-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IxFTrdjqVaenWqGr95khujQL/8L4lPu6XINZjr+KE9E4uhggJHBf9sefJHE5GIbn 8ODpKPK9NjFPBZNjzBkrxg== 0000950144-98-003683.txt : 19980331 0000950144-98-003683.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950144-98-003683 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ASA HOLDINGS INC CENTRAL INDEX KEY: 0001023944 STANDARD INDUSTRIAL CLASSIFICATION: AIR TRANSPORTATION, SCHEDULED [4512] IRS NUMBER: 582258221 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-29558 FILM NUMBER: 98579760 BUSINESS ADDRESS: STREET 1: 100 HARTSFIELD CENTRE PARKWAY SUITE 800 CITY: ATLANTA STATE: GA ZIP: 30354 BUSINESS PHONE: 4047661400 MAIL ADDRESS: STREET 1: 100 HARTSFIELD CENTRE PARKWAY SUITE 800 CITY: ATLANTA STATE: GA ZIP: 30354 10-K405 1 ASA HOLDINGS, INC. FORM 10-K405 1 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, 1997 [ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to ____________ Commission file number 0-29558 ASA HOLDINGS, INC. (Exact name of Registrant as specified in its charter) GEORGIA 58-2258221 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 HARTSFIELD CENTRE PARKWAY SUITE 800, ATLANTA, GEORGIA 30354 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (404) 766-1400 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK $0.10 PAR VALUE (Title of class) 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 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 [ ] 2 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] As of March 2, 1998, the aggregate market value of voting stock held by non-affiliates of the Registrant, based on the $40.125 closing sales price of such stock on The Nasdaq Stock Market's National Market on that date, was approximately $834,825,061. As of March 2, 1998, the Registrant had 29,953,977 shares of Common Stock outstanding. Documents Incorporated by Reference Portions of the Registrant's Proxy Statement to be used in connection with the solicitation of proxies for the Registrant's 1998 annual meeting of shareholders are incorporated by reference into Part III of this Report. Portions of the Registrant's Annual Report to Shareholders for the year ended December 31, 1997 are incorporated by reference into Part II and Part IV of this Report. -2- 3 PART I ITEM 1. BUSINESS Cautionary Notice Regarding Forward-Looking Statements Certain of the statements made in this Report and in documents incorporated by reference herein, including matters discussed under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as oral statements made by the Company or its officers, directors or employees, may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "SECURITIES ACT"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"). The words "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and similar expressions are intended to identify such forward-looking statements; however, this Report also contains other forward-looking statements in addition to historical information. Such forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to differ materially from historical results or from any results expressed or implied by such forward-looking statements. Such factors include, without limitation, those discussed in "Business--Factors Affecting Future Performance" herein. Many of such factors are beyond the Company's ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements. The Company disclaims any obligation to update or revise any forward-looking statements contained in this Report, whether as a result of new information, future events or otherwise. General ASA Holdings, Inc. ("ASA HOLDINGS") is a corporation existing under the laws of the State of Georgia. Its principal offices are located at 100 Hartsfield Centre Parkway, Suite 800, Atlanta, Georgia 30354 and its telephone number is (404) 766-1400. ASA Holdings is a holding company the principal assets of which are the shares of its wholly owned subsidiaries Atlantic Southeast Airlines, Inc., a Georgia corporation ("ASA"), and ASA Investments, Inc., a Delaware corporation ("ASA INVESTMENTS"). ASA Holdings considers the airline business of ASA to be its only industry segment. All references herein to the "COMPANY" shall refer collectively to ASA Holdings, ASA and ASA Investments. ASA Holdings became the parent holding company for ASA and ASA Investments pursuant to a corporate reorganization that was effective after the close of business on December 31, 1996 (the "REORGANIZATION"). Pursuant to the Reorganization, ASA merged with a wholly owned subsidiary of ASA Holdings (the "MERGER"). Prior to the Merger, ASA Holdings was a wholly owned subsidiary of ASA. Pursuant to the Merger, each issued and outstanding share of ASA's common stock, $0.10 par value per share ("ASA COMMON STOCK"), was automatically converted into one share of ASA Holdings' common stock, $0.10 par value per share ("HOLDINGS COMMON STOCK"), except for shares of ASA Common Stock then held by ASA as treasury shares, which were canceled as part of the Merger. Immediately after the consummation of the Merger, on December 31, 1996, ASA effected a dividend of all the capital stock of ASA's wholly owned subsidiary, ASA Investments, to ASA Holdings. 4 ASA is a certificated air carrier providing regularly scheduled, high frequency airline service between (i) Hartsfield Atlanta International Airport in Atlanta, Georgia (the "ATLANTA HUB") and 38 other airports in Alabama, Florida, Georgia, Indiana, Kentucky, Louisiana, Michigan, Mississippi, New York, North Carolina, Ohio, South Carolina, Tennessee, Virginia and West Virginia and (ii) Dallas/Fort Worth International Airport in Dallas, Texas (the "DALLAS/FORT WORTH HUB") and 21 other airports in Arkansas, Kansas, Louisiana, Mississippi, Oklahoma and Texas. ASA is the largest regional carrier serving Hartsfield Atlanta International Airport with more flights per week than any other regional carrier. ASA currently operates approximately 3,900 flights per week. A majority of ASA's flights are utilized primarily by business, government and military passengers to make connections with flights operated by Delta Air Lines, Inc. ("DELTA") and other air carriers from the Atlanta and Dallas/Fort Worth hubs. As of March 3, 1998, ASA's operating fleet consisted of 75 turboprop airplanes, 12 of which seat 66 passengers and the remaining 63 of which seat 30 passengers, and 8 jets that seat 50 passengers each. On April 21, 1997, ASA announced that it had executed an acquisition agreement for 30 jets that seat 50 passengers each. See "FLIGHT EQUIPMENT." The sole business of ASA Investments is to manage certain cash assets contributed to it by ASA Holdings and its other subsidiaries. Delta Connection Since 1984, ASA has operated from the Atlanta and Dallas/Fort Worth hubs as a "Delta Connection" carrier pursuant to a marketing agreement (the "DELTA CONNECTION AGREEMENT") with Delta. As a Delta Connection carrier, ASA's flights are shown under Delta's two letter code designation (DL) in the automated airline reservation systems used throughout the industry and in the Official Airline Guide. ASA is assigned a series of distinctive Delta flight numbers that travel agents and airline reservation personnel are able to distinguish as those operated as a Delta Connection carrier. Passengers served by Delta Connection carriers are able to take advantage of the cost savings inherent in joint fares and are offered Delta frequent flyer mileage and a full range of promotional fares provided by Delta and ASA. In addition, ASA is able to offer its passengers coordinated schedules for timely connections with Delta flights. See "FARES" and "MARKETING." Approximately 84% of ASA's passengers during fiscal 1997 connected with or from Delta flights at the Atlanta or the Dallas/Fort Worth hubs. See "ROUTE SYSTEM." ASA believes that its marketing agreement with Delta is similar to those that exist between Delta and other Delta Connection Carriers and in substance to those that exist between other major and regional air carriers. The Delta Connection Agreement has been in effect since 1984 and may be terminated by either party by giving no less than 30-days' advance written notice. ASA believes that its relationship with Delta is good and does not anticipate any termination of the Delta Connection Agreement. Given ASA's relationship with Delta, ASA's results of operations and financial condition may be favorably or adversely impacted by Delta's decisions regarding its flight routes and other operational matters. ASA historically has -2- 5 benefited from its relationship with Delta, but there can be no assurance that such benefits will occur in the future. Any material modification of this relationship with Delta could have a material adverse effect on ASA and ASA Holdings. As of March 3, 1998, Delta Air Lines Holdings, Inc., a wholly owned subsidiary of Delta ("DELTA Holdings"), owned approximately 27% of the outstanding Holdings Common Stock. Pursuant to the terms of a Stock Agreement among Delta, Delta Holdings, ASA Holdings and ASA dated as of March 17, 1997, (the "STOCK AGREEMENT"), (a) at Delta's request, ASA Holdings will include at least two designees of Delta or Delta Holdings who are reasonably acceptable to ASA Holdings on the slate of nominees for election as members of ASA Holdings' Board of Directors and (b) ASA Holdings will use its reasonable best efforts to assure that the designated individuals are elected to ASA Holdings' Board of Directors so long as Delta or Delta Holdings continue to own at least 10% of the outstanding Holdings Common Stock. Prior to the Reorganization, Delta had rights substantially similar to those which it has under the Stock Agreement pursuant to a written agreement with ASA. Route System As of March 3, 1998, ASA's route system included service between the Atlanta hub and 38 other airports in Alabama, Florida, Georgia, Indiana, Kentucky, Louisiana, Michigan, Mississippi, New York, North Carolina, Ohio, South Carolina, Tennessee, Virginia and West Virginia. ASA also operates a similar hub and spoke operation in Dallas/Fort Worth. As of March 3, 1998, ASA provided service from the Dallas/Fort Worth hub to 21 airports in Arkansas, Kansas, Louisiana, Mississippi, Oklahoma and Texas. For information regarding ASA's operating fleet, see "FLIGHT EQUIPMENT." ASA's flight schedules are structured to facilitate the connection of its passengers with Delta's flights at the Atlanta and Dallas/Fort Worth hubs. Approximately 84% of ASA's passengers connected with or from Delta flights at the Atlanta or Dallas/Fort Worth hubs. See "DELTA CONNECTION." The following tables describe ASA's route system as of March 3, 1998: ATLANTA HUB
Air Mileage Date Service Airport Served From Atlanta Hub Commenced ----------------------------------------------------------------------- Albany, GA 146 8/1/82 Alexandria, LA 500 12/1/95 Asheville, NC 164 8/1/82 Augusta, GA 143 4/24/83 Brunswick, GA 238 6/1/81 Charleston, WV 363 2/1/86
-3- 6 ATLANTA HUB
Air Mileage Date Service Airport Served From Atlanta Hub Commenced ----------------------------------------------------------------------- Charlotte, NC 227 4/1/91 Chattanooga, TN 106 6/1/91 Cleveland, OH 554 11/1/97 Columbus, GA 83 6/27/79 Columbus, MS 241 12/15/84 Detroit, MI 594 12/1/97 Dothan, AL 171 10/31/82 Evansville, IN 350 6/1/89 Fayetteville, NC 331 11/1/85 Florence, SC 273 9/11/92 Fort Walton Beach, FL 250 11/15/82 Gainesville, FL 300 10/1/85 Greensboro/High-Point/ Winston-Salem, NC 306 6/1/91 Greenville/Spartanburg, SC 153 4/25/82 Gulfport/Biloxi, MS 352 3/2/91 Jackson, MS 341 4/4/93 Jacksonville, NC 399 12/15/92 Lafayette, LA 503 12/1/95 Lexington, KY 303 12/15/90 Louisville, KY 321 4/4/93 Lynchburg, VA 389 7/1/94 Macon, GA 79 3/20/80 Meridian, MS 267 11/1/84 Montgomery, AL 147 6/1/82 Myrtle Beach, SC 317 9/1/86 New York, NY - JFK* Cleveland, OH 425 11/1/97 Detroit, MI 508 12/1/97 Panama City, FL 247 3/1/84 Pensacola, FL 272 4/1/91 Roanoke, VA 357 12/15/85 Tallahassee, FL 223 12/15/85 Tri-Cities, TN 227 10/31/82 Valdosta, GA 208 9/9/81 Wilmington, NC 377 9/17/90
- -------------------- * New York is served from the Cleveland and Detroit airports. -4- 7 DALLAS/FORT WORTH HUB
Air Mileage Date Service Airport Served From Atlanta Hub Commenced ----------------------------------------------------------------------- Alexandria, LA 285 10/1/87 Amarillo, TX 313 7/1/93 Beaumont/Port Arthur, TX 270 2/1/87 Columbus, MS 491 12/1/95 Corpus Christi, TX 354 6/1/93 Fayetteville, AR 270 12/15/86 Fort Smith, AR 227 12/15/86 Houston, TX (Intercontinental) 224 10/1/93 Houston, TX (Hobby) 247 5/1/94 Killeen, TX 130 5/1/87 Lafayette, LA 351 12/15/87 Lawton, OK 140 2/1/87 Lubbock, TX 282 7/1/93 Meridian, MS 485 12/1/95 Oklahoma City, OK 175 7/1/93 San Antonio, TX 247 10/1/93 Shreveport, LA 190 12/1/95 Texarkana, AR 181 12/15/86 Tulsa, OK 237 6/1/93 Wichita, KS 328 7/1/93 Wichita Falls, TX 113 12/15/86
ASA provides service on all of its routes every weekday with reduced service on weekends. Fares ASA derives its revenues primarily from local fares and through fares. Local fares are those fares for one way and round trips that are not combined with the fare of another air carrier. Through fares are fares for transportation provided jointly by ASA and another carrier. Revenues derived from through fares are distributed among the participating air carriers using various proration formulas. The most widely used method of settlement involves a straight rate prorate division, unless the carriers enter into agreements using variations to this proration formula. The various pricing structures generally are presented in the Airline Tariff Publishing Company's electronic tariff, Passenger Interline Pricing Prorate System (PIPPS). ASA operates as a Delta Connection carrier pursuant to a marketing program with Delta. See "DELTA CONNECTION." In addition to the Delta Connection Agreement, ASA is a party to -5- 8 interline passenger, reservation, ticketing and baggage agreements with each of the other major air carriers with which ASA transacts any significant amount of business. These agreements permit each carrier to reserve seats and sell tickets for flights on the other contracting carrier, provide that each carrier will honor ticket forms of the other carriers and provide for an interline baggage exchange system at airport terminals. Air carriers are permitted to set domestic ticket prices without governmental regulation. SEE "REGULATION." As a result, the industry generally is subject to substantial price competition. See "COMPETITION AND INDUSTRY CONSIDERATIONS." The aviation trust fund tax, a 10% federal excise tax on tickets sold, expired effective January 1, 1996, was reinstated effective August 27, 1996, expired again effective January 1, 1997, and was reinstated again effective March 7, 1997 through September 30, 1997. Congress recently passed legislation reimposing and significantly modifying the ticket tax. The legislation includes the imposition of new excise tax and segment fee tax formulas to be phased in over several years, an increase in the international departures tax, the imposition of a new arrivals tax, and the extension of the ticket tax to cover items such as frequent flyer miles. In addition, legislation that was effective in 1992 allows public airports to impose passenger facility charges of up to $3.00 per departing or connecting passenger. Price competition may have an impact on ASA's ability to pass these charges on to its customers. See "COMPETITION AND INDUSTRY CONSIDERATIONS." Flight Equipment As of March 3, 1998, ASA's operating fleet consisted of 75 turboprop airplanes, 12 of which seat 66 passengers and the remaining 63 of which seat 30 passengers, and 8 jets which seat 50 passengers each. The age of this fleet ranged from less than one year to 13 years. The following table describes ASA's current operating fleet as of March 3, 1998:
Number of Number of Aircraft Type Aircraft Owned Aircraft Leased Average Age - ---------------------------------------------------------------------------------- ATR-72 Turboprop 4 8 4.4 years (66 passenger capacity) Embraer Brasilia Turboprop 59 4 8.9 years (EMB-120) (30 passenger capacity) Canadair Regional Jet -- 8 .3 years (50 passenger capacity)
ASA's Embraer Brasilia EMB-120 turboprop aircraft ("BRASILIAS") operate on mainly medium to long-haul routes from the Atlanta and Dallas/Fort Worth hubs. ASA's Brasilias are very fuel efficient and, because of their operating economy, can provide high frequency service -6- 9 in markets with relatively low volumes of passenger traffic. These aircraft are powered by two Pratt & Whitney turboprop engines and accommodate 30 passengers. ASA leases four of the Brasilias pursuant to operating leases. Two leases expire in December 1998, one will expire in June 1999 and one will expire in December 1999. As of March 3, 1998, ASA operated 12 ATR-72 turboprop aircraft ("ATRS") from the Atlanta hub. ASA initially used the ATRs to replace smaller aircraft in order to increase capacity in existing markets and more recently has used the ATRs to replace its BAe Jets discussed below. The ATRs are 66-passenger aircraft, powered by two Pratt & Whitney turboprop engines, and are built by Avions de Transport Regional, a joint enterprise involving Alenia-Aeritalia & Selenia S.P.A., an Italian aircraft manufacturer, and Aerospatiale Societe Nationale Industrielle, a French aircraft manufacturer. ASA leases eight ATRs pursuant to a lease with a seven-year term expiring in June 2002. ASA also owns four ATRs, the majority of the purchase price of which was provided by bank financing. ASA has an option to acquire 16 additional ATRs. In 1997, ASA operated five British Aerospace BAe 146-200 jets ("BAE JETS") and elected to exercise its option for the early return of all of the BAe Jets to the lessor. By the end of the first quarter of 1998, all five BAe Jets had been removed from operation and returned to the lessor. On April 21, 1997, ASA announced that it had executed an acquisition agreement with Bombardier, Inc. for 30 Canadair Regional Jet aircraft ("CRJs") with options to acquire an additional 60 aircraft. ASA took delivery of its first five 50-passenger CRJ aircraft in the second half of 1997 and an additional three CRJs during the first quarter of 1998 through operating leases with a 16.5 year term. Future deliveries of the remaining 22 CRJs are anticipated to be one aircraft per month thereafter. ASA obtained a commitment from the Export Development Corporation (EDC) of Canada to provide financing to ASA for up to approximately 85% of the purchase price of the CRJs. ASA estimates that the aggregate cost of the first 30 CRJs, including spare parts, will be approximately $600 million. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--LIQUIDITY AND CAPITAL RESOURCES." ASA plans to use the new CRJs for growth in new long-haul markets as well as to replace some turboprop aircraft on existing routes from its Atlanta hub. The CRJs are more effective than the BAe Jets over long-haul routes because the CRJs are faster. As of December 31, 1997, ASA had pledged 36 of the Brasilias it owns and all four of the ATRs it owns, as well as a significant portion of its spare parts, to secure long-term indebtedness of ASA. Personnel and Operations ASA's employees perform a substantial portion of ASA's operations, including ticketing, maintenance, ground and in-flight service and training. Substantially all the maintenance and repairs on ASA's aircraft (except for major engine, propeller and component overhauls as well as major airframe checks) are performed by ASA's maintenance personnel. As of March 3, 1998, ASA had approximately 2,504 employees, of which 1,119 were flight personnel, 993 were -7- 10 ground service personnel, 271 were maintenance personnel and the remainder were management, supervisory and clerical employees. As of March 3, 1998, ASA Holdings had three employees, all of whom provide management services for ASA Holdings' subsidiaries, and ASA Investments had two employees, both of whom were management employees. Approximately 27% of ASA's workforce are members of unions representing pilots and flight attendants. In September 1988, ASA's flight attendants voted to be represented by the Association of Flight Attendants ("AFA"). In June 1991, ASA and AFA entered into an initial collective bargaining agreement which became amendable in 1994. In June 1994, ASA and AFA executed a letter of agreement that extended the amendable date of the initial collective bargaining agreement until June 1995. In September 1997, following direct negotiations and federal mediation, ASA and AFA entered into a new collective bargaining agreement that is amendable in 2002. In 1987, the Air Line Pilots Association ("ALPA") was certified to represent ASA's pilots. In 1989, ASA and ALPA entered into an initial collective bargaining agreement which was amendable in 1992. In October 1992, ASA and ALPA entered into a second collective bargaining agreement that was amendable in October 1995. In September 1995, ASA and ALPA entered into negotiations for a new collective bargaining agreement. In 1996, ASA and ALPA entered federal mediation with respect to those negotiations which continued throughout 1997. In January 1998, ASA and ALPA reached a tentative agreement on a new 54-month collective bargaining agreement, pending ratification of the agreement by the pilots. In March 1998, the members of the pilots' union voted to reject the tentative accord, and management expects negotiations with ALPA to continue under the auspices of the National Mediation Board. The existing collective bargaining agreement between ASA and ALPA will remain in effect until a new agreement is reached and ratified or until the procedures of the Railway Labor Act are exhausted. See "REGULATION--LABOR REGULATION" regarding such procedures. There are no union affiliations with any other groups of ASA's, ASA Holdings' or ASA Investments' employees. ASA operates as a Delta Connection carrier pursuant to a marketing program with Delta. See "DELTA CONNECTION." ASA is also a party to interline passenger, reservation, ticketing and baggage agreements with each of the other major air carriers with which ASA transacts any significant amount of business. See "FARES." In addition to carrying passengers, ASA carries mail, freight and small packages on its flights. Maintenance ASA is subject to the jurisdiction of and regulation by the FAA with respect to ASA's maintenance and operations. See "REGULATION." ASA's aircraft and engines are maintained in accordance with the standards and procedures recommended and approved by the manufacturers and the FAA. ASA provides maintenance for its aircraft using its own personnel, facilities and parts. ASA employs personnel with appropriate FAA Airframe and Powerplant licenses to ensure adequate maintenance of its aircraft. ASA employs major outside repair agencies to perform its engine overhauls, most individual component repairs or overhauls, and major checks on aircraft. -8- 11 ASA's FAA-approved maintenance program specifies the number of days, hours or operating cycles between inspections and overhauls of the airframes and their component parts. The nature and extent of each inspection and overhaul is specifically prescribed by the approved maintenance program. ASA uses an FAA approved alternative for overhauls on each of its three engine types: Pratt & Whitney PW118 engines on the Brasilias, Pratt & Whitney PW127 engines on the ATRs, and General Electric CF34-3B1 engines on the CRJs. "On condition" engine overhaul intervals are set by engine condition monitoring and continuous airworthiness maintenance programs. In addition, all engines contain time-limited components, each of which has a maximum amount of time (measured by operating hours) or a maximum number of operating cycles (measured by takeoffs and landings) after which the component must be removed from the engine assembly and overhauled or scrapped. From time to time, the FAA issues airworthiness directives ("ADS") and other regulations relating to, among other things, retirement of older aircraft, collision avoidance systems, airborne windshear avoidance systems, noise abatement, aircraft safety and increased inspections and maintenance procedures. Some of these ADs 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 ASA to incur substantial, unplanned expense and, occasionally, aircraft or engines must be removed from service prematurely in order to undergo mandated inspections or modifications on an accelerated basis. Since 1988 various air carriers, in cooperation with the FAA, have been engaged in an in-depth review of the adequacy of existing maintenance procedures applicable to older versions of most of the aircraft types in general use in the industry. To date, this review has not included aircraft used by ASA. While certain of these potential aging aircraft ADs may, at some time in the future, necessitate unscheduled removals from service and increased maintenance costs, ASA does not anticipate that compliance with such potential ADs will have a material adverse impact on costs or operations. Aviation Fuel ASA's operations are significantly affected by the availability and price of aviation fuel. Fuel costs, including taxes and "into plane" fees, constituted 10.79% of the Company's operating costs in 1997. Based on ASA's fiscal 1997 fuel consumption, every $0.01 change in the average annual price per gallon of aviation fuel caused an approximate $449,000 change in ASA's annual fuel expense. The following table shows ASA's fuel consumption and costs for fiscal years 1997, 1996 and 1995:
Average Price Percent of Fiscal Year Gallons Consumed Cost Per Gallon Operating Expense ----------- ---------------- ---- ------------- ----------------- 1997 44,872,864 $32,988,262 $0.74 10.79% 1996 43,356,461 $33,479,356 $0.77 11.54% 1995 38,872,025 $24,075,274 $0.62 9.52%
-9- 12 Aircraft fuel expense decreased 1.5% in 1997 compared with 1996, primarily because the average fuel price per gallon decreased 3.9% to $0.74 cents per gallon and aircraft fuel consumption increased 3.5%. See "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." Changes in aviation fuel prices have an industry-wide impact and will tend to affect ASA's competitors in the same manner as ASA. There can be no assurance that ASA will be able to increase its fares in response to any future increases in fuel prices. See "COMPETITION AND INDUSTRY CONSIDERATIONS." ASA currently obtains approximately 56% of its fuel requirements from Chevron USA, Inc. at the Atlanta hub and approximately 25% of its fuel requirements from various fuel suppliers at the Dallas/Fort Worth hub. ASA obtains the rest of its fuel requirements from various suppliers at other airports. ASA's fuel contracts do not provide protection against price increases or for assured availability of supplies. Although ASA is currently able to obtain adequate supplies of fuel, it is impossible to predict the future availability or price of fuel. Political disruptions involving oil producing countries; changes in government policy concerning aircraft fuel production, transportation or marketing; changes in the fuel tax; changes in aircraft fuel production capacity; environmental concerns and other unpredictable events may result in fuel supply shortages and fuel price increases in the future. ASA's business could be significantly adversely affected by such shortages and price increases. The Omnibus Budget Reconciliation Act of 1993 imposed a 4.3 cent per gallon tax on commercial aviation fuel purchased for use in domestic operations. Air carriers were exempt from this tax until October 1995. While additional exemptions have been proposed, there can be no assurance that ASA will not continue to be required to pay this tax. Marketing ASA markets its passenger, air freight and small package services primarily through direct sales activity and cooperative advertising programs. The direct sales activity focuses on high-volume sources of business, such as travel agencies and ticketing outlets located on major military installations. Since 1984, ASA has operated from the Atlanta and Dallas/Fort Worth hubs as a Delta Connection carrier pursuant to a marketing agreement with Delta. See "DELTA CONNECTION." Cooperative advertising programs with Delta, such as Delta's frequent flyer program and Delta Dream Vacations, are used to promote ASA's flights to the Atlanta and Dallas/Fort Worth hubs, and Delta's services from Atlanta and Dallas/Fort Worth to various long-haul destinations. ASA's passengers accrue mileage in Delta's frequent flyer program, which offers incentives to maximize travel on flights offered by Delta and Delta Connection carriers. This -10- 13 program allows participants to accrue mileage for award travel while flying on Delta, Delta Connection carriers and other participating air carriers. Mileage credits may also be accrued for the use of certain services offered by program partners such as hotels, car rental agencies and credit card companies. Mileage vouchers can be redeemed for free or upgraded travel on Delta, Delta Connection carriers and other participating air carriers and for other program partner awards. Delta has reserved the right to terminate the frequent flyer program with six months advance notice and to change the program's terms and conditions at any time without notice. ASA does not accrue for incremental costs associated with the Delta frequent flyer program's mileage accumulation because the impact is immaterial both on a quarterly and annual basis. ASA's management believes that the low percentage of free passenger miles, its load factor and the restrictions applied to free travel awards minimize the displacement of revenue passengers and that the displacement that occurs is not significant. ASA expenses, as incurred, all incremental costs of providing earned free travel awards under Delta's frequent flyer program. ASA makes payments to Delta for Delta frequent flyer mileage earned by passengers flying on ASA's routes where those passengers do not connect to Delta flights. ASA does not receive any payments related to providing carriage to passengers utilizing frequent flyer mileage earned on Delta flights. Competition and Industry Considerations Management of ASA believes that its services are utilized primarily by business, government and military travelers. ASA competes primarily with other air carriers and, particularly with respect to its shorter flights, with ground transportation such as automobiles and buses. Delta provides air service from the Atlanta hub to approximately 33% of the airports served by ASA out of Atlanta. Under the Delta Connection program, ASA's flights are coordinated for timely connections with Delta. The flights provided by Delta and ASA to the same markets are scheduled at different times. ASA generally provides service to these markets at times when ASA can more efficiently serve the market. Other air carriers provide service to approximately 11% of the airports served by ASA from the Atlanta hub. ASA competes primarily with American/American Eagle at the Dallas/Fort Worth hub. Other air carriers provide service to approximately 90% of the airports served by ASA from the Dallas/Fort Worth hub. The airline industry historically has been highly competitive. ASA's management believes that its ability to compete with ground transportation and other air carriers depends upon the public acceptability of its aircraft and ASA's provision of convenient, frequent and reliable service to its markets at reasonable rates. Air carriers' profit levels are highly sensitive to, and during recent years have been severely impacted by, changes in fuel costs, fare levels and passenger demand. Passenger demand and fares can be affected by, among other things, the general state of the economy, -11- 14 international events and actions taken by other air carriers with respect to fares. See "ECONOMY" and "SEASONALITY." Air carriers are permitted to set domestic ticket prices without governmental regulation. As a result, the industry generally is subject to substantial price competition. ASA has in the past both responded to discounting actions taken by other carriers and initiated discounting actions itself. ASA's management expects that low-fare competition is likely to continue from time to time in its markets. If price reductions are not offset by increases in revenue passenger miles, ASA's operating results could be adversely affected. Economy The airline industry is a highly volatile industry. The state of the economy is the primary determinant of the level of passenger travel. Leisure travel is highly discretionary and can easily be postponed during economic down-turns or no growth economic periods. While business travel is not as discretionary, business travel generally diminishes in uncertain times as business tends to tighten cost controls. Seasonality ASA's operations at the Atlanta and Dallas/Fort Worth hubs are primarily dependent upon business, government and military related travel and generally are not subject to wide seasonal variations. However, some seasonal decline in business travel does occur at these hubs during holiday periods and during portions of the winter months (i.e., December, January and February). ASA estimates that leisure travel accounted for approximately 20% of ASA's passengers during 1997. Leisure travel generally increases during the summer months and at holiday periods. Demand for air travel, especially by leisure and other discretionary customers, is also affected by factors such as favorable economic conditions and fare levels. See "FARES" and "ECONOMY." ASA's operations are also unfavorably affected by inclement weather which results in canceled flights, particularly during winter months. The following chart indicates the number of passengers carried by ASA by quarter during its last three fiscal years:
Year 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ---- ----------- ----------- ----------- ----------- 1997 836,455 992,521 989,255 956,386 1996 836,902 985,747 931,812 877,660 1995 680,871 808,338 789,681 788,007
Regulation Historically, the U.S. Department of Transportation ("DOT") and the FAA have exercised regulatory authority over the operations of all air carriers pursuant to the Federal Aviation Act of 1958, as amended (the "1958 ACT"). Most domestic economic regulation of -12- 15 passenger and freight services was eliminated pursuant to the Airline Regulation Act of 1978 and other legislation amending the 1958 Act (collectively, the "ACT"). The FAA's jurisdiction extends primarily to the safety and operational provisions of the Act. The DOT's responsibility primarily involves regulation of the economic and consumer protection aspects of airline operation. Both the DOT and the FAA have authority to institute administrative and judicial proceedings to enforce federal aviation laws and their own regulations, rules and orders. Civil and criminal sanctions may be assessed for violations. ASA is also subject to various other federal, state and local laws and regulations affecting its operations. The United States Postal Service has authority over certain aspects of the transportation of mail. The Communications Act of 1934, as amended, governs ASA's use and operation of radio facilities. Labor relations are generally governed by the Railway Labor Act. Environmental matters (including noise pollution) are governed by various federal, state and local governmental entities. The United States Department of Justice has jurisdiction over mergers and acquisitions involving air carriers. Because it carries military passengers, ASA is also subject to review by the Department of Defense. DOT REGULATION. Because of the economic deregulation of the airline industry, unrestricted authority to operate domestic air transportation (including the carrying of passengers and cargo) is available to any air carrier the DOT determines is "fit" to operate. The DOT also has jurisdiction over economic and consumer protection matters such as advertising, denied boarding compensation, baggage handling, smoking aboard aircraft, handicapped access, computer reservation systems, enforcement of minimum standards of customer service, regulation of federal compensation payments for essential air service, and ownership and control of air carriers. The DOT is also authorized to prohibit unjust discrimination and to require periodic reports from air carriers. The DOT has authorized ASA's flight operations pursuant to a Certificate of Public Convenience and Necessity (a "401 CERTIFICATE") issued under Part 401 of the Act during the first quarter of 1993. The 401 Certificate requires ASA to maintain DOT-prescribed minimum levels of insurance and to comply with all applicable statutes, rules and regulations, and subjects ASA to expanded reporting requirements. The DOT must issue a 401 Certificate to an air carrier before it will be permitted to operate aircraft with more than 60 seats. ASA initiated the use of larger aircraft having more than 60 seats during the second quarter of 1993. Prior to receiving the 401 Certificate, ASA qualified as a commuter air carrier that was exempt from certain provisions of the Act and certain regulatory functions of the DOT. On December 20, 1995, a new federal regulation was issued by the FAA which required all air carriers to accomplish the following by March 20, 1997 (earlier in certain instances): (a) establish a director of safety, and (b) for those air carriers operating aircraft under Part 135 of the Act (30 seats or less), re-certify their operation of those aircraft in accordance with Part 121 of the Act. Prior to March 20, 1997, Part 135 carriers did not have to dispatch all their aircraft or train their pilots to the higher Part 121 standards. Beginning in 1982, ASA operated as both a Part 135 and a Part 121 carrier because it operated aircraft in both categories. ASA began -13- 16 training all of its pilots under Part 121 in 1993, although it was not required to do so. ASA was certified to operate the Brasilias under Part 121 on March 18, 1997. Under the Act, the DOT has the authority to designate ASA as an "essential air carrier" in any community in which it is the only carrier providing service and that is an "essential air service community." Except for such "essential air carrier" service, the economic deregulation of the airline industry permits unrestricted competition with respect to ASA's routes, services, fares and rates. An air carrier that serves an "essential air service community" is required to give advance notice to the DOT if it plans to terminate service to that community. Otherwise, air carriers may terminate service to a community without restriction. ASA is currently the only air carrier that provides service between the Atlanta hub and the following "essential air service communities": Albany, Brunswick, Columbus, Macon and Valdosta, Georgia; Columbus, Gainesville and Meridian, Mississippi; Asheville, North Carolina; Dothan, Alabama; Fort Walton Beach and Panama City, Florida. The service provided by ASA to these "essential air service communities" is on an unsubsidized basis. FAA REGULATION. As part of its safety and operational regulatory authority, the FAA regulates flying operations generally, including, among other things, control of navigable air space; airport access; aircraft certification and maintenance; equipment and ground facilities; flight operations dispatch and other communications; weather observation; the training and qualifications of flight, maintenance and other operational and technical personnel; record keeping and other matters affecting air safety generally. To ensure compliance with its regulations, the FAA requires air carriers to obtain operating, airworthiness and other certificates that are subject to suspension or revocation for cause. ASA holds a valid air carrier operating certificate issued by the FAA. ASA's certificates have never been suspended and, to the knowledge of ASA's management, it is in compliance with all applicable FAA regulations. LABOR REGULATION. The Railway Labor Act ("RLA") governs the labor relations of air carriers and employees in the airline industry. Comprehensive provisions are set forth in the RLA establishing the right of airline employees to organize and bargain collectively along craft or class lines and imposing a duty upon air carriers and their union represented employees to make reasonable efforts to make and maintain collective bargaining agreements. ASA has collective bargaining agreements with two unions which represent its pilots and flight attendants. See "PERSONNEL AND OPERATIONS." Under the RLA, collective bargaining agreements do not terminate, but instead become amendable on a particular date agreed upon by the air carrier and the union. The existing collective bargaining agreement remains in force while a new collective bargaining agreement is being negotiated. Should the parties be unsuccessful in achieving a new amended collective bargaining agreement through direct negotiations, either party may petition the National Mediation Board ("NMB"), for the appointment of a federal mediator to assist the parties with their negotiations. Following appointment by the NMB of a mediator to assist the parties, the parties are required to remain in mediation under the auspices of the NMB until the parties reach a new agreement or the NMB determines, in its sole discretion, that the parties will be unable to reach a new agreement through mediation. Upon making such a determination, the NMB will proffer arbitration to the parties for the purpose of resolving their negotiating differences. If either party rejects the proffer of arbitration, the parties will enter a thirty day "cooling off period" during which the status quo must be maintained. At the end of the thirty day cooling off period, unless a Presidential Emergency Board has been convened, the parties are free to engage in economic self help. For the union, this includes the right to strike. For the carrier, this may include the right, depending upon the circumstances, to impose new terms and conditions of employment on the employees. -14- 17 ENVIRONMENTAL REGULATION. The United States Environmental Protection Agency ("EPA") is authorized to regulate aircraft emissions. ASA's management believes that the engines on ASA's current aircraft and on all aircraft ASA has ordered comply with applicable EPA standards. Federal and state environmental laws require that underground storage tanks be upgraded to new construction standards and equipped with leak detection. These requirements were phased into effect based on the age, construction and use of existing tanks. Federal and state environmental laws also govern the use and operation of above ground storage tanks. ASA operates no underground or above ground storage tanks for the storage of fuels. ASA pays fixed base operators at various airports to store fuels. ASA's management believes it is otherwise in compliance with these laws. NOISE REGULATIONS. The FAA requires air carriers to comply with certain noise restrictions concerning their aircraft. Air carriers must bring existing aircraft into compliance with these regulations by retrofit or engine replacement. ASA's current aircraft and all aircraft ASA has ordered are in compliance with these regulations. In addition, several state legislatures and other governmental administrative bodies have, from time to time, considered noise reduction measures of various sorts. At the present time, ASA's aircraft meet all applicable noise regulations. Insurance For the fiscal year ended December 31, 1997 ASA maintained insurance coverage with major insurance carriers with coverage up to $25 million for damage per aircraft and $400 million of third party liability per occurrence (for personal injury and property damage). The per aircraft deductibles range from $50,000 to $500,000 depending on the type of aircraft. In addition, ASA carries Hull War Risk coverage on certain aircraft where ASA believes, based on information currently available to it, such insurance is necessary to protect it and its property against material loss. ASA's also maintains workers compensation insurance in compliance with state law in each state in which ASA operates. ASA does not maintain business interruption insurance. In the opinion of management, the Company maintains insurance policies of types customary in the airline industry and in amounts and with insurance carriers it believes, based on information currently available to it, are adequate to protect it and its property against material -15- 18 loss. There can be no assurance, however, that the amount of insurance carried by the Company will be sufficient to protect it from material loss. FACTORS AFFECTING FUTURE PERFORMANCE Relationship with Delta A substantial portion of the Company's business is dependent on the Company's relationship with Delta. The Delta Connection Agreement is subject to termination by either party for any reason or no reason upon 30 days' written notice to the other party. The termination of the Delta Connection Agreement or any material modification of its terms may have a material adverse effect on the Company. As a result of the Delta Connection Agreement, the Company's business is sensitive to events and risks affecting Delta. Delta's decisions regarding flight routes, marketing programs and other operational matters, or the occurrence of any event adversely affecting Delta, could have a material adverse effect on the Company. Fuel Costs and Supply Fuel costs represented 10.79% of the Company's total operating expenses in 1997. Fuel prices, which can be volatile and are largely outside of ASA's control, can have a significant impact on the Company's operating results. At ASA's current rate of consumption, every $0.01 increase in the price paid for fuel represents an approximate $449,000 increase in ASA's annual operating expenses. ASA's fuel supply contracts do not assure the price or availability of fuel, and ASA has not entered into hedging transactions with respect to fuel prices. Increases in the price of fuel or reductions in the availability of fuel supplies, as well as ASA's inability to pass on increased fuel costs to consumers due to economic or competitive conditions, could have a material adverse effect on the Company's financial condition and results of operations. Aircraft Fleet As of March 3, 1998, ASA's aircraft fleet consisted of 12 ATRs, 63 Brasilias and eight CRJ aircraft. ASA's operations could be materially adversely affected by the failure of the respective suppliers of these aircraft to provide additional aircraft, parts or related support services on a timely basis. In addition, the issuance of FAA airworthiness directives affecting ASA's aircraft or the need for unanticipated fleet maintenance could interrupt ASA's fleet service, which could have a material adverse effect on the Company. In 1997, ASA exercised its option to return all five of its BAe jets in connection with its proposed acquisition of the new CRJ aircraft. While ASA expects to take delivery of remaining CRJ aircraft under the terms of its agreement with Bombardier, ASA's operations could be materially adversely affected by Bombardier's failure to deliver such future shipments of the CRJs on a timely basis. Financial and Operating Leverage As is characteristic of the airline industry, ASA operates with a high degree of financial and operating leverage. As of December 31, 1997, ASA had $94.6 million in outstanding long- -16- 19 term debt, with annual payments of approximately $21.9 million committed to such obligations in 1998. Payments committed to aircraft operating leases in 1998 amount to approximately $17.7 million. In addition, the Company's acquisition of additional aircraft, including the CRJs, will result in increased leverage in the form of additional operating lease obligations. ASA's leverage will require significant periodic cash payments and may make ASA more vulnerable to the cyclical and seasonal nature of the airline industry. Unlike the revenues generated by any particular flight, the expenses incurred by ASA do not always vary proportionately with the number of passengers carried and the fares charged for each flight. Accordingly, decreases in the number of passengers carried could cause a significant decrease in profits if not offset by higher fares. Brazilian Default Risk In connection with its acquisition of the Brasilia aircraft, ASA negotiated to obtain the right to receive interest rate subsidies from the Federative Republic of Brazil under the country's export support program. From 1995 to 1997, these subsidies represented an average of approximately $2.9 million in annual credits against ASA's interest and lease payment obligations related to the Brasilia aircraft, and such subsidies would be jeopardized if the government of Brazil fails to meet its obligations under the export support program. From time to time, the Brazilian government has experienced economic conditions that have impaired the creditworthiness of such governmental obligations. There can be no assurance that a default on the subsidies will not occur under the export support program. Competition The airline industry is highly competitive and industry earnings are volatile. Since the deregulation of the airline industry in 1978, the industry has consolidated and has integrated major and regional carriers, which in turn has enhanced the competitive environment. Airlines compete on the basis of pricing, scheduling, public perception, on-time performance, frequent flyer programs and other services. While ASA has positioned itself to benefit from these and other factors, there can be no assurance that the Company will not be adversely affected by the introduction of new carriers in ASA's existing markets, the institution of deeply discounted fares by competitors, changes in ASA's ability to react to competitive pressures or other events. Government Regulation ASA is subject to regulation by several governmental authorities, including the DOT and the FAA. These authorities regulate flight operations, safety and economic aspects of air transportation providers. ASA is also subject to laws relating to environmental protection, radio communications, labor relations, employment practices and other matters. ASA incurs substantial costs in maintaining its certifications with federal regulators and otherwise complying with the laws and regulations to which it is subject. Although ASA has all certifications it believes to be necessary for continued operations and believes it is in compliance with all applicable requirements necessary to maintain its operating authority in good standing, any modification, suspension or revocation of ASA's DOT or FAA certifications or authorizations, as -17- 20 well as the failure or inability of ASA to maintain such compliance, could have a material adverse effect on the Company and its operations. Economic Conditions and Seasonal Nature of Airline Business Although ASA's operations at its main hubs are dependent primarily on business, governmental and military related travel, ASA generally experiences lower demand during holiday periods and portions of the winter months. ASA's operations are also unfavorably affected by inclement weather, particularly in the winter months, which may result in canceled flights. In addition, downturns in the economy generally may lower demand for travel by leisure and other discretionary customers and may have a material adverse effect on the Company's financial results. Labor Relations Approximately 27% of ASA's workforce are members of the unions representing pilots and flight attendants. In 1995, collective bargaining agreements with both of these unions became amendable. In September 1997, following direct negotiations and federal mediation, ASA and the flight attendants' union entered into a new collective bargaining agreement that is amendable in 2002. In September 1995, ASA and the union representing its pilots entered into negotiations for a new collective bargaining agreement. In 1996, ASA and the pilots' union entered federal mediation with respect to those negotiations, which continued through 1997. In January 1998, ASA and the pilots' union reached a tentative agreement on a new 54-month collective bargaining agreement, pending ratification of the agreement by the pilots. In March 1998, the members of the pilots' union voted to reject the tentative accord, and management expects negotiations with the pilots' union to continue under the auspices of the National Mediation Board. The existing collective bargaining agreement between ASA and the pilots' union will remain in effect until a new agreement is reached and ratified or until the procedures of the Railway Labor Act, which governs labor relations of air carriers and employees in the airline industry, are exhausted. See "REGULATION--LABOR REGULATION." There can be no assurance that ASA will be able to settle contract negotiations, if at all, without wage increases, work rule changes or other provisions that could have a material adverse effect on the Company's operations or financial performance. In addition, any cessation or disruption of operations due to any strike or work action could have a material adverse effect on the Company and its financial performance. EXECUTIVE OFFICERS; OTHER SIGNIFICANT EMPLOYEES EXECUTIVE OFFICERS The following information is furnished with respect to the executive officers of ASA Holdings as of March 3, 1998: George F. Pickett, age 56, is ASA Holdings' and ASA's Chairman of the Board and Chief Executive Officer and is a member of the Board of Directors of both companies. He has served as Chairman of the Board and Chief Executive Officer of ASA since February 1994 and of ASA Holdings since its inception in September 1996. Since ASA's inception in 1979 and until February 1994, he served as ASA's President and Chief Executive Officer. Mr. Pickett has been a member of the Board of Directors of both ASA and ASA Holdings since their respective inception. -18- 21 John W. Beiser, age 57, is ASA Holdings' and ASA's President and is a member of the Board of Directors of both companies. He has served as President of ASA since February 1994 and of ASA Holdings since its inception. He has served as Secretary of both companies since their respective inception. In addition, Mr. Beiser was ASA's Vice President from its inception until 1985 when he was designated as ASA's Senior Vice President-Sales and Services. Mr. Beiser has been a member of the Board of Directors of ASA since 1982 and of ASA Holdings since its inception. Ronald V. Sapp, age 53, is ASA Holdings' and ASA's Senior Vice President-Finance and Chief Financial Officer. Mr. Sapp was named Senior Vice President-Finance and Chief Financial Officer in May 1997. Mr. Sapp served as Vice President-Finance and Chief Financial Officer for ASA from 1985 until May 1997 and for ASA Holdings from the time of the Reorganization until May 1997. He served as ASA's Treasurer from 1985 until February 1997 and as ASA Holdings' Treasurer between September 1996 and February 1997. From 1983 to 1985, Mr. Sapp served as Vice President-Finance and Treasurer of Air Atlanta, Inc., a scheduled passenger airline. From 1979 to 1983, Mr. Sapp served as Vice President and Controller of Air California, Inc., a scheduled passenger airline. R. Mark Bole, age 39, was named ASA Holdings' and ASA's Assistant Vice President-Treasurer in February 1997. He was ASA's Assistant Vice President-Assistant Treasurer from February 1996 until February 1997 and held the same positions with ASA Holdings from the effective date of the Reorganization until February 1997. Mr. Bole served as a Vice President of Wachovia Bank of Georgia, N.A. from May 1991 until February 1996. Edward J. Paquette, age 47, was named ASA's Senior Vice President-Operations in April 1997. From May 1996 until April 1997, he served as Vice President-Operations of In-Flight Phone Corporation. From November 1994 to May 1996, he served as Vice President-Ground Operations at Ogden Aviation Services. Mr. Paquette served in various capacities at Trans World Airlines from 1969 through 1994, including Senior Vice President-Maintenance and Engineering and Senior Vice President-Operations. OTHER SIGNIFICANT EMPLOYEES The following information is furnished with respect to other significant employees of ASA Holdings and ASA as of March 3, 1998: James J. Cerniglia, age 55, has served as ASA's Assistant Vice President-Flight Systems Controller since March 1998. Mr. Cerniglia has held positions with or served as a consultant to a number of airlines since 1986. He served as the Director-Flight Control of Trump Shuttle, Inc. ("Trump") from February 1989 until September 1991 and as Senior Director-Sales and Marketing of Trump from September 1991 until March 1992. Mr. Cerniglia served as Vice President-Operations of Jet Express/USAir Express from March 1992 until July 1993, as an independent airline consultant from July 1993 until May 1996, as Director-Operations Control of Pan American World Airways, Inc. from May 1996 until September 1997, and as an independent airline consultant from that time until he joined the Company. -19- 22 Mark W. Fischer, age 39, has served as the Vice President-Customer Services of ASA since November 1997. From 1992 until joining ASA, Mr. Fischer served as the Vice President-Customer Service for Piedmont Airlines, Inc., and from 1987 until 1992, he served as Vice President-Customer Services for Midway Airlines, Inc. Mr. Fischer previously held a number of positions with Fischer Bros. Aviation, Inc. from 1987 until 1992. John P. McBryan, age 49, who has served as Vice President-Technical Services of ASA since December 1997, has 27 years of experience in the aviation industry. He was Vice President-Maintenance for Air Wisconsin, Inc. from 1988 until 1992, and served as Director of Maintenance for Allegheny Airlines, Inc. from 1992 until 1993. Mr. McBryan served as Vice President-Operations of Dyn-Air Tech, an aircraft repair station, from 1993 until 1994, and as Manager of Industrial Engineering of The Dee Howard Company, another repair station, from 1994 through 1996. Prior to joining ASA, he was the Director-Programs and Planning for Miami Air International. Tilden M. Shanahan, age 65, has been ASA's Vice President-Flight Operations since 1985. From 1984 to 1985, Mr. Shanahan served as Vice President of Flight Operations for Jet Express, Inc., a charter airline. From 1960 to 1984, Mr. Shanahan served as a pilot, check pilot and Vice President of Flying for Republic Airlines, Inc., a major airline. Renee H. Skinner, age 41, is ASA Holdings' and ASA's Assistant Vice President-Controller. She has held these positions with ASA since 1994 and with ASA Holdings since the Reorganization was effective. Ms. Skinner served as ASA's Manager of Accounting from 1986 through 1994. Samuel J. Watts, age 50, who has served as Vice President-Sales and Corporate Communications of ASA since July 1997, has been employed by ASA in customer service positions since 1983. From 1985 to 1994, he was ASA's Vice President-Customer Services. In 1994, he was elected as ASA's Vice President-Sales and Customer Services. Mr. Watts was employed by Southeastern Airlines, a regional airline, from 1982 to 1983 as its Vice President-Marketing. From 1972 to 1982, Mr. Watts worked for Eastern Airlines, Inc., a major airline, in various line and staff positions. ITEM 2. PROPERTIES ASA has entered into agreements with other air carriers to provide ground handling services (either directly or through outside vendors) to ASA in 27 of the cities it serves. In addition, ASA performs ground handling services for other air carriers at eight airports. ASA maintains ticketing, gate and baggage claim facilities at each of the other airports it serves pursuant to direct leases or use agreements with local airport authorities or other carriers. ASA leases its apron, gate, ticketing and baggage claim facilities at the Dallas/Fort Worth hub from Delta pursuant to a Ground Service Agreement. At 18 airports, ASA operates under month-to-month use agreements. ASA is currently negotiating eight other leases that have -20- 23 expired. ASA is operating month to month at these airports. The leases or use agreements at the remaining airports have remaining terms generally ranging from one month to 13 years. Substantially all the maintenance and repairs on ASA's aircraft operating from the Atlanta hub (except for major engine, propeller and component overhauls as well as major airframe checks) are performed at ASA's 79,000 square foot hangar and maintenance facility in Macon, Georgia. ASA leases the hangar facilities pursuant to a 30-year lease with renewal options until the year 2028. ASA also maintains a limited inventory of spare parts and has maintenance personnel at the Atlanta hub in a facility located near ASA's ramp and gate space that is leased from the City of Atlanta. ASA leases a maintenance facility in Texarkana, Arkansas. Substantially all the maintenance and repairs on ASA's aircraft operating from the Dallas/Fort Worth hub are performed at this facility (except for major engine, propeller and component overhauls as well as major airframe checks). In addition, ASA maintains a limited inventory of spare parts and has maintenance personnel at the Dallas/Fort Worth hub. During 1996, ASA relocated all of its operations to 15 gates on Concourse C North at the Atlanta hub. The relocation has significantly enhanced the convenience of connections between flights operated by ASA and Delta in Atlanta. ASA Holdings and ASA maintain their principal offices and ASA's training center in approximately 45,000 square feet of office space at 100 Hartsfield Centre Parkway, Suite 800, Atlanta, Georgia, under a lease expiring in 1999. ASA's operations control center, located at its principal offices in Atlanta, provides weather information, fuel information, weight limitations, routing instructions and other information to ASA's pilots. ITEM 3. LEGAL PROCEEDINGS There are no material legal proceedings pending in which the Company is a party or to which any of the Company's property is subject. In addition, in the opinion of its management, ASA maintains insurance policies of types customary in the airline industry and in amounts and with insurance carriers it believes, based on information currently available to it, are adequate to protect it and its property against material loss. There can be no assurance, however, that the amount of insurance carried by the Company will be sufficient to protect it from material loss. -21- 24 ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders of ASA Holdings during the fourth quarter of the fiscal year covered by this Report. -22- 25 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information required by this item is set forth under the heading "COMMON STOCK PRICE RANGES AND DIVIDENDS" in the Company's 1997 Annual Report to Shareholders (the "1997 ANNUAL REPORT") and is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA Information required by this item is set forth under the heading "SELECTED CONSOLIDATED FINANCIAL AND STATISTICAL DATA" in the Company's 1997 Annual Report and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information required by this item is set forth under the heading "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in the Company's 1997 Annual Report and is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information required by this item is set forth under the headings "CONSOLIDATED BALANCE SHEETS," "CONSOLIDATED STATEMENTS OF INCOME," "CONSOLIDATED STATEMENTS OF CASH FLOWS," "CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY," "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS," "REPORT OF INDEPENDENT AUDITORS" and "QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)" in the Company's 1997 Annual Report and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No change in or disagreements with the Company's accountants took place during the Company's fiscal years ended December 31, 1997 and 1996, or during the subsequent interim period through March 3, 1998. -23- 26 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is incorporated herein by reference to the data under the heading "ELECTION OF DIRECTORS" and "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" in the Proxy Statement to be used in connection with the solicitation of proxies for ASA Holdings' 1998 annual meeting of shareholders (hereinafter, the "1998 Proxy Statement") to be filed with the Securities and Exchange Commission (the "Commission"). ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference to the data under the heading "EXECUTIVE COMPENSATION" in the 1998 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated herein by reference to the data under the heading "VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF--SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS" in the 1998 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference to the data under the heading "ELECTION OF DIRECTORS--COMPENSATION COMMITTEE INTERLOCKS AND ADDITIONAL INFORMATION WITH RESPECT TO COMPENSATION DECISIONS" in the 1998 Proxy Statement. -24- 27 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this Report: l. The following financial statements of the Registrant required by this Item are included in the Registrant's 1997 Annual Report and are incorporated by reference in Item 8 hereof: Consolidated Balance Sheets as of December 31, 1997 and 1996; Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995; Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995; Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995; and Notes to Consolidated Financial Statements. 2. The following financial statement schedules of the Registrant required by this Item are included as pages 26 through 29 of this Report on Form 10-K: Schedule I - Condensed Financial Information of Registrant Schedule II - Valuation and Qualifying Accounts and Reserves All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 3. The exhibits required by this Item are listed on the Exhibit Index on pages (i) through (ix) of this Report and are filed herewith or incorporated by reference as indicated. The management contracts or compensatory plans or arrangements required to be filed as exhibits to this Report pursuant to Item 14(c) are identified in the Exhibit Index. (b) ASA filed no current reports on Form 8-K during the fourth quarter of 1997. -25- 28 SCHEDULE I ASA HOLDINGS, INC. CONDENSED BALANCE SHEETS (IN THOUSANDS)
December 31, 1997 1996 ---- ---- ASSETS Current Assets Cash and cash equivalents $ 1,093 $ -- Receivables from affiliates 5,542 2,807 Accounts receivable 8 -- -------- -------- 6,643 2,807 Investment in Subsidiaries 295,851 260,217 Other Assets 1,274 1,214 -------- -------- TOTAL ASSETS $303,768 264,238 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 2,172 $ -- Accrued compensation and related expenses 3,433 2,364 Other accrued expenses 242 100 -------- -------- 5,847 2,464 Non-Current Liabilities 1,996 1,558 Shareholders' Equity Common stock 2,973 2,999 Retained earnings 292,952 257,217 -------- -------- 295,925 260,216 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $303,768 $264,238 ======== ========
See accompanying note. -26- 29 ASA HOLDINGS, INC. STATEMENTS OF INCOME (IN THOUSANDS)
Years Ended December 31, 1997 1996 ---- ---- Cost Sharing Revenues $ 1,404 $ 0 -------- -------- Total Revenues 1,404 0 Operating Expenses General and administrative 1,319 0 Depreciation and amortization 122 0 -------- -------- Total Operating Expenses 1,441 0 Net Operating Income (37) 0 -------- -------- Non Operating Income (37) 0 Income before Income Taxes 0 0 -------- -------- Income Taxes 0 0 -------- -------- Net Income before Equity in Earnings of Subsidiaries 0 0 Net Income of Subsidiaries 54,512 56,613 -------- -------- Net Income $ 54,512 $ 56,613 ======== ========
-27- 30 ASA HOLDINGS, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Years Ended December 31, 1997 1996 ---- ---- OPERATING ACTIVITIES: Net Income of Subsidiaries $ 54,512 $ 56,613 Adjustment to Reconcile Net Income to Net Cash Provided by Operating Activities: Undistributed earnings of subsidiaries (35,616) (56,613) Other 30 Changes in Operating Assets and Liabilities: Receivables (2,743) Other assets (60) Accounts payable 2,172 Accrued compensation and related expenses 2,880 Other liabilities 648 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 21,823 0 FINANCING ACTIVITIES Dividends Paid (11,970) Proceeds from Exercise of Stock Options 5,480 Purchase of Common Stock (14,240) -------- -------- NET CASH USED IN FINANCING ACTIVITIES (20,730) 0 INCREASE IN CASH AND CASH EQUIVALENTS 1,093 0 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 0 0 -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,093 $ 0 ======== ========
Note to Condensed Financial Statements Note A -- Basis of Presentation ASA Holdings, Inc., the parent company, was formed pursuant to a corporate reorganization which was effective December 31, 1996. ASA Holdings, Inc. holds all of the outstanding shares of Atlantic Southeast Airlines, Inc. and ASA Investments, Inc. The Company's investment in these subsidiaries is stated using the equity method of accounting. ASA Holdings, Inc. received dividends from ASA Investments, Inc. in the amount of $18.9 million during 1997. -28- 31 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES December 31, 1997
- ---------------------------------------------------------------------------------------------------------------------- Col. A Col. B Col. C Col. D Col. E Additions --------- Balance at Charged to Charged to Balance at beginning of cost and other accounts Deductions end of Description period expenses (describe) (describe) period Year ended December 31, 1995 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts $ 280,569 $ 20,000 $ (34,226)(A) $ 266,343 Allowance for obsolescence of expendable parts 3,504,113 546,339 (1,680)(B) 4,048,772 ----------- ----------- ------- ----------- ----------- $ 3,784,682 $ 566,339 $ 0 $ (35,906) $ 4,315,115 Year ended December 31, 1996 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts $ 266,343 $ (25,000) $ (36,996)(A) 204,347 Allowance for obsolescence of expendable parts 4,048,772 567,788 (413,818)(B) 4,202,742 ----------- ----------- ------- ----------- ----------- $ 4,315,115 $ 542,788 $ 0 $ (450,814) $ 4,407,089 Year ended December 31, 1997 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts $ 204,347 $ 120,000 $ (29,358) $ 294,989 Allowance for obsolescence of expendable parts 4,202,742 737,208 4,939,950 ----------- ----------- ------- ----------- ----------- $ 4,407,089 $ 857,208 $ 0 $ (29,358) $ 5,234,939 =========== =========== ======= =========== ===========
(A) Uncollectible Accounts charged off during the period. (B) Obsolete parts charged off during the period. -29- 32 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. ASA HOLDINGS, INC. By: /s/ George F. Pickett -------------------------------------------- George F. Pickett Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date: March 27, 1998 -30- 33 We, the undersigned officers and directors of ASA Holdings, Inc., hereby severally constitute George F. Pickett and John W. Beiser and each of them singly, our true and lawful attorneys with full power to them, and each of them singly, to sign for us and in our names in the capacities indicated below, any and all amendments to this report, and generally do all such things in our name and behalf in such capacities to enable ASA Holdings, Inc. to comply with the applicable provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission, and we hereby ratify and confirm our signatures as they may be signed by our said attorneys, or either of them, to any and all such amendments. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: /s/ George F. Pickett March 27, 1998 - -------------------------------------------- George F. Pickett, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) and Director /s/ John W. Beiser March 27, 1998 - -------------------------------------------- John W. Beiser, President, Secretary and Director /s/ Ronald V. Sapp March 27, 1998 - -------------------------------------------- Ronald V. Sapp, Senior Vice President- Finance (Principal Financial and Accounting Officer) /s/ Jean A. Mori March 27, 1998 - -------------------------------------------- Jean A. Mori, Director /s/ Parker H. Petit March 27, 1998 - -------------------------------------------- Parker H. Petit, Director /s/ Ralph W. Voorhees March 27, 1998 - -------------------------------------------- Ralph W. Voorhess, Director /s/ Alan M. Voorhees March 27, 1998 - -------------------------------------------- Alan M. Voorhees, Director -31- 34 EXHIBIT INDEX Exhibit Number and Description 3(a) Articles of Incorporation of the Registrant. (Incorporated by reference to Exhibit 3(a) to the Registration Statement on Form S-4 [Registration No. 333-13071], as amended [the "REORGANIZATION REGISTRATION STATEMENT"].) 3(b) Bylaws of the Registrant. (Incorporated by reference to Exhibit 3(b) to the Reorganization Registration Statement.) 10(a) Stock Agreement dated as of March 17, 1997, between ASA Holdings, ASA, Delta and Delta Holdings. (Incorporated by reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, file number 0-29558, filed with the Commission on March 31, 1997.) 10(b) Delta Connection Agreement dated July 1, 1986, between ASA and Delta. (Incorporated by reference to Exhibit 10(a) to Amendment No. 1 to ASA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, file number 0-29558, filed with the Commission on November 26, 1997.) Letter Agreement dated February 19, 1987 from Delta and agreed to and accepted by ASA. (Incorporated by reference to Exhibit 10(b) to Amendment No. 1 to ASA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, file number 0-29558, filed with the Commission on November 26, 1997.) Amendment to the Delta Connection Agreement dated December 17, 1987, between Delta and ASA. (Incorporated by reference to Exhibit 10(c) to Amendment No. 1 to ASA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, file number 0-29558, filed with the Commission on November 26, 1997.) Amendment to the Delta Connection Agreement effective July 1, 1988, between Delta and ASA. (Incorporated by reference to Exhibit 10(d) to Amendment No. 1 to ASA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, file number 0-29558, filed with the Commission on November 26, 1997.) Amendment to the Delta Connection Agreement dated March 4, 1992, between Delta and ASA. (Incorporated by reference to Exhibit 10(e) to Amendment No. 1 to ASA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, file number 0-29558, filed with the Commission on November 26, 1997.) Amendment to the Connection Carrier Agreement dated as of August 1, 1994, between Delta and ASA. (Incorporated by reference to Exhibit 10(f) to Amendment No. 1 to ASA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, file number 0-29558, filed with the Commission on November 26, 1997.) Confidential treatment has been applied for with respect to certain provisions in these exhibits. -i- 35 10(c) Office Lease Agreement dated December 18, 1991, by and between ASA and Trident Partners. (Incorporated by reference to Exhibit 10(q) to ASA's Annual Report on Form 10-K for the year ended December 31, 1991, file number 0-11097, filed with the Commission on March 27, 1992.) 10(d) Lease Agreement dated April 1, 1988, between ASA and Macon - Bibb County Industrial Authority. (Incorporated by reference to Exhibit 10(k) to ASA's Annual Report on Form 10-K for the year ended December 31, 1992, file number 0-11097, filed with the Commission on March 31, 1993.) 10(e) Credit Agreement dated as of December 24, 1986, among ASA, ASA Investments, and Manufacturers Hanover Leasing International Corp., American Security Bank, N.A., Barclays Bank PLC, B.S.F.E. - Banque de la Societe Financiere Europeene, Canadian Imperial Bank of Commerce, Citizens and Southern National Bank, Continental Illinois National Bank and Trust Company of Chicago, Kawasaki Lease Financing Inc., National Bank of Canada, National Bank of Georgia and The Royal Bank of Canada. (Incorporated by reference to Exhibit 10(f) to ASA's Annual Report on Form 10-K for the year ended December 31, 1991, file number 0-11097, filed with the Commission on March 27, 1992.) Amendment No. 1 dated as of February 20, 1987. (Incorporated by reference to Exhibit 10(f) to ASA's Annual Report on Form 10-K for the year ended December 31, 1992, file number 0-11097, filed with the Commission on March 31, 1993.) Amendment No. 2 dated as of May 23, 1989. (Incorporated by reference to Exhibit 19(a) to ASA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1989, file number 0-11097, filed with the commission on November 11, 1989.) Amendment No. 3 dated as of August 17, 1989. (Incorporated by reference to Exhibit 19(b) to ASA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1989, file number 0-11097, filed with the Commission on November 11, 1989.) Fourth Amendment dated September 17, 1996. (Incorporated by reference to Exhibit 10(f) to ASA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, file number 0-11097, filed with the Commission on November 14, 1996.) Confidential treatment has been applied for with respect to certain provisions in the Fourth Amendment. 10(f) Single Payment Note, dated January 26, 1987, payable to SunTrust Bank. (Incorporated by reference to Exhibit 10(g) to ASA's Annual Report on Form 10-K for the year ended December 31, 1991, file number 0-11097, filed with the Commission on March 27, 1992.) 10(g) Credit Agreement dated as of April 23, 1987, among ASA, ASA Investments, Inc., Manufacturers Hanover Leasing International Corp., Kawasaki Lease Financing, Inc. and Credit Lyonnais, Cayman Islands Branch. (Incorporated by reference to Exhibit 10(i) to ASA's Annual Report on Form 10-K for the year ended December 31, 1991, file number 0-11097, filed with the Commission on -ii- 36 March 27, 1992.) Amendment No. 1 dated as of May 23, 1989. (Incorporated by reference to Exhibit 19(c) to ASA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1989, file number 0-11097, filed with the Commission on November 11, 1989.) Second Amendment dated as of October 31, 1989. (Incorporated by reference to Exhibit 10(s) to ASA's Annual Report on Form 10-K for the year ended December 31, 1989, file number 0-11097, filed with the Commission on March 30, 1990.) Third Amendment dated September 17, 1996. (Incorporated by reference to Exhibit 10(h) to ASA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, file number 0-11097, filed with the Commission on November 14, 1996.) Confidential treatment has been applied for with respect to certain provisions in the Third Amendment. 10(h) Credit Agreement dated June 15, 1990 between ASA and Bank of America National Trust and Savings Association ("BANK OF AMERICA"). (Incorporated by reference to Exhibit 10(h) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, file number 0-29558, filed with the Commission on March 31, 1997.) First Amendment dated September 13, 1996 (Incorporated by reference to Exhibit 10(j) to ASA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, file number 0-11097, filed with the Commission on November 14, 1996.) Confidential treatment has been applied for with respect to certain provisions in the First Amendment. 10(i) Credit Agreement dated December 1, 1990 between ASA and Wachovia Bank of Georgia, N.A. ("WACHOVIA"). (Incorporated by reference to Exhibit 10(i) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, file number 0-29558, filed with the Commission on March 31, 1997.) Amendatory Agreement dated July 6, 1993. Second Amendment dated September 13, 1996. (Incorporated by reference to Exhibit 10(l) to ASA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, file number 0-11097, filed with the Commission on November 14, 1996.) Confidential treatment has been applied for with respect to certain provisions in the Second Amendment. 10(j) Credit Agreement dated February 25, 1991 between ASA and Bank of America. (Incorporated by reference to Exhibit 10(j) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, file number 0-29558, filed with the Commission on March 31, 1997.) First Amendment dated September 13, 1996. (Incorporated by reference to Exhibit 10(n) to ASA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, file number 0-11097, filed with the Commission on November 14, 1996.) Confidential treatment has been applied for with respect to certain provisions in the First Amendment. 10(k) Credit Agreement dated April 19, 1991 between ASA and Wachovia. (Incorporated by reference to Exhibit 10(k) to the Company's Annual Report on Form 10-K for the -iii- 37 fiscal year ended December 31, 1996, file number 0-29558, filed with the Commission on March 31, 1997.) First Amendment dated September 13, 1996. (Incorporated by reference to Exhibit 10(p) to ASA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, file number 0-11097, filed with the Commission on November 14, 1996.) Confidential treatment has been applied for with respect to certain provisions in the First Amendment. 10(l) Credit Agreement dated June 1, 1992, among ASA, Wachovia, in both its capacities as Lender and Agent, and the Bank of Tokyo - Mitsubishi, LTD., Atlanta Agency f/k/a The Bank of Tokyo, Ltd., Atlanta Agency. (Incorporated by reference to Exhibit 10(l) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, file number 0-29558, filed with the Commission on March 31, 1997.) First Amendment dated September 13, 1996. (Incorporated by reference to Exhibit 10(r) to ASA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, file number 0-11097, filed with the Commission on November 14, 1996.) Confidential treatment has been applied for with respect to certain provisions in the First Amendment. 10(m) Credit Agreement with Trust Company Bank dated as of April 20, 1994. (Incorporated by reference to Exhibit 10(a) to ASA's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, file number 0-11097, filed with the Commission on May 13, 1994.) Confidential treatment has been granted by the Commission with respect to certain provisions in this Credit Agreement. First Amendment dated September 11, 1996. (Incorporated by reference to Exhibit 10(t) to ASA's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1996, file number 0-11097, filed with the Commission on November 14, 1996.) Confidential treatment has been applied for with respect to certain provisions in the First Amendment. 10(n) Aircraft Purchase Agreement dated August 27, 1990, between ASA and Embraer - Empresa Brasileira de Aeronautica S.A. (Incorporated by reference to Exhibit 10(t) to ASA's Annual Report on Form 10-K for the year ended December 31, 1990, file number 0-11097, filed with the Commission on March 29, 1991.) Confidential treatment has been granted for with respect to certain provisions in this exhibit. 10(o) Purchase Agreement Assignment [N630AS] dated June 22, 1995; Purchase Agreement Assignment [N631AS] dated June 22, 1995; Purchase Agreement Assignment [N632AS] dated June 22, 1995; Purchase Agreement Assignment [N633AS] dated June 22, 1995; Purchase Agreement Assignment [N634AS] dated June 22, 1995; Purchase Agreement Assignment [N635AS] dated June 22, 1995; Purchase Agreement Assignment [N636AS] dated June 22, 1995; and Purchase Agreement Assignment [N637AS] dated June 22, 1995, all between the Company and First Security Bank of Utah, N.A. (Incorporated by reference to Exhibit 10(c) to ASA's Quarterly Report on -iv- 38 Form 10-Q for the quarter ended June 30, 1995, file number 0-11097, filed with the Commission on August 14, 1995.) 10(p) Aircraft Purchase Agreement dated as of April 15, 1993, between ASA and Embraer-Empresa Brasileira de Aeronautica S.A., related Letter Agreements (I), (II), and (III) dated as of April 15, 1993, and a Second Amendment dated as of April 15, 1993, to a Letter Supplement dated as of November 21, 1988. (Incorporated by reference to Exhibit 10(a) to ASA's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, file number 0-11097, filed with the Commission on August 16, 1993.) Confidential treatment has been granted by the Commission with respect to certain provisions in this exhibit. 10(q) Participation Agreement dated as of May 1, 1993 between the Company and Antoine Finance Corporation. (Incorporated by reference to Exhibit 10(b) to ASA's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, file number 0-11097, filed with the Commission on August 16, 1993.) Confidential treatment has been granted by the Commission with respect to certain provisions in this exhibit. 10(r) Unconditional Guaranty of Performance between the Company and Avions de Agreement between the Company and Avions de Transport Regional dated February 10, 1993 and related letter agreements. (Incorporated by reference to Exhibit 10(d) to ASA's quarterly report on Form 10-Q for the quarter ended June 30, 1993, file number 0-11097, filed with the Commission on August 16, 1993.) 10(s) Purchase Agreement Assignment No. 1 dated May 10, 1993, Purchase Agreement Assignment No. 2 dated May 12, 1993, Purchase Agreement Assignment No. 3 dated May 26, 1993, Purchase Agreement Assignment No. 4 dated June 16, 1993, Purchase Agreement Assignment No. 5 dated June 23, 1993, and Purchase Agreement Assignment No. 6 dated July 21, 1993, all with respect to ATR 72 Purchase Agreement between the Company and Avions de Transport Regional dated February 10, 1993 and related letter agreements. (Incorporated by reference to Exhibit 10(e) to ASA's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, file number 0-11097, filed with the Commission on August 16, 1993.) Purchase Agreement Assignment No. 7 dated August 25, 1993, Purchase Agreement Assignment No. 8 dated September 9, 1993, and Purchase Agreement Assignment No. 9 dated September 23, 1993. (Incorporated by reference to Exhibit 10(b) to ASA's quarterly report on Form 10-Q for the quarter ended September 30, 1993, file number 0-11097, filed with the Commission on November 15, 1993.) 10(t) Collateral Assignment of Purchase Agreement with Trust Company Bank dated as of April 20, 1994 with respect to ATR 72 Purchase Agreement between the Company and Avions de Transport Regional dated February 10, 1993. Incorporated by reference -v- 39 to Exhibit 10(b) to ASA's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, file number 0-11097, filed with the Commission on May 13, 1994.) 10(u) Sublease Agreement [N630AS] dated as of June 22, 1995, between the Company and Antoine Finance Corporation and related Sublease Supplement [N630AS] dated June 22, 1995; Sublease Tax Indemnity Agreement [N630AS] dated June 22, 1995; and Nondisturbance and Recognition Agreement [N630AS] dated June 22, 1995. (Incorporated by reference to Exhibit 10(d) to ASA's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1995, file number 0-11097, filed with the Commission on February 23, 1996.) Confidential treatment has been granted by the Commission with respect to certain provisions in this exhibit. 10(v) Sublease Agreement [N631AS] dated as of June 22, 1995, between the Company and Antoine Finance Corporation and related Sublease Supplement [N631AS] dated June 22, 1995; Sublease Tax Indemnity Agreement [N631AS] dated June 22, 1995; and Nondisturbance and Recognition Agreement [N631AS] dated June 22, 1995. (Incorporated by reference to Exhibit 10(e) to ASA's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1995, file number 0-11097, filed with the Commission on February 23, 1996.) Confidential treatment has been granted by the Commission with respect to certain provisions in this exhibit. 10(w) Sublease Agreement [N632AS] dated as of June 22, 1995, between the Company and Antoine Finance Corporation and related Sublease Supplement [N632AS] dated June 22, 1995; Sublease Tax Indemnity Agreement [N632AS] dated June 22, 1995; and Nondisturbance and Recognition Agreement [N632AS] dated June 22, 1995. (Incorporated by reference to Exhibit 10(f) to ASA's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1995, file number 0-11097, filed with the Commission on February 23, 1996.) Confidential treatment has been granted by the Commission with respect to certain provisions in this exhibit. 10(x) Sublease Agreement [N633AS] dated as of June 22, 1995, between the Company and Antoine Finance Corporation and related Sublease Supplement [N633AS] dated June 22, 1995; Sublease Tax Indemnity Agreement [N633AS] dated June 22, 1995; and Nondisturbance and Recognition Agreement [N633AS] dated June 22, 1995. (Incorporated by reference to Exhibit 10(g) to ASA's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1995, file number 0-11097, filed with the Commission on February 23, 1996.) Confidential treatment has been granted by the Commission with respect to certain provisions in this exhibit. 10(y) Sublease Agreement [N634AS] dated as of June 22, 1995, between the Company and Antoine Finance Corporation and related Sublease Supplement [N634AS] dated June 22, 1995; Sublease Tax Indemnity Agreement [N634AS] dated June 22, 1995; and Nondisturbance and Recognition Agreement [N634AS] dated June 22, 1995. -vi- 40 (Incorporated by reference to Exhibit 10(h) to ASA's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1995, file number 0-11097, filed with the Commission on February 23, 1996.) Confidential treatment has been granted by the Commission with respect to certain provisions in this exhibit. 10(z) Sublease Agreement [N635AS] dated as of June 22, 1995, between the Company and Antoine Finance Corporation and related Sublease Supplement [N635AS] dated June 22, 1995; Sublease Tax Indemnity Agreement [N635AS] dated June 22, 1995; and Nondisturbance and Recognition Agreement [N635AS] dated June 22, 1995. (Incorporated by reference to Exhibit 10(i) to ASA's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1995, file number 0-11097, filed with the Commission on February 23, 1996.) Confidential treatment has been granted by the Commission with respect to certain provisions in this exhibit. 10(aa) Sublease Agreement [N636AS] dated as of June 22, 1995, between the Company and Antoine Finance Corporation and related Sublease Supplement [N636AS] dated June 22, 1995; Sublease Tax Indemnity Agreement [N636AS] dated June 22, 1995; and Nondisturbance and Recognition Agreement [N636AS] dated June 22, 1995. (Incorporated by reference to Exhibit 10(j) to ASA's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1995, file number 0-11097, filed with the Commission on February 23, 1996.) Confidential treatment has been granted by the Commission with respect to certain provisions in this exhibit. 10(ab) Sublease Agreement [N637AS] dated as of June 22, 1995, between the Company and Antoine Finance Corporation and related Sublease Supplement [N637AS] dated June 22, 1995; Sublease Tax Indemnity Agreement [N637AS] dated June 22, 1995; and Nondisturbance and Recognition Agreement [N637AS] dated June 22, 1995. (Incorporated by reference to Exhibit 10(k) to ASA's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1995, file number 0-11097, filed with the Commission on February 23, 1996.) Confidential treatment has been granted by the Commission with respect to certain provisions in this exhibit. 10(ac) Agreement to Lease Used British Aerospace 146 Series 200 Aircraft between British Aerospace Holdings, Inc. Asset Management Organization and the Company dated as of October 2, 1995. (Incorporated by reference to Exhibit 10(ac) to ASA's Annual Report on Form 10-K for the year ended December 31, 1995, file number 0-11097, filed with the Commission on April 1, 1996.) 10(ad) JetSpares Agreement, dated as of October 2, 1995, between British Aerospace Holdings, Inc., Avro International Aerospace Division, and ASA. (Incorporated by reference to Exhibit 10(ad) to ASA's Annual Report on Form 10-K for the year ended December 31, 1995, file number 0-11097, filed with the Commission on April 1, 1996.) -vii- 41 10(ae) Engine Maintenance Cost Protection Program Agreement between AlliedSignal, Inc., AlliedSignal Engines and the Company dated as of October 2, 1995. (Incorporated by reference to Exhibit 10(ae) to ASA's Annual Report on Form 10-K for the year ended December 31, 1995, file number 0-11097, filed with the Commission on April 1, 1996.) 10(af) Customer Support Agreement (ALF 502 Series TurboFan Engines) between AlliedSignal Aerospace-Engine Division and the Company dated as of October 2, 1995. (Incorporated by reference to Exhibit 10(af) to ASA's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, file number 0-11097, filed with the Commission on April 1, 1996.) 10(ag) 1990 Stock Appreciation Rights Plan of Atlantic Southeast Airlines, Inc. (Incorporated by reference to Exhibit 19(a) to ASA's Quarterly Report for the quarter ended June 30, 1990, file number 0-11097, filed with the Commission on August 13, 1990.)* 10(ah) Atlantic Southeast Airlines, Inc. Executive Deferred Compensation (Retirement) Plan dated May 15, 1990. (Incorporated by reference to Exhibit 19(b) to ASA's Quarterly Report for the quarter ended June 30, 1990, file number 0-11097, filed with the Commission on August 13, 1990.) First Amendment to Executive Deferred Compensation (Retirement) Plan dated December 31, 1992. (Incorporated by reference to Exhibit 10(s) to ASA's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, file number 0-11097, filed with the Commission on March 31, 1993.)* 10(ai) Founding Officer Agreement dated June 27, 1990, between ASA and George F. Pickett. (Incorporated by reference to Exhibit 19(c) to ASA's Quarterly Report for the quarter ended June 30, 1990, file number 0-11097, filed with the Commission on August 13, 1990.)* 10(aj) Founding Officer Agreement dated June 27, 1990, between ASA and John W. Beiser. (Incorporated by reference to Exhibit 19(d) to ASA's Quarterly Report for the quarter ended June 30, 1990, file number 0-11097, filed with the Commission on August 13, 1990.)* 10(ak) Atlantic Southeast Airlines, Inc. Supplemental Executive Retirement Plan effective May 24, 1995. (Incorporated by reference to Exhibit 10(a) to ASA's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, file number 0-11097, filed with the Commission on August 14, 1995.)* -viii- 42 10(al) Bombardier Purchase Agreement No. P.A.-0372 and related Letter Agreements. (Incorporated by reference to Exhibit 10(a) of the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997, file number 0-29558, filed with the Commission on August 14, 1997.) Confidential treatment has been applied for with respect to certain provisions in these exhibits. 10(am) ASA Holdings, Inc. 1997 Nonqualified Stock Option Plan (Incorporated by reference to Appendix A to the Company's Definitive Proxy Statement on Schedule 14A, file number 0-29558, filed with the Commission on May 17, 1997.)* 13 Those sections of the 1997 Annual Report to Shareholders of ASA Holdings, Inc. which are incorporated by reference in Items 5, 6, 7 and 8 of the Annual Report on Form 10-K. 21 Subsidiaries of the Registrant. 23 Consent of Independent Auditors. 24 Power of Attorney (Included on the signature page of this Form 10-K.) 27(a) Financial Data Schedule for the year ended December 31,1997. 27(b) Financial Data Schedule for the years ended December 31, 1996 and 1995. 99 Information required by Form 11-K with respect to the Atlantic Southeast Airlines, Inc. Investment Savings Plan will be filed as an amendment to this Form 10-K within 180 days after the end of the fiscal year of the plan as permitted by Rule 15d-21 under the Securities Exchange Act of 1934. * The referenced exhibit is a compensatory contract, plan or arrangement. -ix- EX-13 2 SECTIONS OF THE 1997 ANNUAL REPORT 1 EXHIBIT 13 SELECTED SECTIONS OF THE 1997 ANNUAL REPORT TO SHAREHOLDERS OF ASA HOLDINGS, INC. 2 ASA HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS
December 31, 1997 1996 ------------ ------------ ASSETS Current Assets Cash and cash equivalents $112,393,109 $137,468,791 Marketable securities 71,486,542 52,653,227 Receivables, less allowance for uncollectible accounts of $294,989 in 1997 and $204,347 in 1996 - Note K 6,662,587 6,552,616 Expendable parts, less allowance for obsolescence of $4,939,950 in 1997 and $4,202,742 in 1996 6,544,564 8,145,369 Other current assets 3,683,059 2,904,208 ------------ ------------ 200,769,861 207,724,211 Property and Equipment - Note B Flight equipment 468,666,479 456,809,305 Other property and equipment 16,766,413 15,515,205 Advance payments on property and equipment 26,167,400 136,342 ------------ ------------ 511,600,292 472,460,852 Less accumulated depreciation and amortization 231,045,066 203,180,823 ------------ ------------ 280,555,226 269,280,029 Other Assets Investments 11,777,109 -- Other 12,857,537 9,232,637 ------------ ------------ 24,634,646 9,232,637 ------------ ------------ TOTAL ASSETS $505,959,733 $486,236,877 ============ ============
See notes to consolidated financial statements. 3 ASA HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS
December 31, 1997 1996 ------------ ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current portion of long-term debt $ 21,851,783 $ 25,576,213 Accounts payable - Note K 25,410,523 18,402,087 Air traffic liability 2,407,711 4,345,769 Accrued compensation and related expenses 11,148,483 7,286,476 Accrued interest payable 1,057,520 1,318,550 Other accrued expenses 2,520,476 3,075,765 Income taxes payable 6,395,077 -- ------------ ------------- 70,791,573 60,004,860 Long-Term Debt - Note B 72,791,614 94,617,877 Other Non-Current Liabilities 2,231,668 1,763,471 Deferred Income Taxes - Note F 64,219,476 69,634,773 Commitments and Contingencies - Notes B, C and G Shareholders' Equity - Notes A, H and I Common stock, $.10 par; authorized - 150,000,000 shares; issued - 29,730,877 and 29,993,570 shares, respectively 2,973,088 2,999,357 Retained earnings 292,936,988 257,218,657 Unrealized holding gain (loss) on investments 15,326 (2,118) ------------ ------------- Total Shareholders' Equity 295,925,402 260,215,896 ------------ ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $505,959,733 $ 486,236,877 ============ =============
See notes to consolidated financial statements. 4 ASA HOLDINGS, INC. CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1997 1996 1995 ------------- ------------- ------------- REVENUES Operating Revenues: Passenger $ 378,167,801 $ 367,250,428 $ 318,360,153 Other 7,121,652 8,049,998 10,365,287 ------------- ------------- ------------- Total Operating Revenues 385,289,453 375,300,426 328,725,440 EXPENSES Operating Expenses: Flying operations 87,454,721 85,074,131 68,956,898 Maintenance 68,614,905 61,376,727 54,309,317 Passenger service 18,547,370 18,664,839 16,049,620 Aircraft and traffic servicing 45,551,823 45,390,058 40,229,297 Reservation, commission and other 38,529,361 39,344,575 32,148,818 General and administrative 17,590,431 12,078,785 13,159,314 Depreciation, amortization and obsolescence 28,686,264 27,534,057 27,695,335 Other 729,840 684,815 301,734 ------------- ------------- ------------- Total Operating Expenses (Including payments to Delta Air Lines, Inc. of $11.7, $11.9 and $9.6 million) 305,704,715 290,147,987 252,850,333 Income from Operations 79,584,738 85,152,439 75,875,107 Non-Operating (Income) Expenses: Interest: Income (10,920,403) (10,672,964) (11,997,712) Expense 3,834,454 5,862,866 7,609,317 Other, net (170,628) (1,143,983) (510,315) ------------- ------------- ------------- (7,256,577) (5,954,081) (4,898,710) Income before Income Taxes 86,841,315 91,106,520 80,773,817 Income Taxes - Note F: Current 37,744,997 34,058,554 26,289,595 Deferred (5,415,297) 435,246 3,346,805 ------------- ------------- ------------- 32,329,700 34,493,800 29,636,400 ------------- ------------- ------------- NET INCOME $ 54,511,615 $ 56,612,720 $ 51,137,417 ============= ============= ============= EARNINGS PER COMMON SHARE $ 1.82 $ 1.83 $ 1.55 ============= ============= ============= Weighted Average Number of Common Shares Outstanding 29,909,654 30,914,246 32,888,772 EARNINGS PER COMMON SHARE - DILUTED $ 1.81 $ 1.83 $ 1.55 ============= ============= ============= Weighted Average Number of Common Shares and Common Share Equivalents Outstanding 30,091,877 30,990,599 32,964,138
See notes to consolidated financial statements. 5 ASA HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997 1996 1995 ------------- ------------- ------------- OPERATING ACTIVITIES: Net Income $ 54,511,615 $ 56,612,720 $ 51,137,417 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation 27,351,713 26,518,027 26,794,942 Amortization and provision for obsolescence 1,334,551 1,016,030 900,393 Amortization of engine overhauls 7,381,705 6,656,680 7,710,438 Deferred income taxes (5,415,297) 435,246 3,346,805 Other 2,051,505 (107,722) (174,173) Changes in Operating Assets and Liabilities: Receivables (229,971) 5,187,991 (5,014,461) Expendable parts 863,596 (1,859,712) 640,194 Other assets (5,517,143) 742,274 (3,147,901) Accrued compensation and related expenses 4,330,204 983,488 3,014,807 Accrued interest payable (261,030) (1,622,461) (195,201) Other liabilities 4,515,089 (1,213,312) 10,971,435 Income taxes payable 6,395,077 -- (1,243,399) ------------- ------------- ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 97,311,614 93,349,249 94,741,296 INVESTING ACTIVITIES: Purchase of Marketable Securities (167,840,499) (189,882,992) (198,048,934) Proceeds from Sale of Marketable Securities 149,001,159 258,806,167 210,597,389 Purchases of Property and Equipment including Advance Payments (46,188,478) (15,321,851) (13,851,990) Purchase of Investments (11,777,109) -- -- Other 698,075 5,699,260 5,329,796 ------------- ------------- ------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (76,106,852) 59,300,584 4,026,261 FINANCING ACTIVITIES: Principal Payments on Long-Term Debt (25,550,693) (32,405,997) (28,264,141) Dividends Paid (11,969,851) (11,731,958) (11,203,992) Purchase of Common Stock (14,240,313) (37,445,781) (35,423,612) Proceeds from Exercise of Stock Options 5,480,413 -- -- ------------- ------------- ------------- NET CASH USED IN FINANCING ACTIVITIES (46,280,444) (81,583,736) (74,891,745) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (25,075,682) 71,066,097 23,875,812 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 137,468,791 66,402,694 42,526,882 ------------- ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 112,393,109 $ 137,468,791 $ 66,402,694 ============= ============= =============
See notes to consolidated financial statements. 6 ASA HOLDINGS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Capital in Common Stock Excess Retained Treasury Stock Shares Amount of Par Earnings Other Shares Amount ------------------------------------------------------------------------------------------------ Balance, January 1, 1995 34,363,707 $3,436,371 $ 45,238,051 $218,924,394 ($151,377) (1,140,000) ($19,977,188) Net Income 51,137,417 Dividends Paid (34c per share) (11,203,992) Exercise of Stock Appreciation Rights 22,963 2,296 649,296 Unrealized Holding Gain on Investments, Net 223,821 Purchase of Common Stock (1,543,100) (35,423,612) ------------------------------------------------------------------------------------------------ Balance, December 31, 1995 34,386,670 3,438,667 45,887,347 258,857,819 72,444 (2,683,100) (55,400,800) Net Income 56,612,720 Dividends Paid (38c per share) (11,731,958) Unrealized Holding Loss on Investments, Net (74,562) Purchase of Common Stock (1,710,000) (37,445,781) Cancellation of Treasury Stock (4,393,100) (439,310) (45,887,347) (46,519,924) 4,393,100 92,846,581 ------------------------------------------------------------------------------------------------ Balance, December 31, 1996 29,993,570 2,999,357 -- 257,218,657 (2,118) -- -- Net Income 54,511,615 Dividends Paid (40c per share) (11,969,851) Unrealized Holding Gain on Investments, Net 17,444 Purchase of Common Stock (541,000) (54,100) (7,362,780) (6,823,433) Exercise of Stock Options and Stock Appreciation Rights 278,307 27,831 7,362,780 ------------------------------------------------------------------------------------------------ Balance, December 31, 1997 29,730,877 $2,973,088 $ -- $292,936,988 $ 15,326 -- $ -- ================================================================================================
See notes to consolidated financial statements. 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Consolidation and Business: ASA Holdings, Inc. (ASA Holdings) is a holding company the principal assets of which are the shares of its wholly owned subsidiaries, Atlantic Southeast Airlines, Inc. (ASA) and ASA Investments, Inc. (ASA Investments). ASA Holdings became the parent holding company for ASA and ASA Investments pursuant to a corporate reorganization (the Reorganization) which was effective after the close of business on December 31, 1996. Pursuant to the Reorganization, ASA merged with a wholly owned subsidiary of ASA Holdings. As part of the merger, each issued and outstanding share of ASA's common stock (other than treasury stock, which was canceled) was converted into one share of ASA Holdings' common stock. Immediately after the merger on December 31, 1996, ASA effected a dividend to ASA Holdings of all of the capital stock of ASA Investments. As a result of the Reorganization, ASA and ASA Investments became wholly owned subsidiaries of ASA Holdings. There was no significant impact on the consolidated financial statements as a result of these transactions. All references to the Company contained herein refer collectively to ASA and its subsidiaries, ASA Holdings and ASA Investments, prior to December 31, 1996, and to ASA Holdings and its subsidiaries, ASA and ASA Investments, beginning December 31, 1996. All significant intercompany transactions have been eliminated. ASA, ASA Holdings' principal operating subsidiary, is a large regional airline serving airports in the Southeastern and Southwestern United States. ASA derives its revenues primarily through the air transportation of passengers and cargo in scheduled airline service under a marketing agreement with Delta Air Lines, Inc. (Delta). Under this agreement, ASA's flights are listed on reservation systems as connecting Delta flights. Delta Air Lines Holdings, Inc., a subsidiary of Delta, owns approximately 27% of ASA Holdings' common stock (See Note K). ASA Investments operates as an investment entity which manages cash assets contributed to it by ASA Holdings or its other subsidiaries. Use of Estimates: The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make 8 estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Such investments include municipal obligations, corporate commercial paper and overnight repurchase agreements. The Company believes that the credit risk is minimal. Marketable Securities and Investments: The Company's investment in marketable securities consists of debt instruments of U.S. Government agencies and municipal authorities, bank certificates of deposit, medium term notes and corporate commercial paper. All such marketable securities have a maturity of less than one year. Long-term investments consists of municipal bonds with a maturity of more than one year. All of these investments are classified as available for sale and reported at fair market value. Expendable Parts: Flight equipment expendable parts are valued at average cost less an allowance for obsolescence. Expendable parts are charged to maintenance expense as used. Property, Equipment and Depreciation: Flight equipment and other property and equipment are stated at cost. Major additions, betterments and renewals are capitalized. The Company capitalizes interest in connection with deposits made under aircraft acquisition agreements. During the year ended December 31, 1997, $1,137,000 of interest was capitalized. Depreciation of costs less estimated residual values is computed on the straight-line basis over the estimated useful lives of the related assets as follows: Flight equipment 3 - 20 years Other property and equipment 2 - 28 years
For income tax purposes, accelerated depreciation methods are used. Maintenance: Routine costs for aircraft and engine maintenance generally are expensed as incurred. The cost of major engine overhauls for aircraft is generally capitalized and amortized to maintenance expense over the estimated overhaul life. Intangibles: Excess of cost over fair value of tangible assets acquired is amortized by the straight-line method over a 40-year period. Also included 9 in other assets are deferred financing fees and deferred gate assignment costs. These deferred assets are amortized over periods from one to 20 years. Accumulated amortization for these intangible assets and deferred costs at December 31, 1997 and 1996 was $3,492,975 and $2,910,829, respectively. Also included in other assets is restricted cash which serves as collateral for a portion of ASA's financings (See Note B). The cost of routine development of new or extended routes and the pre-operating costs incurred in connection with aircraft acquisitions are charged to expense as incurred. Passenger Revenue Recognition: ASA issues Delta ticket stock for passenger sales. Passenger revenues are recognized at the time transportation is provided. ASA derives its revenues primarily from local fares and through fares. Local fares are those fares for one way and round trips that are not combined with the fare of another air carrier. Through fares are fares for transportation provided jointly by ASA and another carrier. Revenues derived from through fares are distributed among the participating air carriers using the straight rate prorate division method or agreed variations to this proration formula. Included in air traffic liability are cargo liabilities and amounts resulting from timing differences in billings with Delta. As a "Delta Connection" carrier, ASA participates in Delta's frequent flyer incentive program. ASA does not accrue for incremental costs associated with the program's mileage accumulation since the impact is immaterial both on a quarterly and annual basis. Income Taxes: The Company uses the liability method of accounting for income taxes. Deferred income taxes are provided for temporary differences in the recognition of income and expenses for financial reporting and income tax reporting. Earnings per Share: Statement of Financial Accounting Standards No. 128, "Earnings per Share," requires presentation of "Basic" and "Diluted" earnings per share amounts, as defined. "Basic" earnings per share replaces primary earnings per share under APB Opinion No. 15, and excludes the dilutive effects of options, warrants and convertible securities, if any, from the calculation. Fully diluted earnings per share has not changed significantly but has been renamed "Diluted" earnings per share. Statement No. 128 became effective for fiscal years ending after December 15, 1997. All earnings per share amounts prior to 1997 have been restated as required to comply with this Statement (See Note M). Recent Pronouncements: In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." 10 Statement No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements for periods beginning after December 15, 1997. The Statement requires that business segment financial information be reported in the financial statements utilizing the management approach. The management approach is defined as the manner in which managment organizes the segments within the enterprise for making operating decisions and assessing performance. Management believes that the adoption of Statement No. 131 will not have a material impact on the financial statements. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and displaying comprehensive income, as defined, and its components in financial statements issued for fiscal years beginning after December 15, 1997. Management believes that the adoption of Statement No. 130 will not have a material impact on the financial statements. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," encourages companies to recognize expense for stock-based awards based on their fair value on the date of grant. At a minimum, Statement No. 123 requires pro forma disclosures beginning with the Company's 1996 financial statements. The Company elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations and provide the necessary disclosures required by Statement No. 123, rather than adopt the expense recognition provisions of this Statement (See Note I). Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company adopted Statement No. 121 in the first quarter of 1996 and the effect of adoption was not significant. 11 NOTE B - LONG-TERM DEBT ASA's long-term debt was as follows:
DECEMBER 31, 1997 1996 ---- ---- Notes payable to banks. ASA pledged aircraft and support equipment with a net book value of $20,286,435 as collateral. Payments are due in semi-annual installments of $1,651,462 plus interest at 6.5% to 1999. $3,409,280 $9,648,266 Notes payable to banks. ASA pledged aircraft and support equipment with a net book value of $16,119,138 as collateral. Payments are due in semi-annual installments of $1,262,363 plus interest at 6.125% to 6.5% to 1999. 3,856,556 6,837,627 Notes payable to banks. ASA pledged aircraft and support equipment with a net book value of $6,310,578 as collateral. Payments are due in quarterly installments of $259,663 plus interest at 7% to 1999. 1,817,634 2,856,285 Notes payable to bank. ASA pledged aircraft and support equipment with a net book value of $10,744,021 as collateral. Payments are due in semi-annual installments of $788,902 plus interest at 5.35% to 5.7875% to 2000. 4,470,410 6,048,214 Floating rate note payable to bank. ASA pledged aircraft and support equipment with a net book value of $3,805,423 as collateral. Payments are due in semi-annual installments of $264,615 plus interest based on floating six month LIBOR to 2000. Rate at December 31, 1997 was 6.4688%. 1,587,690 2,116,920 Floating rate note payable to bank. ASA pledged a Euro-time deposit of an equal amount as collateral. Payments are due in semi-annual installments of $264,927 plus interest based on floating six month LIBOR to 2000. Rate at December 31, 1997 was 6.7438%. 1,589,556 2,119,411
12 Floating rate notes payable to bank. ASA pledged aircraft and support equipment with a net book value of $15,847,223 as collateral. Payments are due in semi-annual installments of $1,069,328 plus interest based on floating six month LIBOR to 2001. Rates at December 31, 1997 were 6.69375% or 6.725%. 7,485,289 9,623,945 Floating rate notes payable to bank. ASA pledged aircraft and support equipment with a net book value of $16,200,748 as collateral. Payments are due in semi-annual installments of $1,051,214 plus interest based on floating six month LIBOR to 2002. Rates at December 31, 1997 were 6.45%. 7,879,428 9,981,855 Floating rate notes payable to bank. ASA pledged aircraft and support equipment with a net book value of $45,567,411 as collateral. Payments are due in semi-annual installments of $2,727,239 plus interest based on floating six month LIBOR to 2003. Rates at December 31, 1997 were 6.4688% or 6.5313%. 28,392,338 33,846,816 Floating rate notes payable to bank. ASA pledged aircraft and support equipment with a net book value of $40,543,683 as collateral. Payments are due in mortgage style semi-annual installments estimated at $1,548,395 (subject to change) plus interest based on floating six month LIBOR to 2006. Rates at December 31, 1997 were 6.125% to 6.40625%. 34,155,216 37,114,751 ----------- ------------ 94,643,397 120,194,090 Less current portion 21,851,783 25,576,213 ----------- ------------ $72,791,614 $ 94,617,877 ----------- ------------
As of December 31, 1997, maturities on long-term debt were: 1998 $21,851,783 1999 18,652,589 2000 15,369,419 2001 11,626,789 2002 9,749,654 After 2002 17,393,163 ----------- $94,643,397 -----------
Certain of ASA's credit agreements contain restrictive covenants that, among other things, limit the sale or lease of assets and the acquisition of stock of other entities; establish a minimum ratio of total liabilities to tangible net worth; and require maintenance of minimum tangible net worth 13 and funds flow coverage. In addition, the transfer of funds by ASA in the form of cash dividends, loans or advances is limited solely to the extent that the payment of such transfers would cause ASA to breach other financial covenants. ASA Holdings and ASA Investments are not subject to the restrictive covenants of ASA's credit agreements, except to the extent that ASA is restricted in its ability to transfer funds to ASA Holdings or ASA Investments in the form of cash dividends, loans or advances. At December 31, 1997, approximately $27 million of net assets was available for distribution by ASA to ASA Holdings under the most restrictive of these provisions. ASA has negotiated to receive interest rate subsidies on certain indebtedness through the export support program of the Federative Republic of Brazil. Outstanding debt aggregating $60,488,179 at December 31, 1997 is subject to subsidy payments which reduce the stated interest rates on such debt to an average of approximately 3.36%. However, subsidies on an aggregate of $56,017,766 of such outstanding debt are at risk to ASA if the Federative Republic of Brazil does not meet its obligations under the export support program. For the remaining debt that is subject to such subsidies, the lenders have assumed such risk by building such subsidy payments into ASA's payment obligations. During 1997, 1996 and 1995, ASA reduced its interest expense by $2,175,601, $2,826,564 and $3,726,620, respectively, as a result of these interest rate subsidies. The amount of net interest paid during 1997, 1996 and 1995 was $5,075,122, $7,314,112 and $7,446,255, respectively. As indicated above, ASA is at risk with respect to certain of these subsidy payments. While the Company has no reason to believe, based on information currently available to it, that ASA will not continue to receive such subsidy payments from the Federative Republic of Brazil in the future, there can be no assurance that a default will not occur under the export support program. NOTE C - AIRCRAFT COMMITMENTS On April 21, 1997, ASA announced that it had executed an acquisition agreement with Bombardier, Inc. for 30 Canadair Regional Jet aircraft (CRJ) aggregating approximately $600 million with options to acquire an additional 60 aircraft. ASA took delivery of its first five 50-passenger CRJ aircraft in the second half of 1997 through operating leases with 16.5 year terms. ASA obtained a commitment from the Export Development Corporation (EDC) of Canada to provide financing to ASA for up to approximately 85% of the purchase price of each of the CRJs. This facility, 14 which ASA is not obligated to use for its acquisition of all or any of the CRJs, is available on an aircraft by aircraft basis in the form of either direct loans or leases, with interest payable at various interest rate options determined by reference to either U.S. treasury rates or LIBOR, and on various repayment terms. ASA has arranged to acquire its next five CRJs under operating lease arrangements. Thereafter, future deliveries of the remaining 20 CRJs are anticipated to be at an approximate rate of one aircraft per month and the financing arrangements have not yet been determined. NOTE D - LINES OF CREDIT ASA has an $8,000,000 bank line of credit available at LIBOR plus .4%. This line of credit expires in February 1999 and is renewed annually. At December 31, 1997 and 1996, there was $.7 million of this line committed to support a letter of credit. The remainder is available for general working capital purposes on an as needed basis. At December 31, 1997 and 1996, there were no outstanding amounts under this line of credit. NOTE E - INTEREST RATE RISK MANAGEMENT ASA, upon its determination of the nature of financing for aircraft acquisitions, may enter into interest rate lock agreements in order to fix the underlying interest rate index upon which the financing rate is determined. At December 31, 1997, such agreements with a notional amount of $85 million effectively had fixed rates between 7.06% and 7.10%. Under these arrangements, the Company makes or receives payments based upon the differential between a specified rate and a market interest rate on a notional principal amount on a certain date. The fair value to ASA of the interest rate lock agreements at December 31, 1997 was $(2.3 million), based on interest rates in effect at December 31, 1997. At December 31, 1997, the Company had approximately $4 million related to settled interest rate lock agreements which are being amortized over the term of the related financing. NOTE F - INCOME TAXES Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred income tax liabilities and assets as of 15 December 31, 1997 and 1996 are as follows: 1997 1996 ---- ---- Deferred income tax liabilities: Tax over book depreciation $69,569,768 $72,736,336 Other 737,973 110,225 ----------- ----------- Total deferred income tax liabilities 70,307,741 72,846,561 Deferred income tax assets: Accounts receivable and inventory reserves 1,156,869 749,755 Other 4,931,396 2,462,033 ----------- ----------- Total deferred income tax assets 6,088,265 3,211,788 ----------- ----------- Net deferred income tax liabilities $64,219,476 $69,634,773 ----------- -----------
For financial reporting purposes, the provision for income taxes includes the following components for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995 ------------ ----------- ----------- Federal: Current $ 34,347,947 $30,993,254 $23,397,695 Deferred (4,927,897) 396,046 2,978,705 ------------ ----------- ----------- 29,420,050 31,389,300 26,376,400 ------------ ----------- ----------- State: Current 3,397,050 3,065,300 2,891,900 Deferred (487,400) 39,200 368,100 ------------ ----------- ----------- 2,909,650 3,104,500 3,260,000 ------------ ----------- ----------- $ 32,329,700 $34,493,800 $29,636,400 ------------ ----------- -----------
16 A reconciliation of the provision for income taxes at the applicable federal statutory income tax rate to the income tax expense as reported is as follows for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995 ------------ ----------- ------------ Income tax expense, at statutory rate $ 30,394,460 $31,887,282 $ 28,270,836 State income taxes, net of federal tax benefit 1,978,194 2,004,211 2,160,835 Other (42,954) 602,307 (795,271) ------------ ----------- ------------ Income tax expense $ 32,329,700 $34,493,800 $ 29,636,400 ------------ ----------- ------------
In 1997, ASA received a tax refund related to certain amended prior years' state tax returns and, accordingly, reduced income tax expense by approximately $500,000. In 1995, certain prior years' income tax audits were resolved and the Company reduced its tax liabilities and deferred tax expense by approximately $1.3 million. The Company paid income taxes in the amount of $32,384,060 in 1997, $33,389,841 in 1996 and $27,259,730 in 1995. NOTE G - COMMITMENTS AND CONTINGENCIES ASA's current fleet includes the following aircraft under operating leases:
INITIAL NON-CANCELLABLE # OF AIRCRAFT TYPE OF AIRCRAFT LEASE TERM - ------------- ---------------- --------------- 8 ATR-72 7 years 4 EMB-120 3.1 - 4.4 years 8 CRJ 16.5 years
ASA leases facilities from local airport authorities or other carriers as well as office space for its corporate headquarters and hangar facilities. These leases are operating leases and have terms ranging from one month to 21 years. Total rental expense on operating leases for the years ended December 31, 1997, 1996 and 1995 was $25,695,796, $24,041,093 and $17,591,292, respectively. 17 Minimum future lease payments under all non-cancellable operating leases are as follows: 1998 $21,622,080 1999 20,245,026 2000 19,264,045 2001 18,936,876 2002 13,988,644 After 2002 118,771,781 ------------ $212,828,452 ------------
Approximately 27% of ASA's workforce are members of the unions representing pilots and flight attendants. In 1995, collective bargaining agreements with unions representing both the flight attendants and pilots became amendable. In September 1997, following direct negotiations and federal mediation, ASA and the flight attendants' union entered into a new collective bargaining agreement that is amendable in 2002. In September 1995, ASA and the union representing its pilots entered into negotiations for a new collective bargaining agreement. In 1996, ASA and the pilots' union entered federal mediation with respect to those negotiations which continued throughout 1997. In January 1998, ASA and the pilots' union reached a tentative agreement on a new 54-month collective bargaining agreement, pending ratification of the agreement by the pilots. In March 1998, the members of the pilots' union voted to reject the tentative accord, and management expects negotiations with the pilots' union to continue under the auspices of the National Mediation Board. The existing collective bargaining agreement between ASA and the pilots' union will remain in effect until a new agreement is reached and ratified or until the procedures of the Railway Labor Act, which governs labor relations of air carriers and employees in the airline industry, are exhausted. There can be no assurance that ASA will be able to settle contract negotiations, if at all, without wage increases, work rule changes or other provisions that could have a material adverse effect on the Company's operations or financial performance. In addition, any cessation or disruption of operations due to any strike or work action could have a material adverse effect on the Company and its financial performance. NOTE H - DIVIDENDS AND COMMON STOCK TRANSACTIONS Pursuant to its stock repurchase programs, the Company purchased $14,240,000, $37,446,000 and $35,424,000 of its common stock in 1997, 1996 and 1995, respectively. In February 1998, ASA Holdings announced that its Board of Directors authorized the repurchase of up to an additional $50,000,000 of its common stock on the open market during 1998. 18 During 1997, the Company paid a total of $11,969,851 in dividends at 10 cents per share per quarter. In February 1998, the Company's Board of Directors increased the regular quarterly cash dividend to 11 cents per share. NOTE I - STOCK PLANS In May 1997, the shareholders of ASA Holdings approved the adoption of a Nonqualified Stock Option Plan (Option Plan). In connection with the adoption of the Option Plan, the Stock Appreciation Rights (SARs) Plan was terminated and all SARs outstanding on May 21, 1997 were canceled, in exchange for options covering the same number of shares with the same exercise prices and expiration dates. Grants of options are made by a committee of the Board of Directors of ASA Holdings and the exercise price is set at the time of each option grant. SARs transactions are as follows:
NUMBER OF SARS GRANT PRICE -------------- --------------- Outstanding at January 1, 1995 529,700 $17.13 - $36.75 Exercised (150,300) 21.13 Granted 411,000 17.13 ---------- -------------- Outstanding at December 31, 1995 790,400 17.13 - 36.75 Exercised -- -- Granted -- -- ---------- -------------- Outstanding at December 31, 1996 790,400 17.13 - 36.75 Exercised (10,000) 17.13 Granted 414,100 22.38 Granted 53,600 21.25 ---------- --------------- Canceled at May 21, 1997 1,248,100 $17.13 - $36.75 ---------- ---------------
19 Option transactions are as follows:
NUMBER WEIGHTED AVERAGE OF OPTIONS EXERCISE PRICE ---------- ---------------- Granted at May 21, 1997 1,248,100 $23.18 Exercised (276,900) 19.79 --------- ------ Outstanding at December 31, 1997 971,200 $24.14 --------- ------
The following table summarizes information about stock options outstanding at December 31, 1997:
DATE OF GRANT NUMBER OF OPTIONS EXERCISE PRICE - ------------- ----------------- --------------- May 21, 1997 235,700 $36.75 May 21, 1997 375,300 $22.38 May 21, 1997 53,600 $21.25 May 21, 1997 306,600 $17.13 ------- --------------- Total 971,200 $17.13 - $36.75 ------- ---------------
The weighted average remaining contractual life of the options outstanding at December 31, 1997 was 2.7 years. Of the 971,200 options outstanding at December 31, 1997, 946,075 were fully vested and exercisable at prices from $17.13 through $36.75. At May 21, 1997, the Company reserved 2,500,000 shares of common stock for issuance under the Option Plan. At December 31, 1997, 1,251,900 shares remained available for future grants. In February 1998, an additional 391,800 options were granted under the Option Plan at an exercise price of $40.63. During 1997, SARs increased expense by approximately $2,600,000. The SARs expense of $2,600,000 was reversed upon cancellation of the SARs, but an equivalent amount of compensation expense related to the new options issued under the Option Plan was recorded due to the one-time issuance of options with exercise prices less than the market price of the Company's stock on May 21, 1997. In 1996 and 1995, SARs increased expense by approximately $729,000 and $2,416,000, respectively. In connection with the exercise of SARs, the Company made cash payments of $21,018 and issued 1,407 shares of common stock in 1997, and made cash payments of $434,445 and issued 22,963 shares of common stock in 1995. 20 As indicated in Note A, the Company elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its SARs. However, Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," requires pro forma information regarding net income and earnings per share as if the Company had accounted for its SARs/options granted subsequent to December 31, 1994 under the fair value method of that Statement. The fair value of these SARs/options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions for grants made in 1995 and 1997: a risk-free interest rate of 6%; a dividend yield of 2%; a volatility factor of the expected common stock market price of .472 and .41, respectively; and a weighted-average expected life of the SARs/options of five years. The fair values of the SARs/options granted in 1997 were $8.41 and $7.99. The fair value of the SARs granted in 1995 was computed to be $7.11. No SARs or stock options were granted in 1996. 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 employee stock options and previous SARs have characteristics significantly different from those of traded options and 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 or previous SARs. For purposes of pro forma disclosures, the estimated fair value of the SARs/options is amortized over the relevant vesting period. The Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands except per share information):
1997 1996 ------- ------- Net Income - as reported $54,512 $56,613 Net Income - pro forma $52,883 $56,524 Earnings per Common Share - Diluted as reported $ 1.81 $ 1.83 Earnings per Common Share - Diluted pro forma $ 1.76 $ 1.82
21 NOTE J - EMPLOYEE BENEFIT PLANS All employees of the Company who have completed one year of employment are generally eligible to participate in ASA's Investment Savings Plan. For each dollar of salary reduction elected by an employee (up to 6% of an employee's earnings), the Company has made a matching contribution of 20 cents to 50 cents (depending on the number of years of participation for each participant). The amounts contributed by the Company for 1997, 1996 and 1995 were approximately $882,000, $920,000 and $915,000, respectively. The Company has an Executive Deferred Compensation Plan for certain employees, as designated by a committee of the Board of Directors. The Company contributes from 10% to 15% of each participant's base salary to the plan. Approximately $120,000, $126,000 and $122,000 were contributed in 1997, 1996 and 1995, respectively. The Company has a Supplemental Executive Retirement Plan (SERP). The SERP provides supplemental retirement income to certain key executive employees at the time of their retirement or termination of employment from the Company, on or after the attainment of age 55. During 1997, 1996 and 1995, respectively, the Company recorded expense of approximately $160,000, $142,000 and $131,000 related to the SERP. At December 31, 1997 and 1996, respectively, other non-current liabilities included approximately $1,219,000 and $913,000 related to the SERP. The Company has no material liability for post-retirement or post-employment benefits under Statements of Financial Accounting Standards No. 106 and 112. NOTE K - RELATED PARTY TRANSACTIONS Delta Air Lines Holdings, Inc. (a subsidiary of Delta) owns 7,995,000 shares or approximately 27% of ASA Holdings' outstanding common stock. ASA leases reservation equipment and certain terminal facilities from Delta and Delta provides certain services to ASA including reservation and ground handling services. Expenses under these agreements were approximately $11,686,000 in 1997, $11,883,000 in 1996, and $9,642,000 in 1995. Other information related to Delta is as follows: 22
1997 1996 ---------- ---------- Accounts Receivable from Delta at December 31: $ 205,000 $ 121,000 Accounts Payable to Delta at December 31: $1,725,000 $1,747,000
Given ASA's relationship with Delta, ASA's results of operations and financial condition may be favorably or adversely impacted by Delta's decisions regarding its flight routes and other operational matters. ASA's flight schedules are structured to facilitate the connection of its passengers with Delta flights at ASA's Atlanta and Dallas/Fort Worth hubs. ASA has historically benefited from its relationship with Delta, but there can be no assurance that such benefits will continue in the future. NOTE L - MARKETABLE SECURITIES AND FAIR VALUE INFORMATION The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amount reported in the balance sheets for cash and cash equivalents approximates its fair value. Marketable securities and long-term investments: Short-term investments in marketable securities are classified as available for sale and reported at fair value (estimated based on quoted market prices). Gross unrealized holding losses of $9,457 as of December 31, 1997 and $3,432 as of December 31, 1996 are reflected as adjustments to shareholders' equity, net of related income taxes. Realized gains and losses other than interest income were not material. Long-term investments are classified as available for sale and reported at fair value (estimated based on quoted market prices). The gross unrealized holding gain of $33,034 as of December 31, 1997 is reflected as an adjustment to shareholders' equity, net of related income taxes. The maturity of these investments range from July 1998 to February 1999. Long-term debt: The fair values of the Company's long-term debt are estimated using discounted cash flow analyses, based on the Company's estimate of current borrowing rates for credit facilities with maturities 23 which approximate the weighted average maturities for its existing long-term debt. Off-balance sheet financial instruments: The Company receives interest rate subsidies on certain long-term debt instruments (See Note B). The fair values of these off-balance sheet instruments are estimated using discounted cash flow analyses based on the Company's estimate of current borrowing rates. The Company also has outstanding interest rate lock agreements (See Note E). The carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1997 and 1996 are as follows:
CARRYING AMOUNTS ESTIMATED FAIR VALUE 1997 1996 1997 1996 ------------- ------------- ------------- ------------- Cash and cash equivalents $ 112,393,109 $ 137,468,791 $ 112,393,109 $ 137,468,791 Marketable securities 71,486,542 52,653,227 71,486,542 52,653,227 Long-term investments 11,777,109 -- 11,777,109 -- Total long-term debt (including current maturities) (94,643,397) (120,194,090) (94,608,577) (119,894,051) Off-balance sheet financial instruments -- -- 1,478,273 5,700,053
24 NOTE M - EARNINGS PER COMMON SHARE The following table sets forth the computation of earnings per common share:
1997 1996 1995 ----------- ----------- ----------- Numerator: Net Income $54,511,615 $56,612,720 $51,137,417 ----------- ----------- ----------- Denominator: For Earnings per Common Share: Weighted Average Common Shares Outstanding 29,909,654 30,914,246 32,888,772 Effect of Dilutive Securities: Stock Options/SARs 182,223 76,353 75,366 ----------- ----------- ----------- For Earnings per Common Share - Diluted: Weighted Average Common Shares and Share Equivalents Outstanding 30,091,877 30,990,599 32,964,138 ----------- ----------- ----------- Earnings per Common Share $ 1.82 $ 1.83 $ 1.55 ----------- ----------- ----------- Earnings per Common Share - Diluted $ 1.81 $ 1.83 $ 1.55 ----------- ----------- -----------
SARs/options to purchase 235,700 shares of common stock at $36.75 per share were outstanding during 1997, 1996 and 1995, but were not included in the computation of diluted earnings per share because the exercise price of the SARs/options was greater than the average market price of the common shares and, therefore, the effect would be antidilutive. In February 1998, the Company issued an additional 391,800 options at an exercise price of $40.63. 25 REPORT OF INDEPENDENT AUDITORS Shareholders and Board of Directors ASA Holdings, Inc. We have audited the accompanying consolidated balance sheets of ASA Holdings, Inc. as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ASA Holdings, Inc. at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Atlanta, Georgia January 30, 1998, except for the last paragraph of Note G, as to which the date is March 12, 1998 26 ASA HOLDINGS, INC. REPORT OF MANAGEMENT The management of ASA Holdings, Inc. is responsible for the preparation, content, integrity and objectivity of the financial statements and other information presented in this report. The financial statements, which were prepared in conformity with generally accepted accounting principles applied on a consistent basis, have been audited by Ernst & Young LLP, independent auditors. The Company maintains a system of internal controls that provides reasonable assurance as to the integrity and reliability of the financial statements, that its assets are safeguarded against loss or unauthorized use and that fraudulent financial reporting is prevented and detected. The Board of Directors pursues its responsibilities through its Audit Committee composed entirely of directors who are not employees of the Company. The Audit Committee meets periodically and privately with the Company's independent auditors and Company management to review accounting, auditing, internal control and financial reporting matters. /s/ George F. Pickett - ------------------------------- GEORGE F. PICKETT Chairman of the Board and Chief Executive Officer /s/ Ronald V. Sapp - ------------------------------- RONALD V. SAPP Chief Financial Officer and Senior Vice President - Finance 27 ASA HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Annual Report, including the Management's Discussion and Analysis which follows, contains forward-looking statements in addition to historical information, including but not limited to statements regarding the Company's current views with respect to future events, trends, market conditions and financial performance. Such forward-looking statements are subject to certain factors that could cause actual results to differ materially from historical results or anticipated events, trends or results. These factors include, but are not limited to, material changes in the Company's relationship with Delta Air Lines, Inc. (Delta); the cost and supply of aviation fuel; the acquisition and phase-in of new aircraft; competitive pressures on pricing; changes in regulations affecting the Company; and seasonal factors and general economic conditions affecting demand for air transportation. These and other factors affecting the Company's future performance are further detailed in publicly available reports filed from time to time by the Company with the Securities and Exchange Commission, such as the Company's Annual Report on Form 10-K for the year ended December 31, 1997. Reorganization ASA Holdings, Inc. (ASA Holdings) is a holding company the principal assets of which are the shares of its wholly owned subsidiaries Atlantic Southeast Airlines, Inc. (ASA) and ASA Investments, Inc. (ASA Investments). ASA Holdings became the parent holding company for ASA and ASA Investments pursuant to a corporate reorganization (the Reorganization), which was effective after the close of business on December 31, 1996. 28 Pursuant to the Reorganization, ASA merged with a wholly owned subsidiary of ASA Holdings. As part of the merger, each issued and outstanding share of ASA's common stock (other than treasury stock, which was canceled) was converted into one share of ASA Holdings' common stock. Immediately after the merger on December 31, 1996, ASA effected a dividend to ASA Holdings of all of the capital stock of ASA Investments. As a result of the Reorganization, ASA and ASA Investments became wholly owned subsidiaries of ASA Holdings. ASA Holdings considers the airline business of ASA to be its only industry segment. There was no significant impact on the consolidated financial statements as a result of these transactions. All references to the Company contained in this section refer collectively to ASA and its subsidiaries, ASA Holdings and ASA Investments, prior to December 31, 1996, and to ASA Holdings and its subsidiaries, ASA and ASA Investments, beginning December 31, 1996. All significant intercompany transactions have been eliminated. ASA's material lenders consented to the Reorganization where ASA's credit agreements made such consent necessary. In addition, during 1996 ASA renegotiated the restrictive covenants in its credit agreements. The renegotiated credit agreements currently contain restrictive covenants that, among other things, limit the sale or lease of assets and the acquisition of stock of other entities; establish a minimum ratio of total liabilities to tangible net worth; and require maintenance of minimum tangible net worth and funds flow coverage. In addition, the transfer of funds by ASA in the 29 form of cash dividends, loans or advances is limited solely to the extent that such transfers would cause ASA to breach other financial covenants. ASA Holdings and ASA Investments are not subject to the restrictive covenants of ASA's credit agreements except to the extent that ASA is restricted in its ability to transfer funds to ASA Holdings or ASA Investments in the form of cash dividends, loans or advances. Liquidity and Capital Resources The Company's working capital decreased to $130.0 million with a current ratio of 2.8 at December 31, 1997 compared with working capital of $147.7 million and a current ratio of 3.5 at December 31, 1996. At December 31, 1997, the Company had $11.8 million of long-term investments which were previously invested in instruments with short-term maturities. During 1997, ASA paid $25 million in pre-delivery deposits on 30 Canadair Regional Jet aircraft (CRJ) which it is acquiring from Bombardier, Inc. (Bombardier), as more fully described below. Without these two factors, working capital would have been $166.8 million with a current ratio of 3.4. Cash, cash equivalents and investments in marketable securities decreased $6.2 million in 1997 primarily due to a $46.2 million investment in property and equipment ($25 million of which was CRJ pre-delivery deposits), $11.8 million of long-term investments, $25.6 million in principal payments on long-term debt, $12.0 million of dividends paid and $14.2 million of treasury stock purchases, offset by $97.3 million in cash provided by operating activities and $5.5 million from the exercise of stock options. ASA has an unsecured line of credit totaling $8 million with one of its banks. At December 31, 1997, $.7 million of this line was committed to 30 support a letter of credit. The remainder is available for general working capital purposes on an as needed basis. At December 31, 1997, there were no outstanding amounts against the line of credit. Management believes that, as a result of the Reorganization, borrowings from banks, other financial institutions or the securities markets are available to ASA Holdings on substantially the same terms as were available to ASA prior to the Reorganization. ASA Holdings also can borrow money directly and use it internally or contribute it to ASA or any other subsidiary. In addition, any of the subsidiaries can borrow money independently. Total assets were up by $19.7 million at December 31, 1997 primarily due to an $11.3 million increase in net property and equipment. Flight equipment was higher by $11.9 million primarily due to purchases related to the Company's acquisition of a new aircraft type, the CRJ. As mentioned above, advance payments were higher by $26.0 at December 31, 1997 primarily due to the $25 million pre-delivery deposits on 30 CRJ aircraft. This $39.1 million increase in property and equipment was offset by an increase of $27.9 million in accumulated depreciation. Current liabilities increased by $10.8 million to $70.8 million at December 31, 1997 compared with $60.0 million at December 31, 1996. This increase was primarily due to $2.2 million of additional accounts payable related to common stock repurchases and a $6.4 million increase in income taxes payable due to the reversal of temporary differences and the timing of estimated tax payments. These increases were offset by a decrease in the current portion of long-term debt of $3.7 million, which consisted of debt payments of $4.3 million offset by a $.6 million reclassification from current maturities to long-term debt. 31 The Company's percentage of long-term debt to equity decreased to 25% at December 31, 1997 compared with 36% at the end of 1996. Long-term debt decreased by $21.8 million due to $21.2 million of long-term debt payments and the reclassification of $.6 million from current maturities to long-term debt. Thirty-six EMB-120 Brasilia aircraft and four ATR-72 aircraft, as well as a significant portion of ASA's spare parts, are pledged to secure long-term debt. Current maturities of long-term debt, aircraft lease payments, costs of compliance with FAA directives and other capital expenditures were funded from the Company's cash reserves and internally generated funds during fiscal 1997. Shareholders' equity per share increased to $9.95 at December 31, 1997 from $8.68 at the end of 1996. Net worth increased $35.7 million in 1997 primarily due to earnings of $54.5 million and $7.4 million from the exercise of stock options, offset by $12.0 million of dividends paid and $14.2 million of common stock repurchases. During 1996, ASA renegotiated the restrictive covenants in its credit agreements. See "Reorganization" above. ASA Holdings and ASA Investments are not subject to the restrictive covenants in ASA's credit agreements except to the extent that ASA is restricted in its ability to transfer funds to ASA Holdings or ASA Investments in the form of cash dividends, loans or advances. ASA's dividend to ASA Holdings of all of the shares of ASA Investments' capital stock in connection with the 32 Reorganization provided ASA Holdings with net assets that are free of the restrictive covenants in ASA's credit agreements. Approximately $27 million of net assets was available at December 31, 1997, for distribution by ASA to ASA Holdings under the most restrictive of these agreements. The net number of shares of common stock outstanding decreased by .3 million to 29.7 million at December 31, 1997 compared with the number outstanding at December 31, 1996. The number of shares decreased by 541,000 due to the repurchase of common stock, offset by 278,307 shares issued in connection with the exercise of stock options. ASA's Board of Directors authorized ASA to repurchase up to $50.0 million of its common stock on the open market at any time on or before December 31, 1995 and up to an additional $50.0 million of ASA common stock during 1996. During 1995 and 1996, respectively, ASA repurchased approximately $35.4 million and $37.4 million of its common stock. All of the repurchased shares of common stock were held as treasury stock. In connection with the Reorganization on December 31, 1996, all of the shares of ASA treasury stock were canceled. In January 1997, ASA Holdings' Board of Directors authorized the Company to repurchase up to $50.0 million of its common stock on the open market at any time on or before December 31, 1997. Pursuant to this repurchase program, ASA Holdings repurchased approximately $14.2 million of its common stock during 1997. In February 1998, ASA Holdings announced that its Board of Directors authorized the repurchase of up to an additional $50.0 million of its common stock on the open market during 1998. The repurchased shares will be held as treasury stock and used for general corporate purposes or will be canceled. Repurchases are subject to market conditions. The Company paid dividends 33 in the amount of $12.0 million, $11.7 million and $11.2 million on its outstanding stock in 1997, 1996 and 1995, respectively. On April 21, 1997, ASA announced that it had executed an acquisition agreement with Bombardier for 30 CRJ aircraft with options for an additional 60 CRJ aircraft. The CRJ is a 50-passenger jet with four-abreast seating that ASA will use to promote growth in new markets as well as replace some turboprop equipment on existing routes. The value of the 30 aircraft, including spare parts and spare engines, will be approximatley $600 million. ASA took delivery of its first five CRJ aircraft in the second half of 1997 through operating leases with 16.5 year terms. ASA obtained a commitment from the Export Development Corporation (EDC) of Canada to provide financing to ASA for up to approximately 85% of the purchase price of each of the CRJs. This facility, which ASA is not obligated to use for its acquisition of all or any of the CRJs, is available on an aircraft by aircraft basis in the form of either direct loans or leases, with interest payable at various interest rate options determined by reference to either U.S. treasury rates or LIBOR, and on various repayment terms. The EDC facility was used to provide financing for the first five CRJs acquired from Bombardier. ASA has arranged to acquire its next five CRJs under similar operating lease arrangements with EDC, but is not committed to future financing through the EDC facility and will determine the method or source for financing the additional CRJs at the time of each acquisition based upon a consideration of various factors, such as prevailing conditions in the aircraft financing markets and ASA's operations and other capital needs. ASA may finance the CRJs as well as other anticipated expenditures through a combination of existing cash reserves, internally generated funds and lease and debt financing. Given the nature of the considerations relevant to the 34 determination of the most advantageous form of financing at a given time, the Company cannot predict with any certainty the anticipated amount of funds which may be provided from such possible financing sources. Approximately 27% of ASA's workforce are members of the unions representing pilots and flight attendants. In 1995, collective bargaining agreements with both of these unions became amendable. In September 1997, following direct negotiations and federal mediation, ASA and the flight attendants' union entered into a new collective bargaining agreement that is amendable in 2002. In September 1995, ASA and the union representing its pilots entered into negotiations for a new collective bargaining agreement. In 1996, ASA and the pilots' union entered federal mediation with respect to those negotiations, which continued through 1997. In January 1998, ASA and the pilots' union reached a tentative agreement on a new 54-month collective bargaining agreement, pending ratification of the agreement by the pilots. In March 1998, the members of the pilots' union voted to reject the tentative accord, and management expects negotiations with the pilots' union to continue under the auspices of the National Mediation Board. The existing collective bargaining agreement between ASA and the pilots' union will remain in effect until a new agreement is reached and ratified or until the procedures of the Railway Labor Act, which governs labor relations of air carriers and employees in the airline industry, are exhausted. There can be no assurance that ASA will be able to settle contract negotiations, if at all, without wage increases, work rule changes or other provisions that could have a material adverse effect on the Company's operations or financial performance. In addition, any cessation or disruption of operations due to any strike or work action could have a material adverse effect on the Company and its financial performance. The Company has implemented a Year 2000 compliance program designed to ensure that the Company's computer systems and applications will function properly beyond 1999. The Company believes that it has allocated adequate resources for this purpose and expects its Year 2000 conversions to be completed on a timely basis. The Company is not aware of any Year 2000 issues that would materially adversely affect operations or results thereof and does not expect implementation to have a material impact on the financial statements. However, there can be no assurance that the systems of third 35 parties upon which the Company's business relies will be Year 2000 compliant on a timely basis. The failure of the Company's computer systems or applications or those operated by such third parties could have a material adverse effect on the Company's business, results of operations and financial condition. ASA has negotiated to receive interest rate subsidies on certain indebtedness through the export support program of the Federative Republic of Brazil. Outstanding debt aggregating approximately $60.5 million at December 31, 1997 is subject to subsidy payments which reduce the stated interest rates on such debt to an average of approximately 3.36%. Of this amount, subsidies on outstanding debt aggregating approximately $56.0 million are at risk to ASA if the Federative Republic of Brazil does not meet its obligations under the export support program. For the remaining debt that is subject to such subsidies, the lenders have assumed such risk by building such subsidy payments into ASA's payment obligations. During 1997, 1996 and 1995, ASA reduced its interest expense by approximately $2.2 million, $2.8 million and $3.7 million, respectively, as a result of these interest rate subsidies. As indicated above, there can be no assurance that ASA will continue to receive such subsidy payments. In 1984, ASA and Delta implemented a marketing program called the "Delta Connection." At December 31, 1997, Delta Air Lines Holdings, Inc. (an affiliate of Delta) owned approximately 27% of ASA Holdings' outstanding common stock. Delta leases reservation equipment and terminal facilities to ASA, and provides certain services to ASA, including reservation and ground handling services. Given ASA's relationship with Delta, ASA's results of operations and financial condition may be favorably or adversely impacted 36 by Delta's decisions regarding flight routes and other operational matters. ASA has historically benefited from its relationship with Delta, but there can be no assurance that such benefits will continue in the future. Based on information currently available to it, the Company believes that available resources will be sufficient to meet its existing expenditure commitments (including current maturities of long-term debt and aircraft lease payments) as well as its anticipated capital expenditures and other working capital requirements for the foreseeable future. As previously indicated, financial resources anticipated to be available to the Company for such purposes include existing cash reserves, internally generated funds, amounts available under the existing line of credit, and short and long-term financing arrangements that the Company believes are available to it. ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," was issued by the Financial Accounting Standards Board (FASB) in June 1997. Statement No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements for periods beginning after December 15, 1997. The Statement requires that business segment financial information be reported in the financial statements utilizing the management approach. The management approach is defined as the manner in which management organizes the segments within the enterprise for making operating decisions and assessing performance. Management believes that the adoption of Statement No. 131 will not have a material impact on the Company's financial statements. 37 The FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," in June 1997. Statement No. 130 establishes standards for reporting and displaying comprehensive income, as defined, and its components in financial statements issued for fiscal years beginning after December 15, 1997. Management believes that the adoption of Statement No. 130 will not have a material impact on the financial statements. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," encourages companies to recognize expense for stock-based awards based on their fair value on the date of grant. At a minimum, Statement No. 123 requires pro forma disclosures in the Company's 1996 financial statements. The Company elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations and provide the necessary disclosures required by Statement No. 123, rather than adopt the expense recognition provisions of this Statement. Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company adopted Statement No. 121 in the first quarter of 1996 and the adoption did not have a material impact on the financial statements. 38 RESULTS OF OPERATIONS The Company set new records in passenger traffic and operating revenues in 1997. Total operating revenues were $385.3 million in 1997 compared with $375.3 million in 1996 and $328.7 million in 1995. Operating revenues were up 3% in 1997 primarily due to a 6% increase in revenue passenger miles (RPMs) flown to 924 million. RPMs were higher in 1997 due to the number of passengers carried increasing by 4% to 3.8 million while the average trip length increased by 2% to 245 miles. ASA's load factor for 1997 was 51.0% compared with 49.1% for 1996. The average passenger yield (passenger revenue divided by RPMs) decreased by 2.6% to 40.9 cents in 1997 compared with 42.0 cents in 1996, while the average passenger fare was down 1% to $100.19 in 1997 compared with $101.11 in 1996. Passenger fares vary based on a number of factors including competition, fare discounting and economic conditions. Operating revenues in 1996 increased 14% over 1995 primarily due to a .7% increase in the average passenger yield and a 15% increase in RPMs. ASA's average load factor in 1996 was 49.1%, up from 45.2% in 1995. For the year ended December 31, 1997, net income decreased by 4% to $54.5 million compared with $56.6 million for 1996. Diluted earnings per common share for 1997 decreased to $1.81 on 30.1 million weighted average shares outstanding compared with $1.83 on 31.0 million weighted average shares outstanding for 1996. The decrease in the average number of shares outstanding was due to the stock repurchase program noted above in "Liquidity and Capital Resources" offset by shares issued in connection with the exercise of stock options. The financial results included a one-time after- 39 tax charge of $1.7 million or $.06 per share primarily related to ASA's decision during 1997 to exercise its option for the early return of all BAe 146 aircraft to their lessor, as well as after-tax expense of $.7 million or $.02 per share incurred related to training and start-up expenses associated with the introduction of the new CRJ aircraft. Included in 1997 and 1996 are after-tax accruals of $1.6 million or $.05 per share and $.5 million or $.01 per share associated with the Company's former Stock Appreciation Rights (SARs) Plan and were due to increases in the price of the Company's stock during the existence of that plan. On May 21, 1997, the Company's shareholders approved the cancellation of all outstanding SARs and the adoption of a Nonqualified Stock Option Plan (Option Plan). The Company does not intend to incur any additional SARs expense in the future. Excluding these non-recurring expenses, 1997 diluted earnings per common share would have been $1.94 compared to $1.84 for fiscal 1996. In 1995, net income was $51.1 million or $1.55 per share on 32.9 million weighted average shares outstanding. Operating expenses increased 5% in 1997 and 15% in 1996. The Company experienced a 4% increase in the cost per available seat mile (ASM) flown to 16.9 cents compared with 16.3 cents in 1996. Capacity (the number of ASMs) was up 2% in 1997 due to changes in aircraft as described in "Liquidity and Capital Resources" above. Operating expenses in 1997 included $2.6 million of expense related to the Company's SARs plan due to a 13% increase in the Company's stock price and additional vesting, while 1996 included $.7 million of expense associated with SARs due to a 2% increase in the stock price and additional vesting. Included in operating expenses for 1997 was $2.7 million primarily related to ASA's decision to exercise its option for the early return of all BAe 146 aircraft to their lessor 40 and approximately $1.1 million of start-up expenses associated with adding the CRJ aircraft to the fleet. Excluding the effect of the SARs expense, BAe 146 return costs and CRJ start-up costs, operating expenses would have increased 3% in 1997 compared with 1996 and are higher primarily due to increased maintenance costs for the EMB-120 Brasilia turboprop fleet as well as rent on the CRJ jet aircraft. Operating expenses in 1996 were up 15% compared with 1995. Included in 1996 was $.7 million of SARs expense due to a 2% increase in the Company's stock price and additional vesting compared with $2.4 million in 1995 due to a 39% increase in the stock price. Included in operating expenses for 1995 was approximately $2.3 million of start-up costs associated with adding the BAe 146 aircraft to the fleet. Excluding the effect of the BAe 146 start-up costs in 1995 and SARs expense in both years, operating expenses would have increased 17% in 1996 compared with 1995 primarily due to more expensive jet fuel, higher marketing related expenses, increased maintenance costs for the EMB-120 Brasilia turboprop fleet, and rent on the BAe 146 aircraft. The following table compares components of operating cost per ASM for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995 ----- ----- ----- Labor and related 4.4c 4.2c 4.3c Fuel 1.8 1.9 1.4 Direct maintenance 2.9 2.6 2.4 Passenger related 2.0 2.1 1.8 Depreciation and aircraft rent 2.5 2.4 2.2 Other 3.3 3.1 2.9 ----- ----- ----- Total operating expense per ASM 16.9c 16.3c 15.0c
41 The following table presents various components of operating expense as a percentage of total operating expense for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995 ---- ---- ---- Labor and related 26% 25% 29% Fuel 11 12 9 Direct maintenance 17 16 16 Passenger related 12 13 12 Depreciation and aircraft rent 15 15 15 Other 19 19 19 --- --- --- Total operating expense 100% 100% 100%
The Company's break-even load factor was 39.5% in 1997 compared with 37.2% in 1996 and 34.1% in 1995. The higher break-even load factor in 1997 was primarily the result of higher operating expenses and the adjustments for SARs, the BAe 146 return and the CRJ start-up costs. The slightly higher break-even load factor in 1996 compared with 1995 was primarily the result of higher operating expenses. Labor and related costs were $78.9 million in 1997, $74.2 million in 1996 and $72.3 million in 1995. The average number of employees in 1997 was 2,497, an increase of 4% over 1996 which contributed to higher labor and related costs. As mentioned above, 1997 included $2.6 million of expense related to the SARs plan in comparison with $.7 million of such expense in 1996 and $2.4 million in 1995. Excluding SARs expense, labor and related 42 costs per ASM would have been 4.2 cents for 1997 and 4.1 cents for both 1996 and 1995, compared with 4.4 cents, 4.2 cents and 4.3 cents, respectively. Fuel expense was $33.0 million, $33.5 million and $24.1 million in 1997, 1996 and 1995, respectively. Fuel consumption increased 3% in 1997 while the average fuel price per gallon, including taxes and into plane fees, decreased 5% in 1997 to 73.5 cents from 77.2 cents in 1996 due primarily to the decrease in crude oil prices during 1997. The average price per gallon, including taxes and into plane fees, increased in 1996 compared with 1995 by 25% to 77.2 cents from 61.9 cents, due primarily to the increase in crude oil prices during 1996 and the additional 4.3 cent per gallon transportation fuel tax beginning in October 1995. In August 1993, the United States government increased taxes on fuel, including aircraft fuel, by 4.3 cents per gallon. ASA was exempt from this tax increase until October 1995. This new tax increased the Company's operating expenses by approximately $1.9 million in both 1996 and 1997. Changes in the cost and supply of aviation fuel have an industry wide impact and will tend to affect ASA's competitors in the same manner as ASA. Direct maintenance expense, excluding labor and related costs, increased to $52.8 million in 1997 from $46.2 million and $40.3 million in 1996 and 1995, respectively. This 14% increase in 1997 was primarily due to charges for the return of the BAe 146 aircraft, start-up costs related to the CRJ aircraft, a 2% increase in capacity and increased maintenance inspections and overhauls of time controlled components. As with any air carrier, as ASA's fleet of aircraft ages, it requires more frequent maintenance. The addition of the new 50-passenger CRJ aircraft, which are expected to be 43 used over longer routes, should create a higher capacity over which maintenance costs can be distributed. Maintenance expenses in 1996 were higher compared with 1995 primarily due to a 6% increase in capacity, more frequent maintenance on aging aircraft, BAe 146 maintenance plan expenses, and the timing for scheduled maintenance inspections and overhauls. Passenger related expenses, which include a majority of the expenses under the caption "Reservation, commission and other" on the Company's Consolidated Statements of Income, were $35.9 million, $36.8 million and $30.2 million in 1997, 1996 and 1995, respectively. The increase of $6.6 million in 1996 compared with 1995 was primarily due to an increase in travel agency commissions, credit card discounts and reservation fees. These expenses are directly related to the 18% increase in passengers carried in 1996 versus 1995. Passenger related expenses were approximately 10% of passenger revenue in 1997 and 1996 compared with 9% of passenger revenue in 1995. Delta began charging ASA higher fees for reservation service/systems in April 1995 and higher credit card fees in October 1995. Aircraft rental costs were approximately $18.3 million in 1997, compared with $16.9 million in 1996 and $10.3 million in 1995. The increased expense in 1997 was primarily attributable to the acquisition of five new CRJs during the last half of 1997. Aircraft rental expense was higher in 1996 compared with 1995 primarily due to the three EMB-120 Brasilia aircraft and four BAe 146 aircraft leased during the fourth quarter of 1995, as well as a fifth BAe 146 aircraft leased in January 1996. Depreciation expense increased to $27.4 million in 1997 compared with $26.5 million and $26.8 million for 1996 and 1995, respectively. 44 Other expenses increased to $59.4 million in 1997 compared with $56.1 million in 1996 and $48.9 million in 1995. The increase in 1997 was partially attributable to costs associated with the negotiations related to the pilot and flight attendant contracts. The increase in 1996 compared with 1995 was due primarily to higher station security fees, liability insurance and interrupted trip and baggage claim expenses. Interest expense decreased to $3.8 million in 1997 compared with $5.9 million in 1996 and $7.6 million in 1995. The decrease in 1997 was attributable to less total debt outstanding and the recording of $1.1 million in capitalized interest related to the deposits on the CRJ aircraft. The decrease in 1996 compared with 1995 was attributable to lower interest rates on ASA's outstanding floating rate debt and less total debt outstanding. Interest income was $10.9 million in 1997 compared with $10.7 million in 1996 and $12.0 million in 1995. A decline in interest rates contributed to lower interest income in 1996 compared with 1995. The Company's effective income tax rate differs from the statutory rate of 35% due primarily to the impact of state income taxes, net of federal tax benefit. In 1997, ASA received a tax refund related to certain amended prior years' state tax returns and, accordingly, reduced income tax expense by approximately $500,000. In 1995, deferred tax liabilities and deferred tax expense were reduced by $1.3 million due to the resolution of prior years' income tax audits. 45 ASA HOLDINGS, INC. QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED) (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
FIRST SECOND THIRD FOURTH YEAR 1997 Operating Revenues $89,615 $ 99,638 $99,023 $97,014 $385,290 Operating Income 15,750 21,234 22,784 19,817 79,585 Income before Income Taxes 17,028 23,027 24,742 22,045 86,842 Net Income $10,732 $ 14,772 $15,340 $13,668 $ 54,512 Earnings per Common Share $ 0.36 $ 0.50 $ 0.51 $ 0.46 $ 1.82 Weighted Average Common Shares Outstanding 29,971 29,813 29,870 29,985 29,910 Earnings per Common Share - Diluted $ 0.36 $ 0.49 $ 0.51 $ 0.45 $ 1.81 Weighted Average Common Shares and Share Equivalents Outstanding 30,031 30,003 30,102 30,201 30,092 1996 Operating Revenues $89,405 $104,238 $94,670 $86,987 $375,300 Operating Income 17,063 28,823 25,462 13,804 85,152 Income before Income Taxes 18,221 29,960 26,821 16,105 91,107 Net Income $11,297 $ 18,430 $16,549 $10,337 $ 56,613 Earnings per Common Share $ 0.36 $ 0.59 $ 0.54 $ 0.34 $ 1.83 Weighted Average Common Shares Outstanding 31,425 31,223 30,895 30,124 30,914 Earnings per Common Share - Diluted $ 0.36 $ 0.59 $ 0.53 $ 0.34 $ 1.83 Weighted Average Common Shares and Share Equivalents Outstanding 31,490 31,325 30,975 30,181 30,991
COMMON STOCK PRICE RANGES AND DIVIDENDS The common stock of ASA Holdings is regularly quoted on the Nasdaq National Market under the symbol ASAI. ASA common stock was traded on the Nasdaq National Market under the same symbol prior to the December 31, 1996 Reorganization (see Note A of the Notes to Consolidated Financial Statements). The following table sets forth, for the periods indicated, the high and low sales prices of the common stock and the quarterly cash dividends per share:
HIGH LOW DIVIDENDS 1997 1st Quarter $25.63 $19.63 $ 0.10 2nd Quarter 28.63 20.13 0.10 3rd Quarter 31.13 26.75 0.10 4th Quarter 31.75 26.50 0.10 1996 1st Quarter $28.50 $17.88 $0.095 2nd Quarter 29.38 22.00 0.095 3rd Quarter 28.38 20.25 0.095 4th Quarter 25.00 19.88 0.095
As of March 2, 1998, there were approximately 931 shareholders of record. Certain of ASA's credit agreements contain restrictive covenants which limit ASA's ability to transfer funds to ASA Holdings in the form of cash dividends, loans or advances. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes B and H of the Notes to Consolidated Financial Statements herein regarding such restrictions. 46 ASA HOLDINGS, INC. SELECTED CONSOLIDATED FINANCIAL AND STATISTICAL DATA (Dollars in thousands except per share amounts)
1997 1996 1995 1994 1993 OPERATING FINANCIAL DATA Total Operating Revenues $385,290 $375,300 $328,725 $312,090 $288,463 Total Operating Expenses 305,705 290,148 252,850 227,818 210,843 Income from Operations 79,585 85,152 75,875 84,272 77,620 Total Non-Operating (Income) Expense (7,257) (5,955) (4,899) (1,348) 198 Income before Taxes and Accounting Change 86,842 91,107 80,774 85,620 77,422 Income Taxes 32,330 34,494 29,637 32,964 31,090 Cumulative Effect of Accounting Change -- -- -- -- 4,212 Net Income $ 54,512 $ 56,613 $ 51,137 $ 52,656 $ 50,544 Earnings per Common Share * $ 1.82 $ 1.83 $ 1.55 $ 1.54 $ 1.47 Weighted Average Common Shares Outstanding (000) * 29,910 30,914 32,889 34,140 34,290 Earnings per Common Share - Diluted * $ 1.81 $ 1.83 $ 1.55 $ 1.54 $ 1.47 Weighted Average Common Shares and Share Equivalents Outstanding (000) * 30,092 30,991 32,964 34,188 34,395 OTHER FINANCIAL DATA Working Capital $129,978 $147,719 $141,677 $140,391 $126,975 Total Assets $505,960 $486,237 $512,699 $519,684 $474,599 Long-Term Debt, excluding Current Portion $ 72,792 $ 94,618 $120,210 $152,610 $135,963 Total Liabilities $210,035 $226,021 $259,844 $272,214 $249,512 Shareholders' Equity $295,925 $260,216 $252,855 $247,470 $225,087 Shareholders' Equity per Share * $ 9.95 $ 8.68 $ 7.98 $ 7.45 $ 6.55 Return on Average Shareholders' Equity 20% 22% 20% 22% 25% Shareholders' Equity to Total Liabilities 141% 115% 97% 91% 90% Cash Dividends Declared per Share * 40c 38c 34c 32c 28c Long-Term Debt to Shareholders' Equity 25% 36% 48% 62% 60% Shares Outstanding at End of Year (000) * 29,731 29,994 31,704 33,224 34,340 STATISTICAL DATA Revenue Passengers Carried (000) 3,775 3,632 3,067 3,120 2,661 Revenue Passenger Miles (000,000) 924 874 763 780 641 Available Seat Miles (000,000) 1,813 1,781 1,688 1,654 1,367 Yield per Revenue Passenger Mile 40.9c 42.0c 41.7c 39.2c 44.2c Operating Cost per Available Seat Mile 16.9c 16.3c 15.0c 13.8c 15.4c Passenger Load Factor 51.0% 49.1% 45.2% 47.2% 46.9% Break-Even Load Factor 39.5% 37.2% 34.1% 34.2% 34.3% Average Passenger Trip Length (miles) 245 241 249 250 241 Flights per Week (end of period) 3,942 3,814 3,886 4,163 4,087 1992 1991 1990 1989 1988 OPERATING FINANCIAL DATA Total Operating Revenues $235,579 $221,916 $187,229 $180,130 $137,144 Total Operating Expenses 174,765 169,388 147,363 136,160 117,896 Income from Operations 60,814 52,528 39,866 43,970 19,248 Total Non-Operating (Income) Expense 1,497 932 (1,124) (566) 666 Income before Taxes and Accounting Change 59,317 51,596 40,990 44,536 18,582 Income Taxes 22,250 19,093 15,600 16,924 7,065 Cumulative Effect of Accounting Change -- -- -- -- -- Net Income $ 37,067 $ 32,503 $ 25,390 $ 27,612 $ 11,517 Earnings per Common Share * $ 1.09 $ 0.96 $ 0.73 $ 0.76 $ 0.31 Weighted Average Common Shares Outstanding (000) * 34,097 33,942 34,748 36,105 37,743 Earnings per Common Share - Diluted * $ 1.09 $ 0.95 $ 0.73 $ 0.76 $ 0.31 Weighted Average Common Shares and Share Equivalents Outstanding (000) * 34,165 34,050 34,938 36,299 37,743 OTHER FINANCIAL DATA Working Capital $ 93,372 $ 78,721 $ 59,590 $ 55,525 $ 42,011 Total Assets $430,752 $377,603 $325,311 $287,971 $231,626 Long-Term Debt, excluding Current Portion $145,804 $139,356 $127,724 $111,749 $ 90,109 Total Liabilities $252,013 $229,683 $204,956 $179,613 $139,958 Shareholders' Equity $178,738 $147,910 $120,355 $108,358 $ 91,668 Shareholders' Equity per Share * $ 5.23 $ 4.35 $ 3.57 $ 3.07 $ 2.47 Return on Average Shareholders' Equity 23% 24% 22% 28% 13% Shareholders' Equity to Total Liabilities 71% 64% 59% 60% 65% Cash Dividends Declared per Share * 24c 20c 15.9c 8c -- Long-Term Debt to Shareholders' Equity 82% 94% 106% 103% 98% Shares Outstanding at End of Year (000) * 34,180 34,034 33,750 35,314 37,075 STATISTICAL DATA Revenue Passengers Carried (000) 2,417 2,251 2,002 2,001 1,586 Revenue Passenger Miles (000,000) 547 501 427 413 320 Available Seat Miles (000,000) 1,077 1,020 856 791 753 Yield per Revenue Passenger Mile 42.2c 43.2c 43.2c 42.9c 42.3c Operating Cost per Available Seat Mile 16.2c 16.6c 17.2c 17.2c 15.7c Passenger Load Factor 50.8% 49.2% 49.9% 52.3% 42.5% Break-Even Load Factor 38.0% 37.7% 39.0% 39.3% 36.7% Average Passenger Trip Length (miles) 226 223 213 207 202 Flights per Week (end of period) 3,507 3,360 3,124 3,033 2,827
* Adjusted for stock splits on November 26, 1991 and February 18, 1993 EX-21 3 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Atlantic Southeast Airlines, Inc., a Georgia corporation, is 100% owned by ASA Holdings, Inc. ASA Investments, Inc., a Delaware corporation, is 100% owned by ASA Holdings, Inc. EX-23 4 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of ASA Holdings, Inc. of our report dated January 30, 1998, except for the last paragraph of Note G, as to which the date is March 12, 1998, included in the 1997 Annual Report to Shareholders of ASA Holdings, Inc. Our audit also included the financial statement schedules of ASA Holdings, Inc. listed in Item 14(a). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 2-94852-99) pertaining to the Atlantic Southeast Airlines, Inc. Investment Savings Plan and in the Registration Statement (Form S-8 No. 333-29503), pertaining to the ASA Holdings, Inc. 1997 Nonqualified Stock Option Plan of our report dated January 30, 1998, except for the last paragraph of Note G, as to which the date is March 12, 1998, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedules included in this Annual Report (Form 10-K) of ASA Holdings, Inc. /s/ ERNST & YOUNG LLP ERNST & YOUNG LLP Atlanta, Georgia March 30, 1998 EX-27.(A) 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF ASA HOLDINGS, INC. FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1997 DEC-31-1997 112,393 71,487 6,958 (295) 6,545 200,770 511,600 231,045 505,960 70,792 72,792 0 0 2,973 292,952 505,960 0 385,290 0 305,705 0 120 3,834 86,842 32,330 54,512 0 0 0 54,512 1.82 1.81
EX-27.(B) 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RESTATED FINANCIAL STATEMENTS OF ASA HOLDINGS, INC. FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AND 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR YEAR DEC-31-1996 DEC-31-1995 DEC-31-1996 DEC-31-1995 137,469 66,403 52,653 121,697 6,757 11,982 (204) (266) 8,145 6,440 207,724 210,743 472,461 483,011 203,181 190,613 486,237 512,699 60,005 69,066 94,618 120,210 0 0 0 0 2,999 3,171 257,217 249,684 486,237 512,699 0 0 375,300 328,725 0 0 290,148 252,850 0 0 (25) 20 5,863 7,609 91,107 80,774 34,494 29,636 56,613 51,137 0 0 0 0 0 0 56,613 51,137 1.83 1.55 1.83 1.55
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