Delta Airlines 2002 Annual Report Download - page 142

FAIR VALUE OF FINANCIAL INSTRUMENTS
We record our cash equivalents and short-term investments at cost, which we
believe approximates their fair values. The estimated fair values of other
financial instruments, including debt and derivative instruments, have been
determined using available market information and valuation methodologies,
primarily discounted cash flow analyses and the Black-Scholes model.
Note 2. Marketable and Other Equity Securities
PRICELINE.COM INCORPORATED (PRICELINE)
We are party to an agreement with priceline under which we (1) provide ticket
inventory that may be sold through priceline's Internet-based e-commerce system
and (2) received certain equity interests in priceline. We are required to
provide priceline access to unpublished fares.
2000
At January 1, 2000, our equity interests in priceline included (1) a warrant to
purchase up to 5.5 million shares of priceline common stock for $56.63 per share
(1999 Warrant) (see discussion below); (2) a right to exchange six million
shares of priceline common stock for six million shares of priceline convertible
preferred stock (Exchange Right); and (3) 7.2 million shares of priceline common
stock. During 2000, we (1) exercised the Exchange Right in full, receiving six
million shares of priceline Series A Convertible Preferred Stock (Series A
Preferred Stock); (2) sold 1.2 million shares of priceline common stock; and (3)
received 549,764 shares of priceline common stock as a dividend on the Series A
Preferred Stock. In our 2000 Consolidated Statement of Operations, we recognized
(1) a pretax gain of $301 million from the exercise of the Exchange Right and
the sale of priceline common stock and (2) other income of $14 million, pretax,
from the dividend.
The fair value of the 1999 Warrant on the date received was determined to be $61
million based on an independent third-party appraisal. This amount was
recognized in income ratably from November 1999 through November 2002.
On November 2, 2000, the 1999 Warrant was amended to reduce (1) the number of
shares underlying the warrant from 5.5 million to 4.7 million and (2) our per
share purchase price for those shares from $56.63 to $4.72 (Amended 1999
Warrant). The Amended 1999 Warrant became exercisable in full on January 1,
2001, and expires on November 17, 2004. The amendment of the 1999 Warrant did
not have a material impact on our Consolidated Financial Statements.
2001
On February 6, 2001, we and priceline agreed to restructure our investment in
priceline. We exchanged our six million shares of Series A Preferred Stock for
(1) 80,000 shares of priceline Series B Redeemable Preferred Stock (Series B
Preferred Stock) and (2) a warrant to purchase up to 26.9 million shares of
priceline common stock for $2.97 per share (2001 Warrant).
The Series B Preferred Stock (1) bears an annual per share dividend of
approximately 36 shares of priceline common stock; (2) has a liquidation
preference of $1,000 per share plus any dividends accrued or accumulated but not
yet paid (Liquidation Preference); (3) is subject to mandatory redemption on
February 6, 2007, at a price per share equal to the Liquidation Preference; and
(4) is subject to redemption in whole, at the option of us or priceline, if
priceline completes any of certain business combination transactions (Optional
Redemption).
Based on an independent third-party appraisal, at February 6, 2001, the fair
value of (1) the Series B Preferred Stock was estimated to be $80 million and
(2) the 2001 Warrant was estimated to be $46 million. The total fair value of
these securities equaled the carrying amount of the Series A Preferred Stock,
including its conversion feature and accumulated dividends on the date the
Series A Preferred Stock was exchanged for the Series B Preferred Stock and the
2001 Warrant. Accordingly, we did not recognize a gain or loss on this
transaction.
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