UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


(Mark One)

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

OR

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                      

Commission file number 001-06033

UAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

 

36-2675207

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
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)

(847) 700-4000

(Registrant’s telephone number, including area code)

 


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   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  o

Accelerated filer  x

Non-accelerated filer  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No  x

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x     No  o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class

 

 

Outstanding at
July 28, 2006

 

Common Stock ($0.01 par value)

104,247,443

 

 

 




UAL Corporation and Subsidiary Companies Report on Form 10-Q
For the Quarter Ended June 30, 2006

Index

 

Page  No.

PART I.

FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

 

 

 

Statements of Consolidated Financial Position (Unaudited)

3

 

 

Statements of Consolidated Operations (Unaudited)

5

 

 

Statements of Consolidated Cash Flows (Unaudited)

7

 

 

Statements of Consolidated Stockholders’ Equity (Deficit) (Unaudited)

8

 

 

Notes to Consolidated Financial Statements (Unaudited)

9

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and
Results of Operations

46

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

65

 

 

Item 4. Controls and Procedures

66

 

PART II.

OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

67

 

 

Item 6. Exhibits

68

 

Signature

69

 

Exhibit Index

70

 

 

2




PART I.   FINANCIAL INFORMATION

Item 1.                        Financial Statements

UAL Corporation and Subsidiary Companies
Statements of Consolidated Financial Position (Unaudited)
(In Millions)

 

 

Successor

 

Predecessor

 

 

 

June 30,
2006

 

December 31,
2005

 

Assets

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

4,094

 

 

 

$

1,761

 

 

Restricted cash

 

 

397

 

 

 

643

 

 

Short-term investments

 

 

59

 

 

 

77

 

 

Receivables, less allowance for doubtful accounts (2006—$28; 2005—$23)

 

 

1,079

 

 

 

839

 

 

Prepaid fuel

 

 

321

 

 

 

258

 

 

Aircraft fuel, spare parts and supplies, less obsolescence allowance
 (2006—$2; 2005—$66)

 

 

191

 

 

 

193

 

 

Deferred income taxes

 

 

132

 

 

 

 

 

Prepaid expenses and other

 

 

472

 

 

 

488

 

 

 

 

 

6,745

 

 

 

4,259

 

 

Operating property and equipment:

 

 

 

 

 

 

 

 

 

Owned—

 

 

 

 

 

 

 

 

 

Flight equipment

 

 

8,638

 

 

 

13,443

 

 

Advances on flight equipment

 

 

103

 

 

 

128

 

 

Other property and equipment

 

 

1,346

 

 

 

3,837

 

 

 

 

 

10,087

 

 

 

17,408

 

 

Less—accumulated depreciation and amortization

 

 

(229

)

 

 

(6,106

)

 

 

 

 

9,858

 

 

 

11,302

 

 

Capital leases:

 

 

 

 

 

 

 

 

 

Flight equipment

 

 

1,574

 

 

 

2,581

 

 

Other property and equipment

 

 

15

 

 

 

84

 

 

 

 

 

1,589

 

 

 

2,665

 

 

Less—accumulated amortization

 

 

(38

)

 

 

(739

)

 

 

 

 

1,551

 

 

 

1,926

 

 

 

 

 

11,409

 

 

 

13,228

 

 

Other assets:

 

 

 

 

 

 

 

 

 

Intangibles, less accumulated amortization (2006—$77; 2005—$218)

 

 

3,090

 

 

 

371

 

 

Goodwill

 

 

2,803

 

 

 

17

 

 

Aircraft lease deposits

 

 

518

 

 

 

477

 

 

Restricted cash

 

 

509

 

 

 

314

 

 

Investments

 

 

111

 

 

 

20

 

 

Prepaid rent

 

 

8

 

 

 

67

 

 

Other, net

 

 

829

 

 

 

589

 

 

 

 

 

7,868

 

 

 

1,855

 

 

 

 

 

$

26,022

 

 

 

$

19,342

 

 

 

See accompanying Notes to Consolidated Financial Statements (Unaudited).

3




UAL Corporation and Subsidiary Companies
Statements of Consolidated Financial Position (Unaudited)
(In Millions)

 

 

Successor

 

Predecessor

 

 

 

June 30,
2006

 

December 31,
2005

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Advance ticket sales

 

 

$

2,362

 

 

 

$

1,575

 

 

Mileage Plus deferred revenue

 

 

1,057

 

 

 

681

 

 

Accrued salaries, wages and benefits

 

 

768

 

 

 

844

 

 

Accounts payable

 

 

750

 

 

 

596

 

 

Advanced purchase of miles (Note 17)

 

 

710

 

 

 

679

 

 

Long-term debt maturing within one year (Note 11)

 

 

587

 

 

 

13

 

 

Fuel purchase commitments

 

 

321

 

 

 

258

 

 

Current obligations under capital leases

 

 

136

 

 

 

20

 

 

Accrued interest

 

 

238

 

 

 

32

 

 

Other

 

 

965

 

 

 

536

 

 

 

 

 

7,894

 

 

 

5,234

 

 

Long-term debt (Note 11)

 

 

8,514

 

 

 

1,298

 

 

Long-term obligations under capital leases

 

 

1,371

 

 

 

102

 

 

Other liabilities and deferred credits:

 

 

 

 

 

 

 

 

 

Mileage Plus deferred revenue

 

 

2,435

 

 

 

242

 

 

Postretirement benefit liability (Note 7)

 

 

2,011

 

 

 

1,932

 

 

Deferred income taxes

 

 

706

 

 

 

428

 

 

Deferred pension liability (Note 7)

 

 

132

 

 

 

95

 

 

Other

 

 

671

 

 

 

555

 

 

 

 

 

5,955

 

 

 

3,252

 

 

Liabilities subject to compromise

 

 

 

 

 

35,016

 

 

Mandatorily convertible preferred securities (Note 12)

 

 

356

 

 

 

 

 

Commitments and contingent liabilities (Note 14)

 

 

 

 

 

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

 

 

Predecessor preferred stock (Note 12)

 

 

 

 

 

 

 

Successor preferred stock (Note 12)

 

 

 

 

 

 

 

Predecessor Company common stock at par, $0.01 par value; authorized 200,000,000 shares; issued 132,342,405 shares at December 31, 2005

 

 

 

 

 

1

 

 

Successor Company common stock at par, $0.01 par value; authorized 1,000,000,000 shares; issued 101,624,732 shares at June 30, 2006

 

 

1

 

 

 

 

 

Additional capital invested

 

 

1,993

 

 

 

5,064

 

 

Retained deficit

 

 

(104

)

 

 

(29,122

)

 

Predecessor Company stock held in treasury, at cost

 

 

 

 

 

 

 

 

 

Preferred, 10,213,519 depositary shares

 

 

 

 

 

(305

)

 

Common, 16,121,446 shares

 

 

 

 

 

(1,162

)

 

Accumulated other comprehensive income (loss)

 

 

42

 

 

 

(36

)

 

 

 

 

1,932

 

 

 

(25,560

)

 

 

 

 

$

26,022

 

 

 

$

19,342

 

 

 

See accompanying Notes to Consolidated Financial Statements (Unaudited).

4




UAL Corporation and Subsidiary Companies
Statements of Consolidated Operations (Unaudited)
(In Millions, Except per Share)

 

 

Successor

 

Predecessor

 

 

 

Three Months Ended June 30,

 

 

 

        2006        

 

        2005        

 

Operating revenues:

 

 

 

 

 

 

 

 

 

Passenger—United Airlines

 

 

$

3,806

 

 

 

$

3,301

 

 

Passenger—Regional Affiliates

 

 

761

 

 

 

632

 

 

Cargo

 

 

194

 

 

 

180

 

 

Other operating revenues

 

 

352

 

 

 

310

 

 

 

 

 

5,113

 

 

 

4,423

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Aircraft fuel

 

 

1,250

 

 

 

955

 

 

Salaries and related costs

 

 

1,071

 

 

 

1,052

 

 

Regional affiliates

 

 

715

 

 

 

685

 

 

Purchased services

 

 

447

 

 

 

383

 

 

Aircraft maintenance materials and outside repairs

 

 

257

 

 

 

227

 

 

Landing fees and other rent

 

 

225

 

 

 

225

 

 

Depreciation and amortization

 

 

218

 

 

 

201

 

 

Cost of sales

 

 

190

 

 

 

147

 

 

Aircraft rent

 

 

109

 

 

 

109

 

 

Commissions

 

 

82

 

 

 

76

 

 

Special operating items (Note 18)

 

 

 

 

 

18

 

 

Other operating expenses

 

 

289

 

 

 

297

 

 

 

 

 

4,853

 

 

 

4,375

 

 

Earnings from operations

 

 

260

 

 

 

48

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(211

)

 

 

(111

)

 

Interest income

 

 

67

 

 

 

6

 

 

Interest capitalized

 

 

4

 

 

 

 

 

Miscellaneous, net

 

 

(4

)

 

 

9

 

 

 

 

 

(144

)

 

 

(96

)

 

Earnings (loss) before reorganization items, income taxes and equity in earnings of affiliates

 

 

116

 

 

 

(48

)

 

Reorganization items, net

 

 

 

 

 

(1,386

)

 

Earnings (loss) before income taxes and equity in earnings of affiliates

 

 

116

 

 

 

(1,434

)

 

Income taxes

 

 

 

 

 

 

 

Earnings (loss) before equity in earnings of affiliates

 

 

116

 

 

 

(1,434

)

 

Equity in earnings of affiliates

 

 

3

 

 

 

4

 

 

Net income (loss)

 

 

$

119

 

 

 

$

(1,430

)

 

Earnings (loss) per share, basic

 

 

$

1.01

 

 

 

$

(12.33

)

 

Earnings (loss) per share, diluted

 

 

$

0.93

 

 

 

$

(12.33

)

 

 

See accompanying Notes to Consolidated Financial Statements (Unaudited).

5




UAL Corporation and Subsidiary Companies
Statements of Consolidated Operations (Unaudited)
(In Millions, Except Per Share)

 

 

Successor

 

 

Predecessor

 

 

 

Period from
February 1
to June 30,
2006

 

 

Period from
January 1 to
January 31,
2006

 

Six Months
Ended June 30,
2005

 

Operating revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Passenger—United Airlines

 

 

$

5,988

 

 

 

 

$

1,074

 

 

 

$

6,217

 

 

Passenger—Regional Affiliates

 

 

1,226

 

 

 

 

204

 

 

 

1,156

 

 

Cargo

 

 

318

 

 

 

 

56

 

 

 

352

 

 

Other operating revenues

 

 

588

 

 

 

 

124

 

 

 

613

 

 

 

 

 

8,120

 

 

 

 

1,458

 

 

 

8,338

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aircraft fuel

 

 

1,955

 

 

 

 

362

 

 

 

1,760

 

 

Salaries and related costs

 

 

1,797

 

 

 

 

358

 

 

 

2,085

 

 

Regional affiliates

 

 

1,183

 

 

 

 

228

 

 

 

1,330

 

 

Purchased services

 

 

743

 

 

 

 

134

 

 

 

744

 

 

Aircraft maintenance materials and outside repairs

 

 

436

 

 

 

 

80

 

 

 

446

 

 

Landing fees and other rent

 

 

370

 

 

 

 

75

 

 

 

458

 

 

Depreciation and amortization

 

 

366

 

 

 

 

68

 

 

 

414

 

 

Cost of sales

 

 

318

 

 

 

 

65

 

 

 

290

 

 

Aircraft rent

 

 

184

 

 

 

 

30

 

 

 

229

 

 

Commissions

 

 

133

 

 

 

 

24

 

 

 

153

 

 

Special operating items (Note 18)

 

 

 

 

 

 

 

 

 

18

 

 

Other operating expenses

 

 

494

 

 

 

 

86

 

 

 

613

 

 

 

 

 

7,979

 

 

 

 

1,510

 

 

 

8,540

 

 

Earnings (loss) from operations

 

 

141

 

 

 

 

(52

)

 

 

(202

)

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(352

)

 

 

 

(42

)

 

 

(220

)

 

Interest income

 

 

95

 

 

 

 

6

 

 

 

10

 

 

Interest capitalized

 

 

7

 

 

 

 

 

 

 

(5

)

 

Miscellaneous, net

 

 

2

 

 

 

 

 

 

 

67

 

 

 

 

 

(248

)

 

 

 

(36

)

 

 

(148

)

 

Loss before reorganization items, income taxes and equity in earnings of affiliates

 

 

(107

)

 

 

 

(88

)

 

 

(350

)

 

Reorganization items, net

 

 

 

 

 

 

22,934

 

 

 

(2,154

)

 

Earnings (loss) before income taxes and equity in earnings of affiliates

 

 

(107

)

 

 

 

22,846

 

 

 

(2,504

)

 

Income taxes

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) before equity in earnings of affiliates

 

 

(107

)

 

 

 

22,846

 

 

 

(2,504

)

 

Equity in earnings of affiliates

 

 

3

 

 

 

 

5

 

 

 

4

 

 

Net income (loss)

 

 

$

(104

)

 

 

 

$

22,851

 

 

 

$

(2,500

)

 

Earnings (loss) per share, basic and diluted

 

 

$

(0.94

)

 

 

 

$

196.61

 

 

 

$

(21.56

)

 

 

See accompanying Notes to Consolidated Financial Statements (Unaudited).

6




UAL Corporation and Subsidiary Companies
Statements of Consolidated Cash Flows (Unaudited)
(In Millions)

 

 

Successor

 

 

 

Predecessor

 

 

 

Period from
February 1 to
June 30,
2006

 

 

 

Period from
January 1 to
January 31,
2006

 

Six Months
Ended June 30,
2005

 

Cash flows provided (used) by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss before reorganization items

 

 

$

(104

)

 

 

 

 

$

(83

)

 

 

$

(346

)

 

Adjustments to reconcile to net cash provided (used) by operating activities—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase in advance ticket sales

 

 

697

 

 

 

 

 

109

 

 

 

724

 

 

Depreciation and amortization

 

 

366

 

 

 

 

 

68

 

 

 

414

 

 

Increase (decrease) in accrued liabilities

 

 

(173

)

 

 

 

 

148

 

 

 

(30

)

 

Increase in other current assets

 

 

(135

)

 

 

 

 

(24

)

 

 

(113

)

 

Increase in receivables

 

 

(128

)

 

 

 

 

(88

)

 

 

(131

)

 

Increase in accounts payable

 

 

125

 

 

 

 

 

19

 

 

 

43

 

 

Mileage Plus deferred revenue

 

 

119

 

 

 

 

 

14

 

 

 

48

 

 

Stock-based compensation

 

 

109

 

 

 

 

 

 

 

 

 

 

Postretirement benefits

 

 

8

 

 

 

 

 

(9

)

 

 

(27

)

 

Increase in accrued aircraft rent

 

 

5

 

 

 

 

 

6

 

 

 

29

 

 

Pension expense

 

 

3

 

 

 

 

 

8

 

 

 

167

 

 

Amortization of deferred gains

 

 

 

 

 

 

 

(6

)

 

 

(42

)

 

Other, net

 

 

85

 

 

 

 

 

(1

)

 

 

82

 

 

 

 

 

977

 

 

 

 

 

161

 

 

 

818

 

 

Cash flows provided (used) by reorganization activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reorganization items, net

 

 

 

 

 

 

 

22,934

 

 

 

(2,154

)

 

Increase in aircraft rejection liability

 

 

 

 

 

 

 

 

 

 

389

 

 

Increase in other liabilities

 

 

 

 

 

 

 

37

 

 

 

147

 

 

Increase in non-aircraft claims accrual

 

 

 

 

 

 

 

429

 

 

 

509

 

 

Discharge of claims and liabilities

 

 

 

 

 

 

 

(24,628

)

 

 

 

 

Revaluation of Mileage Plus frequent flyer deferred revenue

 

 

 

 

 

 

 

2,399

 

 

 

 

 

Revaluation of other assets and liabilities

 

 

 

 

 

 

 

(2,106

)

 

 

 

 

Pension curtailment, settlement and employee claims

 

 

 

 

 

 

 

912

 

 

 

1,045

 

 

 

 

 

 

 

 

 

 

(23

)

 

 

(64

)

 

Cash flows provided (used) by investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Decrease (increase) in restricted cash

 

 

254

 

 

 

 

 

(203

)

 

 

(91

)

 

Decrease in segregated funds

 

 

200

 

 

 

 

 

 

 

 

 

 

Additions to property and equipment

 

 

(129

)

 

 

 

 

(30

)

 

 

(97

)

 

Sale of My Points

 

 

56

 

 

 

 

 

 

 

 

 

 

Proceeds on disposition of property and equipment

 

 

19

 

 

 

 

 

(1

)

 

 

35

 

 

Decrease in short-term investments

 

 

16

 

 

 

 

 

2

 

 

 

62

 

 

Other, net

 

 

(21

)

 

 

 

 

(6

)

 

 

(22

)

 

 

 

 

395

 

 

 

 

 

(238

)

 

 

(113

)

 

Cash flows provided (used) by financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from Credit Facility

 

 

2,961

 

 

 

 

 

 

 

 

 

 

Repayment of Credit Facility

 

 

(161

)

 

 

 

 

 

 

 

 

 

Repayment of DIP Financing

 

 

(1,157

)

 

 

 

 

 

 

 

(10

)

 

Repayment of other long-term debt

 

 

(456

)

 

 

 

 

(24

)

 

 

(113

)

 

Principal payments under capital leases

 

 

(35

)

 

 

 

 

(5

)

 

 

(55

)

 

Increase in deferred financing costs

 

 

(58

)

 

 

 

 

(1

)

 

 

(9

)

 

Other, net

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

 

1,091

 

 

 

 

 

(30

)

 

 

(187

)

 

Increase (decrease) in cash and cash equivalents during the period

 

 

2,463

 

 

 

 

 

(130

)

 

 

454

 

 

Cash and cash equivalents at beginning of the period

 

 

1,631

 

 

 

 

 

1,761

 

 

 

1,223

 

 

Cash and cash equivalents at end of the period

 

 

$

4,094

 

 

 

 

 

$

1,631

 

 

 

$

1,677

 

 

 

See accompanying Notes to Consolidated Financial Statements (Unaudited).

7




UAL Corporation and Subsidiary Companies
Statements of Consolidated Stockholders’ Equity (Deficit) (Unaudited)
(In Millions)

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

 

 

 

 

Common

 

Capital

 

Retained

 

Treasury

 

Comprehensive

 

 

 

 

 

Stock

 

Invested

 

(Deficit)

 

Stock

 

Loss

 

Total

 

Balance at December 31, 2005 (Predecessor Company)

 

 

$

1

 

 

 

$

5,064

 

 

$

(29,122

)

$

(1,467

)

 

$

(36

)

 

$

(25,560

)

Net loss before reorganization
items—January 2006

 

 

 

 

 

 

 

(83

)

 

 

 

 

(83

)

Reorganization items—January 2006

 

 

 

 

 

 

 

(1,401

)

 

 

 

 

(1,401

)

Subtotal

 

 

1

 

 

 

5,064

 

 

(30,606

)

(1,467

)

 

(36

)

 

(27,044

)

Debt discharge

 

 

 

 

 

 

 

24,628

 

 

 

 

 

24,628

 

Valuation adjustments, net

 

 

 

 

 

 

 

(293

)

 

 

 

 

(293

)

Balance at January 31, 2006 (Predecessor Company)

 

 

1

 

 

 

5,064

 

 

(6,271

)

(1,467

)

 

(36

)

 

(2,709

)

Fresh start adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cancellation of Predecessor preferred and common stock

 

 

(1

)

 

 

(5,064

)

 

 

1,467

 

 

 

 

(3,598

)

Elimination of Predecessor accumulated deficit and accumulated other comprehensive loss

 

 

 

 

 

 

 

6,271

 

 

 

36

 

 

6,307

 

Issuance of new equity interests in connection with emergence from Chapter 11

 

 

1

 

 

 

1,884

 

 

 

 

 

 

 

1,885

 

Balance at February 1, 2006 (Successor Company)

 

 

1

 

 

 

1,884

 

 

 

 

 

 

 

1,885

 

Net loss from February 1 to June 30, 2006

 

 

 

 

 

 

 

(104

)

 

 

 

 

(104

)

Unrealized gain on derivatives, net

 

 

 

 

 

 

 

 

 

 

42

 

 

42

 

Stock-based compensation

 

 

 

 

 

109

 

 

 

 

 

 

 

109

 

Balance at June 30, 2006 (Successor Company)

 

 

$

1

 

 

 

$

1,993

 

 

$

(104

)

$

 

 

$

42

 

 

$

1,932

 

 

See accompanying Notes to Consolidated Financial Statements (Unaudited).

8




UAL Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited)

The Company

UAL Corporation is a holding company and its principal, wholly owned subsidiary is United Air Lines, Inc., a Delaware corporation (“United”). We sometimes collectively refer to UAL Corporation, together with its consolidated subsidiaries, as “we,” “our,” “us,” “UAL” or the “Company.”

Interim Financial Statements

The Company has prepared the unaudited consolidated financial statements shown here as required by the Securities and Exchange Commission (the “SEC”). Some information and footnote disclosures normally included in financial statements that meet generally accepted accounting principles (“GAAP”) have been condensed or omitted as permitted by the SEC. The Company believes that the disclosures presented here are not misleading. The financial statements include all adjustments (which include only normal recurring adjustments, adjustments required by fresh-start reporting and reorganization items described below) that are considered necessary for a fair presentation of its financial position and operating results. These financial statements should be read together with the information included in our most recent Annual Report on Form 10-K for the year 2005.

As a result of the application of fresh-start reporting in accordance with American Institute of Certified Public Accountants’ Statement of Position 90-7 “Financial Reporting by Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”), the financial statements prior to February 1, 2006 are not comparable with the financial statements for periods on or after February 1, 2006. References to “Successor Company” refer to UAL on or after February 1, 2006, after giving effect to the application of fresh-start reporting. References to “Predecessor Company” refer to UAL prior to February 1, 2006. See Note 1, “Voluntary Reorganization Under Chapter 11 - Fresh-Start Reporting” for further details.

(1)          Voluntary Reorganization Under Chapter 11

Bankruptcy Considerations.   The following discussion provides general background information regarding the Company’s Chapter 11 cases, and is not intended to be an exhaustive summary. Detailed information pertaining to the bankruptcy filings may be obtained at www.pd-ual.com.

On December 9, 2002 (the “Petition Date”), UAL, United and 26 direct and indirect wholly-owned subsidiaries (collectively, the “Debtors”) filed voluntary petitions to reorganize their businesses under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division (the “Bankruptcy Court”). On January 20, 2006, the Bankruptcy Court confirmed the Debtors’ Second Amended Joint Plan of Reorganization Pursuant to Chapter 11 of the United States Bankruptcy Code (the “Plan of Reorganization”). The Plan of Reorganization became effective and the Debtors emerged from bankruptcy protection on February 1, 2006 (the “Effective Date”). On the Effective Date, UAL implemented fresh-start reporting.

The Plan of Reorganization generally provided for the full payment or reinstatement of allowed administrative claims, priority claims, and secured claims, and the distribution of new equity securities to the Debtors’ creditors and employees in satisfaction of allowed unsecured and deemed claims. The Plan of Reorganization contemplated UAL issuing up to 125 million shares of common stock (out of the one billion shares of new common stock authorized under its certificate of incorporation). The new common stock was listed on the NASDAQ National Market and began trading under the symbol “UAUA” on
 February 2, 2006. The distributions of common stock, subject to certain holdbacks as described in the Plan of Reorganization, will be as follows:

·       Approximately 115 million shares of common stock to unsecured creditors and employees;

9




·       Up to 9.825 million shares of common stock (or options or other rights to acquire shares) under the management equity incentive plan (“MEIP”) approved by the Bankruptcy Court; and

·       Up to 175,000 shares of common stock (or options or other rights to acquire shares) under the director equity incentive plan (“DEIP”) approved by the Bankruptcy Court.

The Plan of Reorganization also provided for the issuance of the following securities:

·       5 million shares of 2% mandatorily convertible preferred stock, which were issued to the Pension Benefit Guaranty Corporation (“PBGC”) shortly after the Effective Date;

·       Approximately $150 million in aggregate principal amount of 5% senior convertible notes, which were issued to holders of certain municipal bonds shortly after the Effective Date;

·       $726 million in aggregate principal amount of 4.5% senior limited-subordination convertible notes, which were issued in July 2006 to certain irrevocable trusts established for the benefit of certain employees (the “employee convertible notes”);

·       $500 million in aggregate principal amount of 6% senior notes, which were issued to the PBCG shortly after the Effective Date; and

·       $500 million in aggregate principal amount of 8% senior contingent notes (in up to eight equal tranches of $62.5 million) issuable to the PBGC upon the satisfaction of certain contingencies.

Pursuant to the Company’s Plan of Reorganization, the employee convertible notes were to be issued with a conversion price equal to 125% of the average closing price for the 60 consecutive trading days following February 1, 2006. In addition, the Plan of Reorganization required that the interest rate on the employee convertible notes be set so that they trade at par upon issuance which, in the absence of the modification described in the next sentence, would have required an interest rate significantly higher than 4.5% because the conversion price would have been based on a trading price for the common stock that was significantly higher than that prevailing at the time of issuance. In July 2006, the Company reached agreement with five of the seven eligible employee groups to modify the conversion price to instead be based upon the volume-weighted average price of the common stock over the two trading days ending on July 25, 2006, the date the notes were issued to the trusts. The Company reached agreement with the two other employee groups to pay them cash totaling approximately $0.4 million rather than issuing additional notes of similar value.

Pursuant to the Plan of Reorganization, UAL common stock, preferred stock and Trust Originated Preferred Securities issued prior to the Petition Date were canceled on the Effective Date, and no distribution was made to holders of those securities.

On the Effective Date, the Company secured access to $3.0 billion in secured exit financing (the “Credit Facility”) which consists of a $2.45 billion term loan, a $350 million delayed draw term loan and a $200 million revolving credit line. On the Effective Date, the $2.45 billion term loan and the entire revolving credit line were drawn and used to repay the Debtor-In-Possession credit facility (the “DIP Financing”) and to make other payments required upon exit from bankruptcy, as well as to provide ongoing liquidity to conduct post-reorganization operations. Subsequently, during the first quarter of 2006, the Company repaid $161 million on the revolving credit line and accessed the $350 million delayed draw term loan.

10




Significant Matters Resolved Since Emergence from Bankruptcy.   During the course of the Chapter 11 proceedings, the Company successfully reached settlements with most of its creditor constituencies and resolved most pending claims against the Debtors. The following material matters have been resolved in the Bankruptcy Court since the Effective Date:

(a)          The Company had an ongoing dispute with respect to a group of mostly-public financiers (the “Public Debt Group”) involving 14 aircraft financed under the Series 1997-1 Enhanced Equipment Trust Certificates (“1997-1 EETC”). During the first quarter of 2006, the Company resolved the dispute and entered into a settlement agreement that was approved by the Bankruptcy Court. The settlement agreement resolved all pending litigation in connection with the 1997-1 EETC transaction and aircraft and provided for a permanent mutual release of all related claims. The Company remitted $281 million to the 1997-1 EETC trustee as final payment to the holders of the Tranche A certificates. The Company previously acquired the 1997-1 EETC Tranche B and Tranche C certificates as a precursor to utilizing the transaction par buyout mechanism to purchase the Tranche A certificates. Following shortly thereafter in the first quarter of 2006, the Company refinanced the 14 aircraft with the $350 million delayed draw term loan provided under the Credit Facility. The Company recorded the 1997-1 EETC debt at fair market value upon its emergence from bankruptcy in accordance with fresh-start reporting. As a result, no gain or loss was realized on the extinguishment of debt. See “Fresh-Start Reporting” below for further details.

(b)         Wells Fargo Bank Northwest, N.A., not individually but in its capacity as a trustee, filed a notice of appeal of the confirmation order to the United States District Court for the Northern District of Illinois (“District Court”). The parties subsequently filed a stipulation agreeing to voluntarily dismiss the appeal, and the appeal has been dismissed.

(c)          In August 2005, United entered into term sheets to restructure the three post-1997 Enhanced Equipment Trust Certificate (“EETC”) transactions, financing 80 aircraft in United’s fleet that were controlled by the Public Debt Group. In May 2006, the Company reached a settlement with the Public Debt Group with respect to these financing transactions. In conjunction with the settlement, the Company and the EETC trustees agreed to cooperate and to use reasonable efforts to complete definitive documentation. The settlement was approved by the Bankruptcy Court in June 2006. The Company completed definitive documentation on the three post-1997 EETC transactions in July 2006 and met its obligations to have the transactions rated by both Standard and Poor’s and Moody’s.

In addition, in August 2005, United entered into term sheets to restructure the pre-1997 transactions financing 19 aircraft that are controlled by the Public Debt Group. United has subsequently closed transactions covering 18 of the 19 associated aircraft. The Company has reached agreement on all business terms associated with the last aircraft and anticipates closing shortly after other technical documentation has been executed.

Significant Matters Remaining to be Resolved in Chapter 11 Cases.   The following material matters remain to be resolved in the Bankruptcy Court or another court:

(a)          United is a party to numerous long-term agreements to lease certain airport and maintenance facilities that are financed through tax-exempt municipal bonds that are issued by various local municipalities to build or improve airport and maintenance facilities. During 2003, the Company filed four complaints for declaratory judgment and corresponding motions for temporary restraining orders concerning United’s municipal bond obligations for facilities at Denver International Airport (“DEN”), John F. Kennedy International Airport (“JFK”), San Francisco International Airport (“SFO”), and Los Angeles International Airport (“LAX”). In each case, United sought clarification of its obligations to pay principal and interest under the applicable

11




municipal bonds, and the protection of its rights concerning related airport lease agreements at the applicable airports. With respect to SFO, LAX and JFK, the Bankruptcy Court ruled in United’s favor. With respect to DEN, the Bankruptcy Court ruled against United. The Bankruptcy Court’s rulings with respect to each of the four matters were subsequently appealed to the District Court. The District Court reversed the Bankruptcy Court’s rulings with respect to SFO and LAX but upheld the Bankruptcy Court’s rulings with respect to JFK and DEN. All four of the District Court’s rulings in turn were appealed to the United States Court of Appeals for the Seventh Circuit (“Court of Appeals”). The Court of Appeals reversed the District Court’s ruling against the Company with respect to the SFO adversary proceeding and the SFO defendants’ petition for a rehearing was denied. The defendants in the SFO matter petitioned the United States Supreme Court (“Supreme Court”) for a writ of certiorari, which was denied in March 2006. As a result of this final non-appealable order in favor of United, approximately $24 million in interim payments made by United into an escrow account, plus interest, were returned to United in April 2006. In addition, see item (c) below for details on the security interest claim filed by the trustee of the SFO municipal bonds as a result of United’s success in this matter. In May 2006, the Court of Appeals also reversed the District Court’s ruling against the Company with respect to the LAX matter. The defendants might still file a petition of writ of certiorari with the Supreme Court. Even if the LAX obligations are determined to be financings and not true leases, there is likely to remain an issue regarding the extent to which those financings would be considered to have a security interest in the underlying leasehold or the value thereof, as discussed in paragraph (d) below. The Court of Appeals affirmed the District Court’s ruling with respect to the JFK adversary proceeding. The defendants in the JFK matter filed a petition for rehearing with the Court of Appeals, which was denied. The time for filing a petition for writ of certiorari in the JFK matter has expired. In July 2006, the Court of Appeals also affirmed the District Court’s ruling against the Company with respect to the DEN matter. The Company has accepted the ruling and will not pursue any further legal action in regard to this matter.

(b)         Similarly, in 2003, United filed a complaint for declaratory judgment for all seven municipal bond issues (which represent approximately $601 million in principal) relating to its facilities at O’Hare International Airport (“O’Hare”), seeking, among other things, a declaration that a certain cross-default provision in the O’Hare airport lease is unenforceable. In 2005, the Bankruptcy Court approved an agreement (“O’Hare Settlement Agreement”) resolving the disputes between United, the trustees and the bondholders. The City of Chicago, a party to these adversary proceedings, is not a party to the O’Hare Settlement Agreement. Subsequently, the Company announced that it had reached an agreement in principle with the City of Chicago, with respect to all unresolved disputes relating to our facilities at O’Hare. However, the parties were unable to finalize the terms of this settlement. The City of Chicago maintained that it could revoke United’s exclusive rights to terminals in place of “preferential” rights if United did not meet the terms of the cross-default provision (the O’Hare Airport Use Agreement (“AUA”) did not define or provide for any usage rights, other than exclusive rights). United responded that the cross-default provision was unenforceable against a debtor in bankruptcy as provided under Section 365 of the Bankruptcy Code, and thus United should retain its exclusive rights at O’Hare. The Bankruptcy Court held a one day trial to determine certain evidentiary issues underlying a determination of whether the cross-default provision was enforceable. After the parties completed post-trial briefing, the Bankruptcy Court issued an opinion and order, in July 2006, in favor of United that the cross-default provision was unenforceable against United pursuant to Section 365 of the Bankruptcy Code. Specifically, the Bankruptcy Court held that the AUA is a self-contained agreement, governing United’s use of O’Hare and providing the full consideration for that use. To realize the full value of United’s estate, Section 365(a) of the Bankruptcy Code allows United

12




to assume the AUA free from obligations imposed under the separate bond payment agreements, notwithstanding the cross-default provisions. The City of Chicago’s time to appeal has not yet expired, and therefore, the matter cannot be deemed resolved.

(c)          HSBC Bank Inc. (“HSBC”), as trustee for the 1997 municipal bonds related to SFO, filed a complaint against United asserting a security interest in United’s leasehold for portions of its maintenance base at SFO. Pursuant to Section 506(a) of the Bankruptcy Code, HSBC alleges that it is entitled to be paid the value of that security interest, which HSBC had claimed was as much as $257 million. HSBC and United went to trial in April 2006 and the Bankruptcy Court rejected as a matter of law HSBC’s $257 million claim. HSBC subsequently alleged that it was entitled to $154 million, or at a minimum, approximately $93 million. The parties tried the case and filed post-trial briefs which were heard by the Bankruptcy Court. The Bankruptcy Court subsequently set a status conference for September 2006. The Company is currently unable to predict the outcome of this litigation.

(d)         In addition, there is pending litigation before the Bankruptcy Court regarding the extent to which the LAX municipal bond debt is entitled to secured status under Section 506(a) of the Bankruptcy Code. In July 2006, the Bankruptcy Court entered an order setting discovery deadlines and scheduling a trial for January 2007. The Company is currently unable to predict the outcome of this litigation.

(e)          In December 2004, the PBGC filed an involuntary termination proceeding against United, as plan administrator for the United Airlines Pilot Defined Benefit Pension Plan (the “Pilot Plan”), in the District Court. In January 2005, the District Court granted a motion filed by the Company and referred the involuntary termination proceeding to the Bankruptcy Court. The Air Line Pilots Association (“ALPA”) and the United Retired Pilots Benefit Protection Association and seven retired pilots (collectively, “URPBPA”) were later granted leave to intervene in the involuntary termination proceeding.

After several months, the Bankruptcy Court conducted a trial and determined that the Pilot Plan should be involuntarily terminated under the Employee Retirement Income Security Act (“ERISA”) Section 4042 with a termination date of December 30, 2004. Subsequently, the Bankruptcy Court entered an order authorizing termination of the Pilot Plan.

The PBGC, ALPA and URPBPA filed notices of appeal with the District Court. In February 2006, the District Court reversed and remanded the Bankruptcy Court’s termination order on the grounds that the matter was not a core proceeding in which it could issue a final order, but rather, could only issue proposed findings of fact and conclusions of law for consideration by the District Court. Upon remand and after the Bankruptcy Court made proposed findings of fact and conclusions of law, in June 2006, the District Court entered an order approving the termination of the Pilot Plan. ALPA and URPBPA filed an appeal with the Court of Appeals. In July 2006, the Court of Appeals granted United’s motion to consolidate this termination appeal with URPBPA’s appeal of the District Court’s dismissal of URPBPA’s appeal of the Plan of Reorganization confirmation order, as discussed in (h) below. Briefing on both appeals will be completed in August 2006 and oral argument is scheduled to occur on September 26, 2006 with respect to the termination appeal (though oral arguments have not yet been scheduled with respect to the confirmation appeal). If the termination order was ultimately reversed on appeal, it could have a materially adverse effect on the Company’s financial performance, should such determination result in the reversal of the termination of one or more defined benefit pension plans.

(f)            After the PBGC commenced its involuntary termination proceeding and sought a December 30, 2004 termination date, the Company suspended payment of ALPA non-qualified pension

13




benefits pending the setting of such a termination date. In the first quarter of 2005, the Bankruptcy Court required the Company to continue paying non-qualified pension benefits to retired pilots pending a termination in the involuntary termination proceeding, notwithstanding the possibility that the Pilot Plan might be terminated retroactively to December 30, 2004. Then, on October 6, 2005, the Bankruptcy Court entered an order requiring the Company to continue paying non-qualified pension benefits until entry of an order terminating the Pilot Plan. However, United appealed that order and placed the funds necessary to pay non-qualified benefits for the month of October 2005 in a segregated account. Following the entry of the Bankruptcy Court’s termination order on October 28, 2005, United ceased paying non-qualified benefits. Subsequently, during the first quarter of 2006, the District Court dismissed the Company’s appeal of the Bankruptcy Court’s October 6, 2005 order in light of its earlier decision reversing the Bankruptcy Court’s termination order. The Company filed a notice of appeal of the District Court’s ruling to the Court of Appeals. In accordance with the Court of Appeals’ rules, the Court of Appeals set deadlines for the briefing to be completed in August 2006. The Court of Appeals has not yet scheduled oral argument.

In March 2006, the Bankruptcy Court ruled that the Company was obligated to make payment of all non-qualified pension benefits for the months of November and December 2005 and January 2006. The Bankruptcy Court also ruled that the Company’s obligation to pay non-qualified pension benefits ceased as of January 31, 2006. The Company filed a notice of appeal of the Bankruptcy Court’s ruling to the District Court. URPBPA and ALPA also filed notices of appeal with respect to the Bankruptcy Court’s order, which were subsequently consolidated with the Company’s appeal. United agreed with URPBPA and ALPA to pay the disputed non-qualified pension benefits for the months of November and December 2005 and January 2006, an aggregate amount totaling approximately $17 million, into an escrow account. Briefing on this issue was completed in July 2006 and a status hearing in the District Court is scheduled for September 2006.

(g)          In January 2005, United filed a motion seeking approval of an agreement to restructure ALPA’s collective bargaining agreement pursuant to Section 363(b) of the Bankruptcy Code. The Bankruptcy Court approved the ALPA agreement over the objections of various parties. The active pilots ratified the agreement, and the Bankruptcy Court entered an order approving the ALPA agreement (the “ALPA Order”). In February 2005, URPBPA filed its notice of appeal of the ALPA Order based principally on the allegation that the ALPA Order unfairly failed to provide for the distribution of unsecured notes to the retired pilots as provided to the active pilots pursuant to the ALPA agreement. The ALPA Order was approved by the District Court and, in March 2006, by the Court of Appeals. In June 2006, URPBPA filed a petition for a writ of certiorari from the Supreme Court to review the Court of Appeals’ ruling with respect to this matter. No decision has been made by the Supreme Court whether to grant the writ of certiorari.

(h)         In January 2006, URPBPA filed a notice and brief supporting an appeal of the order confirming the Plan of Reorganization. In February 2006, United filed a motion to dismiss the appeal based on the substantial consummation of the Plan of Reorganization. In June 2006, the District Court dismissed URPBPA’s appeal. Subsequently, URPBPA filed a notice of appeal of the decision to the Court of Appeals. In July 2006, the Court of Appeals granted United’s motion to consolidate URPBPA’s appeal with URPBPA and ALPA’s Pilot Plan termination appeal, as discussed in (e) above. Briefing on both appeals will be completed in August 2006. The Court of Appeals has set oral argument to occur on September 26, 2006 with respect to the termination appeal (though oral arguments have not yet been scheduled with respect to the confirmation appeal). If the confirmation order was ultimately reversed on appeal, it could have a materially adverse effect on the Company’s financial performance.

14




Claims Resolution Process.   As permitted under the bankruptcy process, the Debtors’ creditors filed proofs of claim with the Bankruptcy Court. Through the claims resolution process, the Company identified many claims which were disallowed by the Bankruptcy Court for a number of reasons, such as claims that were duplicative, amended or superseded by later filed claims, were without merit, or were otherwise overstated. Throughout the Chapter 11 proceedings, the Company resolved many claims through settlement or objections ordered by the Bankruptcy Court. The Company will continue to settle claims and file additional objections with the Bankruptcy Court.

With respect to unsecured claims, once a claim is deemed to be valid, either through the Bankruptcy Court process or through other means, the claimant is entitled to a distribution of common stock in the Successor Company. Pursuant to the terms of the Plan of Reorganization, 115 million shares of common stock in the Successor Company have been authorized to satisfy valid unsecured claims. The Bankruptcy Court confirmed the Plan of Reorganization and established January 20, 2006 as the record date for purposes of establishing the persons that are claimholders of record to receive distributions. Approximately 98 million shares have been issued and distributed to holders of valid unsecured claims between February 2, 2006, the first distribution date established in the Plan of Reorganization, and June 30, 2006. As of June 30, 2006, approximately 42,000 valid unsecured claims aggregating to approximately $28 billion in claim value had received those common shares to partially satisfy those claims. The approximate 17 million remaining shares are being held in reserve to satisfy all of the remaining disputed and undisputed unsecured claim values, once the remaining claim disputes are resolved.

The Company’s current estimate of the probable range of unsecured claims to be allowed by the Bankruptcy Court is between $28 and $31 billion. Differences between claim amounts filed and the Company’s estimates are being investigated and will be resolved in connection with the claims resolution process. However, there will be no further financial impact to the Company associated with the settlement of such unsecured claims, as the holders of all allowed unsecured claims will receive under the Plan of Reorganization only their pro rata share of the distribution of the 115 million shares of common stock of the Successor Company, together with the previously-agreed issuance of certain securities.

With respect to valid administrative and priority claims, pursuant to the terms of the Plan of Reorganization these claims will be satisfied with cash. Many asserted administrative and priority claims still remain unpaid, and the Company will continue to settle claims and file objections with the Bankruptcy Court to eliminate or reduce such claims. An estimate of these claims have been accrued by the Successor Company based upon the best available estimates of amounts to be paid. However, it should be noted that the claims resolution process is uncertain and adjustments to claims estimates could result in material adjustments to the Successor Company’s financial statements in future periods.

Additionally, secured claims were deemed unimpaired under the Plan of Reorganization. Pursuant to the Plan of Reorganization those claims were satisfied upon either reinstatement of the obligations in the Successor Company, surrendering the collateral to the secured party, or by making full payment in cash. However, certain disputes still remain with respect to the valuation of some security interests that may result in material future adjustments to the Company’s financial statements.

Financial Statement Presentation.   We have prepared the accompanying consolidated financial statements in accordance with SOP 90-7 and on a going-concern basis, which assumes continuity of operations, realization of assets and satisfaction of liabilities in the ordinary course of business.

15




SOP 90-7 requires that the financial statements for periods subsequent to a Chapter 11 filing separate transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, all transactions (including, but not limited to, all professional fees, realized gains and losses and provisions for losses) directly associated with the reorganization and restructuring of the business are reported separately in the financial statements as reorganization items, net. For the month ended January 31, 2006 and the three and six months ended June 30, 2005, the Predecessor Company recognized the following primarily non-cash reorganization income (expense) in its financial statements:

(In millions)

 

Period from
January 1 to 31,
2006

 

Three Months
Ended June 30,
2005

 

Six Months
Ended June 30,
2005

 

Discharge of claims and liabilities

 

 

$

24,628

 

 

 

$

 

 

 

$

 

(a)

Revaluation of frequent flyer obligations

 

 

(2,399

)

 

 

 

 

 

 

(b)

Revaluation of other assets and liabilities

 

 

2,106

 

 

 

 

 

 

 

(c)

Employee-related charges

 

 

(898

)

 

 

(6

)

 

 

(13

)

(d)

Contract rejection charges

 

 

(429

)

 

 

(509

)

 

 

(509

)

(e)

Professional fees

 

 

(47

)

 

 

(48

)

 

 

(92

)

 

Pension-related charges

 

 

(14

)

 

 

(612

)

 

 

(1,045

)

(f)

Aircraft claim charges

 

 

 

 

 

(212

)

 

 

(506

)

(g)

Other

 

 

(13

)

 

 

1

 

 

 

11

 

 

 

 

 

$

22,934

 

 

 

$

(1,386

)

 

 

$

(2,154

)

 

 

(a)           The discharge of claims and liabilities primarily relates to those unsecured claims arising during the bankruptcy process, such as the termination and settlement of the Company’s U.S. defined benefit pension plans and other employee claims; aircraft-related claims, such as those arising as a result of aircraft rejections; other unsecured claims due to the rejection or modification of executory contracts, unexpired leases and regional carrier contracts; and claims associated with certain municipal bond obligations based upon their rejection, settlement or the estimated impact of the outcome of pending litigation. In accordance with the Plan of Reorganization, the Company discharged its obligations to unsecured creditors in exchange for the distribution of 115 million common shares of the Successor Company and the issuance of certain other securities. Accordingly, the Company recognized a non-cash reorganization gain of $24.6 billion.

(b)          The Company revalued its Mileage Plus frequent flyer obligations at fair value as a result of fresh-start reporting, which resulted in a $2.4 billion non-cash reorganization charge.

(c)           In accordance with fresh-start reporting, the Company revalued its assets at their estimated fair value and liabilities at estimated fair value or the present value of amounts to be paid. This resulted in a non-cash reorganization gain of $2.1 billion, primarily as a result of newly recognized intangible assets, offset partly by reductions in the fair value of tangible property and equipment.

(d)          In January 2006, the Company recorded the value of the deemed claim that the salaried and management group received upon confirmation of the Plan of Reorganization. The deemed claim was based upon the cost savings provided by this employee group during the bankruptcy process.

(e)           Contract rejection charges are non-cash costs that include estimated claim values resulting from the Company’s rejection or negotiated modification of certain contractual obligations such as executory contracts, unexpired leases and regional carrier contracts.

(f)             In the first and second quarters of 2005, the Company recognized non-cash pension curtailment charges of $433 million and $207 million, respectively, associated with actions taken by the PBGC to involuntarily terminate United Air Lines, Inc. Ground Employees’ Retirement Plan (the “Ground Employees Plan”), United Airlines Flight Attendant Defined Benefit Pension Plan (the “Flight

16




Attendant Plan”) and United Airlines Management, Administrative and Public Contact Defined Benefit Pension Plan (“MAPC Plan”). The PBGC was appointed trustee for the Ground Employees Plan effective May 23, 2005 and the MAPC Plan and the Flight Attendant Plan effective June 30, 2005, assuming all rights and powers over the pension assets and obligations of each plan. Upon termination and settlement of these plans in the second quarter of 2005, the Company recognized a non-cash net settlement loss of approximately $395 million in accordance with SFAS No. 88, “Employer’s Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” (“SFAS 88”). In addition, the Company recognized a non-cash settlement loss in the amount of $10 million for the termination of the non-qualified supplemental retirement plan for management employees who have benefits under the tax-qualified pension plan that cannot be paid due to Internal Revenue Code limits on compensation or benefits.

(g)           Aircraft claim charges include the Company’s estimate of claims incurred as a result of the rejection of certain aircraft leases and return of aircraft as part of the bankruptcy process, together with certain claims resulting from the modification of other aircraft financings in bankruptcy.

The Statements of Consolidated Financial Position (Unaudited) distinguish pre-petition liabilities subject to compromise from both those pre-petition liabilities that are not subject to compromise and from post-petition liabilities. Liabilities subject to compromise were reported at the amounts expected to be allowed by the Bankruptcy Court, even if they were settled for lesser amounts.

At December 31, 2005, we had liabilities subject to compromise consisting of the following:

(In millions)

 

 

 

 

 

Employee claims and deemed claims

 

$

18,007

 

Long-term debt, including accrued interest

 

6,624

 

Aircraft-related obligations and deferred gains

 

6,104

 

Capital lease obligations, including accrued interest

 

1,631

 

Municipal bond obligations and claims

 

1,344

 

Accounts payable

 

261

 

Early termination fees

 

162

 

Other

 

883

 

 

 

$

35,016

 

 

DIP Financing.   At January 31, 2006, the Company’s outstanding balance of its DIP Financing was $1.2 billion. On the Effective Date, the proceeds from the Credit Facility were drawn and used to repay the DIP Financing. For further details on the Credit Facility, see Note 11, “Debt Obligations”.

Fresh-Start Reporting.   Upon emergence from its Chapter 11 proceedings on February 1, 2006, the Company adopted fresh-start reporting in accordance with SOP 90-7. The Company’s emergence from Chapter 11 resulted in a new reporting entity with no retained earnings or accumulated deficit. Accordingly, the Company’s consolidated financial statements for periods prior to February 1, 2006 are not comparable to consolidated financial statements presented on or after February 1, 2006.

Fresh-start reporting reflects the value of the Company as determined in the confirmed Plan of Reorganization. Under fresh-start reporting, the Company’s asset values are remeasured using fair value, and are allocated in conformity with Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS 141”). The excess of reorganization value over the fair value of tangible and identifiable intangible assets is recorded as goodwill in the accompanying Statements of Consolidated Financial Position (Unaudited). In addition, fresh-start reporting also requires that all liabilities, other than deferred taxes, should be stated at fair value or at the present values of the amounts to be paid using

17




appropriate market interest rates. Deferred taxes are determined in conformity with Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes” (“SFAS 109”).

Estimates of fair value represent the Company’s best estimates based on independent appraisals and valuations and, where the foregoing have not yet been completed or are not available, industry data and trends and by reference to relevant market rates and transactions. The foregoing estimates and assumptions are inherently subject to significant uncertainties and contingencies beyond the control of the Company. Accordingly, we cannot provide assurance that the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could vary materially. In accordance with SFAS 141, the preliminary allocation of the reorganization value is subject to additional adjustment within one year after emergence from bankruptcy when additional or improved information on asset and liability valuations becomes available. The Company expects that adjustments to recorded fair values may include those relating to:

·       Completion of valuation reports associated with long-lived tangible and newly identified intangible assets, and certain liabilities, such as the Mileage Plus frequent flyer liability, and debt discounts which may change based on the consideration of new or improved information by the Company and its valuation consultants;

·       Deferred tax assets and liabilities, which may be adjusted based upon additional information, including adjustments to fair value estimates of underlying assets or liabilities and the determination of cancellation of indebtedness income; and

·       Adjustments to recorded fair values and deferred tax assets and liabilities which could change the amount of recorded goodwill, as well as the allocation of such goodwill to reportable segments.

To facilitate the calculation of the enterprise value of the Successor Company, the Company developed a set of financial projections. Based on these financial projections and with the assistance of financial advisors, the equity value was determined by the Company, using various valuation methods, including (i) a comparison of the Company and its projected performance to the market values of comparable companies; (ii) a review and analysis of several recent transactions of companies in similar industries to the Company; and (iii) a calculation of the present value of the future cash flows of the Company under its projections.

The estimated enterprise value, and corresponding equity value, is highly dependent upon achieving the future financial results set forth in the projections as well as the realization of certain other assumptions. The estimated equity value of the Company was calculated to be approximately $1.9 billion. The estimates and assumptions made in this valuation are inherently subject to significant uncertainties and the resolution of contingencies beyond the reasonable control of the Company. Accordingly, there can be no assurance that the estimates, assumptions, and amounts reflected in the valuations will be realized, and actual results could vary materially. Moreover, the market value of the Company’s common stock may differ materially from the equity valuation.

In accordance with SOP 90-7, we were required to adopt on February 1, 2006 all accounting guidance that was going to become effective within the subsequent twelve-month period. See Note 2(m), “Summary of Significant Accounting Policies—New Accounting Pronouncements”.

The following fresh-start balance sheet illustrates the financial effects of the implementation of the Plan of Reorganization and the adoption of fresh-start reporting. In addition, it reflects the effect of the consummation of the transactions contemplated in the Plan of Reorganization, including settlement of various liabilities, issuance of certain securities, incurrence of new indebtedness, repayment of old indebtedness, and other cash payments.

18




As a result of the adoption of fresh-start reporting, the Company’s financial statements on or after February 1, 2006 are not comparable with its pre-emergence financial statements because they are, in effect, those of a new entity. The effects of the Plan of Reorganization and fresh-start reporting on the Company’s Statements of Consolidated Financial Position (Unaudited) are as follows (in millions):

 

 

Fresh-Start Adjustments

 

 

 

Predecessor

 

(a)
Settlement
of
Unsecured
Claims

 

(b)
Reinstatement
of Liabilities

 

(c)
Revaluation
of Assets
and
Liabilities

 

Successor

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

1,631

 

 

 

$

 

 

 

$

 

 

 

$

 

 

 

$

1,631

 

 

Restricted cash

 

 

847

 

 

 

 

 

 

 

 

 

1

 

 

 

848

 

 

Short-term investments

 

 

75

 

 

 

 

 

 

 

 

 

 

 

 

75

 

 

Receivables, net

 

 

935

 

 

 

 

 

 

 

 

 

10

 

 

 

945

 

 

Prepaid fuel

 

 

280

 

 

 

 

 

 

 

 

 

 

 

 

280

 

 

Deferred income taxes

 

 

1

 

 

 

 

 

 

 

 

 

102

 

 

 

103

 

 

Aircraft fuel, spare parts and supplies, net

 

 

203

 

 

 

 

 

 

 

 

 

(32

)

 

 

171

 

 

Prepaid expenses and other

 

 

499

 

 

 

 

 

 

 

 

 

107

 

 

 

606

 

 

 

 

 

4,471

 

 

 

 

 

 

 

 

 

188

 

 

 

4,659

 

 

Operating property and equipment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owned—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Flight equipment

 

 

13,446

 

 

 

 

 

 

 

 

 

(4,823

)

 

 

8,623

 

 

Advances on flight equipment

 

 

128

 

 

 

(25

)

 

 

 

 

 

 

 

 

103

 

 

Other property and equipment

 

 

3,838

 

 

 

 

 

 

 

 

 

(2,545

)

 

 

1,293

 

 

 

 

 

17,412

 

 

 

(25

)

 

 

 

 

 

(7,368

)

 

 

10,019

 

 

Less—Accumulated depreciation and amortization

 

 

(6,158

)

 

 

 

 

 

 

 

 

6,158

 

 

 

 

 

 

 

 

11,254

 

 

 

(25

)

 

 

 

 

 

(1,210

)

 

 

10,019

 

 

Capital leases