<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 September 30, 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 October 31, 1999:
Common Stock, $1.50 par value - 132,866,260 shares outstanding
<PAGE> 2
DELTA AIR LINES, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30 JUNE 30
ASSETS 1999 1999
- --------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,511 $ 1,124
Short-term investments 93 19
Accounts receivable, net of allowance for uncollectible accounts
of $32 at September 30, 1999 and $30 at June 30, 1999 984 602
Deferred income taxes 416 403
Prepaid expenses and other 532 524
------- -------
Total current assets 3,536 2,672
------- -------
PROPERTY AND EQUIPMENT:
Flight equipment 13,795 13,389
Less: Accumulated depreciation 4,504 4,405
------- -------
9,291 8,984
------- -------
Flight equipment under capital leases 506 515
Less: Accumulated amortization 267 264
------- -------
239 251
------- -------
Ground property and equipment 3,900 3,862
Less: Accumulated depreciation 2,159 2,123
------- -------
1,741 1,739
------- -------
Advance payments for equipment 542 493
------- -------
Total property and equipment 11,813 11,467
------- -------
OTHER ASSETS:
Marketable equity securities 264 523
Investments in associated companies 317 300
Cost in excess of net assets acquired, net 780 782
Leasehold and operating rights, net 110 113
Other 597 687
------- -------
Total other assets 2,068 2,405
------- -------
Total assets $17,417 $16,544
======= =======
</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>
SEPTEMBER 30 JUNE 30
LIABILITIES AND SHAREOWNERS' EQUITY 1999 1999
- ----------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 661 $ 660
Current obligations under capital leases 40 39
Accounts payable and miscellaneous accrued liabilities 2,212 2,144
Air traffic liability 1,842 1,819
Accrued salaries and vacation pay 431 470
Accrued rent 187 195
--------- ---------
Total current liabilities 5,373 5,327
--------- ---------
NONCURRENT LIABILITIES:
Long-term debt 2,276 1,756
Postretirement benefits 1,902 1,894
Accrued rent 720 720
Capital leases 179 196
Deferred income taxes 986 820
Other 470 470
--------- ---------
Total noncurrent liabilities 6,533 5,856
--------- ---------
DEFERRED CREDITS:
Deferred gain on sale and leaseback transactions 630 642
Manufacturers' and other credits 203 76
--------- ---------
Total deferred credits 833 718
--------- ---------
COMMITMENTS AND CONTINGENCIES (See Notes 4 and 5)
EMPLOYEE STOCK OWNERSHIP PLAN
PREFERRED STOCK:
Series B ESOP Convertible Preferred Stock (issued and outstanding
6,520,285 shares at September 30, 1999 and 6,547,495 shares at
June 30, 1999) 469 471
Unearned compensation under
employee stock ownership plan (258) (276)
--------- ---------
211 195
--------- ---------
SHAREOWNERS' EQUITY:
Common Stock at par (total shares issued: 179,988,872 shares at
September 30, 1999 and 179,763,547 shares at June 30, 1999) 270 270
Additional paid-in capital 3,219 3,208
Accumulated other comprehensive income 101 149
Retained earnings 3,104 2,756
Treasury stock at cost (47,132,892 shares at September 30, 1999
and 41,209,828 shares at June 30, 1999) (2,227) (1,935)
--------- ---------
Total shareowners' equity 4,467 4,448
--------- ---------
Total liabilities and shareowners' equity $ 17,417 $ 16,544
========= =========
</TABLE>
3
<PAGE> 4
DELTA AIR LINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
-------------------------------------
1999 1998
------------- -------------
<S> <C> <C>
OPERATING REVENUES:
Passenger $ 3,522 $ 3,487
Cargo 140 139
Other, net 215 176
------------- -------------
Total operating revenues 3,877 3,802
------------- -------------
OPERATING EXPENSES:
Salaries and related costs 1,318 1,237
Depreciation and amortization (See Note 8) 396 218
Aircraft fuel 367 339
Contracted services 213 183
Passenger commissions 202 252
Other selling expenses 195 196
Landing fees and other rents 184 179
Aircraft maintenance materials and outside repairs 166 143
Aircraft rent 154 145
Passenger service 133 133
Other 199 225
------------- -------------
Total operating expenses 3,527 3,250
------------- -------------
OPERATING INCOME 350 552
------------- -------------
OTHER INCOME (EXPENSE):
Interest expense (66) (49)
Interest capitalized 13 10
Interest income 20 22
Miscellaneous income, net 266 3
------------- -------------
233 (14)
------------- -------------
INCOME BEFORE INCOME TAXES 583 538
INCOME TAXES PROVIDED, NET (231) (211)
------------- -------------
NET INCOME 352 327
PREFERRED STOCK DIVIDENDS (3) (3)
------------- -------------
NET INCOME AVAILABLE TO COMMON
SHAREOWNERS $ 349 $ 324
============= =============
BASIC EARNINGS PER SHARE $ 2.53 $ 2.19
============= =============
DILUTED EARNINGS PER SHARE $ 2.38 $ 2.08
============= =============
WEIGHTED AVERAGE SHARES USED IN
PER SHARE COMPUTATION:
Basic 138,300,991 147,929,524
Diluted 147,360,186 156,711,974
DIVIDENDS PER COMMON SHARE $ 0.025 $ 0.025
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE> 5
DELTA AIR LINES, INC.
Statistical Summary
Excluding the Statistics of Atlantic Southeast Airlines, Inc. (ASA)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30
---------------------
1999 1998
--------- ---------
<S> <C> <C>
Statistical Summary:
Revenue Passengers Enplaned (thousands) 27,183 27,602
Revenue Passenger Miles (millions) 28,296 28,113
Available Seat Miles (millions) 37,732 36,673
Passenger Mile Yield 12.01c. 12.40c.
Operating Revenue Per Available Seat Mile 9.94c. 10.37c.
Operating Cost Per Available Seat Mile 9.10c. 8.86c.
Operating Cost Per Available Seat Mile --
Excluding Asset Impairments and Other
Non-Recurring Charges* 8.71c. 8.86c.
Passenger Load Factor 74.99 76.66%
Breakeven Passenger Load Factor 67.98% 64.52%
Breakeven Passenger Load Factor -- Excluding
Asset Impairments and Other Non-Recurring
Charges* 64.70% 64.52%
Revenue Ton Miles (millions) 3,268 3,229
Cargo Ton Miles (millions) 437 418
Cargo Ton Mile Yield 31.93c. 33.27c.
Fuel Gallons Consumed (millions) 713 703
Average Price Per Fuel Gallon 50.23c. 48.21c.
Number of Aircraft in Fleet at End of Period 586 578
Average Full-Time Equivalent Employees 72,300 71,000
</TABLE>
* See Note 8 for additional discussion of asset impairments and other
non-recurring charges.
5
<PAGE> 6
DELTA AIR LINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
------------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES:
Net Income $ 352 $ 327
Adjustments to reconcile net income to cash
provided by operating activities, net 299 314
Changes in certain assets and liabilities, net (280) (104)
--------- ---------
Net cash provided by operating activities 371 537
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions:
Flight equipment, including advance payments (480) (514)
Ground property and equipment (103) (90)
Decrease in short-term investments, net (74) (46)
Proceeds from sale of investments 115 --
Other, net 95 1
--------- ---------
Net cash used in investing activities (447) (649)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 10 32
Repurchase of common stock (45) (441)
Payments on long-term debt and capital lease obligations (69) (31)
Payments on notes payable (42) --
Issuance of long-term obligations 571 --
Issuance of notes payable 42 --
Income tax benefit from exercise of stock options -- 13
Cash dividends (4) (4)
--------- ---------
Net cash provided by (used in) financing activities 463 (431)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 387 (543)
Cash and cash equivalents at beginning of period 1,124 1,077
--------- ---------
Cash and cash equivalents at end of period $ 1,511 $ 534
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 65 $ 56
Income taxes $ 55 $ 55
</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
September 30, 1999
(Unaudited)
1. ACCOUNTING AND REPORTING POLICIES
Our Company's accounting and reporting policies are summarized in
Note 1 of the Notes to the Consolidated Financial Statements (page 41-42)
in our 1999 Annual Report to Shareowners. These interim financial
statements should be read in conjunction with the consolidated financial
statements and the accompanying footnotes included in our 1999 Annual
Report to Shareowners. Management believes that 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. Due to seasonal
variations in the demand for air travel, operating results for the
periods presented do not necessarily indicate operating results for the
entire year. We have reclassified certain amounts from prior years to be
consistent with the presentation in our current year financial
statements.
2. LONG-TERM DEBT
In July 1999, we issued $538 million of 8.125% unsecured notes in
a public offering. We will use the proceeds of this offering for general
corporate purposes. The notes mature on July 1, 2039, but we may redeem
the notes at par on or after July 1, 2004.
3. SHAREOWNERS' EQUITY
During the September 1999 quarter, we issued 227,905 shares of
common stock at an average price of $43.88 per share. These shares were
issued under our broad-based employee stock option plans, 1989 Stock
Incentive Plan, Dividend Reinvestment and Stock Purchase Plan, and
Non-Employee Directors' Stock Plan. In addition, we distributed 36,480
shares of common stock from treasury primarily under the 1989 Stock
Incentive Plan. We returned 66,967 shares to treasury as a result of
forfeited restricted stock.
In fiscal 1996, our Board of Directors authorized us to
repurchase common stock in connection with our Company's broad-based
employee stock option plans. During the September 1999 quarter, we
repurchased 892,577 shares of common stock, at an average price of
$50.42 per share, under this authorization.
In addition, we repurchased five million shares of common stock
at a price of $48.99 per share. The repurchase was in connection with
the unwinding of our equity cross-investments with Singapore Airlines
Limited. For additional information, see Note 10 of this Form 10-Q.
7
<PAGE> 8
At September 30, 1999, our Company had shares of stock reserved
as follows:
- 38,446,989 shares of common stock for issuance under our
broad-based employee stock option plans;
- 14,448,358 shares of common stock for issuance under the 1989
Stock Incentive Plan;
- 11,186,484 shares of common stock for conversion of Series B ESOP
Convertible Preferred Stock;
- 250,000 shares of common stock for issuance under the
Non-Employee Directors' Stock Option Plan;
- 493,879 shares of common stock for issuance under the
Non-Employee Directors' Stock Plan; and
- 2,250,000 shares of preferred stock for issuance under the
Shareowner Rights Plan.
4. AIRCRAFT PURCHASE COMMITMENTS
Our aircraft fleet, purchase commitments, options and rolling
options at September 30, 1999 are summarized in the following table.
Options have scheduled delivery slots. Rolling options replace options
and are assigned delivery slots as options expire or are exercised.
<TABLE>
<CAPTION>
Current Fleet
---------------------------------------
Rolling
Aircraft Type Owned Leased Total Orders Options Options
--------------------------- ---------- ----------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
B-727-200 106 10 116 - - -
B-737-200 1 53 54 - - -
B-737-300 - 26 26 - - -
B-737-600/700/800 11 - 11 114 60 264
B-757-200 63 41 104 15 20 80
B-767-200 15 - 15 - - -
B-767-300 4 24 28 - - -
B-767-300ER 43 8 51 8 11 15
B-767-400ER - - - 21 24 25
B-777-200 2 - 2 11 20 30
L-1011-1 12 - 12 - - -
L-1011-250 6 - 6 - - -
L-1011-500 10 - 10 - - -
MD-11 8 7 15 - - -
MD-88 63 57 120 - - -
MD-90 16 - 16 - - -
ATR-72 4 8 12 - - -
EMB-120 53 1 54 - - -
CRJ-200 1 26 27 18 45 -
CRJ-700 - - - 12 8 -
---------- ----------- ------------ ----------- ---------- -----------
Total 417 262 679 199 188 414
========== =========== ============ =========== ========== ===========
</TABLE>
8
<PAGE> 9
During the September 1999 quarter, we accepted delivery of four
new B-737-800 aircraft and four new B-757-200 aircraft. We sold four
B-727-200 aircraft and three EMB-120 aircraft. We also exercised options
for 18 B-737-800 aircraft. In addition, we acquired four new CRJ-200
aircraft and sold and leased back five CRJ-200 aircraft. We also retired
one L-1011-1 aircraft and one L-1011-500 aircraft.
Also during the September 1999 quarter, Atlantic Southeast
Airlines (ASA) entered into a memorandum of understanding to lease seven
ATR-72 aircraft during fiscal 2000.
Subsequent to September 30, 1999, we accepted delivery of four new
B-737-800 aircraft, one new B-757-200 aircraft and one new CRJ-200
aircraft.
Future expenditures for aircraft and engines on firm order at
October 31, 1999 are estimated to be $8.6 billion, as follows:
<TABLE>
<CAPTION>
Amount
Fiscal Year Ending June 30 (In Millions)
-------------------------- -------------
<S> <C>
Remainder of fiscal year 2000 $ 2,180
2001 2,180
2002 1,420
2003 650
2004 500
After 2004 1,640
-------
Total $ 8,570
=======
</TABLE>
Our purchase commitments include future payments for eleven B-777
aircraft on order. These payments are included above based on their
delivery dates under the related purchase agreement. The delivery of
these aircraft are currently deferred, which could impact the timing of
future payments. For additional information regarding the status of our
B-777 fleet, see "Personnel Matters" on page 25 of this Form 10-Q.
5. CONTINGENCIES
Delta is a defendant in legal actions related to alleged
employment discrimination practices, antitrust matters, environmental
issues and other matters concerning our business. Although the ultimate
outcome of these matters cannot be predicted with certainty, we believe
that the resolution of these actions is not likely to have a material
adverse effect on our consolidated financial statements.
9
<PAGE> 10
6. GEOGRAPHIC INFORMATION
Our Company is managed as a single business unit that provides
air transportation for passengers and cargo. Our operating revenues by
geographic region are summarized in the following table:
<TABLE>
<CAPTION>
For the Three Months Ended:
---------------------------------------------------
(In Millions) September 30, 1999 September 30, 1998
---------------------------------------------------------------------------------
<S> <C> <C>
Domestic $ 3,074 $2,982
Atlantic 603 646
Latin America 101 76
Pacific 99 98
------- ------
Total $ 3,877 $3,802
======= ======
</TABLE>
7. COMPREHENSIVE INCOME
During fiscal 1999, we adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting comprehensive income and its components. The
adoption of SFAS 130 had no net effect on our net income or shareowners'
equity for the three months ended September 30, 1999 and 1998.
Comprehensive income (net of income taxes) totaled $304 million for the
three months ended September 30, 1999 and $289 million for the three
months ended September 30, 1998.
8. ASSET IMPAIRMENTS AND OTHER NON-RECURRING CHARGES
During the September 1999 quarter, we recorded non-recurring
pretax charges totaling $149 million, comprised of asset impairment
losses and costs to streamline certain operations. The following
discussion summarizes the non-recurring charges recorded during the
quarter.
We changed our business practice during September 1999 regarding
the sale of surplus aircraft parts and entered into an agreement to sell
a significant portion of our existing surplus aircraft parts inventory to
a third party. As a result, we wrote down surplus aircraft parts and
obsolete flight equipment and parts to their estimated fair values,
resulting in a non-recurring pretax charge of $107 million. This charge
was recorded in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" and is included in
depreciation and amortization in our Consolidated Statements of
Operations. We determined the fair value of inventory that has been sold
using the negotiated purchase price. The fair value of the remaining
surplus inventory and flight equipment was determined by comparison to
industry prices.
Also during the September 1999 quarter, we implemented certain
technology initiatives relating to airport renewal, flight scheduling
and hardware platforms. These initiatives resulted in an impairment of
legacy hardware and software assets under SFAS 121, and a non-recurring
10
<PAGE> 11
pretax charge totaling $26 million. This charge is included in
depreciation and amortization in our Consolidated Statements of
Operations.
We have also remeasured the useful lives of certain technology
assets that are still in use but that will be replaced earlier than
originally planned as part of current initiatives. We are accelerating
the depreciation of these assets over the new estimated useful lives of
the technology.
During the September 1999 quarter, management made a decision to
streamline certain administrative processes and to close certain sales
offices and stations. This decision resulted in non-recurring pretax
charges totaling $16 million for employee severance benefits and lease
termination costs. The charges are included in salaries and related
costs and landing fees and other rents in our Consolidated Statements of
Operations.
9. FINANCIAL INSTRUMENTS - CONVERTIBLE SECURITIES
INVESTMENT IN PRICELINE.COM INCORPORATED - During fiscal 1999, Delta
entered into an agreement with priceline.com to provide ticket inventory
for sale through priceline.com's Internet-based e-commerce system. As
part of this agreement, we received warrants to purchase up to 18.6
million shares of priceline.com's common stock for $0.93 per share. All
of the performance thresholds related to the exercise of the warrants
have been met. However, the warrants, and the shares issuable when the
warrants are exercised, are not registered under the Securities Act of
1933. We have certain demand and piggyback registration rights relating
to the shares underlying our warrants.
On August 17, 1999, pursuant to a registration statement that
priceline.com filed with the SEC, we exercised warrants to purchase 1.8
million shares and sold the related shares in a public offering. The
exercise of the warrants and sale of the related stock resulted in a
pretax gain of $115 million, which is reflected in miscellaneous income,
net in our Consolidated Statements of Operations.
In accordance with SFAS 115, "Accounting for Certain Investments
in Debt and Equity Securities," we have marked-to-market the warrants
that we reasonably expect to be exercisable into registered common shares
of priceline.com during the next 12 months. Based upon our analysis, we
expect that approximately 1.1 million shares of the common stock
underlying our warrants will be registered. The estimated fair value of
the warrants relating to these shares was approximately $70 million at
September 30, 1999, which is recorded as marketable equity securities on
our Consolidated Balance Sheets. The estimated fair value of these
warrants was determined using the intrinsic value of the warrants at
September 30, 1999.
We have remaining warrants to purchase 15.7 million shares of
priceline.com. The estimated fair value of the remaining warrants is
approximately $1.0 billion, based upon the intrinsic value of the
warrants at September 30, 1999. We do not currently expect the shares
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<PAGE> 12
underlying these warrants to be registered within the next 12 months;
therefore, their fair value is not reflected on our Consolidated Balance
Sheets at September 30, 1999.
Due to the subjective nature of the determination of the fair
value of our equity investment in priceline.com, fluctuations in the
price of priceline.com common stock could cause fluctuations in the
amount recorded as marketable equity securities on our Consolidated
Balance Sheets in future periods.
INVESTMENT IN EQUANT - Delta is a member of the SITA Foundation, whose
principal assets are the shares of Equant, N.V. (Equant), an
international data network services company. We hold depository
certificates that may become convertible into 816,228 shares of Equant.
These certificates are not marketable under SFAS 115. Therefore, our
investment is carried at cost (which is nominal) on our Consolidated
Balance Sheets at September 30, 1999. The shares underlying the value of
these certificates had an estimated fair market value of approximately
$66 million at September 30, 1999.
10. SALE OF INVESTMENT IN SINGAPORE AIRLINES LIMITED
During September 1999, Delta sold its equity interest in
Singapore Airlines. The sale resulted in a pretax gain of $137 million
and cash proceeds of $318 million. The pretax gain is included in
miscellaneous income, net in our Consolidated Statements of Operations.
Because we did not receive the cash related to the sale until October
1999, the proceeds are reflected in accounts receivable, net on our
Consolidated Balance Sheets at September 30, 1999.
At the same time as this transaction, we repurchased five million
shares of Delta common stock previously held by Singapore Airlines for
$245 million. Because the cash paid for the repurchase was not disbursed
until October 1999, the amount owed is reflected as accounts payable and
miscellaneous accrued liabilities on our Consolidated Balance Sheets at
September 30, 1999. The shares repurchased are recorded as treasury
stock on our Consolidated Balance Sheets. In October 1999, we received
net cash proceeds of $73 million from these transactions.
11. EARNINGS PER SHARE
We calculate basic earnings per share by dividing the income
available to common shareowners by the weighted average number of common
shares outstanding. Diluted earnings per share includes the dilutive
effects of stock options and convertible securities. The following table
shows our computation of basic and diluted earnings per share:
12
<PAGE> 13
<TABLE>
<CAPTION>
Three Months Ended
September 30
----------------------------
1999 1998
--------- --------
(In Millions, Except Per Share Data)
<S> <C> <C>
BASIC:
Net income $ 352 $ 327
Dividends on allocated Series B ESOP
Convertible Preferred Stock (3) (3)
-------- --------
Income available to common
shareowners $ 349 $ 324
Weighted average shares outstanding 138.3 147.9
Basic earnings per share $ 2.53 $ 2.19
======== ========
DILUTED:
Net income $ 352 $ 327
Adjustment to net income
assuming conversion of Series B ESOP
Convertible Preferred Stock (1) (1)
-------- --------
Income available to
common shareowners $ 351 $ 326
Weighted average shares outstanding 138.3 147.9
Conversion of allocated Series B ESOP
Convertible Preferred Stock 5.1 4.8
Exercise of stock options 3.8 4.0
Performance-based stock plan 0.2 --
-------- --------
Weighted average shares outstanding
as adjusted 147.4 156.7
Diluted earnings per share $ 2.38 $ 2.08
======== ========
</TABLE>
12. SALE OF RECEIVABLES
During fiscal 1999, we sold a defined pool of our accounts
receivable, on a revolving basis, through a special purpose, wholly
owned subsidiary to a third party. In exchange for the receivables sold,
we received cash and a subordinated promissory note, which totaled $218
million at September 30, 1999. The balance of the subordinated
promissory note is included in accounts receivable, net on our
Consolidated Balance Sheets.
13
<PAGE> 14
As part of the agreement, the subsidiary is required to pay fees
to a third party based upon the amounts invested. For the September 1999
quarter, these fees approximated $5 million. This expense is included in
other income (expense) under miscellaneous income (expense), net in our
Consolidated Statements of Operations.
For additional information regarding Delta's sale of a defined
pool of our accounts receivable, see Note 16 of the Notes to the
Consolidated Financial Statements (page 56) in our 1999 Annual Report to
Shareowners.
13. SUBSEQUENT EVENT - AGREEMENT TO ACQUIRE COMAIR HOLDINGS, INC.
On October 17, 1999, Delta, Kentucky Sub, Inc., an indirect
wholly owned subsidiary of Delta (Kentucky Sub), and Comair Holdings,
Inc. (Comair) entered into an agreement and plan of merger (Merger
Agreement) providing for the merger of Kentucky Sub into Comair. Comair
is a holding company whose principal asset is its 100% ownership of
Comair, Inc., a certificated regional jet carrier and a participant in
the Delta Connection program. Prior to entering into the Merger
Agreement, we beneficially owned approximately 22% of Comair's
outstanding common stock.
Pursuant to the Merger Agreement, Kentucky Sub began a tender
offer on October 22, 1999 to purchase all the outstanding shares of
Comair's common stock (other than shares already beneficially owned by
Delta) at a price of $23.50 per share in cash. Kentucky Sub's obligation
to purchase shares in the tender offer is conditioned on:
1. the valid tendering of a number of shares of Comair's
common stock which, together with the shares that Delta
already beneficially owns, represents at least two-thirds
of the outstanding shares of Comair's stock on a fully
diluted basis;
2. the expiration or termination of the waiting period under
the Hart-Scott-Rodino Antitrust Improvements Act; and
3. other customary conditions.
The waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act expired on November 10, 1999.
The tender offer is scheduled to expire on November 19, 1999.
The Merger Agreement provides that Kentucky Sub will merge into
Comair as soon as practicable after the purchase of shares under the
tender offer and the satisfaction of certain conditions. At the
effective time of the merger, each outstanding share of Comair's common
stock (other than shares held in the treasury of Comair, shares already
beneficially owned by Delta or shares for which dissenters' rights have
been timely exercised) will be converted into the right to receive
$23.50 in cash. When the merger becomes effective, Kentucky Sub will
cease to exist and Comair and Comair, Inc. will become indirect, wholly
owned subsidiaries of Delta.
The total amount of funds required by our Company to consummate
the tender offer and the merger and to pay related fees and expenses is
estimated to be approximately $1.8 billion. We expect to obtain these
funds from borrowings under a term loan facility that we intend to enter
into with The Chase Manhattan Bank (Chase) as agent.
14
<PAGE> 15
Pursuant to a commitment letter dated October 17, 1999, we have
obtained a commitment from Chase to provide a senior unsecured term loan
of up to $1.9 billion to finance the tender offer and the merger. The
principal terms of the term loan, including the covenants and events of
default, will be substantially similar to those contained in our 1997
Bank Credit Agreement (See Note 5 of the Notes to the Consolidated
Financial Statements (page 46) in our 1999 Annual Report to
Shareowners).
The term loan may be funded in two drawings, with the first
drawdown on the business day following the expiration of the tender
offer, and the second drawdown in connection with the consummation of the
merger. All borrowings under the term loan will mature 24 months after
the first drawdown date. The interest rate under this facility is, at
Delta's option, the alternate base rate or the Eurodollar rate, in
either case plus a margin that varies between 0% and 1% for alternate
base rate borrowings and between 0.75% and 2.00% for Eurodollar
borrowings, depending on Delta's long-term senior unsecured debt ratings
(as established from time to time by Standard & Poor's and Moody's
Investor Services). If our long-term senior unsecured debt is rated
below investment grade, we will be required to maintain a specific
coverage ratio as of the last day of each fiscal quarter.
Chase's commitment to fund on the first drawdown date is subject
to the following conditions:
1. Chase's completion of and satisfaction in all respects
with a due diligence investigation of Delta, Comair and
their respective subsidiaries;
2. there not having been, since September 30, 1999, any
material adverse change in the condition or operations of
Delta and its subsidiaries, considered as a whole (on a
pro forma basis assuming consummation of the tender offer
and the merger);
3. Chase not becoming aware after October 17, 1999 of any
information or other matter that in its judgment is
inconsistent in a material and adverse manner with any
information or other matter disclosed to it prior to
October 17,1999;
4. there not having occurred a material disruption of or
material adverse change in conditions in the financial,
banking or capital markets that, in Chase's reasonable
judgment, could impair the syndication of the term loan;
5. preparation of satisfactory documentation relating to the
term loan; and
6. other customary closing conditions.
Chase's obligation to fund on the second drawdown date is
contingent upon the consummation of the merger and other customary
conditions substantially similar to those that would be applicable to
borrowings under our 1997 Bank Credit Agreement. We may prepay the term
loan in whole or in part at any time.
The summary of certain provisions of the Merger Agreement and the
commitment letter with Chase does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the Merger
Agreement and the commitment letter, which are included as Exhibits 99.1
and 99.2, and Exhibit 99.3, respectively, to this Form 10-Q.
15
<PAGE> 16
14. SUBSEQUENT EVENT - SALE OF INVESTMENT IN SAIRGROUP
On October 8, 1999, we sold our equity interest in SAirGroup, the
parent company of Swissair. The sale resulted in a pretax gain of $29
million and net proceeds of $114 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
NET INCOME AND EARNINGS PER SHARE
For the quarter ended September 30, 1999, our Company reported unaudited
consolidated operating income of $350 million and net income of $352 million.
Excluding non-recurring charges and gains on sales of investments (as described
below), operating income totaled $499 million and net income totaled $290
million. For the quarter ended September 30, 1998, we recorded operating income
of $552 million and net income of $327 million. Our operating margin, which is
the ratio of operating income to operating revenues, was 9.0% for the September
1999 quarter. Operating margin was 12.9% excluding non-recurring charges,
compared to 14.5% for the September 1998 quarter.
Pretax income of $583 million for the September 1999 quarter resulted in
an income tax provision of $231 million. After a $3 million provision for
preferred stock dividends, net income available to common shareowners was $349
million.
Basic earnings per share totaled $2.53 for the September 1999 quarter,
compared to $2.19 for the September 1998 quarter, a 16% increase. Diluted
earnings per share increased 14% from $2.08 in the September 1998 quarter to
$2.38 in the September 1999 quarter. Excluding non-recurring charges and gains
on sales of investments, diluted earnings per share was $1.96 for the September
1999 quarter.
During the September 1999 quarter, our Company recorded pretax
non-recurring charges totaling $149 million ($91 million after tax, or $0.66
basic and $0.62 diluted earnings per share). For additional information
regarding these charges, see Note 8 of the Notes to the Consolidated Financial
Statements in this Form 10-Q. Also during the September 1999 quarter, we sold
our equity interest in Singapore Airlines Limited, resulting in a pretax gain
of $137 million. We exercised a portion of our warrants in priceline.com and
sold the related shares for a pretax gain of $115 million. These sales provided
a total pretax gain of $252 million ($154 million after tax, or $1.11 basic and
$1.04 diluted earnings per share).
16
<PAGE> 17
Our results for the quarter ending September 30, 1999 include the results
of operations for ASA Holdings, Inc. (ASA Holdings). For information regarding
our acquisition of ASA Holdings, see Note 17 of the Notes to the Consolidated
Financial Statements (page 57) in our 1999 Annual Report to Shareowners.
OPERATING REVENUES
Our operating revenues totaled $3.88 billion in the September 1999
quarter, a 2% increase from $3.80 billion in the September 1998 quarter.
Passenger revenue increased 1% to $3.5 billion, the result of a 2% increase in
revenue passenger miles offset by a 1% decrease in passenger mile yield.
DOMESTIC PASSENGER REVENUES - Domestic passenger revenues rose 2% to $2.83
billion for the September 1999 quarter, reflecting a 1% increase in revenue
passenger miles and a 1% increase in passenger mile yield. Domestic capacity
increased 5%, primarily due to the inclusion of ASA Holdings in our results of
operations for the September 1999 quarter and the expansion of our fleet. During
the September 1998 quarter, we experienced increased traffic due to a pilot
strike at one of our competitors. During the September 1999 quarter, our
operations were adversely affected by flight cancellations related to Hurricane
Floyd. Passenger mile yield continues to be negatively impacted by capacity
increases from competitors.
INTERNATIONAL PASSENGER REVENUES - International passenger revenues decreased
4% to $695 million during the September 1999 quarter. The decrease reflects a
9% decline in passenger mile yield, partially offset by a 5% increase in
revenue passenger miles. The decline in passenger mile yield is primarily due
to competitive pressures resulting from industry-wide capacity increases on
Atlantic routes and lower demand on Pacific routes. The increase in revenue
passenger miles reflects Delta's continued international expansion,
particularly in Latin American and Atlantic markets.
CARGO REVENUES AND OTHER REVENUES - Cargo revenue rose less than 1% in the
September 1999 quarter. Cargo ton miles increased 5%, while the cargo ton mile
yield decreased 3%. We utilized competitive pricing strategies in Latin America
and Atlantic markets to increase cargo traffic, which resulted in higher cargo
ton miles and lower ton mile yields. Ton mile yield was also affected by
continued overcapacity in the Atlantic market and increased competition in
domestic markets. Other revenues increased 22% to $215 million, largely due to
increases in miles sold to our frequent flyer partners.
OPERATING EXPENSES
Operating expenses for the September 1999 quarter totaled $3.53 billion,
rising 9% from the September 1998 quarter. Excluding non-recurring charges and
the impact of the inclusion of ASA Holdings in the September 1999 quarter,
operating expenses increased 1% from the September 1998 quarter. Operating
capacity increased 5% to 38.35 billion available seat miles.
17
<PAGE> 18
Salaries and related costs grew 7%, reflecting a 6% increase in
average full-time equivalent employees and a general salary increase effective
January 1, 1999. Consistent with our customer service initiatives, we have
increased staffing in the areas of in-flight service and reservations. The rise
in full-time equivalent employees is also a result of the inclusion of the
employees of ASA Holdings in the September 1999 quarter. September 1999
quarterly salary expense also includes non-recurring charges of $12 million
associated with our decision to streamline certain operations and
administrative processes and close certain sales offices and stations.
Depreciation and amortization expense rose 82%, which includes
non-recurring charges of $133 million resulting from the impairment of surplus
and obsolete aircraft parts, as well as certain technology legacy assets.
Excluding these charges, depreciation and amortization expense rose 21% due to
the acquisition of additional flight and ground equipment and the inclusion of
depreciation and amortization expense for Atlantic Southeast Airlines, Inc.
(ASA). Aircraft fuel expense increased 8%, the result of a 5% rise in our
average fuel price per gallon and a 4% increase in fuel gallons consumed.
Contracted services expense increased 16% due to higher contracted
ground handling and cabin cleaning expenses, higher information technology
costs, higher cargo and ramp handling expenses, and expanded operations in new
and existing markets, as well as the inclusion of ASA's contracted services
expense. Passenger commissions decreased 20%, reflecting changes to the
commission rate structure for international travel implemented in October 1998
and an increase in the use of low cost distribution channels by our customers.
Landing fees and other rents rose 3% due to $4 million of
non-recurring charges, which resulted from our Company's decision to streamline
its operations by terminating certain lease agreements. Excluding these
non-recurring charges, landing fees and other rents increased 1%. Aircraft
maintenance materials and outside repairs expenses rose 16%, primarily due to
the inclusion of ASA's outside repairs expense. Aircraft rentals increased 6%
as a result of an increased number of leased aircraft, primarily due to the
inclusion of ASA. The 12% reduction in other costs was primarily attributable
to lower professional fees and insurance expense.
OTHER INCOME (EXPENSE)
Nonoperating income in the September 1999 quarter was $233 million,
compared to nonoperating expense of $14 million in the September 1998 quarter.
Interest expense increased 35% due to higher levels of debt outstanding.
Interest income decreased 9% due to lower average interest rates received,
partially offset by higher investment balances. Miscellaneous income increased
$263 million, primarily due to a $137 million gain on the sale of our Singapore
Airlines investment and a $115 million gain on the sale of a portion of our
investment in priceline.com.
18
<PAGE> 19
FINANCIAL CONDITION
Cash and cash equivalents and short-term investments totaled $1.6
billion at September 30, 1999, compared to $1.1 billion at June 30, 1999. Our
principal sources and uses of cash during the three months ended September 30,
1999 are detailed below.
SOURCES:
- - Generated $371 million of cash from operations.
- - Issued $571 million in long-term debt.
- - Generated $115 million in net proceeds from the exercise of a portion of
our warrants in priceline.com and the sale of the related shares.
- - Generated $91 million in proceeds from the sale-leaseback of five
CRJ-200 aircraft and the sale of three EMB-120 aircraft.
- - Issued 227,905 shares of common stock for $10 million. These shares were
primarily issued under our broad-based employee stock option plans.
USES:
- - Invested $480 million in flight equipment and $103 million in ground
property and equipment.
- - Paid $45 million to repurchase 892,577 shares of common stock.
- - Made principal payments of $69 million on long-term debt and capital
lease obligations.
- - Paid $4 million in cash dividends on our common stock.
The Company may prepay its long-term debt and repurchase common stock
from time to time. For information regarding share repurchases, see Note 3 of
the Notes to the Consolidated Financial Statements in this Form 10-Q and Note
11 of the Notes to the Consolidated Financial Statements (page 53) in our 1999
Annual Report to Shareowners.
As of September 30, 1999, our Company had a negative working capital
position of $1.8 billion, compared to negative working capital of $2.7 billion
at June 30, 1999. A negative working capital position is normal for us,
primarily due to our air traffic liability, and does not indicate a lack of
liquidity. We expect to meet our 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 September 30, 1999, we had $1.25 billion of credit available under
our 1997 Bank Credit Agreement. For additional information regarding this
agreement, see Note 5 of the Notes to the Consolidated Financial Statements
(pages 46-48) in our 1999 Annual Report to Shareowners.
Long-term debt and capital lease obligations (including current
maturities) totaled $3.2 billion at September 30, 1999, compared to $2.7
billion at June 30, 1999. Shareowners' equity was $4.5 billion at September 30,
1999 and June 30, 1999. Our debt-to-equity position, including current
maturities, was 40% debt and 60% equity at September 30, 1999 and 36% debt and
64% equity at June 30, 1999. The change in the debt-to-equity position from
June 30, 1999 reflects debt issued during July 1999 for general corporate
purposes.
19
<PAGE> 20
At September 30, 1999, $290 million of the Delta Family-Care Savings
Plan's Series C Guaranteed Serial ESOP Notes were outstanding. Delta is
required to purchase the Series C ESOP Notes in certain circumstances. See Note
5 of the Notes to the Consolidated Financial Statements (pages 46-48) in our
1999 Annual Report to Shareowners.
For additional information regarding our outstanding debt, see Note 2
of the Notes to the Consolidated Financial Statements in this Form 10-Q.
At its meeting on October 28, 1999, our Board of Directors declared a
cash dividend of 2.5 cents per common share, payable December 1, 1999, to
shareowners of record on November 10, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding our membership in the SITA Foundation and our
investment in priceline.com, see Note 9 of the Notes to the Consolidated
Financial Statements in this Form 10-Q. For additional information regarding
Delta's exposure to market risks, see "Market Risks Associated With Financial
Instruments" (pages 34-35), as well as Notes 2 and 4 (pages 43-44 and 45,
respectively) of the Notes to the Consolidated Financial Statements in our 1999
Annual Report to Shareowners.
20
<PAGE> 21
[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 September 30,
1999, and the related consolidated statements of operations and the condensed
consolidated statements of cash flows for the three-month periods ended
September 30, 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
November 10, 1999
21
<PAGE> 22
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Under the Delta Air Lines, Inc. Directors' Deferred Compensation Plan,
members of our Board of Directors may defer all or a part of their cash
compensation earned as a director for a specific period of time. A
participating director can choose an investment return on the deferred amount
from 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 Savings Plan is the
Delta Common Stock Fund, a fund invested primarily in our Company's common
stock. During the quarter ended September 30, 1999, a participant in the Plan
deferred $18,125 in the Delta Common Stock Fund, which is equivalent to
approximately 331 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.
22
<PAGE> 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of Shareowners held on October 28, 1999, the
owners of our common stock voted together as a single class with the owners of
our Series B ESOP Convertible Preferred Stock. The resulting actions are
detailed below.
1. Elected the persons named below to our Board of Directors by the
following vote:
<TABLE>
<CAPTION>
FOR WITHHELD
--- --------
<S> <C> <C>
Edwin L. Artzt 132,271,924 2,506,911
James L. Broadhead 132,273,547 2,505,288
Edward H. Budd 132,359,795 2,419,040
R. Eugene Cartledge 132,361,823 2,417,012
Mary Johnston Evans 132,385,943 2,392,892
George M.C. Fisher 132,475,285 2,303,550
David R. Goode 132,484,312 2,294,523
Gerald Grinstein 132,296,889 2,481,946
Leo F. Mullin 132,400,539 2,378,296
Andrew J. Young 131,802,878 2,975,957
</TABLE>
There were no broker non-votes on this matter.
2. Ratified the appointment of Arthur Andersen LLP as our independent
auditors for fiscal year 2000 by a vote of 133,291,938 FOR; 845,846
AGAINST; and 641,051 ABSTENTIONS. There were no broker non-votes on this
matter.
3. Defeated a shareowner proposal relating to cumulative voting for
directors, by a vote of 43,481,122 FOR; 62,199,784 AGAINST; and
16,002,335 ABSTENTIONS. There were 13,095,594 broker non-votes on this
matter.
4. Defeated a shareowner proposal relating to executive compensation
matters, by a vote of 11,343,838 FOR; 102,378,332 AGAINST; and 7,961,071
ABSTENTIONS. There were 13,095,594 broker non-votes on this matter.
5. Defeated a shareowner proposal relating to executive severance packages,
by a vote of 26,497,823 FOR; 85,756,124 AGAINST; and 9,429,294
ABSTENTIONS. There were 13,095,594 broker non-votes on this matter.
23
<PAGE> 24
ITEM 5. OTHER INFORMATION
YEAR 2000
Our Company has completed all phases of our Year 2000 program for our
aircraft fleet, onboard flight support systems, and onboard flight management
systems. In addition, all Year 2000 phases for our ground-based, safety-related
computer systems and equipment and all critical internal business systems are
complete. We will continue to test selected systems and equipment through
December 31, 1999 as part of our normal systems maintenance. We will also
monitor these systems well into calendar year 2000 to confirm that our hardware
and software are operating correctly.
We are replacing customer service hardware that is currently installed
at our airport facilities with upgraded, Year 2000 compliant hardware. We began
this effort in September 1998 and expect to complete installation during the
December 1999 quarter.
We will continue to communicate with third parties during the December
1999 quarter to determine our exposure to the failure of the third parties to
remediate their Year 2000 issues, and to resolve any problems discovered to the
extent practicable.
Our Company estimates that the total cost of achieving Year 2000
readiness for our internal systems and equipment is approximately $110 million.
We have recognized $97 million as expense ($6 million of which was incurred in
the September 1999 quarter) in our Consolidated Statements of Operations
through September 30, 1999.
This "Year 2000" section is a "Year 2000 Readiness Disclosure" within
the meaning of the Year 2000 Information and Readiness Disclosure Act enacted
in October 1998. This "Year 2000" section includes forward-looking statements
as defined in the Private Securities Litigation Reform Act of 1995. Our Company
uses the words "believes", "expects", "estimates" and similar expressions to
identify forward-looking statements. Forward-looking statements involve a
number of risks and uncertainties that could cause the actual results to differ
materially from the projected results. Factors that could cause these
differences include, but are not limited to:
- - the ability to identify and remediate all date-sensitive lines of
computer code or to replace embedded computer chips in affected systems
or equipment;
- - the availability of qualified personnel and other information technology
resources; and
- - the actions of governmental agencies or other third parties with respect
to Year 2000 problems.
For additional information regarding our Year 2000 program, see pages
29-31 of our 1999 Annual Report to Shareowners.
24
<PAGE> 25
BROAD-BASED STOCK OPTION PLANS
For information regarding our broad-based stock option plans, see Note
15 of our 1999 Annual Report to Shareowners (pages 55-56) and Note 3 of the
Notes to the Consolidated Financial Statements in this Form 10-Q.
PERSONNEL MATTERS
COLLECTIVE BARGAINING AGREEMENTS
For information regarding our employees who are represented by unions,
see "Collective Bargaining Agreements" on page 32 of our 1999 Annual Report to
Shareowners.
In October 1999, the National Mediation Board certified the election
of the Transport Workers Union to represent Delta's 107 pilot ground training
instructors.
Unions are currently seeking to become the collective bargaining
representative of various groups of our employees. The outcome of these matters
cannot presently be determined.
B-777 AND B-767-400 PILOT NEGOTIATIONS
In September 1999, Delta and the negotiating committee of the Delta
Air Line Pilots Association, International (ALPA) reached a tentative agreement
that sets pilot pay rates and working conditions for B-777 and B-767-400
aircraft. The tentative agreement has been approved by the Delta ALPA Master
Executive Council, but is subject to ratification by Delta pilots. The outcome
of the ratification vote is scheduled to be announced in December 1999 and
cannot presently be determined.
PILOT COLLECTIVE BARGAINING AGREEMENT NEGOTIATIONS
On September 8, 1999, Delta began negotiations with ALPA on a new
collective bargaining agreement to replace the existing contract, which becomes
amendable on May 2, 2000. The outcome of these negotiations cannot presently be
determined.
LITIGATION
On October 17, 1999, Delta, Kentucky Sub, Inc. (an indirect, wholly
owned subsidiary of Delta) and Comair Holdings, Inc. (Comair) entered into an
agreement and plan of merger (Merger Agreement) providing for the merger of
Kentucky Sub into Comair. See Note 13 of the Notes to the Consolidated
Financial Statements in this Form 10-Q.
As discussed below, five lawsuits are pending relating to the Merger
Agreement. Each of these lawsuits names as defendants Comair, the members of
the Comair Board of Directors and
25
<PAGE> 26
Delta, and seeks to proceed on behalf of a purported class of Comair common
shareholders other than the defendants.
1. On or about October 19, 1999, an action styled Barkley v. Comair
Holdings, Inc. was commenced by a purported Comair shareholder in the Jefferson
County Circuit Court, Commonwealth of Kentucky. The complaint alleges, among
other things: (a) that the members of the Comair Board of Directors breached
their fiduciary duties to Comair shareholders by agreeing to allegedly
inadequate consideration in the Merger Agreement; and (b) that Delta, which
plaintiff alleges to be a "controlling shareholder" of Comair, allegedly aided
and abetted those breaches of fiduciary duty, all of which allegedly has
deprived Comair shareholders of the highest value available to them for their
shares. The complaint seeks to enjoin Delta's acquisition of Comair; to rescind
the acquisition if it is consummated; unspecified monetary damages; and costs
and attorneys' fees. On October 29, 1999, the Jefferson County Circuit Court
issued an opinion and order denying plaintiff's motions for a temporary
restraining order enjoining Delta's acquisition of Comair and invalidating
certain provisions of the Merger Agreement.
2. On October 20, 1999, an action styled Byrnes v. Castellini was
commenced by two purported Comair shareholders in the Supreme Court of the
State of New York for Nassau County. The complaint makes allegations and seeks
relief substantially similar to the allegations made and relief sought in the
Barkley complaint, and also alleges that Delta breached fiduciary duties it
owed directly to Comair shareholders.
3. On October 28, 1999, plaintiffs in three other previously filed actions
filed a first amended consolidated class action complaint in the Boone County
Circuit Court, Commonwealth of Kentucky, under the caption Schear v. Comair
Corporation. On October 29, 1999, the Boone County Circuit Court consolidated
the three actions. The amended consolidated complaint alleges (a) that the price
for Comair shares agreed to in the Merger Agreement is inadequate; (b) that the
members of the Comair Board of Directors breached their fiduciary duties to
Comair shareholders by allegedly failing to thoroughly investigate the value of
Comair before entering into the Merger Agreement; and (c) that Delta purportedly
aided and abetted these alleged breaches of duty. The amended consolidated
complaint, among other things, also makes other related claims against the
Comair Board of Directors and Comair's financial advisor, Morgan Stanley Dean
Witter. The amended consolidated complaint seeks preliminary and permanent
injunctive relief against Delta's acquisition of Comair; compensatory and/or
rescissory damages in an unspecified amount; and costs and attorneys' fees. On
October 29, 1999, the Boone County Circuit Court denied plaintiffs' motion for a
preliminary injunction to enjoin Delta's acquisition of Comair and for expedited
discovery.
4. On October 28, 1999, an action styled Deutch v. Mueller was commenced
by a purported Comair shareholder in the Court of Common Pleas of Hamilton
County, Ohio. The complaint makes allegations and seeks relief substantially
similar to the allegations made and relief sought in the Schear amended
consolidated complaint and in the Barkley complaint.
5. On November 1, 1999, an action styled Shutte v. Comair Holdings, Inc.
was commenced by a purported Comair shareholder in the Jefferson County Circuit
Court in the Commonwealth of
26
<PAGE> 27
Kentucky. The complaint makes allegations and seeks relief substantially
similar to the allegations made and relief sought in the Barkley complaint.
On November 10, 1999, counsel for the parties to the five lawsuits
described above entered into a memorandum of understanding (Memorandum of
Understanding) setting forth the parties' agreement-in-principle to the terms of
a proposed settlement of those actions. Under the Memorandum of Understanding,
which was agreed to by Comair, the members of the Comair Board of Directors and
Delta (collectively, Defendants) solely to avoid the burden, expense and
distraction of further litigation, Defendants (1) agreed to amend the Merger
Agreement to eliminate the $50 million termination fee payable to Delta if the
Merger Agreement were terminated in the event Comair received and accepted a
superior acquisition offer or in certain other circumstances; and (2) agreed to
certain other matters, including meeting with plaintiffs' counsel and their
financial experts and discussing with them the considerations of the Comair
Board of Directors leading up to the Merger Agreement and providing plaintiffs'
counsel with an opportunity to review and comment upon the disclosure contained
in the publicly filed disclosure documents relating to the Merger Agreement. The
settlement contemplated in the Memorandum of Understanding is subject to a
number of conditions, including consummation of Delta's acquisition of Comair as
contemplated in the Merger Agreement; completion by plaintiffs of appropriate
discovery reasonably satisfactory to plaintiffs' counsel; drafting and execution
of definitive settlement documents; and final approval of the settlement by the
Boone County Circuit Court following notice and a hearing regarding its fairness
and adequacy to Comair shareholders other than the Defendants. If the Court
approves the settlement that is contemplated in the Memorandum of Understanding,
the Defendants and certain other parties will be released and discharged from
all claims that were or could have been raised against them in the actions or in
connection with the Merger Agreement and the actions will be dismissed with
prejudice as to a class consisting of all Comair shareholders (other than
Defendants) for the period from May 19, 1999, through and including the
effective time of the merger of Kentucky Sub into Comair. In connection with
Court approval of the settlement contemplated in the Memorandum of
Understanding, plaintiffs' counsel intend to apply to the Court for an award of
fees to be paid by Comair or its successor corporation up to an aggregate amount
of $675,000 and expenses up to an aggregate of $75,000, which Defendants have
agreed in principle not to oppose.
27
<PAGE> 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C>
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).
99.1 Agreement and Plan of Merger, dated as of October 17, 1999, among
Comair Holdings, Inc., Delta Air Lines, Inc. and Kentucky Sub,
Inc. (Incorporated herein by reference to Exhibit 3 of Amendment
No. 3 to the Statement on Schedule 13D filed by Delta Air Lines,
Inc. and Delta Air Lines Holdings, Inc. on October 18, 1999).
99.2 Amendment No. 1 to Agreement and Plan of Merger, dated as of
November 10, 1999, among Comair Holdings, Inc., Delta Air Lines,
Inc. and Kentucky Sub, Inc. (Incorporated herein by reference to
Exhibit (a)(8) to Amendment No. 3 to the Schedule 14D-1 filed by
Delta Air Lines, Inc., Delta Air Lines Holdings, Inc. and Kentucky
Sub, Inc. on November 12, 1999).
99.3 Term Loan Commitment Letter from Chase Securities Inc. and The
Chase Manhattan Bank to Delta Air Lines, Inc. dated October 17,
1999 (Incorporated herein by reference to Exhibit (b)(1) to the
Statement on Schedule 14D-1 filed by Delta Air Lines, Inc.,
Kentucky Sub, Inc. and Delta Air Lines Holdings, Inc. on October
22, 1999).
</TABLE>
(b) Reports on Form 8-K:
We filed a Current Report on Form 8-K dated July 13, 1999 relating to
our sale of a defined pool of accounts receivable, certain antitrust
litigation, our deferral of orders for eleven B-777 aircraft and the
retirement of our Chief Operating Officer.
We filed a Current Report on Form 8-K dated July 16, 1999 to file
certain documents as exhibits to our Registration Statement on Form S-3
(Registration No. 333-58647).
We filed a Current Report on Form 8-K dated July 23, 1999 to report our
financial results for the three and twelve month periods ended June 30,
1999.
28
<PAGE> 29
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/ Edward H. West
---------------------------------
Edward H. West
Executive Vice President
and Chief Financial Officer
November 12, 1999
29
<PAGE> 1
EXHIBIT 12
DELTA AIR LINES, INC.
STATEMENT REGARDING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions, except ratios)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Three Months Three Months
Ended Ended
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
Earnings (loss):
Earnings (loss) before income taxes $ 583 $ 538
Add (deduct):
Fixed charges from below 204 211
Interest capitalized (13) (10)
--------- ---------
Earnings (loss) as adjusted $ 774 $ 739
Fixed charges:
Interest expense $ 66 $ 49
Portion of rental expense representative of the
interest factor 138 162
--------- ---------
Total fixed charges $ 204 $ 211
Ratio of earnings to fixed charges 3.79 3.50
</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 September 30, 1999, which
includes our report dated November 10, 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
November 10, 1999
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<LEGEND>
EXHIBIT 27
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DELTA AIR
LINES, INC. FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE RELATED FINANCIAL STATEMENTS.
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<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,511
<SECURITIES> 93
<RECEIVABLES> 1,016
<ALLOWANCES> (32)
<INVENTORY> 74
<CURRENT-ASSETS> 3,536
<PP&E> 18,743
<DEPRECIATION> 6,930
<TOTAL-ASSETS> 17,417
<CURRENT-LIABILITIES> 5,373
<BONDS> 3,156
0
0
<COMMON> 270
<OTHER-SE> 4,197
<TOTAL-LIABILITY-AND-EQUITY> 17,417
<SALES> 0
<TOTAL-REVENUES> 3,877
<CGS> 0
<TOTAL-COSTS> 3,527
<OTHER-EXPENSES> 299
<LOSS-PROVISION> 4
<INTEREST-EXPENSE> 66
<INCOME-PRETAX> 583
<INCOME-TAX> 231
<INCOME-CONTINUING> 352
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 352
<EPS-BASIC> 2.53
<EPS-DILUTED> 2.38
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