-----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, Rf04QnvYDkM0bkaOn4BSv59Hfpx89m33FtqgGvaSV1r06KoPRFsOtg24Op0Q7TgP pEC2fEvXNbxafjBDglyd5A== 0000950144-99-003188.txt : 19990326 0000950144-99-003188.hdr.sgml : 19990326 ACCESSION NUMBER: 0000950144-99-003188 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990325 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: 99573016 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 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, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to ____________ Commission file number 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 the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] 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, 1999, the aggregate market value of voting stock held by non-affiliates of the Registrant, based on the $33.563 closing sales price of such stock on The Nasdaq Stock Market's National Market on that date, was approximately $551,535,845. As of March 2, 1999, the Registrant had 28,523,177 shares of Common Stock outstanding. -2- 3 TABLE OF CONTENTS
PAGE NUMBER ------ ? Part I Item 1. Business.............................................................................. 1 Factors That May Affect Future Performance............................................ 17 Item 2. Properties............................................................................ 21 Item 3. Legal Proceedings..................................................................... 22 Item 4. Submission of Matters to a Vote of Security Holders................................... 23 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................................................................... 24 Item 6. Selected Financial Data............................................................... 25 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................. 26 Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................ 36 Item 8. Financial Statements and Supplementary Data........................................... F-1 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.............................................................. 38 Part III Item 10. Directors and Executive Officers of the Registrant.................................... 39 Item 11. Executive Compensation................................................................ 42 Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 49 Item 13. Certain Relationships and Related Transactions........................................ 51 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................... 53
4 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 That May Affect 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 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"). 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, unless the context indicates otherwise. 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 40 other airports in Alabama, Arkansas, Florida, Georgia, Indiana, Kansas, 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 5 approximately 4,160 flights per week. A majority of ASA's flights are utilized 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. Since 1984, ASA has operated as a "Delta Connection" carrier. The sole business of ASA Investments is to manage certain cash assets contributed to it by ASA Holdings and its other subsidiary. RECENT DEVELOPMENTS AGREEMENT AND PLAN OF MERGER On February 15, 1999, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Delta and its wholly-owned indirect subsidiary Delta Sub, Inc. ("Purchaser"). The Merger Agreement provides for the acquisition of all of the common stock of the Company by Purchaser at a price of $34.00 per share, net to the seller in cash (the "Offer Price"). Pursuant to the Merger Agreement, Purchaser commenced a tender offer (the "Offer") for all outstanding shares of the Company's common stock, which Offer expired at midnight on March 19, 1999. As a result of the Offer, Purchaser acquired approximately 18 million shares of the Company's common stock (about 88% of the outstanding shares not already beneficially owned by Delta prior to the beginning of the Offer). The Merger Agreement provides, among other things, that, upon the terms and subject to the conditions set forth in the Merger Agreement, following the purchase of shares pursuant to the Offer, Purchaser will be merged with and into the Company (the "Merger"). Following consummation of the Merger, Purchaser will cease to exist and the Company will continue as the surviving corporation (the "Surviving Corporation") and a wholly-owned indirect subsidiary of Delta. At the effective time of the Merger (the "Effective Time"), each share outstanding immediately prior to the Effective Time (other than shares held by the Company as treasury stock or owned by Delta or any of its subsidiaries or shares as to which dissenters' rights have been exercised under the Georgia Business Corporation Code ("Excluded Shares")) will be converted automatically into the right to receive $34.00 in cash, without interest. The consummation of the Merger is subject to the satisfaction or waiver of certain conditions, including, if required under the Georgia Business Corporation Code, the adoption of the Merger Agreement by the affirmative vote of the shareholders of the Company holding a majority of the outstanding shares. The Company has agreed to convene a special meeting of its shareholders as promptly as practicable for such purpose. As a result of the consummation of the Offer, Purchaser has sufficient voting power to adopt the Merger Agreement without the vote of any other shareholder. As a result of the consummation of the Offer, Delta is entitled pursuant to the Merger Agreement to designate a certain number of directors to the Company's Board. The Merger -2- 6 Agreement also provides that the Company will use its reasonable best efforts to cause at least two persons who are not employees of the Company or affiliated with Delta to be members of the Company's Board until the Merger is consummated. Pursuant to the foregoing provisions, all incumbent directors of the Board except for Messrs. Parker H. Petit and Jean A. Mori are expected to resign effective the close of business on March 25, 1999, and the following five designees of Delta will be appointed and elected to fill these vacancies on the Board effective March 26, 1999: Messrs. Maurice W. Worth, Malcolm B. Armstrong, Warren C. Jenson and Frederick W. Reid and Ms. Vicki B. Escarra. COMMERCIAL ARRANGEMENTS BETWEEN DELTA AND THE COMPANY The following summarizes the existing relationship between the Company and Delta. MARKETING AND CODE SHARING ARRANGEMENTS BETWEEN THE COMPANY AND DELTA ASA has operated from a hub in Atlanta since 1984 and a hub in Dallas/Fort Worth since late 1986 as a "Delta Connection" carrier pursuant to a marketing agreement with Delta (the "Delta Connection Agreement"). The Delta Connection Agreement was originally entered into on August 6, 1984 and was restated or amended several times subsequently. The Delta Connection Agreement was originally terminable by either party upon 180 days' advance written notice; however, since December 31, 1994, the Delta Connection Agreement has been terminable by either party thereto on 30 days' prior written notice. Under the Delta Connection program, all of ASA's flights are promoted as part of the Delta route network in computer systems used by travel agents and in advertising and published timetables, and all ASA flights carry the Delta designator code. ASA flights are sold on Delta ticket stock, and all revenue from ASA ticket sales by travel agents are remitted to Delta. Delta handles ASA's reservations calls. Customer payments for tickets purchased from agents or at Delta city ticket offices for ASA's flights are remitted to Delta. ASA and Delta split revenues (less certain costs of sales) in accordance with an agreed-upon revenue proration arrangement. Under this arrangement, ASA is paid all revenue (less agreed expenses) for tickets sold to passengers not connecting to a Delta-operated flight (i.e. local traffic). Revenue for passengers traveling on a ticket with an ASA flight connecting to a Delta-operated flight are prorated between Delta and ASA using a proration methodology that considers the mileage of the flight segments flown and the relative cost of the service provided, minus certain costs of sales, with adjustments made for international tickets. Delta and the Company have had various discussions in the past regarding certain aspects of the revenue allocation and cost sharing arrangements related to their marketing alliance. Prior to the parties' execution of the Merger Agreement, Delta proposed significant changes to the revenue reallocation and cost sharing arrangements, which, if implemented, would have a substantial negative impact on the future financial performance of the Company. See "Factors That May Affect Future Performance -- Relationship with Delta." -3- 7 DELTA OWNERSHIP OF SHARES; STOCK AGREEMENT On June 19, 1986, Delta purchased from Atlantic Southeast Airlines, Inc. 2,665,000 shares pursuant to a stock purchase agreement dated May 28, 1986 (the "Original Stock Agreement") between the two companies. After giving effect to the issuance of these shares, Delta's investment represented approximately 20% of the then outstanding number of shares. On December 27, 1989, Delta assigned and transferred to Delta Air Lines Holdings, Inc. ("Delta Holdings") all of the shares then owned by Delta. On March 17, 1997, following the Company's 1996 Reorganization, the Company, Atlantic Southeast Airlines, Inc., Delta and Delta Holdings entered into an amended agreement (the "Stock Agreement"), containing terms and conditions which are substantially the same as those contained in the Original Stock Agreement. At December 31, 1998, after giving effect to previous stock splits and share repurchases, Delta held 7,995,000 shares, or approximately 28% of the Company's outstanding shares. Pursuant to the Stock Agreement, as long as Delta beneficially owns at least 10% of the outstanding shares of the Company's common stock, either Delta or Delta Holdings has the right to cause the Company (i) to include in its slate of nominees for election to the Company's Board of Directors (the "Board of Directors" or the "Board") at least two designees of Delta or Delta Holdings who are reasonably acceptable to the Company, and (ii) to use its reasonable best efforts to assure that these individuals are elected to the Board. Delta's only designee to the Board resigned from that position effective March 31, 1997, and since that time, notwithstanding its right under the Stock Agreement to nominate two designees for election to the Board, neither Delta nor any of its affiliates have nominated any designees to, or had any representatives on, the Board. The Stock Agreement also grants Delta and Delta Holdings certain demand and piggyback registration rights and preemptive rights, and grants the Company a right of first refusal in respect of certain sales by Delta or Delta Holdings of shares of the Company's common stock to persons pursuant to a demand registration or in a private sale. ROUTE SYSTEM As of March 2, 1999, ASA's route system included service between the Atlanta hub and 40 other airports in Alabama, Arkansas, Florida, Georgia, Indiana, Kansas, 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 2, 1999, 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." -4- 8 The following tables describe ASA's route system as of March 2, 1999: 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 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, AR 589 3/2/99 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 Roanoke, VA 357 12/15/85 Tallahassee, FL 223 12/15/85
-5- 9 ATLANTA HUB
Air Mileage Date Service Airport Served From Atlanta Hub Commenced - ------------------------------------------------------------------------------------- Tri-Cities, TN 227 10/31/82 Valdosta, GA 208 9/9/81 Wichita, KS 781 3/2/99 Wilmington, NC 377 9/17/90
- ---------------- * New York is served from the Cleveland and Detroit airports. DALLAS/FORT WORTH HUB
Air Mileage From Dallas/Fort Worth Date Service Airport Served 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. -6- 10 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. In addition to the Delta Connection Agreement, ASA is 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. 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. The federal excise tax in effect from October 1, 1997 through September 30, 1998 was 9% on domestic tickets plus $1.00 per segment flown for non-rural domestic airports. A segment is defined as a take-off and a landing. Effective October 1, 1998 and for the period through September 30, 1999, the federal excise tax is 8% on domestic tickets plus $2.00 per segment flown for non-rural domestic airports. 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 2, 1999, ASA's operating fleet consisted of 71 turboprop airplanes, 12 of which seat 66 passengers and the remaining 59 of which seat 30 passengers, and 19 jets which -7- 11 seat 50 passengers each. The age of this fleet ranged from less than one year to 14 years. The following table describes ASA's current operating fleet as of March 2, 1999:
Number of Number of Aircraft Type Aircraft Owned Aircraft Leased Average Age - ------------------------------------------------------------------------------------- ATR-72 Turboprop 4 8 5.4 years (66 passenger capacity) Embraer Brasilia 57 2 9.8 years Turboprop (EMB-120) (30 passenger capacity) Canadair Regional Jet-200 -- 19 .9 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 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 two of the Brasilias pursuant to operating leases, which expire in June 1999 and December 1999, respectively. As of March 2, 1999, 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, which must be exercised and aircraft delivered before December 31, 2000. In 1997, ASA exercised its option for the early return of all five British Aerospace BAe 146-200 jets ("BAe Jets"), and they were removed from operation and returned to the lessor by the end of the first quarter of 1998. In April 1997, ASA executed an acquisition agreement with Bombardier, Inc. ("Bombardier") for 30 Canadair Regional Jet-200 aircraft ("CRJ-200"), a 50-passenger jet, with options to acquire an additional 60 aircraft. Delivery of these aircraft began in August 1997, and ASA acquired a total of 17 CRJ-200 aircraft as of December 31, 1998 through operating leases with 16.5 year terms. The 13 remaining aircraft are scheduled to be delivered at a rate of one per month until January 2000. On September 3, 1998, ASA entered into an amendment to this acquisition agreement with Bombardier. Under the terms of the amendment, ASA exercised -8- 12 options to acquire 15 additional CRJ-200 aircraft. Delivery of the 15 additional CRJ-200s is scheduled to start in February 2000 and continue through June 2001 at an approximate rate of one aircraft per month. 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 45 CRJ-200 aircraft. 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 U.S. treasury rates or LIBOR, and on various repayment terms. ASA may finance the CRJ-200 aircraft 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 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. On September 3, 1998, ASA entered into a second acquisition agreement with Bombardier for 12 Canadair Regional Jet-700 aircraft ("CRJ-700"), a 70-passenger jet. Delivery of the CRJ-700 aircraft is scheduled to commence in the fourth quarter of 2001 and be completed in the first quarter of 2003. The value including spares of the additional 15 CRJ-200 and the 12 CRJ-700 aircraft is approximately $575 million. 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. As of December 31, 1998, ASA pledged 30 of the Brasilias it owns and all four of the ATRs it owns, as well as a 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 2, 1999, ASA had approximately 2,669 employees, of which 1,253 were flight personnel, 974 were ground service personnel, 306 were maintenance personnel and the remainder were management, supervisory and clerical employees. As of March 2, 1999, 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 24% 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"). The current collective bargaining agreement between ASA and AFA was entered into in September 1997 and is amendable in 2002. In 1987, the Air Line Pilots Association ("ALPA") was certified to represent ASA's pilots. The current collective bargaining agreement between ASA and ALPA became effective September 15, 1998 and is -9- 13 amendable in September 2002. On November 10, 1998, the Transport Workers Union was certified to represent ASA's dispatchers. Negotiations for an initial collective bargaining agreement have not yet begun. ASA is aware that the International Association of Machinists and Aerospace Workers is currently soliciting employees in a purported craft or class of ramp workers employed by ASA for purposes of submitting a petition to represent such workers, although to the knowledge of representatives of ASA, no such petition is currently pending. See "Regulation--Labor Regulation" regarding the procedures applicable to the negotiation of such collective bargaining agreements. There are no union affiliations with any other groups of employees of ASA, ASA Holdings or ASA Investments. ASA operates as a Delta Connection carrier pursuant to a marketing program with Delta. See "Commercial Arrangements Between Delta and the Company." 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. 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 -10- 14 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 9.29% of the Company's operating costs in 1998. Based on ASA's fiscal 1998 fuel consumption, every $0.01 change in the average annual price per gallon of aviation fuel caused an approximate $374,000 change in ASA's annual fuel expense. The following table shows ASA's fuel consumption and costs for fiscal years 1998, 1997 and 1996:
Average Price Percent of Fiscal Year Gallons Consumed Cost Per Gallon Operating Expense - ----------- ---------------- ---- ------------- ----------------- 1998 46,439,341 $29,141,584 $0.63 9.29% 1997 44,872,864 $32,988,262 $0.74 10.79% 1996 43,356,461 $33,479,356 $0.77 11.54%
Aircraft fuel expense decreased 11.7% in 1998 compared with 1997, primarily because the average fuel price per gallon decreased 14.9% to $0.63 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 49% of its fuel requirements from Chevron USA, Inc. at the Atlanta hub and approximately 22% 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. -11- 15 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. See "Factors That May Affect Future Performance -- Fuel Cost and Supply." 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 operated from the Atlanta and Dallas/Fort Worth hubs as a Delta Connection carrier pursuant to a marketing agreement with Delta. 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 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 all incremental costs of providing earned free travel awards under Delta's frequent flyer program as incurred. ASA makes payments to Delta for Delta frequent flyer mileage earned by passengers -12- 16 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 28% 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 from the Atlanta hub to approximately 13% of the airports served by ASA. ASA competes with American/American Eagle in all of the Company's markets operated 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 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, 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 -13- 17 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 1998. 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 ---- ----------- ----------- ----------- ----------- 1998 869,162 1,061,502 1,061,926 1,034,356 1997 836,455 992,521 989,255 956,386 1996 836,902 985,747 931,812 877,660
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 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 -14- 18 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 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. 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, Gulfport and Meridian, Mississippi; Asheville, North Carolina; Dothan, Alabama; and Fort Walton Beach, Gainesville 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 -15- 19 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. Negotiations for an initial collective bargaining agreement with the Transport Workers Union, which has been certified to represent ASA's dispatchers, have not yet begun. 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. 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 -16- 20 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, 1998, ASA maintained insurance coverage with major insurance carriers with coverage up to $30 million for damage per aircraft and $500 million of third party liability per occurrence (for personal injury and property damage). The per aircraft deductibles range from $50,000 to $250,000 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 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 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 THAT MAY AFFECT 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. The Company is particularly dependent on the proration methodology by which the Company and Delta share revenues and the markets in which Delta allows the Company to operate using the "DL" designator code. 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. -17- 21 Based upon discussions between Delta and the Company's management with respect to revenue reallocation and cost sharing arrangements proposed by Delta as part of the negotiation for renewing the Delta Connection Agreement with the Company, the terms proposed by Delta would, in management's view, be likely to reduce the Company's net income approximately $21 million in 1999 and approximately $45-55 million in each of the four years thereafter from the net income the Company previously projected. In addition, Delta proposed other changes which would adversely affect the future financial performance of the Company, including proposals to impose upon the Company new charges for the payment of overrides to travel agents' commissions, to specify markets into which the Company's regional jets would be deployed, and to impose fees for passengers not connecting with Delta flights and service performance penalties. If the transactions contemplated by the Merger Agreement are not consummated, a renegotiation of the Delta Connection Agreement to include such proposed terms would have a material adverse effect on the Company and its results of operations. FUEL COSTS AND SUPPLY Fuel costs represented 9.29% of the Company's total operating expenses in 1998. 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 $374,000 increase in ASA's annual operating expenses. ASA's fuel supply contracts do not assure the price or availability of fuel. ASA enters into fuel swap contracts to manage risk associated with changes in aircraft fuel prices. Under these contracts, ASA receives or makes payments based on differences between fixed and variable prices for certain fuel commodities. Gains or losses from fuel swap contracts are deferred and recognized as a component of fuel expense when the underlying fuel being hedged is used. At December 31, 1998, ASA had a contract covering approximately 10% of its projected 1999 aircraft fuel requirements. Historically, the Company has not closed any contracts prior to the execution of the underlying purchase transactions, nor have any of the purchase transactions failed to occur. At December 31, 1998, the fair value of ASA's swap contract, representing the amount ASA would pay if the contract was closed, was immaterial. 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 2, 1999, ASA's aircraft fleet consisted of 12 ATRs, 59 Brasilias and 19 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 -18- 22 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, 1998, ASA had $72.8 million in outstanding long-term debt, with annual payments of approximately $18.7 million committed to such obligations in 1999. Payments committed to aircraft operating leases in 1999 amount to approximately $30.3 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 1996 to 1998, these subsidies represented an average of approximately $2.2 million in annual credits against ASA's interest payment obligations related to debt associated with 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 -19- 23 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 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 24% 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, ASA and AFA, the flight attendants' union, entered into a new collective bargaining agreement that is amendable in 2002. In August 1998, ASA and the pilots' union, ALPA, approved a new collective bargaining agreement that became effective September 15, 1998 and is amendable in September 2002. On November 10, 1998, the Transport Workers Union was certified to represent ASA's dispatchers. Negotiations for an initial collective bargaining agreement between ASA and that union have not yet begun. ASA is aware that the International Association of Machinists and Aerospace Workers is currently soliciting employees in a purported craft or class of ramp workers employed by ASA for purposes of submitting a petition to represent such workers, although to the knowledge of representatives of ASA, no such petition is currently pending. See "Regulation--Labor Regulation." There can be no assurance that ASA will be able to settle any future contract negotiations 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. RISKS RELATING TO YEAR 2000 ISSUES The Year 2000 issue refers generally to the data structure and processing problems that may prevent systems from properly processing date-sensitive information when the year changes to 2000. The Year 2000 problem could result in system failures or miscalculations, causing disruptions of a company's operations. As a result, in less than a year, certain information -20- 24 technology ("IT") and non-IT systems may need to be upgraded to address Year 2000 problems. IT and non-IT systems are critical to the Company's operations. The Company believes completed and planned modifications and conversions of its internal systems and equipment will allow it to resolve material problems created by the Year 2000 issue in a timely manner. However, there can be no assurance that the Company's systems will properly address Year 2000 issues prior to December 31, 1999, or that the failure of any such system will not have a material adverse effect on the Company's business, operating results and financial condition. To the extent the Year 2000 problem has a material adverse effect on the business, operations or financial condition of third parties with whom the Company has material relationships, such as Delta, vendors, suppliers and customers, the Year 2000 problem could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, customers may alter their travel arrangements at the end of 1999 and the beginning of 2000 due to concerns regarding risks and problems related to flying at the turn of the millennium. To the extent travelers are reluctant to fly during fourth quarter 1999 and first quarter 2000, the Year 2000 issue could have a material adverse effect on the Company's business, results of operations and financial condition. ITEM 2. PROPERTIES ASA entered into agreements with other air carriers to provide ground handling services (either directly or through outside vendors) to ASA in 25 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 20 airports, ASA operates under month-to-month use agreements. ASA is currently negotiating seven other leases that have 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 12 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's lease of a maintenance facility in Texarkana, Arkansas has expired, and ASA currently is a tenant at will with respect to this facility. 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). -21- 25 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 on March 31, 2006. 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 On February 25, 1999, Mala Nebenzahl and Alex Pappas ("Plaintiffs"), on behalf of themselves and other shareholders of the Company, filed a putative class action complaint in the Superior Court of Fulton County in the State of Georgia against the Company and its directors (collectively, the "ASA Defendants") and Delta, seeking, among other things, to enjoin the Offer and Merger or to rescind the Offer or Merger transactions if either is consummated. On March 9, 1999, the parties entered into a memorandum of understanding setting forth the terms of an agreement-in-principle to settle this litigation, including the payment of Plaintiffs' legal fees up to $400,000, subject to court approval. Pursuant to the memorandum of understanding, the Company, Delta and Purchaser have amended the Merger Agreement to eliminate the $5 million break-up fee that would otherwise have been payable to Delta if the Merger Agreement were to be terminated as a result of the Company receiving and accepting a superior offer for its shares. The proposed settlement is subject to the approval of the Fulton County Superior Court. On March 18, 1999, the Company received a letter from Private Capital Management, Inc. ("PCM"), a company claiming to exercise discretionary control over 246,300 shares of Company stock. The letter contends that one of PCM's clients may have initiated a lawsuit in connection with the Offer and/or the Merger. The Company, however, has not received any summons in respect of, nor does it have any knowledge of, any legal action relating to the Offer or the Merger being taken other than the lawsuit initiated by Mala Nebenzahl and Alex Pappas which is described above. There are no other 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, -22- 26 that the amount of insurance carried by the Company will be sufficient to protect it from material loss. ITEM 4. SUBMISSION OF MATTERS TO A 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. -23- 27 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock of ASA Holdings is regularly quoted on the Nasdaq National Market under the symbol ASAI. 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 ---------------------------------------- 1998 1st Quarter $40.88 $28.25 $0.11 2nd Quarter 51.00 35.63 0.11 3rd Quarter 50.25 31.50 0.11 4th Quarter 40.00 21.75 0.11 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
As of March 2, 1999, there were approximately 868 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. -24- 28 ITEM 6. SELECTED FINANCIAL DATA ASA HOLDINGS, INC. SELECTED CONSOLIDATED FINANCIAL AND STATISTICAL DATA (Dollars in thousands except per share amounts)
1998 1997 1996 1995 1994 1993 OPERATING FINANCIAL DATA Total Operating Revenues $409,859 $385,290 $375,300 $328,725 $312,090 $288,463 Total Operating Expenses 313,828 305,705 290,148 252,850 227,818 210,843 Income from Operations 96,031 79,585 85,152 75,875 84,272 77,620 Total Non-Operating (Income) Expense (10,214) (7,257) (5,955) (4,899) (1,348) 198 Income before Taxes and Accounting Change 106,245 86,842 91,107 80,774 85,620 77,422 Income Taxes 40,108 32,330 34,494 29,637 32,964 31,090 Cumulative Effect of Accounting Change -- -- -- -- -- 4,212 Net Income $ 66,137 $ 54,512 $ 56,613 $ 51,137 $ 52,656 $ 50,544 Earnings per Common Share * $ 2.24 $ 1.82 $ 1.83 $ 1.55 $ 1.54 $ 1.47 Weighted Average Common Shares Outstanding (000) * 29,561 29,910 30,914 32,889 34,140 34,290 Earnings per Common Share - Diluted * $ 2.22 $ 1.81 $ 1.83 $ 1.55 $ 1.54 $ 1.47 Weighted Average Common Shares and Share Equivalents Outstanding (000) * 29,729 30,092 30,991 32,964 34,188 34,395 OTHER FINANCIAL DATA Working Capital $132,636 $129,978 $147,719 $141,677 $140,391 $126,975 Total Assets $499,769 $505,960 $486,237 $512,699 $519,684 $474,599 Long-Term Debt, excluding Current Portion $ 54,063 $ 72,792 $ 94,618 $120,210 $152,610 $135,963 Total Liabilities $189,995 $210,035 $226,021 $259,844 $272,214 $249,512 Shareholders' Equity $309,774 $295,925 $260,216 $252,855 $247,470 $225,087 Shareholders' Equity per Share * $ 10.85 $ 9.95 $ 8.68 $ 7.98 $ 7.45 $ 6.55 Return on Average Shareholders' Equity 22% 20% 22% 20% 22% 25% Shareholders' Equity to Total Liabilities 163% 141% 115% 97% 91% 90% Cash Dividends Declared per Share * 44c. 40c. 38c. 34c. 32c. 28c. Long-Term Debt to Shareholders' Equity 17% 25% 36% 48% 62% 60% Shares Outstanding at End of Year (000) * 28,543 29,731 29,994 31,704 33,224 34,340 STATISTICAL DATA Revenue Passengers Carried (000) 4,027 3,775 3,632 3,067 3,120 2,661 Revenue Passenger Miles (000,000) 1,041 924 874 763 780 641 Available Seat Miles (000,000) 1,865 1,813 1,781 1,688 1,654 1,367 Yield per Revenue Passenger Mile 38.5c. 40.9c. 42.0c. 41.7c. 39.2c. 44.2c. Operating Cost per Available Seat Mile 16.8c. 16.9c. 16.3c. 15.0c. 13.8c. 15.4c. Passenger Load Factor 55.8% 51.0% 49.1% 45.2% 47.2% 46.9% Break-Even Load Factor 41.3% 39.5% 37.2% 34.1% 34.2% 34.3% Average Passenger Trip Length (miles) 258 245 241 249 250 241 Flights per Week (end of period) 3,965 3,942 3,814 3,886 4,163 4,087 1992 1991 1990 1989 OPERATING FINANCIAL DATA Total Operating Revenues $235,579 $221,916 $187,229 $180,130 Total Operating Expenses 174,765 169,388 147,363 136,160 Income from Operations 60,814 52,528 39,866 43,970 Total Non-Operating (Income) Expense 1,497 932 (1,124) (566) Income before Taxes and Accounting Change 59,317 51,596 40,990 44,536 Income Taxes 22,250 19,093 15,600 16,924 Cumulative Effect of Accounting Change -- -- -- -- Net Income $ 37,067 $ 32,503 $ 25,390 $ 27,612 Earnings per Common Share * $ 1.09 $ 0.96 $ 0.73 $ 0.76 Weighted Average Common Shares Outstanding (000) * 34,097 33,942 34,748 36,105 Earnings per Common Share - Diluted * $ 1.09 $ 0.95 $ 0.73 $ 0.76 Weighted Average Common Shares and Share Equivalents Outstanding (000) * 34,165 34,050 34,938 36,299 OTHER FINANCIAL DATA Working Capital $ 93,372 $ 78,721 $ 59,590 $ 55,525 Total Assets $430,752 $377,603 $325,311 $287,971 Long-Term Debt, excluding Current Portion $145,804 $139,356 $127,724 $111,749 Total Liabilities $252,013 $229,683 $204,956 $179,613 Shareholders' Equity $178,738 $147,910 $120,355 $108,358 Shareholders' Equity per Share * $ 5.23 $ 4.35 $ 3.57 $ 3.07 Return on Average Shareholders' Equity 23% 24% 22% 28% Shareholders' Equity to Total Liabilities 71% 64% 59% 60% Cash Dividends Declared per Share * 24c. 20c. 15.9c. 8c. Long-Term Debt to Shareholders' Equity 82% 94% 106% 103% Shares Outstanding at End of Year (000) * 34,180 34,034 33,750 35,314 STATISTICAL DATA Revenue Passengers Carried (000) 2,417 2,251 2,002 2,001 Revenue Passenger Miles (000,000) 547 501 427 413 Available Seat Miles (000,000) 1,077 1,020 856 791 Yield per Revenue Passenger Mile 42.2c. 43.2c. 43.2c. 42.9c. Operating Cost per Available Seat Mile 16.2c. 16.6c. 17.2c. 17.2c. Passenger Load Factor 50.8% 49.2% 49.9% 52.3% Break-Even Load Factor 38.0% 37.7% 39.0% 39.3% Average Passenger Trip Length (miles) 226 223 213 207 Flights per Week (end of period) 3,507 3,360 3,124 3,033
* Adjusted for stock splits on November 26, 1991 and February 18, 1993 -25- 29 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Annual Report on Form 10-K, including 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 views with respect to future events, trends, market conditions and financial performance. Without limiting the generality of the foregoing, the words "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate," and similar expressions, when used in this Report and in such other statements, are intended to identify forward-looking statements. 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; potential adverse effects of the Year 2000 computer problem; 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. 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). 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. Recent Developments On February 15, 1999, the Company entered into the Merger Agreement with Delta and Purchaser. The Merger Agreement provides for the acquisition of all of the outstanding shares of common stock of the Company not owned by Delta or its affiliates for a total consideration of approximately $700 million. See "Recent Developments -- Agreement and Plan of Merger." As a result of the consummation of the Offer, Delta has sufficient voting power to approve the Merger without the vote of any other shareholder. Prior to entering into the Merger Agreement, Delta and the Company had various discussions regarding certain aspects of the revenue allocation and cost sharing arrangements related to their marketing alliance. See "Business -- Factors That May Affect Future Performance -- Relationship with Delta." -26- 30 Liquidity and Capital Resources The Company's working capital increased slightly to $132.6 million at December 31, 1998 compared with $130.0 million at December 31, 1997. The current ratio was 2.8 at December 31, 1998 and 1997, respectively. Cash, cash equivalents and investments in marketable securities increased by $2.0 million primarily due to $100.4 million in cash from operations, $8.9 million from the exercise of stock options, an $11.8 million reclassification of long-term investments to short-term marketable securities, and $4.9 million in proceeds from the sale of aircraft equipment. These increases were partially offset by a $37.8 million investment in property and equipment ($16 million of which was Canadair Regional Jet aircraft pre-delivery deposits), $13.1 million of dividends paid, $51.4 million of common stock repurchases and a $21.9 million net decrease in long-term debt. At December 31, 1998, the Company had two unsecured lines of credit totaling $108.0 million with several banks. During the second quarter of 1998, ASA Holdings established a new $100 million unsecured credit facility to enhance the Company's flexibility for future growth. The facility is guaranteed by ASA and ASA Investments. The current pricing is LIBOR plus 27.5 basis points. In addition, the Company pays a facility commitment fee of 12.5 basis points on the amount of the revolving commitment regardless of whether, and to what extent, the revolving commitment is utilized. The new line of credit has a five year term which expires on June 26, 2003 and contains customary financial covenants. At December 31, 1998, only $.7 million of one line was committed to support two letters of credit and there were no outstanding amounts against these lines of credit. In connection with the Merger Agreement, the $100 million unsecured credit facility was terminated effective March 22, 1999. The remaining line of credit is available for general corporate purposes. The Company's percentage of long-term debt to equity decreased to 17% at December 31, 1998 compared with 25% at the end of 1997. Long-term debt decreased to $54.1 million from $72.8 million at the end of 1997. The current portion of long-term debt decreased by $3.1 million from December 31, 1997. Thirty EMB-120 Brasilia aircraft and four ATR-72 aircraft, as well as a 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 1998. Shareholders' equity per share increased to $10.85 at December 31, 1998 from $9.95 at the end of 1997. Net worth increased $13.8 million in 1998 primarily due to earnings of $66.1 million and $12.3 million from the exercise of stock options, offset by $13.1 million of dividends paid and $51.4 million of common stock repurchases. During the second quarter of 1998, ASA entered into fuel swap contracts to manage risk associated with changes in aircraft fuel prices. Under these contracts, ASA receives or makes payments based on differences between fixed and variable prices for certain fuel commodities. -27- 31 Gains and losses from fuel swap contracts are deferred and recognized as a component of fuel expense when the underlying fuel being hedged is used. At December 31, 1998, ASA had a contract outstanding covering approximately 10% of its projected fiscal 1999 aircraft fuel requirements. At December 31, 1998, the fair value of the ASA swap contract, representing the amount ASA would pay if the contract were closed, was immaterial. During 1996, ASA renegotiated the restrictive covenants in its credit agreements due to the reorganization. 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 reorganization provided ASA Holdings with net assets that are free of the restrictive covenants in ASA's credit agreements. At December 31, 1998, the net assets of subsidiaries subject to these restrictions approximated $238 million. At December 31, 1998, approximately $60 million of net assets was available 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 1.2 million to 28.5 million at December 31, 1998 compared with the number outstanding at December 31, 1997. The number of shares decreased by 1,555,100 due to the repurchase of common stock, offset by 367,400 shares issued in connection with the exercise of stock options. During 1996, 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, 1996. ASA repurchased approximately $37.4 million of its common stock during 1996. 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. During 1997, the Company repurchased a total of approximately $14.2 million of its common stock. In February 1998, ASA Holdings' Board of Directors authorized ASA to repurchase up to $50.0 million of its common stock on the open market during the following twelve month period. In November 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 through January 2000. During 1998, the Company repurchased a total of approximately $51.4 million of its common stock. 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 in the amount of $13.1 million, $12.0 million and $11.7 million on its outstanding stock in 1998, 1997 and 1996, respectively. In April 1997, ASA executed an acquisition agreement with Bombardier, Inc. (Bombardier) for 30 Canadair Regional Jet-200 aircraft (CRJ-200) aggregating approximately $600 million with options to acquire an additional 60 aircraft. Delivery of these aircraft began in August 1997, and ASA had acquired a total of 17 CRJ-200 aircraft as of December 31, 1998 through operating leases with 16.5 year terms. The 13 remaining aircraft are scheduled to be delivered at a rate of one per month until January 2000. On September 4, 1998, ASA announced that it had executed an amendment to this acquisition agreement with Bombardier. Under the terms of the amendment, ASA exercised options to acquire 15 additional 50-passenger CRJ-200 aircraft. Delivery of the 15 additional CRJ-200 aircraft is scheduled to start in February 2000 and -28- 32 continue through June 2001. As of December 31, 1998, ASA had ordered a total of 45 CRJ-200 aircraft (17 have been delivered as of December 31, 1998). 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 45 CRJ-200 aircraft. 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. As of March 1, 1999, ASA acquired its eighteenth and nineteenth CRJ-200, also through operating leases with 16.5 year terms. ASA is scheduled to acquire its next two CRJ-200s, also under operating lease arrangements, by May 1999. Future deliveries of the remaining 24 CRJ-200s are anticipated to be at an approximate rate of one aircraft per month and the financing arrangements have not yet been determined. On September 4, 1998, ASA also announced that it had executed a second acquisition agreement with Bombardier for 12 CRJ-700 aircraft. Delivery of the CRJ-700 aircraft is scheduled to commence in the fourth quarter of 2001 and be completed in the first quarter of 2003, and the financing arrangements have not yet been determined. The list value including spares of the additional 15 CRJ-200 and the 12 CRJ-700 aircraft is approximately $575 million. ASA may finance the 24 CRJ-200s and 12 CRJ-700s, as well as other anticipated expenditures, through a combination of existing cash reserves, internally generated funds and lease and debt financing, which may include loans from Delta. Given the nature of the considerations relevant to the 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 sources. Approximately 24% of ASA's workforce are members of the unions representing pilots and flight attendants. 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. On August 26, 1998, ASA announced that its pilots ratified a new four-year collective bargaining agreement effective September 15, 1998. On November 10, 1998, the Transport Workers Union was certified to represent ASA's dispatchers. Negotiations for an initial collective bargaining agreement have not yet begun. ASA is aware that the International Association of Machinists and Aerospace Workers is currently soliciting employees in a purported craft or class of ramp workers employed by ASA for purposes of submitting a petition to represent such workers, although to the knowledge of representatives of ASA, no such petition is currently pending. ASA negotiated to receive interest rate subsidies on certain indebtedness through the export support program of the Federative Republic of Brazil. Outstanding debt aggregating approximately $41.8 million at December 31, 1998 is subject to subsidy payments which reduce the stated interest rates on such debt to an average of approximately 2.89%. Of this amount, subsidies on outstanding debt aggregating approximately $39.2 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 1998, 1997 and 1996, ASA reduced its interest expense by approximately $1.6 million, $2.2 million and $2.8 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, 1998, Delta Air Lines Holdings, Inc. (an affiliate of Delta) -29- 33 owned approximately 28% 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 by Delta's decisions regarding flight routes, revenue proration methodology 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. As noted above under "Recent Developments," Delta and the Company have entered into the Merger Agreement. Pursuant to the Merger Agreement, Purchaser commenced the Offer, which expired at midnight on March 19, 1999. As a result of the consummation of the Offer, Delta beneficially owned approximately 91% of the total number of outstanding shares of the Company's common stock as of March 22, 1999. Following the consummation of the Merger, which will be preceded by approval of the Merger by holders of a majority of the Company's outstanding common stock, the Company will become a wholly-owned subsidiary of Delta. Purchaser has sufficient voting power to approve the Merger without the vote of any other shareholder. 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, existing lines of credit, and short and long-term financing arrangements that the Company believes are available to it. Because the Company became an indirect, 91% owned subsidiary of Delta on March 22, 1999, certain negative covenants and change of control provisions contained in Delta's existing credit facilities which are applicable to Delta and its subsidiaries may become applicable to the Company or ASA or have an impact on its future financial condition, liquidity or results of operations. Delta has an unsecured revolving credit facility with a group of banks under which it may borrow up to $1.25 billion until May 1, 2002, subject to compliance with certain conditions (the "1997 Bank Credit Agreement"). Delta also has a credit agreement with a group of banks which provides for the issuance of letters of credit for up to $500 million in stated amount (the "Letter of Credit Facility") to credit enhance the Delta Family-Care Savings Plan's Series C Guaranteed Serial ESOP Notes, which are guaranteed by Delta. On March 22, 1999, Delta entered into an unsecured revolving credit facility with a group of banks (the "1999 Credit Agreement") pursuant to which Delta may borrow until the earlier of the effective date of the Merger or 120 days after March 22, 1999, up to $500 million to provide financing for a portion of the Merger consideration required to be paid in connection with the acquisition of the Company's common stock by Delta and its affiliates. The 1997 Bank Credit Agreement, the Letter of Credit Facility and the 1999 Credit Agreement each contain similar covenants that restrict Delta's and its subsidiaries' ability to grant liens, to incur or guarantee debt and to enter into flight equipment leases. These agreements also provide that if there is a change in control (as defined therein) of Delta, the banks' obligations to extend credit terminate, any amounts outstanding become immediately due and payable, and Delta must immediately deposit cash collateral with the banks in an amount equal to all outstanding letters -30- 34 of credit. At March 22, 1999, no borrowings or letters of credit were outstanding under the 1997 Bank Credit Agreement; $445 million face amount of a letter of credit was issued under the Letter of Credit Facility; and $400 million was outstanding under the 1999 Credit Agreement and payable on March 22, 2001. The acquisition by Delta of a controlling interest in the Company, however, did not violate any of the covenants contained in these credit agreements. Accounting Standards In June 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in years beginning after June 15, 1999. Because of the Company's minimal use of derivatives, management does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the financial position of the Company. Results of Operations The Company set new records in passenger traffic, operating revenues and net income in 1998. Total operating revenues were $409.9 million in 1998 compared with $385.3 million in 1997 and $375.3 million in 1996. Operating revenues were up 6% in 1998 primarily due to a 13% increase in revenue passenger miles (RPMs) flown to 1,041 million. RPMs were higher in 1998 due to the number of passengers carried increasing by 7% to 4.0 million while the average passenger trip length increased by 5% to 258 miles. ASA's load factor for 1998 was 55.8% compared with 51.0% for 1997. The average passenger yield (passenger revenue divided by RPMs) decreased by 5.9% to 38.5 cents in 1998 compared with 40.9 cents in 1997, while the average passenger fare was down .8% to $99.36 in 1998 compared with $100.19 in 1997. Passenger fares vary based on a number of factors including competition, fare discounting and economic conditions. Operating revenues in 1997 increased 3% over 1996 primarily due to a 6% increase in RPMs offset by a 2.6% decrease in the average passenger yield. ASA's average load factor in 1997 was 51.0%, up from 49.1% in 1996. For the year ended December 31, 1998, net income increased by 21% to $66.1 million compared with $54.5 million for 1997. Diluted earnings per common share for 1998 increased approximately 23% to $2.22 on 29.7 million weighted average shares outstanding compared with $1.81 on 30.1 million weighted average shares outstanding for 1997. 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 in 1997 included a one-time after-tax charge of $1.2 million or $.04 per share 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 that 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). Excluding these non- -31- 35 recurring expenses, 1997 diluted earnings per common share would have been $1.92 compared to $1.84 for fiscal 1996. Operating expenses increased 3% in 1998 and 5% in 1997. The Company's cost per available seat mile (ASM) flown remained relatively constant at 16.8 cents in 1998 compared with 16.9 cents in 1997. Capacity (the number of ASMs) was up 3% in 1998 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 $1.9 million related to ASA's decision to exercise its option for the early return of all BAe 146 aircraft to their lessor 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 4% 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. The following table compares components of operating cost per ASM for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996 ---- ---- ---- Labor and related 4.6c. 4.4c. 4.2c. Fuel 1.6 1.8 1.9 Direct maintenance 2.8 2.9 2.6 Passenger related 1.8 2.0 2.1 Depreciation and aircraft rent 2.6 2.5 2.4 Other 3.4 3.3 3.1 ---- ---- ---- Total operating expense per ASM 16.8c. 16.9c. 16.3c.
The following table presents various components of operating expense as a percentage of total operating expense for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996 ---- ---- ---- Labor and related 27% 26% 25% Fuel 9 11 12 Direct maintenance 17 17 16 Passenger related 11 12 13 Depreciation and aircraft rent 16 15 15 Other 20 19 19 --- ---- ---- Total operating expense per ASM 100% 100% 100%
The Company's break-even load factor was 41.3% in 1998 compared with 39.5% in 1997 and 37.2% in 1996. The higher break-even load factor in 1998 was primarily the result of a -32- 36 lower average passenger yield. The higher break-even load factor in 1997 compared with 1996 was primarily the result of higher operating expenses and the adjustments for SARs, the BAe 146 return and the CRJ start-up costs. Labor and related costs were $85.4 million in 1998, $78.9 million in 1997 and $74.2 million in 1996. The average number of employees in 1998 was 2,566, an increase of 3% over 1997 which contributed to higher labor and related costs. The increase in 1998 was due primarily to the additional headcount as well as higher salaries and costs of benefits. 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. Excluding SARs expense, labor and related costs per ASM would have been 4.2 cents for 1997 and 4.1 cents for 1996, compared with 4.4 cents and 4.2 cents, respectively. Fuel expense was $29.1 million, $33.0 million and $33.5 million in 1998, 1997 and 1996, respectively. Fuel consumption increased 3% in 1998 while the average fuel price per gallon, including taxes and into plane fees, decreased 15% in 1998 to 62.8 cents from 73.5 cents in 1997 due primarily to the decrease in crude oil prices during 1998. The average price per gallon, including taxes and into plane fees, decreased in 1997 compared with 1996 by 5% to 73.5 cents from 77.2 cents, due primarily to the decrease in crude oil prices during 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, remained constant at $52.8 million in 1998 and 1997, compared with $46.2 million in 1996. Direct maintenance cost decreased to 2.8 cents per ASM in 1998 compared with 2.9 cents per ASM in 1997. Maintenance expense increased in 1998 due to 3% higher capacity, increased maintenance inspections and overhauls of time controlled components and more frequent maintenance on aging EMB-120 Brasilia aircraft, offset by the addition of the new 50-passenger CRJ-200s. As with any air carrier, as ASA's fleet of aircraft ages, it requires more frequent maintenance. The addition of the new CRJ aircraft, which are expected to be used over longer routes, should create a higher capacity over which maintenance costs can be distributed. The 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. 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 $33.8 million, $35.9 million and $36.8 million in 1998, 1997 and 1996, respectively. The decrease in 1998 compared with 1997 was primarily attributable to lower rates for travel agency commissions. Passenger related expenses were approximately 8% of passenger revenue in 1998 and 10% of passenger revenue in 1997 and 1996. Aircraft rental costs were approximately $24.7 million in 1998, compared with $18.3 million in 1997 and $16.9 million in 1996. The higher expense in 1998 was due primarily to the acquisition of five CRJ-200s during the last half of 1997 and an additional 12 CRJ-200s during 1998, offset by a reduction in rent expense on the BAe-146 aircraft which were returned to their -33- 37 lessor. The increased expense in 1997 compared with 1996 was primarily attributable to the acquisition of five new CRJ-200s during the last half of 1997. Depreciation expense decreased to $24.8 million in 1998 compared with $27.4 million and $26.5 million for 1997 and 1996, respectively. This decrease in 1998 was primarily due to fixed assets that have become fully depreciated. Other expenses increased to $63.2 million in 1998 compared with $59.4 million in 1997 and $56.1 million in 1996. The increase in 1998 was primarily attributable to higher station rental and passenger-related expenses, and costs associated with negotiations related to the pilot contract. The increase in 1997 was partially attributable to costs associated with the negotiations related to the pilot and flight attendant contracts. Interest expense decreased to $2.7 million in 1998 compared with $3.8 million in 1997 and $5.9 million in 1996. The decrease in 1998 and 1997 was attributable to less total debt outstanding and the recording of $1.9 million and $1.1 million, respectively, in capitalized interest related to the deposits on the CRJ aircraft. Interest income was $11.1 million in 1998 compared with $10.9 million in 1997 and $10.7 million in 1996. Other non-operating income was $1.8 million in 1998 compared with $.2 million in 1997 and $1.1 million in 1996. Other non-operating income in 1998 and 1996 was higher due primarily to gains on the sale of aircraft equipment in those periods. 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. Year 2000 The Year 2000 issue refers generally to the data structure and processing problem that may prevent systems from properly recognizing dates after the year 1999. The Year 2000 issue affects information technology ("IT") systems, such as computer programs and various types of electronic equipment that process date information by using only two digits rather than four digits to define the applicable year, and thus may recognize a date using "00" as the year 1900 rather than the year 2000. The issue also affects some non-IT systems, such as devices which rely on a microcontroller to process date information. The Year 2000 issue could result in system failures or miscalculations, causing disruptions of a company's operations. The Company's State of Readiness 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's Year 2000 compliance program has four phases: (1) identification, (2) assessment (including prioritization), (3) remediation (including modification, upgrading, replacement and testing by third parties) and (4) contingency planning. -34- 38 Safety of Flight Systems. The Company has completed its review of the impact of Year 2000 issues on its aircraft fleet and onboard flight support systems (including a review of both IT and non-IT systems) and has determined that there are no safety-of-flight issues with respect to such systems. The Company has completed the identification phase with respect to the review of its onboard flight management systems, which maximize operating efficiency but are not essential to the safe operation of flights, and expects to complete the assessment phase during second quarter 1999 and the remediation phase during third quarter 1999. The Company also uses ground-based, safety-related computer systems and equipment which are vital to the maintenance of aircraft and the control of flight operations. The Company has completed the remediation phase with respect to such systems and equipment. Internal Business Systems. The Company's material internal business systems and equipment include computer hardware, software and related equipment, which are essential for flight scheduling and seat inventory management, finance systems (such as revenue management, revenue accounting and payroll) and other functions (such as internal voice and data communications, aircraft ground handling and baggage handling). The Company has completed the identification phase, and has started the assessment phase, for all of its material internal business systems and equipment. The assessment phase and the remediation phase with respect to such systems and equipment are expected to be completed during the second quarter 1999. Year 2000 Issues Relating to Third Parties. The Company is reviewing, and has initiated formal communications with, third parties which provide goods or services which are essential to its operations in order to determine the extent to which the Company is vulnerable to any failure by such material third parties to remediate their respective Year 2000 problems and resolve such problems to the extent practicable. These entities include other airlines, suppliers of infrastructure systems critical to the airline industry (such as the air traffic control and related systems of the U.S. Federal Aviation Administration and international aviation authorities, the U.S. Department of Transportation and local airport authorities), and suppliers of aircraft fuel, utilities and communication services. The Company has completed the identification phase, and has started the assessment phase, with respect to such third-party systems. The assessment phase and the remediation phase with respect to such third-party systems are expected to be completed during the second and third quarter 1999, respectively. To the extent the Year 2000 problem has a material adverse effect on Delta's business, operations or financial condition, such Year 2000 problem could have a material adverse effect on the Company's business, results of operations and financial condition. Delta leases reservation equipment and terminal facilities to the Company, and provides certain services to the Company, including reservation and ground handling services. The Company has had formal communications with Delta regarding its Year 2000 compliance program and expects to complete the assessment and remediation phases with respect to Delta's systems at the same time it completes such phases with respect to other material third-party systems. -35- 39 Costs to Address the Company's Year 2000 Issues The Company estimates that the total cost of achieving Year 2000 readiness for its internal systems and equipment will be less than $1.0 million. However, the Company's Year 2000 compliance program is an ongoing process involving continual evaluation and may be subject to change in response to new developments, which may result in increased costs. The Company's Contingency Plans The Company is revising its existing business interruption contingency plans to address internal and external issues specific to the Year 2000 problem, to the extent practicable. Such revisions are expected to be completed by third quarter 1999. These plans, which are intended to enable the Company to continue to operate to the extent that it can do so safely, include performing certain processes manually; repairing or obtaining replacement systems; and changing suppliers. The Company believes, however, that due to the widespread nature of potential Year 2000 issues, the contingency planning process is an ongoing one which will require further modifications as the Company obtains additional information regarding the Company's internal systems and equipment during the assessment and remediation phases of its Year 2000 program and the status of third-party Year 2000 readiness. The Risks of the Company's Year 2000 Issues The Company believes completed and planned modifications and conversions of its internal systems and equipment will allow it to resolve material problems created by the Year 2000 issue in a timely manner. However, there can be no assurance that the Company's systems will properly address Year 2000 issues prior to December 31, 1999, or that the failure of any such system will not have a material adverse effect on the Company's business, operating results and financial condition. In addition, to the extent the Year 2000 problem has a material adverse effect on the business, operations or financial condition of third parties with whom the Company has material relationships, such as Delta, vendors, suppliers and customers, the Year 2000 problem could have a material adverse effect on the Company's business, results of operations and financial condition. While the Company does not currently expect any significant modification of its operations in response to the Year 2000 issue, in a worst case scenario the Company could be required to alter or curtail its operations significantly. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risks Associated With Financial Instruments The risk inherent in the Company's market risk sensitive instruments and positions is the potential loss arising from adverse changes in the price of fuel and interest rates as discussed below. The sensitivity analyses presented do not consider the effects that such adverse changes may have on the overall economic activity, nor do they consider additional actions management -36- 40 may take to mitigate its exposure to such changes. Actual results may differ. See Note E to the consolidated financial statements for accounting policies and additional information. Commodity Price Risk The Company's results of operations are significantly impacted by changes in the price of aircraft fuel. During fiscal 1998, aircraft fuel accounted for 9.3% of the Company's operating expenses. Based on the Company's fiscal 1999 projected aircraft fuel consumption of 60.7 million gallons, every one-cent change in the average annual price per gallon of aircraft fuel would impact ASA's annual aircraft fuel expense by approximately $0.5 million. The Company uses fuel swap contracts to manage aircraft fuel price risk. At December 31, 1998, the Company had entered into a swap contract for 10% of its projected fiscal 1999 aircraft fuel requirements. (See Note E of Notes to Consolidated Financial Statements.) Interest Rate Risk The Company's earnings are also affected by changes in interest rates due to the impact those changes have on its interest income from cash and short-term investments and its interest expense from variable-rate debt instruments. If interest rates increased by 1.0% in 1999 as compared to 1998, the Company's interest expense would increase by approximately $540,000 and interest income from cash and short-term investments would increase by $1,840,000. These amounts are determined by considering the impact of the hypothetical interest rates on the Company's variable-rate long-term debt and cash and short-term investment balances at December 31, 1998. The Company has no fixed-rate long- term debt. At December 31, 1998, the Company operated 27 aircraft under operating leases at rates that are fixed. As defined in Item 305, leases are not market risk sensitive financial instruments and, therefore are not included in the interest rate sensitivity analysis above. Commitments related to leases are disclosed in Note G to the Consolidated Financial Statements. -37- 41 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ASA HOLDINGS, INC. CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Consolidated Balance Sheets as of December 31, 1998 and 1997...................................................................... F-2 Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996................................... F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996................................... F-5 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1998, 1997 and 1996................................... F-6 Notes to Consolidated Financial Statements.......................................... F-7 Report of Independent Auditors...................................................... F-23 Report of Management................................................................ F-24
F-1 42 ASA HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS
December 31, 1998 1997 ------------ ------------ ASSETS Current Assets Cash and cash equivalents $130,553,224 $112,393,109 Marketable securities 55,291,576 71,486,542 Receivables, less allowance for uncollectible accounts of $143,204 in 1998 and $294,989 in 1997 - Note K 8,529,052 6,662,587 Expendable parts, less allowance for obsolescence of $4,701,567 in 1998 and $4,939,950 in 1997 6,982,087 6,544,564 Other current assets 3,246,457 3,683,059 ------------ ------------ 204,602,396 200,769,861 Property and Equipment - Note B Flight equipment 468,927,148 468,666,479 Other property and equipment 18,645,955 16,766,413 Advance payments on property and equipment 43,039,311 26,167,400 ------------ ------------ 530,612,414 511,600,292 Less accumulated depreciation and amortization 247,549,235 231,045,066 ------------ ------------ 283,063,179 280,555,226 Other Assets Investments -- 11,777,109 Other 12,103,074 12,857,537 ------------ ------------ 12,103,074 24,634,646 TOTAL ASSETS $499,768,649 $505,959,733 ============ ============
See notes to consolidated financial statements. F-2 43 ASA HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS
December 31, 1998 1997 ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current portion of long-term debt $ 18,723,997 $ 21,851,783 Accounts payable - Note K 34,831,048 25,410,523 Air traffic liability 5,597,386 2,407,711 Accrued compensation and related expenses 8,654,701 11,148,483 Accrued interest payable 747,303 1,057,520 Other accrued expenses 1,524,284 2,520,476 Income taxes payable 1,887,781 6,395,077 ------------ ------------ 71,966,500 70,791,573 Long-Term Debt - Note B 54,062,622 72,791,614 Other Non-Current Liabilities 2,737,514 2,231,668 Deferred Income Taxes - Note F 61,228,464 64,219,476 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 and outstanding - 28,543,177 and 29,730,877 shares, respectively 2,854,318 2,973,088 Retained earnings 306,981,836 292,936,988 Accumulated other comprehensive income (62,605) 15,326 ------------ ------------ Total Shareholders' Equity 309,773,549 295,925,402 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $499,768,649 $505,959,733 ============ ============
See notes to consolidated financial statements. F-3 44 ASA HOLDINGS, INC. CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1998 1997 1996 ------------ ------------ ------------- REVENUES Operating Revenues: Passenger $400,128,103 $378,167,801 $367,250,428 Other 9,731,000 7,121,652 8,049,998 ------------ ------------ ------------ Total Operating Revenues 409,859,103 385,289,453 375,300,426 EXPENSES Operating Expenses: Flying operations 94,397,953 87,454,721 85,074,131 Maintenance 68,934,447 68,614,905 61,376,727 Passenger service 20,195,771 18,547,370 18,664,839 Aircraft and traffic servicing 51,500,669 45,551,823 45,390,058 Reservation, commission and other 37,717,940 38,529,361 39,344,575 General and administrative 13,756,128 17,590,431 12,078,785 Depreciation, amortization and obsolescence 25,867,047 28,686,264 27,534,057 Other 1,458,234 729,840 684,815 ------------ ------------ ------------ Total Operating Expenses (including payments to Delta Air Lines, Inc. of $11.5 million, $11.7 million and $11.9 million) 313,828,189 305,704,715 290,147,987 Income from Operations 96,030,914 79,584,738 85,152,439 Non-Operating (Income) Expenses: Interest: Income (11,163,240) (10,920,403) (10,672,964) Expense 2,720,920 3,834,454 5,862,866 Other, net (1,771,547) (170,628) (1,143,983) ------------ ------------ ------------ (10,213,867) (7,256,577) (5,954,081) Income before Income Taxes 106,244,781 86,841,315 91,106,520 Income Taxes - Note F: Current 43,098,512 37,744,997 34,058,554 Deferred (2,991,012) (5,415,297) 435,246 ------------ ------------ ------------ 40,107,500 32,329,700 34,493,800 ------------ ------------ ------------ NET INCOME $ 66,137,281 $ 54,511,615 $ 56,612,720 ============ ============ ============ EARNINGS PER COMMON SHARE $ 2.24 $ 1.82 $ 1.83 ============ ============ ============ Weighted Average Number of Common Shares Outstanding 29,560,513 29,909,654 30,914,246 ============ ============ ============ EARNINGS PER COMMON SHARE - DILUTED $ 2.22 $ 1.81 $ 1.83 ============ ============ ============ Weighted Average Number of Common Shares and Common Share Equivalents Outstanding 29,728,630 30,091,877 30,990,599 ============ ============ ============
See notes to consolidated financial statements. F-4 45 ASA HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998 1997 1996 ------------ ------------ ------------ OPERATING ACTIVITIES: Net Income $ 66,137,281 $ 54,511,615 $ 56,612,720 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation 24,822,751 27,351,713 26,518,027 Amortization and provision for obsolescence 1,044,296 1,334,551 1,016,030 Amortization of engine overhauls 7,453,515 7,381,705 6,656,680 Deferred income taxes (2,991,012) (5,415,297) 435,246 Other 1,183,580 2,051,505 (107,722) Changes in Operating Assets and Liabilities: Receivables (1,886,465) (229,971) 5,187,991 Expendable parts (681,850) 863,596 (1,859,712) Other assets 463,160 (5,517,143) 742,274 Accrued compensation and related expenses (1,987,936) 4,330,204 983,488 Accrued interest payable (310,217) (261,030) (1,622,461) Accounts payable and other liabilities 11,614,008 4,515,089 (1,213,312) Income taxes payable (4,507,296) 6,395,077 -- ------------ ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 100,353,815 97,311,614 93,349,249 INVESTING ACTIVITIES: Purchase of Marketable Securities and Investments (105,192,501) (179,617,608) (189,882,992) Proceeds from Sale of Marketable Securities and Investments 133,152,469 149,001,159 258,806,167 Purchases of Property and Equipment, including Advance Payments (37,838,072) (46,188,478) (15,321,851) Other 5,126,947 698,075 5,699,260 ------------ ------------ ------------ NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (4,751,157) (76,106,852) 59,300,584 FINANCING ACTIVITIES: Principal Payments on Long-Term Debt (21,856,778) (25,550,693) (32,405,997) Dividends Paid (13,095,039) (11,969,851) (11,731,958) Purchase of Common Stock (51,401,512) (14,240,313) (37,445,781) Proceeds from Exercise of Stock Options 8,910,786 5,480,413 -- ------------ ------------ ------------ NET CASH USED IN FINANCING ACTIVITIES (77,442,543) (46,280,444) (81,583,736) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 18,160,115 (25,075,682) 71,066,097 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 112,393,109 137,468,791 66,402,694 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $130,553,224 $112,393,109 $137,468,791 ============ ============ ============
See notes to consolidated financial statements. F-5 46 ASA HOLDINGS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated Common Stock Capital in Other Treasury Stock -------------------- Excess Retained Comprehensive ------------------------- Shares Amount of Par Earnings Income Shares Amount ---------------------------------------------------------------------------------------------- Balance, January 1, 1996 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 (38(cent)per share) (11,731,958) 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 Unrealized Holding Loss on Investments, Net (74,562) Comprehensive Income ---------------------------------------------------------------------------------------------- Balance, December 31, 1996 29,993,570 2,999,357 -- 257,218,657 (2,118) -- -- Net Income 54,511,615 Dividends Paid (40(cent)per share) (11,969,851) 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 7,362,870 Unrealized Holding Gain on Investments, Net 17,444 Comprehensive Income ---------------------------------------------------------------------------------------------- Balance, December 31, 1997 29,730,877 2,973,088 -- 292,936,988 15,326 -- -- Net Income 66,137,281 Dividends Paid (44(cent)per share) (13,095,039) Purchase of Common Stock (1,555,100) (155,510) (12,248,608) (38,997,394) Exercise of Stock Options 367,400 36,740 12,248,608 Unrealized Holding Loss on Investments, Net (77,931) Comprehensive Income ---------------------------------------------------------------------------------------------- Balance, December 31, 1998 28,543,177 $2,854,318 $ -- $306,981,836 ($62,605) -- $ -- ==============================================================================================
Total Comprehensive Shareholders' Income Equity ------------------------------------ Balance, January 1, 1996 $252,855,477 Net Income $56,612,720 56,612,720 Dividends Paid (38(cent)per share) (11,731,958) Purchase of Common Stock (37,445,781) Cancellation of Treasury Stock 0 Unrealized Holding Loss on Investments, Net (74,562) (74,562) ----------- Comprehensive Income $56,538,158 ===========----------------- Balance, December 31, 1996 260,215,896 Net Income $54,511,615 54,511,615 Dividends Paid (40(cent)per share) (11,969,851) Purchase of Common Stock (14,240,313) Exercise of Stock Options and Stock Appreciation Rights 7,390,611 Unrealized Holding Gain on Investments, Net 17,444 17,444 ----------- Comprehensive Income $54,529,059 ===========----------------- Balance, December 31, 1997 295,925,402 Net Income $66,137,281 66,137,281 Dividends Paid (44(cent)per share) (13,095,039) Purchase of Common Stock (51,401,512) Exercise of Stock Options 12,285,348 Unrealized Holding Loss on Investments, Net (77,931) (77,931) ----------- Comprehensive Income $66,059,350 ===========----------------- Balance, December 31, 1998 $309,773,549 ============
F-6 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 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 primarily 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 28% 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 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. F-7 48 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: 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. At December 31, 1997, long-term investments consisted 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 years ended December 31, 1998 and 1997, respectively, $1,935,000 and $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 1 - 28 years
For income tax purposes, accelerated depreciation methods are used. Maintenance: Routine costs for aircraft and engine maintenance are generally 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 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, 1998 and 1997 was $4,010,088 and $3,492,975, 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. Asset Impairment: The Company generally accounts for long-lived asset impairment under Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This Statement requires that long-lived assets and certain identifiable intangibles to be held and used be reviewed for F-8 49 impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the Company estimates the future cash flows expected to result from the use of the asset. If the sum of the estimated expected future cash flows is less than the carrying amount of the asset, an impairment loss is recognized. Otherwise, an impairment loss is based on the estimated fair value of the asset. Long-lived assets to be disposed of are generally recorded at the lower of their carrying amount or estimated fair value less cost to sell. 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. Recent Pronouncements: In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), which is required to be adopted in years beginning after June 15, 1999. SFAS 133 permits early adoption as of the beginning of any fiscal quarter after its issuance. SFAS 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company is currently evaluating the impact of SFAS 133 to the Company's financial condition or results of operations. F-9 50 Note B - Long-Term Debt ASA's long-term debt was as follows:
December 31, 1998 1997 ---------- ---------- Notes payable to banks. ASA pledged aircraft and support equipment with a net book value of $9,412,258 as collateral. Payments are due in semi-annual installments plus interest at 6.5% to 1999. $ 756,981 $3,409,280 Notes payable to banks. ASA pledged aircraft and support equipment with a net book value of $8,661,588 as collateral. Payments are due in semi-annual installments plus interest at 6.125% to 6.4375% to 1999. 1,565,923 3,856,556 Notes payable to banks. ASA pledged aircraft and support equipment with a net book value of $5,408,508 as collateral. Payments are due in quarterly installments plus interest at 7% to 1999. 649,571 1,817,634 Notes payable to bank. ASA pledged aircraft and support equipment with a net book value of $9,447,404 as collateral. Payments are due in semi-annual installments plus interest at 5.35% to 5.7875% to 2000. 2,629,991 4,470,410 Floating rate note payable to bank. ASA pledged aircraft and support equipment with a net book value of $3,327,785 as collateral. Payments are due in semi-annual installments plus interest based on floating six month LIBOR to 2000. Rate at December 31, 1998 was 5.739%. 1,058,460 1,587,690 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 plus interest based on floating six month LIBOR to 2000. Rate at December 31, 1998 was 6.0594%. 1,059,705 1,589,556 Floating rate notes payable to bank. ASA pledged aircraft and support equipment with a net book value of $14,323,946 as collateral. Payments are due in semi-annual installments plus interest based on floating six month LIBOR to 2001. Rates at December 31, 1998 were 6.60%. 5,346,637 7,485,289 Floating rate notes payable to bank. ASA pledged aircraft and support equipment with a net book value of $15,092,430 as collateral. Payments are due in semi-annual installments plus interest based on floating six month LIBOR to 2002. Rates at December 31, 1998 were 6.0313% or 6.3438%. 5,777,000 7,879,428
F-10 51 Floating rate notes payable to bank. ASA pledged aircraft and support equipment with a net book value of $42,684,109 as collateral. Payments are due in semi-annual installments plus interest based on floating six month LIBOR to 2003. Rates at December 31, 1998 were 5.7831% or 6.375%. 22,937,851 28,392,338 Floating rate notes payable to bank. ASA pledged aircraft and support equipment with a net book value of $37,449,751 as collateral. Payments are due in mortgage style semi-annual installments plus interest based on floating six month LIBOR to 2006. Rates at December 31, 1998 were 5.585% to 5.84375%. 31,004,500 34,155,216 ----------- ----------- 72,786,619 94,643,397 Less current portion 18,723,997 21,851,783 ----------- ----------- $54,062,622 $72,791,614 ----------- -----------
As of December 31, 1998, maturities on long-term debt were: 1999 $18,723,997 2000 15,423,506 2001 11,661,178 2002 9,761,738 2003 5,400,604 After 2003 11,815,596 ----------- $72,786,619 -----------
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 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, 1998, the net assets of subsidiaries subject to these restrictions approximated $238 million. At December 31, 1998, approximately $60 million of net assets was available for distribution by ASA to ASA Holdings under the most restrictive of these provisions. ASA negotiated to receive interest rate subsidies on certain indebtedness through the export support program of the Federative Republic of Brazil. Outstanding debt aggregating $41,782,120 at December 31, 1998 is subject to subsidy payments which reduce the stated interest rates on such debt to an average of approximately 2.89%. However, subsidies on an aggregate of $39,152,129 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 F-11 52 payments into ASA's payment obligations. During 1998, 1997 and 1996, ASA reduced its interest expense by $1,578,513, $2,175,601 and $2,826,564, respectively, as a result of these interest rate subsidies. The amount of net interest paid during 1998, 1997 and 1996 was $4,460,091, $5,075,122 and $7,314,112, 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 In April 1997, ASA announced that it had executed an acquisition agreement with Bombardier, Inc. (Bombardier) for 30 Canadair Regional Jet-200 aircraft (CRJ-200) aggregating approximately $600 million with options to acquire an additional 60 aircraft. Delivery of these aircraft began in August 1997, and ASA acquired a total of 17 CRJ-200 aircraft as of December 31, 1998 through operating leases with 16.5 year terms. The 13 remaining aircraft are scheduled to be delivered at a rate of one per month until January 2000. On September 4, 1998, ASA announced that it executed an amendment to this acquisition agreement with Bombardier. Under the terms of the amendment, ASA exercised options to acquire 15 additional 50-passenger CRJ-200 aircraft. Delivery of the 15 additional CRJ-200 aircraft is scheduled to start in February 2000 and continue through June 2001. As of December 31, 1998, ASA had ordered a total of 45 CRJ-200 aircraft (17 have been delivered as of December 31, 1998). 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 45 CRJ-200 aircraft. 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. Future deliveries of the remaining 28 CRJ-200s are anticipated to be at an approximate rate of one aircraft per month, and four of these CRJ-200 aircraft are expected to be financed under the same arrangements as previously received aircraft. On September 4, 1998, ASA also announced that it executed a second acquisition agreement with Bombardier for 12 CRJ-700 aircraft. Delivery of the CRJ-700 aircraft is scheduled to commence in the fourth quarter of 2001 and be completed in the first quarter of 2003, and the financing arrangements have not yet been determined. The list value including spares of the additional 15 CRJ-200 and the 12 new CRJ-700 aircraft is approximately $575 million. Note D - Lines of Credit As of December 31, 1998, the Company had two unsecured lines of credit totaling $108.0 million with several banks. During the second quarter of 1998, ASA Holdings established a new $100 million unsecured credit facility to enhance the Company's flexibility for future growth. The facility is guaranteed by ASA and ASA Investments. The current pricing on a loan is LIBOR plus 27.5 basis points. In addition, the Company pays a facility commitment fee of 12.5 basis points on the amount of the revolving commitment regardless of whether, and to what extent, the revolving commitment is utilized. The new line of credit has a five year term which expires on F-12 53 June 26, 2003 and contains customary financial covenants. At December 31, 1998 and 1997, there was $.7 million of one line committed to support two letters of credit and there were no outstanding amounts against these lines of credit. In connection with the Merger Agreement, the $100 million unsecured credit facility was terminated effective March 22, 1999. The remaining line of credit is available for general corporate purposes on an as needed basis. Note E - 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. 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. In 1997, the Company paid approximately $4 million upon maturity to settle interest rate locks applicable to certain aircraft acquisitions. These amounts are being amortized as an increase to lease expense over the term of the related financing. No unsettled interest rate lock agreements were outstanding as of December 31, 1998. ASA enters into fuel swap contracts to manage risk associated with changes in aircraft fuel prices. Under these contracts, ASA receives or makes payments based on differences between fixed and variable prices for certain fuel commodities. Gains and losses from fuel swap contracts are deferred and recognized as a component of fuel expense when the underlying fuel being hedged is used. The changes in market value of such agreements have a high correlation to the price changes recognized as a component of fuel expense when the underlying fuel being hedged is used. Gains and losses on fuel hedging agreements would be recognized immediately should the changes in the market value of the agreements cease to have a high correlation to the price changes of the fuel being hedged. At December 31, 1998, ASA had a contract outstanding covering 1,000,000 gallons per month through June 30, 1999, representing approximately 10% of its projected fiscal 1999 aircraft fuel requirements which effectively fixes the Company's cost of this fuel at $0.4595 per gallon. Historically, the Company has not closed any contracts prior to the execution of the underlying purchase transactions, nor have any of the underlying purchase transactions failed to occur. At December 31, 1998, the fair value of ASA's swap contract, representing the amount ASA would pay if the contract were closed, was immaterial. F-13 54 Note F - Income Taxes Deferred income taxes reflect the net income 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 December 31, 1998 and 1997 are as follows:
1998 1997 ----------- ------------ Deferred income tax liabilities: Tax over book depreciation $66,862,979 $69,569,768 Other 1,473,662 737,973 ----------- ------------ Total deferred income tax liabilities 68,336,641 70,307,741 Deferred income tax assets: Inventory reserves 1,015,922 1,156,869 Other 6,092,255 4,931,396 ----------- ----------- Total deferred income tax assets 7,108,177 6,088,265 ----------- ----------- Net deferred income tax liabilities $61,228,464 $64,219,476 ----------- -----------
For financial reporting purposes, the provision for income taxes includes the following components for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996 ----------- ----------- ----------- Federal: Current $39,219,612 $34,347,947 $30,993,254 Deferred (2,721,812) (4,927,897) 396,046 ----------- ----------- ----------- 36,497,800 29,420,050 31,389,300 ----------- ----------- ----------- State: Current 3,878,900 3,397,050 3,065,300 Deferred (269,200) (487,400) 39,200 ----------- ----------- ----------- 3,609,700 2,909,650 3,104,500 ----------- ----------- ----------- $40,107,500 $32,329,700 $34,493,800 ----------- ----------- -----------
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, 1998, 1997 and 1996:
1998 1997 1996 ----------- ----------- ----------- Income tax expense, at statutory rate $37,185,673 $30,394,460 $31,887,282 State income taxes, net of federal tax benefit 2,478,930 1,978,194 2,004,211 Other 442,897 (42,954) 602,307 ----------- ----------- ----------- Income tax expense $40,107,500 $32,329,700 $34,493,800 ----------- ----------- -----------
F-14 55 In 1997, ASA received an income tax refund related to certain amended prior years' state income tax returns and, accordingly, reduced the provision for income taxes by approximately $500,000. The Company paid income taxes in the amount of $45,725,336 in 1998, $32,384,060 in 1997 and $33,389,841 in 1996. Note G - Commitments and Contingencies 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 20 years. The Company leases a number of its aircraft under operating leases. The aircraft lease agreements contain certain provisions which allow for renewals at then current market rates and purchase options at various dates. ASA's fleet at December 31, 1998 includes the following aircraft under operating leases:
Initial Non-Cancelable # of Aircraft Type of Aircraft Lease Term ------------- ---------------- ---------------------- 8 ATR-72 7 years 2 EMB-120 3.1 - 4.4 years 17 CRJ-200 16.5 years
Total rental expense on operating leases for the years ended December 31, 1998, 1997 and 1996 was $33,016,464, $25,695,796 and $24,041,093, respectively. Minimum future lease payments under all non-cancelable operating leases at December 31, 1998 are as follows:
December 31, 1999 $ 35,232,840 2000 34,130,453 2001 33,645,937 2002 28,338,444 2003 23,942,556 After 2003 242,236,643 ------------ $397,526,873
Approximately 24% of ASA's workforce are members of the unions representing pilots and flight attendants. In September 1997, ASA and the flight attendants' union entered into a new collective bargaining agreement that is amendable in 2002. On August 26, 1998, ASA announced that its pilots ratified a new four-year collective bargaining agreement effective September 15, 1998. On November 10, 1998, the Transport Workers Union was certified to represent ASA's dispatchers. Negotiations for an initial collective bargaining agreement have not yet begun. ASA is aware that the International Association of Machinists and Aerospace Workers is currently soliciting employees in a purported craft or class of ramp workers employed by ASA for purposes of submitting a petition to represent such workers, although to the knowledge of representatives of ASA, no such petition is currently pending. F-15 56 Note H- Common Stock Transactions Pursuant to its stock repurchase programs, the Company purchased $51,402,000, $14,240,000 and $37,446,000 of its common stock in 1998, 1997 and 1996, respectively. In February 1998, ASA Holdings announced that its Board of Directors authorized the repurchase of up to $50,000,000 of its common stock on the open market during 1998. All of this authorization was used and in November 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 through January 2000. 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, 1996 790,400 $17.13 - $36.75 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 ---------- ---------------
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 Granted 413,600 40.60 Exercised (367,400) 24.25 ---------- ------ Outstanding at December 31, 1998 1,017,400 $30.79 ---------- ------
F-16 57 The following table summarizes information about stock options outstanding at December 31, 1998:
Date of Grant Number of Options Exercise Price ------------- ----------------- --------------- May 21, 1997 121,200 $36.75 May 21, 1997 325,500 $22.38 May 21, 1997 26,800 $21.25 May 21, 1997 130,300 $17.13 February 11, 1998 391,800 $40.63 March 2, 1998 21,800 $40.13 ----------- --------------- Total 1,017,400 $17.13 - $40.63 ----------- ---------------
The weighted average remaining contractual life of the stock options outstanding at December 31, 1998 was 2.9 years. Of the 1,017,400 options outstanding at December 31, 1998, 577,000 with a weighted average exercise price of $24.21 were fully vested. At May 21, 1997, the Company reserved 2,500,000 shares of common stock for issuance under the Option Plan. At December 31, 1998, 838,300 shares remained available for future grants. In January 1999, an additional 432,000 options were granted under the Option Plan at an exercise price of $30.25. During 1997, SARs increased general and administrative 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, SARs increased expense by approximately $729,000. 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. In May 1998, the Company's shareholders approved a Nonqualified Stock Option Plan for Non-Employee Directors. The Company reserved 250,000 shares of common stock for issuance under this option plan. During 1998, 12,500 options were granted at an exercise price of $37.03 and were fully vested. In January 1999, another 12,500 options were granted under this plan with an exercise price of $30.31. The Company has 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 1998 and 1997, respectively: a risk-free interest rate of 5% and 6%; a dividend yield of 1% and 2%; a volatility factor of the expected common stock market price of .41 and .4; and a weighted-average expected life of the SARs/options of five years. The weighted average fair values of the options granted in 1998 and 1997 were computed to be $15.78 and $8.36, respectively. The Black-Scholes option valuation model was F-17 58 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):
1998 1997 1996 ---- ---- ---- Net Income - as reported $66,137 $54,512 $56,613 Net Income - pro forma $63,167 $52,883 $56,524 Earnings per Common Share - Diluted as reported $2.22 $1.81 $1.83 Earnings per Common Share - Diluted pro forma $2.12 $1.76 $1.82
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). After 7 years of service by an employee, the Company will make a matching contribution of 75 cents for each dollar of salary reduction elected by an employee. The amounts contributed by the Company for 1998, 1997 and 1996 were approximately $1,355,000, $882,000 and $920,000, 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 $180,000, $120,000 and $126,000 were contributed in 1998, 1997 and 1996, respectively. The Company has an unfunded 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 1998, 1997 and 1996, respectively, the Company accrued to general and administrative expense approximately $172,000, $160,000 and $142,000 related to the SERP. At F-18 59 December 31, 1998 and 1997, respectively, other non-current liabilities included approximately $1,500,000 and $1,219,000 related to the SERP. Note K - Related Party Transactions At December 31, 1998 Delta Air Lines Holdings, Inc. (a subsidiary of Delta) owned 7,995,000 shares or approximately 28% 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 $11,812,000 in 1998, $11,686,000 in 1997, and $11,883,000 in 1996. Other information related to Delta is as follows:
1998 1997 ---- ---- Accounts Receivable from Delta at December 31: $ 225,000 $ 205,000 Accounts Payable to Delta at December 31: $2,068,000 $1,725,000
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, revenue proration methodology 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 $99,616 as of December 31, 1998 and $9,457 as of December 31, 1997 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 ranged 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 F-19 60 credit facilities with maturities 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 carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1998 and 1997 are as follows:
Carrying Amounts Estimated Fair Value 1998 1997 1998 1997 ---- ---- ---- ---- Cash and cash equivalents $130,553,224 $112,393,109 $130,553,224 $112,393,109 Marketable securities 55,291,576 71,486,542 55,291,576 71,486,542 Long-term investments -- 11,777,109 -- 11,777,109 Total long-term debt (including current maturities) (72,786,619) (94,643,397) (72,825,281) (94,608,577) Off-balance sheet financial instruments -- -- 2,253,821 1,478,273
Note M - Earnings per Common Share The following table sets forth the computation of earnings per common share:
1998 1997 1996 ---- ---- ---- Numerator: Net Income $66,137,281 $54,511,615 $56,612,720 ----------- ----------- ----------- Denominator: For Earnings per Common Share: Weighted Average Common Shares Outstanding 29,560,513 29,909,654 30,914,246 Effect of Dilutive Securities: Stock Options/SARs 168,117 182,223 76,353 ----------- ----------- ----------- For Earnings per Common Share - Diluted: Weighted Average Common Shares and Share Equivalents Outstanding 29,728,630 30,091,877 30,990,599 ----------- ----------- ----------- Earnings per Common Share $ 2.24 $ 1.82 $ 1.83 ----------- ----------- ----------- Earnings per Common Share - Diluted $ 2.22 $ 1.81 $ 1.83 ----------- ----------- -----------
F-20 61 SARs/options to purchase 235,700 shares of common stock at $36.75 per share were outstanding during 1997 and 1996, 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 January 1999, the Company issued an additional 432,000 options at an exercise price of $30.25 and 12,500 options at an exercise price of $30.31. Note N - Acquisition by Delta On February 15, 1999, the Company entered into an Agreement and Plan of Merger (the "Agreement") with Delta which provides for Delta's acquisition of the 72% of the Company's common stock which Delta did not already own for a total consideration of approximately $700 million. Under the terms of the agreement, a newly formed Delta subsidiary made a tender offer (the Offer) to purchase all outstanding shares of common stock of the Company for $34 per share in cash. Delta commenced the Offer on February 22, 1999 and it expired at 12:00 midnight, Eastern Standard Time, on March 19, 1999. As a result of the consummation of the Offer, Delta beneficially owned approximately 91% of the total number of outstanding shares of the Company's common stock as of March 22, 1999. Following the consummation of the Merger, which will be preceded by the approval by holders of a majority of the Company's outstanding common stock, the Delta subsidiary will be merged with and into the Company, and the Company will be a wholly-owned subsidiary of Delta. Delta has sufficient voting power to approve the Merger without the vote of any other shareholder. In connection with the Agreement a putative class action complaint was filed in the Superior Court of Fulton County in the State of Georgia against the Company and its directors and Delta, seeking, among other things, to enjoin the Offer and Agreement or to rescind the Offer and Agreement if either is consummated. On March 9, 1999, the parties entered into a memorandum of understanding, setting forth the terms of an agreement-in-principle to settle this litigation, including the payment of Plaintiffs' legal fees up to $400,000, subject to court approval. Pursuant to the memorandum of understanding, the Company and Delta have amended the Merger Agreement to eliminate the $5 million break-up fee that would otherwise have been payable to Delta if the Merger Agreement were to be terminated as a result of the Company receiving and accepting a superior offer for its shares. The proposed settlement is subject to the approval of the Fulton County Superior Court. On March 18, 1999, the Company received a letter from Private Capital Management, Inc. ("PCM"), a company claiming to exercise discretionary authority over 246,300 shares of Company stock. The letter contends that one of PCM's clients may have initiated a lawsuit in connection with the Offer and/or the Merger. The Company, however, has not received any summons in respect of, nor does it have any knowledge of, any legal action relating to the Offer or the Merger being taken other than the lawsuit which is discussed above. It is possible that other legal actions may be filed with respect to the Offer or the Merger. The Company is unable to determine the outcome of any such matters, if any. The Company accrued approximately $7 million in the first quarter of 1999 related to certain investment banking and legal fees incurred in connection with the Agreement. In recent discussions with Delta, the Company believes Delta may make adjustments to the revenue proration methodology currently in use. In addition, Delta proposed other changes which would adversely affect the future financial performance of the F-21 62 Company, including proposals to impose upon the Company new charges for the payment of overrides to travel agents' commissions, to specify the markets into which the Company's regional jets would be deployed, and to impose fees for passengers not connecting with Delta flights and service performance penalties. If such adjustments are made there could be a material adverse change to the Company's consolidated financial position and results of operations. F-22 63 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, 1998 and 1997, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules 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, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Atlanta, Georgia February 1, 1999 except for Notes D and N as to which the date is March 22, 1999 F-23 64 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 F-24 65 QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED) (in thousand except per share data)
FIRST SECOND THIRD FOURTH YEAR 1998 Operating Revenues $93,748 $106,667 $105,003 $104,441 $409,859 Operating Income 19,359 28,863 25,870 21,939 96,031 Income before Income Taxes 21,407 31,391 29,186 24,261 106,245 Net Income $13,326 $ 19,541 $ 18,168 $ 15,102 $ 66,137 Earnings per Common Share $ 0.45 $ 0.65 $ 0.61 $ 0.52 $ 2.24 Weighted Average Common Shares Outstanding 29,839 29,839 29,804 28,769 29,561 Earnings per Common Share - Diluted $ 0.44 $ 0.65 $ 0.61 $ 0.52 $ 2.22 Weighted Average Common Shares and Share Equivalents Outstanding 30,023 30,016 29,979 28,906 29,729 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
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -38- 66 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following information is furnished with respect to the directors, executive officers and other significant employees of ASA Holdings, Inc. as of February 18, 1999: George F. Pickett, age 57, 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. From ASA's inception in 1979 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 inceptions. John W. Beiser, age 58, 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 in September 1996. 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 54, 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 40, 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 48, 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 -39- 67 Trans World Airlines from 1969 through 1994, including Senior Vice President-Maintenance and Engineering and Senior Vice President-Operations. Charles J. Thibaudeau, age 52, has served as ASA's Vice President-Human Resources since November 1998. Mr. Thibaudeau has approximately 20 years of experience in the human resources and employee relations areas from his tenure at Trans World Airlines. James J. Cerniglia, age 56, has served as ASA's Assistant Vice President-Flight Systems Controls 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 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 ASA. Mark W. Fischer, age 40, has served as the Vice President-Customer Service 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 Service 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 50, 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. John A. Bedson, age 43, has been ASA's Vice President-Flight Operations since November 1998. From 1994 until 1998, Mr. Bedson was Vice President-Operations Support for British Aerospace, North America, Inc. Prior to that time, he was Director-Flight Operations for Trans World Express from 1990 to 1994, and held the positions of Director-Flight Operations, Chief Pilot and Chief Instructor at PanAm Express from 1985 to 1990. Renee H. Skinner, age 42, 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 51, who has served as Vice President-Sales and Corporate Communications of ASA since July 1997, has been employed by ASA in customer service -40- 68 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. W. Grant Nichols, age 34, has served as ASA's Assistant Vice President-Market Development since 1997. Mr. Nichols previously served as the Manager of Revenue Control from 1989 until 1997. Prior to 1989, Mr. Nichols held various positions with ASA from 1985 to 1989. George Berry, age 61, has served for the past eight years as Senior Vice President of Cousins Properties Incorporated, a publicly-held real estate investment trust. Mr. Berry also serves as a director of Community Trust Financial Services Corporation. From 1983 to 1990, he served as Commissioner of Industry, Trade and Tourism for the State of Georgia. From 1962 to 1983, Mr. Berry served in the administrations of four mayors of the City of Atlanta, and was appointed as Chief Administrative Officer under two mayoral administrations. His responsibilities with the Atlanta administration included an appointment as Commissioner of Aviation, in which capacity he supervised a major expansion of Hartsfield Atlanta International Airport. Jean A. Mori, age 62, has been a member of ASA Holdings' Board of Directors since September 30, 1996, and was a member of ASA's Board of Directors from 1994 until December 31, 1996. Mr. Mori is Chairman of the Board and President of Mori Luggage & Gifts, Inc., a retail chain of 29 stores throughout the Southeast specializing in luggage, business cases, leather goods and gifts. He has held this position since the founding of Mori Luggage & Gifts, Inc. in 1971. Mr. Mori served as the President of the National Luggage Dealers Association from 1986 to 1988 and has served on its Board of Directors since 1980. Parker H. Petit, age 59, has been a member of ASA Holdings' Board of Directors since September 30, 1996, and was a member of ASA's Board of Directors from 1982 until December 31, 1996. Mr. Petit has served as Chairman of the Board of Directors of Matria Healthcare, Inc. ("Matria"), a disease management services company, since March 1996. He was the founder of Healthdyne, Inc. and acted as its Chairman and Chief Executive Officer from 1970 until Healthdyne and Tokos Medical Corporation (Delaware) merged with and into Matria in March 1996. Mr. Petit also serves as a director of HIE, Inc., Intelligent Systems, Inc., Norrell Corporation and Logility, Inc. Alan M. Voorhees, age 76, has been a member of ASA Holdings' Board of Directors since September 30, 1996, and was a member of ASA's Board of Directors from 1979 until December 31, 1996. Mr. Voorhees was Chairman of the Board of ASA from 1979 until February 1994. Mr. Voorhees is Chairman of the Board of Summit Enterprises, Inc. of Virginia, an investment management firm organized by Mr. Voorhees in 1979. Mr. Voorhees has served as a director of Micros Systems, Inc., an electronic cash register manufacturer for the hospitality industry, since 1982. -41- 69 Ralph W. Voorhees, age 72, has been a member of ASA Holdings' Board of Directors since September 30, 1996, and was a member of ASA's Board of Directors from 1979 until December 31, 1996. Mr. Voorhees has been Senior Vice President-Investments with PaineWebber Incorporated, an investment banking firm, since 1973. As a result of the consummation of the Offer, Delta is entitled pursuant to the Merger Agreement to designate a certain number of directors to the Company's Board. The Merger Agreement also provides that the Company will use its reasonable best efforts to cause at least two persons who are not employees of the Company or affiliated with Delta to be members of the Company's Board until the Merger is consummated. Pursuant to the foregoing provisions, all incumbent directors of the Board except for Messrs. Parker H. Petit and Jean A. Mori are expected to resign effective the close of business on March 25, 1999, and the following five designees of Delta will be appointed and elected to fill these vacancies on the Board effective March 26, 1999: Messrs. Maurice W. Worth, Malcolm B. Armstrong, Warren C. Jenson and Frederick W. Reid and Ms. Vicki B. Escarra. ITEM 11. EXECUTIVE COMPENSATION COMPENSATION OF DIRECTORS During 1998, the Company's directors who were employees of the Company and its subsidiaries received no additional or special remuneration for serving as members of the Board of Directors. The compensation for each member of the Company's Board of Directors who was not also an officer or employee of the Company or its subsidiaries was set at $2,500 per quarter plus $1,000 for each meeting of the Board of Directors and $500 for each meeting of a committee of the Board of Directors that he attended. All members of the Company's Board of Directors were reimbursed for their expenses associated with attendance at formal Board meetings during 1998. Pursuant to the Company's 1998 Nonqualified Stock Option Plan for Non-Employee Directors (the "Directors Plan"), each member of the Board of Directors who qualifies as an Outside Director (as defined in the Directors Plan) on December 31st of any year receives an option to purchase 2,500 shares of the Company's Common Stock. In addition, the Board may grant options on a discretionary basis under the Directors Plan to Outside Directors. The following directors are Outside Directors for purposes of the Directors Plan: George Berry, Jean A. Mori, Parker H. Petit, Alan M. Voorhees and Ralph W. Voorhees. -42- 70 SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION The following table sets forth certain information concerning the compensation of the Company's Chief Executive Officer and each of the three other executive officers of the Company serving as of December 31, 1998 whose total salary and bonus for 1998 exceeded $100,000 (these four individuals are referred to collectively as the "named executive officers"). The table reflects all compensation received by each such executive officer for services rendered in all capacities to the Company and its subsidiaries that was paid or accrued during the fiscal years ended December 31, 1998, 1997 and 1996. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS ------------------------------------------- ----------------- SECURITIES FISCAL OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION($) (1) OPTIONS/SARS(#)(2) COMPENSATION ($) - --------------------------- ----- ---------- --------- ------------------- ------------------ ---------------- George F. Pickett............... 1998 $294,540 $118,000 $ 1,290 94,300 $44,181 (3) Chairman of the Board and 1997 283,200 113,000 1,473 132,900 42,480 (3) Chief Executive Officer 1996 271,020 108,000 13,278 -- 40,653 (3) John W. Beiser.................. 1998 287,520 115,000 1,260 92,000 43,128 (4) President and Secretary 1997 276,480 111,000 1,650 129,700 41,472 (4) 1996 264,600 106,000 2,617 -- 39,690 (4) Ronald V. Sapp.................. 1998 165,800 65,000 -- 37,100 23,255 (5) Senior Vice President-- 1997 127,800 51,000 -- 42,000 17,230 (5) Finance and Chief 1996 116,160 50,000 -- -- 15,116 (5) Financial Officer Edward J. Paquette (6).......... 1998 165,800 65,000 -- 37,100 18,072 (7) Senior Vice President-- 1997 155,000 62,000 -- 53,600 10,810 (7) Operations of ASA
- ------------------------- (1) At the end of fiscal 1995, ASA's Compensation Committee authorized ASA to pay to each of Messrs. Pickett and Beiser annually reimbursements to cover Medicare tax liability with respect to the vested portion of his respective interest in the SERP. Messrs. Pickett and Beiser received such reimbursements in 1996, 1997 and 1998. Such reimbursements were disclosed as additional salary in the Summary Compensation Table in prior years. (2) For grants in periods prior to May 21, 1997, reflects shares underlying SARs granted in the respective year, all of which were canceled on May 21, 1997 and replaced on a one-for-one basis by stock options with the same basic terms as the outstanding SARs. For grants in periods after May 21, 1997, reflects shares underlying options. (3) Includes contributions by the Company of $44,181 and $42,480 to the Deferred Compensation Plan in 1998 and 1997, respectively; and contributions by ASA of $40,653 to the Deferred Compensation Plan in 1996. (4) Includes contributions by the Company of $43,128 and $41,472 to the Deferred Compensation Plan in 1998 and 1997, respectively; and contributions by ASA of $39,690 to the Deferred Compensation Plan in 1996. (5) Includes contributions by the Company of $16,580 and $12,780 to the Deferred Compensation Plan, and $6,675 and $4,450 by ASA to the Savings Plan in 1998 and 1997, respectively; and contributions by ASA of $11,616 to the Deferred Compensation Plan and $3,500 to the Savings Plan in 1996. -43- 71 (6) Mr. Paquette was named as Senior Vice President--Operations of ASA on April 21, 1997. The Company's Board of Directors designated Mr. Paquette as an "executive officer" of the Company on May 21, 1997 because he performs policy-making functions for the Company. (7) Includes contributions by ASA of $16,580 and $10,810 to the Deferred Compensation Plan in 1998 and 1997, respectively; and contributions by ASA of $1,492 to the Savings Plan in 1998. STOCK OPTION GRANTS AND RELATED INFORMATION The following table sets forth information concerning all options granted in 1998 to the named executive officers. No other options were granted to the named executive officers in 1998.
OPTION GRANTS IN 1998 INDIVIDUAL GRANTS --------------------------------------------------------------- NUMBER OF % OF POTENTIAL REALIZABLE VALUE SECURITIES TOTAL AT ASSUMED ANNUAL RATES UNDERLYING OPTIONS EXERCISE OF STOCK PRICE APPRECIATION OPTIONS GRANTED TO OR BASE FOR OPTION TERM GRANTED EMPLOYEES PRICE EXPIRATION --------------------------- NAME (#) (1) IN 1998 ($/SH) DATE 5% 10% - ----------------------- -------------- ----------- --------- ----------- ---------- ------------ George F. Pickett..... 94,300 22.8% $40.625 2/11/03 $1,058,518 $2,339,112 John W. Beiser........ 92,000 22.2% $40.625 2/11/03 $1,032,700 $2,282,060 Ronald V. Sapp........ 37,100 9.0% $40.625 2/11/03 $ 416,448 $ 920,266 Edward J. Paquette.... 37,100 9.0% $40.625 2/11/03 $ 416,448 $ 920,266
- ------------------------- (1) The options granted become exercisable in two equal annual installments beginning on the first anniversary of the date of grant. The exercisability of options may be accelerated upon the optionee's retirement with consent of the Company, death or material disability. The exercise price may be paid with the delivery of already-owned shares or through a broker-assisted exercise. On February 15, 1999, the Company amended the ASA Holdings, Inc. 1997 Nonqualified Stock Option Plan (the "1997 Plan") to provide that in the event of a Change in Control, all options granted under the 1997 Plan will become fully vested and immediately exercisable. "Change in Control" is defined as set forth in the amendment to the 1997 Plan. Consummation of the Offer constituted a Change in Control under the 1997 Plan. The Company has also previously granted to certain directors of the Company options to purchase shares under the Company's 1998 Nonqualified Stock Option Plan for Non-Employee Directors, all of which options are fully exercisable by their terms. Under the terms of the Merger Agreement, each of the employee and director stock options outstanding as of the Effective Time will be canceled in return for a cash payment to the option holder equal to the product of (A) the merger consideration minus the per share exercise price of the option, multiplied by (B) the number of shares subject to the option. -44- 72 The following table sets forth information with respect to the named executive officers concerning the exercise of options during the last fiscal year and unexercised options held as of the end of the fiscal year. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE- OPTIONS AT MONEY OPTIONS FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)(1) ---------------------------- --------------------------- SHARES ACQUIRED VALUE NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- --------------- ------------ ----------- ------------- ----------- ------------- George F. Pickett..... -- -- 341,800 94,300 2,822,514 -- John W. Beiser ....... 204,000 3,657,731 129,700 92,000 1,053,813 -- Ronald V. Sapp........ 38,800 887,675 65,400 37,100 341,250 -- Edward J. Paquette... 26,800 489,250 -- 63,900 -- 247,900
(1) The fair market value of the Common Stock at the close of business on December 31, 1998, was $30.50 per share based on the closing price per share as quoted on the Nasdaq National Market. EXECUTIVE DEFERRED COMPENSATION PLAN Pursuant to the Atlantic Southeast Airlines, Inc. Executive Deferred Compensation (Retirement) Plan, as amended on February 15, 1999 (the "Deferred Plan"), each month the Employer (defined as either the Company or Atlantic Southeast Airlines, Inc.) contributes an amount equal to 15% of the compensation of a Class A participant (senior executive officer designated by the Company's Board) and 10% of the compensation of a Class B participant (officer designated by the Company's Board), to a fund established to receive and invest such contributions. No employee contributions are allowed. Employees may direct the investment of their accounts. If a participant's employment is terminated without Cause or if the participant terminates employment for Good Reason within two years after a Change in Control, the participant will have a nonforfeitable vested interest in all benefits accrued under the terms of the Deferred Plan. "Change in Control," "Cause" and "Good Reason" are defined as set forth in the Deferred Plan. The definition of "Change in Control" was amended on February 15, 1999 to conform to the definition of "Change in Control" in the 1997 Plan. The consummation of the Offer constituted a Change in Control under the Deferred Plan. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN The Company maintains a Supplemental Executive Retirement Plan ("SERP") to provide certain of its key executives with supplemental retirement income. Currently, Messrs. Pickett and Beiser are the only SERP participants. Under the SERP, after reaching age 55 and after retiring or terminating employment with the Company and its subsidiaries, participants will be -45- 73 entitled to annual benefits, paid on a monthly basis, of $150,000 offset by (i) 50% of the participant's annual Social Security benefits projected as of the last day of the calendar month of the participant's actual date of retirement or termination of employment; (ii) the actuarial equivalent, expressed as an annual benefit for the life of the participant, of 100% of the vested amount in the participant's Employer Matching Account under the Savings Plan as of the last day of the calendar month containing the participant's actual date of retirement or termination; and (iii) the actuarial equivalent, expressed as an annual benefit for the life of the participant, of 100% of the participant's vested benefits under the Deferred Compensation Plan as of the last day of the calendar month containing the participant's actual date of retirement or termination of employment. For each year that the participant continues to be employed by the Company and its subsidiaries after reaching age 55 and until the attainment of age 65, the base amount of his benefits under the SERP is increased by an additional 6%. As of the date of this report, the benefits payable to Messrs. Pickett and Beiser would be $178,652 annually, reduced by the applicable amounts of their benefits under the Savings Plan, the Deferred Compensation Plan and Social Security. On February 15, 1999, the SERP was amended to change the "Change in Control" definition to have the same meaning as in the 1997 Plan. EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS EMPLOYMENT AND CONSULTING AGREEMENTS On February 15, 1999, the Company and Messrs. George F. Pickett and John W. Beiser (each an "Executive") agreed pursuant to certain memorandum agreements (each a "Memorandum Agreement") with Delta to negotiate in good faith to enter into formal written employment and consulting agreements incorporating the terms described below, with the intention that such employment and consulting agreements will be executed prior to Effective Time. Pursuant to the terms of the Memorandum Agreements, Mr. Pickett is to serve as Chief Executive Officer of the Company and Mr. Beiser is to serve as President and Secretary of the Company from February 15, 1999 until the Effective Time or such shorter period as provided by the Memorandum Agreements (the "Employment Term") and each is to serve as a non-employee consultant of the Company from the Effective Time until the 180th day following the Effective Time or such shorter period as provided by the Memorandum Agreements (the "Consulting Term"). During the Employment Term and the Consulting Term, the Company is to pay Messrs. Pickett and Beiser base salaries at the rate in effect as of February 15, 1999 and each is to continue to earn an annual bonus entitlement equal to 40% of his respective base salary on the same terms that currently apply to such officer under the Company's annual bonus plan. As of the 180th day following the Effective Time, the Company shall pay to Mr. Pickett and to Mr. Beiser a lump sum payment (the "Special Consideration") of $427,267 and $416,896, respectively (provided, however, that such payment is subject to a reduction, if necessary, if it would be treated as an "excess parachute payment" under Section 280G of the Internal Revenue Code, as amended (the "Code")), as consideration for each officer's agreement to render services and honor the non-competition covenant in the Memorandum Agreements. Pursuant to the terms -46- 74 of the Memorandum Agreements, from February 15, 1999 until the second anniversary of the Effective Time, neither Mr. Pickett nor Mr. Beiser may (i) directly or indirectly provide management or executive services to any person or entity operating a commuter airline using planes with a capacity of less than 70 seats in any market in which the Company currently operates or (ii) solicit or hire any employee of the Company to perform a service on behalf of a competitor similar to any service performed by such employee on behalf of the Company. If the Executive's employment or consulting services are terminated without Cause (as defined in the Memorandum Agreements) or because of death or disability during the Employment Term or Consulting Term, the Executive will receive accrued salary, a pro rata bonus and the Special Consideration. SPECIAL SEVERANCE PLAN On February 15, 1999, the Company adopted the ASA Holdings, Inc. Special Severance Plan (the "Severance Plan"). Generally, the Severance Plan provides that if the Company terminates the employment of an eligible executive (which includes certain senior officers other than Mr. Pickett and Mr. Beiser) without "Cause" or the executive terminates for "Good Reason" within two years of a "Change in Control," the executive will receive an amount in cash equal to either 18 or 24 months of the executive's highest annual rate of base salary in effect during the twelve-month period immediately prior to termination plus an average of the executive's bonus for the last two years, subject to a reduction, if necessary, if the payments thereunder would be treated as "excess parachute payments" under Section 280G of the Code. In addition, the executive will also receive continued coverage under the Company's medical, dental and life insurance plans for the same number of months. In the event the executive cannot continue to participate in such plans, the Company will otherwise provide such benefits on the same after-tax basis as if continued participation had been permitted. "Cause," "Good Reason" and "Change in Control" are defined as set forth in the Severance Plan. Consummation of the Offer constituted a Change in Control under the Severance Plan. RETENTION AGREEMENTS On February 15, 1999, the Company entered into retention agreements (each a "Retention Agreement") with each of Ronald V. Sapp and Edward J. Paquette. Mr. Sapp's Retention Agreement provides that if Mr. Sapp is still employed with the Company on the six month anniversary of the closing of the Offer, Mr. Sapp will receive a lump sum amount equal to approximately three times the annual base salary payable to Mr. Sapp for the 1999 calendar year (provided, however, that such payment is subject to a reduction, if necessary, if it would be treated as an "excess parachute payment" under Section 280G of the Code). Mr. Paquette's Retention Agreement provides that if Mr. Paquette is still employed with the Company on the six month anniversary of the closing of the Offer, he will receive a lump sum amount equal to the annual base salary payable to him for the 1999 calendar year. The Retention Agreements also provide that each of Messrs. Sapp and Paquette will receive such amount if the Company terminates the employee's employment without "Cause" or the employee terminates for "Good Reason" prior to the six month anniversary of the closing of the Offer. "Cause" and "Good Reason" are defined as set forth in the Retention Agreements. -47- 75 INDEMNITY AGREEMENTS OF EXECUTIVE OFFICERS AND DIRECTORS On February 15, 1999, the Board of Directors authorized the Company to enter into an Indemnity Agreement (each an "Indemnity Agreement of Executive Officer") with each of six of its executive officers, including George F. Pickett, John W. Beiser, Edward J. Paquette, Ronald V. Sapp, R. Mark Bole and Renee Skinner. The Indemnity Agreement of Executive Officer provides the Indemnitee with specific contractual assurance that indemnification protection provided under the Company's Bylaws will be available to Indemnitee regardless of, among other things, any amendment to or revocation of the Company's Articles or Bylaws or a Change in Control of the Company. The Indemnity Agreement of Executive Officer further provides that the Company has purchased and maintains directors' and officers' insurance consisting of a primary policy providing $15 million in aggregate coverage and a supplemental policy providing $15 million in aggregate coverage, and that the Company will maintain such insurance coverage for so long as Indemnitee shall continue to serve as an executive officer of the Company or thereafter shall be subject to any possible Claim or threatened, pending or completed litigation. "Indemnitee," "Change in Control" and "Claim" are defined as set forth in the form of Indemnity Agreement of Executive Officer. On February 15, 1999, the Board of Directors authorized the Company to enter into an Indemnity Agreement (each an "Indemnity Agreement of Director") with each of its directors, which included at such time George F. Pickett, John W. Beiser, Jean A. Mori, Parker H. Petit, Alan M. Voorhees, Ralph M. Voorhees and George Berry. The terms of the Indemnity Agreement of Director are substantially similar to the terms of the Indemnity Agreement of Executive Officer described above. AMENDED AND RESTATED FOUNDING OFFICER AGREEMENT The Company, Atlantic Southeast Airlines, Inc. and George F. Pickett and John W. Beiser, respectively, are parties to Amended and Restated Founding Officer Agreements, each dated April 16, 1997, as further amended on February 15, 1999, pursuant to which if Mr. Pickett or Mr. Beiser, as the case may be, ceases to be an employee of the Company within two years after a Change in Control, the Company and Atlantic Southeast Airlines, Inc. will pay Mr. Pickett or Mr. Beiser, as applicable, the lesser of (i) two times gross compensation accrued in the last twelve months or (ii) the maximum amount which may be paid to Mr. Pickett or Mr. Beiser, as applicable, which is deductible to the Company under Section 280G of the Code. "Change in Control" is defined as set forth in the Amended and Restated Founding Officer Agreement. CERTAIN TRAVEL BENEFITS On February 15, 1999, in recognition of Mr. Pickett's and Mr. Beiser's founding the Company and of their service to the Company, the Board granted lifetime travel privileges to Mr. Pickett and his wife and to Mr. Beiser, his wife and Mr. Beiser's dependent children, respectively, on all Atlantic Southeast Airlines flights. -48- 76 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS The following table sets forth certain information as to the Common Stock of the Company beneficially owned as of February 18, 1999 by each person, other than persons whose ownership is reflected under the caption "Security Ownership of Management," who is known by the Company to own, directly or indirectly, more than 5% of the outstanding shares of the Company's Common Stock, and reflects information presented in each such person's Schedule 13D or Schedule 13G (and amendments, if any, thereto) as filed with the Securities and Exchange Commission and provided to the Company.
AMOUNT AND NATURE OF PERCENT OF NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS (1) - ------------------------------------ -------------------- ---------- Delta Air Lines Holdings, Inc. (2)......... 7,995,000 28.03% 1101 North Market Street Suite 1300 Wilmington, DE 19801 FMR Corporation............................. 3,003,800 (3) 10.53% 82 Devonshire Street Boston, MA 02109
(1) Percent of Class is based on 28,523,177 shares of the Company's Common Stock outstanding as of February 18, 1999 (excluding treasury shares). (2) Delta Air Lines Holdings, Inc. is a wholly-owned subsidiary of Delta. As a result of the consummation of the Offer, Delta beneficially owned 91% of the Company's outstanding common stock on March 22, 1999. (3) Based upon an amendment to the Schedule 13G filed on February 11, 1999 with the Securities and Exchange Commission by FMR Corp. ("FMR"), Edward C. Johnson, III and Abigail P. Johnson. Of the shares reported, (a) 2,500,700 shares are owned beneficially by Fidelity Management & Research Company ("Fidelity"), a wholly-owned subsidiary of FMR and an investment advisor to various investment companies (the "Funds"), (b) 1,570,000 shares are owned beneficially by Fidelity Low-Priced Stock Fund (the "Fund"), a registered investment company, and (c) 503,100 shares are owned beneficially by Fidelity Management Trust Company ("FMTC"), a wholly-owned subsidiary of FMR. According to the Schedule 13G as amended, (i) each of FMR, Fidelity, Mr. Johnson and the Funds has the sole power to dispose of all 2,500,700 of the shares owned by the Funds, and (ii) the sole power to vote the shares owned directly by the Funds resides with the Funds' Board of Trustees. Each of Mr. Johnson and FMR, through its control of FMTC, has sole dispositive power over 503,100 shares and sole power to vote or direct the voting of 446,400 shares owned by the above beneficial owners. -49- 77 SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth certain information as to the Common Stock beneficially owned as of February 18, 1999 by each of the Company's directors, each executive officer, and all directors and executive officers as a group.
AMOUNT AND NATURE OF PERCENT OF NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS (1) - ------------------------ -------------------- -------- George F. Pickett........................... 810,287 (2)(3) 2.8% John W. Beiser.............................. 467,847 (3)(4) 1.6% Ronald V. Sapp.............................. 70,439 (3) * R. Mark Bole................................ 9,800 (3) * Jean A. Mori................................ 6,124 (5)(8) * Parker H. Petit............................. 10,000 (8) * Alan M. Voorhees............................ 248,027 (6)(8) * Ralph W. Voorhees........................... 43,200 (7)(8) * George Berry................................ 6,000 (8) * Edward J. Paquette.......................... 18,550 (3) * All directors, nominees and executive officers as a group (ten persons)........... 1,690,274 (9) 5.9%
- --------------------- * Represents holdings of less than 1%. (1) Information with respect to beneficial ownership is based upon information furnished by each owner. Percent of Class is based on 28,523,177 shares of the Company's Common Stock outstanding as of February 18, 1999 (excluding treasury shares). (2) Includes 118,650 shares held by the wife of George F. Pickett, as to which shares Mr. Pickett disclaims any beneficial ownership interest. (3) Includes shares of the Company's Common Stock that the individual has the right to acquire, on or before April 19, 1999 (60 days from February 18, 1999), through the exercise of options granted under the Nonqualified Stock Option Plan (see "Stock Option Grants and Related Information") as follows: George F. Pickett - 310,350 shares; John W. Beiser - 175,700 shares; Ronald V. Sapp - 60,550 shares; Edward J. Paquette - 18,550 shares; and R. Mark Bole - 8,600 shares. As previously noted because consummation of the Offer constituted a Change in Control under this plan, all outstanding options have vested. -50- 78 (4) Includes 140,000 shares held by the wife of John W. Beiser, as to which shares Mr. Beiser disclaims any beneficial ownership interest. (5) Includes 230 shares held by the wife of Jean A. Mori, as to which shares Mr. Mori disclaims any beneficial ownership interest. (6) Includes 243,027 shares held by irrevocable trusts created for the benefit of the adult children of Alan M. Voorhees, as to which shares Mr. Voorhees disclaims any beneficial ownership interest. (7) Includes 19,300 shares held by the wife of Ralph W. Voorhees, as to which shares Mr. Voorhees disclaims any beneficial ownership interest. (8) Includes 5,000 shares that the individual has the right to acquire through the exercise of options granted under the Company's Nonqualified Stock Option Plan for Non-Employee Directors. (9) Includes an aggregate of 598,750 shares which the directors and executive officers as a group have the right to acquire as of April 19, 1999 through the exercise of options. Pursuant to the Shareholders Agreement (as defined below), Messrs. Pickett and Beiser and their wives tendered into the Offer a total of 499,937 shares and 292,147 shares of the Company's common stock, respectively. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 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. ASA leases reservation equipment and certain terminal facilities from Delta and Delta provides certain services to ASA, including reservation and ground handling services at certain stations. Expenses paid under the joint marketing agreement during the 1998 fiscal year were approximately $11,812,000. In addition, at December 31, 1998, Delta owed ASA approximately $225,000 for various services performed by ASA for Delta and ASA owed Delta approximately $2,068,000 for various services performed by Delta for ASA, as described above. During 1998, approximately 84% of ASA's passengers connected with or from Delta flights at ASA's Atlanta, Georgia and Dallas/Fort Worth, Texas hubs. As of February 18, 1999, Delta (through its wholly owned subsidiary Delta Air Lines Holdings, Inc.) beneficially owned approximately 28.03% of the Company's outstanding Common Stock. On March 19, 1999, Delta completed the Offer and accepted 18,011,033 shares of the Company's common stock representing 91.15% of the outstanding shares. Upon approval by holders of a majority of the Company's outstanding common stock at a special meeting of shareholders to be called by the Company pursuant to the Merger Agreement, Purchaser will be merged with and into the Company, and the Company will be a wholly-owned subsidiary of Delta. Delta has sufficient voting power to approve the Merger without the vote of any other shareholder. See "Recent Developments" for information regarding the Merger Agreement as well as Delta's Offer to purchase the Company. -51- 79 THE SHAREHOLDERS AGREEMENT Delta entered into a shareholders agreement, dated as of February 15, 1999 (the "Shareholders Agreement"), with George F. Pickett, John W. Beiser, Elizabeth H. Pickett and Maureen W. Beiser (collectively, the "Interested Shareholders"). Pursuant to the Shareholders Agreement, each Interested Shareholder agreed to tender, or cause to be tendered, upon the request of Delta (and agree that, subject to applicable law, he or she will not withdraw), pursuant to and in accordance with the terms of the Offer, all outstanding shares of the Company's common stock beneficially owned by such Interested Shareholder. Further, the Interested Shareholders agreed not to vote any shares in favor of the approval of any (i) Acquisition Proposal (as defined in the Shareholders Agreement), (ii) reorganization, recapitalization, liquidation or winding up of ASA or any other extraordinary transaction involving ASA, (iii) corporate action the consummation of which would frustrate the purposes, or prevent or delay the consummation, of the transactions contemplated by the Merger Agreement or (iv) other matter relating to, or in connection with, any of the foregoing matters. CONFIDENTIALITY AGREEMENT On February 9, 1999, Delta and the Company entered into a confidentiality agreement (the "Confidentiality Agreement"), under which the Company agreed to provide certain confidential information relating to its operations to Delta. Pursuant to the Confidentiality Agreement, Delta agreed that Delta and its representatives would hold non-public information received from the Company under the Confidentiality Agreement in confidence, except to the extent that disclosure is legally mandated or compelled by any court, tribunal or governmental authority. The Confidentiality Agreement does not limit Delta's use of any information which (i) was previously known by Delta or its representatives, (ii) was independently developed by Delta or its representatives, (iii) was acquired by Delta or its representatives from a third party which is not obligated not to disclose such information or (iv) which is or becomes publicly available through no breach by Delta of its obligations under the Confidentiality Agreement. -52- 80 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 at Item 8 hereof: Consolidated Balance Sheets as of December 31, 1998 and 1997; Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996; Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996; Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996; Notes to Consolidated Financial Statements; and Report of Independent Auditors. 2. The following financial statement schedules of the Registrant required by this Item are included as pages 54 through 57 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 Holdings filed no current reports on Form 8-K during the fourth quarter of 1998. -53- 81 SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT ASA HOLDINGS, INC. (PARENT COMPANY) CONDENSED BALANCE SHEETS (IN THOUSANDS)
December 31, 1998 1997 ---- ---- ASSETS Current Assets Cash and cash equivalents $ 3,468 $ 1,093 Receivables from affiliates 8,821 5,542 Accounts receivable 8 8 -------- -------- 12,297 6,643 Investment in Subsidiaries 300,883 295,851 Other Assets 1,261 1,274 -------- -------- TOTAL ASSETS $314,441 $303,768 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 0 $ 2,172 Accrued compensation and related expenses 2,012 3,433 Other accrued expenses 253 242 -------- -------- 2,265 5,847 Non-Current Liabilities 2,403 1,996 Shareholders' Equity Common stock 2,854 2,973 Retained earnings 306,919 292,952 -------- -------- 309,773 295,925 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $314,441 $303,768 ======== ========
See accompanying note. -54- 82 SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED ASA HOLDINGS, INC. (PARENT COMPANY) STATEMENTS OF INCOME (IN THOUSANDS)
Years Ended December 31, 1998 1997 -------- -------- Cost Sharing Revenues $ 1,479 $ 1,404 -------- -------- Total Revenues 1,479 1,404 Operating Expenses General and administrative 1,473 1,319 Depreciation and amortization 122 122 -------- -------- Total Operating Expenses 1,595 1,441 -------- -------- Net Operating Loss (116) (37) Non Operating Income (Loss) 121 (37) -------- -------- Income before Income Taxes 5 0 Income Taxes 5 0 -------- -------- Net Income before Equity in Earnings of Subsidiaries 0 0 Net Income of Subsidiaries 66,137 54,512 -------- -------- Net Income $ 66,137 $ 54,512 ======== ========
-55- 83 SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED ASA HOLDINGS, INC. (PARENT COMPANY) STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Years Ended December 31, 1998 1997 ---- ---- OPERATING ACTIVITIES: Net Income of Subsidiaries $ 66,137 $ 54,512 Adjustment to Reconcile Net Income to Net Cash Provided by Operating Activities: Undistributed earnings of subsidiaries (5,037) (35,616) Other (72) 30 Changes in Operating Assets and Liabilities: Receivables (3,279) (2,743) Other assets 13 (60) Accounts payable (2,172) 2,172 Accrued compensation and related expenses 542 2,880 Other liabilities 1,829 648 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 57,961 21,823 FINANCING ACTIVITIES Dividends Paid (13,095) (11,970) Proceeds from Exercise of Stock Options 8,911 5,480 Purchase of Common Stock (51,402) (14,240) -------- -------- NET CASH USED IN FINANCING ACTIVITIES (55,586) (20,730) INCREASE IN CASH AND CASH EQUIVALENTS 2,375 1,093 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,093 0 -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,468 $ 1,093 ======== ========
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 $54.6 million and from Atlantic Southeast Airlines, Inc. in the amount of $6.5 million during 1998. -56- 84 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES December 31, 1998 - --------------------------------------------------------------------------------
Col. A Col. B Col. C Col. D Col. E Additions --------- Balance at Charged to Charged to Balance at Description beginning of cost and other accounts Deductions end of period expenses (describe) (describe) period 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) (A) $ 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 Year ended December 31, 1998 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts $ 294,989 $ 20,000 $ (171,785) (A) $ 143,204 Allowance for obsolescence of expendable parts 4,939,950 470,725 (709,108) (C) 4,701,567 ---------- -------- ------ ----------- ---------- $5,234,939 $490,725 $ -0- $ (880,893) $4,844,771 ========== ======== ====== =========== ==========
(A) Uncollectible Accounts charged off during the period. (B) Obsolete parts charged off during the period. (C) Parts which were sold were written off during the period. -57- 85 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. Date: March 24, 1999 By: /s/ George F. Pickett ----------------------------------------- George F. Pickett Chairman of the Board and Chief Executive Officer (Principal Executive Officer) -58- 86 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 as of the date indicated: /s/ George F. Pickett - -------------------------------------------- George F. Pickett, Chairman of the Board and March 24, 1999 Chief Executive Officer (Principal Executive Officer) and Director /s/ John W. Beiser March 24, 1999 - -------------------------------------------- John W. Beiser, President, Secretary and Director /s/ Ronald V. Sapp March 24, 1999 - -------------------------------------------- Ronald V. Sapp, Senior Vice President- Finance (Principal Financial and Accounting Officer) /s/ George Berry March 24, 1999 - -------------------------------------------- George Berry, Director /s/ Jean A. Mori March 24, 1999 - -------------------------------------------- Jean A. Mori, Director /s/ Parker H. Petit March 24, 1999 - -------------------------------------------- Parker H. Petit, Director /s/ Ralph W. Voorhees March 24, 1999 - -------------------------------------------- Ralph W. Voorhees, Director /s/ Alan M. Voorhees March 24, 1999 - -------------------------------------------- Alan M. Voorhees, Director
-59- 87 EXHIBIT INDEX Exhibit Number and Description 2 Agreement and Plan of Merger dated as of February 15, 1999, among ASA Holdings, Inc., Delta Air Lines, Inc. and Delta Sub, Inc. (filed as Exhibit 4 to the Company's Schedule 14D-9 dated February 22, 1999 (the "Schedule 14D-9") and incorporated herein by reference.) 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. 10.1 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.) 10.2 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
-i- 88 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. 10.3 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.) 10.4 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.) 10.5 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. 10.6 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.)
-ii- 89 10.7 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 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. 10.8 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. 10.9 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. 10.10 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,
-iii- 90 filed with the Commission on November 14, 1996.) Confidential treatment has been applied for with respect to certain provisions in the First Amendment. 10.11 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 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. 10.12 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. 10.13 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. 10.14 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. 10.15 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;
-iv- 91 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 Form 10-Q for the quarter ended June 30, 1995, file number 0-11097, filed with the Commission on August 14, 1995.) 10.16 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. 10.17 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. 10.18 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.) 10.19 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.)
-v- 92 10.20 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 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.) 10.21 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. 10.22 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. 10.23 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. 10.24 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.
-vi- 93 10.25 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. (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. 10.26 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. 10.27 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. 10.28 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. 10.29 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.)
-vii- 94 10.30 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.) 10.31 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.) 10.32 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.) 10.33 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.)* 10.34 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.)* 10.35 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.)* 10.36 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.
-viii- 95 10.37 ASA Holdings, Inc. 1997 Nonqualified Stock Option Plan (filed as Appendix A to the Company's Proxy Statement for the 1997 Annual Meeting of Shareholders and incorporated herein by reference.)* 10.38 ASA Holdings, Inc. 1998 Nonqualified Stock Option Plan for Non-Employee Directors (filed as Appendix A to the Company's Proxy Statement for the 1998 Annual Meeting of Shareholders and incorporated herein by reference.)* 10.39.1 Credit Agreement dated as of June 26, 1998 by and among ASA Holdings, Inc., the Lenders named therein and NationsBank, N.A., as Issuing Bank and Administrative Agent (the "1998 Credit Agreement") (filed as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,1998 and incorporated herein by reference.) 10.39.2 First Amendment dated as of March 22, 1999 to 1998 Credit Agreement. 10.40 First Amendment dated September 3, 1998 to Purchase Agreement No. P.A. - 0372 dated April 17, 1997 between Bombardier Inc. and Atlantic Southeast Airlines, Inc., and related letter agreements. Confidential treatment has been applied for with respect to certain provisions in this exhibit (filed as Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 and incorporated herein by reference.) 10.41 Purchase Agreement No. P.A. - 0430 dated September 3, 1998 between Bombardier Inc. and Atlantic Southeast Airlines, Inc., and related letter agreements. Confidential treatment has been applied for with respect to certain provisions in this exhibit (filed as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 and incorporated herein by reference.) 10.42 Memorandum Agreement (with respect to employment and consulting), dated as of February 15, 1999, among George F. Pickett, ASA Holdings, Inc. and Delta Air Lines, Inc. (filed as Exhibit 7 to the Company's Schedule 14D-9 and incorporated herein by reference.)* 10.43 Memorandum Agreement (with respect to employment and consulting), dated as of February 15, 1999, among John W. Beiser, ASA Holdings, Inc. and Delta Air Lines, Inc. (filed as Exhibit 8 to the Company's Schedule 14D-9 and incorporated herein by reference.)* 10.44 The Company Special Severance Plan (filed as Exhibit 9 to the Company's Schedule 14D-9 and incorporated herein by reference.)*
-ix- 96 10.45 Form of Retention Agreement between the Company and Ronald V. Sapp dated as of February 15, 1999 (filed as Exhibit 10 to the Company's Schedule 14D-9 and incorporated herein by reference.)* 10.46 Form of Retention Agreement between the Company and Edward J. Paquette dated as of February 15, 1999 (filed as Exhibit 11 to the Company's Schedule 14D-9 and incorporated herein by reference.)* 10.47 Amendment to the Company 1997 Nonqualified Stock Option Plan (filed as Exhibit 12 to the Company's Schedule 14D-9 and incorporated herein by reference.)* 10.48 Second Restatement and Amendment By the Entirety of and Third Amendment to the Atlantic Southeast Airlines, Inc. Executive Deferred Compensation (Retirement) Plan (filed as Exhibit 13 to the Company's Schedule 14D-9 and incorporated herein by reference.)* 10.49 Stock Agreement among Delta Air Lines, Inc., Atlantic Southeast Airlines, Inc. and the Company dated as of March 17, 1997 (filed as Exhibit 14 to the Company's Schedule 14D-9 and incorporated herein by reference.) 10.50 Form of Indemnity Agreement of Executive Officer (filed as Exhibit 15 to the Company's Schedule 14D-9 and incorporated herein by reference.)* 10.51 Form of Indemnity Agreement of Director (filed as Exhibit 16 to the Company's Schedule 14D-9 and incorporated herein by reference.)* 10.52 Amended and Restated Founding Officer Agreement among George F. Pickett, Atlantic Southeast Airlines, Inc. and the Company dated as of April 16, 1997 and amended as of February 15, 1999 (filed as Exhibit 17 to the Company's Schedule 14D-9 and incorporated herein by reference.)* 10.53 Amended and Restated Founding Officer Agreement among John W. Beiser, Atlantic Southeast Airlines, Inc. and the Company dated as of April 16, 1997 and amended as of February 15, 1999 (filed as Exhibit 18 to the Company's Schedule 14D-9 and incorporated herein by reference.)* 10.54 Confidentiality Agreement between Delta and the Company dated as of February 9, 1999 (filed as Exhibit 19 to the Company's Schedule 14D-9 and incorporated herein by reference.) 10.55 Second Amendment to the Company's Supplemental Executive Retirement Plan (filed as Exhibit 20 to the Company's Schedule 14D-9 and incorporated herein by reference.)*
-x- 97 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 Financial Data Schedule. 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. -xi- EX-3.(B) 2 BY-LAWS OF THE REGISTRANT 1 EXHIBIT 3(b) BYLAWS OF ASA HOLDINGS, INC. As Amended on May 21, 1998 TABLE OF CONTENTS ARTICLE ONE OFFICES...............................................................................................1 Section 1.1 Registered Office and Agent........................................................................1 Section 1.2 Other Offices......................................................................................1 ARTICLE TWO CAPITAL STOCK.........................................................................................1 Section 2.1 Issuance and Notice................................................................................1 Section 2.2 Transfer Agents and Registrars.....................................................................2 Section 2.3 Transfer...........................................................................................2 Section 2.4 Lost Certificates..................................................................................2 Section 2.5 Shareholders of Record.............................................................................3 Section 2.6 Determining Shareholders of Record.................................................................3 ARTICLE THREE SHAREHOLDERS' MEETINGS..............................................................................3 Section 3.1 Place of Meetings..................................................................................3 Section 3.2 Annual Meeting.....................................................................................4 Section 3.3 Special Meetings...................................................................................4 Calling of Special Meetings.................................................................................4 Persons Entitled to Call Special Meetings...................................................................4 Permissible Matters.........................................................................................4 Section 3.4 Notice.............................................................................................4 Notice of Meetings..........................................................................................5 Method of Notice............................................................................................5 Time of Notice..............................................................................................5 Contents of Notice..........................................................................................5 Section 3.5 Waiver of Notice...................................................................................5 Section 3.6 Quorum.............................................................................................5 What Constitutes a Quorum...................................................................................6 Loss of Quorum..............................................................................................6 Section 3.7 Adjournment........................................................................................6 Section 3.8 Voting.............................................................................................6 Voting Rights...............................................................................................7 Proxies.....................................................................................................7
-i- 2 Section 3.9 List of Shareholders...............................................................................7 Section 3.10 Election Judges...................................................................................7 Section 3.11 Chairman of Meeting...............................................................................8 Section 3.12 Secretary of Meeting..............................................................................8 ARTICLE FOUR DIRECTORS............................................................................................8 Section 4.1 Management of Business.............................................................................8 Section 4.2 Number, Qualification and Term of Office...........................................................8 Section 4.3 Vacancies..........................................................................................9 When Vacancies Occur........................................................................................9 Declaration of Vacancy......................................................................................9 Filling Vacancies..........................................................................................10 Section 4.4 Compensation......................................................................................10 ARTICLE FIVE DIRECTORS' MEETINGS.................................................................................10 Section 5.1 Place of Meetings.................................................................................10 Section 5.2 Annual Meeting....................................................................................10 Time of Annual Meeting.....................................................................................10 Notice of Annual Meeting...................................................................................10 Section 5.3 Regular Meetings..................................................................................10 When Regular Meetings Held.................................................................................11 Call of Regular Meetings...................................................................................11 Notice of Regular Meetings.................................................................................11 Section 5.4 Special Meetings..................................................................................11 Special Meetings...........................................................................................11 Notice of Special Meeting..................................................................................11 Section 5.5 Waiver of Notice..................................................................................11 Section 5.6 Purpose of Meeting................................................................................11 Section 5.7 Presence by Telephone.............................................................................11 Section 5.8 Quorum and Majority Action........................................................................11 Section 5.9 Manifestation of Dissent..........................................................................11 Section 5.10 Action by Consent of Board Without Meeting.......................................................11 Section 5.11 Adjourned Meetings...............................................................................11 Adjournment................................................................................................11 Notice of Adjourned Meeting................................................................................11 Section 5.12 Conduct of Meetings..............................................................................11 ARTICLE SIX COMMITTEES...........................................................................................11 Section 6.1 Committees........................................................................................11 Section 6.2 Executive Committee...............................................................................11 Section 6.3 Audit and Compensation Committees.................................................................11 ARTICLE SEVEN OFFICERS...........................................................................................11 Section 7.1 Office............................................................................................11 Section 7.2. Term.............................................................................................11 Section 7.3 Compensation......................................................................................11
-ii- 3 Section 7.4 Removal and Resignation of Officers...............................................................11 Removal....................................................................................................11 Resignation................................................................................................11 Section 7.5 Chief Executive Officer...........................................................................11 Section 7.6 President.........................................................................................11 Section 7.7 Chief Financial Officer...........................................................................11 Section 7.8 Vice Presidents...................................................................................11 Section 7.9 Secretary.........................................................................................11 Section 7.10 Treasurer........................................................................................11 ARTICLE EIGHT INDEMNIFICATION....................................................................................11 Section 8.1 Circumstances for Claim of Indemnification........................................................11 Section 8.2 Determination of Right to Indemnification.........................................................11 Section 8.3 Payment During Pendency of Action.................................................................11 Section 8.4 Intent............................................................................................11 Section 8.5 Notice to Shareholders of Certain Payments........................................................11 ARTICLE NINE DIVIDENDS AND RESERVES..............................................................................11 Section 9.1 Dividends.........................................................................................11 Section 9.2 Reserves..........................................................................................11 ARTICLE TEN CORPORATE BOOKS AND RECORDS..........................................................................11 Section 10.1 Minutes of Corporate Meetings....................................................................11 Section 10.2 Share Register...................................................................................11 Section 10.3 Inspection of Records............................................................................11 By Shareholders............................................................................................11 By Directors...............................................................................................11 ARTICLE ELEVEN GENERAL PROVISIONS................................................................................11 Section 11.1 Fiscal Year......................................................................................11 Section 11.2 Annual Report....................................................................................11 Section 11.3 Authority for Execution of Contracts and Instruments.............................................11 Section 11.4 Signing of Checks, Drafts, Etc...................................................................11 Section 11.5 References.......................................................................................11 ARTICLE TWELVE SEAL..............................................................................................11 Section 12.1 Seal.............................................................................................11 ARTICLE THIRTEEN AMENDMENTS......................................................................................11 Section 13.1 Amendments.......................................................................................11
-iii- 4 BYLAWS OF ASA HOLDINGS, INC. ARTICLE ONE OFFICES Section 1.1 Registered Office and Agent. The Corporation shall maintain a registered office in metropolitan Atlanta, Georgia, and shall have a registered agent whose business office is identical with such registered office. Section 1.2 Other Offices. The Corporation may have offices at such place or places, within or without the State of Georgia, where the Corporation is qualified to do business, as the Board of Directors may, from time to time, appoint or as the business of the Corporation may require or make desirable. ARTICLE TWO CAPITAL STOCK Section 2.1 Issuance and Notice. Certificates of each class of common stock shall be numbered consecutively in the order in which they are issued. They shall be signed by the Chief Executive Officer and Secretary and the seal of the Corporation shall be affixed thereto. In an appropriate place in the corporate records shall be entered the name of the person owning the shares, the number of shares and the date of issue. Certificates of stock exchanged or returned shall be canceled. Facsimile signatures may be utilized in accordance with Section 2.2 of this Article. 5 Section 2.2 Transfer Agents and Registrar. The Board of Directors of the Corporation may appoint a transfer agent or agents and a registrar or registrars of transfer other than the Corporation itself or an employee thereof for shares of stock of the Corporation and may require that all stock certificates bear the signature of such transfer agent or registrar. In the event such a transfer agent or registrar is thus appointed, any share certificate may be signed by the facsimile of the signature of either or both of the Chief Executive Officer and Secretary and printed thereon. If the same is countersigned by the transfer agent of the Corporation, the certificates bearing the facsimile of such Officers and printed thereon shall be valid in all respects as if such person or persons were still in office, even though such Officer or Officers shall have died or otherwise ceased to be Officers. Section 2.3 Transfer. Upon the surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of assignment or authority to transfer, it shall be the duty of the Corporation or the transfer agent to cancel the surrendered certificate and issue a certificate to the person entitled thereto and otherwise record the transaction upon the books of the Corporation. Section 2.4 Lost Certificates. Any person claiming a certificate of stock to be lost or destroyed shall make an affidavit or affirmation of that fact and shall, if the Corporation so requires, comply with such other conditions applicable to the circumstances as the Corporation may require, including the delivery of a bond of indemnity, in form with one or more sureties satisfactory to the Corporation, in at least double in value of the stock represented by said certificates; whereupon a new certificate may be issued of the same tenor and for the same number of shares as the one alleged to be lost or destroyed. -2- 6 Section 2.5 Shareholders of Record. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder thereof in fact and shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not the Corporation shall have express or other notice thereof, except as otherwise expressly provided by law. Section 2.6 Determining Shareholders of Record. The Board of Directors shall have the power to close the stock transfer books of the Corporation for a period not exceeding seventy (70) days preceding the date of any meeting of Shareholders or the date for payment of any dividend. Such date shall serve as the record date for the determination of the Shareholders entitled to notice of and to vote at such meeting or to receive payment of such dividend. When a record date is so fixed, only Shareholders of record on that date shall be entitled to notice of and to vote at the meeting or to receive payment of any dividend, notwithstanding any transfer of any shares on the books of the Corporation after the record date. ARTICLE THREE SHAREHOLDERS' MEETINGS Section 3.1 Place of Meetings. All meetings of the Shareholders shall be held at the registered office of the Corporation, or at such other place either within or without the State of Georgia as the Board of Directors may from time to time designate. Section 3.2 Annual Meeting. The annual meeting of the Shareholders shall be held each year on such hour and such date between April 1 and June 30 of each year as the Board of Directors shall designate. At such annual meeting, the Shareholders shall elect a Board of -3- 7 Directors and transact such other business as may properly come before the meeting, regardless of whether notice of such matter has been given. Section 3.3 Special Meetings A. Calling of Special Meetings. Upon request in writing to the Chief Executive Officer or Secretary, sent by registered mail or delivered to such Officer in person, by any of the persons entitled to call a meeting of Shareholders, as provided in Section 3.3(B) below, such Officer shall forthwith cause notice to be given to the Shareholders entitled to vote at such meeting. If the notice is not given within thirty (30) days after the date of delivery of the request, the persons calling the meeting may fix the time of meeting and give the notice in the manner provided in these By-laws. B Persons Entitled to Call Special Meetings. Special meetings of the Shareholders, for any purpose whatsoever, may be called at any time by any of the following: (1) the Chief Executive Officer, (2) a majority of the Board of Directors in office; and (3) Shareholders holding not less than twenty-five percent (25%) of the voting power of the Corporation. C. Permissible Matters. Business transacted at all special meetings shall be confined to the objects stated in the call. Section 3.4 Notice. A. Notice of Meetings. Notice of all meetings of Shareholders shall be given in writing to Shareholders entitled to vote signed by the Secretary or an Assistant Secretary or other person charged with that duty, or, in case of his neglect or refusal, or if there is no person charged with the duty of giving notice, by any Director or Shareholder. -4- 8 B. Method of Notice. A notice may be given by the Corporation to any Shareholder, either personally or by mail or other means of written communication, charges prepaid, addressed to the Shareholder at his address appearing on the books of the Corporation. C. Time of Notice. Notice of meeting of Shareholders shall be sent to each Shareholder entitled thereto not less than ten (10) days nor more than sixty (60) days before the meeting, except in the case of a meeting for the purpose of approving a merger or consolidation agreement in which case the notice must be given not less than twenty (20) days prior to the date of the meeting. D. Contents of Notice. Notice of any meeting of Shareholders shall specify the place, the day and the hour of the meeting, and in the case of a special meeting, the purpose for calling the meeting. Section 3.5 Waiver of Notice. Notice of a meeting need not be given to any Shareholder who signs a waiver of notice, in person or by proxy, either before or after the meeting; and a Shareholder's waiver shall be deemed the equivalent of giving notice. Neither the business transacted nor the purpose of the meeting need be specified in the waiver, except as may be otherwise required by the Georgia Business Corporation Code. Section 3.6 Quorum. A. What Constitutes a Quorum. The majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at any meeting of Shareholders. If a quorum is present, the affirmative vote of the majority of shares represented at the meeting and entitled to vote on the subject matter shall be the act of the Shareholders, except as may be otherwise required by the Georgia Business Corporation Code. -5- 9 B. Loss of Quorum. The Shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment notwithstanding the withdrawal of enough Shareholders to leave less than a quorum. Section 3.7 Adjournment. Any meeting of the Shareholders may be adjourned to another time and place by the holders of a majority of the voting shares represented at a meeting, whether or not a quorum is present. Notice of the adjourned meeting or of the business to be transacted at such meeting shall not be necessary, provided the time and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken. Notwithstanding the preceding sentence, if the Board of Directors fixes a new record date for the adjourned meeting with respect to who can vote at such meeting, then notice of the adjourned meeting shall be given to each Shareholder of record on the new record date who is entitled to vote at such meeting, which notice shall be given in accordance with the provisions of Section 3.4 hereof. At an adjourned meeting at which a quorum is present or represented, any business may be transacted which could have been transacted at the meeting originally called. Section 3.8 Voting. A. Voting Rights. The holders of the common stock, or any proxies of such holders, shall be entitled to one vote for each share of stock standing in their name or for which they hold a proxy. Neither treasury shares nor shares held by a subsidiary of the Corporation shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time. B. Proxies. A Shareholder entitled to vote may vote in person or by proxy executed in writing by the Shareholder or by his attorney-in-fact. A proxy shall not be valid after eleven -6- 10 months from the date of its execution unless a longer period is expressly stated in such proxy. Every proxy shall be revocable at the pleasure of the Shareholder executing it except as may be otherwise provided in the Georgia Business Corporation Code. Section 3.9 List of Shareholders. At each meeting of the Shareholders, a full, true and complete list, in alphabetical order, of all the Shareholders entitled to vote at such meeting, and indicating the address and the number of shares held by each, certified by the Secretary of the Corporation, shall be furnished. Such list shall be open to the inspection of the Shareholders, for any purpose germane to the meeting, at the time and place of the meeting. Such list shall be prima facie evidence of who is a Shareholder of record, but in the event of challenge, the record of Shareholders determined in accordance with Section 2.6 above shall prevail. Section 3.10 Election Judges. The Board of Directors, or, if the Board shall not have made the appointment, the chairman presiding at any meeting of Shareholders, shall appoint two or more persons to act as election judges to receive, canvass, certify and report the votes cast by the Shareholders at such meeting; but no candidate for the office of Director shall be appointed as an election judge at any meeting for the election of Directors. Section 3.11 Chairman of Meeting. The Chief Executive Officer shall preside at all meetings of the Shareholders; and, in the absence of the Chief Executive Officer, the Board of Directors may appoint any Director or Officer to act as chairman of the meeting. Section 3.12 Secretary of Meeting. The Secretary of the Corporation shall act as secretary of all meetings of the Shareholders; and, in his absence, the chairman of the meeting may appoint any person to act as secretary of the meeting. -7- 11 ARTICLE FOUR DIRECTORS Section 4.1 Management of Business. Subject to limitations included in the Corporation's Articles of Incorporation, these Bylaws or the Georgia Business Corporation Code concerning action which shall be authorized by the Shareholders, the full and entire management of the affairs and business of the Corporation shall be vested in the Board of Directors. *Section 4.2 Number, Qualification and Term of Office. The business and affairs of the Corporation shall be managed by a Board of Directors which shall consist of a number of members not less than three (3) nor more than nine (9), which number may be designated by resolution of the holders or voters of a majority in interest of the outstanding shares entitled to vote or may be determined from time to time by resolution of the Board of Directors. The Board of Directors so elected shall designate a Chairman of the Board who shall, if present, preside at all meetings of the Board of Directors and who shall perform such other functions as may be specifically delegated to him by the Board of Directors. None of the Directors need be a resident of the State of Georgia or hold shares of stock in the Corporation, but each Director shall be elected at an annual meeting of the Shareholders and shall serve for a term of one (1) year and until his successor is elected and qualified or until his earlier resignation, removal from office or death. *Amended on May 21, 1998. Section 4.3 Vacancies. A. When Vacancies Occur. Vacancies in the Board of Directors shall exist in the case of happening of any of the following events: (1) the death, resignation or removal of any -8- 12 Directors; (2) a declaration of vacancy by the Board of Directors as provided in Paragraph B below; (3) the authorized number of Directors is increased by the Shareholders; or (4) at any meeting of Shareholders at which the Directors are elected, the Shareholders fail to elect the full authorized number of Directors to be voted for at that meeting. A reduction of the authorized number of Directors does not remove any Director prior to the expiration of his term in office. B. Declaration of Vacancy. The Board of Directors may declare vacant the office of any Director in either of the following cases: (1) if he is declared of unsound mind by an appropriate court order or convicted of a felony; or (2) if within sixty (60) days after notice of his election he does not accept the office in writing or by attending a meeting of the Board of Directors. C. Filling Vacancies. Vacancies may be filled by a majority of the remaining Directors, though less than a quorum, or by a sole remaining Director. Each Director so elected shall hold office until his successor is elected at an annual or special meeting of the Shareholders. Section 4.4 Compensation. By resolution of the Board of Directors, compensation to the Directors shall be fixed and expenses of attendance allowed for attendance at meetings of the Board. A Director may serve the Corporation in a capacity other than that of Director and receive compensation for the services rendered in such other capacity. ARTICLE FIVE DIRECTORS' MEETINGS Section 5.1 Place of Meetings. The meetings of the Board of Directors may be held at the registered office of the Corporation or at such other place either within or without the State of Georgia as the Board of Directors may from time to time designate. -9- 13 Section 5.2 Annual Meeting. A. Time of Annual Meeting. The Board of Directors shall meet each year immediately preceding the annual meeting of the Shareholders at the place that meeting has been held or at such other time and date as a majority of the number of the members of the Board of Directors may designate by resolution. At such annual meeting, any business may be transacted which is within the powers of the Directors. B. Notice of Annual Meeting. Notice of the annual meeting of the Board of Directors need not be given. Section 5.3 Regular Meetings. A. When Regular Meetings Held. Regular meetings of the Board of Directors shall be held at least four (4) times annually. The annual meeting of the Board of Directors shall constitute a regular meeting. B. Call of Regular Meetings. All regular meetings of the Board of Directors of the Corporation shall be called by the Chairman of the Board or the President. C. Notice of Regular Meetings. Written notice of the time and place of the regular meetings of the Board of Directors (other than the annual meeting) shall be delivered personally to each Director or sent to each Director by mail or by other form of written communication at least three (3) days before the meeting. Section 5.4 Special Meetings. A. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board, by the President or by any two Directors. -10- 14 B. Notice of Special Meeting. Written notice of the time and place of special meetings of the Board of Directors shall be delivered personally to each Director or sent to each Director by mail or by other form of written communication at least three (3) days before the meeting. Section 5.5 Waiver of Notice. A Director may waive in writing notice of a regular or special meeting of the Board either before or after the meeting and his waiver shall be deemed the equivalent of giving notice. Attendance of a Director at a meeting shall constitute a waiver of notice of that meeting except when he attends a meeting solely for the purpose of stating at the beginning of the meeting any such objection or objections to the transaction of business. Section 5.6 Purpose of Meeting. Neither the business to be transacted at a regular or special meeting, nor the purpose of such meeting, need be specified in the notice or waiver of notice of such meeting. Section 5.7 Presence by Telephone. Members of the Board of Directors may participate in a meeting of the Board of Directors by means of a conference telephone or similar communications equipment by which all Directors participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 5.7 shall constitute presence in person at such meeting. Section 5.8 Quorum and Majority. At meetings of the Board of Directors, a majority of the number of the Directors shall constitute a quorum for the transaction of business. Only when a quorum is present may the Board of Directors continue to do business at any such meeting. If a quorum is present, the acts of a majority of the number of Directors in attendance shall be the acts of the Board of Directors. -11- 15 Section 5.9 Manifestation of Dissent. A Director of the Corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the Secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a Director who voted in favor of such action. Section 5.10 Action by Consent of Board Without Meeting. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting if all members of the Board shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board. Such action by written consent shall have the same force and effect as a unanimous vote of such Directors. Any certificate or other document filed under any provision of the Georgia Business Corporation Code which relates to action so taken shall state that the action was taken by unanimous written consent of the Board of Directors without a meeting and that these By-laws authorize the Directors to so act, and such statement shall be prima facie evidence of such authority. Section 5.11 Adjourned Meetings A. Adjournment. In the absence of a quorum, a majority of the Directors present may adjourn from time to time until the time fixed for the next regular meeting of the Board or until a quorum shall be present. -12- 16 B. Notice of Adjourned Meeting. Notice of the time and place of holding an adjourned meeting of a meeting need not be given to absent Directors if the time and place are fixed at the meeting adjourned. Section 5.12 Conduct of Meetings. At every meeting of the Board of Directors, the Chairman of the Board, or in his absence, the President, or in the absence of both the Chairman of the Board and the President, a chairman chosen by a majority of the Directors present, shall preside. The Secretary of the Corporation shall act as Secretary of the Board of Directors. In case the Secretary shall be absent from any meeting, the chairman of the meeting may appoint any person to act as secretary of the meeting. ARTICLE SIX COMMITTEES Section 6.1 Committees. The Board of Directors may from time to time, by majority resolution of the full Board of Directors, appoint from among its members such Committees as the Board may determine. Section 6.2 Executive Committee. The members of the Executive Committee, if there is one, shall consist of either the Chairman of the Board or the Chief Executive Officer, and at least a majority of the members of such Committee shall be neither Officers nor otherwise employed by the Corporation. If an Executive Committee is formed, such Committee shall, during the interval between meetings of the Board, advise and aid the Officers of the Corporation in all matters concerning the Corporation's interest and the management of its business and generally perform such duties and exercise such powers as may be directed or delegated by the Board of Directors from time to time. The Board may delegate to the Executive Committee -13- 17 authority to exercise all powers of the Board, excepting powers which may not be delegated to such Committee under the Georgia Business Corporation Code, while the Board is not in session. Vacancies in the membership of any Committee which shall be so appointed by the Board of Directors shall be filled by the Board of Directors at a regular meeting or at a special meeting called for that purpose. Section 6.3 Audit and Compensation Committees. The Board of Directors shall maintain an Audit Committee and Compensation Committee. The composition, authority and activities of the Audit Committee and Compensation Committee shall be determined from time to time by resolution of the full Board of Directors. ARTICLE SEVEN OFFICERS Section 7.1 Offices. The officers of the Corporation shall consist of a President, a Secretary, and a Treasurer, each of whom shall be elected or appointed by the Board of Directors. The Board of Directors may elect or appoint a Chief Executive Officer that may be separate from the President and a Chief Financial Officer that may be separate from the Treasurer. The Board of Directors may also elect a Chairman of the Board from among its members as an officer of the Corporation. The Board of Directors from time to time may, or may authorize the Chief Executive Officer to, create and establish the duties of other offices and may, or may authorize the Chief Executive Officer to, elect or appoint, or authorize specific senior officers to appoint, the persons who shall hold such other offices, including one or more Vice Presidents (including Executive Vice Presidents, Senior Vice Presidents, Assistant Vice Presidents, and the like), one or more Assistant Secretaries, and one or more Assistant Treasurers. Whether or not so provided -14- 18 by the Board of Directors, the Chairman of the Board (if any) or the Chief Executive Officer may appoint one or more Assistant Secretaries, and one or more Assistant Treasurers. Any two or more offices may be held by the same person. In the event that any such office is vacated at any time, it shall not be necessary for the Board of Directors to fill the vacated office until such time as they deem appropriate. Section 7.2. Term. Each officer shall serve at the pleasure of the Board of Directors (or, if appointed by the Chief Executive Officer or other senior officer pursuant to this Article Seven, at the pleasure of the Board of Directors, the Chief Executive Officer, or any other senior officer authorized to have appointed the officer) until his or her death, resignation, or removal, or until his or her replacement is elected or appointed in accordance with this Article Seven. Section 7.3 Compensation. Either the Board of Directors or the Compensation Committee shall prescribe or fix the salaries, bonuses, pensions, benefits under pension and profit sharing plans, stock option plans and all other employee benefit plans and all other benefits and compensation to be paid or allowed to or in respect of all officers of the Corporation, including officers who may also be directors of the Corporation. Subject to the Corporation Code and Article Nine, directors shall not be disqualified from voting on their own or any other person's plan, benefit or compensation to be paid by the Corporation merely because they or such other person is a director or an officer or an employee of the Corporation. Officers may serve without compensation. Section 7.4 Removal and Resignation of Officers. (a) Removal. All officers (regardless of how elected or appointed) may be removed, with or without cause, by the Board of Directors, by the Chief Executive Officer or by -15- 19 any other senior officer authorized to have appointed the officer to be removed. Removal will be without prejudice to the contract rights, if any, of the person removed, but shall be effective notwithstanding any damage claim that may result from infringement of such contract rights. (b) Resignation. An officer may resign at any time by delivering notice to the Corporation. Any such resignation is effective when the notice is so delivered unless the resignation specifies a later date. Section 7.5 Chief Executive Officer. The Chief Executive Officer shall be charged with the administration of the Corporation (including the general and active management of the business operations and corporate affairs of the Corporation and supervision of the policies of the Corporation), shall see that all orders and resolutions of the Board of Directors are carried into effect, shall have the authority to select and appoint employees and agents of the Corporation, shall have the authority to conduct all ordinary business on behalf of the Corporation, shall have the authority to execute and deliver on behalf of the Corporation any contract, conveyance, or similar document not requiring approval by the Board of Directors or shareholders as provided in the Bylaws or the Corporation Code, and shall, in the absence or disability of the Chairman of the Board or if none has been elected, perform the duties and exercise the powers of the Chairman of the Board. The Chief Executive Officer shall perform any other duties and have any other authority as may be delegated from time to time by the Board of Directors, and shall be subject to the limitations fixed from time to time by the Board of Directors. In the event that the Chief Executive Officer shall also be the Chairman of the Board, then such individual may execute and deliver documents or instruments under the title "Chairman," "Chairman of the Board" or "Chief Executive Officer." -16- 20 Section 7.6 President. If there shall be no separate Chief Executive Officer of the Corporation, then the President shall be the chief executive officer of the Corporation and shall have all the duties and authority given under these Bylaws to the Chief Executive Officer. The President shall otherwise be the chief operating officer of the Corporation and shall, subject to the authority of the Chief Executive Officer, have responsibility for the conduct and general supervision of the business operations of the Corporation. The President shall perform such other duties and have such other authority as may from time to time be delegated, and shall be subject to the limitations fixed from time to time, by the Board of Directors or the Chief Executive Officer. In the absence or disability of the Chief Executive Officer, the President shall perform the duties and exercise the powers of the Chief Executive Officer. Section 7.7 Chief Financial Officer. Unless otherwise provided by the Board of Directors, the Chief Financial Officer shall be charged with management of the financial affairs of the Corporation and shall be responsible for the custody of all funds and securities belonging to the Corporation and for the receipt, deposit, or disbursement of these funds and securities under the direction of the Board of Directors. The Chief Financial Officer shall cause full and true accounts of all receipts and disbursements to be maintained and shall make reports of these receipts and disbursements to the Board of Directors, Chief Executive Officer, Chief Operating Officer and President upon request. The Chief Financial Officer shall also cause the preparation of the Annual Report as required by Section 11.2. The Chief Financial Officer shall perform any other duties and have any other authority as from time to time may be delegated by the Board of Directors or the Chief Executive Officer, Chief Operating Officer or President. -17- 21 Section 7.8 Vice Presidents. The Vice President (if any) shall, in the absence or disability of the President, or at the direction of the President, perform the duties and exercise the powers of the President, whether the duties and powers are specified in these Bylaws or otherwise. If the Corporation has more than one Vice President, the order of election or other order of seniority designated by the Board of Directors or the Chief Executive Officer shall determine which Vice President shall act in the event of the absence or disability of the President and any more senior Vice President. Vice Presidents shall perform any other duties and have any other authority as from time to time may be delegated by the Board of Directors, the Chief Executive Officer, or the President. Section 7.9 Secretary. The Secretary shall be responsible for preparing minutes of the meetings of shareholders, directors, and committees of directors and for authenticating records of the Corporation. The Secretary or any Assistant Secretary shall have authority to give all notices required by law or these Bylaws. The Secretary shall be responsible for the custody of the corporate books, records, contracts, and other documents. The Secretary or any Assistant Secretary may affix the corporate seal to any lawfully executed document requiring it, may attest to the signature of any officer of the Corporation and the corporate seal, and shall sign any document or instrument that requires the Secretary's signature. The Secretary or any Assistant Secretary shall perform any other duties and have any other authority as from time to time may be delegated by the Board of Directors, the Chief Executive Officer. Section 7.10 Treasurer. If there shall be no Chief Financial Officer of the Corporation, the Treasurer shall otherwise be the chief financial officer of the Corporation, shall be charged with management of the financial affairs of the Corporation and shall otherwise have the duties -18- 22 and responsibilities of the Chief Financial Officer. The Treasurer or any Assistant Treasurer shall perform any other duties and have other authority as from time to time may be delegated by the Board of Directors, the Chief Executive Officer, the Chief Operating Officer, the President or the Chief Financial Officer. ARTICLE EIGHT INDEMNIFICATION Section 8.1 Circumstances for Claim of Indemnification. A. Any person made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal (other than an action by or in the right of the Corporation) because he is or was a Director or Officer of this Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another domestic or foreign corporation, partnership, joint venture, trust, employee benefit plan or other entity, shall be indemnified by this Corporation against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if (1) he conducted himself in good faith and (2) he reasonably believed (x) in the case of conduct in his official capacity, that such conduct was in the best interest of this Corporation, (y) in all other cases, that such conduct was at least not opposed to the best interests of this Corporation, and (z) in the case of any criminal proceeding, that he had no reasonable cause to believe that such conduct was unlawful. An individual's conduct with respect to an employee benefit plan for a purpose he believed in good faith to be in the interests of the participants in and beneficiaries of the plan is conduct that meets the standard set forth in the -19- 23 immediately preceding sentence. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or, upon a plea of nolo contendere or its equivalent, shall not, of itself, be determinative that the person did not meet the standard set forth in the first sentence of this paragraph. Notwithstanding anything to the contrary herein, no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged liable on the basis that personal benefit was improperly received by him, whether or not acting in his official capacity. B. Any person made a party to any threatened, pending or completed action or suit by or in the right of this Corporation to procure a judgment in its favor because he is or was a Director or Officer of this Corporation, or is or was serving at the request of this Corporation as a director, officer, partner, trustee, employee or agent of another domestic or foreign corporation, partnership, joint venture, trust, employee benefit plan or other entity shall be indemnified by this Corporation against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if (1) he conducted himself in good faith and (2) he reasonably believed (x) in the case of conduct in his official capacity, that such conduct was in the best interests of this Corporation, (y) in all other cases, that such conduct was at least not opposed to the best interests of this Corporation, and (z) in the case of any criminal proceeding, that he had no reasonable cause to believe that such conduct was unlawful. Notwithstanding anything to the contrary herein, no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all -20- 24 relevant circumstances, it is fair and reasonable to indemnify such person for such expenses which the court shall deem proper. Section 8.2 Determination of Right to Indemnification. Determination of the right to such indemnification and the amount thereof may be made, at the option of the person to be indemnified, pursuant to procedure set forth from time to time in the Bylaws or by any of the following procedures: (i) order of the court or administrative body or agency having jurisdiction of the action, suit or proceeding, (ii) if there are two or more disinterested Directors, resolution adopted by a majority vote of all disinterested Directors of the Corporation (a majority of whom shall for such purpose constitute a quorum) or by a majority of the members of a committee of two or more disinterested Directors appointed by such a vote, or if such a quorum of disinterested Directors cannot be obtained, by independent counsel in a written opinion, (iii) resolution adopted by a majority in interest of the shares of the Corporation entitled to vote at any meeting, such shares owned by or voted under the control of a Director who at the time does not qualify as a disinterested Director may not be voted on the determination, or (iv) order of any court having jurisdiction over the Corporation. Any such determination that a payment by way of indemnity should be made shall be binding upon the Corporation. Such right of indemnification shall not be exclusive of any other right which such Directors and Officers of the Corporation, and the other persons above mentioned, may have or hereafter acquire and, without limiting the generality of such statement, they shall be entitled to their respective rights of indemnification or reimbursement under any Bylaws, agreement or vote of the Shareholders, their rights under this Article being cumulative. The provisions of this Article shall apply to any -21- 25 member of any Committee appointed by the Board of Directors as fully as though such person had been a Director or Officer of the Corporation. Section 8.3 Payment During Pendency of Action. A majority of the members of the Board of Directors of this Corporation who were not parties to such action, suit or proceeding or a majority in interest of the shares of the Corporation entitled to vote shall be authorized to pay to any person entitled to indemnification under this Article, all actual expenses incurred in connection with such action, suit or proceeding during the pendency thereof. Section 8.4 Intent. It is the intention of this Corporation that this Article of the Bylaws of this Corporation and the indemnification hereunder shall extend to the maximum indemnification possible under the laws of the State of Georgia, and if one or more words, phrases, clauses, sentences or sections of this Article should be held unenforceable for any reason, all remaining portions of this Article shall remain in full force and effect. Section 8.5 Notice to Shareholders of Certain Payments. If any expenses or other amounts are paid by way of indemnification, otherwise than by court order or action by the Shareholders or by an insurance carrier pursuant to insurance maintained by the Corporation, then the Corporation shall send the Shareholders of record then entitled to vote a statement specifying the persons paid, the amounts paid and the nature and status at the time of such payment of the litigation or threatened litigation. Such information shall be sent by first class mail not later than the next annual meeting of Shareholders after such payment, if such meeting is not held within three (3) months from the date of such payment, otherwise, not later than fifteen (15) months from the date of such payment. -22- 26 ARTICLE NINE DIVIDENDS AND RESERVES Section 9.1 Dividends. The Board of Directors of the Corporation may, from time to time, declare, and the Corporation thereon shall pay dividends on such outstanding shares in cash, property, or its own shares, except when the Corporation is insolvent or when the declaration or payment thereof would be contrary to any restrictions contained in the Articles of Incorporation, subject to the following provisions: A. Dividends may be declared and paid in cash or property only out of the unreserved and unrestricted earned surplus of the Corporation, or out of the unreserved and unrestricted net earnings of the current fiscal year, computed to the date of the declaration of the dividend or the next preceding fiscal year. B. Dividends may be declared and paid in the Corporation's own shares out of any treasury shares that have been reacquired out of surplus of the Corporation. C. Dividends may be declared and paid in the Corporation's own authorized but unissued shares out of any unreserved and unrestricted surplus of the Corporation provided that such shares shall be issued at not less than the par value thereof and there shall be transferred to stated capital at the time such dividend is paid an amount of surplus at least equal to the aggregate par value of the shares to be issued as a dividend. D. The Corporation shall have the use of any cash or property declared as a dividend that is unclaimed until the time it escheats to the applicable jurisdiction. Any stock declared as a dividend or unclaimed shall be voted by the Board of Directors. -23- 27 Section 9.2 Reserves. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Directors from time to time, in their absolute discretion, think proper as a reserve fund to meet contingencies or for equalizing dividends or for repairing or maintaining any property of the Corporation or for such other purpose as the Directors shall think conducive to the interest of the Corporation, and the Directors may modify or abolish any such reserve in the manner by which it was created. ARTICLE TEN CORPORATE BOOKS AND RECORDS Section 10.1 Minutes of Corporate Meetings. The Corporation shall keep at the principal office, or such other place as the Board of Directors may order, a book of minutes of all meetings of its Directors and of its Shareholders with the time and place of holding, whether annual, regular or special, and, if special, how authorized, the notice thereof given, the names of those present at Directors' meetings, the number of shares present or represented at Shareholders' meetings and the proceedings thereof. Section 10.2 Share Register. The Corporation shall keep at the principal office, or at the office of the transfer agent, a share register showing the names of the Shareholders and their addresses, the number of shares held by each and the number and date of cancellation of every certificate surrendered for cancellation. The above specified information may be kept by the Corporation on punch cards, magnetic tape or other information storage device related to electronic data processing equipment provided that such card, tape or other equipment is capable of reproducing the information in clearly legible form for the purposes of inspection as provided in Section 10.3 of these By-laws. -24- 28 Section 10.3 Inspection of Records. A. By Shareholders. The share register or duplicate share register shall be open to inspection by the Shareholders as provided under the law of the State of Georgia. B. By Directors. Every Director shall have the absolute right at any reasonable time to inspect all books, records, documents of every kind and the physical properties of the Corporation and also of its subsidiary corporations, domestic or foreign. Such inspection by a Director may be made in person or by agent or attorney and the right of inspection includes the right to make extracts. ARTICLE ELEVEN GENERAL PROVISIONS Section 11.1 Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. Section 11.2 Annual Report. The Board of Directors of the Corporation shall present at each annual meeting, and when called for by vote of the Shareholders at any special meeting of the Shareholders, a full and clear statement of any business and condition of the Corporation. Section 11.3 Authority for Execution of Contracts and Instruments. The Chief Executive Officer, President, Chief Financial Officer and any Vice Presidents may enter into any contract or execute and deliver any instrument in the name and on behalf of the Corporation. The Board of Directors, except as otherwise provided in these By-laws, may authorize any other Officer or Officers, agent or agents to enter into any contract or execute and deliver any instrument in the name and on behalf of the Corporation, and such authority may be general or confined to specific instances; and, unless so authorized, no such other Officer, agent or -25- 29 employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable pecuniarily for any purpose or in any amount. Section 11.4 Signing of Checks, Drafts, Etc. All checks, drafts or other order for payment of money, notes or other evidences of indebtedness issued in the name of or payable to the Corporation shall be signed or endorsed by such person or persons and in such manner as shall be determined from time to time by the Chief Executive Officer or Chief Financial Officer. Section 11.5 References. All references to "he," "him" or similar phrases shall refer to both males and females. ARTICLE TWELVE SEAL Section 12.1 Seal. The seal of the Corporation shall have inscribed thereon the name of the Corporation, the year of its organization and the words "CORPORATE SEAL-GEORGIA". In the event it is inconvenient to use such a seal at any time, the signature of the Corporation followed by the words "Corporate Seal" enclosed in parentheses or scroll shall be deemed the seal of the Corporation. The seal shall be in the custody of the Secretary and affixed by him or any Assistant Secretary on the certificates of stock and such other papers as may be directed by law, by these By-laws or by the President or Board of Directors. -26- 30 ARTICLE THIRTEEN AMENDMENTS Section 13.1 Amendments. These By-laws may be amended at any meeting of the Board of Directors by the affirmative vote of a majority of the members of the Board of Directors, except as prohibited by the Georgia Business Corporation Code. I, John W. Beiser, Secretary of ASA Holdings, Inc. formed and existing under the laws of the State of Georgia, do hereby certify that the foregoing is a true and complete copy of the Bylaws of this Corporation as adopted by the Board of Directors on September 24, 1996. -27- 31 IN WITNESS WHEREOF, I have hereunder subscribed my name and affixed the seal of the Corporation, this 24th day of September, 1996. ---------------------------------- JOHN W. BEISER, Secretary (CORPORATE SEAL) -28- EX-10.39.2 3 FIRST AMENDMENT DATED AS OF MARCH 22, 1999 1 EXHIBIT 10.39.2 FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT ("First Amendment") is made and entered into as of the 22nd day of March, 1999, by and between ASA HOLDINGS, INC., a Georgia corporation ("Borrower"), NATIONSBANK, N.A., SOUTHTRUST BANK, N.A., SUNTRUST BANK, ATLANTA, and WACHOVIA BANK, N.A. (the "Lenders"), and NATIONSBANK, N.A., as Administrative Agent and Issuing Bank ("Administrative Agent"). WITNESSETH: WHEREAS, Borrower, Lenders and Administrative Agent entered into a credit agreement (the "Credit Agreement") dated as of June 26, 1998 by and among Borrower, the Lenders, the Administrative Agent and Nationsbanc Montgomery Securities LLC, as Arranger; and WHEREAS, no Loans are outstanding under the Credit Agreement as of March 22, 1999; and WHEREAS, the parties wish to terminate the Credit Agreement. NOW, THEREFORE, for and in consideration of each party's agreement to be bound hereby, and for other good and adequate consideration, the parties do hereby agree as follows: 1. The term "Termination Date" in Section 1.1 of the Credit Agreement is hereby amended in its entirety to read as follows: "Termination Date" means 12:01 a.m. March 22, 1999. 2. All other capitalized terms used and not otherwise defined herein have the same meaning ascribed to them in the Credit Agreement. 3. This First Amendment may be executed in one or more counterparts in accordance with Section 13.14 of the Credit Agreement. 2 IN WITNESS WHEREOF, the Borrower, Lenders and Administrative Agent have each caused this Termination Agreement to be executed by its duly authorized officers and its seal to be affixed hereto as of March 22nd 1999. THE BORROWER: THE ADMINISTRATIVE AGENT AND ISSUING BANK: ASA HOLDINGS, INC. NATIONSBANK, N.A. By: /s/ Ronald V. Sapp By: /s/ Chas McDonell --------------------------------- ---------------------- Title Senior Vice President-Finance Title Vice President ------------------------------- -------------------- THE LENDERS: NATIONSBANK, N.A., as a Lender SUNTRUST BANK, ATLANTA By: /s/ Chas McDonell By: /s/ Deborah S. Armstrong --------------------------- -------------------------- Title Vice President Title Vice President ------------------------- ------------------------ By: /s/ Eric M. Johnson -------------------------- Title Officer ------------------------ SOUTHTRUST BANK, N.A. WACHOVIA BANK, N.A. By: /s/ Ron Fontenot By: /s/ Anne L. Sayles --------------------------- ---------------------- Title Vice President Title Vice President ------------------------- -------------------- 2 EX-21 4 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 5 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We 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 February 1, 1999, except for Notes D and N as to which the date is March 22, 1999, with respect to the consolidated financial statements and the financial statement schedules included in this Annual Report (Form 10-K) of ASA Holdings, Inc. /s/ Ernst & Young LLP Atlanta, Georgia March 24, 1999 EX-27.1 6 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, 1998 AND 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 DEC-31-1998 130,553 55,292 8,672 (143) 6,982 204,602 530,612 247,549 499,769 71,967 54,063 0 0 2,854 306,920 499,769 0 409,859 0 313,828 0 20 2,721 106,245 40,108 66,137 0 0 0 66,137 2.24 2.22
-----END PRIVACY-ENHANCED MESSAGE-----