<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-5424
DELTA AIR LINES, INC.
State of Incorporation: Delaware
IRS Employer Identification No.: 58-0218548
Hartsfield Atlanta International Airport, Atlanta, Georgia 30320
Telephone: (404) 715-2600
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Number of shares outstanding by each class of common
stock, as of April 30, 1999:
Common Stock, $1.50 par value - 140,345,505 shares outstanding
<PAGE> 2
DELTA AIR LINES, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31 JUNE 30
ASSETS 1999 1998
- ------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 979 $ 1,077
Short-term investments 34 557
Accounts receivable, net of allowance for uncollectible accounts
of $39 at March 31, 1999 and $36 at June 30, 1998 968 938
Deferred income taxes 420 464
Prepaid expenses and other 339 326
------- -------
Total current assets 2,740 3,362
------- -------
PROPERTY AND EQUIPMENT:
Flight equipment 13,106 11,180
Less: Accumulated depreciation 4,333 3,895
------- -------
8,773 7,285
------- -------
Flight equipment under capital leases 515 515
Less: Accumulated amortization 252 216
------- -------
263 299
------- -------
Ground property and equipment 3,651 3,285
Less: Accumulated depreciation 2,073 1,854
------- -------
1,578 1,431
------- -------
Advance payments for equipment 511 306
------- -------
Total property and equipment 11,125 9,321
------- -------
OTHER ASSETS:
Marketable equity securities 457 424
Investments in associated companies 261 326
Cost in excess of net assets acquired, net 690 265
Leasehold and operating rights, net 116 124
Other 776 781
------- -------
Total other assets 2,300 1,920
------- -------
Total assets $16,165 $14,603
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
2
<PAGE> 3
DELTA AIR LINES, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31 JUNE 30
LIABILITIES AND SHAREOWNERS' EQUITY 1999 1998
- ------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 418 $ 67
Current obligations under capital leases 55 63
Notes payable 250 --
Accounts payable and miscellaneous accrued liabilities 2,094 2,025
Air traffic liability 1,800 1,667
Accrued salaries and vacation pay 457 553
Accrued rent 162 202
------- -------
Total current liabilities 5,236 4,577
------- -------
NONCURRENT LIABILITIES:
Long-term debt 1,876 1,533
Postretirement benefits 1,907 1,873
Accrued rent 697 651
Capital leases 196 249
Deferred income taxes 520 262
Other 570 511
------- -------
Total noncurrent liabilities 5,766 5,079
------- -------
DEFERRED CREDITS:
Deferred gain on sale and leaseback transactions 655 694
Manufacturers' and other credits 87 55
------- -------
Total deferred credits 742 749
------- -------
COMMITMENTS AND CONTINGENCIES (NOTE 4 and 5
EMPLOYEE STOCK OWNERSHIP PLAN
PREFERRED STOCK:
Series B ESOP Convertible Preferred Stock (issued and outstanding
6,559,296 shares at March 31, 1999 and 6,603,429 shares at
June 30, 1998) 473 475
Unearned compensation under
employee stock ownership plan (276) (300)
------- -------
197 175
------- -------
SHAREOWNERS' EQUITY:
Common Stock at par (total shares issued: 179,012,237 shares at
March 31, 1999 and 176,566,178 shares at June 30, 1998) 268 265
Additional paid-in capital 3,165 3,034
Accumulated other comprehensive income 109 89
Retained earnings 2,400 1,687
Treasury stock at cost (37,935,624 shares at March 31, 1999
and 26,115,784 shares at June 30, 1998) (1,718) (1,052)
------- -------
Total shareowners' equity 4,224 4,023
------- -------
Total liabilities and shareowners' equity $16,165 $14,603
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
3
<PAGE> 4
DELTA AIR LINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
------------------------------- -------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Passenger $ 3,203 $ 3,120 $ 9,825 $ 9,517
Cargo 134 138 424 441
Other, net 167 132 505 419
------------ ------------ ------------ ------------
Total operating revenues 3,504 3,390 10,754 10,377
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Salaries and related costs 1,268 1,209 3,721 3,618
Aircraft fuel 316 342 1,006 1,160
Depreciation and amortization 241 216 692 625
Other selling expenses 192 173 567 507
Passenger commissions 191 229 650 729
Contracted services 190 173 566 513
Landing fees and other rent 176 159 520 482
Aircraft rent 146 137 437 411
Aircraft maintenance materials and outside repairs 134 126 415 376
Passenger service 113 107 370 324
Other 181 182 582 531
------------ ------------ ------------ ------------
Total operating expenses 3,148 3,053 9,526 9,276
------------ ------------ ------------ ------------
OPERATING INCOME 356 337 1,228 1,101
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (47) (44) (139) (143)
Interest capitalized 12 10 34 29
Interest income 8 17 41 56
Miscellaneous income, net 29 2 52 10
------------ ------------ ------------ ------------
2 (15) (12) (48)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 358 322 1,216 1,053
INCOME TAXES PROVIDED (142) (127) (479) (414)
------------ ------------ ------------ ------------
NET INCOME 216 195 737 639
PREFERRED STOCK DIVIDENDS (2) (2) (8) (8)
------------ ------------ ------------ ------------
NET INCOME AVAILABLE TO COMMON
SHAREOWNERS $ 214 $ 193 $ 729 $ 631
============ ============ ============ ============
BASIC INCOME PER COMMON SHARE $ 1.51 $ 1.29 $ 5.06 $ 4.25
============ ============ ============ ============
DILUTED INCOME PER COMMON SHARE $ 1.42 $ 1.23 $ 4.80 $ 4.06
============ ============ ============ ============
WEIGHTED AVERAGE SHARES USED IN
PER SHARE COMPUTATION:
Basic 141,438,912 149,994,048 144,026,858 148,628,220
Diluted 152,034,789 159,091,552 152,837,902 156,590,708
DIVIDENDS PER COMMON SHARE $ 0.025 $ 0.025 $ 0.075 $ 0.075
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE> 5
DELTA AIR LINES, INC.
STATISTICAL SUMMARY
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
------------------------ ------------------------
STATISTICAL SUMMARY: 1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue Passengers Enplaned (thousands) 25,174 24,593 78,323 76,586
Revenue Passenger Miles (millions) 24,336 23,376 77,272 74,104
Available Seat Miles (millions) 34,829 34,041 107,425 104,632
Operating Margin 10.2% 10.0% 11.4% 10.6%
Passenger Mile Yield 13.16(cents) 13.35(cents) 12.71(cents) 12.84(cents)
Operating Revenue Per Available Seat Mile 10.06(cents) 9.96(cents) 10.01(cents) 9.92(cents)
Operating Cost Per Available Seat Mile 9.04(cents) 8.97(cents) 8.87(cents) 8.87(cents)
Passenger Load Factor 69.87% 68.67% 71.93% 70.82%
Breakeven Passenger Load Factor 62.10% 61.24% 62.94% 62.63%
Revenue Ton Miles (millions) 2,840 2,764 8,989 8,721
Cargo Ton Miles (millions) 406 427 1,262 1,311
Cargo Ton Mile Yield 33.04(cents) 32.34(cents) 33.58(cents) 33.62(cents)
Fuel Gallons Consumed (millions) 652 644 2,034 1,985
Average Price Per Fuel Gallon 48.52(cents) 53.17(cents) 49.44(cents) 58.40(cents)
Number of Aircraft in Fleet at End of Period* 671 561 671 561
Average Full-Time Equivalent Employees* 74,189 67,700 73,707 66,400
</TABLE>
*Fiscal year 1999 figures include the statistics of ASA Holdings, Inc.
5
<PAGE> 6
DELTA AIR LINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31
----------------------
1999 1998
------- -------
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES:
Net Income $ 737 $ 639
Adjustments to reconcile net income to cash
provided by operating activities, net 961 849
Changes in certain assets and liabilities, net 97 528
------- -------
Net cash provided by operating activities 1,795 2,016
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions:
Flight equipment, including advance payments (1,887) (1,234)
Ground property and equipment (339) (229)
Decrease in short-term investments, net 554 9
Acquisition of a business, net of cash acquired (480) --
Other, net 14 8
------- -------
Net cash used in investing activities (2,138) (1,446)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 98 276
Repurchase of common stock (668) (258)
Payments on long-term debt and capital lease obligations (134) (273)
Payments on notes payable (27) --
Issuance of long-term obligations 300 --
Issuance of notes payable 677 --
Income tax benefit from exercise of stock options 24 35
Cash dividends (25) (26)
------- -------
Net cash provided by (used in) financing activities 245 (246)
------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (98) 324
Cash and cash equivalents at beginning of period 1,077 662
------- -------
Cash and cash equivalents at end of period $ 979 $ 986
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 103 $ 117
Income taxes $ 211 $ 180
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
6
<PAGE> 7
DELTA AIR LINES, INC.
Notes to Consolidated Financial Statements
March 31, 1999
(Unaudited)
1. ACCOUNTING AND REPORTING POLICIES
The Company's accounting and reporting policies are summarized in Note
1 (page 39) to the Consolidated Financial Statements in Delta's 1998
Annual Report to Shareowners. These interim financial statements
should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's 1998 Annual
Report to Shareowners. In the opinion of management, the accompanying
unaudited condensed consolidated financial statements reflect all
adjustments, consisting of normal recurring items, necessary for a
fair statement of results for the interim periods presented. Certain
prior year amounts have been reclassified to conform with the current
year financial statement presentation.
As a result of a review of its aircraft fleet plan and comparable
industry practices, the Company increased the depreciable life of
certain new generation aircraft types from 20 to 25 years. The change
in estimate was effective July 1, 1998, and reduced depreciation
expense by approximately $71 million ($0.49 basic and $0.47 diluted
earnings per common share) for the nine months ended March 31, 1999.
2. ACQUISITION OF ASA HOLDINGS, INC.
On February 16, 1999, Delta and its indirect, wholly owned subsidiary
Delta Sub, Inc. (Delta Sub) entered into an Agreement and Plan of
Merger (Acquisition Agreement) with ASA Holdings, Inc. (ASA Holdings)
providing for the merger of Delta Sub with and into ASA Holdings. ASA
Holdings is a holding company whose principal assets are its 100%
ownership of Atlantic Southeast Airlines, Inc. (ASA) and ASA
Investments, Inc. ASA is a certificated regional air carrier and a
participant in the Delta Connection program. Prior to entering into
the Acquisition Agreement, Delta beneficially owned approximately 8
million, or 28%, of the outstanding shares of common stock of ASA
Holdings (Shares).
Pursuant to the Acquisition Agreement, on February 22, 1999, Delta Sub
commenced a tender offer (Offer) to purchase all the remaining
outstanding Shares at a price of $34.00 per Share, net to the seller
in cash. As a result of the Offer, which expired at midnight on March
19, 1999, Delta Sub purchased approximately 18 million Shares
(representing approximately 88% of the outstanding Shares, excluding
the Shares beneficially owned by Delta prior to the beginning of the
Offer). This purchase increased Delta's beneficial ownership of the
outstanding Shares to approximately 91%.
On May 11, 1999, Delta Sub merged with and into ASA Holdings (Merger).
At the effective time of the Merger, each Share outstanding
immediately prior to the effective time (other than Shares owned by
Delta or any of its affiliates, Shares held by ASA Holdings as
treasury
7
<PAGE> 8
stock or Shares held by shareholders of ASA Holdings who properly
exercised dissenters' rights under the Georgia Business Corporation
Code) was converted automatically into the right to receive $34.00 in
cash, without interest. As a result of the Merger, Delta Sub ceased to
exist, and ASA Holdings became an indirect, wholly owned subsidiary of
Delta.
Delta's acquisition of ASA Holdings is being accounted for using the
purchase method of accounting. Under the purchase method, Delta's
purchase price of approximately $700 million to acquire ASA Holdings'
remaining outstanding Shares was allocated to the assets acquired and
the liabilities assumed based upon their preliminary estimated fair
values. Delta's allocation of the purchase price will be finalized by
May 11, 2000. Based on the allocation as of May 11, 1999, Delta's total
cost of the acquisition exceeded the estimated fair value of the net
assets acquired by approximately $475 million. The cost in excess of
net assets acquired is being amortized over 40 years.
Delta's Consolidated Balance Sheet as of March 31, 1999 includes the
balance sheet of ASA Holdings as of that date. ASA Holdings' results
of operations were consolidated into Delta's results effective April
1, 1999. ASA Holdings' results of operations for the period from the
completion of the Offer through March 31, 1999 were immaterial to
Delta's Consolidated Financial Statements.
3. SHORT-TERM AND LONG-TERM DEBT
On December 22, 1998, the Company issued notes with a principal amount
of $250 million in a private placement for general corporate purposes.
The notes bear interest based on the three month LIBOR rate. They are
due and payable on June 29, 1999, and are reflected in notes payable
on the accompanying Consolidated Balance Sheet.
On March 22, 1999, Delta entered into a $500 million credit agreement
with a group of banks to pay a portion of the funds required to
acquire ASA Holdings (1999 Bank Credit Agreement). The loans under the
1999 Bank Credit Agreement are structured to be funded in two
drawings. The interest rate on borrowings under the 1999 Bank Credit
Agreement is, at Delta's option, the base rate or the Eurodollar rate,
plus a margin that depends on the credit rating of Delta's long-term
senior unsecured debt. Borrowings under the 1999 Bank Credit Agreement
mature on March 22, 2001, but Delta may prepay the loans in whole or
in part at any time.
The 1999 Bank Credit Agreement contains certain negative covenants and
a "change in control" provision that are substantially similar to the
corresponding provisions in Delta's 1997 Bank Credit Agreement. The
1999 Bank Credit Agreement also provides that if Delta's long-term
senior unsecured debt is rated below investment grade by Standard &
Poor's and Moody's Investors Service, Delta shall be required to
maintain a specified coverage ratio as of the last day of each fiscal
quarter.
The Company borrowed $400 million on March 22, 1999 and $100 million
on May 11, 1999 under the 1999 Bank Credit Agreement in connection
with the consummation of the Offer
8
<PAGE> 9
and the Merger, respectively. Because the Company intends to repay the
$400 million borrowing on or before March 22, 2000, that obligation is
included in the current maturities of long-term debt in the
accompanying Consolidated Balance Sheet.
On March 2, 1999, the Company issued $300 million principal amount of
Medium Term Notes, Series C, in a public offering to pay a portion of
the funds required to acquire ASA Holdings. The Medium Term Notes were
sold at an initial public offering price of 99.924% of their principal
amount, bear interest at the rate of 6.65% per annum, are payable
semi-annually, mature on March 15, 2004, and are included in long-term
debt on the accompanying Consolidated Balance Sheet.
4. AIRCRAFT PURCHASE COMMITMENTS
At March 31, 1999, the Company's (including ASA's) aircraft fleet,
purchase commitments, options (which have scheduled delivery slots)
and rolling options (which replace options and are assigned delivery
slots as options expire or are exercised) were:
<TABLE>
<CAPTION>
Current Fleet
---------------------------
Rolling
Aircraft Type Owned Leased Total Orders Options Options
----------------- ----- ------ ----- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
B-727-200 112 10 122 0 0 0
B-737-200 1 53 54 0 0 0
B-737-300 0 26 26 0 0 0
B-737-600/700/800 6 0 6 98 60 269
B-757-200 59 41 100 18 20 81
B-767-200 15 0 15 0 0 0
B-767-300 3 24 27 1 0 0
B-767-300ER 38 8 46 9 11 16
B-767-400ER 0 0 0 21 24 25
B-777-200 2 0 2 11 20 30
L-1011-1 14 0 14 0 0 0
L-1011-250 6 0 6 0 0 0
L-1011-500 11 0 11 0 0 0
MD-11 8 7 15 0 0 0
MD-88 63 57 120 0 0 0
MD-90 16 0 16 0 0 0
ATR-72 4 8 12 0 16 0
EMB-120 57 2 59 0 0 0
CRJ-200 0 20 20 25 45 0
CRJ-700 0 0 0 8 12 0
=== === === === === ===
Total 415 256 671 191 208 421
=== === === === === ===
</TABLE>
9
<PAGE> 10
During the March 1999 quarter, Delta accepted delivery of one new
B-737-800 aircraft, one new B-757-200 aircraft, three new B-767-300ER
aircraft, and two new B-777-200 aircraft. Delta also exercised options
for three B-737-800 aircraft and two B-767-300ER aircraft, and
converted an order for one B-777-200 aircraft into an order for one
B-767-300ER aircraft. The Company also acquired three new CRJ-200
aircraft under operating leases during the quarter.
In addition, the Company retired five B-727-200 aircraft, two L-1011-1
aircraft and one L-1011-500 aircraft during the quarter. The aircraft
acquisitions and retirements are part of the Company's ongoing fleet
simplification strategy.
Subsequent to March 31, 1999, Delta accepted delivery of two new
B-767-300ER aircraft and one new CRJ-200 aircraft.
Also subsequent to March 31, 1999, the Company entered into an
agreement with The Boeing Company to defer to fiscal 2005 the delivery
of four B-777-200 aircraft, which were scheduled for delivery in
fiscal year 2000. To replace the four deferred B-777-200's, Delta
ordered four B-767-300ER aircraft, which are scheduled for delivery
during fiscal 2000.
Future expenditures for aircraft, engines and engine hushkits on firm
order at April 30, 1999 are estimated to be $7.3 billion, as follows:
<TABLE>
<CAPTION>
Amount
Years Ending June 30 (In Millions)
-------------
<S> <C>
Remainder of fiscal year 1999 $ 380
2000 2,210
2001 2,120
2002 530
2003 550
After 2003 1,550
------
Total $7,340
======
</TABLE>
During March 1999, Delta reached an agreement in principle to sell 119
B-727 aircraft and up to 39 associated spare engines over the next six
years as these aircraft are retired from Delta's fleet.
5. CONTINGENCIES
The Company is a defendant in certain legal actions relating to
alleged employment discrimination practices, antitrust matters,
environmental issues and other matters concerning Delta's business.
Although the ultimate outcome of these matters cannot be predicted
with certainty, management believes that the resolution of these
actions is not likely to have a material adverse effect on Delta's
consolidated financial statements.
10
<PAGE> 11
6. SHAREOWNERS' EQUITY
On October 22, 1998, Delta's shareowners approved an amendment to the
Company's Certificate of Incorporation to increase its authorized
Common Stock from 150 million shares, par value $3.00 per share, to
450 million shares, par value $1.50 per share, and to effect a
two-for-one split of the issued Common Stock (Stock Split). The
amendment and the Stock Split became effective on November 2, 1998.
All references in this Form 10-Q to the number of shares of Common
Stock, the Company's earnings per share of Common Stock and per share
Common Stock prices have been restated to reflect the Stock Split.
During the March 1999 quarter, the Company issued a total of 1,337,151
shares of Common Stock, at an average price of $44.84 per share, under
its broad-based employee stock option plans, 1989 Stock Incentive
Plan, Dividend Reinvestment and Stock Purchase Plan, and Non-Employee
Directors' Stock Plan. In addition, the Company distributed a total of
21,659 shares of Common Stock from treasury under its 1989 Stock
Incentive Plan.
The Company has two Common Stock repurchase programs. The Company's
Board of Directors authorized the Company to repurchase its Common
Stock and Common Stock equivalents (1) for an aggregate purchase price
of up to $750 million from time to time through December 31, 1999
(July 1998 Authorization); and (2) in connection with the Company's
broad-based employee stock option plans (April 1996 Authorization).
During the March 1999 quarter, the Company repurchased (1) 1,645,500
shares of Common Stock, at an average price of $65.22 per share, under
the July 1998 Authorization; and (2) 129,300 shares of Common Stock,
at an average price of $68.73 per share, under the April 1996
Authorization. The Company has purchased a total of 11,025,145 shares
of Common Stock for an aggregate purchase price of $614 million under
the July 1998 Authorization.
At March 31, 1999, 39,158,682 shares of Common Stock were reserved for
issuance under the Company's broad-based employee stock option plans;
14,765,139 shares of Common Stock were reserved for issuance under the
1989 Stock Incentive Plan; 11,253,128 shares of Common Stock were
reserved for conversion of the Series B ESOP Convertible Preferred
Stock; 494,752 shares of Common Stock were reserved for issuance under
the Non-Employee Directors' Stock Plan; and 1,500,000 shares of
preferred stock were reserved for issuance under the Shareholder
Rights Plan.
7. COMPREHENSIVE INCOME
During the September 1998 quarter, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which establishes standards for the reporting
of comprehensive income and its components. The adoption of SFAS No.
130 had no net effect on the Company's net income or shareowners'
equity for the three and nine months ended March 31, 1999 and 1998.
Total comprehensive income for the three months ended March 31, 1999
and 1998 was $200 million and $235 million, respectively. For the nine
months ended March 31, 1999 and 1998, total comprehensive income was
$757 million and $645 million, respectively.
11
<PAGE> 12
8. EARNINGS PER SHARE
During the December 1997 quarter, Delta adopted SFAS No. 128,
"Earnings per Share," which established new standards for computing
and presenting income per share data. The following table shows a
reconciliation of the numerator (net income) and denominator (average
shares outstanding) used in computing basic and diluted income per
share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31 March 31
--------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- -------
(In Millions, except per share data)
<S> <C> <C> <C> <C>
BASIC:
Net income $ 216 $ 195 $ 737 $ 639
Preferred stock dividends (2) (2) (8) (8)
------- ------- ------- -------
Income available to common
shareowners $ 214 $ 193 $ 729 $ 631
Weighted average shares outstanding 141.4 150.0 144.0 148.6
Basic income per common share $ 1.51 $ 1.29 $ 5.06 $ 4.25
======= ======= ======= =======
DILUTED:
Net income $ 216 $ 195 $ 737 $ 639
Adjustment to net income
assuming conversion of Series B ESOP
Convertible Preferred Stock (1) (1) (3) (3)
------- ------- ------- -------
Income available to
common shareowners $ 215 $ 194 $ 734 $ 636
Weighted average shares outstanding 141.4 150.0 144.0 148.6
Conversion of Series B ESOP
Convertible Preferred Stock 4.7 4.2 4.7 4.2
Exercise of stock options 5.9 4.8 4.1 3.8
------- ------- ------- -------
Average shares outstanding as adjusted 152.0 159.0 152.8 156.6
Diluted income per common share $ 1.42 $ 1.23 $ 4.80 $ 4.06
======= ======= ======= =======
</TABLE>
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Cash and cash equivalents and short-term investments totaled $1.01 billion at
March 31, 1999, compared to $1.63 billion at June 30, 1998. This 38% decrease
was largely due to aircraft acquisitions and Common Stock repurchases since
June 30, 1998. During the nine months ended March 31, 1999, the principal
sources of funds were $1.80 billion of cash from operations, $400 million of
borrowings under the 1999 Bank Credit Agreement (see Note 3 to the Consolidated
Financial Statements in this Form 10-Q), $300 million from the issuance of
long-term debt, $277 million from the issuance of short-term obligations, and
$122 million (including an income tax benefit of $24 million related to the
exercise of stock options) from the issuance of 1,942,717 shares of Common
Stock primarily under the Company's broad-based employee stock option plans.
The $221 million decrease in cash from operations for the nine months ended
March 31, 1999 compared to the nine months ended March 31, 1998 was primarily
attributable to the timing of amounts received during the September 1997
quarter from Delta's frequent flyer partners for the prepayment of mileage
credits.
During the nine months ended March 31, 1999, the Company invested $1.89 billion
in flight equipment and $339 million in ground property and equipment; paid
$668 million to repurchase 11,787,050 shares of Common Stock; made principal
payments of $134 million on long-term debt and capital lease obligations and
$27 million on short-term obligations; and paid $25 million in cash dividends.
The Company used $480 million, net of cash acquired, in the acquisition of ASA
Holdings (see Note 2 to the Consolidated Financial Statements in this Form
10-Q). The Company may prepay its long-term debt and repurchase Common Stock
from time to time. For information regarding Delta's Common Stock repurchase
authorizations, see Note 6 to the Consolidated Financial Statements in this
Form 10-Q and Note 14 (page 51) to the Consolidated Financial Statements in
Delta's 1998 Annual Report to Shareowners.
As of March 31, 1999, the Company had negative working capital of $2.50
billion, compared to negative working capital of $1.22 billion at June 30,
1998. The increase in negative working capital is primarily due to increases in
short-term notes payable and the current portion of long-term debt from the
borrowings used to finance the acquisition of ASA Holdings. A negative working
capital position is normal for Delta, primarily due to its air traffic
liability, and does not indicate a lack of liquidity. The Company expects to
meet its current obligations as they become due through available cash,
short-term investments and internally generated funds, supplemented as
necessary by borrowings and proceeds from sale and leaseback transactions.
At March 31, 1999, the Company had $1.25 billion of credit available on a
revolving basis under its 1997 Bank Credit Agreement. As of that date, no
borrowings or letters of credit were outstanding under the agreement. See Note
6 (page 43) to the Consolidated Financial Statements in Delta's 1998 Annual
Report to Shareowners for additional information regarding the 1997 Bank Credit
Agreement.
13
<PAGE> 14
At March 31, 1999, long-term debt and capital lease obligations, including
current maturities, totaled $2.55 billion, compared to $1.91 billion at June
30, 1998. Shareowners' equity was $4.22 billion at March 31, 1999 and $4.02
billion at June 30, 1998. The Company's debt-to-equity position, including
current maturities, was 39% debt and 61% equity at March 31, 1999 and 32% debt
and 68% equity at June 30, 1998. The change in the debt-to-equity position from
June 30, 1998 reflects debt issued to finance Delta's acquisition of ASA
Holdings.
At March 31, 1999, there was outstanding $290 million principal amount of the
Delta Family-Care Savings Plan's Series C Guaranteed Serial ESOP Notes (Series
C ESOP Notes). Delta is required to purchase the Series C ESOP Notes in certain
circumstances. See Note 6 (page 43) to the Consolidated Financial Statements in
Delta's 1998 Annual Report to Shareowners.
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 such
transfers would cause ASA to breach other financial covenants. Delta and ASA
Holdings 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 Delta or ASA Holdings in the form of cash dividends, loans or
advances. At March 31, 1999, the net assets of ASA subject to these
restrictions approximated $244 million. At March 31, 1999, approximately $63
million of net assets was available for distribution by ASA to Delta and ASA
Holdings under the most restrictive of these provisions.
For additional information regarding Delta's outstanding debt, see Note 3 to
the Consolidated Financial Statements in this Form 10-Q.
At its meeting on April 22, 1999, Delta's Board of Directors declared a cash
dividend of 2.5 cents per common share, payable June 1, 1999, to shareowners of
record on May 12, 1999.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 and 1998
For the quarter ended March 31, 1999, Delta recorded unaudited consolidated
operating income of $356 million and net income of $216 million. For the
quarter ended March 31, 1998, Delta recorded operating income of $337 million
and net income of $195 million. The Company's operating margin (ratio of
operating income to operating revenue) for the March 1999 quarter was 10.2%,
compared to 10.0% for the March 1998 quarter.
Operating revenues in the March 1999 quarter totaled $3.50 billion, an increase
of 3% from $3.39 billion in the March 1998 quarter. Passenger revenue increased
3% to $3.20 billion, the result of a 4% increase in revenue passenger miles
offset by a 1% decrease in passenger mile yield.
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Domestic passenger revenue rose 3% to $2.74 billion for the March 1999 quarter,
reflecting a 4% gain in domestic revenue passenger miles, offset by a less than
1% decline in domestic passenger mile yield. The rise in domestic revenue
passenger miles was primarily due to increased traffic, partially due to a
pilot job action at another airline during February 1999, as well as a 1%
increase in domestic capacity. Lower passenger mile yield reflects sale fares
implemented in December 1998 to stimulate traffic in certain leisure markets
due to mild winter weather. The passenger mile yield was also negatively
impacted by increased competition from a low-fare carrier in one of Delta's
major hubs.
International passenger revenue in the March 1999 quarter decreased less than
1% to $459 million, reflecting a 5% increase in international revenue passenger
miles offset by a 5% decline in international passenger mile yield. The
increase in international revenue passenger miles reflects the Company's
continued international expansion. The decline in international passenger mile
yield is primarily due to competitive pressures resulting from industry-wide
capacity increases on Atlantic and Latin American routes as well as lower
demand on Pacific routes resulting from the Asian economic slowdown.
Cargo revenue fell 3% to $134 million in the March 1999 quarter. Cargo ton
miles decreased 5%, while the cargo ton mile yield increased 2%. The decrease
in cargo ton miles was due to the continued shifting of U.S. Postal Service
business from passenger carriers to dedicated air-freight carriers and ground
transportation providers as well as industry-wide overcapacity in international
markets. The cargo ton mile yield increase was primarily a result of increased
sales of higher-margin products in the domestic market. All other revenue, net,
increased 26%, to $167 million, largely due to improved results from frequent
flyer partnership programs and increased administrative service charge
revenues.
Operating expenses for the March 1999 quarter totaled $3.15 billion, rising 3%
from the March 1998 quarter on an operating capacity increase of 2% to 34.83
billion available seat miles. Salaries and related costs grew 5%, reflecting a
6% increase in average full-time equivalent employees and a 2% general salary
increase effective January 1, 1999, partially offset by lower pension expense,
mainly due to the effect of accumulated returns on pension plan assets.
Consistent with its customer service initiatives, the Company has increased
staffing in the areas of in-flight service, airport customer service, technical
operations and reservations. Aircraft fuel expense decreased 8% as the average
fuel price per gallon fell 9% to 48.52 cents, partially offset by a 1% increase
in fuel gallons consumed. Depreciation and amortization expense rose 12% mainly
due to the acquisition of 28 additional aircraft since the March 1998 quarter,
partially offset by the increase in the depreciable life of certain aircraft
types, effective July 1, 1998 (see Note 1 to the Consolidated Financial
Statements in this Form 10-Q).
Other selling expenses increased 12%, due to increased booking fee payments as
well as higher credit card expenses resulting from an increase in the
percentage of tickets purchased with credit cards. Passenger commissions were
17% lower than the March 1998 quarter, reflecting lower effective commission
rates offset by higher passenger revenue. The lower commission rates were
primarily attributable to commission changes implemented in September 1997 and
October 1998, and are recognized over time as the tickets sold under the new
commission rates are used.
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Contracted services expense increased 10% due to higher information technology
costs, rate increases in ground handling and cabin cleaning contracts, and
expanded operations in new and existing markets. Landing fees and other rent
rose 11% due to higher terminal facility rent expense at certain locations.
Aircraft rentals increased 7% as a result of an increased number of leased
aircraft. Aircraft maintenance expenses were 6% higher resulting from the
expiration of certain engine warranties and other costs associated with the
maturation of the fleet. Passenger service expense grew 5% as a result of
on-board product enhancements and increased passenger traffic. The 1% reduction
in other costs was primarily attributable to lower professional fees and
insurance expense, partially offset by higher interrupted operations expense.
Nonoperating income in the March 1999 quarter was $2 million, compared to
nonoperating expense of $15 million in the March 1998 quarter. The rise in
nonoperating income is primarily the result of a $26 million gain on the sale
of a portion of the Company's interest in an international data network
services company, partially offset by higher interest expense and lower
interest income. For additional information regarding the $26 million gain, see
Item 5 - "Gain on Sale of Equant Stock" on page 21 of this Form 10-Q.
Pretax income of $358 million for the March 1999 quarter resulted in an income
tax provision of $142 million. After a $2 million provision for preferred stock
dividends, net income available to common shareowners was $214 million.
Nine Months Ended March 31, 1999 and 1998
For the nine months ended March 31, 1999, Delta recorded unaudited consolidated
operating income of $1.23 billion and net income of $737 million. For the nine
months ended March 31, 1998, the Company recorded operating income of $1.10
billion and net income of $639 million. The Company's operating margin for the
nine months ended March 31, 1999 was 11.4%, compared to 10.6% for the nine
months ended March 31, 1998.
Operating revenues for the nine months ended March 31, 1999 totaled $10.75
billion, a 4% increase from $10.38 billion for the nine months ended March 31,
1998. Passenger revenue rose 3% to $9.83 billion, reflecting a 4% increase in
revenue passenger miles, offset by a decrease of 1% in passenger mile yield.
Domestic passenger revenue rose 3% to $8.11 billion, reflecting 3% growth in
domestic revenue passenger miles and a less than 1% increase in domestic
passenger mile yield. Domestic revenue passenger mile growth is primarily due to
generally favorable economic conditions, the reallocation of assets to higher
demand markets, and increased traffic (including the effects of a pilot strike
at one airline in September 1998 and a pilot job action at another airline in
February 1999). The slight rise in domestic passenger mile yield is due to the
domestic business fare increase implemented during September 1997, improved
revenue management models, and the reallocation of assets to higher return
markets, partially offset by the Company's matching of "sale" fares offered by a
competitor during the December 1998 quarter following a pilot strike at that
airline, and increased competition from a low-fare carrier in one of Delta's
major hubs.
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International passenger revenue grew 3% to $1.72 billion, reflecting an
increase in international revenue passenger miles of 9%, offset by a 5% decline
in international passenger mile yield. The increase in revenue passenger miles
reflects Delta's continued international expansion. The decline in passenger
mile yield is primarily due to increased competitive pressures resulting from
industry-wide capacity increases on Atlantic and Latin American routes and the
combination of lower business demand on Pacific routes resulting from the Asian
economic slowdown and an increase in industry-wide capacity in the U.S.-Japan
market.
Cargo revenue fell 4% to $424 million. Cargo ton miles dropped 4%, largely due
to industry-wide overcapacity in international markets, as well as the
continued shift of certain U.S. Postal Service business from passenger carriers
to dedicated air-freight carriers and ground transportation providers. All
other revenue, net, increased 21% to $505 million, due to higher revenues from
frequent flyer partnership programs and administrative service charge revenues.
Operating expenses for the nine months ended March 1999 totaled $9.53 billion,
an increase of 3% compared to the nine months ended March 1998. Operating
capacity increased 3% to 107.42 billion available seat miles. Salaries and
related costs increased 4% primarily due to a 7% growth in average full-time
equivalent employees and a 2% general salary increase effective January 1,
1999, partially offset by a decrease in pension expense, mainly due to the
effect of accumulated returns on pension plan assets. Headcount increased in
the areas of in-flight service, airport customer service, technical operations
and reservations, consistent with the Company's customer service initiatives.
Aircraft fuel expense decreased 13% as the average fuel price per gallon fell
15% to 49.44 cents, partially offset by a 3% increase in fuel gallons consumed.
Depreciation and amortization expense increased 11%, largely due to the
acquisition of additional flight and ground equipment, partially offset by the
increase in the depreciable lives of certain aircraft types (see Note 1 to the
Consolidated Financial Statements in this Form 10-Q).
Other selling expenses increased 12%, mainly the result of higher credit card
service charges, booking fees and advertising and promotion expense. Passenger
commissions declined 11% due to lower effective commission rates, partially
offset by higher passenger revenue. Contracted services expense was up 10% due
to increased information technology costs, as well as rate increases in ground
handling and cabin cleaning contracts and expanded operations in new and
existing markets. Landing fees and other rent rose 8% due to higher facility
rents at certain locations and new operating leases. Aircraft rental expense
increased 6% as a result of an increased number of leased aircraft. Aircraft
maintenance expense rose 10% due to the timing of scheduled heavy maintenance
visits, the expiration of certain engine warranties, and other costs associated
with the maturation of the fleet. Passenger service expense grew 14%, primarily
the result of higher food costs associated with increased passenger traffic and
product enhancements. Other costs were 11% higher, reflecting higher expenses
associated with customer loyalty programs, supplies, and communications costs,
partially offset by lower insurance costs.
Nonoperating expense for the nine months ended March 1999 totaled $12 million,
compared to nonoperating expense of $48 million for the nine months ended March
1998. Interest expense fell 3% to $139 million, due to lower average levels of
debt outstanding. Interest income declined
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27% to $41 million due to lower average cash and cash equivalent balances, as
well as lower effective interest rates. Miscellaneous income for the nine
months ended March 31, 1999 totaled $52 million, primarily the result of a gain
on the sale of the Company's investment in a ground handling company in the
United Kingdom during the September 1998 quarter, as well as a gain on the sale
of a portion of the Company's interest in an international data network
services company during the March 1999 quarter (see Item 5 "Gain on Sale of
Equant Stock" on page 21 of this Form 10-Q).
Pretax income of $1.22 billion for the nine months ended March 1999 resulted in
an income tax provision of $479 million. After an $8 million provision for
preferred stock dividends, net income available to common shareowners was $729
million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the December 1998 quarter, the Company began to use foreign currency
options instead of forward contracts to manage its foreign currency exchange
rate risk. These options have maturities of up to six months. Management
believes that the change from forward contracts to options does not have a
material adverse impact on the Company's exposure to foreign currency risk.
Under the Company's fuel price risk management program, as amended, the Company
may enter into option and fuel swap contracts and other non-leveraged
over-the-counter instruments (as well as fixed price or collared purchase
contracts in the physical market) to hedge up to 80% of its expected annual jet
fuel requirements. In addition, the maximum hedging horizon was increased from
twelve to thirty-six months. Management believes that the changes in the
Company's hedging policy will not have a material adverse impact on the
Company's exposure to fuel price risk.
For additional information regarding the Company's exposure to certain market
risks, see "Market Risks Associated With Financial Instruments" (page 33), as
well as Notes 2 and 4 (page 40 and 41, respectively) to the Consolidated
Financial Statements in Delta's 1998 Annual Report to Shareowners.
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[LETTERHEAD OF ARTHUR ANDERSEN LLP]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Delta Air Lines, Inc.:
We have reviewed the accompanying consolidated balance sheet of DELTA AIR
LINES, INC. (a Delaware corporation) AND SUBSIDIARIES as of March 31, 1999 and
the related consolidated statements of operations for the three-month and
nine-month periods ended March 31, 1999 and 1998, and the condensed
consolidated statements of cash flows for the nine-month periods ended March
31, 1999 and 1998. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
- -------------------
Atlanta, Georgia
May 12, 1999
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
For information regarding the Company's two-for-one Stock Split, which became
effective November 2, 1998, see Note 6 to the Consolidated Financial Statements
in this Form 10-Q.
As a result of the Stock Split, the number of preferred stock purchase rights
(Rights) which accompany each outstanding share of Common Stock was adjusted
from one Right per common share to one-half Right per common share. The Rights
become exercisable only in certain circumstances. See Note 12 to the
Consolidated Financial Statements in Delta's 1998 Annual Report to Shareowners
for additional information regarding the Rights.
Also as a result of the Stock Split, each outstanding share of the Company's
Series B ESOP Convertible Preferred Stock was adjusted by changing (1) the
conversion price from $83.94 to $41.97; (2) the conversion rate from 0.8578 to
1.7155; and (3) the voting rights from one vote to two votes.
Under the Delta Air Lines, Inc. Directors' Deferred Compensation Plan (Plan),
members of the Company's Board of Directors may defer for a specified period
all or any part of their cash compensation earned as a director. A
participating director may choose an investment return on the deferred amount
from among the investment return choices available under the Delta Family-Care
Savings Plan, a qualified defined contribution pension plan for eligible Delta
personnel. One of the investment return choices under the Delta Family-Care
Savings Plan is a fund invested primarily in Common Stock (Delta Common Stock
Fund). During the quarter ended March 31, 1999, a participant in the Plan
deferred $9,125 in the Delta Common Stock Fund investment return choice
(equivalent to approximately 154 shares of Common Stock at prevailing market
prices). These transactions were not registered under the Securities Act of
1933, as amended, in reliance on Section 4(2) of such Act.
ITEM 5. OTHER INFORMATION
YEAR 2000
The Company estimates that the total cost of achieving Year 2000 readiness for
its internal systems and equipment is approximately $120 million to $135
million, of which $84 million has been recognized as expense ($11 million of
which was incurred in the March 1999 quarter) in the Company's Consolidated
Statements of Operations through March 31, 1999. This estimate is a
forward-looking statement which involves a number of risks and uncertainties
that could cause the actual results to differ materially from the projected
results. Factors that may cause these differences include, but are not limited
to, the availability of qualified personnel and other information technology
resources; the ability to identify and remediate all affected systems and
equipment; and the actions of governmental agencies or other third parties with
respect to Year
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2000 problems. See pages 28-30 of the Company's 1998 Annual Report to
Shareowners for additional information regarding Delta's Year 2000 program. For
information regarding ASA Holdings' Year 2000 program, see Exhibit 99 to this
Form 10-Q, which includes certain pages of ASA Holdings' Annual Report on Form
10-K for the fiscal year ended December 31, 1998.
EURO CURRENCY ISSUE
On January 1, 1999, certain members of the European Union introduced the "euro"
currency. During the December 1998 quarter, Delta completed modifications to
its internal customer reservations systems and business support systems to
operate in the euro environment. Delta also trained its employees to use the
modified systems and to process transactions involving the euro. The
introduction of the euro did not have a material impact on the results of
operations of the Company. For additional information regarding Delta's euro
currency issue, see pages 30-31 of the Company's 1998 Annual Report to
Shareowners.
PRICELINE.COM
During August 1998, Delta entered into an agreement with Priceline.com which
sets forth the terms and conditions under which ticket inventory provided by
Delta may be sold utilizing Priceline.com's internet-based electronic commerce
system. In connection with this agreement, Delta received warrants to purchase
up to 18.6 million shares of Priceline.com's common stock for $0.93 per share,
subject to adjustment in certain circumstances. These warrants are exercisable
in phases during the period beginning when certain performance thresholds are
met (but not earlier than September 26, 1999) and ending December 31, 2005. Any
warrants that are not exercisable as of December 31, 2005 will become
exercisable on that date for a period of six months. These warrants, and the
shares issuable when the warrants are exercised, are not registered under the
Securities Act of 1933, but Delta has certain demand and piggyback registration
rights with respect to the shares.
GAIN ON SALE OF EQUANT STOCK
Delta is a member of the SITA Foundation (SITA), whose principal assets are the
shares of Equant, N.V. (Equant), an international data network services
company. In February 1999, SITA sold a portion of its interest in Equant in a
secondary public offering and distributed pro rata the proceeds to its members
that elected to participate in the offering. Delta sold approximately one-third
of its interest in Equant as part of the offering, resulting in a pretax gain
of approximately $26 million, which is reported as miscellaneous income, net on
Delta's Consolidated Statement of Operations.
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BROAD-BASED STOCK OPTION PLANS
On October 24, 1996, the Company's shareowners approved two plans providing for
the issuance of non-qualified stock options to substantially all of Delta's
non-officer personnel to purchase a total of 49.4 million shares of Common
Stock. One plan is for eligible Delta personnel who are not pilots (Nonpilot
Plan); the other plan covers the Company's eligible pilots (Pilot Plan).
The Nonpilot and Pilot Plans involve non-qualified stock options to purchase
29.4 million and 20 million shares of Common Stock, respectively. The plans
provide for grants in three annual installments at an exercise price equal to
the opening price of the Common Stock on the New York Stock Exchange on the
grant date. Stock options awarded under these plans are generally exercisable
beginning one year and ending ten years after their grant dates, and are not
transferable other than upon the death of the person granted the stock options.
On October 30, 1998, 1997 and 1996, Delta granted eligible personnel
non-qualified stock options to purchase 16.4 million, 16.6 million and 16.4
million shares of Common Stock, respectively, at exercise prices of $50.59 per
share, $49 per share and $34.50 per share, respectively. References to shares
and exercise prices in this and the preceding paragraphs have been restated to
reflect the Stock Split.
LITIGATION
ASA Holdings Shareholder Lawsuit
On February 25, 1999, two individual shareholders of ASA Holdings, on behalf of
themselves and other shareholders of ASA Holdings, filed a purported class
action complaint in the Superior Court of Fulton County in the state of Georgia
against ASA Holdings, its directors (collectively, the ASA Holdings Defendants)
and Delta. The complaint seeks (i) to enjoin the Offer and the Merger or to
rescind those transactions if consummated; (ii) unspecified compensatory and
rescissory damages; and (iii) costs and disbursements of the action. The
complaint alleges, among other things: (i) that the ASA Holdings Defendants
violated their fiduciary duties to shareholders of ASA Holdings by entering
into the Acquisition Agreement and by recommending the Offer and the Merger;
and (ii) that Delta is a controlling shareholder of ASA Holdings, violated its
fiduciary duties to shareholders of ASA Holdings because it "wrongfully used
its superior position and control to bring to bear pressure on the [Board of
Directors of ASA Holdings]," and caused the ASA Holdings Defendants to accept
an inadequate price for the Shares.
On March 9, 1999, the parties entered into a memorandum of understanding
(Memorandum of Understanding) setting forth the terms of an agreement in
principle to settle this litigation. Pursuant to the Memorandum of
Understanding, on March 10, 1999, Delta, Delta Sub and ASA Holdings amended the
Acquisition Agreement to eliminate the $5 million termination fee that would
otherwise have been payable to Delta if the Acquisition Agreement was
terminated as a result of ASA Holdings receiving and accepting a superior offer
for the Shares. The proposed settlement is subject to certain conditions,
including completion by plaintiffs of appropriate discovery reasonably
satisfactory to plaintiffs' counsel; the preparation and execution of
definitive settlement documents; and final court approval of the settlement
which would be binding upon a class consisting of all shareholders of ASA
Holdings from February 15, 1999 through
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May 11, 1999. ASA Holdings has agreed to pay the fees and expenses of
plaintiffs' counsel up to an aggregate amount of $400,000, subject to final
court approval of the settlement.
ALPA Lawsuit
On April 23, 1999, the Air Line Pilots Association, International (ALPA), the
collective bargaining representative of the Company's approximately 9,000
pilots, filed a lawsuit against Delta in the United States District Court for
the Eastern District of New York. The lawsuit concerns the utilization of
regional jets operated by Delta Connection carrier Comair for a portion of the
new Delta Shuttle operation between Boston and Washington, D.C., which is
scheduled to begin on June 1, 1999. ALPA's complaint alleges (i) that the use
of non-Delta aircraft and non-Delta pilots for that Shuttle operation violates
the understanding and long-standing practices of Delta and ALPA which
constitute the "status quo" under the Railway Labor Act (RLA); and, therefore,
(ii) that such operation will violate the RLA. The complaint seeks an
injunction, declaratory relief and other appropriate relief. Delta believes the
complaint is without merit and intends to vigorously defend this lawsuit.
PERSONNEL MATTERS
Changes in Compensation Program
During the December 1998 quarter, Delta announced changes to its compensation
program that apply to most domestic, noncontract employees. Effective January
1, 1999, the Company discontinued its broad-based profit sharing program;
converted the maximum 6% of annual base salary payout for eligible personnel
under that program to a 6% base salary increase for those personnel; and
granted an additional 2% base salary increase for eligible personnel. In
January 1999, the Company also made a profit sharing payment to eligible
personnel of 6% of base salary paid for the period July 1, 1998 through
December 31, 1998. The Company offered to make similar compensation program
changes for its pilots, and ALPA accepted this offer.
Pilot Collective Bargaining Agreement Matters
Delta and ALPA are parties to a collective bargaining agreement (Existing
Contract) covering the rates of pay, rules and working conditions (Pay Rates)
of the Company's pilots. The Existing Contract was entered into in 1996 and
becomes amendable on May 2, 2000. It provides in part that if the Company
operates an aircraft type for which the Pay Rates are not set forth in the
Existing Agreement (New Equipment), Delta and ALPA will negotiate the Pay Rates
for the New Equipment; pilots will fly the New Equipment whether or not Pay
Rates for the New Equipment have been agreed upon; but the pilots' obligation
to fly the New Equipment will end if Pay Rates have not been agreed upon within
six months after Delta places the New Equipment into service.
Delta operates or has placed orders to purchase the following aircraft types,
each of which constitutes New Equipment under the Existing Contract:
B-737-600/700/800 aircraft; B-777 aircraft; and B-767-400 aircraft. In
addition, Delta leases from a third party certain B-737-300 aircraft which also
constitute New Equipment under the Existing Contract.
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In October 1997, Delta and ALPA began negotiations on the Pay Rates for
B-737-600/700/800 aircraft and the B-737-300 aircraft discussed above (B-737
New Equipment). ALPA announced plans to request pilots not to fly the B-737 New
Equipment subsequent to the six-month period after the B-737 New Equipment was
initially placed in service unless and until Pay Rates for these aircraft were
agreed upon. Additionally, in January 1998, Delta's pilots voted to authorize
ALPA to assess pilots 1% of their gross pay for up to nine months to finance a
contingency fund for pilots who would have flown these aircraft.
In June 1998, Delta and ALPA reached an agreement which establishes industry
leading Pay Rates for the B-737 New Equipment (B-737 Agreement), subject to
ratification by Delta's pilots. Delta placed its first B-737 New Equipment in
service during July 1998. In October 1998, ALPA announced that Delta's pilots
had approved the B-737 Agreement, with 60% of the pilots who voted voting in
favor of that agreement.
In February 1999, Delta and ALPA began negotiations on Pay Rates for Delta's
B-777 aircraft. Delta has offered to provide industry leading rates of pay for
B-777 pilots; ALPA is seeking rates of pay that are significantly higher than
Delta's offer as well as work rule changes that would further increase the
Company's cost of operating B-777 aircraft. ALPA has announced plans to request
pilots not to fly the B-777 aircraft subsequent to the six-month period after
that aircraft type is initially placed in service unless and until Pay Rates
for these aircraft are agreed to. In May 1999, Delta pilots are scheduled to
vote on whether to authorize ALPA to assess pilots 3.5% of their gross pay for
up to nine months to finance a contingency fund for pilots who would have flown
these aircraft.
During the March 1999 quarter, Delta accepted delivery of two B-777 aircraft,
which were placed in service on May 1, 1999. Delta has orders to purchase
eleven additional B-777 aircraft. The first five of these aircraft, which are
in later stages of production, are scheduled to be delivered between August and
November 1999. The next four orders, which were in earlier stages of
production, were originally scheduled to be delivered between December 1999 and
April 2000, but have been deferred as discussed below. The last two orders,
which are not yet in production, are scheduled to be delivered in March 2002
and March 2003.
In April 1999, Delta entered into an agreement with The Boeing Company (Boeing)
to defer until fiscal 2005 the delivery of the four B-777 aircraft that were
originally scheduled for delivery between December 1999 and April 2000, and to
order four B-767-300ER aircraft for delivery in fiscal 2000 to replace the four
deferred B-777 aircraft. Delta's decision to defer the delivery of these four
B-777 aircraft at this time was due to the need to advise Boeing whether to
maintain its production schedules; the lack of progress in the B-777 Pay Rate
negotiations, which makes it unlikely that a tentative agreement and subsequent
pilot ratification can be completed in time for these aircraft to be included
in Delta's flight schedule that will be loaded into computer reservations
systems on or about August 1, 1999; and the unacceptable customer service
disruption that would occur if these aircraft were included in Delta's schedule
but pilots refused to fly these aircraft after November 1, 1999.
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Delta intends to continue to negotiate in good faith with ALPA on B-777 Pay
Rates. The Company is, however, considering its alternatives with respect to
the two B-777 aircraft it owns and the eleven B-777 aircraft on order in the
event Delta and ALPA are unable to reach an agreement on B-777 Pay Rates in a
timely manner. The outcome of these matters cannot presently be determined.
Delta and ALPA plan to begin negotiations in September 1999 on Pay Rates for
the Company's B-767-400 aircraft. Delta has 21 B-767-400 aircraft on order,
which are scheduled to be delivered beginning in May 2000.
The Existing Contract provides that the parties may begin negotiations in March
2000 on a new collective bargaining agreement to replace the Existing Contract.
In January 1999, Delta and ALPA agreed to begin these negotiations on the
earlier of September 1999 or the date that Delta and ALPA reach an agreement on
B-777 Pay Rates.
For information regarding a lawsuit recently filed against Delta by ALPA, see
"ALPA Lawsuit" under "Litigation" in Item 5, on page 23 of this Form 10-Q.
Flight Superintendents' Contract
On December 18, 1998, the Company entered into a new collective bargaining
agreement with the Professional Airline Flight Controllers Association, the
collective bargaining representative for the Company's approximately 210 flight
superintendents. The new agreement replaces the collective bargaining agreement
which became amendable on January 1, 1999. The new agreement became effective
on January 1, 1999, provides for certain pay increases and becomes amendable on
January 1, 2003.
Pilot Ground Training Instructors
Delta's relations with labor unions in the United States are governed by the
Railway Labor Act. Under the Railway Labor Act, a labor union seeking to
represent an unrepresented craft or class of employees is required to file with
the National Mediation Board (NMB) an application alleging a representation
dispute, along with representation cards signed by at least 35% of the
employees in that craft or class. The NMB then investigates the dispute and, if
it finds the labor union has obtained a sufficient number of representation
cards, will conduct an election to determine whether to certify the labor union
as the collective bargaining representative of that craft or class.
On March 10, 1999, the NMB informed Delta that it had received an application
from the Transport Workers Union of America seeking to represent an alleged
craft or class consisting of Delta's approximately 110 pilot ground training
instructors for purposes of collective bargaining. The NMB is investigating the
application. The outcome of this matter cannot presently be determined.
25
<PAGE> 26
ASA Labor Matters
ASA's pilots and flight attendants, who constitute approximately 24% of ASA's
workforce, are represented by ALPA and the Association of Flight Attendants
(AFA), respectively. ASA's collective bargaining agreements with ALPA and AFA
become amendable in September 2002.
In November 1998, the NMB certified the Transport Workers Union of America
(TWU) as the collective bargaining representative of ASA's approximately 30
dispatchers. Negotiations for the initial collective bargaining agreement
between ASA and the TWU have not yet begun.
26
<PAGE> 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12. Computation of ratio of earnings to fixed charges.
15. Letter from Arthur Andersen LLP regarding unaudited interim
financial information.
27. Financial Data Schedule (For SEC use only).
99. Pages 1 and 34-36 of ASA Holdings' Annual Report on Form 10-K
for the fiscal year ended December 31, 1998.
(b) Reports on Form 8-K:
On January 8, 1999, Delta filed a Current Report on Form 8-K to file
certain exhibits in connection with its Registration Statement on Form
S-3 (File No. 333-58647). The exhibits relate to the offering by the
Company of up to $300 million aggregate principal amount of
Medium-Term Notes, Series C.
27
<PAGE> 28
SIGNATURE
Pursuant to the requirements 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.
Delta Air Lines, Inc.
----------------------------
(Registrant)
By: /s/ Warren C. Jenson
----------------------------
Warren C. Jenson
Executive Vice President and
Chief Financial Officer
May 14, 1999
28
<PAGE> 1
DELTA AIR LINES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions, except ratios) EXHIBIT 12
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
March 31 March 31 March 31 March 31
1999 1998 1999 1998
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Earnings:
Earnings before income taxes $ 358 $ 322 $ 1,216 $ 1,053
Add (deduct):
Fixed charges from below 208 192 618 590
Interest capitalized (12) (10) (34) (29)
------- ------- ------- -------
Earnings as adjusted $ 554 $ 504 $ 1,800 $ 1,614
Fixed charges:
Interest expense $ 47 $ 44 $ 139 $ 143
Portion of rental expense representative of the
interest factor 161 148 479 447
------- ------- ------- -------
Total fixed charges $ 208 $ 192 $ 618 $ 590
Ratio of earnings to fixed charges 2.66 2.63 2.91 2.74
</TABLE>
<PAGE> 1
[LETTERHEAD OF ARTHUR ANDERSEN LLP]
EXHIBIT 15
To Delta Air Lines, Inc.:
We are aware that Delta Air Lines, Inc. has incorporated by reference in its
Registration Statement Nos. 2-94541, 33-30454, 33-65391, 333-16471, 333-49553,
and 333-58647 its Form 10-Q for the quarter ended March 31, 1999, which
includes our report dated May 12, 1999 covering the unaudited interim financial
information contained therein. Pursuant to Regulation C of the Securities Act
of 1933 (the "Act"), that report is not considered a part of the Registration
Statements prepared or certified by our firm or a report prepared or certified
by our firm within the meaning of Sections 7 and 11 of the Act.
Arthur Andersen LLP
- -------------------
Atlanta, Georgia
May 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DELTA AIR
LINES, INC. FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE RELATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 979
<SECURITIES> 34
<RECEIVABLES> 1,007
<ALLOWANCES> (39)
<INVENTORY> 18
<CURRENT-ASSETS> 2,740
<PP&E> 17,783
<DEPRECIATION> 6,658
<TOTAL-ASSETS> 16,165
<CURRENT-LIABILITIES> 5,236
<BONDS> 2,545
0
0
<COMMON> 268
<OTHER-SE> 3,956
<TOTAL-LIABILITY-AND-EQUITY> 16,165
<SALES> 0
<TOTAL-REVENUES> 10,754
<CGS> 0
<TOTAL-COSTS> 9,526
<OTHER-EXPENSES> 127
<LOSS-PROVISION> 14
<INTEREST-EXPENSE> 139
<INCOME-PRETAX> 1,216
<INCOME-TAX> 479
<INCOME-CONTINUING> 737
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 737
<EPS-PRIMARY> 5.06
<EPS-DILUTED> 4.80
</TABLE>
<PAGE> 1
Exhibit 99--Excerpts from ASA Holdings, Inc. Annual Report on Form 10-K for the
year ended December 31, 1998.
1. Excerpt from Part I, Item 1, numbered pages 20- 21, of ASA Holdings, Inc.
Annual Report on Form 10-K for the year ended December 31, 1998, "Factors That
May Affect Future 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
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."
2. Excerpt from Part II, Item 7, numbered pages 34-36, of ASA Holdings, Inc.
Annual Report on Form 10-K for the year ended December 31, 1998, "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000".
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
<PAGE> 2
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.
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.
<PAGE> 3
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.
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."
