures) and (ii) whether or not the Underwriting Alternative has been consummated at or prior to the Effective Time the total amount of New Shares issuable to each Option holder in respect of all Options held by such holder shall be rounded upwards to the nearest whole New Share. Except as specifically provided in this Section 1.7, the Company shall not make any other adjustments to the terms of the Options as a result of the issuance of the ESOP Preferred Stocks or the terms of the ESOP Preferred Stocks (including, without limitation, the dividend and conversion rights thereof).
 
 

SECTION 1.8    Convertible Company Securities.  Each share of the Prior Preferred Stock and each of the Air Wis Services, Inc. 73/4% Convertible Subordinated Debentures, due 2010, and Air Wis Services, Inc. 8 1/2% Convertible Subordinated Notes, due 1995 (collectively, the "Air Wis Convertible Debentures"), outstanding immediately prior to the Effective Time (each, a "Convertible Company Security") shall upon and following consummation of the Recapitalization remain outstanding, and each holder of any such Convertible Company Security shall thereafter have the right to receive, upon conversion, without interest, the Recapitalization Consideration with respect to each Old Share that such holder would have been entitled to receive had such holder converted such Convertible Company Security in full immediately prior to the Effective Time. The Recapitalization Consideration issuable upon conversion of a Convertible Company Security shall be issued in the same proportion as holders of Old Shares receive their Recapitalization Consideration, but for fractional interests, among cash and New Shares and, if applicable, principal amount of Series A and Series B Debentures and Depositary Shares representing interests in the $25 liquidation preference of Public Preferred Stock, except that (i) if the Underwriting Alternative has not been consummated for any reason at or prior to the Effective Time with respect to the Depositary Shares, the Series A Debentures or the Series B Debentures, as the case may be, the total amount of each of Series A and Series B Debentures and Depositary Shares to be issued upon conversion of the Convertible Company Security shall be rounded upwards to the nearest integral multiple of $100, $100 and $25, respectively, (collectively, the "Convertible Company Security Adjustment") and the amount of cash payable shall be reduced by a corresponding amount so that the holder does not receive fractional Depositary Shares representing interests in the $25 liquidation preference of Public Preferred Stock, fractional Series A Debentures or fractional Series B Debentures (provided, however; if upon conversion of a Convertible Company Security the amount of cash to be received is less than the Convertible Company Security Adjustment, the total amount of each of Series A and Series B Debentures and Depositary Shares representing interests in the $25 liquidation preference of Public Preferred Stock shall be rounded downwards to the nearest integral multiple of $100, $100 and $25, respectively, and the amount of cash payable shall be increased by a corresponding amount so that the holder does not receive fractional Depositary Shares, fractional Series A Debentures of fractional Series B Debentures) and (ii) whether or not the Underwriting Alternative has been consummated at of prior to the Effective Time the total amount of New Shares issuable to each holder of Convertible Company Securities in respect of all Convertible Company Securities held by such holder shall be rounded upwards to the nearest whole New Share. Except as specifically provided in this Section 1.8, the Company shall not make any other adjustments to the terms of the Convertible Company Securities as a result of the issuance of the ESOP Preferred Stocks or the terms of the ESOP Preferred Stocks (including, without limitation, the dividend and conversion rights thereof).
 
 

SECTION 1.9    Form of Recapitalization Consideration.  Notwithstanding anything in Section 1.7 or 1.8 to the contrary, if the holder of an Option or a Convertible Company Security exercises such Option or Convertible Company Security at any time after either series of Debentures or the Public Preferred Stock has been redeemed, retired or repaid in full (the securities redeemed, retired or repaid hereinafter referred to as the "Retired Securities"), the holder of such Option or Convertible Company Security shall not be entitled to receive any Retired Securities but shall receive in lieu thereof an amount of cash equal to the principal amount (without premium regardless of whether a premium is paid at the time of redemption, retirement or repayment in full) or liquidation preference (without the amount of accrued dividends regardless of whether accrued dividends were paid at the time of redemption, retirement or repayment in full), as the case may be, of or represented by the Retired Securities that such holder otherwise would have received in respect of the exercise of such Option or Convertible Company Security.
 
 

SECTION 1.10    Additional ESOP Shares.   (a) As soon as practicable after the Measuring Date, the Company shall (x) contribute shares of Supplemental ESOP Preferred Stock to Part B of the ESOP and (y) provide an allocation of shares of Supplemental ESOP Preferred Stock on a book entry basis in a manner consistent with the allocation under the Supplemental ESOP, such that the aggregate number of shares under (x) and (y) is equal to a fraction of the Additional Shares (as defined in Section 1.10(b) below), which fraction shall be the First Year Fraction. All such shares shall be Supplemental ESOP Preferred. To the extent permissible under the limitations imposed by the Internal Revenue Code, .the shares determined under this subsection (a) shall be contributed to Part B of the ESOP, and the remaining shares shall be allocated under the Supplemental ESOP.
 
 

(b) "Additional Shares" shall mean the number of shares of ESOP Convertible Preferred Stock determined as the excess of (A) the product of (w) a fraction, the numerator of which is the Adjusted Percentage (as defined in Section 1.10(c) below) at the close of business on the Measuring Date, and the denominator of which is the excess of one over such Adjusted Percentage (expressed as a decimal), (x) the Fully-Diluted Shares (as defined in Section 1.10(d) below) at the close of business on the Measuring Date, (y) a fraction, the numerator of which is one, and the denominator of which is the Conversion Rate (as defined in Article FOURTH, Part II, Section 6.1 of the Restated Certificate), and (z) .9999, over (B) 17,675,345 , provided that the number of Additional Shares shall not be less than zero.
 
 

(c) "Adjusted Percentage" shall mean that percentage set forth under the heading "Adjusted Percentage" on the table set forth on Schedule 1.10 that corresponds to the Average Closing Price (as defined in Section 1.10(e) below) set forth under the heading "Average Closing Price" on such table, provided that if the Average Closing Price falls between two entries on the table, the Adjusted Percentage shall be determined by a straight-line interpolation between the two entries in the "Adjusted Percentage" column that correspond to the next lowest and next highest entries in the "Average Closing Price" column, rounded to the nearest 0.00000001 %.
 
 

(d) "Fully-Diluted Shares" shall mean the sum of (i) the excess of (A) the aggregate number of New Shares outstanding immediately prior to the close of business on the Measuring Date over (B) the aggregate number of New Shares issued after the Effective Time other than upon exercise, conversion or exchange of Options or Convertible Company Securities, (ii) the aggregate number of New Shares issuable (whether or not from New Shares held in its treasury) upon the conversion of the Series A Preferred Stock outstanding immediately prior to the close of business on the Measuring Date, (iii) the aggregate number of New Shares issuable (whether or not from New Shares held in its treasury) upon the exercise, conversion or exchange immediately prior to the close of business on the Measuring Date of any other Convertible Company Securities with an exercise, conversion or exchange price equal to or less than the Old Share Equivalent Price (as defined in Section 1.10(t) below) and (iv) the aggregate number of New Shares that would be required to be issued by the Company (whether or not from New Shares held in its treasury) if all Options with an exercise price less than the Old Share Equivalent Price were exercised in full immediately prior to the close of business on the Measuring Date and the proceeds from such Option exercises are used by the Company to repurchase Recapitalization Consideration (in the open market at the Old Share Equivalent Price) to be delivered in connection with the Company's obligation to issue Recapitalization Consideration upon exercise of such Options.
 
 

(e) "Average Closing Price" shall mean the average of the product of (i) the Current Market Price (as defined in Section l.10(g) below) of a New Share for each Trading Day (as defined in Section 1.10(h) below) during the Measuring Period (as defined in Section 1.10(i) below) (or in case the New Shares are exchanged for or changed, reclassified or converted into stock, securities or other property (including cash or any combination thereof), whether or not of the Company, the Fair Market Value (as defined in Section 1.10(j) below) of such stock, securities or other property into which a New Share has been exchanged, changed, reclassified or converted) and (ii) the Conversion Rate in effect on such Trading Day.
 
 

(f) "Old Share Equivalent Price" shall mean the sum of (i) the product of (x) 0.5 and (y) the Average Closing Price of a New Share, (ii) either (a) the product of (x) 1.244 and (y) the average of the Current Market Price of a Depositary Share for each Trading Day during the Measuring Period or (b) if the Underwriting Alternative with respect to the Depositary Shares has been consummated, the Depositary Share Proceeds Amount, (iii) either (a) the product of (x) .1550 and (y) the average of the Current Market Price of a Series A Debenture for each Trading Day during the Measuring Period or (b) if the Underwriting Alternative with respect to the Series A Debentures has been consummated, the Series A Debenture Proceeds Amount, (iv) either (a) the product of (x) .1550 and (y) the average of the Current Market Price of a Series B Debenture for each Trading Day during the Measuring Period or (b) if the Underwriting Alternative with respect to the Series B Debentures has been consummated, the Series B Debenture Proceeds Amount and (v) $25.80.
 
 

(g) "Current Marker Price" of publicly traded New Shares or any other class or series of capital stock or other security of the Company or any other issuer for any day shall mean the last reported sales price, regular way on such day, or, if no sale takes place on such day, the average of the reported closing bid and asked prices on such day, regular way, in either case as reported on the New York Stock Exchange Composite Tape or, if such security is not listed or admitted for trading on the New York Stock Exchange, Inc. ("NYSE"), on the principal national securities exchange on which such security is listed or admitted for trading or quoted or, if not listed or admitted for trading or quoted on any national securities exchange, on the Nasdaq National Market, or, if such security is not quoted on such National Market, the average of the closing bid and asked prices on such day in the over-the-counter market as reported by the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") or, if bid and asked prices for such security on such day shall not have been reported through NASDAQ, the average of the bid and asked prices on such day as furnished by any NYSE member firm regularly making a market in such security selected for such purpose by the Board of Directors of the Company.
 
 

(h) "Trading Day" shall mean any day on which the securities in question are traded on the NYSE, or if such securities are not listed or admitted for trading or quoted on the NYSE, on the principal national securities exchange on which such securities are listed or admitted, or if not listed or admitted for trading or quoted on any national securities exchange, on the Nasdaq National Market, or if such securities are not quoted on such National Market, in the applicable securities market in which the securities are traded.
 
 

(i) "Measuring Period" shall mean the period commencing on the day of the Effective Time and ending on the Measuring Date.
 
 

(j) "Fair Market Value" shall mean the average of the daily Current Market Prices of the security in question during the five (5) consecutive Trading Days before the earlier of the day in question and the "ex" date with respect to the issuance or distribution requiring such computation. The term "'ex' date," when used with respect to any issuance or distribution, means the first day on which the New Shares trade regular way, without the right to receive such issuance or distribution, on the exchange or in the market, as the case may be, used to determine that day's Current Market Price. With respect to any asset or security for which there is no Current Market Price, the Fair Market Value of such asset or security shall be determined in good faith by the Board of Directors of the Company.
 
 

SECTION 1.11 Underwriting Alternative. Prior to the date that is ten days after the date of the Company Proxy Statement, but at least seven days prior to the Announcement Date, the Company may elect to pursue the underwriting of (a) the Depositary Shares, (b) the Series A Debentures, (c) the Series B Debentures, or (d) any combination of the foregoing (referred to collectively herein as the "Underwriting Alternative"), provided that consummating an underwriting with respect to the Depositary Shares and/or either or both series of Debentures, as the case may be, shall be in lieu of issuing Depositary Shares or either or both such series of Debentures to holders ef Old Shares pursuant to Section 1.5 hereof, to holders of Options pursuant to Section 1.7 hereof and to holders of Convertible Company Securities pursuant to Section 1.8 hereof. If the Company elects the Underwriting Alternative, it may offer pursuant thereto approximately the amounts of Depositary Shares and/or Debentures which if the Underwriting Alternative were not elected would be issuable upon the exchange of all outstanding Old Shares in the Reclassification and upon exercise of Options and conversion of the Convertible Company Securities reasonably expected to be exchanged or converted in accordance with Sections 1.7 and 1.8 hereof (at the rate of $31.10 liquidation preference of Public Preferred Stock as represented by Depositary Shares, $15.55 principal amount of Series A Debentures and $15.55 principal amount of Series B Debentures per Old Share), which amounts shall be rounded up to produce aggregate amounts of Depositary Shares and Debentures of each series that are consistent with customary aggregate underwriting denominations. If it so elects to pursue the Underwriting Alternative, the Company shall use its best efforts to accomplish such underwritings, including selecting a managing underwriter or underwriters, filing registration statements with the SEC, and entering into a firm commitment underwriting agreement or agreements, provided, however, that the Company may elect to terminate the Underwriting Alternative at any time prior to the Effective Time. The Unions will cooperate and use their best efforts to facilitate the underwritings. The Underwriting Alternative will be effected in accordance with customary underwriting agreements which may reflect that, if the Company is advised by the managing underwriter or managing underwriters that the Public Preferred Stock (represented by Depositary Shares), Series A Debentures or Series B Debentures would be priced in excess of the Maximum Price applicable to such security (so that such security, if priced at the applicable Maximum Pricing, could only be sold at less than par), and is further advised that consistent with industry practice the Underwriting Alternative would be facilitated by the sale of such securities at or closer to par, the Company may reduce the amount of such securities to be sold and increase the dividend or interest rate above the applicable Maximum Pricing so that such securities may be sold at or closer to par, provided that the aggregate amount of dividends payable annually in respect of the Public Preferred Stock (represented by the Depositary Shares) to be sold, and the aggregate amount of interest payable annually in respect of either series of Debentures to be sold, that are priced above the applicable Maximum Pricing may not exceed the aggregate amount of dividends or interest payable annually in respect of such security at the applicable Maximum Pricing with respect to the amount of such securities as originally proposed to be offered. If the Underwriting Alternative with respect to the Depositary Shares and both series of Debentures is consummated, the amount of cash payable in respect of each Old Share shall equal the sum of (i) $25.80 per share and (ii) the gross proceeds (price to public without deducting any underwriting discount or other costs) received by the Company for each $31.10 liquidation preference of the Public Preferred Stock as represented by Depositary Shares in the appropriate underwriting (the "Depositary Share Proceeds Amount"), (iii) the gross proceeds (price to public without deducting any underwriting discount or other costs) received by United for each $15.55 principal amount of Series A Debentures in the appropriate underwriting (the "Series A Debenture Proceeds Amount") and (iv) the gross proceeds (price to public without deducting any underwriting discount or other costs) received by United for each $15.55 principal amount of Series B Debentures in the appropriate underwriting (the "Series B Debenture Proceeds Amount").
 
 

ARTICLE II   THE COMPANY AND UNITED   SECTION 2.1    Certificate of Incorporation.  As of the Effective Time, the certificate of incorporation of the Company shall be the Restated Certificate.
 
 

SECTION 2.2    Bylaws.    As of the Effective Time, the bylaws of the Company in effect immediately prior to the Effective Time shall be amended and restated in accordance with applicable law and the Restated Certificate, in form and substance as set forth in Schedule 2.2 (the "Restated Bylaws").
 
 

SECTION 2.3.   Directors and Officers.   Immediately prior to the Effective Time, the Company shall cause the persons identified on Schedule 2.3(i) to resign, as of the Effective Time, from the Board of Directors of the Company (which resignations, for purposes of all rights and benefits of such directors under all agreements, plans, policies and arrangements of the Company and United including those identified in the letter referred to in Section 5.11 hereof, shall be deemed to have occurred immediately following the Effective Time). From and after the Effective Time, until their successors are duly elected or appointed and qualified in accordance with applicable law, the Restated Certificate and the Restated Bylaws, or until their earlier death, resignation, disqualification or removal, the persons identified or described on Schedule 2.3(ii) shall constitute the entire Board of Directors of the Company (the "New Directors") and each shall serve in the classes and capacities identified in such Schedule. Except as provided in the two preceding sentences, or as otherwise provided in the Restated Certificate or in the Restated. Bylaws, the officers of the Company immediately prior to the Effective Time (other than the Chairman and Chief Executive Officer, the President and Chief Operating Officer and the Executive Vice-President-Corporate Affairs and General Counsel of the Company (the "Retiring Executives")) shall be the officers of the Company from and after the Effective Time until their successors are duly elected or appointed and qualified or until their earlier death, resignation, disqualification or removal. The Retiring Executives shall retire from all positions with the Company and the Subsidiaries held by them effective at or immediately prior to the Effective Time and such retirement shall be treated as set forth in separate letter agreements to be entered into at or prior to the Effective Time among each Retiring Executive, on the one hand, and the Company and United, on the other hand, substantially in the form and substance provided to the Unions prior to the date hereof. Other than the Retiring Executives, no other officer of the Company or United may be terminated for a period of six months following the Effective Time unless such termination shall be approved, specifically as to such officer, by at least two of the New Directors identified as "Outside Public Directors" in Schedule 2.3(ii) and the Chief Executive Officer of the Company following the Effective Time. At the Effective Time, Gerald Greenwald or such other person as shall be proposed by the Unions prior to the Effective Time (and not found unacceptable by the Company) shall be appointed by the Board of Directors, subject to his being ready, willing and able to serve, as Chief Executive Officer of the Company and United. Such person as shall be proposed by the Chief Executive Officer and the Unions following the Effective Time (and approved in accordance with the provisions of Article FIFTH, Section 3.6.2 of the Restated Certificate) shall be appointed by the Board of Directors, subject to his/her being ready, willing and able to serve, as Chief Operating Officer of the Company and United. From and after the Effective Time, subject to the fiduciary duties of the Board of Directors, until the Termination Date the Company shall cause (i) the Chief Executive Officer of the Company to also be one of the Board's nominees to serve as a Management Public Director (as defined in the Restated Certificate) and (ii) the Chief Executive Officer of the Company to also serve as the Chief Executive Officer of United.
 
 

SECTION 2.4    United.    The Company shall take all appropriate actions such that, as of the Effective Time, the certificate of incorporation of United shall be amended to include the provision set forth in Schedule 2.4 hereto.
 
 

ARTICLE III  
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY


The Company represents and warrants to each of the Unions that: SECTION 3.1    Corporate Existence and Power.   The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware, and has all corporate power and authority and all governmental licenses, authorizations, consents and approvals required to own, operate and lease its assets and to carry on its business as now conducted except for licenses, authorizations, consents and approvals the absence of which would not have a Material Adverse Effect (as defined below). The Company is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities makes such qualification necessary, except for those jurisdictions where the failure to be so qualified would not have a Material Adverse Effect. For purposes of this Agreement, "Material Adverse Effect" means, individually or in the aggregate, any change or effect the consequence of which is materially adverse to (i) the condition (financial or otherwise), business, assets or results of operations of the Company and the Subsidiaries (as defined in Section 3.6), taken as a whole, from that in effect on the date of the Company's Annual Report on Form 10-K, dated March 11, 1994, for the fiscal year ended December 31, 1993, as amended by Form 10-K/A, dated March 15, 1994, as filed with the Securities and Exchange Commission and previously furnished to the Unions (the "1993 10-K") (except as otherwise specifically provided herein) or (ii) the Company's ability to effect any of the transactions constituting part of the Recapitalization, except for such changes or effects resulting from, or in connection with, (i) labor relations between the Company or its Subsidiaries, on the one hand, and employees represented by the Unions, on the other hand (including a strike or other disruption in the operations of the Company or its Subsidiaries, which shall not be regarded as a Material Adverse Effect) or (ii) matters disclosed in this Agreement or any Schedule, Exhibit or other attachment hereto. The Company has heretofore delivered to counsel to the Unions true and complete copies of the Company's Restated Certificate of Incorporation as currently in effect (the "Certificate of Incorporation"), bylaws and Rights Agreement (as defined in Section 3.5),:.each as currently in effect. There has been no change in or amendment of the Certificate of Incorporation or bylaws of the Company or, except as set forth in Section 5.6, the Rights Agreement since November 1, 1993. The Company is not in violation of any of the provisions of the Certificate of Incorporation or its bylaws.
 
 

SECTION 3.2    Corporate Authorization.   The execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the transactions contemplated hereby are within the Company's corporate powers and, except for (w) any required approval by the Company's stockholders in connection with the consummation of the Shareholder Vote Matters (as defined in Section 5.2), (x) the approval by the Company's stockholders of amendments to each of the Company's 1981 Incentive Stock Program, 1988 Restricted Stock Plan and Incentive Compensation Plan, in form and substance as set forth on Schedule 3.2(i), Schedule 3.2(ii) and Schedule 3.2(iii), respectively (the "Company Plan Matters"), (y) the approval and ratification of the Company Plan Matters by the New Directors following the Effective Time and (z) approval by the Board of Directors of the Company of the filing of the Restated Certificate in accordance with the applicable provisions of Delaware Law, have been duly authorized by all necessary corporate action. Prior to the Effective Time, the Board of Directors of the Company shall approve the filing of the Restated Certificate in accordance with the applicable provisions of Delaware Law. This Agreement has been duly executed and delivered by the Company and, assuming due authorization, execution and delivery by each of the Unions, constitutes a legal, valid and binding agreement of the Company, enforceable against the Company in accordance with its terms. The Board of Directors of the Company has taken all necessary and appropriate actions so that the restrictions on "business combinations" contained in Section 203 of Delaware Law (i) will not apply with respect to or as a result of the Recapitalization, including, without limitation, the acquisition of the ESOP Preferred Stock by the ESOPs and (ii) will not apply prior to the Termination Date (as defined in Article FIFTH, Section 1.72 of the Restated Certificate) to "business combinations" (as defined in Section 203 of Delaware Law) involving the Company or any of its Subsidiaries, on the one hand, and the ESOP Trustee, the ESOPS or either of the Unions, on the other hand, which otherwise would be subject to Article FIFTH, Section 3.8 of the Restated Certificate. The Company has taken all appropriate action to establish each of the ESOPS effective not later than the Effective Time.
 
 

SECTION 3.3    Governmental Authorization.  The execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the transactions contemplated hereby require no consent, approval, authorization or other action by or in respect of, or filing with or notification to, any governmental body, agency, official or authority other than (i) the filing of the Restated Certificate in accordance with Delaware Law; (ii) compliance with any applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"); (iii) compliance with any applicable requirements of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (the "1933 Act"), the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (the "1934 Act") and the TIA; (iv) any applicable filings with the United States Department of Transportation ("DOT"); and (v) actions or filings the absence of which would not have a Material Adverse Effect.
 
 

SECTION 3.4    Non-Contravention.   Except as set forth on Schedule 3.4, the execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the transactions contemplated hereby do not and will not (i) contravene or conflict with the Certificate of Incorporation or bylaws of the Company, (ii) assuming compliance with the matters referred to in Section 3.3, contravene or conflict with or constitute a violation of any provision of any law, regulation, judgment, injunction, order or decree binding upon or applicable to the Company, any Subsidiary, or, to the knowledge of the Company, any of the CRS Companies (as defined in Section 3.6), (iii) constitute a default under or give rise to a right of termination, cancellation or acceleration (other than with respect to the acceleration of the exercisability of Options, the vesting of restricted stock of the Company or the payment of severance benefits) of any right or obligation of the Company, any Subsidiary or, to the knowledge of the Company, any of the CRS Companies, or to a loss of any benefit to which the Company, any Subsidiary or, to the knowledge of the Company, any of the CRS Companies, is entitled under. any provision of any agreement, contract or other instrument binding upon the Company, any Subsidiary or, to the knowledge of the Company, any of the CRS Companies, or any license, franchise, permit or other similar authorization held by the Company, any Subsidiary, or, to the knowledge of the Company, any of the CRS Companies, or (iv) result in the creation or imposition of any Lien (as defined below) on any asset of the Company, any Subsidiary, or, to the knowledge of the Company, any of the CRS Companies, which violations, defaults, rights of termination or Liens could have a Material Adverse Effect. For purposes of this Agreement, "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. For purposes of the representations and warranties relating to the CRS Companies that are qualified by the knowledge of the Company, "knowledge of the Company" shall mean the knowledge of the executive officers of the Company, United and Covia Corporation. There are no (i) consents from holders of Options nor (ii) amendments to the terms of Options or compensation plans or arrangements, that are necessary to give effect to the transactions contemplated by Section 1.7.
 
 

SECTION 3.5    Capitalization.    The authorized capital stock of the Company is set forth in the Certificate of Incorporation of the Company and consists of (i) 125,000,000 Old Shares and (ii) 16,000,000 shares of Preferred Stock, without par value, of which 1,250,000 hive been designated as Series C Junior Participating Preferred Stock ("Junior Preferred Stock") and are reserved for issuance upon exercise of the Rights (as defined in the Rights Agreement dated as of December 11, 1986 between the Company and First Chicago Trust Company of New York (formerly Morgan Shareholder Services Trust Company), as amended (the "Rights Agreement")) and 6,000,000 have been designated as Prior Preferred Stock. As of March 22, 1994, there were outstanding (a) 24,570,539 Old Shares (including 119,643 unvested shares issued under the UAL 1988 Restricted Stock Plan), (b) 6,000,000 shares of Prior Preferred Stock (convertible into 3,833,866 Old Shares), (c) Rights to purchase 245,710 shares of Junior Preferred Stock, (d) Options to purchase an aggregate of 1,648,668 Old Shares (of which 13,927 have tandem stock appreciation rights held by former employees with an aggregate exercise price of $1,061,872.75 and of which Options 11,500 are held by ex-employees of the Company with vesting dates after the expiration of such Options pursuant to such ex-employees' severance agreements), and (e) $35,535,000 principal amount of Air Wis Convertible Debentures convertible into 140,134 Old Shares, of which $2,530,000 principal amount, convertible into 9,765 Old Shares, is held by Air Wis Services, Inc. All outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable. Except as set forth in this Section 3.5 and except for changes since March 1, 1994 resulting from the exercise of Options or the conversion of Convertible Company Securities, in each case outstanding on such date, there are outstanding no (w) shares of capital stock or other voting securities of the Company, (x) securities of the Company or any Subsidiary convertible into or exchangeable for shares of capital stock or voting securities of the Company, (y) options, subscriptions, warrants or other rights, agreements, arrangements or commitments of any character to acquire from the Company or any Subsidiary any capital stock, voting securities or securities convertible into or exchangeable or exercisable for capital stock or voting securities of the Company, or (z) obligations of the Company or any Subsidiary to issue any capital stock, voting securities or securities convertible into or exchangeable or exercisable for capital stock or voting securities of the Company (the items in clauses (w), (x), (y) and (z) being referred to collectively as the "Company Securities"). Except (i) as set forth above, (ii) for tax withholding and cashless exercise features of the Options and restricted stock, and (iii) for stock appreciation rights that do not become exercisable until September 1, 1994 and expire at the Effective Time, there are no obligations of the Company or any Subsidiary to repurchase, redeem or otherwise acquire any Company Securities or make any payments based upon the value of any Company Securities.
 
 

SECTION 3.6    Subsidiaries. (a) Each Subsidiary is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, has all corporate power and authority and all governmental licenses, authorizations, consents and approvals required to own, operate and lease its assets and to carry on its business as now conducted (except for those the absence of which would not have a Material Adverse Effect) and is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities make such qualification necessary, except for those jurisdictions where failure to be so qualified would not have a Material Adverse Effect. For purposes of this Agreement, "Subsidiary" means any entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are directly or indirectly owned by the Company, but shall in no event include the CRS Companies. A list of Subsidiaries and their respective jurisdictions of incorporation previously has been delivered to counsel to the Unions by the Company. Nothing in this Section 3.6 or Section 5.1 shall be deemed to prohibit the merger or other consolidation of immaterial wholly-owned Subsidiaries with or into the Company or any of its wholly-owned Subsidiaries (Covia Corporation being deemed material for the purpose of this sentence).
 
 

(b) Except for director qualifying shares and similar securities, all of the outstanding capital stock of, or other ownership interests in, each Subsidiary is owned by the Company, directly or indirectly, free and clear of any Lien and free of any other limitation or restriction (including any restriction on the right to vote, sell or otherwise dispose of such capital stock or other ownership interests). Except for director qualifying shares and similar securities, there are outstanding no (i) securities of the Company or any Subsidiary convertible into or exchangeable for shares of capital stock or other voting securities or ownership interests in any Subsidiary or (ii) options, subscriptions, warrants or other rights, agreements, arrangements or commitments of any character to acquire from the Company or any Subsidiary, and no other obligation of the Company or any Subsidiary to issue, any capital stock, voting securities or other ownership interests in, or any securities convertible into or exchangeable or exercisable for any capital stock, voting securities or ownership interests in, any Subsidiary (the items in clauses (i) and (ii) being referred to collectively as the "Subsidiary Securities"). There are no outstanding obligations of the Company or any Subsidiary to repurchase, redeem or otherwise acquire any outstanding Subsidiary Securities or make any payments based upon the value of any Subsidiary Securities.
 
 

(c) Each of Apollo Travel Services Partnership, a Delaware general partnership ("ATS"), Galileo Japan Partnership, a Delaware general partnership ("GJP"), and Galileo International Partnership, a Delaware general partnership ("GIP" and, together with ATS and GJP, collectively, the "CRS Companies") is a general partnership formed under the laws of the State of Delaware, is validly existing and in good standing under the laws of Delaware, and has all partnership power and authority and all governmental licenses, authorizations, consents and approvals required to own, operate and lease its assets and to carry out its business as now conducted (except for those the absence of which would not have a Material Adverse Effect). The partnership agreement establishing each of the CRS Companies, together with _ all exhibits and amendments thereto has been provided to the Unions, and no Subsidiary that is party to either such partnership agreement is or has been in any manner in breach of, or in default under, any provision thereof, nor is the Company, United or any officer or director of either of them aware of any breach or default by any other party to either of such partnership agreements that would or could be reasonably expected to result in a Material Adverse Effect. Except as set forth on Schedule 3.6(c), all of the outstanding ownership interests held by Covia Corporation, a Delaware corporation and wholly owned Subsidiary, of the CRS Companies are free and clear of any Lien other than as set forth in the partnership agreement with respect to such entity.
 
 

SECTION 3.7    Securities and Exchange Commission ("SEC") Filings. (a) The Company has delivered to counsel for each of the Unions (i) its Annual Reports on Form 10-K for its fiscal years ended December 31, 1993, 1992 and 1991, without exhibits, (ii) all of its Quarterly Reports on Form 10-Q filed with the SEC since December 31, 1992, without exhibits, (iii) its proxy or information statements relating to meetings of, or actions taken without a meeting by, the stockholders of the Company since December 31, 1992 and (iv) all of its other reports, statements, schedules and registration statements filed with the SEC since December 31, 1992, without exhibits. The reports, statements and schedules referred to in the preceding sentence are all the documents (other than preliminary material and supplemental filings, excluding supplemental prospectuses) that the Company was required to file with the SEC since December 31, 1992. As of its filing date, all of such reports, statements and schedules,complied in all material respects with the requirements of the 1933 Act or the 1934 Act, as the case may be.
 
 

(b) As of its filing date, no such report, statement or schedule filed pursuant to the 1934 Act contained any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading.
 
 

(c) No such registration statement, as amended or supplemented, if applicable, filed pursuant to the 1933 Act as of the date such statement or amendment became effective contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading.
 
 

SECTION 3.8    Financial Statements.   The audited consolidated financial statements of the Company included in its Annual Reports on Form 10-K and the unaudited consolidated interim financial statements included in its Quarterly Reports on Form 10-Q referred to in Section 3.7 have been prepared in accordance with generally accepted accounting principles consistently applied and fairly present (except as may be indicated in the notes thereto) the consolidated financial position -of the Company and its consolidated subsidiaries as of the dates thereof and their consolidated results of operations and cash flows for the periods then ended (subject to normal, immaterial year-end audit adjustments in the case of any unaudited interim financial statements).
 
 

SECTION 3.9.   Disclosure Documents. (a) Each document required to be filed by the Company with the SEC in connection with the transactions contemplated by this Agreement (the "Company Disclosure Documents"), including, without limitation, the proxy statement of the Company (the "Company Proxy Statement") (which also is the prospectus of the Company and United with respect to the New Shares, Depositary Shares, Public Preferred Stock, Redeemable Preferred Stock and Debentures to be issued in connection with the Recapitalization (the "Recapitalization Securities") and is to be included in the Registration Statement on Form S-4 (the "Registration Statement") to be filed with the SEC by the Company under the 1933 Act and in the Transaction Statement on Schedule 13E-3 (the "Schedule 13E-3") to be filed with the SEC by the Company under the 1934 Act), and the registration statements to be filed with the SEC by the Company and United under the 1933 Act in connection with the underwriting described in Section 1.11 hereof (the "Underwriting Registration Statements") and any amendments or supplements to any of the foregoing documents will, when filed, when the Registration Statement and the Underwriting Registration Statements are declared effective by the SEC, at the time of the distribution thereof and at the time stockholders vote on the Shareholder Vote Matters comply as to form in all material respects with the applicable requirements of the 1933 Act and the 1934 Act.
 
 

(b) At the time the Company Proxy Statement and Schedule 13E-3 or any amendment or supplement thereto is first mailed to stockholders of the Company, and at the time such stockholders of the Company vote on the Shareholder Vote Matters, the Company Proxy Statement and Schedule 13E-3, as supplemented or amended, if applicable, will not be false or misleading with respect to any material fact, or omit to state any material fact required to be stated therein or necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading. At the time of the filing of the Registration Statement and the Underwriting Registration Statements and any amendment or supplement thereto, at the time the same are declared effective by the SEC, at the time of any distribution under the Registration Statement and the Underwriting Registration Statements, at the time the stockholders of the Company vote on the Shareholder Vote Matters and at the Effective Time, such Registration Statement and Underwriting Registration Statements, as so amended or supplemented, will not be false or misleading with respect to any material fact or omit to state any material fact required to be stated therein or necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading. At the time of the filing of any Company Disclosure Document other than the Company Proxy Statement, Schedule 13E-3, Registration Statement and the Underwriting Registration Statements and at the time of any distribution thereof, such Company Disclosure Document will not be false or misleading with respect to any material fact or omit to state any material fact required to be stated therein or necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties contained in this Section 3.9(b) will not apply to statements included in or omissions from the Company Disclosure Documents based upon information furnished to the Company in writing by either Union specifically for use therein.
 
 

SECTION 3.10    Absence of Certain Changes.    Except as disclosed in SEC filings referred to in Section 3.7 filed prior to the date hereof, since December 31, 1993, there has been no event, and no state of circumstances has existed, that has had or will, or could reasonably be expected to, have a Material Adverse Effect.
 
 

SECTION 3.11    Finders' Fees.    Except for First Boston and Lazard, whose fees will be paid by the Company, and as specifically contemplated herein, there is no investment banker, broker or finder which has been retained by or is authorized to act on behalf of the Company, any Subsidiary or, to the knowledge of the Company, any CRS Company, who might be entitled to any fee or commission from the Company, either Union or any affiliate of either of them upon consummation of the transactions contemplated by this Agreement (other than in connection with the Underwriting Alternative), based upon arrangements made by or on behalf of the Company. .
 
 

SECTION 3.12.   Board Action.   The Board of Directors (i) has determined that the transactions contemplated hereby are fair to and in the best interest of the Company's stockholders, (ii) has approved the Reclassification, the Recapitalization and this Agreement, (iii) has approved the Company Plan Matters, subject to ratification by the Company's stockholders and the New Directors, and (iv) has resolved to recommend (subject to the provisions of Section 5.4) the approval and adoption of the Shareholder Vote Matters to the Company's stockholders at the Company Stockholder Meeting.
 
 

SECTION 3.13    Securities.   The Recapitalization Securities and the ESOP Preferred Stocks (and the New Shares into which the ESOP Preferred Stocks are convertible) to be issued pursuant to Sections 1.2, 1.3, 1.4, 1.6 and 1.10, when so issued in accordance with such Sections and the Registration Statement and the Underwriting Registration Statements, if applicable, will be duly authorized and validly issued and, in the case of such securities other than the Debentures, will be fully paid and nonassessable.
 
 

SECTION 3.14    Opinion of Financial Advisers.   The Company has received the respective oral opinions of First Boston and Lazard to the effect that, as of May 20, 1994, the consideration to be received in the Recapitalization by the Company's stockholders is fair to the Company's stockholders from a financial point of view, which opinions shall be confirmed in writing and delivered to each of the Unions promptly following receipt (the "Company Fairness Opinions").
 
 

SECTION 3.15    Vote Required.    The affirmative vote of a majority of the votes that holders of the outstanding Old Shares are entitled to cast is the only vote of the holders of any class or series of capital stock of the Company necessary to approve the Shareholder Vote Matters. The Shareholder Vote Matters are the only matters required to be approved by holders of capital stock of the Company in connection with the Recapitalization.
 
 

SECTION 3.16.   Limitations.    As of the date of this Agreement, the Company has no knowledge of any event or condition which would preclude it from taking any action necessary to consummate the transactions contemplated hereby.
 
 

SECTION 3.17.   Compliance with Status Quo.   The Company has complied in all material respects with its obligations contained in Sections 10 and 11 of that certain letter setting forth the principal terms of the Recapitalization, dated December 22, 1993, among the Company, the IAM and ALPA (the "Letter Agreement"), which apply to transactions entered into after December 22, 1993 and on or prior to March 15, 1994 (the "Status Quo Provisions"). Except as set forth on Schedule 3.17, neither the Company nor any of its Subsidiaries has taken any action that would have violated the Status Quo Provisions in any material respect had the Status Quo Provisions continued to remain in effect through the date hereof. Except as set forth on Schedule 5.1, the Company has not disclosed to the Unions any plans of the type referred to in Section 5.1 (e) since December 22, 1993.
 
 

SECTION 3.18    Rights Agreement.   The Board of Directors has taken all necessary action to amend the Rights Agreement, effective at or immediately prior to the Effective Time, in form and substance as set forth in Schedule 3.18 (the "Rights Amendment").
 
 
 
 

ARTICLE IV  
REPRESENTATIONS AND WARRANTIES
OF THE UNIONS


Each Union hereby severally, and not jointly, represents and warrants to the Company that: SECTION 4.1    Existence and Power.   Such Union is, in the case of ALPA, an unincorporated association organized and maintained for purposes of a labor association and the duly authorized representative of pilots employed by United under the Railway Labor Act, as amended (the "RLA"), and, in the case of the 1AM, is an incorporated association organized and maintained for purposes of a labor organization and is the duly authorized representative of employees employed by United as mechanics and related employees, ramp and stores employees, food service employees, dispatchers, and security officers, and has all organizational powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted.
 
 

SECTION 4.2    Authorization.    The execution, delivery and performance by such Union of this Agreement and the consummation by such Union of the transactions contemplated hereby (including the applicable Labor Agreement) are within the organizational powers of such Union and have been duly authorized by all necessary organizational action of such Union. This Agreement has been duly executed and delivered by such Union and, assuming due authorization, execution and delivery by the Company and the other Union, constitutes a valid and binding agreement of such Union, enforceable against such Union in accordance with its terms.
 
 

SECTION 4.3    Governmental Authorization.   The execution, delivery and performance by such Union of this Agreement and the consummation by such Union of the transactions contemplated by this Agreement require no consent, approval, authorization or other action by or in respect of, or filing with or notification to, any governmental body, agency, official or authority other than (i) compliance with any applicable requirements of the HSR Act, (ii) any applicable filings with DOT, and (iii) actions or filings the absence of which would not, in the aggregate, have a material adverse effect on such Union or on the ability of such Union to perform its obligations under this Agreement.
 
 

SECTION 4.4    Non-Contravention   The execution, delivery and performance by such Union of this Agreement and the consummation by such Union of the transactions contemplated hereby do not and will not (i) contravene or conflict with the organizational documents of-such Union, (ii) assuming compliance with the matters referred to in Section 4.3, contravene or conflict with any provision of law, regulation, judgment, order or decree binding upon such Union or (iii) constitute a default under or give rise to any right of termination, cancellation or acceleration of any right or obligation of such Union or to a loss of any benefit to which such Union is entitled under any agreement, contract or other instrument binding upon such Union, which defaults, terminations, cancellations, accelerations or losses, could individually or in the aggregate have a material adverse effect on such Union or on the ability of such Union to perform its obligations under this Agreement.
 
 

SECTION 4.5.   Disclosure Documents.   The information with respect to such Union that such Union furnishes to the Company in writing specifically for use in any Company Disclosure Documents, taken as a whole, will not be false or misleading with respect to any material fact of omit to state any material fact required to be stated therein or necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading (i) in the case of the Company Proxy Statement and the Schedule 13E-3, at the time it or any amendment or supplement thereto is first mailed to stockholders of the Company, and at the time the stockholders vote on adoption of the Shareholder Vote Matters, (ii) in the case of the Registration Statement and each of the Underwriting Registration Statements, at the time it or any amendment is filed and is declared effective by the SEC and is distributed and, in the case of the Registration Statement, at the time the stockholders vote on the Shareholder Vote Matters and at the Effective Time, and (iii) in the case of any other Company Disclosure Document, at the time of the filing thereof and at the time of any distribution thereof.
 
 

SECTION 4.6    Finders' Fees    Except as previously disclosed to the Company in writing (and such other persons that such Union may have selected after the date hereof whose fees will be paid by such Union or the Company, subject, in the case of payment by the Company, to the terms of the Fee Letter (as defined in Section 10.4)) or as otherwise contemplated hereby or by their engagement letters, there is no investment banker, broker, finder or other intermediary who might be entitled to any fee or commission from the Company, such Union or any affiliate of either of them upon consummation of the transactions contemplated by this Agreement based upon arrangements made by or on behalf of such Union.
 
 

SECTION 4.7.   Limitations.    As of the date of this Agreement, such Union has no knowledge of any event or conditions which would preclude it from taking any action necessary to consummate the transactions contemplated hereby.
 
 
 
 
 
 

ARTICLE V   COVENANTS OF THE COMPANY   The Company agrees that: SECTION 5.1    Conduct of the Company.   From the date hereof until the Effective Time, without the consent of the Unions, the Company and its Subsidiaries shall, except as specifically provided in Article 1, Section 5.4 and Section 9.1(dxii) or on Schedule 5.1(i) or other Schedules, Exhibits or attachments hereto, conduct their business in the ordinary course consistent with past practice and shall use their best efforts to preserve intact their business organizations and relationships with third parties and to keep available the services of their present officers and employees. Without limiting the generality of the foregoing, from the date hereof until the Effective Time, neither the Company nor any Subsidiary shall, without the prior written consent of the Unions, except as otherwise expressly provided in this Agreement:
 
  (a) issue, sell, dispose of, pledge or otherwise encumber, or authorize or propose the issuance, sale, disposition, pledge or other encumbrance of, any Company Securities or Subsidiary Securities other than pursuant to the exercise of options outstanding as of December 22, 1993 (or issued in accordance with the restrictions contained in Letter Agreement) under the Company's 1981 Incentive Stock Program or the issuance of Rights in connection with the issuance of Old Shares upon exercise of such options, or, with respect to securities of Subsidiaries, to the Company;
 
 

(b) reclassify, combine, split, subdivide, redeem, purchase or otherwise acquire, or propose to purchase or otherwise acquire, any Company Securities or Subsidiary Securities, except repurchases of Company securities, (x) pursuant to employee stock purchase, stock option, stock grant or other employee arrangements or (y) pursuant to rules or requirements under the Employee Retirement Income Security Act of 1974, as amended;
 
 

(c) declare or pay any dividend or distribution on the Old Shares;
 
 

(d) (i) increase the compensation of any of its directors, officers or key employees, except in the ordinary course of business and consistent with past practice or pursuant to the terms of agreements or plans currently in effect; (ii) pay or agree to pay any pension, retirement allowance or other employee benefit that is either not required or specifically permissible by any existing plan, agreement or arrangement to any director, officer or key employee, other than in the ordinary course of business and consistent with past practice; (iii)'commit itself to any additional pension, profit-sharing, bonus, extra compensation, incentive, deferred compensation, stock purchase, stock option, stock appreciation right, group insurance, severance pay, retirement or other employee benefit plan, agreement or arrangement, or to any employment or consulting agreement with or for the benefit of any director, officer or key employee whether past or present, except in the ordinary course of business consistent with past practice; or (iv) except as required by applicable law, amend in any material respect any such plan, agreement or arrangement; provided that the foregoing shall not be deemed to restrict necessary and reasonable actions taken in connection with (aa) retention of personnel other than executive officers or (bb) promotions and new hires in the ordinary course of business consistent with past practice; provided, further. that nothing herein shall preclude the Company or any of its Subsidiaries from taking any action reasonably designed to permit any employee to realize vested benefits under any existing plan, agreement or arrangement referred to above;
 
 

(e) except in the ordinary course of business and consistent with past practice and except for refinancings or pursuant to existing plans of the Company disclosed to the Unions in writing prior to the date hereof (i) incur any material amount of long-term indebtedness for borrowed money or issue any material amount of debt securities (other than trade debt and commercial paper) or assume, guarantee or endorse the obligations of any other person except for obligations of wholly owned Subsidiaries; (ii) make any material loans, advances or capital contributions to, or investments in, any other person (other than to wholly owned Subsidiaries or customary loans or advances to employees in amounts not material to the maker of such loan or advance); or (iii) mortgage or pledge any of its material assets, tangible or intangible, or create or suffer to exist any lien thereupon, other than any purchase money mortgage or lien; or
 
 

(f) enter into any agreement or arrangement to do any of the foregoing.
 
 

In addition, except as specifically provided in Section 5.4 and Section 9.1(d)(ii), from the date hereof until the Effective Time, without the prior written consent of the Unions, the Company and its Subsidiaries shall not take any action (i) which would violate or be inconsistent with the job protection provisions set forth in Section 1 and Letters 94-1 and 94-2 of the ALPA Labor Agreement (as defined below) or the job protection provisions of the IAM Labor Agreement (as defined below) set forth on Schedule 5.1(ii) as if all references to the date of signing, the date of the ALPA and IAM Labor Agreements, the date of ratification or the date of closing in such Labor Agreements (including all references therein to July 1, 1994, when intended to be the date of closing of such Labor Agreements) referred to the date of this Agreement or (ii) which, either alone or together with any matters entered into from December 22, 1993 through the date hereof, would be subject to Article FIFTH, Sections 3.1 through 3.5 of the Restated Certificate or (iii) except as provided in Section 5.7, to alter or amend the terms of any of the Company's Board of Directors' resolutions or any of its policies, practices, procedures or employee benefit plans (as described on Schedule 5.l(iii)) in any manner which would adversely affect the right or ability of the employees of the Company or United directly or indirectly to purchase equity securities of the Company.
 
 

The Flight Kitchen severance package described in paragraph 26 of Exhibit E-2 to the Letter Agreement shall be restored and benefits described in that paragraph shall be provided as if the condition described in paragraph 26, section 5(a) of Exhibit E-2 had been fully complied with. Any Food Service Agreement employee who can demonstrate that his or her job status at United was adversely affected by his or her detrimental reliance on United's March 16, 1994 announcement cancelling the Flight Kitchen LPP's will be entitled to receive a remedy from United for his or her actual contractual damages, if any. Any disagreement regarding entitlement to or the nature of such remedy may be submitted to the United-IAM System Board of Adjustment.
 
 

SECTION 5.2    Stockholder Meeting; Proxy Material.   Subject to receipt by the Company of updated Company Fairness Opinions from First Boston and Lazard to the effect that, as of the date of the Company Proxy Statement, the consideration to be received in the Recapitalization by the Company's stockholders is fair to the Company's stockholders from a financial point of view, the Company shall cause a meeting of its stockholders (the "Company Stockholder Meeting") to be duly called and held as soon as reasonably practicable after the date on which the Registration Statement is declared effective by the SEC, for the purpose of voting on the approval and adoption of each of the Reclassification, the Restated Certificate, the election of four of the five initial Public Directors to the Board of Directors of the Company, the Recapitalization and the issuance of the ESOP Preferred Stock as part of the Recapitalization (such matters are collectively referred to as the "Shareholder Vote Matters") and the Company Plan Matters. The Shareholder Vote Matters shall be presented as a single proposal, or the effectiveness of each such matter shall be conditioned on the approval of all of such matters. Consistent with its obligations under Section 7.1, the Company shall be entitled to delay the Company Stockholder Meeting if the Company does not receive, as of the Announcement Date, updated Company Fairness Opinions from First Boston and Lazard to the effect that, as of the Announcement Date, the consideration to be received in the Recapitalization by the Company's stockholders is fair to the Company's stockholders from a financial point of view. Subject to Section 5.4, the directors of the Company shall recommend the approval and adoption of the Shareholder Vote Matters by the Company's stockholders and shall use its best efforts (as defined in Section 7.1) in soliciting such approval. Subject to Section 5.4, in connection with such meeting, the Company (i) will promptly prepare and file with the SEC, will use its best efforts to have cleared by the SEC and will, subject to the effectiveness of the Registration Statement, thereafter mail to its stockholders as promptly as practicable, the Company Proxy Statement (including the information required by the Schedule 13E-3) and all other proxy materials for such meeting, (ii) will use its best efforts to obtain the necessary approvals by its stockholders of the Shareholder Vote Matters and (iii) will otherwise comply with all legal requirements applicable to such meeting. A reasonable period of time prior to the initial filing of (or the filing of any amendment of supplement to) any of the Company Proxy Statement, the Registration Statement, the Underwriting Registration Statements, the Schedule 13E-3 or any other Company Disclosure Document, the Company shall provide to each of the Unions, in accordance with the notice provisions contained in Section 10.1, a copy of the same. The Company shall provide the Unions with a reasonable opportunity to review and comment on each of such documents prior to such filing with a view toward the production and filing of mutually acceptable documents, subject to (1) the Company's responsibilities under applicable securities laws and (2) other applicable legal requirements.
 
 

SECTION 5.3    Access. Subject to the absence of a material breach of Section 6.1, from the date hereof until the Effective Time, the Company will give each Union, its counsel, financial advisors, auditors and other designated representatives reasonable access following reasonable notice during normal business hours (which access shall be coordinated through a person designated by the Company, which person (or another authorized person) shall be available during normal business hours) to the offices, employees, properties, books and records of the Company and the Subsidiaries, will furnish, if reasonably requested, to each Union, its counsel, financial advisors, auditors and other authorized representatives such financial and operating data and other information in connection with the Agreement and the transactions contemplated hereby as such persons may reasonably request and will instruct the Company's officers, employees, counsel and financial advisors to cooperate reasonably with each Union and each Union's counsel, financial advisors, auditors and other designated representatives in their investigation of the business of the Company and the Subsidiaries and to take such steps as may be reasonably requested by each Union and such counsel, advisors, auditors and other representatives to assist them in connection with the transactions contemplated by this Agreement; provided that no investigation pursuant to this Section shall affect any representation, warranty, covenant or agreement made by the Company to each Union under this Agreement. Each Union, its counsel, financial advisors, auditors and other designated representatives shall conduct themselves under this Section 5.3 so as not to interfere with the day-to-day operations of the Company.
 
 

SECTION 5.4    Other Potential Transactions.   The Company shall not, directly or indirectly, encourage, solicit, participate in or initiate discussions or negotiations with, or provide any information to, any corporation, partnership, person or other entity or group (other than the Unions or their advisors or the ESOP Trustee or its advisors) concerning any merger, sale of assets, sale of, or tender or exchange offer for, shares of capital stock or similar transaction, involving a change of control of the Company or all or substantially all of the assets of the Company (an "Acquisition"), except as set forth below. The Company may, directly or indirectly, furnish information and access, in each case in response to an unsolicited request therefor, to the same extent permitted by Section 5.3 hereof, to any corporation, partnership, person or other entity or group pursuant to appropriate confidentiality agreements, and may participate in discussions and negotiate with such entity or group concerning any such transaction, if the entire Board of Directors of the Company (the "Board") (and, to the extent a director is a participant in an alternative Acquisition, the disinterested members of the Board) determine in their good faith judgment, upon advice of independent legal and financial advisors (who may be the Company's regularly engaged independent legal and financial advisors), that such action is required by their fiduciary duties. In addition, the Company's officers and other appropriate personnel may take such steps as are necessary or appropriate to provide the Board with sufficient information to make an informed decision concerning the matters described in the previous sentence and, if the Board so determines that such actions are required by their fiduciary duties, the Company may direct its officers and other appropriate personnel to cooperate with and be reasonably available to consult with any such entity or group which were the subject of such determination. Nothing herein shall prevent the Board from taking, and disclosing to the Company's shareholders, a position contemplated by Rules 14d-9 and 14e-2 promulgated under the 1934 Act with respect to any tender offer or from making such other disclosure to shareholders or taking such other action which, in the judgment of the Board, upon advice of such counsel, is required by law to discharge any fiduciary duty imposed thereby.
 
 

SECTION 5.5    Notices of Certain Events.   The Company shall notify each Union of, and provide to each Union all relevant details relating to, and documentation submitted to or by the Company in respect of, (i) any notice or other communication from any person alleging that the consent of such person is or may be required in connection with the transactions contemplated by this Agreement, (ii) any notice or other communication from any governmental or regulatory agency or authority in connection with the transactions contemplated by this Agreement and (iii) any proposal for, or contacts and expressions of interest relating to, an Acquisition or other matter contemplated by Section 5.4 and action taken by the Company in respect thereof.
 
 

SECTION 5.6    Amendment of Rights Agreement.   The Company shall amend the Rights Agreement, effective immediately prior to the Effective Time, in accordance with the Rights Amendment and to provide that each outstanding share of ESOP Convertible Preferred Stock following the Effective Time, as well as each Available Unissued ESOP Share (as defined in Article FIFTH, Section 1.5 of the Restated Certificate), shall have associated with it and represent that number of Rights (as defined in the Rights Agreement) as would be associated with the number of New Shares into which the relevant share of ESOP Convertible Preferred Stock is then convertible and to cause such Rights to be exercisable by, and to cause separate certificates representing such Rights to be distributed to, and be separately transferable by, holders of shares of ESOP Convertible Preferred Stock (and Available Unissued ESOP Shares) at the time and upon terms substantially the same as those applicable to the holders of New Shares.
 
 

SECTION 5.7    Employee Benefit Plans.   The Company shall take such action to amend, in form reasonably satisfactory to each Union, the directed account plans and 401(k) plans maintained by the Company or United for the benefit of employees, and shall take all other reasonable action, so as to permit investment of the funds held thereunder at the individual direction of the beneficiaries of such plans to purchase the Company's common stock, preferred stock, Depositary Shares and/or debt securities in the open market, subject to rules and regulations under the 1934 Act. The Company shall take such action to amend the stock purchase plans maintained by the Company or United for the benefit of employees so as to require the distribution of the consideration received upon redemption of the Redeemable Preferred Stock in accordance with Section 1.3 to be received by such plans in the Reclassification, or the cash proceeds from the sale thereof, to participants, subject to applicable law. Consistent with existing Company policy with respect to purchases of Old Shares, the aforementioned plan amendments to the directed account plans and the 401(k) plans, and the stock purchase plans, shall permit employees of the Company and United following the Effective Time to acquire, in addition to amounts held in the ESOPs, the following securities: (X) up to the lesser of (i) 30% of the outstanding New Shares held by persons other than the ESOPs and (ii) 20% of the aggregate number of outstanding New Shares and New Shares issuable upon conversion of the ESOP Preferred Stock outstanding or issuable to Sections 1.6 or 1.10 hereof (including Available Unissued ESOP Shares) and (Y) except with respect to the stock purchase plan, up to (i) 20% of the outstanding Depositary Shares, (ii) 20% of the outstanding principal amount of Series A Debentures and (iii) 20% of the outstanding principal amount of Series B Debentures; subject to the following additional limits: (A) no employee group of the Company or its Subsidiaries (which, for this purpose, shall mean employees represented by each of ALPA, the IAM, and the AFA (as defined in Section 7.3) and the Salaried and Management Employees (as defined in Section 5.8(b)) (each, an "Employee Group") may individually acquire more than 10% of the outstanding shares or amount of any class of securities referred to in clause (X) and (Y) above through such plans; (B) in the case of the directed account plans, no Employee Group may individually acquire more than 2% of the outstanding shares or amount of any such class of securities in any monthly subscription period through such plans; (C) no Employee Group may individually acquire more than 2% of the outstanding New Shares held by persons other than the ESOPs (in addition to New Shares received in the Reclassification) through such plans during the six month period beginning at the Effective Time; and (D) no New Shares may be acquired through such plans during the six month period ending on the last day of the Measuring Period, as defined in Section 1.10.
 
 

The Company shall not be required to expand the scope of any third party indemnity in a manner adverse to the Company in order to implement the amendments referred to in clause (Y) above.
 
 

SECTION 5.8    Labor Agreements. (a) The Company shall cause United, at the Effective Time, to execute and deliver new collective bargaining agreements (or amendments to existing collective bargaining agreements) with each of ALPA and the IAM, each in form and substance as set forth on Schedules 5.8(i) and 5.8(ii), respectively. The agreement set forth on Schedule 5.8(i) is referred to herein as the "ALPA Labor Agreement," the agreements set forth on Schedule 5.8(ii) are collectively referred to herein as the "IAM Labor Agreement" and the ALPA Labor Agreement and the IAM Labor Agreement are collectively referred to herein as the "Labor Agreements."
 
 

(b) The Company shall also establish and cause United to establish appropriate employment terms for the employees of the Company and United who perform the functions currently performed by the salaried and management employees of the Company and United (including any functions which such group of employees begin performing in the future) (the "Salaried and Management Employees"), in form and substance as set forth on Schedule 5.8(iii), effective at the Effective Time. From and after the date hereof, the Company shall provide the Unions and their respective counsel, financial advisors, auditors and other representatives with the access and information necessary to confirm the Company's continuing implementation of the provisions of this Section 5.8(b).
 
 

SECTION 5.9    Solvency Letter.   The Company has retained American Appraisal Associates (the "Appraiser") to provide, at or prior to the Effective Time, opinion in writing to the Company and the Board substantially similar to the letter set forth on Schedule 5.9 (the "Solvency Letter"). If the Solvency Letter is delivered to the effect that sufficient surplus is available to permit the consummation of the Recapitalization consistent with Delaware Law, the Board shall take all lawful and appropriate action, effective as at the Effective Time, to revalue the Company's assets and liabilities to permit the consummation of the Recapitalization in accordance with Delaware Law.
 
 

SECTION 5.10    Other Transaction Documents.   The Company hereby agrees that at the Effective Time it will execute the form of employment agreement (the "Employment Agreement") between the Company and Gerald Greenwald in the form attached to the agreement (the "Retention Agreement") between the Unions and Gerald Greenwald providing for his employment by the Company from and after the Effective Time on the terms set forth in the Employment Agreement. The Comply hereby agrees from and after execution by Gerald Greenwald of the Employment Agreement at the Effective Time to perform all of its obligations, whether or not due and owing, under the Employment Agreement. The Retention Agreement may not be amended without the written consent of the Company. A true and correct copy of the Retention Agreement (with the attached form of the Employment Agreement) has been delivered by the Unions to the Company. In addition, immediately prior to the Effective Time, the Company shall execute and deliver (or shall have theretofore executed and delivered) the following documents and agreements: the Officers' Certificate relating to the Indenture, the Deposit Agreement, the initial ESOP Stock Purchase Agreement, the ESOP Trusts, the Exchange Agent Agreement, the Rights Amendment, the Class I Preferred Stock Subscription Agreement, the Class Pilot MEC Preferred Stock Subscription Agreement, the Class IAM Preferred Stock Subscription Agreement, the Class SAM Preferred Stock Subscription Agreement, a shareholders agreement with the initial Independent Directors in form and substance as set forth on Schedule 5.10 (i) (the "Class I Preferred Stock Shareholders Agreement"), a shareholder agreement with the holders of the Class SAM Preferred Stock in form and substance as set forth on Schedule 5.10(ii), and a First Refusal Agreement between the Company, the Unions and the SAM Director, in form and substance as set forth on Schedule 5.10(iii) (collectively, the "Closing Agreements").
 
 

SECTION 5.11    Certain Agreements.   Without limiting in any respect the Company's and United's rights or obligations under any other agreement, arrangement or understanding to which it is a party, the Company specifically confirms, and shall cause United to confirm, their respective obligations under the employee and director benefit plans, agreements, policies and arrangements maintained by the Company and/or United or to which the Company and/or United is a party, in each case as in effect on the date hereof (subject to revision in accordance with Section 5.1), identified in a letter to the Unions dated the date hereof (the "Officer and Director Arrangements"); provided, that the provisions of this Section 5.11 (a) shall be subject to Section 5.1 prior to the Effective Time and (b) shall not restrict the Company's or United's ability to terminate, revise or replace any Officer and Directors Arrangements after the Effective Time so long as such action does not reduce or otherwise adversely affect rights of any beneficiary under any such Officers and Directors Arrangements that the Company or United is obligated to provide following the Effective Time without his or her consent.
 
 
 
 
 
 

ARTICLE VI   COVENANTS OF EACH UNION   Each Union agrees that:
 
 

SECTION 6.1    Confidentiality.
 
 

(a) Prior to the Effective Time and after any termination of this Agreement, each Union agrees that, except as provided herein, it will not at any time after its receipt of any Confidential Information (as defined below), directly or indirectly, divulge to any person or entity any of the Confidential Information or any information, report, analysis, compilation, study, interpretation, forecast, record or other material prepared by such Union or its Representatives (as defined below) (including, if maintained in some written or other form, in whatever form maintained, whether documentary, computer storage or otherwise) containing, in whole or in part, any Confidential Information. "Confidential Information" shall include all confidential written or oral information concerning the Company and the Subsidiaries furnished to such Union in connection with the transaction contemplated by this Agreement, except to the extent that such information does not include information which is or becomes (i) generally available to the public other than as a result of disclosure by a Union or its Representatives in violation of this Agreement, (ii) was available to a Union or one of its Representatives on a non-confidential basis prior to its disclosure to them by the Company or (iii) known or available to a Union or' its Representatives on a non-confidential basis from a source (other than the Company) who, insofar as is known to such Union or its Representatives after due inquiry, is not prohibited from transmitting the information to such Union or its Representatives by a contractual, legal or fiduciary duty. The term "person" shall be broadly interpreted to include, without limitation, any individual, corporation, company, unincorporated association, partnership, group or other entity.
 
 

(b) Each Union shall limit access to the Confidential Information to its officials and Representatives who in the reasonable judgment of such Union need to know the Confidential Information for purposes of participating in making decisions concerning, or advising it with respect to, the Confidential Information ("informed officials and Representatives"). Disclosure of Confidential Information may be made only to officers, directors, employees, accountants, counsel, consultants, advisors and agents of one of the Unions who executes a Confidentiality Statement (a "Representative"), in the form attached either to this Agreement as Schedule 6.1 or as an attachment to a confidentiality agreement between the Company and such Union entered into prior to the date hereof (a "Confidentiality Statement"). An executed original of each such Confidentiality Statement shall be provided to the Company by the Union obtaining it. Each Union and its Representatives tray discuss with the informed officials and Representatives of each other Union the Confidential Information which such Union has been provided pursuant to this Agreement or any prior confidentiality agreement between the Company afar such Union relating to the Confidential Information provided that such Confidential Information shall continue to be subject to this Agreement and any other applicable confidentiality agreement. In all events, each Union shall be responsible for any actions by its Representatives which are not in accordance with the provisions hereof and of any Confidentiality Statement executed by a Representative but shall not be responsible for such actions of any informed official or Representative of the other Union. ..
 
 

(c) In the event that a Union, its Representatives or anyone to whom a Union or its Representatives supply Confidential Information are requested or required through legal process (by oral questions, interrogatories, requests for information or documents, subpoena, civil investigative demand, any informal or formal investigation by any government or governmental agency or authority or otherwise) to disclose any Confidential Information, the Union will, upon learning of such request or requirement, (i) immediately notify the Company of the existence, terms and circumstances surrounding such a request, (ii) consult with the Company on the advisability of taking legally available steps to resist or narrow such request and (iii) if disclosure of such information is required, furnish only that portion of the Confidential Information which, in the opinion of the Union's legal counsel, it is legally compelled to disclose and cooperate with any action by the Company to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded the Confidential Information.
 
 

(d) Except in respect of any Confidential Information that is in this Agreement (or may in the future be) the subject of an express representation by the Company, (i) neither the Company nor its employees, agents, affiliates or representatives (collectively hereinafter referred to as the "Company Representatives") makes any express or implied representation as to the accuracy or completeness of the Confidential Information and (ii) each Union and its Representatives agree that neither the Company nor any Company Representative shall have any liability to such Union or its Representatives resulting from the use by such Union or its Representatives of Confidential Information. So long as neither Union is in material breach of its obligations under this Section 6.1, nothing in this Section 6.1(d) is intended to limit Section 5.3.
 
 

(e) Each Union hereby acknowledges that it is aware, and that it will advise its Representatives who are informed in accordance with the terms of this Agreement, as to the matters which are the subject of this Agreement, that the United States securities laws prohibit any person who has received from an issuer material, non-public information concerning the matters which are the subject of this Agreement from purchasing or selling securities of such issuer due to the receipt of Confidential Information or from communicating such information to any other person under circumstances in which it is reasonably foreseeable that such person is likely to purchase or sell such securities due to the receipt of Confidential Information.
 
 

(f) Each Union expressly acknowledges that (i) the preservation of the confidentiality of the Confidential Information has highly important commercial significance for the Company and (ii) its unauthorized disclosure could have serious and irreparable adverse commercial, financial and legal consequences for the Company. It accordingly agrees that the Company shall be entitled to injunctive relief to prevent breaches of this Agreement and to specifically enforce the terms and provisions of this Section, in addition to any other remedy to which the Company may be entitled, at law or in equity or pursuant to this Agreement.
 
 

(g) Each Union and its Representatives hereby acknowledge that the Confidential Information is being furnished to them solely in connection with a review in connection with the transactions contemplated by this Agreement and analysis of the Company's business and financial condition and none of such Unions or their Representatives shall use the Confidential Information other than in connection with such review and analysis and potential responses thereto made directly to the Company (which may be discussed among and be made by the Unions). No right or license, express or implied, under any patent, copyright, trademark, trade secret, or other proprietary right in the Confidential Information is granted hereunder by United to a Union or its Representatives.
 
 

(h) Each Union will keep a record of the location of the Confidential Information. If the Agreement is terminated prior to the Effective Time, each Union agrees for itself and for its Representatives who reviewed the Confidential Information, to return to the Company or destroy all documents reflecting the Confidential Information and to certify in writing to the Company that such documents have been so returned or destroyed.
 
 

SECTION 6.2    Labor Agreements.   Such Union shall execute and deliver, at the Effective Time, the relevant Labor Agreement.
 
 

SECTION 6.3    No Public Director Nominations.   Such Union shall not, directly or indirectly, nominate or cause to be nominated any individual for election as an Outside- Public Director (as defined in Article FIFTH, Section 2.3 of the Restated Certificate) of the Company; provided, however, that any such nomination by an employee of the Company or United, acting in his or her individual capacity as a shareholder of the Company, shall not be deemed to violate this Section 6.3 so long as such nomination was not made with the advice, support, or assistance of any officer of such Union.
 
 

SECTION 6.4    Independent Director Vacancies.  The Unions agree to use their best efforts to cause any Independent Director vacancy resulting after the Effective Time promptly to be filled in accordance with Article FIFTH, Section 4.1.6 of the Restated Certificate.
 
 
 
 

ARTICLE VII  
COVENANTS OF EACH OF THE UNIONS
AND THE COMPANY


The parties hereto agree that: SECTION 7.1    Best Efforts.   Subject to the terms and conditions of this Agreement, including Section 5.4, each party (a) will use its best efforts, and will cause all of its directors, officers and advisors retained by such party to use their best efforts, to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations that may be necessary or useful, to consummate the transactions contemplated by this Agreement and (b) will, and will cause its directors, officers and advisors retained by such party to, refrain from taking any actions detrimental to or inconsistent with the foregoing. In the event that any action, suit, proceeding or investigation relating hereto or to the transactions contemplated hereby is commenced, whether before or after the Effective Time, the parties hereto agree to cooperate and use their best efforts to defend against the same and respond thereto. As used in this Agreement, the term "best efforts" shall mean efforts of a type that a prudent person desirous of achieving a result would use in similar circumstances in seeking to achieve such result reasonably promptly in light of the Outside Termination Date (as defined in Section 9.1); provided, however, that a party required to use its best efforts under this Agreement will not be required to take actions that would not normally be taken by the parties in similar circumstances or that would result in a materially adverse change in the benefits intended to be conferred upon such party pursuant to this Agreement and the transactions contemplated hereby.
 
 

SECTION 7.2    Certain Filings.   The Company and each of the Unions shall cooperate with one another (a) in connection with any preparation of the Company Disclosure Documents, the Company Proxy Statement, the Schedule 13E-3, the Registration Statement and the Underwriting Registration Statements, (b) in determining whether any action by or in respect of, or filing with, any governmental body, agency, official or authority is required, or any actions, consents, approvals or waivers are required to be obtained from parties to any material contracts, permits, licenses and franchises, in connection with the consummation of the transactions contemplated by this Agreement and (c) in seeking any such actions, consents, approvals or waivers or making any such filings, furnishing information required in connection therewith or with the Company Disclosure Documents, the Company Proxy Statement, the Schedule 13E-3, the Registration Statement or the Underwriting Registration Statements, and seeking timely to obtain any such actions, consents, approvals or waivers. As soon as practicable after the date hereof, the Company shall, in accordance with Section 5.2, (a) file with the SEC the Company Proxy Statement, the Schedule 13E-3 and the Registration Statement, (b) obtain and furnish the information required to be included therein, (c) after consultation with each Union, respond promptly to comments made by the SEC with respect to the Company Proxy Statement, the Schedule 13E-3 and Registration Statement and any preliminary version thereof and (d) cause the Registration Statement to become effective and the Company Proxy Statement to be mailed to the Company's stockholders at the earliest practicable date. Prior to the effective date of the Registration Statement, the Company shall obtain all necessary state securities laws or "blue sky" permits and approvals required to carry out the Recapitalization and the transactions contemplated by this Agreement.
 
 

SECTION 7.3    Participation.    If,prior to the Effective Time, the Association of Flight Attendants ("AFA") agrees to provide, in the sole judgment of the Company, an investment equal to $416 million (present value in January 1994 dollars for a five year AFA mainline investment and a twelve year AFA Competitive Action Plan (as defined in Schedule 1.1) investment and assuming semi-annual payments, first period not discounted, and annual discount rate of 10%) then, provided that the parties hereto agree upon all aspects of the AFA's participation in the transactions contemplated hereby (e.g. governance provisions set forth in Schedule 1.1, ESOP provisions set forth in Section 1.6 and related schedules) other than the matters described in clauses (i) and (ii) below, the parties hereto shall revise all applicable documents such that (i) the employee investment period with respect to ALPA, IAM and salaried and management employees shall be reduced by nine months; and (ii) 12.62% of the ESOP Preferred Stock otherwise to be allocated to ALPA-represented employees, IAM-represented employees and Salaried and Management Employees (the "Allocated Shares") shall be made available for allocation to the AFA-represented employees, such that after such allocation, 40.4% of the Allocated Shares shall be allocated to ALPA-represented employees, 32.44% of the Allocated Shares shall be allocated to the IAM-represented employees, 14.54% of the Allocated Shares shall be allocated to the Salaried and Management Employees and 12.62% of the Allocated Shares shall be allocated to the AFA-represented employees.
 
 
 
 

ARTICLE VIII   CONDITIONS TO THE RECAPITALIZATION   SECTION 8.1    Conditions to the Obligations of Each Party.   The obligation of the Company to file the Restated Certificate at the Effective Time pursuant to Section 1.1 and the obligations of each of the Unions to enter into the Labor Agreements at the Effective Time are subject to the satisfaction of the following conditions: (i) the Shareholder Vote Matters shall have been approved and adopted by the stockholders of the Company in accordance with the Certificate of Incorporation and Bylaws of the Company and in accordance with Delaware Law;
 
 

(ii) any applicable waiting period under the HSR Act relating to the Recapitalization shall have expired or been terminated;
 
 

(iii) the Registration Statement shall have become effective under the 1933 Act and shall not be the subject of any stop order or governmental proceedings seeking a, stop order;
 
 

(iv) all material actions by or in respect of or filings with any governmental body, agency, official, or authority required to permit the consummation of the Recapitalization shall have been obtained;
 
 

(v) the New Shares issuable as part of the Recapitalization (including New Shares issuable upon conversion of the ESOP Preferred Stock and upon conversion of the Convertible Company Securities) shall have been authorized for listing on the NYSE subject to official notice of issuance;
 
 

(vi) there shall have been no change in Delaware Law enacted or any applicable decision of a court of competent jurisdiction decided after the date hereof and prior to the Effective Time that would cause the Restated Certificate or Restated Bylaws to fail to comply in any material respect with the applicable provisions of Delaware Law;
 
 

(vii) the ESOP Trustee shall have received the written opinion of Houlihan, Lokey, Howard & Zukin to the effect that, as of the Effective Time, the acquisition of the ESOP Preferred Stock pursuant to Section 1.6(d) hereof by the ESOPs is fair, from a financial point of view, to the ESOP participants;
 
 

(viii) the Board of Directors of the Company shall have received the Solvency Letter; and
 
 

(ix) (A) there shall not be instituted or pending any action, proceeding, application, claim, or counterclaim by any United States federal, state or local government or governmental authority or agency, including the DOT, before any court or governmental regulatory or administrative agency, authority or tribunal, which (x) restrains or prohibits or is reasonably likely to restrain or prohibit the making or consummation of, or is reasonably likely to recover material damages or other relief as a result of, the Recapitalization, or the receipt by holders of the Old Shares of the full amount of the Recapitalization Consideration, or restrains or prohibits or is reasonably likely to restrain or prohibit the performance of, or is reasonably likely to recover material damages or other relief as a result of, this Agreement or any of the transactions contemplated hereby or (y) prohibits or limits or seeks to prohibit or limit the ownership or operation by either Union, the ESOP Trustee, any of the ESOPs or any participant therein of all or any substantial portion of the capital stock, business or assets of the Company or any of its Subsidiaries or compels or seeks to compel either Union, the ESOP Trustee, any of the ESOPs or any participant therein to dispose of or hold separate aA or any substantial portion of the capital stock, business or assets of the Company or any of its Subsidiaries or imposes or seeks to impose any material limitation on the ability of either Union, the ESOP Trustee, any of the ESOPs or any participant therein, to conduct such business or own such assets, (B) there shall not have been instituted or be pending any action, proceeding, application, claim or counterclaim by any other person, before any such body, that is reasonably likely to result in any of the consequences referred to in clauses (A)(x) or (A)(y) above, and (C) there shall not be any United States federal, state or local statute, rule, regulation, decree, order or injunction promulgated, enacted, entered, or enforced by any United States federal, state or local government agency or authority or court, that has any of the effects referred to in clauses (A)(x) or (A)(y) above;
 
 

(x) all conditions to the obligations of the parties to the Closing Agreements to consummate such transactions shall have been satisfied or are capable of being satisfied concurrently upon the occurrence of the Effective Time;
 
 

(xi) the Closing Agreements shall be legal, valid and binding agreements of the Company and the other parties thereto from and after the Effective Time, enforceable against the Company and such other parties in accordance with their terms; and
 
 

(xii) Gerald Greenwald (or such other person as shall be proposed by the Unions prior to the Effective Time and not found unacceptable by the Company) shall be ready, willing and able to assume the office of Chief Executive Officer of the Company and United.
 
 

SECTION 8.2    Conditions to the Obligations of each of the Unions.    The obligations of each of the Unions to enter into the Labor Agreements at the Effective Time are subject to the satisfaction of the following further conditions:
 
  (i) the Company shall have performed, both individually and collectively, in all material respects all of its covenants, agreements or other obligations hereunder required to be performed by it at or prior to the Effective Time; and
 
 

(ii) the representations and warranties of the Company set forth in this Agreement shall be true and correct, both individually and- collectively, in all material respects at and as of the Effective Time as if made at and as of such time; provided that the representations and warranties of the Company set forth in Section 3.10 and each representation and warranty of the Company set forth in this Agreement that is qualified by a "materiality" or similar standard (including, Material Adverse Effect), shall be true in all respects (taking into account all "materiality" and similar qualifications (including; Material Adverse Effect) contained in such representation or warranty) at and as of the Effective Time, as if trade at and as of such time.
 
 

SECTION 8.3    Conditions to the Obligations of the Company.   The obligation of the Company to file the Restated Certificate at the Effective Time pursuant to Section 1.1 is subject to the satisfaction of the following further conditions:
 
  (i) Each Union shall have performed, both individually and collectively, in all material respects all of its covenants, agreements or other obligations hereunder required to be performed by it at or prior to the Effective Time;
 
 

(ii) the representations and warranties of the Unions set forth in this Agreement shall be true and correct, both individually and collectively, in all material respects at and as of the Effective Time as if made at and as of such time; provided that each representation and warranty of the Unions set forth in this Agreement that is qualified by a "materiality" or similar standard shall be true in all respects (taking into account all "materiality" and similar qualifications contained in such representation or warranty) at and as of the Effective Time, as if made at and as of such time;
 
 

(iii) the Board of Directors of the Company shall have received the written opinions of each of First Boston and Lazard, each dated as of the Announcement Date, confirming their earlier opinions, to the effect that the Recapitalization is fair from a financial point of view to the holders of Old Shares; and
 
 

(iv) the Labor Agreements shall have been executed and delivered by the Unions and shall be in full force and effect as of the Effective Time.
 
 

(v) the Board of Directors of the Company shall have received the written opinions of Skadden, Arps, Slate, Meagher & Flom to the effect that (A) when issued, all New Shares, all Depositary Shares and all shares of Public Preferred Stock represented thereby will be duly authorized, validly issued, fully paid and nonassessable, (B) the revaluation of the Company's and United's assets contemplated by Section 5.9 hereof may be effected in connection with the Recapitalization consistent with Delaware Law, (C) when issued, the Debentures will be validly issued and enforceable obligations of United, (D) the consummation of the transactions contemplated by Section 1.6(d) hereof will not result in a non-exempt prohibited transaction under Section 4975(c)(1) of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), or Section 406(a) of the Employee Retirement Income Security Act of 1974, (E) the Recapitalization and Reclassification will not result in the recognition of income, gain or loss to the Company for United States federal income tax purposes and (F) the contributions made by the Company to the ESOPs and, assuming the Company has sufficient earnings and profits, the dividends paid on the ESOP Preferred Stock that, in each case, are used to repay the debt evidenced by the ESOP Note issued in connection with the transactions contemplated by Section 1.6(d) hereof will be deductible under Section 404 of the Internal Revenue Code;
 
 

(vi) the Company shall have determined that it is reasonably likely to have sufficient earnings and profits such that, based on the opinion of counsel described in Section 8.3(v)(F) above, the dividends paid on the ESOP Preferred Stock that are used to repay the debt evidenced by the ESOP Note issued in connection with the transactions contemplated by Section 1.6(d) hereof are reasonably likely to be deductible under Section 404 of the Internal Revenue Code; and
 
 

(vii) the Company shall have determined that the Company will be reasonably likely to have sufficient surplus (whether revaluation surplus or earned surplus) or net profits under Delaware Law to permit the legal payment of dividends on the ESOP Preferred Stock and the Public Preferred Stock when due.
 
 
 
 
 
 
 
 
 
 

ARTICLE IX           TERMINATION  
SECTION 9.1    Termination.    This Agreement shall terminate and the Recapitalization shall be abandoned (notwithstanding any approval of the Shareholder Vote Matters by the stockholders of the Company, any legal action or otherwise) if the Effective Time shall not have occurred by 11:59 p.m. on August 31, 1994 (the "Outside Termination Time"). In addition, this Agreement may be terminated and the Recapitalization may be abandoned at any time prior to the Outside Termination Time and prior to the Effective Time (notwithstanding any approval of the Shareholder Vote Matters by the stockholders of the Company):
 
  (a) by mutual written consent of each of the Unions and the Company; (b) by either of the Unions or the Company if (i) the stockholders of the Company shall not have approved the Shareholder Vote Matters at the Company Stockholder Meeting; or (ii) any court of competent jurisdiction in the United States or other United States federal, state or local governmental body shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the Recapitalization and such order, decree, ruling or other action shall have become final and nonappealable;
 
 

(c) by either Union if (i) the Board shall have withdrawn or modified in a manner materially adverse to such Union its approval or recommendation of the Recapitalization or the Shareholder Vote Matters or shall have recommended, or shall have failed to recommend against, another Acquisition, (ii) the Board shall have resolved to do any of the foregoing, (iii) the Company shall have breached, either individually or collectively, in any material respect any of its material representations, warranties, covenants or other agreements contained in this Agreement, (iv) any person shall have acquired "beneficial ownership" (as defined in the Rights Agreement) or the right to acquire beneficial ownership of, or any "group" (as such term is defined in Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder) shall have been formed which beneficially owns, or has the right to acquire beneficial ownership of, more than 15% of the then outstanding Old Shares, or shall have become an "Acquiring Person" under the Rights Agreement, or (v) there shall have occurred a "Share Acquisition Date" or "Distribution Date" under the Rights Agreement; or
 
 

(d) by the Company if (i) either Union shall have breached, either individually or collectively, in any material respect any of its material representations, warranties, covenants or other agreements contained in this Agreement or (ii) the Board, in accordance with Section 5.4, shall have withdrawn or modified in a manner adverse to either Union its approval or recommendation of the Recapitalization or shall have recommended another Acquisition, or shall have resolved- to do any of the foregoing.
 
 

SECTION 9.2    Termination of Status Quo.    If the Effective Time shall not have occurred on or before the earlier of expiration of four months following the date of the filing by the Company of the preliminary Company Proxy Statement with the SEC and August 31, 1994, the Company may, by written notice to each of the Unions, terminate its obligations under Section 5.1 of this Agreement; provided that the Company's right to so terminate its obligations under Section 5.1 shall not be available in the event the Company's failure to fulfill any obligation under this Agreement has been the cause of or resuited in the failure of the Effective Time to occur on or before such date. In the event the Company elects to terminate its obligations under Section 5.1 in accordance with the preceding sentence, either of the Unions may terminate this Agreement.
 
 

SECTION 9.3    Effect of Termination.   Except as provided in the next sentence, if this Agreement is terminated pursuant to Section 9.1 or 9.2, this Agreement shall become void and of no effect with no liability on the part of any party hereto, except that the agreements contained in Sections 6.1, 9.3 and 10.4 shall survive the termination hereof. Notwithstanding the preceding sentence, if the failure of the Effective Time to occur on or prior to the Outside Termination Date results directly from either (i) a material breach of a specific material representation or warranty contained in this Agreement by one of the parties hereto under circumstances where the breaching party had actual knowledge at the date of this Agreement that such representation or warranty was materially false or misleading or (ii) a material breach of a specific material covenant (a breach described in clause (i) or (ii), as modified by proviso (A) hereto, being called a "Willful Breach"), and one of the other parties hereto has established, as determined by a court of competent jurisdiction, that such Willful Breach has occurred, the breaching party shall be liable to the other parties hereto for proximate and provable damages resulting from such Willful Breach (which shall include the reasonable fees and expenses of such non-breaching parties, including reasonable attorney's fees and expenses, incurred in connection with the transactions contemplated hereby other than in connection with any litigation or other dispute between or among parties hereto); provided (A) to the extent that the material breach of a specific material covenant is not determinable solely by an objective fact (e.g. any best efforts obligation or requirement of reasonableness) such breach shall be actionable hereunder only if the breaching party knew (or demonstrated reckless disregard for whether) its action or failure to act was in violation of such covenant; and (B) such calculation of damages shall not include consequential or punitive damages and shall be the sole and exclusive remedy of the non-breaching parties in the event of a Willful Breach. With respect to a Willful Breach, "knowledge" (or any corollary thereof) or "reckless disregard" shall mean the knowledge or reckless disregard of the senior executives or officials of the Company and United or the Unions, as the case may be, each of whom shall conclusively be deemed to have read this Agreement.
 
 
 
 
 
 

ARTICLE X       MISCELLANEOUS   SECTION 10.1    Notices.    All notices, requests and other communications to any party hereunder shall be in writing (including telex or similar writing) and shall be given,
 
  if to ALPA, to:
 
  UAL-MEC/ALPA

6400 Shafer Court

Suite 700

Rosemont, IL 60018

Telephone: (708) 292-1700

Telecopy: (708) 292-1760
 
 

Attention: Captain Roger D. Hall
 
 

and copies to:,
 
  Paul, Weiss, Rifkind, Wharton & Garrison

1285 Avenue of the Americas

New York, NY 10019

Telephone: (212) 373-3000

Telecopy: (212) 757-3990
 
 

Attention: Stuart I. Oran, Esq.
 
 

and to:
 
  Cohen, Weiss and Simon

330 West 42nd Street

New York, NY 10036

Telephone: (212) 563-4100

Telecopy: (212) 695-5436
 
 

Attention: Stephen Presser, Esq.
 
 

If to IAM, to:
 
  International Association of Machinists and Aerospace Workers Machinists Building 1300 Connecticut Avenue Washington, D.C. 20036 Telephone: (202) 857-5200 Telecopy: (202) 331-9076 Attention: William L. Scheri
 
 

IAM Local 1487

321 Allerton Avenue

San Francisco, CA 94080

Telephone: (415) 873-0662

Telecopy: (415) 873-1676
 
 

Attention: Ken Theide
 
 

and copies to:
 
  Taylor Roth Bush & Geffner

3500 W. Olive, Suite 1100

Burbank, CA 91505

Telephone: (818) 973-3200

Telecopy: (818) 973-3201
 
 

Attention: Robert A. Bush, Esq.
 
 
 
 
 
 
 
 

Lowenstein Sandler Kohl Fisher & Boylan

65 Livingston Avenue

Roseland, New Jersey 07068

Telephone: (201) 992-8700

Telecopy: (201) 992-5820
 
 

Attention: Peter H. Ehrenberg, Esq.
 
 

If to the Company to:
 
  UAL Corporation

1200 E. Algonquin Road

Elk Grove Township, Illinois 60007

Telephone: (708) 956-2400

Telecopy: (708) 952-4683
 
 

Attention: Stephen M. Wolf and

Lawrence M. Nagin, Esq.
with a copy to:
 
  Skadden, Arps, Slate, Meagher & Flom

919 Third Avenue

New York, NY 10022

Telephone: (212) 735-3000

Telecopy: (212) 735-2000
 
 

Attention: Peter Allan Atkins, Esq.
 
 

or such other address or telecopy number as such party may hereafter specify for the purpose by notice to the other parties hereto. Each such notice, request or other communication shall be effective (i) if given by facsimile, when received by the addressee using the facsimile number specified in this Section, as evidenced by an automated confirmation receipt from the sending facsimile machine or (ii) if given by any other means, when delivered at the address specified in this Section.
 
 

SECTION 10.2    Survival.    The representations and warranties contained herein and in any certificate or other writing delivered pursuant hereto shall not survive the Effective Time. The agreements of the parties contained herein and in any certificate or other writing delivered pursuant hereto shall not survive the Effective Time unless expressly provided in such agreement (it being understood that, without limiting the survival of any other agreements contained herein the survival of which is expressly provided for in such agreement, the following agreements shall survive the Effective Time: Sections 1.2, 1.3, 1.5, 1.6, 1.7, 1.8, 1.9, 1.10, 2.3, 2.4, clause (iii) of the last sentence of Section 5.1, 5.7, 5.8(b), 5.10, 5.11, 6.3, 6.4, 10.2 and 10.4) (all such surviving agreements being referred to herein as the "Express Agreements"). Except with respect to any Collective Bargaining Agreement (as defined in the Restated Certificate) and the Express Agreements, from and after the consummation of each of the transactions contemplated to take place at or about the Effective Time, each of the parties hereto (in their capacities as such) fully releases, discharges, waives, and renounces (collectively "Releases") any and all claims, controversies, demands, rights, disputes and causes of action it may have had at or prior to the Effective Time against, and agrees not to initiate any suit, action or other proceeding involving, each of the other parties hereto, its officials, officers, directors, employees, accountants, counsel, consultants, advisors and agents and, if applicable, security holders relating to or arising out of this Agreement or the transactions contemplated hereby (including, but not limited to, matters contemplated under Section 5.11 and matters involving claims, controversies, demands, rights, disputes or cause of action based on securities laws, ERISA, common law tort theory or any other similar bodies of law); provided that the foregoing Releases shall not apply to any claims, controversies, demands, rights, disputes and causes of action arising from and after the Effective Time (and based on facts and circumstances arising from and after the Effective Time) under any of the documents, instruments or transactions entered into, filed or effected in connection with the Recapitalization (other than this Agreement, to the extent provided in this Section 10.2).
 
 

SECTION 10.3    Amendments; No Waivers. (a) Any provision of this Agreement may be amended or waived prior to the Effective Time (including, without limitation, an amendment to this Agreement to extend the Outside Termination Time) if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by the Company and each Union or in the case of a waiver, by the party against whom the waiver is to be effective; provided that no amendment to or waiver of an Express Agreement shall be effective against a person entitled to enforce such Express Agreement pursuant to Section 10.8 unless agreed to in writing by such person; and provided, further, that after the adoption of the Shareholder Vote Matters by the stockholders of the Company, no such amendment or waiver shall, without the further approval of such stockholders if and to the extent such approval is required by Delaware Law, alter or change (i) the amount or kind of consideration to be received in connection with the Recapitalization, (ii) any term of the Restated Certificate or (iii) any of the terms or conditions of this Agreement if such alteration or change would materially adversely affect the holders of any shares of capital stock of the Company.
 
 

(b) No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law.
 
 

SECTION 10.4    Fees and Expenses; Indemnification.
 
 

(a) Except as provided in the fee letter agreement, dated the date hereof, among the Company and the Unions (the "Fee Letter"), or hereafter agreed by the parties in writing or as set forth in this Section, all fees, costs and expenses incurred in connection with this Agreement shall be paid by the party incurring such fee, cost or expense. The parties agree that the fees, costs and expenses of the Deadlock Firm and the Solvency Firm shall be paid by the Company. The Company represents and agrees that the fees of its principal financial and legal advisors to be incurred by the Company in connection with the transactions contemplated by this Agreement other than fees in connection with the underwriting described in Section 1.11 hereof shall not exceed $25 million.
 
 

(b) Upon the occurrence of a Triggering Event (as defined below), the Company shall promptly pay to or at the direction of the Unions any amounts the Company would otherwise have been required to pay pursuant to the Fee Letter had the Effective Time occurred at the time of the occurrence of such Triggering Event. Such amounts shall be exclusive of any amounts paid or payable pursuant to indemnification or contribution arrangements. For purposes of this paragraph (b), "Triggering Event" shall mean the occurrence of each of the following: (i)(A) following the public announcement of a proposal for an Acquisition, either the stockholders of the Company shall not have approved the Shareholder Vote Matters at the Company Stockholder Meeting or (B) the Board shall have withdrawn or modified in a manner materially adverse to the Unions its approval or recommendation of the Recapitalization or the Shareholder Vote Matters or shall have recommended, or failed to recommend against, another Acquisition; (ii) subsequent to the stockholder or Board action referred to in clause (i) above, this Agreement shall have been terminated by the Company pursuant to Sections 9.1(b)(i) or 9.1(d)(ii) or by either Union pursuant to Sections 9.1(b)(i) or 9.1(c)(i); and (iii) within 12 months of the termination of the Agreement in accordance with clause (ii) above, an Acquisition shall have been consummated.
 
 

(c) All amounts payable by the Company to either Union under this Section 10.4 shall be paid directly to such Union or directly to persons designated in writing by such Union as such Union may specify.
 
 

(d) To the extent that the Company shall make payments to, or on behalf of, either Union under this Section 10.4 and such Union is reimbursed by another source (or otherwise receives a refund of the amount paid), such Union shall return such amounts to the Company to the extent of such reimbursement (or refund).
 
 

(e) The Company (the "Indemnitor") shall indemnify the Unions, their controlling persons, and their respective directors, trustees, officers, partners, affiliates, agents, representatives, advisors and employees (a "Union Indemnified Person") against and hold each Union Indemnified Person harmless from any and all liabilities, losses, claims, damages, actions, proceedings, investigations or threats thereof (all of the foregoing, and including expenses (including reasonable attorneys' fees, disbursements and other charges) incurred in connection with the defense thereof, except as set forth below, being referred to as "Liabilities") based upon, relating to or arising out of the execution, delivery or performance of this Agreement or the transactions contemplated hereby (including, without limitation, the underwriting described in Section 1.11 hereof); provided, however, that the Indemnitor shall not be liable in any such case to the extent that any such Liability arises out of any inaccurate information supplied by any such Union Indemnified Person specifically for inclusion in the proxy materials related to such transactions or any other filings made by the Company or any Union Indemnified Person with any federal or state governmental agency in connection therewith (including without limitation the prospectuses relating to the underwriting described in Section 1.11 hereof) or if any such Liability is finally judicially determined, not subject to further appeal, to have resulted from bad faith, willful misconduct or negligence on such Union Indemnified Person's part. Notwithstanding anything to the contrary contained herein, "Liabilities" shall not include any losses, claims, damages or expenses (including attorneys' fees, disbursements and other charges) based upon, relating to or arising out of any action, claim, proceeding, investigation or threat thereof (i) brought by a Union against the other Union, (ii) brought by any employee of the Company or a subsidiary of the Company, as such, represented by a Union or any member of a Union (whether or not an employee of the Company or a subsidiary of the Company), in his or her capacity as such, if, and only if, the underlying action, claim, proceeding or threat is made against (1) his or her Union or (2) against the other Union, (iii) brought by any Union or any Union Indemnified Person against the Company or any controlling persons, directors, officers, partners, agents, representatives, advisors or employees of the Company (a "Company Related Person") or by the Company or any Company Related Person against any Union or Union Indemnified Person or (iv) which arise primarily as a result of acts by a Union Indemnified Person following the Effective Time.
 
 

(f) In connection with the Indemnitor's obligation to indemnify for expenses as set forth above in subsection (e) of this Section, the Indemnitor further agrees to reimburse each Union Indemnified Person for all such expenses (including reasonable attorneys' fees, disbursements and other charges) as they are incurred by such Union Indemnified Person, provided, however, that if a Union Indemnified Person is reimbursed hereunder for any such expenses, such reimbursement of expenses shall be refunded to the extent it is finally judicially determined, not subject to further appeal, that the Union Indemnified Person is not entitled to indemnification by reason of the proviso clause in the first sentence or the last sentence of subsection (e) of this Section. The Company shall not be required to reimburse any Union Indemnified Person for the reasonable attorney's fees, disbursements or other charges of more than one counsel (plus local counsel, if appropriate), or of more than one counsel (plus local counsel, if appropriate) for any one Union (together with Union Indemnified Persons who are controlling persons, directors, officers, partners, affiliates, agents, representatives, advisors and employees of such Union) who can be represented by common counsel so long as no conflict of interest or different or additional colorable defenses are reasonably believed by such Indemnified Persons to exist between or among them relative to the claims asserted.
 
 

(g) Promptly after receipt by a Union Indemnified Person of notice of any claim or the commencement of any action, proceeding or investigation in respect of which indemnity or reimbursement may be sought as provided in this Section, such Union Indemnified Person will notify the Indemnitor in writing of the receipt or commencement thereof, but the failure to so notify shall not relieve the Indemnitor from any obligation or liability which it may have pursuant to this Section or otherwise except to the extent that the Indemnitor is materially prejudiced thereby. In case any such action, proceeding or investigation is brought or threatened against a Union Indemnified Person, the Indemnitor will be entitled to participate therein and, to the extent that it may wish, to assume the defense thereof, with counsel selected by the Indemnitor and approved by the Union Indemnified Person (such approval not to be unreasonably withheld). After notice from the Indemnitor to such Union Indemnified Person of its election to assume the defense thereof, the Indemnitor will not be liable to such Union Indemnified Person for any legal expense subsequently incurred for services rendered by any other counsel retained by such Union Indemnified Person in connection with the defense unless such Union Indemnified Person, in the opinion of its counsel, has colorable defenses which are different from or in addition to defenses available to the Indemnitor or the Indemnitor has an interest which conflicts with the interests of such Union Indemnified Person and which makes separate representation advisable, in which event all legal expenses of such Union Indemnified Person (subject to the last sentence of subsection (f) above) shall continue to be paid by the Indemnitor. Notwithstanding. Section 10.4(f), the indemnification provided for in this Section 10.4 shall include reimbursement for all expenses (including reasonable attorneys' fees, disbursements and other charges) incurred by Union Indemnified Persons to enforce their rights under this Section 10.4. The Indemnitor shall not settle any action, claim, proceeding or investigation which is the subject of this Section 10.4 without the prior written approval of the Union Indemnified Person (such approval not to be unreasonably withheld), unless such settlement involves solely the payment of money and the Indemnitor is not contesting any right of a Union Indemnified Person to receive. indemnification hereunder. References to Union Indemnified Persons shall in all cases include the controlling persons, directors, officers, affiliates, agents, representatives, advisors and employees of each Union Indemnified Person.
 
 

(h) If the indemnification provided for in this Section 10.4 is finally judicially determined, not subject to further appeal, to be unavailable to a Union Indemnified Person, then the Indemnitor shall, in lieu of indemnifying such Union Indemnified Person, contribute to the amount paid or payable in respect of any Liability by such Union Indemnified Person in such proportion as shall be fair and equitable after taking into account the relative benefits received by the parties, the relative fault of the parties and such other equitable considerations as any court of competent jurisdiction shall determine. For purposes of the preceding sentence, the benefits received by a Union Indemnified Person that is an advisor shall not be deemed to exceed the amount of fees payable to such Union Indemnified Person. The rights accorded to the Indemnified Persons under this Section 10.4 shall be in addition to any rights that any Union Indemnified Person may have at common law, by separate agreement or otherwise.
 
 

(i) All rights to indemnification existing in favor of the present or former directors, officers, employees, fiduciaries and agents of the Company or any of its Subsidiaries (collectively, the "Company Indemnified Persons") as provided in the Company's Certificate of Incorporation or By-laws or other agreements or arrangements, or articles of incorporation or by-laws (or similar documents) or other agreements or arrangements of any Subsidiary as in effect as of the date hereof with respect to matters occurring at or prior to the Effective Time shall survive the Effective Time and shall continue in full force and effect. In addition, the Company shall provide, for a period of not less than six years following the Effective Time, for directors' and officers' liability insurance for the benefit of directors and officers of the Company immediately prior to the Effective Time with respect to matters occurring at or prior to the Effective Time by electing, in its sole discretion, one of the two alternatives set forth below (which election shall be reported to the Unions prior to the Effective Time): (i) maintain for a period of not less than six years following the Effective Time, the current policies of directors' and officers' liability insurance with respect to matters occurring at or prior to the Effective Time, provided that in satisfying its obligation under this clause (i), the Company shall not be obligated to pay premiums in excess of 150% of the amount per annum the Company paid for the policy year ending during calendar year 1994, which amount has been disclosed to the Unions or (ii) purchase, prior to the Effective Time, run-off coverage for the benefit of directors and officers of the Company immediately prior to the Effective Time for matters occurring at or prior to the Effective Time, which coverage shall provide for a separate insurance pool for such directors and officers of at least $75 million in coverage, provided, that in satisfying the obligations under this clause (ii), the Company shall not pay in excess of an amount set forth in a letter previously delivered by the Company to counsel to the Unions. The Company shall also maintain for a period of not less than six years following the Effective Time, the current fiduciaries' liability insurance with respect to matters occurring at or prior to the Effective Time.
 
 

SECTION 10.5   Successors and Assigns.   The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the written consent of the other parties hereto. In the event the Company or any of its successors, transferees or assigns (i) consolidates with or merges with or into any other person and shall not be the continuing or surviving entity of such consolidation or merger, (ii) transfers or conveys all or substantially all of its properties or assets to any transferee or (iii) engages in any similar transaction with any person, then, as a condition to the consummation of such transaction, proper provision shall be made so the successor, transferee or assignee of the Company pursuant to such transaction assumes the obligations of the Company set forth in each of the Express Agreements.
 
 

SECTION 10.6    Governing Law.    This Agreement shall be construed in accordance with and governed by the law of the State of Delaware, without regard to the conflicts of laws principles thereof. The parties agree that this Agreement (including the Schedules and other attachments hereto), other than Schedules 1.6(a)(i), 1.6(a)(ii), 1.6(a)(iii), 1.6(a)(iv), 5.8(i) and 5.8(ii) (to the extent such Schedules relate to employees of the Company and its Subsidiaries represented by the Unions), shall not be subject to the jurisdiction of any System Board of Adjustment under the Railway Labor Act.
 
 

SECTION 10.7    Counterparts; Efectiveness.   This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received counterparts hereof signed by all of the other parties hereto.
 
 

SECTION 10.8   Parties in Interest.    This Agreement shall be binding upon and inure solely, other than the provisions of Section 10.4, to the-benefit of the parties hereto, and, except for the Express Agreements, nothing in the Agreement, express or implied, is intended to confer upon any other person any rights, benefits or remedies. With respect to the Express Agreements, the agreements set forth in the following Sections are for the benefit of, and may be enforced by, the following parties: Sections 1.2, 1.3, 1.5, 6.3 and 6.4: the holders of New Shares; Section 1.7: holders of Options; Section 1.8: holders of Company Convertible Securities; Sections 2.3 (other than the last sentence thereof) and 5.11: officers and directors of the Company prior to the Effective Time; the first sentence of Section 5.8(b): the ESOP Trustee; the first sentence of Section 5.10: Gerald Greenwald; Section 10.4(c)-(h): Union Indemnified Persons; and Section 10.4(i): Company Indemnified Persons.
 
 

SECTION 10.9    Specific Performance.   Prior to the Effective Time or the termination of this Agreement, the parties agree that in the event a Willful Breach is established by a court of competent jurisdiction, the other parties hereto shall be entitled to specific performance of the terms hereof which were the subject of such Willful Breach; provided, however, in no event shall such remedy of specific performance in any way extend or modify the Outside Termination Date. The parties acknowledge that in the event of a Willful Breach, irreparable damage would occur, no adequate remedy at law would exist and damages would be difficult to determine. No other remedy shall be available prior to the Effective Time or the termination of this Agreement except that the remedy of damages shall be available if such remedy (including the amount of damages) would be available after termination pursuant to the terms of Section 9.3 hereof.
 
 

SECTION 10.10    Entire Agreement.   Except as otherwise explicitly set forth in this Agreement, or in other writings signed concurrently herewith, this Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof.
 
 
 
 
 
 
 
 
 
 
 
 
 
 

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.
 
 

UAL CORPORATION
 
 

By  /S/   STEPHEN M. WOLF

Name:  Stephen M. Wolf

Title:  Chairman and Chief

Executive Officer
 
 

AIR LINE PILOTS ASSOCIATION, INTERNATIONAL
 
 

By  /S/   ROGER D. HALL

Name:  Roger D. Hall

Title:   Chairman, UAL-MEC
 
 

INTERNATIONAL ASSOCIATION OF MACHINISTS AND AEROSPACE WORKERS
 
 

By  /S/   KEN THIEDE
Name:    Ken Thiede
Title:    President and General Chairman, District Lodge 141
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EXHIBIT 10 <DOCUMENT>
<TYPE> EX-10.2
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                                                                                                                                      Exhibit 10.2



SECOND AMENDMENT TO THE AGREEMENT
AND PLAN OF RECAPITALIZATION

Second Amendment (this "Amendment"), dated as of June 29, 1994, to the Agreement and Plan of Recapitalization (as amended, the "Plan of Recapitalization"), dated as of March 25, 1994, by and among UAL Corporation, a Delaware corporation (the "Company"), Air Line Pilots Association, International, pursuant to its authority as the collective bargaining representative for the crafts or class of pilots employed by United Air Lines, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company ("United"), and the International Association of Machinists and Aerospace Workers, pursuant to its authority as the collective bargaining representative for the crafts or classes of mechanics and related employees, ramp and stores employees, food service employees, dispatchers and security officers employed by United, as amended by the First Amendment to the Plan of Recapitalization, dated as of June 2, 1994.
 
 

W I T N E S S ET H

WHEREAS, the parties hereto desire to amend the Plan of Recapitalization and certain Schedules thereto; and
 
 

WHEREAS, Section 10.3 (a) of the Plan of Recapitalization permits amendments to the Plan of Recapitalization and the Schedules thereto by written instrument signed by all parties;
 
 

NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, the parties hereto agree an follows:
 
 

1. Section 1.3 of the Plan of Recapitalization is hereby amended and restated in its entirety in the form attached to this Amendment asExhibit A.
 
 

2. Section 1.5(b) of the Plan of Recapitalization in hereby amended and restated in its entirety in the form attached to this Amendment as Exhibit B.

3. Section 1.11 of the Plan of Recapitalization is hereby amended and restated in its entirety in the form attached to this Amendment as Exhibit C.
 
 

4. Article FOURTH, Part I.D, Section 2.5 of the Restated Certificate is hereby amended and restated in its entirety in the form attached to this Amendment as Exhibit D.
 
 

Miscellaneous

A. Definitions. Capitalized terms used in this Amendment and not defined herein shall have the meanings ascribed to them in the Plan of Recapitalization or the Schedules or other attachments thereto.
 
 

B. Entire Plan of Recapitalization; Restatement. The Plan of Recapitalization, as amended by this Amendment, is the entire agreement of the parties with respect to the subject matter hereof and the parties hereto hereby agree that the Plan of Recapitalization and all Schedules thereto may be restated to reflect all amendments provided for in this Amendment.
 
 

C. Governing Law. This Amendment shall be deemed to be made in and in all respects shall be interpreted, governed by and construed in accordance with the laws of the State of Delaware, without regard to the conflicts of laws principles thereof.
 
 

D. Counterparts. This Amendment may be executed in counterparts, each of which shall be an original and all of which shall together constitute one and the same instrument.
 
 




Second Amendment to the Agreement
and Plan of Recapitalization

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized on the date first above written.
 
 

UAL CORPORATION
 
 

By: /s/ Stephen M. Wolf
Name: Stephen M. Wolf
Title: Chairman and Chief
       Executive Officer
 
 

AIR LINE PILOTS ASSOCIATION,
INTERNATIONAL
 
 

By: /s/ Roger D. Hall
Name: Roger D. Hall
Title: Chairman, UAL-MEC
 
 

INTERNATIONAL ASSOCIATION OF
MACHINISTS AND AEROSPACE WORKERS
 
 

By: /s/ Ken Thiede
Name: Ken Thiede
Title: President and
       General Chairman,
       District Lodge 141
 


 
 

EXHIBIT INDEX

 
Exhibit A - Section 1.3 of the Plan of Recapitalization  
 
Exhibit B - Section 1.5 (b) of the Plan of Recapitalization  
 
Exhibit C - Section 1.11 of the Plan of Recapitalization   Exhibit D - Article FOURTH, Part I.D, Section 2.5 of the Restated Certificate

 
 
 
EXHIBIT A

 SECTION 1.3 Redemption. Following the Effective Time, all outstanding shares of Redeemable Preferred Stock shall, to the extent of funds legally available therefor and subject to the provisions of the Restated Certificate, be redeemed immediately after issuance according to the terms thereof (the "Redemption"). Pursuant to the Redemption, the holders of Redeemable Preferred Stock, if any, shall be entitled to receive, in respect of each one one-thousandth of a share of Redeemable Preferred Stock, subject to the terms thereof and Section 1. 5(f):
 
 

(i) 25.80 in cash;   (ii) either (a) if the Underwriting Alternative with respect to depositary shares (the "Depositary Shares") representing interests in Series B Preferred Stock of the Company, without par value (the "Public Preferred Stock"), is not consummated, both (I) an additional cash payment equal to $12.20, plus (II) Depositary Shares representing interests in a liquidation preference of Public Preferred Stock equal to the excess of (xx) $31.10 over (yy) the product of $12.20 and a fraction (but in no event less than one) the numerator of which is the Applicable Rate with respect to the Depositary Shares assuming that the Underwriting Alternative with respect to the Depositary Shares is consummated, and the denominator of which is 11.375%, or (b) if the Underwriting Alternative with respect to the Depositary Shares is consummated, a cash payment equal to the Depositary Share Proceeds Amount (as defined in Section 1.11 below);
 
 

(iii) either (a) $15.55 principal amount of Series A Senior Unsecured Debentures due 2004 of United issued as provided below (the "Series A Debentures") or (b) if the Underwriting Alternative with respect to the Series A Debentures is consummated, a cash payment equal to the Series A Debenture Proceeds Amount (as defined in Section 1.11 below); and

(iv) either (a) $15.55 principal amount of Series B Senior Unsecured Debentures due 2014 of United issued as provided below (the "Series B Debentures" and, together with the Series A Debentures, collectively, the "Debentures") or (b) if the underwriting Alternative with respect to the Series B Debentures is consummated, a cash payment equal to

the Series B Debenture Proceeds Amount (as defined in Section 1.11 below).
 
The Depositary Shares shall be issued pursuant to a Deposit Agreement substantially in the form set forth on Schedule 1.3 (a) (the "Deposit Agreement"). The Depositary Shares shall be issued only in denominations of $25.00 of liquidation preference and integral multiples thereof. The Public Preferred Stock shall have the rights, powers and privileges described in the Restated Certificate, which shall include a per share liquidation preference of $25,000. The Debentures shall be issued pursuant to the Indenture, dated as of July 1, 1991, between United and the Bank of New York, and the Officers' Certificate (the "Officers' Certificate") in form and substance as set forth on Schedule 1.3 (b) (collectively, the "Indenture"). Such Indenture shall be qualified under the Trust Indenture Act of 1939, and the rules and regulations promulgated thereunder (the "TIA"). The Debentures shall be issued only in denominations of $100 and integral multiples thereof or, if the Underwriting Alternative with respect to either series of Debentures is consummated at or prior to the Effective Time and the Company so elects, denominations of $1,000 and integral multiple thereof, in which case conforming changes shall be made to this Agreement and the attachments hereto to take into account such greater denominations with respect to such series.
 
 
 
 
EXHIBIT B

  [SECTION 1.5 Surrender and Exchange.]
 
(b) Each holder of Old Shares that have been converted into New Shares and Redeemable Preferred Stock, upon surrender to the Exchange Agent of an Old Certificate or Certificates, together with a properly completed letter of transmittal covering such Old Shares, will be entitled to receive in respect of such Old Shares, subject to Section 1.5(f):
 
  (i) a certificate or certificates representing 0.5 of a New Share for each Old Share formerly represented by such Old Certificate or Certificates in accordance with Section 1.2:
 
 

(ii) either (a) if the Underwriting Alternative with respect to Depositary Shares representing interests in the Public Preferred Stock is not consummated, for each Old Share formerly represented by such Old Certificate or Certificates in respect of the Redemption, both (I) a cash payment equal to $12.20, plus (II) a depositary receipt or receipts representing Depositary Shares representing interests in a liquidation preference of Public Preferred Stock equal to the excess of (xx) $31.10 over (yy) the product of $12.20 and a fraction (but in no event less than one) the numerator of which is the Applicable Rate with respect to the Depositary Shares assuming that the Underwriting Alternative with respect to the Depositary Shares is consummated, and the denominator of which is 11.375%, or (b) if the Underwriting Alternative with respect to the Depositary Shares is consummated, a cash payment equal to the Depositary Share Proceeds Amount in respect of the Redemption;
 
 

(iii) either (a) $15.55 principal amount of Series A Debentures for each old Share formerly represented by such Old Certificate or Certificates in respect of the Redemption or (b) if the Underwriting Alternative with respect to the Series A Debentures is consummated, a cash payment equal to the Series A Debenture Proceeds Amount in respect of the Redemption;

(iv) either (a) $15.55 principal amount of Series B Debentures for each Old Share formerly represented by such Old Certificate or Certificates in respect of the Redemption or (b) if the Underwriting Alternative with respect to the Series B Debentures is consummated, a cash payment equal to the Series B Debenture Proceeds Amount in respect of the Redemption; and
 
 

(v) a cash payment of $25.80 for each Old Share formerly represented by such Old Certificate or Certificates in respect of the Redemption (the cash and/or securities distributed pursuant to clauses (i) through (v), collectively, the "Recapitalization Consideration").
 
 

Until so surrendered, each Old Certificate or Certificates formerly representing Old Shares shall, after the Effective Time, represent for all purposes only the right to receive such Recapitalization Consideration.
 
 
 
 
EXHIBIT C


 Section 1.11 Underwriting Alternative
 
 

The Company has elected to pursue the underwriting of (a) a number of Depositary Shares calculated as provided in the next sentence, (b) $382.5 million principal amount of Series A Debentures, subject to reduction as described below, and (c) $382.5 principal amount of Series B Debentures, subject to reduction as described below (referred to collectively herein as the "Underwriting Alternative"), and the consummation of the underwritings with respect to the Depositary Shares and the Debentures shall be in lieu of issuing Depositary Shares and Debentures to holders of Old Shares pursuant to Section 1.5 hereof, to holders of Options pursuant to Section 1.7 hereof and to holders of Convertible Company Securities pursuant to Section 1.8 hereof. The number of Depositary Shares that shall be subject to the Underwriting Alternative (which may be rounded up to produce an aggregate amount of Depositary Shares that is consistent with customary aggregate underwriting denominations) shall equal one twenty-fifth of the excess of (I) the product of $765 million and a fraction (such fraction, which shall in no event be greater than one, is referred to herein as the "Liquidation Preference Fraction"), the numerator of which is 11.375%, and the denominator of which is the Applicable Rate with respect to the Depositary Shares assuming that the Underwriting Alternative with respect to the Depositary Shares is consummated, over (II) $300 million. The Company shall use its best efforts to accomplish such underwritings, including entering into a firm commitment underwriting agreement or agreements, provided, however, that the Company may elect to terminate the Underwriting Alternative at any time prior to the Effective Time. The Unions will cooperate and use their respective best efforts to facilitate the underwritings. The Underwriting Alternative will be effected in accordance with customary underwriting agreements which may reflect that, if the Company is advised by the managing underwriter or managing underwriters that the Series A Debentures or Series B Debentures would be priced in excess of the maximum price applicable to such security (so that such security, if priced at the applicable Maximum Pricing, could only be sold at less than par), and is further advised that consistent with industry practice the Underwriting Alternative will be facilitated by the sale of such securities at or closer to par, the Company may reduce the amount of such securities to be sold and increase the interest rate above the applicable Maximum Pricing so that such securities may be sold at or closer to par, provided that (1) the yield to maturity of the reduced par amount of Debentures will not exceed the yield to maturity that would result if the unreduced par amount of such Debentures were priced at a discount to par using the Maximum Pricing for the respective Debenture and (2) the proceeds from the issuance of the reduced par amount of Debentures will equal the proceeds that would result if the unreduced par amount of such Debentures were priced at a discount to par using the Maximum Pricing for the respective Debenture. If the Underwriting Alternative is consummated, the amount of cash payable in respect of each Old Share shall equal the sum of (i) $25.80 per share, (ii) the sum of $12.20 and the gross proceeds (price to the public without deducting any underwriting discount or other cost) received by the Company from the sale of the "Underwriting Liquidation Preference" of Public Preferred Stock as represented by Depositary Shares in the Underwriting Alternative (collectively, the "Depositary Share Proceeds Amount"), (iii) the gross proceeds (price to the public without deducting any underwriting discount or other costs) received by United from the sale of each $15.55 principal amount of Series A Debentures in the Underwriting Alternative (subject to adjustment as described in the immediately preceding sentence, the "Series A Debenture Proceeds Amount") and (iv) the gross proceeds (price to the public without deducting any underwriting discount or other costs) received by United from the sale of each $15.55 principal amount of Series B Debentures in the Underwriting Alternative (subject to adjustment as described in the immediately preceding sentence, the "Series B Debenture Proceeds Amount"). The "Underwriting Liquidation Preference" shall equal the excess of (I) the product of $31.10 and the Liquidation Preference Fraction over (III) $12.20.
 
 
 
 
 
 

EXHIBIT D
[D. DESIGNATION, PREFERENCES AND RIGHTS OF
    SERIES D REDEEMABLE PREFERRED STOCK]
 
2.5 "Redemption Consideration" shall mean (subject to Section 6 hereof) (i) $25.80 in cash, (ii)$15.55 principal amount of Series A Debentures,* (iii)
$15.55 principal amount of Series B Debentures** and (iv) an additional $12.20 in cash and Depositary Shares representing interests in $ *** in liquidation preference of shares of Series B Preferred Stock, which Preferred Stock shall be issued in the name of the Depositary
pursuant to the Deposit Agreement and against which the Depositary shall issue Depositary Shares to the holder of the fraction of a share of the Series D Preferred Stock being redeemed, as provided in the Deposit Agreement,**** such Redemption Consideration to be distributed by the
Corporation in respect of each 1/1,OOOth of a share of Series D Preferred Stock to the holder thereof upon the redemption of such fraction of a share as provided in Section 6 hereof and as adjusted as provided in Section 6
hereof.
 
  * If the Underwriting Alternative with respect to the Series A Debentures is consummated, delete clause (ii), increase the cash payment in clause (i) by the Series A Debenture Proceeds Amount and revise definitions as appropriate.
 
 

** If the Underwriting Alternative with respect to the Series B Debentures is consummated, delete clause (iii), increase the cash payment in clause (i) by the Series B Debenture Proceeds Amount and revise definitions as appropriate.
 
 

*** Amount to be calculated in accordance with Plan of Recapitalization.
 
 

**** If the Underwriting Alternative with respect to the Depositary Shares is consummated, delete clause (iv), increase the cash payment in clause (i) by the Depositary Share Proceeds Amount and revise definitions as appropriate.
 

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Exhibit 10.4
UAL CORPORATION

EMPLOYEE STOCK OWNERSHIP PLAN

(Effective as of July 12, 1994)

Table of Contents


 
Page
PREAMBLE 
1
SECTION 2 
12
  2.1 Eligibility for Participation
12
  2.2 Participation Not Guarantee of Employment
12
  2.3 Transferred Participants
13
SECTION 3 
13
  3.1 Employer Contributions
13
  3.2 Limitation on Contributions
15
  3.3 Timing of Contributions
15
  3.4 Participant Contributions
15
SECTION 4 
15
  4.1 Exclusive Benefit of Participants
16
  4.2 Investment in Company Stock
16
  4.3 Acquisition Loans
16
  4.4 Fiduciary Concerns
16
SECTION 5 
17
  5.1 Accounting for Allocations
17
  5.2 Allocation and Crediting of Participants' ESOPStock Accounts
17
  5.3 Allocation and Crediting of Participants' ESOPCash Accounts
17
  5.4 Allocation and Crediting of Employer Contributions
18
  5.5 Limitation on Allocations to Participants
26
  5.6 Valuations
27
SECTION 6 
27
SECTION 7 
27
  7.1 Pre-Retirement Diversification Rights
27
  7.2 Distributions on Account of Termination of Employment
28
  7.3 Manner and Form of Distributions
28
  7.4 Special Distribution Rules
29
  7.5 Direct Rollover
30
  7.6 Facility of Payment
30
  7.7 Interests Not Transferable
31
  7.8 Absence of Guaranty
31
  7.9 Designation of Beneficiary
31
  7.10 Missing Participants or Beneficiaries
32
  7.11 Qualified Domestic Relations Order
32
SECTION 8 
32
  8.1 Voting
32
  8.2 Control Transaction
34
  8.3 No Illegal Actions
39
SECTION 9 
39
  9.1 Right of First Refusal
39
  9.2 Put Option
40
  9.3 Share Legend
40
  9.4 Nonterminable Rights
40
SECTION 10 
40
  10.1 Class 1 Non-Voting Preferred Stock
40
  10.2 Other Dividends
41
  10.3 Special Allocated Share Rule
42
SECTION 11 
42
  11.1 General 
42
  11.2 Membership and Authority
42
  11.3 Delegation by ESOP Committee
46
  11.4 Information To Be Furnished to ESOP Committee
47
  11.5 ESOP Committee's Decision Final
47
  11.6 Remuneration and Expenses
47
  11.7 Indemnification of the ESOP Committee
47
  11.8 Resignation or Removal of ESOP Committee Member
48
  11.9 Appointment of Successor ESOP Committee Members
48
  11.10 Interested ESOP Committee Member
48
  11.11 Compliance with Laws
48
  11.12 Expenses of the Plan and Trust
48
SECTION 12 
49
  12.1 Written Claim
49
  12.2 Notice of Denial
49
  12.3 Review Procedure
49
  12.4 Notices
50
SECTION 13 
50
  13.1 Amendment
50
  13.2 Termination
51
  13.3 Merger and Consolidation of Plan; Transferof Plan Assets
51
  13.4 Distribution on Termination
52
SECTION 14 
52
  14.1 Top-Heavy Provisions
52
  14.2 Amendments
52
  14.3 Super Top-Heavy Provisions
53
  14.4 Special Rule
53
SECTION 15
53
  15.1 Qualification
53
  15.2 Reversions to Employer
54
  15.3 Governing Law
54
  15.4 Notices
54
  15.5 Evidence
55
  15.6 Action by Employer
55
  15.7 Execution
55
  15.8 Adjustments
56

 
 
 
 
 
 
 

UAL CORPORATION

EMPLOYEE STOCK OWNERSHIP PLAN

(Effective as of July 12, 1994)

PREAMBLE

Nature of Plan

    The Plan has been established to enable Eligible Employees of the Company and certain of its Affiliates to acquire stock ownership interests in the Company. The Plan is designed to invest exclusively in Company Stock (except for de minimis investments of cash pending investment in Company Stock or pending distribution to Participants) and, to the extent it is an employee stock ownership plan, primarily in "qualifying employer securities" (as defined in Code section 4975(e)(8)).

    Subject to Section 13, the Plan is intended to be permanent and to benefit Eligible Employees of the Company and its participating Affiliates on the Effective Date, as well as the Eligible Employees entering employment thereafter.

    The Plan consists of an employee stock ownership plan and a stock bonus plan. The employee stock ownership plan ("Part A" hereof) forms a part of the stock bonus plan, includes a money purchase pension plan and is intended to be qualified under Code sections 401(a) and 4975(e)(7). With respect to the portion of this Plan that is an employee stock ownership plan, as a single employee stock ownership plan: (i) the Initial Acquisition Loan and the Additional Acquisition Loans shall be a joint obligation of the component plans, (ii) the Plan shall not maintain separate Loan Suspense Accounts for the stock bonus and money purchase pension components, (111) dividends paid on Company Stock in either such component plan shall be used to repay the Initial Acquisition Loan and the Additional Acquisition Loans to the extent provided in the Plan, and (iv) separate Accounts shall not be maintained for Participants with respect to such component plans. The Trust holding the assets of the Trust Fund is intended to be exempt from taxation under Code section 501(a).

    The Plan consists of two portions, a "leveraged" portion (Part A) that is intended to be an employee stock ownership plan and an "unleveraged" portion (Part B). Part A consists of both a stock bonus plan component and a money purchase pension plan component and Part B consists solely of a stock bonus plan component. Unless the context otherwise requires or unless specifically provided, all provisions of this Plan document shall apply to both Part A and Part B.

Transaction

    The Plan is part of an overall program (which includes the Supplemental Plan) resulting in the acquisition by Eligible Employees of a majority ownership stake in the Company as contemplated by the Agreement and Plan of Recapitalization, among UAL Corporation and Air Line Pilots Association, International and International Association of Machinists and Aerospace Workers, as amended (the "Recapitalization Agreement"). Specifically, on the Effective Date, Eligible Employees will become entitled to receive 55% of the equity and voting power of the Company through the Trust and the Supplemental Trust. The overall program will be accomplished by the allocation to individual Participant accounts over the Wage Investment Period of shares of Class 1 Non-Voting Preferred Stock, Class 2 Non-Voting Preferred Stock and Voting Preferred Stock under the Trust and Supplemental Trust (or equivalent fictional book-entry shares under the Supplemental Plan), which shares shall, in the aggregate, be convertible into shares of Common Stock in an amount that represents 55% of the Company's equity and voting power measured as of the Effective Date. In addition, as described under the paragraph entitled "Additional Shares" below, depending on the market price per share of the Common Stock during the one-year period commencing on the Effective Date, up to an additional 8% of the Company's equity and voting power may be allocated to Participants' accounts under the Plan and the Supplemental Plan, bringing the total up to 63% of the equity and voting power of the Company.

    Of the overall Employee stake, 46.23% of the underlying shares, including the Additional Shares, if any, will be reserved for allocation to the ALPA Employee Group, 37.13% of the underlying shares will be reserved for allocation to the IAM Employee Group and 16.64 % of the underlying shares will be reserved for allocation to the Management and Salaried Employee Group.

    If there were no Code limitations on compensation and allocations, all shares to be acquired under the overall program would be delivered solely under Part A and such shares would be allocated to Participants of the respective Employee Groups over the Wage Investment Period in accordance with the percentages set forth in the preceding paragraph. Because such Code limitations will, in fact, operate to limit the annual benefits available under Part A, only a portion (expected to be approximately 78.15% of the underlying shares of Preferred Stock) will be acquired by the Trust from time to time on and after the Effective Date and allocated to Participants under Part A. To maximize certain employee stock ownership plan-related tax benefits, the Employee Groups may receive less than their overall equity ownership interest under Part A, with the balance to be received under Part B and the Supplemental Plan. Most of the shares allocable under Part B and the Supplemental Plan will be allocable to the ALPA Employee Group. (The preceding does not refer to Voting Preferred Stock; it will be contributed and allocated for all Employee Groups as described below under the paragraph entitled "Part B: Voting Preferred Stock.")

    Shares not acquired under Part A will be allocated to appropriate Participant Accounts under Part B, subject to Code limitations, including Code sections 401(a)(4), 401(a)(17) and 415. To the extent that shares cannot be allocated under Part B by reason of those Code limitations, such shares will be allocated to accounts of appropriate Participants in accordance with the provisions of the Supplemental Plan.

    The combined effect of the allocations under the overall program (Part A, Part B and the Supplemental Plan) will be to put each Participant, to the extent possible, in the position such Participant would have been had all shares, including the Additional Shares, if any, been delivered to and allocated under Part A.

Part A

    With respect to Part A, it is intended that, on the Effective Date and from time to time thereafter, the Trustee will enter into the Initial Acquisition Loan and Additional Acquisition Loans on behalf of the Trust and use the proceeds thereof to purchase shares of Preferred Stock, representing approximately 42.9825% of the equity of the Company (subject to increase due to any Additional Shares issued). The Preferred Stock purchased will be Class 1 Non-Voting Preferred Stock. The shares of Class 1 Non-Voting Preferred Stock will be allocated ratably, over the Wage Investment Period, to the Employee Groups in accordance with the following percentages:

                            ALPA Employee Group - 31.759437%

                            IAM Employee Group - 47.511196%

                            Management and Salaried Employee Group - 20.729367%

Part B: Class 2 Non-Voting Preferred Stock

    With respect to Part B, it is intended that the Company will contribute (or will cause the trustee of the Supplemental Trust to transfer), during the Wage Investment Period, shares of Class 2 Non-Voting Preferred Stock (including Additional Shares, if any) to the Plan. Subject to certain Code limitations, Such shares will be allocated to Participants who receive less than their full entitlement under the overall program under Part A. In general, the formula for determining the amount of allocations under Part B to make up for the shortfall of Company Stock delivered under Part A is set forth in Section 5.4(c).

Part B: Voting Preferred Stock

    With respect to Part B, it is also intended that the Company will contribute, during the Wage Investment Period, shares of Voting Preferred Stock to the Plan. The Voting Preferred Stock contributed will be comprised of three classes. A separate class of Voting Preferred Stock, representing 25.4265% of the voting power of the Company, will be reserved for allocation to Participants who are members of the ALPA Employee Group ("Class P"); a separate class of Voting Preferred Stock, representing 20.4215% of the voting power of the Company, will be reserved for allocation to Participants who are members of the IAM Employee Group ("Class M"); and a separate class of Voting Preferred Stock, representing 9.152% of the voting power of the Company, will be reserved for allocation to Participants who are members of the Management and Salaried Employee Group ("Class S"). (The shares reserved above include shares reserved for allocation to the respective Employee Groups under the Supplemental Plan and Supplemental Trust.) Such percentages shall be appropriately adjusted in the event the initial Employee ownership percentage is increased (up to 63% in the aggregate) as provided below. It is intended that the number of shares of Voting Preferred Stock to be allocated to each Participant's Account on each Valuation Date will equal the number of shares of Preferred Stock allocated to that Participant under Part A and Part B on such Valuation Date (taking into account the special Effective Date contribution and allocation described below). The terms of each class of Voting Preferred Stock provide that the shares outstanding at any particular time (in combination with any shares of Common Stock held by the Trustee or trustee under the Supplemental Trust allocable or allocated to the relevant Employee Group) will command the aggregate voting power reserved for such Employee Group. Thus, for example, if there are 100 shares of Class P outstanding, each such share will command 1% of the voting power reserved for the ALPA Employee Group (25.4265%, assuming 55% ownership by Employees). As additional shares of Class P are issued. the per share voting power will decrease proportionately.

    As a special Employer Contribution, one share of each of Class P, Class M and Class S will be contributed by the Company to Part B on the Effective Date. These three shares will be allocated, per capita, to the Accounts of the appropriate Participants under Part B on the Effective Date.

Supplemental Plan and Supplemental Trust

    To the extent that, in any Plan Year during the Wage Investment Period. shares of Company Stock cannot be allocated to a Participant's Account by reason of any Code limitations, including Code section 401(a)(17), Code section 415 and Code section 401(a)(4), appropriate credits will be made to the accounts of the affected Participants under the Supplemental Plan (attached hereto as Exhibit A) in accordance with the terms thereof and shares of Voting Preferred Stock (and in certain circumstances, Class 2 Non-Voting Preferred Stock) used to satisfy the relevant credits will be held in the Supplemental Trust (attached hereto as Exhibit B) in accordance with the terms thereof for the benefit of the affected Participants.

Part B: Flowback

    During and after the Wage Investment Period, to the extent that the allocation of shares of Company Stock under the Plan for any Participant was limited in a prior Plan Year by reason of the limitations of Code section 401(a)(17), Code section 415 or Code section 401(a)(4) (with the result that the Participant received corresponding credits under the Supplemental Plan), it is intended that the Company will contribute (or the Company will cause the trustee of the Supplemental Trust to transfer) to such Participant's Account shares of Class 2 Non-Voting Preferred Stock and shares of Voting Preferred Stock, as the case may be, in a subsequent Plan Year, and that such shares will be allocated under this Plan to the Accounts of the affected Participants in accordance with the terms hereof, subject to any applicable Code limitations as applied to the subsequent Plan Year (and corresponding debits will be made under the Supplemental Plan).

Additional Shares:

    Depending on the fair market value per share of the Common Stock during the one-year period commencing on the Effective Date, a number of additional shares determined in accordance with Section 1.6 and Section 1.10 of the Recapitalization Agreement will be allocated to Participants' Accounts under the Plan and participants' accounts under the Supplemental Plan over the remainder of the Wage Investment Period. Such number of shares of Company Stock will be allocated to the Employee Groups in accordance with the percentages specified in the paragraph above entitled "Transaction. "

    In general, 78.15% of the Additional Shares which are Preferred Stock will be Class 1 Non-Voting Preferred Stock; provided, however, that the portion of the Additional Shares attributable to Preferred Stock allocated as of December 31, 1994 will be Class 2 Non-Voting Preferred Stock contributed to Part B or allocated as credits under the Supplemental Plan as of December 31, 1994. Except as described in the foregoing proviso, it is intended that such Additional Shares of Class 1 Non-Voting Preferred Stock will increase, on a pro rata basis, the number of such shares acquired pursuant to each Additional Acquisition Loan. Unless the parties agree otherwise, these Class 1 shares will be allocated over the remainder of the Wage Investment Period in accordance with the percentages set forth under Part A above.

    Any Additional Shares not sold to the Trustee pursuant to Part A will be contributed by the Company to Part B or credited to the Supplemental Plan during the remainder of the Wage Investment Period. Subject to certain Code limitations, such shares will be allocated to Participants who receive less than their full entitlement, giving effect to the allocation of the Additional Shares, of shares of Class 1 Non-Voting Preferred Stock under Part A. To the extent possible, the formula in Section 5.4(c) will be applied by assuming all Additional Shares (other than the shares of Voting Preferred Stock) had been sold to the Trust under Part A on the Effective Date and allocated ratably over the following 69 months.

SECTION 1

Definitions

    In this Plan (including the preamble), whenever the context so indicates, the singular or plural number and the masculine or feminine gender shall be deemed to include the other, the terms "he," "his," and "him" shall refer to a Participant or Beneficiary, as the case may be, and, except as otherwise provided, or unless the context otherwise requires, the capitalized terms shall have the following meanings:

(a)     "Account" or "Accounts" mean a Participant's or Beneficiary's ESOP Stock Account and/or his ESOP Cash Account, as the context so requires.

(b)     "Acquisition Loan" means a loan (or other extension of credit, including an installment obligation to a party in interest (as defined in ERISA section 3(14))) incurred by the Trustee in connection with the purchase of Company Stock.

(c)     "Additional Acquisition Loans" means the Acquisition Loans entered into from time to time after the Effective Date between the Trustee and the Company as contemplated by Section 1.6 of the Recapitalization Agreement.

(d)     "Additional Shares" means the number of additional shares, if any, of Company Stock to be issued by the Company in accordance with Section 1.10 of the Recapitalization Agreement. Any reference herein to additional shares shall only be applicable when, if and to the extent that additional shares are determined to be issuable in accordance with Section 1.10 of the Recapitalization Agreement.

(e)     "Affiliate" means any corporation, trade or business, which, at the time of reference, is together with the Company, a member of a controlled group of corporations, a group of trades or businesses (whether or not incorporated) under common control or an affiliated service group, as described in Code sections 414(b), 414(c) and 414(m), respectively, or any other organization treated as a single employer under Code section 414(o); provided, however, that, where the context so requires, the ten-n "Affiliate" shall be construed to give full effect to the provisions of Code sections 409(1)(4) and 415(h).

(f)     "ALPA" means the Air Line Pilots Association, International.

(g)     "ALPA Employee Group" means Eligible Employees in classifications represented by ALPA under the Railway Labor Act who are either listed on the Pilots' System Seniority List or Second Officer Eligibility Seniority List.

(h)     "Beneficiary" means the person or persons to whom a deceased Participant's benefits are payable under the Plan all as provided in Section 7.9.

(i)     "Board of Directors" means the board of directors of the Company.

(j)     "Class 1 Non-Voting Preferred Stock" means the shares of Class 1 ESOP Convertible Preferred Stock issued by the Company and allocated under Part A.

(k)     "Class 2 Non-Voting Preferred Stock" means the shares of Class 2 ESOP Convertible Preferred Stock issued by the Company and allocated under Part B. Any reference to such shares credited under the Supplemental Plan shall be deemed to be a reference to fictional book-entry shares of Class 2 Non-Voting Preferred Stock credited under the Supplemental Plan.

(l)     "Code" means the provisions of the Internal Revenue Code of 1986, as amended, and all successor laws thereto. Where the Plan refers to a particular section of the Code, such reference shall also apply to any successor to that section.

(m)     "Common Stock" means common stock issued by the Company that meets the requirements of Code section 409(1), which on the Effective Date includes the common stock that may be received upon the conversion of the Preferred Stock and Voting Preferred Stock.

(n)     "Company" means UAL Corporation and any successor corporation or entity to the Company by merger, consolidation or otherwise.

(o)     "Company Stock" means Voting Preferred Stock, Common Stock and/or Preferred Stock, as the context so requires.

(p)     "Compensation" means (i) the total cash compensation paid to the Participant, for services while a Participant and an Eligible Employee, during the Plan Year for services rendered to his Employer, including bonuses and overtime pay, plus (ii) elective deferrals under a plan meeting the requirements of Code section 401(k) or Code section 125 for such Plan Year, but excluding reimbursement of moving expenses, relocation allowances, housing allowances, reimbursement of membership costs and dues, other expense reimbursement payments and allowances, severance pay or other special payments relating to termination of employment by retirement or otherwise and cash payments in respect of stock appreciation rights. With respect to the Management and Salaried Employee Group only, Compensation shall not include pay received for vacation time that was accrued but not actually taken as vacation before termination of employment by retirement or otherwise. A Participant's Compensation shall not exceed $150,000 (as adjusted pursuant to Code section 401(a)(17)); provided, however, that with respect to Part A, Compensation of a Participant who is a member of the ALPA Employee Group shall be limited to an amount equal to four times the dollar limitation under Code section 415(c)(1)(A) (as adjusted pursuant to Code section 415). Compensation for services performed prior to July 13, 1994 or after the end of the Wage Investment Period shall not be taken into account under the Plan, except for purposes of applying any Code limitations.

(q)     "Control Transaction" means (a) any tender offer or exchange offer for Company Stock or any other opportunity or series of opportunities for the Plan to dispose of (or convert in connection with a sale, exchange or disposition) at least 3% of its Company Stock (other than conversions or dispositions to effectuate distributions or diversification elections under the Plan), and (b) any transaction or series of related transactions pursuant to which any person or group (as defined in Rule 13d-3 under the Exchange Act) acquires or seeks to acquire, directly or indirectly, "control" (as defined in the Exchange Act) of the Company or of all or a substantial portion of the tangible or intangible assets of the Company and its subsidiaries, whether by merger, consolidation, share exchange, tender offer, exchange offer, sale, lease, exchange, conversion, voting trust, proxy or otherwise. For purposes of Plan provisions relating to a "Control Transaction," "person" means an individual, corporation, association, partnership, joint venture, limited liability company, trust, estate, unincorporated organization, governmental authority, judicial entity or other entity.

(r)     "Effective Date" means July 12, 1994.

(s)     "Eligible Employee" means any Employee of an Employer (other than any employee who is not a member of an Employee Group and any "leased employee" (as defined in Code section 414(n))), subject to the following:

    (i)     if an Employee is included in a unit of Employees covered by a collective bargaining agreement, he shall not be an Eligible Employee unless the applicable collective bargaining agreement expressly provides that he shall be eligible to participate in this Plan. On the Effective Date, members of the ALPA Employee Group, the IAM Employee Group, and, if the Transport Workers Union collective bargaining agreement so provides, the meteorologist Employees who are members of a group represented by the Transport Workers Union (these meteorologists are members of the Management and Salaried Employee Group) are Eligible Employees;

    |(ii)     an Employee shall not be an Eligible Employee if he is a non-resident alien with no earned income from U.S. sources;

    |(iii)     an Employee shall not be an Eligible Employee as of the date his Compensation no longer reflects all of the wage concessions contemplated as part of the recapitalization of UAL effective July 12, 1994; and

    |(iv)     with respect to an Employee who is a member of the Management and Salaried Employee Group, the Employer may provide in a resolution of its board of directors, additional limitations for participation with the consent of the Board of Directors; provided, however, that any such limitation shall not have the effect of reducing the amount of Company Stock intended to be allocated to the Management and Salaried Employee Group under Part A or affect the method or pace of allocations of Company Stock in a manner that would adversely affect the Plan's projected ability to meet the requirements of Code section 415(c)(6).

 (t)     "Employee" means any person, including an officer or director, who is actually performing services for the Company or any of its Affiliates in a common-law, employer-employee relationship and treated as an employee on the payroll records and any "leased employee" (within the meaning of Code section 414(n)).

(u)     "Employee Group" means each of the ALPA Employee Group, the IAM Employee Group and the Management and Salaried Employee Group.

(v)     "Employer" means the Company or any of its Affiliates (or a division or business unit thereof) that has adopted the Plan with the consent of the Board of Directors.

(w)     "Employer Contribution" means the amount contributed, whether in cash or in kind, by each Employer pursuant to the provisions of Section 3.1.

(x)     "Entry Date" means, with respect to each Eligible Employee employed on the Effective Date, the Effective Date, and with respect to each Eligible Employee employed after the Effective Date, (i) in the case of members of the ALPA Employee Group, the employment commencement date (or reemployment commencement date), (ii) in the case of members of the IAM, the first day of the first payroll period coincident with or next following the date the Eligible Employee becomes a member of the IAM Employee Group, and (iii) in the case of members of the Management and Salaried Employee Group, the first day of the first payroll period coincident with or next following the anniversary date of the Eligible Employee's employment commencement date (or reemployment commencement date); provided, however, that if such Eligible Employee's employment with the Employers terminates before he becomes a Participant and such Eligible Employee returns to the employ of an Employer within one year of such termination, the Entry Date shall be the first day of the first payroll period coincident with or next following the later of (i) the reemployment commencement date or (ii) the anniversary date of such Eligible Employee's employment commencement date. Any Participant whose employment with the Employers terminates and who returns to the employ of an Employer as an Eligible Employee shall become a Participant immediately.

(y)     "ERISA" means the provisions of the Employee Retirement Income Security Act of 1974, as amended, and all successor laws thereto. Where the Plan refers to a particular section of ERISA, such reference shall also apply to any successor to that section.

(z)     "ESOP Cash Account" means the account established and maintained in the name of each Participant or Beneficiary to reflect his share of the Trust Fund, other than Company Stock.

(aa)     "ESOP Committee" means the committee appointed to administer the Plan pursuant to Section 11.

(bb)     "ESOP Stock Account" means the account established and maintained in the name of each Participant or Beneficiary to reflect his share of Company Stock.

(cc)     "Exchange Act" means the Securities Exchange Act of 1934, as amended.

(bb)     "Financed Shares" means shares of Company Stock acquired by the Trustee with the proceeds of an Acquisition Loan, which shall constitute "qualifying employer securities" under Code section 409(1) and any shares of Company Stock received upon conversion or exchange of such shares.

(cc)     "IAM" means the International Association of Machinists and Aerospace Workers.

(dd)     "IAM Employee Group" means non-probationary regular Employees (other than Employees employed on a temporary basis) who are both (i) classified by the Company as Mechanic and Related Employees, Ramp and Stores Employees, Food Services Employees, Security Officers, Dispatchers, or Communications Employees and (ii) members of a group of employees represented by the International Association of Machinists and Aerospace Workers, AFL-CIO.

(ee)     "Initial Acquisition Loan" means the Acquisition Loan or Acquisition Loans entered into on the Effective Date between the Trustee and the Company pursuant to the Preferred Stock Purchase Agreement.

(ff)     "Loan Suspense Account" means the suspense account in the Trust to which Financed Shares are initially credited prior to release for allocation to Participants' ESOP Stock Accounts. Subaccounts shall be maintained to reflect Financed Shares acquired with the Initial Acquisition Loan and each applicable Additional Acquisition Loan.

(gg)     "Management and Salaried Employee Group" means Eligible Employees who perform the functions performed by the salaried and managerial Employees on the Effective Date (including any functions that such Employees will perform in the future).
 

Furthermore, Eligible Employees who are meteorologists represented by the Transport Workers Union are members of the Management and Salaried Employee Group.
  (hh)     "Normal Retirement Date" means (i) in the case of a Participant who is a member of the ALPA Employee Group, the date on which such Participant attains age 60, and (ii) in the case of any other Participant, the date on which such Participant attains age 65.

    (ii)     "Part A" means the portion of the Plan under which benefits are provided for Participants through the purchase of shares of Class 1 Non- Voting Preferred Stock acquired with the proceeds of the Initial Acquisition Loan and Additional Acquisition Loans.

    (jj)     "Part B" means the portion of the Plan under which benefits are provided for Participants through the contribution of shares of Class 2 Non-Voting Preferred Stock and Voting Preferred Stock by the Company or through the transfer of any such shares from the Supplemental Trust.

(kk)     "Participant" means any Eligible Employee who has become a Participant in accordance with Section 2 or any other person with an Account balance under the Plan.

(ll)     "Plan" means the UAL Corporation Employee Stock Ownership Plan, consisting of Part A and Part B, as amended from time to time. The Trust created in connection with the Plan shall be incorporated in, and form a part of, the Plan.

(mm)     "Plan Year" means the calendar year; provided, however, that the initial Plan Year shall commence on the Effective Date and end on December 31, 1994.

(nn)     "Preferred Stock" means the Class 1 Non-Voting Preferred Stock and the Class 2 Non-Voting Preferred Stock.

(oo)     "Preferred Stock Purchase Agreement" means either (i) the stock purchase agreement, dated as of March 25, 1994, as amended, effective July 12, 1994, by and between the Company and the Trustee pursuant to which shares of Class 1 Non-Voting Preferred Stock will be purchased by the Trustee for allocation under Part A and/or (ii) the stock purchase agreements by and between the Company and the Trustee pursuant to which Additional Shares of Class 1 Non-Voting Preferred Stock will be purchased by the Trustee in connection with Additional Acquisition Loans for allocation under Part A, as the context so requires.

(pp)     "Supplemental Plan" means the UAL Corporation Supplemental ESOP, effective July 12, 1994.

(qq)     "Supplemental Trust" means the UAL Corporation Supplemental ESOP Trust, effective July 12, 1994.

(rr)     "Total Disability" means that, in the opinion of a physician selected by the ESOP Committee, the Participant is permanently incapable of performing services for his Employer or any of its Affiliates due to a disability; provided, however, that for any, member of the ALPA Employee Group, "Total Disability" shall have the meaning ascribed thereto in the United Air Lines, Inc. Pilots' Fixed Benefit Retirement Income Plan.

(ss)     "Trust" means the UAL Corporation Employee Stock Ownership Plan Trust created in connection with the establishment of the Plan.

(tt)     "Trust Agreement" means the trust agreement establishing the Trust.

(uu)     "Trust Fund" means the assets held in the Trust for the benefit of the Participants and their Beneficiaries.

(vv)     "Trustee" means the trustee or trustees from time to time in office under the Trust Agreement.

(ww)     "Valuation Date" means the last day of each Plan Year, April 12, 2000 (except for Participants in the IAM Employee Group) and July 12, 2000 for Participants in the IAM Employee Group and any other date selected by the ESOP Committee as necessary for the equitable operation of the Plan.

(xx)     "Voting Preferred Stock" means the shares of each class of ESOP Voting Junior Preferred Stock issued by the Company. Such preferred stock consists of Class P, Class M and Class S.

(yy)     "Wage Investment" means, for a member of the IAM Employee Group, the sum of:

    (i)     The product of (A) the number of hours for which the Participant is compensated during a Plan Year, multiplied by (B) the difference between the "book rate of pay" as in effect immediately prior to the Effective Date and the "actual rate of pay" as in effect on the Effective Date for services rendered during a Plan Year; plus

    (ii)     the sum of the following: (A) the amount determined under item (i) times 7.6% (which represents the Employers' portion of the FICA tax), (B) the amount determined under item (i) times .46% (which represents the Employers' portion of the FUTA tax), (C) the amount determined under item (i) times .05% (which represents the Employers' contribution for long term disability coverage), and (D) the amount determined under item (i) times .4% (which represents the Employers' contribution for life insurance coverage); provided, however, that in the case of each of the items (A) through (D) above, the members of the ESOP Committee appointed by the IAM may require the substitution of an alternative percentage which they deem appropriate and which is uniformly applicable to each member of the IAM Employee Group; plus
 

                    (iii)     the book rate of pay as in effect immediately prior to the Effective Date for each hour, or fraction thereof, of lunch (or other
                     meal) periods multiplied by the number of days services are rendered during a Plan Year.
For purposes hereof, "book rate of pay" means the hourly rate of pay including increases due to overtime, premium pay and shift differentials that would have been paid to each IAM Employee Group member on the day immediately preceding the Effective Date, and as adjusted over the Wage Investment Period to account solely for increments due based on changes in the scale or step for each such member, and "actual rate of pay" means the hourly rate of pay for each IAM Employee Group member on the Effective Date, as adjusted over the Wage Investment Period to account solely for increments based on changes in the scale or step and not on account of negotiated changes effective during the Wage Investment Period. If a member of the IAM Employee Group changes job classifications (for example, due to a promotion), then such member's book rate of pay and actual rate of pay shall, following the change of job classifications, be determined by reference to the member's new job classification. The calculation of the Wage Investment shall be made by using the information reasonably available to the Employers under the Employers' recordkeeping and payroll systems. The Wage Investment may be calculated by using reasonable estimates, and the members of the ESOP Committee appointed by the IAM shall adopt any such reasonable estimates as are necessary for the Wage Investment to be determined. Such members of the ESOP Committee shall consult with the Employers to calculate the Wage Investment. Pursuant to Section 11.4, the Employers shall furnish the members of the ESOP Committee such data and information as may be reasonably required to calculate the Wage Investment and to formulate such reasonable estimates. The determination of the Wage Investment based upon such estimates shall be final and binding for all purposes hereunder. (zz)     "Wage Investment Period" means the period commencing on July 13, 1994 and ending on April 12, 2000 (July 12, 2000, for members of the IAM Employee Group).
SECTION 2

Plan Participation

    2.1     Eligibility for Participation. Subject to the conditions and limitations of the Plan, each Eligible Employee of an Employer shall become a Participant on the applicable Entry Date.

    2.2     Participation Not Guarantee of Employment. Participation in the Plan does not constitute a guarantee or contract of employment and will not give any Employee the right to be retained in the employ of his Employer or any of its Affiliates nor any right or claim to any benefit under the terms of the Plan unless such right or claim has specifically accrued under the terms of the Plan.

    2.3     Transferred Participants. If a Participant transfers from one Employee Group to another Employee Group, the ESOP Committee shall maintain separate Accounts for such Participant, such Accounts reflecting such Participant's participation in the Plan as a member of the respective Employee Groups.

SECTION 3

Contributions

    3.1     Employer Contributions. Subject to the conditions and limitations of the Plan, for each Plan Year, the Employers shall contribute to the Trust cash equal to, or Company Stock having an aggregate fair market value equal to, such amount, if any, as the respective boards of directors of the Employers shall determine by resolution; provided, however, that:

(a)     Part A.

        (i)     The Company shall contribute to Part A an amount in cash equal to the amount required to enable the Trustee (together with dividends used to repay the Initial Acquisition Loan and the Additional Acquisition Loans in accordance with Section 10) to pay any principal and interest on the Initial Acquisition Loan and the Additional Acquisition Loans payable during the Plan Year. Of the contribution amount required to enable the Trustee to discharge the aggregate principal and interest on such indebtedness, 60% shall be made to the money purchase pension plan component of Part A of the Plan. The balance of the required contribution amount shall be made to the stock bonus plan component of Part A of the Plan. The Trustee shall apply such money purchase pension plan component contributions to repay the principal on each of the respective Acquisition Loans in proportion to the excess of the principal due on such Acquisition Loan for the Plan Year over the dividends available to repay the principal on such Acquisition Loan.

        |(ii)     In lieu of the foregoing, the Company may forgive an amount of indebtedness equal to the required Employer Contribution (or any portion thereof).

        |(iii)     On the Effective Date, the Company shall contribute an amount in cash equal to the aggregate par value of the Company Stock to be acquired under the Initial Acquisition Loan. In addition, the Company shall contribute an amount in cash equal to the aggregate par value of the Company Stock, if any, to be acquired under each Additional Acquisition Loan. Such contributions shall first be divided, pro rata, among the Employee Groups in accordance with Section 5.4(a)(i)(A), and then shall be allocated to the ESOP Cash Accounts of Participants as follows: (A) in the case of the ALPA Employee Group and the Management and Salaried Employee Group, according to the Compensation paid to such Participants in such Employee Group for the Plan Year, and (B) in the case of the IAM Employee Group, according to Wage Investments of such Participants for the Plan Year. Such contribution shall be used by the Trustee as partial consideration for the purchase of shares of Class 1 Non-Voting Preferred Stock under the applicable Preferred Stock Purchase Agreement, and the ESOP Cash Accounts of the Participants shall be charged accordingly. Shares of Class 1 Non-Voting Preferred Stock equal in value (based on the prices per share paid by the Trustee under the applicable Preferred Stock Purchase Agreement) to the amount of such contribution shall be allocated, as of the last day of the applicable Plan Year, from the shares purchased under the applicable Preferred Stock Purchase Agreement to the ESOP Stock Accounts of the Participants, pro rata, according to the allocations of such contribution above.

(b)     Part B.

        (i)     On the Effective Date, the Company shall contribute to Part B, as a special Employer Contribution, one share of each of Class P, Class M and Class S.

        |(ii)     As soon as practicable after the end of each Plan Year, the Company shall contribute (or shall cause the trustee of the Supplemental Trust to transfer) to Part B shares of Class 2 Non-Voting Preferred Stock and shares of Voting Preferred Stock in accordance with Section 5.4(c)(vii); provided, however, that any shares of Company Stock transferred by the trustee of the Supplemental Trust in respect of such obligation shall satisfy, to the extent of such transfer, the Company's obligation under this Section 3.1(b). Such contributions may not be used to repay Acquisition Loan indebtedness and shall be made to the stock bonus plan component of the Plan.

        |(iii)     If cash dividends have been paid to the holders of Common Stock during any Plan Year and if dividends are applied to repay the Initial Acquisition Loan or any Additional Acquisition Loan pursuant to Section 10 during that Plan Year, the Company shall make an additional Employer Contribution to Part B in the amount, if any, set forth in the next sentence as soon as practicable after the last day for that Plan Year (and for the purpose of this clause (iii), "Plan Year" shall be defined to include only the period from the Effective Date to 12/31/94, the five 12-month periods ending 12/31/95 through 12/31/99, and the three-month period ending 3/31/2000). The amount of such contribution shall equal the excess of A plus B over C; where A equals the least of:
 

(I)     the cash dividends (excluding dividends that constitute Participating Dividends and Extraordinary Distributions with respect to the outstanding Class 1 Non-Voting Preferred Stock) that would have been received by the Plan during that Plan Year if the outstanding Class 1 Non- Voting Preferred Stock had been converted into Common Stock immediately prior to each dividend record date, which amount shall be reduced by the excess, if any, of the amount described in clause (11) below over the amount described in clause (III) below;

(II)     the Fixed Dividends that have been paid on the Class 1 Non-Voting Preferred Stock during that Plan Year; and

(III)     the amount of the cash dividends used to repay the Initial Acquisition Loan and the Additional Acquisition Loans pursuant to Section 10.1(a) during such Plan Year;
 

B equals the cash dividends (excluding dividends that constitute Extraordinary Distributions with respect to the Class 1 Non-Voting Preferred Stock) that would have been received by the Plan during the Plan Year if the Class 1 Non-Voting Preferred Stock contemplated for future sale to this Plan as part of the future Additional Acquisition Loans had been, immediately prior to each dividend record date, sold to this Plan and converted into Common Stock. The number of shares of Class 1 Non-Voting Preferred Stock contemplated for future sale shall equal 13,813,282 (adjusted for the issuance of Additional Shares of Class 1 Non-Voting Preferred Stock) reduced by the number of shares of Class 1 Non-Voting Preferred Stock sold to this Plan prior to the dividend record date; and

C equals the amount of cash contributions previously made pursuant to this clause (iii) with respect to such Plan Year.

For the purposes of the Plan, "Participating Dividends", "Extraordinary Distributions" and "Fixed Dividends" shall have the meanings ascribed to such terms in the Certificate of Incorporation of the Company, Article Fourth, Part II relating to Class 1 Non-Voting Preferred Stock.

    3.2     Limitation on Contributions. In no event may any Employer Contributions under Section 3.1 for any Plan Year exceed the maximum amount deductible as an expense for federal income tax purposes under Code section 404; provided, however, that if Employer Contributions are so limited, appropriate arrangements will be made in accordance with Section 1.6(1) of the Recapitalization Agreement to protect the substantive rights of each Employee Group (hereinafter "Appropriate Arrangements").

    3.3     Timing of Contributions. For each Plan Year, Employer Contributions shall be due no later than the time prescribed for filing the Employer's federal income tax return for that Plan Year, including any extensions of time; provided, however, that Employer Contributions shall be made at such times as to enable the Trustee to meet its repayment obligations under the documents governing the Initial Acquisition Loan, the Additional Acquisition Loans or as otherwise required by the terms of the Plan.

    3.4     Participant Contributions. Contributions by Participants are neither required nor permitted.

SECTION 4

Investment of Trust Fund

    4.1     Exclusive Benefit of Participants. All Employer Contributions, Company Stock acquired with Employer Contributions and with proceeds of Acquisition Loans, and dividends and distributions thereon, shall become a part of the Trust Fund and shall be held and disbursed by the Trustee in accordance with the provisions of the Plan and Trust Agreement. No person shall have any Interest in or right to assets held in the Trust Fund except as provided in the Plan and Trust Agreement. The Trust Fund shall be held for the exclusive benefit of the Participants and their Beneficiaries, and shall be used solely to pay benefits to such persons. The Trust Fund shall not revert to the benefit of the Company or any of its Affiliates, except as provided in Section 15.2.

    4.2     Investment in Company Stock. The Trust Fund shall be invested exclusively in shares of Company Stock, subject to the Trustee's power to hold cash pending investment in Company Stock or pending distribution to Participants, and, accordingly, the Trustee may invest and hold up to 100% of the Trust Fund in Company Stock.

    4.3     Acquisition Loans. In respect of Part A, the Trustee may incur the Initial Acquisition Loan and the Additional Acquisition Loans. In addition, the Trustee, with the consent of the Company, may incur other Acquisition Loans from time to time to finance the acquisition of Company Stock for the Trust or to repay a prior Acquisition Loan. Each Acquisition Loan shall meet all applicable legal requirements, including those set forth under Code section 4975 and ERISA section 408. Financed Shares shall initially be credited to the Loan Suspense Account and shall be released for allocation to the ESOP Stock Accounts of Participants only as payments of principal and interest, or principal, on the Acquisition Loan are made by the Trustee. The number of Financed Shares to be released from the Loan Suspense Account (or subaccount attributable to that Acquisition Loan) for allocation to Participants' ESOP Stock Accounts for each Plan Yea., shall be based upon either: (x) the ratio that the payments of principal made on the Acquisition Loan for that Plan Year bear to the sum of principal payments during that Plan Year, plus the projected payments of principal during the remainder of the Acquisition Loan repayment period, provided that the special conditions set forth under Treasury Regulation section 54.4975-7(b)(8)(ii) are satisfied, or (y) the ratio that the payments of principal and interest on the Acquisition Loan for that Plan Year, bear to the sum of principal and interest payments during that Plan Year, plus the projected payments of principal and interest during the remainder of the Acquisition Loan repayment period. A separate ratio will be calculated for each Acquisition Loan. The applicable loan documents will specify whether clause (x) and/or clause (y) shall apply. Shares released from the Loan Suspense Account in connection with the Initial Acquisition Loan and the Additional Acquisition Loans shall be released in accordance with clause (x) above.

    4.4     Fiduciary Concerns. With respect to the exercise of any fiduciary responsibility with respect to the Plan or Trust, including, without limitation, the voting, sale, exchange, other disposition or conversion of Company Stock, the relevant fiduciary may, to the extent permitted by law, take into consideration any relevant economic factors affecting the interests of current and future Participants (and Beneficiaries), including, but not limited to, the prospect for continued Employee enfranchisement through the voting power of Company Stock held in the Plan, the prospect for future benefits under the Plan as a result of the prospective release and allocation of Company Stock held in the Loan Suspense Account and the prospect for future employment with the Company and its Affiliates.

SECTION 5

Plan Accounting

    5.1     Accounting for Allocations. The ESOP Committee shall establish the Accounts (and sub-accounts, if deemed necessary) for each Participant, and the accounting procedures for the purpose of making the allocations to the Participants' Accounts provided for in this Section 5. The ESOP Committee shall maintain adequate records of the cost basis of shares of Company Stock allocated to each Participant's ESOP Stock Account. The ESOP Committee also shall keep separate records of Financed Shares attributable to each Acquisition Loan and of Employer Contributions (and of any earnings thereon) made for the purpose of enabling the Trust to repay any Acquisition Loan. From time to time, the ESOP Committee may modify its accounting procedures for the purposes of achieving equitable and nondiscriminatory allocations among the Accounts of Participants, in accordance with the provisions of this Section 5 and the applicable requirements of the Code and ERISA. In accordance with Section 11, the ESOP Committee may delegate the responsibility for maintaining Accounts and records.

    5.2     Allocation and Crediting of Participants' ESOP Stock Accounts. As of each Valuation Date, the ESOP Committee shall:

(a)     First, charge to each Participant's ESOP Stock Account all distributions and payments made to him since the last preceding Valuation Date that have not been previously charged;

(b)     Next, credit to each Participant's ESOP Stock Account the shares of Company Stock, if any, that have been purchased with amounts from his ESOP Cash Account since the last preceding Valuation Date, and adjust such ESOP Cash Account in accordance with the provisions of Section 5.3; and

(c)     Finally, allocate and credit to each Participant's ESOP Stock Account the shares of Company Stock representing Employer Contributions made in the form of Company Stock and the number of Financed Shares released under Section 4.3 that are to be allocated and credited as of that date in accordance with the provisions of Section 5.4.

    5.3     Allocation and Crediting of Participants' ESOP Cash Accounts. As of each Valuation Date, the ESOP Committee shall adjust the ESOP Cash Accounts to reflect activity since the last preceding Valuation Date as follows: (a)     First, charge to each Participant's ESOP Cash Account all distributions and payments made to him that have not been previously charged;

(b)     Next, if Company Stock is purchased with assets from a Participant's ESOP Cash Account, such shares shall be credited to the ESOP Stock Account of such Participant, and the Participant's ESOP Cash Account shall be charged accordingly;

(c)     Next, subject to the dividend provisions of Section 10, the ESOP Committee shall also credit to the ESOP Cash Account of each Participant any cash dividends paid to the Trustee on shares of Company Stock held in that Participant's ESOP Stock Account (as of the record date for such cash dividends) and dividends paid on shares of Company Stock held in the Loan Suspense Account that have not been used to repay any Acquisition Loan. Cash dividends and any earnings that have not been used to repay any Acquisition Loan and have been credited to a Participant's ESOP Cash Account shall be applied by the Trustee to the purchase of shares of Common Stock, which shares shall then be credited to the ESOP Stock Account of such Participant. The Participant's ESOP Cash Account shall then be charged by the amount of cash used to purchase such Common Stock or used to repay any Acquisition Loan. In addition, any earnings (i) on ESOP Cash Accounts will be allocated to Participants' ESOP Cash Accounts, pro rata, based on such ESOP Cash Account balances and (ii) on the Loan Suspense Account, other than dividends used to repay the Acquisition Loan, will be allocated to Participants' Accounts, pro rata, based on their Account balances in Part A;

(d)     Next, allocate and credit the Employer Contributions made for the purpose of repaying any Acquisition Loan in accordance with Section 5.4. Such amount shall then be used to repay any Acquisition Loan and such Participant's ESOP Cash Account shall be charged accordingly; and

(e)     Finally, allocate and credit the Employer Contributions (other than amounts contributed to repay an Acquisition Loan) that are made in cash for the Plan Year to the ESOP Cash Account of each Participant (including Participants whose employment with the Company and its Affiliates terminated for any reason during the Plan Year) in accordance with Section 5.4(b).

    5.4     Allocation and Crediting of Employer Contributions. As of the Valuation Date for each Plan Year, all cash contributions and shares of Company Stock transferred by each Employer to the Trustee for that Plan Year under Section 3.1 and the number of Financed Shares released from the Loan Suspense Account for allocation to Participants' ESOP Stock Accounts under Section 4.3 (except as provided under Section 10.3) during the Plan Year shall be allocated among and credited to the Accounts of Participants (including Participants whose employment with the Company and its Affiliates terminated for any reason during the Plan Year) as follows: (a)     Part A. On each Valuation Date, the cash contributions used to repay the Acquisition Loan indebtedness and the shares of Class 1 Non- Voting Preferred Stock released for that Plan Year shall be allocated and credited to each Participant's Account as follows:

    (i)     First, the Employer Contributions made in cash used to repay each Acquisition Loan (or treated as cash due to forgiveness of such Acquisition Loan indebtedness) shall be allocated among the Employee Groups as follows:
 

(A)     The allocation percentage for the Class 1 Non-Voting Preferred Stock released for that Plan Year shall be as follows: ALPA Employee Group--31.759437%; IAM Employee Group--47.511196%; and Management and Salaried Employee Group--20.729367%. All such shares released for such Plan Year shall be allocated to the Employee Groups in accordance with such allocation percentages.

(B)     There shall be calculated for each Participant an allocation of shares of Class 1 Non-Voting Preferred Stock on account of dividends paid during the Plan Year on such Preferred Stock previously allocated to such Participant's ESOP Stock Account and applied in accordance with Sections 10.1(a) and 10.3. The foregoing allocations for each Participant shall be made out of the Class 1 Non-Voting Preferred Stock allocated to that Participant's Employee Group under subclause (A) above.

(C)     Employer Contributions to be allocated in accordance with this clause (i)(C) shall be allocated to each Employee Group in the proportion that (x) shares of Class 1 Non-Voting Preferred Stock allocated to that respective Employee Group pursuant to subclause (A) reduced by the shares allocated to members of that Employee Group pursuant to subclause (B), bears to (y) all shares of Class 1 Non-Voting Preferred Stock released for the Plan Year reduced by all shares allocated pursuant to subclause (B).
 

    (ii)     Second, the allocations of Employer Contributions under clause (i)(C) shall be reduced by all of the interest on the Initial Acquisition Loan and the Additional Acquisition Loans paid during that period. Such reduction shall be made in proportion to the allocations made under clause (i)(C).

    (iii)     Third, there shall be tentatively allocated to the Accounts of each Participant in each Employee Group that portion of the resulting Employer Contributions which such Participant's Compensation (or, in the case of the [AM Employee Group, such Participant's Wage Investments) for the Plan Year bears to the aggregate Compensation (or, in the case of the IAM Employee Group. Wage Investments) for all such Participants for such Plan Year; provided that such Employer Contributions shall not be allocated to any Participant's Account to such extent the allocation would exceed the limitation of Code section 415(c). The amount, if any, by which the allocation to any such Participant's Account shall be reduced under the foregoing proviso shall be, subject to the Code section 415(c) limitation, tentatively allocated (and, if necessary, reallocated) to the Accounts of all other Participants in his Employee Group (x) for the Management and Salaried Employee Group, in proportion to their Compensation, (y) in the case of the IAM Employee Group, Wage Investments, and (z) in the case of the ALPA Employee Group, first in proportion to (but not more than) the amount of Class 2 Non-Voting Preferred Stock otherwise scheduled for contribution and allocation to each Participant's Account under Part B for the current Plan Year (absent this clause (iii)) and otherwise in proportion to Compensation.

    |(iv)     Fourth, if the total Employer Contributions tentatively allocated to "highly compensated employees" (as defined in Code section 414(q)) under clause (iii) do not exceed one-third of the total Employer Contributions tentatively allocated to the Accounts of all Participants under clause (iii), the tentative allocations of Employer Contributions to Participants shall become final. The foregoing limitation shall be applied by aggregating all Participants in all Employee Groups.

    (v)     Fifth, if the one-third limitation described in clause (iv) is exceeded, the amount of Employer Contributions allocated to Accounts of Participants in the ALPA Employee Group who are highly compensated employees shall be reduced, pro rata, based on Compensation and reallocated to Participants in the ALPA Employee Group who are not highly compensated employees, to the extent necessary to meet the one-third limitation described in clause (iv), subject, however, to Code section 415(c). The foregoing reallocations to each non-highly compensated employee shall be allocated in proportion to (but not more than) the number of shares of Class 2 Non-Voting Preferred Stock otherwise scheduled for contribution and allocation to his Account under Part B for the current Plan Year (absent this clause (v)). If and to the extent appropriate arrangements are made between the Company and ALPA to protect the interests of the ALPA Employee Group (which arrangements shall be consistent with Section 13.1 and which the Company agrees to do upon reasonable request and which shall not require IAM consent), contributions for the highly compensated ALPA Employee Group members may be reduced, pro rat.T, to meet the one- third limitation described in clause (iv).

    (vi)     Sixth, if, after the reallocation of Employer Contributions described in clause (v), the one-third limitation described in clause (iv) is still exceeded, then the computations described in foregoing clauses (i) through (v) shall be disregarded. In lieu thereof the allocation shall be made in accordance with clauses (i) through (iii), but clause (ii) shall be disregarded. If such allocations do not result in a violation of Code section 415(c) for all members of any Employee Group, the tentative allocations shall become final.

    (vii)     Seventh, if the allocation of Employer Contributions described in clause (vi) results in a violation of Code section 415(c) for all members of any Employee Group (after reallocating any excess allocations owing to members of such Employee Group), then clause (vi) shall be disregarded. The computations described in foregoing clauses (i) through (v) (including clause (ii)) shall be repeated, but, after applying clause (v), the amount of Employer Contributions allocated to Accounts of Participants who are members of the Management and Salaried Employee Group who are highly compensated employees shall be reduced, pro rata, based on Compensation, and reallocated to Participants in the Management and Salaried Employee Group who are not highly compensated employees, pro rata, based on Compensation, to the extent necessary to meet the one- third limitation described in clause (iv), subject, however, to Code section 415(c). In making the foregoing reallocations, no non-highly compensated employee shall be allocated more shares under this clause (vii) than the number of shares of Class 2 Non-Voting Preferred Stock otherwise scheduled for contribution and allocation to his Account under Part B for the current Plan Year (absent this clause (vii)). If and to the extent appropriate arrangements are made by the Company to protect the interests of the Management and Salaried Employee Group (which arrangements shall be consistent with Section 13.1 and which shall not require IAM consent, but which shall require ALPA consent. which consent shall not be unreasonably withheld), contributions for the highly compensated Management and Salaried Employee Group members may be reduced, pro rata, to meet the one-third limitation described in clause (iv).

    (viii)     Eighth, all shares of Class 1 Non-Voting Preferred Stock released from the Loan Suspense Account as of the Valuation Date shall be allocated first in respect of dividends paid on previously allocated shares of Class 1 Non-Voting Stock in accordance with Sections 10.1(a)(i) and 10.3 and then allocated in proportion to the percentage of the Employer Contributions allocated to each Participant's Account under clauses (i) through (vii) above.

(b)     Special Contributions to Part B.

    (i)     The special Employer Contribution made by the Company on the Effective Date pursuant to Section 3.1(b)(i) shall be allocated, per capita, to the appropriate Participants' ESOP Stock Accounts under Part B on the Effective Date.

    |(ii)     Employer Contributions made in cash for the Plan Year under Section 3.1(b)(iii) shall be allocated under Part B and credited to the ESOP Cash Accounts of the appropriate Participants to which those cash contributions relate, as follows: to the extent that the calculation of the amount of such contributions refers to shares of Class 1 Non-Voting Preferred Stock held in the Loan Suspense Account or Class 1 Non-Voting Preferred Stock contemplated for further sale, divide such cash contributions among the Employee Groups in accordance with Section 5.4(a)(i)(A); to the extent it refers to shares of Class 1 Non-Voting Preferred Stock allocated to the Participants' ESOP Stock Accounts, apportion those contributions to the relevant Employee Group; then, allocate to the appropriate Participants' Accounts, pro rata, in the case of (i) the ALPA Employee Group and the Management and Salaried Employee Group, according to the Compensation paid to such Participants for the Plan Year, and (ii) the IAM Employee Group, according to Wage Investments made by such Participants for the Plan Year; subject, however, in all cases to Code section 415(c).

(c)     Regular Contributions to Part B. Shares of Class 2 Non-Voting Preferred Stock and Voting Preferred Stock contributed to the Plan pursuant to Section 3.1(b) shall be allocated among and credited to the ESOP Stock Accounts of Participants for that Plan Year as set forth below, provided, however, that no allocations (other than allocations under clauses (i) and (viii) below) shall be made to Accounts of Participants who are members of the IAM Employee Group:

    (i)     First, subject to the applicable Code limitations, one share of Voting Preferred Stock shall be allocated to the Participant's Account for each share of Class 1 Non-Voting Preferred Stock allocated to that Participant under Part A on that Valuation Date. The shares of Voting Preferred Stock shall be allocated under Part B and shall be of the appropriate class for each such Participant. The special allocation under Section 5.4(b)(i) shall be credited against the allocation required pursuant to this clause (i) on the first Valuation Date.

    (ii)     Second, for each Participant, a "hypothetical share number" shall be calculated for the Valuation Date. Such number shall equal the number of shares that would have been allocated to the Participant under Part A on such Valuation Date if (A) all the shares of Class 1 and Class 2 Non-Voting Preferred Stock to be issued pursuant to the Recapitalization Agreement (including, with respect to Valuation Dates occurring on or after December 31, 1995 and after the allocation in subsection (viii) be low, any Additional Shares issued or to be issued) had been (I) purchased by the Trust under a single loan on the Effective Date and held under the Loan Suspense Account pursuant to Part A, and (II) in the case of such Class 2 shares, considered Class 1 Non-Voting Preferred Stock under Part A having the same fair market value as the Class 1 Non-Voting Preferred Stock; provided, however, that such Class 2 shares shall not, except as provided in subclause (E), bear any dividend; (B) the shares of Class 1 and Class 2 Non-Voting Preferred Stock were released under Part A ratably over the 69 months starting on the Effective Date; (C) Section 5.4(a)(i)(A) were applied by allocating the Class 1 Non-Voting Preferred Stock and the Class 2 Non-Voting Preferred Stock among the Employee Groups as follows: ALPA Employee Group - 46.23%; IAM Employee Group - 37.13%; and Management and Salaried Employee Group - 16.64%; (D) allocations under Part A were made as if: (I) the limitations of Code sections 401(a)(4), 401(a)(17) and 415 did not apply; (II) Compensation was based on "compensation" as defined in the Supplemental Plan and (III) clauses (ii), (iv), (v), (vi) and (vii) of Section 5.4(a) did not apply; and (E) each share of Class 2 Non-Voting Preferred Stock that was in fact allocated on a prior Valuation Date to a Participant's account under the Supplemental Plan or under Part B shall, after the date of such allocation, be considered Class 1 Non-Voting Preferred Stock held by Part A (bearing the same Fixed Dividend as the Class 1 Non-Voting Preferred Stock that was allocated under Part A (but not bearing any other dividend)). By way of illustration, assume a member of the ALPA Employee Group has a total of 130 shares of Class 2 Non-Voting Preferred Stock allocated to his account under the Supplemental Plan and 70 shares of Class 2 Non-Voting Preferred Stock allocated to his Account under Part B. Assume further that each share of Class 1 Non-Voting Preferred Stock under Part A has a value of $100, pays an $8 Fixed Dividend, no dividends are paid on Common Stock and that each share of Class 2 Non-Voting Preferred Stock has a $75 value. For purposes of making the allocations under this subclause (E), such individual shall be treated as having received a dividend of $1600 with respect to the shares of Class 2 Non-Voting Preferred Stock allocated under the Supplemental Plan and under Part B. For purposes of calculating the hypothetical share number, that individual shall receive an allocation of 16 shares of Class 2 Non-Voting Preferred Stock to make up for such dividend, notwithstanding the fact that the value of the shares of Class 2 Non-Voting Preferred Stock is S75 per share.

    (iii)     Third, for each ESOP Participant, the "actual share number" for a Valuation Date shall be the actual number of shares of Class 1 Non-Voting Preferred Stock that are allocated to such Participant under Part A on that Valuation Date.

    (iv)     Fourth, for each ESOP Participant, the excess of the hypothetical share number over the actual share number shall be referred to herein as the respective "tentative allocation." If the sum of the tentative allocations (ignoring negative tentative allocations) for all Participants in an Employee Group exceeds the number of shares of Class 2 Non-Voting Preferred Stock released from the "phantom suspense account" to all such Participants' accounts for that Employee Group under Section 2.2 of the Supplemental Plan, each such tentative allocation for Participants of that Employee Group shall be proportionately reduced.

    (v)     Fifth, on each Valuation Date, the number of shares of each of the Class 2 Non-Voting Preferred Stock and Voting Preferred Stock, if any, to be allocated to a Participant under Part B (excluding Voting Preferred Stock described in Section 5.4(c)(i) and 5.4(c)(vi)) shall be the same and shall equal the least of the following numbers: (A) the maximum number of shares of each of the Class 2 Non-Voting Preferred Stock and the Voting Preferred Stock that can be allocated to the Participant for the Valuation Date under Part B without violating Code section 415 or Code section 401(a)(4) (if applicable), (B) the tentative allocation and (C) the excess of the hypothetical share number (calculated for this purpose only by applying the Code section 401(a)(17) limitation) over the actual share number. The hypothetical share number described in this subclause (C) shall be determined by recalculating the allocations made on the current and all prior Valuation Dates by assuming the Participant's Compensation for each Plan Year had been limited to the amount then allowed und7er Code section 401(a)(17). Accordingly, for purposes of calculating the hypothetical share number under this subclause (C), the Participants' Compensation in the current Plan Year shall be limited to the amount provided by Code section 401(a)(17) and the amount of dividends allocated to each Participant's Account during the Plan Year shall be calculated by assuming the allocations of shares made on earlier Valuation Dates were also based on Compensation, as limited by Code section 401(a)(17) limitation then in effect. The excess of the tentative allocations over the amount allocated under clause (v) shall not be allocated under Part B, but shall be allocated in accordance with the terms of the Supplemental Plan.

    (vi)     Sixth, on the last Valuation Date of each Plan Year, in addition to the shares of Class 2 Non-Voting Preferred Stock and Voting Preferred Stock transferred to Part B under clause (v) above, shares credited under the Supplemental Plan, in a prior Plan Year, due to the limitations under Code section 401(a)(4), 401(a)(17) or Code section 415, shall be allocated to Participants' Accounts under Part B, subject to applicable Code limitations in accordance with the following priorities:
 

(A)     first, by a number of shares, if any, of Voting Preferred Stock equal to the excess of the number of shares of Class 1 and Class 2 Non-Voting Preferred Stock allocated to his Account over the number of shares of Voting Preferred Stock allocated to his Account, to the extent such number may be contributed by the Company or transferred from the Supplemental Trust to Part B without disqualifying the Plan or any other qualified plan; provided, however, that the number of shares transferred may include any shares that were not previously contributed or transferred to Part B because of the limitations of Code section 401(a)(17);

(B)     second, by the maximum number of shares of Class 2 NonVoting Preferred Stock and Voting Preferred Stock (such numbers to be the same) that may be contributed by the Company (or transferred from the Supplemental Trust) to Part B without disqualifying the Plan or any other qualified plan; provided, however, that the number of shares transferred may include any shares that were not previously contributed or transferred to Part B because of the limitations of Code section 401(a)(17); and

(C)     third, by the maximum number of shares of Common Stock that may be transferred from the Supplemental Trust to Part B without disqualifying the Plan or any other qualified plan; provided, however, that the number of shares may include any shares that were not previously contributed or transferred to Part B because of the limitations of Code section 401(a)(17).

The reductions described in subclauses (A) through (C) shall not include any Voting Preferred Stock, Class 2 Non-Voting Preferred Stock or Common Stock allocated during the current Plan Year.

    (vii)     Seventh, the Company shall contribute (or, to the extent applicable, the Company shall direct the trustee of the Supplemental Trust to transfer) a number of shares of Voting Preferred Stock and Class 2 Non-Voting Preferred Stock and Common Stock equal to the sum of the number of such respective shares calculated for each Participant under clauses (i), (v) and (vi) above to Part B. Such shares shall be transferred as soon as practicable after the applicable Valuation Date.

    (viii)     Eighth, Prior to the December 31, 1995 Valuation Date, the aggregate hypothetical share numbers for all Participants for the 1994 Plan Year shall be retroactively increased by an additional number equal to X multiplied by Y, where X is the total number of shares of Preferred Stock to be issued as Additional Shares and Y is the release fraction (as defined in the Supplemental Plan) for December 31, 1994. Such shares shall be divided among the Employee Groups (including the IAM Employee Group) in accordance with Section 5.4(c)(ii)(C) and allocated to Participants based upon 1994 data (that is, 1994 Compensation and Wage Investments, as applicable.) The excess of such new hypothetical share number (including such numbers for the IAM Employee Group) for the 1994 Plan Year over the hypothetical share number previously determined for 1994 shall be allocated hereunder or credited under the Supplemental Plan in accordance with clause (v) above, provided that the number in (v)(A) shall be calculated and credited as if the contributions were attributable to 1995, rather than 1994, unless the additional shares calculated in clause (v) to be contributed to ESOP (Part B) are in fact contributed to the ESOP no later than September 15, 1995. The calculations required by this clause (viii) shall be performed prior to calculating the regular allocations for the 1995 year. The additional shares of Class 2 Non-Voting Preferred Stock credited pursuant to this clause (viii) shall, for all purposes, including Section 5.4(c)(ii)(E), be allocated as of December 31, 1994.

(d)     Purpose. The purpose of the foregoing contribution and allocation provisions is to place each Participant, to the extent possible, in the same position such Participant would have been if (i) Code sections 401(a)(4), 401(a)(17) and 415 did not apply, (ii) all of the shares of Preferred Stock to be sold to Part A during the Wage Investment Period had instead been sold on the Effective Date, (iii) all of the shares (excluding shares of the Voting Preferred Stock) contributed to Part B or credited under the Supplemental Plan during the Wage Investment Period had instead been purchased by the Trust on the Effective Date pursuant to Part A as Class 1 Non-Voting Preferred Stock and (iv) the Preferred Stock and Voting Preferred Stock had been allocated ratably (over the 69 months beginning at the Effective Date) to Participants in their respective Employee Groups in accordance with the overall program ownership percentages, that is, the ALPA Employee Group - 46.23%, the IAM Employee Group - 37.13% and the Management and Salaried Employee Group - 16.64%. To the extent any interpretative issues arise in calculating contributions and allocations, such issues shall be resolved, if possible, by effectuating such purpose. To the extent that any shares of Company Stock are converted into shares of Common Stock prior to the end of the Wage Investment Period, an appropriate number of shares of Common Stock will be contributed (if applicable) and allocated hereunder in lieu of the shares of the Company Stock that would have been contributed and/or allocated hereunder and, if appropriate, the number of Class 1 and/or Class 2 Non-Voting Preferred Stock shares set forth in various places in this Plan shall be revised; provided, except to the extent the shares of Voting Preferred Stock are converted into shares of Common Stock, the calculation of the number of shares of Voting Preferred Stock to be contributed and allocated shall continue as if no shares of Company Stock had been converted.

(e)     Special Allocation Provision. For purposes of making allocations under Section 5.4, the period from January 1, 2000 through April 12, 2000 shall be treated as a Plan Year (for the ALPA Employee Group and the Management and Salaried Employee Group) and the period from January 1, 2000 through July 12, 2000 shall be treated as a Plan Year (for the IAM Employee Group).

    5.5     Limitation on Allocations to Participants. (a)     General. Subject to the provisions of this Section 5.5, Code section 415, including the effect of any transitional rule, shall be incorporated by reference into the terms of the Plan. No allocation shall be made under Section 5.4 that would result in a violation of Code section 415.

(b)     Code Section 415 Compensation. For purposes of this Section 5.5, Compensation shall be adjusted to reflect the general rule of Treasury Regulation section 1.415-2(d).

(c)     Limitation Year. The "limitation year" (within the meaning of Code section 415) shall be the calendar year.

(d)     Multiple Defined Contribution Plans. In any case where a Participant also participates in another defined contribution plan of the Company or its Affiliates, the appropriate committee of such other plan shall first reduce the after-tax contributions under any such plan, shall then reduce any elective deferrals under any such plan subject to Code section 401(k), shall then reduce all other contributions under any other such plan and, if necessary, shall then reduce contributions under this Plan (Part B to be reduced before Part A); provided, however, in the case of any Participant who is a member of the ALPA Employee Group, contributions (excluding after-tax contributions and elective deferrals) under the United Air Lines, Inc. Pilots' Directed Account Retirement Income Plan shall be reduced last.

(e)     Combined Plan Limitations. To the extent necessary to comply with the requirements of Code section 415(e), the appropriate committee shall first reduce the annual benefit payable under any defined benefit plan in which the Participant participates and, if necessary, the ESOP Committee shall thereafter reduce the contributions under the defined contribution plans in which such Participant participates in accordance with Section 5.5(d).

(f)     Excess Allocations. If, after applying the allocation provisions under Section 5.4, allocations under Section 5.4 would otherwise result in a violation of Code section 415, the ESOP Committee shall reduce Employer Contributions for the next limitation year for the affected Participant or shall hold excess amounts in a suspense account for allocation in a subsequent Plan Year in accordance with Reg. section 1.415-6(b)(6)(ii). Such suspense account, if permitted, will be created before any reallocation of contributions for the affected individual. If the limits of Code section 415 would cause total allocations to each Participant in an Employee Group to exceed the permitted amount, appropriate arrangements will be made to protect the interests of that Employee Group, consistent with the principles of Section 3.2.

    5.6     Valuations. All valuations of shares of Company Stock that are not readily tradeable on an established securities market shall be valued by an "independent appraiser" (within the meaning of Code section 170(a)(1)).

SECTION 6

Vesting

A Participant's Account shall be fully vested (nonforfeitable) at all times, and will be distributed to him or, in the event of his death, to his Beneficiary, in accordance with the applicable provisions of Section 7.

SECTION 7

Distributions

    7.1     Pre-Retirement Diversification Rights.

(a)     General. Any Participant who has attained age 55 and has 10 years of participation under the Plan ("Qualified Participant") may elect to diversify the investment of a portion of his Account under this Section 7.1. During the six-Plan Year period beginning with the Plan Year in which such Qualified Participant attains age 55 and has 10 years of participation under the Plan, such Qualified Participant shall be entitled to request, within 90 days after the close of each Plan Year in such period (each such period referred to as an "Election Period"), the diversification of up to 25% of the balance of his Account, to the extent such amount exceeds the amount to which any prior election under this Section 7.1 applies. During the last Election Period, the preceding sentence shall be applied by substituting "50%" for "25%".

(b)     Amount. In the case of a Qualified Participant who has made one or more elections during the period, the extent to which a subsequent election exceeds the amount to which any prior election applies shall be (i) in the case of the Qualified Participant's ESOP Cash Account, (A) 25 % or 50 %, as the case may be, of the sum of the balance of such Account as of the Valuation Date of the Plan Year with respect to which the subsequent election is made and the amounts diversified pursuant to prior elections, less (B) the amounts diversified pursuant to prior elections; and (ii) in the case of the Qualified Participant's ESOP Stock Account, (A) 25% or 50%, as the case may be, of the sum of the number of shares of Company Stock in the Qualified Participant's ESOP Stock Account as of the Valuation Date of the Plan Year with respect to which the subsequent election is made and the number of shares of Company Stock diversified pursuant to prior elections, less (B) the number of shares of Company Stock diversified pursuant to prior elections. For the purposes of this Section 7, fractional shares for which a Qualified Participant might be entitled to receive shall be rounded down to the nearest whole share. The diversification of a Participant's Account under this Section 7.1 shall only be effected within 90 days following the 90-day period in which the Qualified Participant makes his request. Notwithstanding the foregoing, if the fair market value of the Company Stock allocated to the ESOP Stock Accounts of a Qualified Participant is $500 or less as of the Valuation Date immediately preceding the first day of an Election Period, such Qualified Participant shall not be entitled to an election under this Section 7.1 for that Election Period.

(c)     Method. A Participant's diversification election pursuant to this Section 7.1 shall only be effected by having the ESOP Committee cause the Trustee to transfer the portion of the Account to be diversified to the Company's Code section 401(k) plan applicable to such Participant. An equal number of shares of Voting Preferred Stock and Preferred Stock shall be diversified.

    7.2     Distributions on Account of Termination of Employment. Subject to the following provisions of this Section 7, a Participant (or, in the case of a Participant's death, his Beneficiary) shall become eligible (but shall not be required) to receive a distribution of the balance of his Account, as of the Valuation Date coincident with or next following the date the Participant's employment with the Company and its Affiliates terminates for any reason, provided, however, that, except as provided in Section 7.4, no distributions shall be made prior to July 13, 1995.

    7.3     Manner and Form of Distributions.

(a)     Manner. A Participant may elect to receive a distribution of his Account balance in either of the following methods:

    (i)     By payment in a lump sum; or

    (ii)     By payment in a series of five substantially equal annual installments (to consist of equal numbers of Voting Preferred Stock and Preferred Stock).
 

If a Participant so desires he may direct how his benefits are to be paid to his Beneficiary. If a deceased Participant did not file a direction with the ESOP Committee, the Beneficiary may elect to receive a distribution of the Account in accordance with this Section 7.3.
  (b)     Form. At the Participant's election, the ESOP Committee shall direct the Trustee to make distribution of a Participant's Account in (i) cash, (ii) Company Stock or (iii) in cash equal to the amount held in such Participant's ESOP Cash Account and in shares of Company Stock with respect to such Participant's ESOP Stock Account; provided, however, that Company Stock (if convertible) shall only be distributed in the form of Common Stock received in the conversion of the Preferred Stock held in his Account and any fractional share shall be paid in cash. If a Participant elects to receive a distribution of his ESOP Stock Account in cash, the Trustee shall be directed to convert (if convertible) the Company Stock in his ESOP Stock Account into Common Stock and to sell the Common Stock and any Company Stock that is not convertible; the amount of cash so distributed shall equal the net proceeds received from the sale of such shares of Common Stock. If a Participant elects to receive a distribution of his ESOP Cash Account in Common Stock, the Trustee will be directed to purchase Common Stock in the open market and the number of shares of Common Stock so distributed shall equal the number of whole shares purchased with such Participants' Account balance, with any excess cash distributed to the Participant.
    7.4     Special Distribution Rules. Notwithstanding any provision herein to the contrary: (a)     Required Distributions.

    (i)     a Participant whose employment with the Company and its Affiliates terminates by reason of attainment of his Normal Retirement Date, death or Total Disability must be eligible to receive a distribution of his Account balance no later than the end of the Plan Year following the Plan Year in which such termination occurs; provided, however, that this provision shall not apply to the shares of Company Stock held in the Participant's Account acquired with the proceeds of an Acquisition Loan until the close of the Plan Year in which such Acquisition Loan has been repaid in full;

    (ii)     unless a Participant otherwise elects under Section 7.4(b), a Participant whose employment with the Company and its Affiliates terminates must commence to receive a distribution of his Account no later than 60 days following the close of the Plan Year in which the latest of the following occurs; (A) a Participant reaches his Normal Retirement Date, (B) the Participant's employment with the Company and its Affiliates terminates and (C) the 10th anniversary of the year in which the Participant commenced participation in the Plan;

    (iii)     a Participant's Account balance must commence to be distributed no later than the April 1 of the calendar year next following the calendar year in which such Participant attains age 70-1/2. Any amount distributed pursuant to this clause (iii) shall, in the case of a Participant who is an Employee, be and be limited to the minimum amount required to be distributed pursuant to Code section 401(a)(9);

    (iv)     If a Participant's employment with the Company and its Affiliates terminates by reason of death, or if a Participant dies after his employment terminates but before a distribution commences from the Plan, then, unless the Participant's spouse is the Beneficiary, all of the Participant's interest in the Plan must be completely distributed within five years after the date of his death unless distributions begin within one year after the Participant's death; and

    (v)     to the extent permitted by law, Code section 40 1 (a)(9) and any related transitional rule are incorporated by reference into the terms of the Plan.

(b)     Deferred Distributions. A Participant (or a spousal Beneficiary) may elect to defer the commencement of his distribution to any date on or prior to the April I of the calendar year next following the calendar year in which such Participant attains age 70-1/2.

    7.5     Direct Rollover. To the extent required by Code section 401(a)(31), the Participant (or a spousal Beneficiary) shall have the right to elect to have any distribution that constitutes an "eligible rollover distribution" (as defined in Code section 401(a)(31)(C)) paid directly to an "eligible retirement plan" (as defined in Code section 401(a)(31)(D)) specified by such Participant (or a spousal Beneficiary). If a Participant (or a spousal Beneficiary) fails to make the foregoing election he shall be deemed to have not made such election. The provisions of this Section 7.5 shall be administered in accordance with, and subject to, such rules as the ESOP Committee may prescribe, which rules may include any limitations permitted under Code section 401(a)(31).

    7.6     Facility of Payment.

(a)     General. Subject to Section 7.6(b), if, in the opinion of the ESOP Committee, a Participant or Beneficiary is under a legal disability or is in any way incapacitated so as to be unable to manage his financial affairs, the ESOP Committee may (but shall not be required to), until claim is made by a conservator or other person legally charged with the care of his person or of his estate, direct the Trustee to make payment to a relative or friend of such person for his benefit. Thereafter, any benefits under the Plan to which such Participant or Beneficiary is entitled shall be paid to such conservator or other person legally charged with the care of his person or his estate.

    (b)     Minors. In the event any amount is payable under the Plan to a minor, payment shall not be made to the minor, but instead shall be paid (i) to that person's then living parent(s) to act as custodian, (ii) if that person's parents are then divorced, and one parent is the sole custodial parent, to such custodial parent, or (iii) if no parent of that person is then living, to a custodian selected by the ESOP Committee to hold the funds for the minor under the Uniform Transfers or Gifts to Minors Act in effect in the jurisdiction in which the minor resides. If no parent is living and the ESOP Committee decides not to select another custodian to hold the funds for the minor, payment shall be made to the duly appointed and currently acting guardian of the estate for the minor or, if no guardian of the estate for the minor is duly appointed and currently acting within 60 days after the date the amount becomes payable, payment shall be deposited with the court having jurisdiction over the estate of the minor.

    (c)     Discharge. Any payment made under this Section 7.6 shall fully discharge, to such extent, the obligation of the Trustee to pay benefits under the Plan with respect to such Participant, Beneficiary or minor.

    7.7     Interests Not Transferable. The interests of Participants and their Beneficiaries under the Plan are not subject to the claims of their creditors and may not be voluntarily or involuntarily assigned, alienated or encumbered, except as otherwise provided in Section 7.11.

    7.8     Absence of Guaranty. The Trustee, the ESOP Committee and the Employers in no way guarantee the Trust Fund from loss or depreciation. Moreover, the Employers do not guarantee any payment to any person. The liability of the Trust to make any payment is limited to the available Trust Fund.

    7.9     Designation of Beneficiary. In the event of the death of a married Participant, the Participant's Account balance will be paid to his surviving spouse, except as otherwise provided below. Each Participant from time to time, by signing a form furnished by the ESOP Committee, may designate any legal or natural person or persons (who may be designated contingently or successively) to whom his benefits are to be paid if he dies before he receives all of his benefits; provided, however, that if a married Participant designates a Beneficiary other than his spouse, his spouse must consent in writing to such designation and acknowledge in writing the effect of such designation, and such consent and acknowledgement must be witnessed by a notary public. Any designation by an unmarried Participant shall be rendered ineffective by any subsequent marriage and any consent of a spouse shall be effective only as to that spouse.

A Beneficiary designation form will be effective only when the signed form is filed with the ESOP Committee while the Participant is alive and will cancel all Beneficiary designation forms signed earlier. If a deceased Participant fails to designate a Beneficiary as provided above (or if the designated Beneficiary dies before the Participant or before receiving complete payment of the Participant's benefits), the ESOP Committee shall direct the Trustee to pay the Participant's benefits as follows:

(a)     first, to the surviving spouse of the Participant, if any;

(b)     second, to the children (including any adopted children) of the Participant, per stirpes; and

(c)     third, if the Participant leaves no surviving spouse or has no descendants pursuant to paragraph (b) above, to the estate of the last to die of the Participant or his designated Beneficiary.

Upon the dissolution of marriage of a Participant, any designation of the Participant's former spouse as a Beneficiary shall be treated as though the Participant's former spouse had predeceased the Participant, unless (i) the Participant executes another Beneficiary designation that complies with this Section 7.9 and that clearly names such former spouse as a Beneficiary, or (ii) a court order presented to the ESOP Committee prior to distribution on behalf of the Participant explicitly requires the Participant to continue to maintain the former spouse as the Beneficiary. In any case in which the Participant's former spouse is treated under the Participant's Beneficiary designation as having predeceased the Participant, no heirs or other beneficiaries of the former spouse shall receive benefits from the Plan as a Beneficiary of the Participant except as provided otherwise in the Participant's Beneficiary designation.

    7.10     Missing Participants or Beneficiaries. Each Participant and each Beneficiary must file with the ESOP Committee from time to time in writing his post office address and each change of post office address. Any communication, statement or notice addressed to a Participant or Beneficiary at his last post office address filed with the ESOP Committee, or if no address is filed with the ESOP Committee, then, in the case of a Participant, at his last post office address as shown on his Employer's records, will be binding on the Participant and his Beneficiary for all purposes of the Plan. The Employers, the ESOP Committee and the Trustee will not be required to search for or locate a Participant or his Beneficiary. In the event that all, or any portion, of the distribution payable to a Participant or his Beneficiary hereunder shall, at the expiration of five years after it shall become payable, remain unpaid solely by reason of the inability of the ESOP Committee, after sending a communication, statement or notice to the last post office address filed with the ESOP Committee, to ascertain the whereabouts of such Participant or his Beneficiary, the amount so distributable shall be reallocated in the same manner as a Company Stock contribution would be allocated under the provisions of Section 5.4. In the event a Participant or his Beneficiary is located subsequent to his benefit being reallocated, such benefit shall be restored first from Trust (including the Supplemental Trust) earnings and second from an Employer Contribution made solely for restoration purposes. The allocation and restoration referred to above shall be effected by giving effect to the class of Company Stock reallocated.

    7.11     Qualified Domestic Relations Order. In addition to payments made under Section 7 on account of a Participant's termination of employment, payments may also be made to an Alternate Payee (as defined below) prior to, coincident with, or after a Participant's termination of employment if made pursuant to a "qualified domestic relations order" (as defined in Code section 414(p)). The ESOP Committee shall establish reasonable procedures to determine the qualified status of domestic relations orders and to administer distributions under such qualified orders, including, in its sole discretion, the establishment of segregated accounts for Alternate Payees. The term "Alternate Payee" means any spouse, former spouse, child or other dependent of a Participant who is recognized by a Qualified Domestic Relations Order as having a right to receive all, or a portion of, the benefits payable under the Plan with respect to the Participant.

SECTION 8

Voting and Certain Dispositions of Company Stock

    8.1     Voting.

(a)     Allocated Shares. Each Participant or Beneficiary, as a named fiduciary within the meaning of ERISA section 403(a)(1), in accordance with the procedures hereinafter set forth, may direct the Trustee with respect to the votes of the shares of Company Stock allocated to his ESOP Stock Account, and the Trustee shall follow the directions of those Participants (and Beneficiaries) who provide timely instructions to the Trustee; provided that, notwithstanding the foregoing, the Trustee shall vote the shares of Company Stock allocated to the Part B Accounts of Participants who are (or were) members of the ALPA Employee Group but are not Employees (or allocated to the Part B Accounts of their Beneficiaries).

(b)     Unallocated and Uninstructed Shares.

    (i)     Part A. Each active Participant (which shall be defined for purposes of Sections 8.1 and 8.2 to mean a Participant who is an Employee) who directed the Trustee with respect to shares allocated to his Account under Part A in accordance with Section 8.1(a) may, again as a named fiduciary, direct the Trustee with respect to a portion of both the number of shares of Company Stock held in the Loan Suspense Account and the number of such shares allocated to any Participant's Account under Part A for which no instructions were timely, received by the Trustee. Such portion shall be determined as follows:
 

(A)     Such portion shall be limited to the sum of: (I) the number of shares of Company Stock held in the Loan Suspense Account reserved for allocation to such Participant's Employee Group, plus (II) the number of shares of Company Stock allocated to the Accounts of Participants in such Participant's Employee Group under Part A for which no instructions were timely received.

(B)     The number of shares of Company Stock determined under clause (i)(A) shall be multiplied by a fraction, the numerator of which is the number of shares of Company Stock allocable to Part A that such Participant directed the Trustee in accordance with Section 8.1(a) and the denominator of which is the aggregate number of shares allocable to Part A that were directed by active Participants in the same Employee Group in accordance with Section 8.1(a).
 

                    (C)     Such Participant, as a named fiduciary, shall be entitled to direct the Trustee with respect to the number of shares determined under clause (i)(B).

(ii)     Part B. Each active Participant who directed the Trustee with respect to shares allocated to his Account under Part B in accordance with Section 8.1(a) may, again as a named fiduciary, direct the Trustee with respect to a portion of the number of such shares allocated to any Participant's Account under Part B for which no instructions were timely received by the Trustee. Such portion shall be determined as follows:

(A)     Such portion shall be limited to the number of shares of Company Stock allocated to the Accounts of Participants in such Participant's Employee Group under Part B for which no instructions were timely received.

(B)     The number of shares of Company Stock determined under clause (ii)(A) shall be multiplied by a fraction, the numerator of which is the number of shares of Company Stock allocable to Part B that such Participant directed the Trustee in accordance with Section 8.1(a) and the denominator of which is the aggregate number of shares allocable to Part B that were directed by active Participants in the same Employee Group in accordance with Section 8.1(a).

(C)     Such Participant, as a named fiduciary, shall be entitled to direct the Trustee, with respect to the number of shares determined under clause (ii)(B).
 

(c)     Procedure. Such directions shall be provided directly to the Trustee and shall be held in confidence and not be divulged or released to any other person. Within a reasonable time prior to each annual or special meeting of holders of Company Stock, the ESOP Committee shall furnish to all Participants (and Beneficiaries) entitled to direct the Trustee as to the voting of shares of Company Stock copies of any proxy solicitation material provided to holders of voting Company Stock generally together with appropriate instruction forms or cards and information concerning the method of providing such instructions to the Trustee. To the extent permitted by law, if the Trustee cannot follow directions of Participants (or Beneficiaries), the ESOP Committee shall direct the Trustee.
    8.2     Control Transaction. (a)     General. The provisions of this Section 8.2 shall apply in the event a Control Transaction is commenced or proposed by a person or persons. In the event a Control Transaction is commenced or proposed, the ESOP Committee, promptly after receiving notice, shall transfer certain of the ESOP Committee's record keeping functions under the Plan to an independent record keeper (which if the Trustee consents in writing, may be the Trustee). The functions so transferred shall be those necessary to preserve the confidentiality of any directions given by the Participants (and Beneficiaries) 'in connection with the Control Transaction. Within a reasonable time after a Control Transaction is commenced, the ESOP Committee shall furnish to all Participants (and Beneficiaries) entitled, as hereinafter set forth, to direct the Trustee with respect to the Control Transaction, copies of all offering material provided to holders of Company Stock generally, together with appropriate instruction forms or cards and information concerning the method of providing such instructions to the Trustee. Except as otherwise required by ERISA, the Trustee shall have no discretion or authority to sell, exchange, transfer, convert or otherwise dispose of any of shares of Company Stock pursuant to such Control Transaction except to the extent that the Trustee is timely directed to do so in writing as follows:

    (i)     Allocated Shares. Each Participant (or Beneficiary) to whose ESOP Stock Account shares of Company Stock have been allocated may, as a named fiduciary within the meaning of ERISA section 403(a)(1), direct the Trustee with respect to the sale, exchange, transfer, conversion or other disposition of the shares of Company Stock allocated to his ESOP Stock Account, and the Trustee shall follow the directions of those Participants (and Beneficiaries) who provide timely instructions to the Trustee.

    (ii)     Unallocated and Uninstructed Shares.
 

(A)     Part A. Each active Participant who directed the Trustee with respect to shares allocated to his Account under Part A in accordance with Section 8.2(a)(i) may, again as a named fiduciary, direct the Trustee with respect to a portion of both the number of shares of Company Stock held in the Loan Suspense Account and the number of such shares allocated to any Participant's Account under Part A for which no instructions were timely received by the Trustee. Such portion shall be determined as follows:
  (I)     Such portion shall be limited to the sum of: (x) the number of shares of Company Stock held in the Loan Suspense Account reserved for allocation to such Participant's Employee Group, plus (y) the number of shares of Company Stock allocated to the Accounts of Participants in such Participant's Employee Group under Part A for which no instructions were timely received.

(II)     The number of shares of Company Stock determined under clause (ii)(A)(I) shall be multiplied by a fraction, the numerator of which is the number of shares of Company Stock allocable to Part A that such Participant directed the Trustee in accordance with Section 8.2(a)(i) and the denominator of which is the aggregate number of shares allocable to Part A that were directed by active Participants in the same Employee Group in accordance with Section 8.2(a)(i).

(III)     Such Participant, as a named fiduciary, shall be entitled to direct the Trustee with respect to the number of shares determined under clause (ii)(A)(11).
 

(B)     Part B. Each active Participant who directed the Trustee with respect to shares allocated to his Account under Part B in accordance with Section 8.2(a)(i) may, again as a named fiduciary, direct the Trustee with respect to a portion of the number of such shares allocated to any Participant's Account under Part B for which no instructions were timely received by the Trustee. Such portion shall be determined as follows:
  (I)     Such portion shall be limited to the number of shares of Company Stock allocated to the Accounts of Participants in such Participant's Employee Group under Part B for which no instructions were timely received.

(II)     The number of shares of Company Stock determined under clause (ii)(B)(1) shall be multiplied by a fraction, the numerator of which is the number of shares of Company Stock allocable to Part B that such Participant directed the Trustee in accordance with Section 8.2(a)(i) and the denominator of which is the aggregate number of shares allocable to Part B that were directed by active Participants in the same Employee Group in accordance with Section 8.2(a)(i).

(III)     Such Participant, as a named fiduciary, shall be entitled to direct the Trustee with respect to the number of shares determined under clause (ii)(B)(II).
 

All such instructions from Participants (and beneficiaries) shall be provided directly to the independent record keeper which, if different from the Trustee, shall then instruct the Trustee as to the amount of shares to be sold, tendered, exchanged, transferred, converted or otherwise disposed of in accordance with the above directions. To the extent the Trustee cannot follow Participant (or Beneficiary) instructions, the ESOP Committee, as a named fiduciary, shall direct the Trustee. Except as contemplated by the foregoing or as required to facilitate the making of Plan distributions or diversification elections or as required by law, the Trustee shall have no authority to dispose of Company Stock in a Control Transaction or otherwise.
  (b)     Records. Following any Control Transaction that has resulted in the sale or exchange of any shares of Company Stock held in the Plan, the record keeper shall continue to maintain on a confidential basis the Accounts of Participants (and Beneficiaries) to whose Accounts shares of Company Stock were allocated at any time during such offer, until complete distribution of such Accounts or such earlier time as the record keeper determines that the transfer of the record keeping functions back to the ESOP Committee will not violate the confidentiality of the directions given by the Participants (and Beneficiaries). In the event that there is no sale or exchange of any shares of ESOP Stock held in the Plan pursuant to the Control Transaction, the record keeper shall transfer back to the ESOP Committee the record keeping functions; provided, however, that the record keeper shall keep confidential any instructions which it may receive from Participants (and Beneficiaries) relating to the Control Transaction.

(c)     Proceeds. For purposes of allocating the proceeds of any sale or exchange pursuant to a Control Transaction, the ESOP Committee or the independent record keeper, as the case may be, shall determine the portion, expressed as a percentage, of shares of each class tendered by the Trustee that were actually sold or exchanged (the "applicable percentage" for that class). For each class, the ESOP Committee or the independent record keeper, as the case may be, shall then treat as having been sold or exchanged from the portion of the Loan Suspense Account applicable to that Employee Group and each of the individual Accounts of Participants (and Beneficiaries) that number of shares (of that class) that is obtained by multiplying (i) the applicable percentage for that class, times (ii) the total number of shares in such Account of that class that were directed to be tendered, exchanged or sold in connection with the Control Transaction. The adjustments to individual Accounts shall be made by the ESOP Committee or the independent record keeper, as the case may be, on information supplied by the Company, the ESOP Committee or the Trustee.

(d)     Actions To Be Taken Following a Control Transaction. Notwithstanding Section 4.2 or any other provision of this Plan or the Trust Agreement that requires that the Trust Fund be invested exclusively in shares of Company Stock, this Section 8.2(d) shall apply if a Control Transaction results in the sale or exchange or other disposition of any shares of Company Stock held in the Plan. If the consideration received by the Trust as a result of the Control Transaction consists solely of "appropriate securities" (as defined below), the terms of the Plan, all outstanding Acquisition Loans, and future sales under Additional Acquisition Loans, shall continue as if the Control Transaction had not occurred. If the consideration received includes cash, property or securities, other than appropriate securities, the Trustee shall invest the proceeds in appropriate securities to the extent possible; if the Trustee is able to reinvest all such proceeds in appropriate securities, the Plan, all outstanding Acquisition Loan and future sales under Additional Acquisition Loans, shall continue as if the Control Transaction had not occurred; if the Trustee is unable to reinvest all such proceeds in appropriate securities, then the Company shall make appropriate arrangements (which shall be reasonably satisfactory to ALPA and the IAM and shall take into account and recognize the position that ESOP Participants would have enjoyed had all of the shares of Class 1 Non-Voting Stock been sold to the ESOP on the Effective Date at a price per share equal to the purchase price with respect to the shares sold on the Effective Date) to protect the substantive interests of each Employee Group, provided, however, that it is not currently intended that such arrangements will consist of forgiveness of any portion of any Acquisition Loan. For purposes of this Section 8.2(d), "appropriate securities" shall mean stock (i) that is described in Code section 409(1), (ii) that is either common stock described in Code section 409 (1)(1) or preferred stock that converts into such common stock, and (iii) the issuer of which stock (A) has a Moody's senior long-term debt rating which is at least as good as the better of the Moody's senior long-term debt rating of the Company or United Airlines, Inc. at such time and (B) is a "public company" as defined in Article Fifth of the Articles of Incorporation of the Company.

(e)     Special Funding Rules. (i) If (x) any person or persons commence (which, for purposes of this paragraph, shall mean-filing a tender offer statement on Schedule 14D-1 (or successor form) with the Securities and Exchange Commission or mailing appropriate solicitation materials to the shareholders) a bona fide tender offer or exchange offer for Company Stock which, if successful, would require the offeror (if a person other than the Company or any of its affiliates) to file a Form 13D (or successor form) with the Securities and Exchange Commission with respect thereto, or (y) the Board of Directors or shareholders approve a Control Transaction described in Section 1(q)(b), then all of the remaining shares of Class 1 Non-Voting Preferred Stock that are to be issued to the Plan pursuant to the Recapitalization Agreement shall be sold ("Top-Off Sale") by the Company to the Plan as soon as possible (and, in all circumstances, in adequate time to allow the Plan to respond to such event), pursuant to an Additional Acquisition Loan (conforming to the first sentence of Section 1.6(g) of the Recapitalization Agreement, provided that the consent of ALPA and the IAM required by that sentence shall not apply), unless and to the extent that ALPA and the IAM jointly request otherwise in writing. (All disputes between the Company and ALPA and the IAM as to whether any such tender offer or exchange offer is bona fide shall be made in accordance with the arbitration procedures described in Section 11.2(b)(ii)(G)-(J) hereof.) In the Company's sole discretion such Top-Off Sale may be made subject to a Condition that prevents, to the extent permitted by law, the consummation of such Top-Off Sale if the event in question does not result in the sale, exchange or other disposition of Company Stock, provided that such contingency does not materially interfere with the Plan's ability to so respond to the event in question. The purchase price of the shares of Class 1 Non-Voting Preferred Stock to be sold pursuant to this subsection (e) shall be the fair market value of such shares of Class 1 Non-Voting Preferred Stock.

    (ii)(A)     If a person or persons make a bona fide offer to the Plan (not covered by paragraph (e)(i)) to acquire, directly or indirectly, at least 5% of the Company Stock held by the Plan (the "Offer"), such Offer shall be treated as if an event described in (e)(i) and the resultant Top- Off Sale shall be effected in accordance with (e)(i), subject, however, to the provisions of (e)(11)(B).
 

(B)     In the event of an Offer, the Trustee shall seek directions from Participants regarding the Offer, in accordance with the provisions of this Section 8.2, both as to the actual shares held by the Plan and as to the additional shares that would be held in the Loan Suspense Account if the Top-Off Sale had been effected. If following those directions as to both actual shares and the shares that would be acquired in a Top-Off Sale, and following those directions only as to actual shares would in each case not result in the direct or indirect acquisition of any Company Stock pursuant to the Offer, then the Top-Off Sale shall not be effected; otherwise, the Top-Off Sale shall be effected as contemplated by (e)(i) and (e)(ii)(A).

(C)     Subject to the next sentence, the provisions of (e)(ii)(B) shall not apply and the Top-Off Sale shall be made in accordance with (e)(ii)(A) if following the (e)(ii)(B) procedures could reasonably be expected to prevent a Top-Off Sale from being effected in adequate time to allow the Plan to accept the Offer. Under the circumstances described in this (e)(ii)(C), however, the Top-Off Sale shall be consummated immediately before the consummation of the transaction contemplated by the Offer and shall, to the extent legally permitted, be subject to the consummation of the transaction contemplated by the Offer.
 

(iii)     If a Top-Off Sale required by (e)(i) or (e)(ii) is not consummated, the Company shall make appropriate arrangements (which shall be reasonably satisfactory to ALPA and the IAM) to protect the substantive interests of the Employee Groups with respect to the ESOP and the relevant transaction and the purposes of this subsection (e). The appropriate arrangements contemplated by the foregoing shall take into account and recognize the position that Participants would have enjoyed had all of the shares of Class 1 Non-Voting Preferred Stock been sold to the Plan on the Effective Date at a price per share equal to the purchase price with respect to the shares of Class 1 Non-Voting Preferred Stock sold on the Effective Date. The provisions of this subsection (e) and subsection (d) are not mutually exclusive, provided that to the extent the sales or other appropriate arrangements described in this subsection (e) occur, the future sales in connection with Additional Acquisition Loans described in subsection (d) shall not be required.
    8.3     No Illegal Actions. Notwithstanding any other provision of this Plan, the Trustee shall not be obligated to follow the direction of a named fiduciary unless such direction is in accordance with the terms of the Plan and is proper under ERISA section 403(a)(2) and not contrary to Title I of ERISA.

SECTION 9

Rights, Restrictions and Options on Company Stock

    9.1     Right of First Refusal. If Company Stock distributed is not readily tradable on an established market (within the meaning of Code section 409(h)), any shares of Company Stock distributed by the Trustee shall be subject to a "Right of First Refusal." The Right of First Refusal shall provide that, prior to any subsequent transfer, such shares of Company Stock must first be offered in writing to the Trust and, if refused by the Trust, to the Company, at the greater of its independently appraised value as of the Valuation Date coinciding with or next preceding such offer, or the price stated in a bona fide written offer and on the same terms. The Trustee (on behalf of the Trust) and the Company, as the case may be, shall have a total of 14 days (from the date the Trust or the Company, as the case may be, receives the offer) to exercise the Right of First Refusal. The ESOP Committee shall determine whether a written offer from a prospective buyer has been made in good faith. A Participant (or Beneficiary) entitled to a distribution of Company Stock may be required to execute an appropriate stock transfer agreement (evidencing the Right of First Refusal) prior to receiving a certificate for Company Stock.

    9.2     Put Option. If Company Stock distributed is not readily tradable on an established market (within the meaning of Code section 409(h)), the Company shall issue a "Put Option" to each Participant (or his Beneficiary) receiving a distribution of such Company Stock from the Plan. The Put Option shall permit the Participant (or his Beneficiary) to sell such Company Stock to the Company, at any time during two put option periods (described below), at the then fair market value, such fair market value to be determined at least annually as of the respective Valuation Date by an independent appraiser selected by the ESOP Committee. The first put option period shall be a period of at least 60 days beginning on the date of distribution of Company Stock to the Participant (or his Beneficiary). The second put option period shall be a period of at least 60 days beginning after the new determination of the fair market value of Company Stock is made by an independent appraiser (and notification is given to the Participant or his Beneficiary) in the next following Plan Year. The Company shall permit the Trustee, in its discretion, to purchase the Company Stock tendered to the Company under a Put Option. If the Company or the Trustee purchases Company Stock tendered under a Put Option and [he Company Stock was distributed to the Participant (or his Beneficiary) in the form of a lump sum, the payment, at the discretion of the Company or Trustee, may be made (a) in five substantially equal annual installments commencing not later than 30 days after the exercise of the Put Option- ' provided, however, that the purchaser provides adequate security and reasonable interest (as determined by the ESOP Committee) on unpaid installments, or (b) in a lump sum. If the Company or Trustee purchases Company Stock tendered under a Put Option and the Company Stock was distributed as part of an installment distribution, the payment, in the form of a lump sum, must be made not later than 30 days after the exercise of the Put Option. The Trustee. on behalf of the Trust, may offer to purchase any shares of Company Stock (which are not sold pursuant to a Put Option) from any former Participant or Beneficiary at any time in the future, at its then fair market value.

    9.3     Share Legend. Shares of Company Stock held or distributed by the Trustee may include such legend restrictions on transferability as the Company may reasonably require in order to assure compliance with applicable federal and state securities laws. Except as otherwise provided in this Section 9, no shares of Company Stock held or distributed by the Trustee may be subject to a put, call or other option, or buy-sell or similar arrangement.

    9.4     Nonterminable Rights. The provisions of this Section 9 shall continue to be applicable to Company Stock even if the Plan ceases to be an "employee stock ownership plan" (as defined under Code section 4975(e)(7)).

SECTION 10

Dividends

    10.1     Class 1 Non-Voting Preferred Stock.

(a)     Application of Fixed Dividend.

    (i)     Allocated Shares. Any cash dividends paid with respect to shares of Class 1 Non-Voting Preferred Stock allocated to the Participants' ESOP Stock Accounts which were acquired with the proceeds of a particular Acquisition Loan, but excluding dividends in excess of the Fixed Dividend paid on such Preferred Stock, shall be used by the Trustee to pay the principal balance of such Acquisition Loan.

    (ii)     Unallocated Shares. Any cash dividends paid with respect to shares of Class 1 Non-Voting Preferred Stock held in the Loan Suspense Account which were acquired with the proceeds of a particular Acquisition Loan, but excluding dividends in excess of the Fixed Dividend paid on such Preferred Stock, shall be used by the Trustee to pay the principal balance of such Acquisition Loan.

    (iii)     Any cash dividends described in clauses (i) or (ii) in excess of the principal balance of the Acquisition Loan which are attributable to prior fixed dividends that are not paid due to a lack of earnings and profits shall be used to pay interest on such Acquisition Loan if the Company made additional contributions to the Plan to make up for such unpaid fixed dividends.

    (iv)     Any cash dividends described in clauses (i) or (ii) above not used to repay the Acquisition Loan in accordance with clauses (i), (ii) or (iii) above shall be allocated pursuant to subsection (b) below as if they were dividends in excess of the Fixed Dividend.

(b)     Application of Excess Dividend.

    (i)     Allocated Shares. Any cash dividends paid with respect to shares of Class 1 Non-Voting Preferred Stock allocated to the Participants' ESOP Stock Accounts in excess of the Fixed Dividend paid on such Preferred Stock shall be allocated to such Accounts, pro rata, according to the number of shares of such Preferred Stock held in such Accounts on the dividend record date; such amounts shall be used by the Trustee to purchase shares of Common Stock.

    (ii)     Unallocated Shares. Any cash dividends paid with respect to shares of Class 1 Non-Voting Preferred Stock held in the Loan Suspense Account in excess of the Fixed Dividend paid on such Preferred Stock shall be allocated among the Employee Groups in proportion to the allocation percentages set forth in Section 5.4(a)(i)(A). The amount allocated to each Employee Group shall then be allocated to the Participants from that Employee Group, pro rata, according to their Part A Account balances on the dividend record date; such amounts shall be used by the Trustee to purchase shares of Common Stock.

    10.2     Other Dividends. Any other cash dividends paid on Company Stock (excluding Class 1 Non-Voting Preferred Stock) shall be used by the Trustee to purchase additional shares of Company Stock as provided in Section 5.3.

    10.3     Special Allocated Share Rule. Any Financed Shares released from a Loan Suspense Account subaccount by reason of dividends paid with respect to Company Stock that was acquired with the proceeds of the Acquisition Loan applicable to that subaccount shall be allocated in the same manner as provided in Section 5.4(a) for Employer Contributions; provided, however, that prior to said allocation, Financed Shares so released from such subaccount with a fair market value (on the applicable dividend payment date) equal to the dividends allocated to Participants' ESOP Cash Accounts and applied to repay such particular Acquisition Loan as provided in Section 10.1 shall first be allocated among and credited to those ESOP Stock Accounts, pro rata, according to the amount of their dividends so applied. To the extent that the fair market value of the shares released from a subaccount is less than the dividends described in the foregoing proviso, Financed Shares released from other Loan Suspense Account subaccounts shall be used to make up the insufficiency (after first applying the foregoing proviso with respect to Financed Shares released from such other subaccount). Notwithstanding any provision of the Plan to the contrary, in any Plan Year the total dividends allocated to a Participant's ESOP Cash Account used to repay Acquisition Loan(s) shall not, to the extent required by law, exceed the fair market value of the Financed Shares released from the Loan Suspense Account and allocated to that Participant's Account.

SECTION 11

Administration

    11.1     General. The Company shall be the administrator of the Plan and shall have the rights, duties and obligations of an "administrator" as that term is defined in ERISA section 3(16)(A) and of a "plan administrator" as that term is defined in Code section 414(g). Some administrative functions have been allocated to the ESOP Committee, which shall have the rights, duties and obligations set forth herein. The ESOP Committee shall be the "named fiduciary, " as described in ERISA section 402, with respect to its authority under the Plan, except to the extent provided in Section 8, for which each Participant (or Beneficiary) shall be the named fiduciary, and except with respect to the Initial Acquisition Loan and Additional Acquisition Loans and the use of the proceeds thereof to purchase Preferred Stock, for which the Trustee shall be the named fiduciary.

    11.2     Membership and Authority.

    (a)     General. The ESOP Committee shall consist of six members: three members shall be appointed by ALPA, two members shall be appointed by the IAM and one member shall be appointed by the Company. Meetings of the ESOP Committee shall be held at the executive offices of the Company unless a majority of all members unanimously agree upon another location. The ESOP Committee shall have the following powers, rights and duties:

    (i)     to adopt such rules of procedure and regulations for the proper and efficient administration of the Plan and as are consistent with the provisions of the Plan;

    (ii)     to enforce the Plan in accordance with its terms and with such applicable rules and regulations as may be adopted by the ESOP Committee-.

    (iii)     to determine all questions arising under the Plan, to resolve all ambiguities, to correct defects, to supply omissions, including the power to determine the rights or eligibility of Employees or Participants and their Beneficiaries and their respective benefits; provided, however, that the ESOP Committee will not have jurisdiction or power to add to or subtract from the Plan or any amendments thereto;

    (iv)     to give such directions to the Trustee with respect to the Trust Fund as may be provided in this Plan or in the Trust Agreement;

    (v)     to maintain and keep adequate books, records and other data as shall be necessary to administer the Plan, except those that are maintained by the Company or by the Trustee;

    (vi)     to direct all payments of benefits to Participants and Beneficiaries, consistent with the terms of the Plan and the Trust Agreement;

    (vii)     to establish an investment policy and objective for the Plan, except that it is understood that the Plan is designed to invest exclusively in Company Stock;

    (viii)     to elect a Chairman and to appoint a Secretary, who need not be a member of the ESOP Committee, who shall keep minutes of the proceedings and have custody of all records and documents pertaining to administration of the Plan;

    (ix)     to be agent for the service of legal process on behalf of the Plan;

    (x)     to authorize one or more of its members to execute any documents on behalf of the ESOP Committee, in which event the ESOP Committee shall notify the Trustee in writing of such action. The certificate of the Secretary or any authorized member of the ESOP Committee that the ESOP Committee has taken or authorized any action shall be conclusive in favor of any person relying on such certificate;

    (xi)     to obtain an independent appraisal of the fair market value of the Company Stock held by the Trust from an independent appraiser who meets the requirements of Code section 170(a)(1); and

    (xii)     perform any other acts, consistent with the Plan and Trust Agreement, necessary or appropriate to the administration of the Plan and the discharge of its duties.

(b)     Special Provisions.

    (i)     If the ESOP Committee unanimously agrees that a matter affects members of only one Employee Group, the matter shall be considered by an ESOP Committee consisting solely of members who were appointed on behalf of such Employee Group, which appointees must act by a majority vote, and the provisions of this Section 11.2 shall be construed accordingly. If the ESOP Committee is unable to agree unanimously that the matter affects only members of one such Employee Group, the jurisdictional determination, that is, whether the matter affects only members of one such Employee Group, shall be made by a neutral arbitrator selected in accordance with clause (iii) below.

    (ii)     As set forth in Section 12.3, the ESOP Committee will have the exclusive power to hear and determine all appeals of claims denied under Section 12.2 of the Plan pursuant to the procedures hereinafter provided. With respect to such disputes, the ESOP Committee will function as a System Board of Adjustment as provided in Title 11 of the Railway Labor Act, as amended, and the following provisions will govern:
 

(A)     The jurisdiction of the ESOP Committee will be exclusive. Appeals may be submitted to the ESOP Committee either by a Participant or a Beneficiary.

(B)     The ESOP Committee will establish rules of procedure for the conduct of appeals before it, which rules will not be inconsistent with the provisions of the Plan. Insofar as possible, such procedures will follow the procedure of the American Arbitration Association. The Chairman will promptly advise the Company, the IAM and ALPA of such rules of procedure.

(C)     All appeals properly referred to the ESOP Committee for consideration will be addressed to the Chairman in the form of a submission as prescribed by the rules of procedure. Six copies of each submission, including all papers and exhibits in connection therewith, will be forwarded to the Chairman, who will promptly transmit one copy thereof to each member of the ESOP Committee. The submission in each dispute will include the question to be decided by the ESOP Committee, the provisions of the Plan involved in the dispute, the position of the petitioner and all asserted facts supporting such position.

(D)     The submission will state the names of the parties to whom the petitioner sent copies of the submission. A copy of the submission will be served by the petitioner upon ALPA, the IAM and the Company.

(E)     The submission will state whether or not the petitioner requests both a hearing on the facts and oral argument, or only oral argument. The answer of each party may request a hearing on the facts and oral argument or only oral argument. If neither the submission nor any answer requests a hearing, the ESOP Committee may waive a hearing and dispose of the dispute on the basis of the submission and answers.

(F)     When a hearing has been requested in a dispute, the ESOP Committee will fix a date for such hearing as soon as reasonably possible after receipt of the submission. The date for the hearing will not be more than 60 days after receipt of the submission (unless circumstances require a longer period which can be no more than 60 days). If two or more members of the ESOP Committee consider the question involved in the dispute to be of sufficient urgency, the ESOP Committee may fix an earlier date, which will not be less than ten days after filing of the answer. If requested by the ESOP Committee or the Participant, a transcript of each proceeding will be made and retained in the files of the ESOP Committee. Such hearing will be heard at the Company's Executive Offices in Elk Grove Township, Illinois, unless the entire ESOP Committee, by a majority vote, otherwise determines.

(G)     Appeals before the ESOP Committee shall be decided by a majority vote of the members of the ESOP Committee. However, a majority of the members of the ESOP Committee appointed on behalf of any Employee Group has the power to require that any submission (except for matters described in subsection (iv) below) be referred for decision to a neutral arbitrator. Furthermore, if the ESOP Committee deadlocks in the case of any vote, the matter shall be referred for decision to a neutral arbitrator. In any case in which a neutral arbitrator is to be appointed, the parties will, within 10 days after notice of the need to appoint a neutral arbitrator, agree upon a neutral arbitrator. If the parties fail to agree upon the selection of a mutually acceptable neutral arbitrator the parties will select an arbitrator by alternate striking from a panel of arbitrators supplied by the American Arbitration Association, preferably a panel with knowledge of employee stock ownership plans. When an neutral arbitrator is selected, the power to take further action with respect to the dispute shall rest with the neutral arbitrator until the final decision is made in the dispute,

(H)     When a neutral arbitrator is selected, any party to a dispute may make a written request to the neutral arbitrator for a further hearing or oral argument provided it is made within 15 days after such selection. The neutral arbitrator will decide such requests. If no further hearing or argument is held, the neutral arbitrator will consider and review the prior record in the dispute. The decision of the neutral arbitrator will be rendered within 30 days after the close of any further hearing or argument. The neutral arbitrator shall decide the matter based upon the record before him and the terms of the Plan and shall not give weight to any previous votes of the ESOP Committee concerning the matter.

(I)     The decision of the ESOP Committee, or neutral arbitrator, if any, will be final and binding upon the Company, ALPA, the [AM, a Participant or Beneficiary and any other person claiming under the Plan.

(J)     Subject to Section 11.12, the expenses and reasonable compensation of the neutral arbitrator selected as provided herein shall be borne by the Company.
 

    (iii)     Except as provided in Section 11.2(b)(i), for all other purposes under the Plan, five members of the ESOP Committee will constitute a quorum, except that to constitute a quorum, one member appointed on behalf of each Employee Group must be present. All actions and decisions of the ESOP Committee under this Section 11 shall be by (A) the affirmative vote of a majority of the members present at the meeting at which the vote is being taken or (B) the unanimous written consent of all members then in office. However, a majority of the members of the ESOP Committee appointed on behalf of any Employee Group has the power to require that any action or decision (except as limited in clause (iv) below) be referred for decision to a neutral arbitrator. Furthermore, if the ESOP Committee deadlocks in the case of any vote, the matter shall be referred for decision to a neutral arbitrator. The procedures set forth in subsections 11.2(b)(ii)(G) through (J) shall apply.

    (iv)     The ESOP Committee is the named fiduciary with respect to the management and disposition of assets held in the Trust Fund. The power of a majority of the members of the ESOP Committee appointed on behalf of any Employee Group to require that a matter be referred to a neutral arbitrator shall not apply to a matter if it concerns the exercise of authority respecting management or disposition of assets held in the Trust Fund. Notwithstanding the preceding sentence, the power of a majority of the members of the ESOP Committee appointed on behalf of any Employee Group to require that a matter be referred to a neutral arbitrator shall apply if (A) the matter does not involve a Control Transaction and (B) it is reasonably determined that the resolution of such matter might reasonably be expected to subject the Company to a material liability. Any dispute with respect to the application of this clause (iv) shall be resolved in accordance with the arbitration procedures described in Section 11.2(b)(ii)(G)-(J).

    11.3     Delegation by ESOP Committee. The ESOP Committee may establish procedures for allocation of fiduciary responsibilities among its members and delegation of fiduciary responsibilities to persons other than named fiduciaries; provided, however, that the delegation of the power to manage or control the assets of the Trust Fund may only be delegated to an investment manager" (as defined in ERISA section 3(38)). In exercising its authority to control and manage the operation and administration of the Plan, the ESOP Committee may employ agents and counsel (who may also be employed by or represent any Employer) and to delegate to them such powers as the ESOP Committee deems desirable. Any such delegation or appointment shall be in writing and shall reflect the unanimous action of the ESOP Committee members then acting. The writing contemplated by the foregoing sentence shall fully describe the advice to be rendered or the functions and duties to be performed by the delegate.

    11.4     Information To Be Furnished to ESOP Committee. The Employers shall furnish the ESOP Committee such data and information as may be reasonably required to administer this Plan; provided, however, that the preceding phrase shall not in any case restrict the ability of ESOP Committee members to see individual Account data with respect to the Participants in the Employee Groups they represent and, provided, further, that individualized information shall be treated in a confidential manner. The ESOP Committee shall be entitled to rely on any information furnished by the Employers that is needed for calculation of benefits due under the Plan, or any matters relating to administration of the Plan. A Participant or Beneficiary entitled to benefits under the Plan must furnish to the ESOP Committee such evidence, data or information as the ESOP Committee considers desirable to carry out its obligations under the Plan. Any benefits under the Plan may be conditional upon the prompt submission of such information.

    11.5     ESOP Committee's Decision Final. Except as otherwise provided herein, to the extent permitted by law, any interpretation of the Plan and any decision on any matter within the discretion of the ESOP Committee made by the ESOP Committee in good faith is binding on all persons. Except as provided in ERISA section 405, a dissenting member is not responsible for any action or failure to act if within a reasonable time he registers his dissent with the other members, the Company and the Trustee.

    11.6     Remuneration and Expenses. No remuneration shall be paid to any ESOP Committee member who is an Employee of the Company or an Affiliate for services performed hereunder. However, subject to Section 11.12, the reasonable expenses of an ESOP Committee member incurred in the performance of an ESOP Committee function shall be reimbursed by the Employers. For purposes of the preceding sentence, flight pay loss and pay loss for each IAM member shall be treated as an expense.

    11.7     Indemnification of the ESOP Committee. To the extent permitted by applicable law, the ESOP Committee and its members and any employee, director, or officer of the Company or its Affiliates, shall be indemnified by the Company against any and all liabilities, settlements, judgments, losses, costs, and expenses (including reasonable legal fees and expenses) of whatever kind and nature which may be imposed on, incurred by or asserted against them by reason of the performance or nonperformance of their duties in connection with the Plan if such action or inaction did not constitute gross negligence or willful misconduct. Furthermore, the Company agrees to indemnify any such persons against any liability imposed as a result of a claim asserted by any person or persons under federal or state law where such persons act in good faith or in reliance on a written direction or certification of the Company. The foregoing right of indemnification shall be in addition to other rights such persons may have by law or by reason of insurance coverage of any kind. The Company may, at its own expense, settle any claim asserted or proceeding brought against any such persons when such settlement appears to be in the best interests of the Company. If the Company obtains fiduciary liability insurance to protect the ESOP Committee or any of its members, the provisions of this Section 11.7 shall be applicable only to the extent that such insurance coverage is insufficient. The Company shall secure fidelity bonding for the fiduciaries of the Plan, as required by ERISA section 412 and shall secure insurance for ESOP Committee members coextensive with any ERISA insurance coverage provided to any member of the Board of Directors or, if more favorable, to any Employee.

    11.8     Resignation or Removal of ESOP Committee Member. An ESOP Committee member may resign at any time by -delivering his written resignation to the Company. Each of the Company, ALPA and the IAM may remove its ESOP Committee members for any reason. In addition, the Company, at its discretion, may remove any ESOP Committee member for cause upon delivery of written notice to him. Except as provided in the preceding sentence, such resignation or removal, as the case may be, shall become effective only upon the appointment of a qualifying successor member being duly appointed in accordance with Section 11.9. For purposes hereof, "cause" shall be construed to mean an action permitting a member of the Board of Directors to be for cause.

    11.9     Appointment of Successor ESOP Committee Members. ALPA, the IAM or the Company, as the case may be, shall, in accordance with the composition of the ESOP Committee described in Section 11.2, promptly fill any vacancy in the membership of the ESOP Committee and shall give prompt written notice thereof to the other ESOP Committee members, the Company and the Trustee.

    11.10     Interested ESOP Committee Member. A member may not decide or determine a,ny matter or question concerning his own benefits under the Plan or as to how they are to be paid to him unless either such decision could be made by him under the Plan if he were not a member of the ESOP Committee, or such decision applies to all affected Participants similarly. If a member is disqualified to act, and the remaining members of the ESOP Committee cannot agree on a decision, ALPA, the IAM or the Company, as the case may be, may appoint a temporary member to exercise the powers of the interested member concerning the matter as to which he is disqualified.

    11.11     Compliance with Laws. Notwithstanding anything in the Plan or the Trust Agreement to the contrary, every individual who is a fiduciary with respect to the Plan shall exercise his responsibilities with respect to the Plan in a manner consistent with ERISA and other applicable laws.

    11.12     Expenses of the Plan and Trust. All reasonable expenses of administering the Plan and Trust shall be charged to and paid by the Employers; provided, however, that, in the case of a dispute between the Company and the Committee, the reasonableness of any expense shall be determined without regard to Sections 11.5 and 11.2(b)(ii)(1), and, provided, further, that in the event of any disagreement with respect to the reasonableness of an expense, neither a determination of the ESOP Committee that an expense is reasonable nor a determination by the Company that an expense is unreasonable shall be accorded any presumption of correctness. Unless the Company and ESOP Committee otherwise agree, such disagreement shall be resolved through the judicial process and the Company shall pay the reasonable expenses of litigation (and with regard to these expenses, the ESOP Committee's determination of reasonableness shall be conclusive). The reasonableness of any expense with respect to the Plan or Trust shall be determined by taking into account, inter alia, (a) the appropriateness and magnitude of the expense, (b) comparative reference to the types and amounts of expenses incurred by other very large employee stock ownership plans that own a significant portion of the employer's outstanding stock, (c) the complexity and size of this Plan and (d) the special purposes for which this Plan was established. Payment of expenses shall not be deemed to be Employer Contributions.

SECTION 12

Claims Procedure

    12.1     Written Claim. The Company, which may delegate its authority, shall be the fiduciary for the initial decision on claims for benefits under the Plan. A Participant (or Beneficiary) may present a claim to the Company for any unpaid benefits. The Company shall establish procedures for action upon claims initially made and the communication of a decision to the claimant promptly and, in any event, not later than 90 days after the claim is received, unless special circumstances require an extension of time for processing the claim. If an extension is required, notice of the extension shall be furnished the claimant prior to the end of the initial 90-day period, which notice shall indicate the reasons for the extension and the expected decision date. The extension shall not exceed 90 days. The claim may be deemed by the claimant to have been denied for purposes of further review described below in the event a decision is not furnished to the claimant within the period described in the three preceding sentences. If the claim for benefits is wholly or partially denied, the Company shall notify the Participant (or Beneficiary) in writing of such denial of benefits within 90 days after the Company initially received the benefit claim. Such 90-day period may be extended for an additional 90 days if the Company provides written notice of the extension to the claimant prior to the termination of such 90-day period and the extension is based on special circumstances.

    12.2     Notice of Denial. A notice of a denial of benefits shall advise the Participant (or Beneficiary) of:

(a)     the specific reason or reasons for the denial;

(b)     the specific provisions of the Plan on which the denial is based;

(c)     any additional material or information necessary for the Participant (or Beneficiary) to perfect his claim and an explanation of why such material or information is necessary; and

(d)     the steps which the Participant (or Beneficiary) must take to have his claim for benefits reviewed.

    12.3     Review Procedure. Each Participant (or Beneficiary) whose claim for benefits has been denied shall have the opportunity to file a written request pursuant to Section 11.2(b)(ii) for a full and fair review of his claim by the ESOP Committee, to review all documents pertinent to his claim, and to submit a written statement regarding issues relative to his claim. Such written request for review of his claim must be filed pursuant to the procedure set forth in Section 11.2(b)(ii) by the Participant (or Beneficiary) within 60 days after receipt of written notification of the denial of his claim.

    12.4     Notices. All notices denying a claim for benefits, and all decisions on requests for a review of the denial of a claim for benefits, shall be written in a manner calculated to be understood by the Participant (or Beneficiary) filing the claim or requesting the review.

SECTION 13

Amendment and Termination

    13.1     Amendment.

(a)     While the Company expects and intends to continue the Plan, the Company must necessarily reserve, and does hereby reserve, the right to amend the Plan, at any time; provided, however, that, subject to Sections 13.1(b), (c), and (d) hereof and Section 1.6(g) of the Recapitalization Agreement (relating to skipped dividends), no amendment may be adopted without the approval of both ALPA and the IAM.

(b)     With respect to selected "intragroup matters," however, the Company may amend the Plan with respect to the Salaried and Management Group and shall amend the Plan as reasonably requested by ALPA and the IAM for their respective Employee Groups. An amendment relates to an "intra-group matter" only if it relates to eligibility, or allocation and does not relate to any other matter, including, without limitation, withdrawal, loan, voting, vesting or fiduciary provisions; provided, however, that no amendment may be made which shall disqualify the Plan or extend allocations hereunder beyond the year 2000 or affect the pace of allocations of Company Stock in a manner that would adversely affect the Plan's projected ability to meet the requirements of Code Section 415(c)(6) (which last requirement may be waived by ALPA). Notwithstanding the preceding sentence, with respect to an intragroup matter, the Company need not and cannot (without the required consent) adopt any amendment if it would entail an additional annual expense in excess of approximately $25,000 or if the Company reasonably believes the Company will be exposed to a material liability if the amendment is adopted and, provided, further, that disputes under this subsection (b) shall be resolved by the arbitration procedures of Section 11.2(b)(ii). Finally, the Company may not adopt with respect to Management and Salaried Employees and neither ALPA nor the IAM may require the Company to adopt more than three amendments under this Section 13.1(b) and, in the case of the ALPA Employee Group and the Management and Salaried Employee Group, no amendment may require that allocations be based on factors other then Compensation, Account balances, dividends, and dividend credits.

(c)     ALPA and the IAM shall be accorded an adequate opportunity to review any submission referred to in the first sentence of Section 7(a) of the Preferred Stock Purchase Agreement, and they shall have the right to participate in the consideration of any amendment required by the second sentence of Section 7(a) of the Preferred Stock Purchase Agreement. If an amendment to the Plan or Trust is required to result in the issuance of a determination letter described in such Section 7(a), and if there is more than one form of amendment that would result in such issuance, the Company, ALPA, and the IAM shall agree on the form of such amendment; provided, that if the three persons cannot timely agree, an arbitrator shall be immediately selected pursuant to the procedures set forth in Section 11.2(b)(ii). Such arbitrator shall select the amendment that would result in such issuance and that best carries out the purposes of this Plan at a reasonable expense.

(d)     Finally, the approval of ALPA and the IAM shall not be required with respect to an amendment if such amendment (w) is in connection with an extension of an Acquisition Loan in accordance with its terms, (x) extends the allocation period applicable to the Salaried and Management Group, (y) will not cause any extension in the allocation period applicable to the ALPA Employee Group or the IAM Employee Group, and (z) the failure to adopt the amendment would make it impossible to successfully complete the steps described in Section 5.4(a)(i) through (vii) without changing the percentages set forth in Section 5.4(a)(i)(A). The Company agrees that its authority to extend an Acquisition Loan shall be conditioned on enactment of an amendment accomplishing the goals of the prior sentence. ALPA and the IAM shall have the unilateral power to require the Company to extend an Acquisition Loan and adopt an amendment identical to that described in the preceding two sentences, so long as the protections described in the preceding two sentences are accorded to the Employee Groups for which the amendment is not required.

(e)     An amendment under Subsection (b) or (d) shall not be effective unless advance notice of at least 10 days before adoption is given to ALPA, the IAM, and the Board of Directors. Such advance notice may be waived by the party to whom notice is otherwise due.

    13.2     Termination. Subject to the approval of ALPA and the IAM, the Plan will terminate as to all of the Employers on any date specified by the Company.

    13.3     Merger and Consolidation of Plan; Transfer of Plan Assets. No merger or consolidation with, or transfer of assets to, any other plan may be effected without the consent of ALPA and the IAM. In the case of any merger or consolidation with, or transfer of assets and liabilities to, any other plan, provisions shall be made so that each Participant in the Plan on the date thereof, if the Plan was then terminated,