EXHIBIT 99.1
GALILEO INTERNATIONAL, INC.
YEAR ENDED DECEMBER 31, 2000
INDEX
PAGE
----
Independent Auditors' Report 2
Consolidated Balance Sheets as of December 31, 2000 and 1999 3
Consolidated Statements of Income for the years ended
December 31, 2000, 1999 and 1998 5
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 6
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2000, 1999 and 1998 7
Notes to Consolidated Financial Statements 8
Independent Auditors' Report
The Board of Directors
Galileo International, Inc.:
We have audited the accompanying consolidated balance sheets of Galileo
International, Inc. and subsidiaries (the "Company") as of December 31, 2000 and
1999, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
2000. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Galileo
International, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Chicago, Illinois
January 26, 2001, except as to Note 15, which is as of February 22, 2001.
2
GALILEO INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
--------------------------
2000 1999
---- ----
ASSETS
------
Current assets:
Cash and cash equivalents $ 2,460 $ 1,794
Accounts receivable:
Trade receivables and other 178,549 166,885
Due from affiliates 23,001 19,057
----------- -----------
201,550 185,942
Less allowances 9,351 7,819
----------- -----------
Net accounts receivable 192,199 178,123
Deferred tax assets 17,794 15,338
Prepaid expenses 18,158 13,240
Other current assets 14,084 21,955
----------- -----------
Total current assets 244,695 230,450
Property and equipment, at cost:
Land 6,470 6,470
Buildings and improvements 76,452 72,219
Equipment 416,406 354,686
----------- -----------
499,328 433,375
Less accumulated depreciation 288,651 242,498
----------- -----------
Net property and equipment 210,677 190,877
Computer software, at cost 480,598 430,706
Less accumulated amortization 320,328 269,912
----------- -----------
Net computer software 160,270 160,794
Intangible assets, at cost:
Customer lists 426,564 406,614
Goodwill 380,014 189,097
Other 87,214 64,167
----------- -----------
893,792 659,878
Less accumulated amortization 173,580 87,742
----------- -----------
Net intangible assets 720,212 572,136
Long-term investments 15,706 29,033
Other noncurrent assets 127,699 71,903
----------- -----------
$ 1,479,259 $ 1,255,193
=========== ===========
(Continued)
See accompanying notes to consolidated financial statements.
3
GALILEO INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS (continued)
(in thousands, except share data)
December 31,
--------------------------
2000 1999
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable:
Trade payables and other $ 73,825 $ 45,676
Due to affiliates 3,088 2,358
----------- -----------
76,913 48,034
Accrued commissions 34,471 33,722
Accrued compensation and benefits 20,709 19,939
Income taxes payable 1,234 2,785
Other accrued liabilities 89,283 93,663
Capital lease obligations, current portion 1,638 110
Long-term debt, current portion 212,654 121,000
----------- -----------
Total current liabilities 436,902 319,253
Pension and postretirement benefits 79,285 68,466
Deferred tax liabilities 35,398 14,656
Other noncurrent liabilities 25,427 24,741
Capital lease obligations, less current portion 2,619 92
Long-term debt, less current portion 434,392 434,392
----------- -----------
Total liabilities 1,014,023 861,600
Stockholders' equity:
Special voting preferred stock: $.01 par value;
7 shares authorized; 3 shares issued and outstanding --- ---
Preferred stock: $.01 par value; 25,000,000 shares
authorized; no shares issued --- ---
Common stock: $.01 par value; 250,000,000 shares
authorized; 105,232,696 and 105,038,035 shares issued;
88,311,977 and 89,999,435 shares outstanding 1,052 1,050
Additional paid-in capital 682,988 671,615
Retained earnings 357,008 368,843
Unamortized restricted stock grants (1,963) (2,761)
Accumulated other comprehensive income (4,493) (2,866)
Common stock held in treasury, at cost: 16,920,719
and 15,038,600 shares (569,356) (642,288)
----------- -----------
Total stockholders' equity 465,236 393,593
----------- -----------
$ 1,479,259 $ 1,255,193
=========== ===========
See accompanying notes to consolidated financial statements.
4
GALILEO INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
Year ended December 31,
-------------------------------------
2000 1999 1998
---- ---- ----
Revenues:
Electronic global distribution
services $ 1,561,464 $ 1,452,101 $ 1,342,705
Information services 81,834 74,001 138,113
----------- ----------- -----------
1,643,298 1,526,102 1,480,818
Operating expenses:
Cost of operations 585,752 527,716 568,271
Commissions, selling and administrative 701,447 613,617 554,509
Special charges (Recovery of) -
restructurings 1,736 (11,359) 26,460
Special charges - services agreements 19,725 83,226 ---
Special charge - in-process research
and development write-off 7,000 --- ---
----------- ----------- -----------
1,315,660 1,213,200 1,149,240
----------- ----------- -----------
Operating income 327,638 312,902 331,578
Other income (expense):
Interest expense, net (44,925) (16,004) (9,629)
Other, net (16,839) 64,374 3,532
----------- ----------- -----------
Income before income taxes 265,874 361,272 325,481
Income taxes 116,985 143,064 129,867
----------- ----------- -----------
Net income $ 148,889 $ 218,208 $ 195,614
=========== =========== ===========
Weighted average shares outstanding 89,972,364 98,140,621 104,796,282
=========== =========== ===========
Basic earnings per share $ 1.65 $ 2.22 $ 1.87
=========== =========== ===========
Diluted weighted average shares
outstanding 90,350,120 98,813,522 105,186,241
=========== =========== ===========
Diluted earnings per share $ 1.65 $ 2.21 $ 1.86
=========== =========== ===========
See accompanying notes to consolidated financial statements.
5
GALILEO INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
------------------------------------
2000 1999 1998
---- ---- ----
Operating activities:
Net income $ 148,889 $ 218,208 $ 195,614
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 217,651 166,299 172,537
Loss (gain) on sale of assets 324 (58,347) (419)
Impairment write-down of minority ownership
investments 10,186 --- ---
Write-off of in-process research and development 7,000 --- ---
Unrealized gain on trading securities --- (10,492) ---
Deferred income taxes, net 4,280 6,516 (5,167)
Changes in operating assets and liabilities, net
of effects from acquisition of businesses:
Accounts receivable, net (3,861) (1,209) (8,149)
Other current assets 8,148 3,194 (2,826)
Noncurrent assets (33,919) (18,299) (28,428)
Accounts payable and accrued commissions (456) 3,111 2,903
Accrued liabilities (9,871) (13,848) 30,258
Income taxes payable (1,534) (8,794) 10,140
Noncurrent liabilities 16,178 (5,962) 12,615
Other 2,036 798 ---
----------- ---------- -----------
Net cash provided by operating activities 365,051 281,175 379,078
Investing activities:
Purchase of property and equipment (55,498) (84,445) (89,442)
Purchase and capitalization of computer software (52,955) (20,657) (23,496)
Proceeds on sale of assets 1,441 60,470 3,750
Acquisition of businesses, net of cash acquired in
2000 and 1998 of $15,551 and $3,576, respectively (128,861) --- (50,433)
Purchase of debt and equity securities (32,421) (35,290) (5,076)
----------- ---------- -----------
Net cash used in investing activities (268,294) (79,922) (164,697)
Financing activities:
Borrowings under credit agreements 190,000 574,000 49,392
Repayments under credit agreements (99,000) (88,128) (230,004)
Repurchase of common stock for treasury (154,640) (635,523) (6,765)
Dividends paid to stockholders (32,356) (33,940) (29,871)
Payments of capital lease obligations (510) (27,701) (7,311)
Other financing activities 298 3,363 787
----------- ---------- -----------
Net cash used in financing activities (96,208) (207,929) (223,772)
Effect of exchange rate changes on cash 117 (1,358) (148)
----------- ---------- -----------
Increase (decrease) in cash and cash equivalents 666 (8,034) (9,539)
Cash and cash equivalents at beginning of year 1,794 9,828 19,367
----------- ---------- -----------
Cash and cash equivalents at end of year $ 2,460 $ 1,794 $ 9,828
=========== ========== ===========
See accompanying notes to consolidated financial statements.
6
GALILEO INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
Special
Voting Additional
Preferred Common Paid - in Retained
Stock Stock Capital Earnings
----- ----- ------- --------
Balance at December 31, 1997 $ - $ 1,048 $ 663,688 $ 18,832
Comprehensive income:
Net income - - - 195,614
Foreign currency translation adjustments - - - -
Comprehensive income
Issuance of 97,900 shares of restricted stock - 1 3,991 -
Amortization of restricted stock grants - - - -
Issuance of 33,150 shares of Common stock under
employee stock option plans - - 787 -
Repurchase of 169,100 shares of Common stock
for treasury - - - -
Dividends paid ($0.285 per share) - - - (29,871)
------- ------- --------- ---------
Balance at December 31, 1998 - 1,049 668,466 184,575
Comprehensive income:
Net income - - - 218,208
Unrealized holding losses on marketable
securities - - - -
Foreign currency translation adjustments - - - -
Other comprehensive income (loss)
Comprehensive income
Amortization of restricted stock grants - - - -
Issuance of 107,285 shares of Common stock under
employee stock option plans - 1 3,149 -
Repurchase of 14,869,500 shares of Common stock
for treasury - - - -
Retirement of 4 shares of Special voting preferred
stock - - - -
Dividends paid ($0.345 per share) - - - (33,940)
------- ------- --------- ---------
Balance at December 31, 1999 - 1,050 671,615 368,843
Comprehensive income:
Net income - - - 148,889
Unrealized holding gains on marketable
securities - - - -
Reclassification adjustment for losses included
in net income - - - -
Foreign currency translation adjustments - - - -
Other comprehensive income (loss)
Comprehensive income
Amortization of restricted stock grants - - - -
Issuance of 194,661 shares of Common stock under
employee stock option plans - 2 494 -
Issuance of stock options upon acquisition of
TRIP.com - - 10,879 -
Issuance of 5,499,630 shares of Common stock from
treasury to acquire TRIP.com - - - (127,917)
Issuance of 21,199 shares of Common stock from
treasury under employee stock purchase plan - - - (451)
Repurchase of 7,402,948 shares of Common stock
for treasury - - - -
Dividends paid ($0.36 per share) - - - (32,356)
------- ------- --------- ---------
Balance at December 31, 2000 $ - $ 1,052 $ 682,988 $ 357,008
======= ======= ========= =========
GALILEO INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
Accumulated
Unamortized Other
Restricted Comprehensive Treasury
Stock Grants Income Stock Total
---------- ----------- ----------------------
Balance at December 31, 1997 $ - $ 128 $ - $ 683,696
Comprehensive income:
Net income - - - 195,614
Foreign currency translation adjustments - (1,267) - (1,267)
----------
Comprehensive income 194,347
Issuance of 97,900 shares of restricted stock (3,992) - - -
Amortization of restricted stock grants 433 - - 433
Issuance of 33,150 shares of Common stock under
employee stock option plans - - - 787
Repurchase of 169,100 shares of Common stock
for treasury - - (6,765) (6,765)
Dividends paid ($0.285 per share) - - - (29,871)
---------- ----------- --------- ----------
Balance at December 31, 1998 (3,559) (1,139) (6,765) 842,627
Comprehensive income:
Net income - - - 218,208
Unrealized holding losses on marketable securities - (1,122) - (1,122)
Foreign currency translation adjustments - (605) - (605)
----------
Other comprehensive income (loss) (1,727)
----------
Comprehensive income 216,481
Amortization of restricted stock grants 798 - - 798
Issuance of 107,285 shares of Common stock under
employee stock option plans - - - 3,150
Repurchase of 14,869,500 shares of Common stock
for treasury - - (635,523) (635,523)
Retirement of 4 shares of Special voting preferred
stock - - - -
Dividends paid ($0.345 per share) - - - (33,940)
---------- ----------- --------- ----------
Balance at December 31, 1999 (2,761) (2,866) (642,288) 393,593
Comprehensive income:
Net income - - - 148,889
Unrealized holding gains on marketable securities - 686 - 686
Reclassification adjustment for losses included in
net income - 1,122 - 1,122
Foreign currency translation adjustments - (3,435) - (3,435)
----------
Other comprehensive income (loss) (1,627)
----------
Comprehensive income 147,262
Amortization of restricted stock grants 798 - - 798
Issuance of 194,661 shares of Common stock under
employee stock option plans - - - 496
Issuance of stock options upon acquisition of TRIP.com - - - 10,879
Issuance of 5,499,630 shares of Common stock from
treasury to acquire TRIP.com - - 226,842 98,925
Issuance of 21,199 shares of Common stock from treasury
under employee stock purchase plan - - 730 279
Repurchase of 7,402,948 shares of Common stock
for treasury - - (154,640) (154,640)
Dividends paid ($0.36 per share) - - - (32,356)
---------- ----------- --------- ----------
Balance at December 31, 2000 $ (1,963) $ (4,493) $ (569,356) $ 465,236
========== =========== ========== ==========
See accompanying notes to consolidated financial statements.
7
GALILEO INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(in thousands, except share data)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Galileo International, Inc. (the "Company"), incorporated in the state of
Delaware, is one of the world's leading providers of electronic global
distribution services for the travel industry utilizing a computerized
reservation system ("CRS"). The Company provides travel agencies and other
subscribers with the ability to access schedule and fare information, book
reservations and issue tickets for airlines. The Company also provides
subscribers with information and booking capability covering car rental
companies and hotel properties throughout the world. Through its wholly owned
subsidiary, Quantitude, Inc. ("Quantitude"), the Company also provides
enterprise networking services to customers both in and outside of the travel
industry. The Company distributes its products and services in 107 countries on
six continents.
Principles of Consolidation and Business Acquisitions
The consolidated financial statements include the accounts of the Company
and all majority-owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.
In 1999, the Company acquired a minority equity interest in TRIP.com, Inc.
("TRIP.com"), an online travel services and technology provider. On March 10,
2000, the Company purchased the remaining 81% ownership interest in TRIP.com for
$214,390 in a combined cash and stock transaction. The Company paid $104,586 in
cash and issued 5,499,630 shares of Common Stock, previously held in treasury,
valued at $98,925. In addition, the Company converted all outstanding stock
options of TRIP.com into the Company's stock options (the "Converted Options")
at an estimated fair value of $10,879.
The following unaudited pro forma financial information presents a summary
of consolidated results of operations of the Company and TRIP.com as if the
acquisition had occurred on January 1, 1999:
Year ended December 31,
-----------------------
2000 1999
---- ----
Revenues $ 1,645,870 $ 1,536,776
Net income 142,459 153,688
Basic earnings per share 1.57 1.48
Diluted earnings per share 1.56 1.47
These unaudited pro forma results include adjustments for additional
amortization of goodwill and other intangible assets. Additionally, the pro
forma operating results include pro forma interest expense on the assumed
acquisition borrowings to finance the cash portion of the TRIP.com acquisition;
pro forma adjustments to the provision for income taxes to reflect the effect of
non-deductible amortization of goodwill and other intangible assets; and pro
forma adjustments to the weighted average shares outstanding and diluted
weighted average shares outstanding used in the earnings per share calculations
for the issuance of the Company's Common Stock and the dilutive effect of the
Converted Options outstanding, respectively.
8
The results of operations reflected in the pro forma information are not
necessarily indicative of the results which would have been reported if the
TRIP.com acquisition had occurred at the beginning of the periods presented, or
of the future operations of the consolidated entities.
Also during 2000, the Company acquired Terren Corporation ("Terren"), a
developer of client-server software for business databases, data communications
and information management, and Travel Automation Services Limited ("Galileo
UK"), the Company's national distribution company ("NDC") in the United Kingdom.
Terren and Galileo UK were acquired on March 8 and April 14, 2000 at purchase
prices of $2,592 and $19,992, respectively. The purchase price for Terren
consisted of $1,405 in cash payments and the assumption of a note payable and
accrued interest totaling $1,187. The purchase price for Galileo UK consisted
entirely of cash. In connection with the acquisition of Galileo UK, the Company
terminated certain revenue sharing obligations in exchange for $10,051 in cash
paid on the acquisition date. The related intangible asset is being amortized
over 17 years. The pro forma effects of these acquisitions are not significant.
In connection with all of the 2000 acquisitions, the Company incurred
expenses of $8,378, which have been accounted for as part of the purchase
prices. The Company accounted for these acquisitions using the purchase method
of accounting. Accordingly, the costs of these acquisitions were allocated to
the assets acquired and liabilities assumed based on their respective fair
values. Goodwill and other intangible assets related to the cost of these
acquisitions are being amortized over 3 to 20 years. The resulting amortization
is included in cost of operations expenses. The results of operations and cash
flows of TRIP.com, Terren and Galileo UK have been consolidated with those of
the Company from the date of each acquisition.
During 1998, the Company acquired a Florida-based airline information
systems company, S. D. Shepherd Systems, Inc. ("Shepherd Systems") and two NDCs:
Galileo Nordiska AB ("Nordiska") and Galileo Canada Distributions Systems, Inc.
("Galileo Canada"). Nordiska, Galileo Canada and Shepherd Systems were acquired
on January 1, June 1 and November 19, 1998 at purchase prices of $2,066,
$34,392, and $16,740, respectively. In connection with the acquisitions, the
Company also incurred expenses of $811, which have been accounted for as part of
the purchase prices. The Company accounted for the acquisitions using the
purchase method of accounting. Accordingly, the costs of the acquisitions were
allocated to the assets acquired and liabilities assumed based on their
respective fair values. Goodwill related to the cost of the acquisitions is
being amortized over 10 to 25 years and is included in cost of operations
expenses. The results of operations and cash flows of the acquired companies
have been consolidated with those of the Company from the date of each
acquisition. In connection with the acquisition of Galileo Canada, the Company
incurred $34,392 of debt under a five-year term loan agreement.
Uses of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain prior-year amounts have been reclassified to conform to the 2000
presentation.
9
Foreign Currency Translation
The Company uses the U.S. dollar for financial reporting purposes as
substantially all of the Company's billings are in U.S. dollars. The balance
sheets of the Company's foreign subsidiaries are translated into U.S. dollars
using the balance sheet date exchange rate, and revenues and expenses are
translated using the average exchange rate. The resulting translation gains and
losses are recorded as a separate component of stockholders' equity. Foreign
currency transaction gains and losses are reflected in the consolidated
statements of income.
Cash and Cash Equivalents
Cash in excess of operating requirements is invested daily in liquid,
income-producing investments, having maturities of three months or less. The
carrying amounts reported on the consolidated balance sheets for cash
equivalents include cost and accrued interest, which approximate fair value.
Fair Value of Financial Instruments
The carrying values of the Company's financial instruments, excluding
non-marketable equity securities (as discussed in Note 6) and derivative
financial instruments, are reasonable estimates of their fair value.
Allowance for Doubtful Accounts Receivable
The allowance for doubtful accounts receivable was $9,351, $7,819, and
$13,747 at December 31, 2000, 1999, and 1998, respectively. Provisions for bad
debts were $5,371, $2,569, and $(3,862) for the years ended December 31, 2000,
1999, and 1998, respectively. Write-offs of uncollectible accounts were $5,948,
$9,763, and $5,124 for the years ended December 31, 2000, 1999, and 1998,
respectively. The 1998 provision includes a $7,548 recovery settlement related
to a contractual dispute from a prior year.
Accounting for the Impairment of Long-Lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
requires that long-lived assets and certain identifiable intangibles to be held
and used by any entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If an indication of a potential impairment exists, recoverability
of the respective assets is determined by comparing the forecasted undiscounted
net cash flows of the operation to which the assets relate, to the carrying
amount, including associated intangible assets, of such operation. If the
operation is determined to be unable to recover the carrying amount of its
assets, then intangible assets are written down first, followed by the other
long-lived assets of the operation, to fair value. Fair value is determined
based on discounted cash flows or appraised values, depending upon the nature of
the assets. In determining the estimated future cash flows, the Company
considers current and projected future levels of income as well as business
trends, prospects and market and economic conditions.
The carrying amount of the Company's long-lived assets at December 31, 2000
and 1999 primarily represents the original amounts invested less the recorded
depreciation and amortization. Management believes the carrying amount of these
investments is not impaired.
10
Property and Equipment
Depreciation of property and equipment is provided on the straight-line
method over the following estimated useful lives of the assets:
Buildings and improvements 3-31 years
Equipment 3-10 years
Depreciation expense for the years ended December 31, 2000, 1999, and 1998
was $77,979, $79,111, and $83,724, respectively.
Computer Software
Effective January 1, 1998, the Company adopted the provisions of Statement
of Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." Accordingly, certain costs to develop internal-use
computer software are being capitalized. Prior to 1998, the Company capitalized
certain software development costs in accordance with Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
Be Sold, Leased or Otherwise Marketed." The ongoing assessment of recoverability
of capitalized software development costs requires considerable judgment by
management with respect to certain external factors, including but not limited
to estimated economic life and changes in software and hardware technology.
Computer software consists principally of purchased computer software and
capitalized computer software development costs. Amortization is provided on a
straight-line method over estimated useful lives of 3 to 10 years. Amortization
expense for the years ended December 31, 2000, 1999, and 1998 was $53,740,
$49,384, and $52,688, respectively.
Intangible Assets
Intangible assets are amortized on the straight-line method over the
following useful lives:
Customer lists 3-17 years
Goodwill 3-25 years
Other 3-17 years
Amortization expense for the years ended December 31, 2000, 1999, and 1998
was $85,932, $37,804, and $35,692, respectively.
Investments
The Company strategically invests in certain equity securities of
technology, travel and Internet-related companies in order to strengthen its
core product offerings or to enhance its technological infrastructure. The
Company classifies its marketable equity securities into trading and
available-for-sale categories in accordance with the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The Company's trading securities are reported at
fair value with unrealized gains and losses reported in other income or expense.
Available-for-sale securities are reported at fair value, with unrealized gains
and losses, net of tax, recorded in stockholders' equity. Realized gains or
losses, and other than temporary declines in value, if any, on equity securities
are reported in other income or expense as incurred. Investments in equity
securities are accounted for under the cost or equity method as appropriate
under APB Opinion No. 18, "The Equity Method of Accounting for Investments in
Common Stock." For non-quoted investments, the Company's
11
policy is to regularly review the assumptions underlying the operating
performance and cash flow forecasts in assessing the carrying values. The
Company identifies and records impairment on these investments in privately-held
companies when events and circumstances indicate that such assets might be
impaired.
Revenue Recognition
Fees are charged to airline, car rental, hotel and other travel suppliers
for bookings made through the Company's CRS and are dependent upon the level and
usage of functionality within the CRS at which the supplier participates.
Booking fee revenue is recognized at the time the reservation is made for air
bookings, at the time of pick-up for car bookings, and at the time of check-out
for hotel bookings.
Research and Development
Research and development costs, excluding amortization of computer
software, are expensed as incurred and were $7,052, $6,205, and $4,786 for the
years ended December 31, 2000, 1999, and 1998, respectively.
Derivative Financial Instruments
In the normal course of business, portions of the Company's expenses are
subject to fluctuations in currency values and interest rates. The Company
addresses these risks through a controlled program of risk management that
includes the use of derivative financial instruments. To some degree, the
Company is exposed to credit-related losses in the event of nonperformance by
counterparties to financial instruments, but management does not expect any
counterparties to fail to meet their obligations given their high credit
ratings. The Company does not hold or issue derivative financial instruments for
trading purposes.
The Company enters into foreign exchange forward contracts to manage
exposure to fluctuations in foreign exchange rates related to the funding of its
European and Canadian operations. The Company accounts for such contracts by
recording any unrealized gains or losses in income each reporting period. At
December 31, 2000, the Company had no foreign exchange forward contracts
outstanding. At December 31, 1999 and 1998, the notional principal amounts of
outstanding forward contracts were $19,635 and $31,123, respectively. The fair
value of outstanding forward contracts at December 31, 1999 and 1998 was $32 and
$821, respectively.
The Company has also entered into interest rate swap agreements to convert
portions of its variable rate debt to fixed rate. The Company accounts for its
interest rate swap agreements as a hedge of its interest rate exposure. (See
Note 8 for further information regarding the Company's interest rate
agreements.)
Income Taxes
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("Statement 109"). Under the asset and liability method of Statement 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to the difference between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under Statement 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
12
Earnings per Share
Basic earnings per share data for the years ended December 31, 2000, 1999
and 1998 is calculated based on the weighted average shares outstanding for the
period. Diluted earnings per share is calculated as if the Company had
additional Common Stock outstanding from the beginning of the year or the date
of grant for all dilutive stock options, net of assumed repurchased shares using
the treasury stock method. This resulted in increases in the weighted average
number of shares outstanding for the years ended December 31, 2000, 1999 and
1998 of 377,756, 672,901, and 389,959, respectively. At December 31, 2000, 1999
and 1998, options totaling 4,208,528, 2,051,981, and 1,837,900, respectively,
were excluded from the calculations as their effect was antidilutive.
2. TRANSACTIONS WITH AFFILIATES
Airline stockholders, in aggregate, owned 64.9% of the Company's
outstanding Common Stock at December 31, 1998, with only United Air Lines, Inc.
("United Airlines") and KLM deemed to be affiliates due to indirect ownership,
individually, greater than 10% of the Company's outstanding Common Stock. In
June 1999, the Company completed a secondary offering of its Common Stock, and
also repurchased shares from an airline stockholder. As of December 31, 2000 and
1999, the percentage of the Company's outstanding Common Stock owned by airline
stockholders was 27.5% and 27.0%, respectively, with only United Airlines deemed
to be an affiliate. (See Note 10 for further information regarding the secondary
offering and repurchase of shares by the Company.)
The Company recognized electronic global distribution services revenues,
primarily in the form of booking fees, from affiliates totaling $133,333,
$138,361, and $170,346 for the years ended December 31, 2000, 1999, and 1998,
respectively. The Company also received information services revenues from
affiliates totaling $70,922, $65,392, and $128,839 for the years ended December
31, 2000, 1999, and 1998, respectively. Total revenues from United Airlines of
$204,255, $203,753, and $269,942 were greater than 10% of the Company's revenues
for the years ended December 31, 2000, 1999, and 1998, respectively.
The Company, in the ordinary course of business, purchases services from
affiliates. Services purchased from affiliates and classified within
commissions, selling and administrative expenses totaled $3,669, $4,715, and
$15,623 for the years ended December 31, 2000, 1999, and 1998, respectively.
In July 1997, the Company entered into certain services agreements with
airline stockholders to provide fare quotation services, internal reservation
services, other internal management services and software development services.
The Company will provide the fare quotation services under existing pricing
arrangements for a period of approximately five years. In December 1999, the
Company amended the agreement under which it provides certain of the above
mentioned services to United Airlines. This amendment, which went into effect on
January 1, 2000, extends the length of the agreement for an additional five
years.
3. EMPLOYEE PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company has defined benefit pension plans and other postretirement
benefit plans that cover substantially all U.S. employees. Other benefits
include health care benefits provided to retired U.S. employees and retiree
flight benefits provided to certain former United Airlines employees. The
Company has no significant postretirement health care benefit plans outside of
the United States. The majority of its
13
U.S. employees may become eligible for these benefits if they reach normal
retirement age while working for the Company.
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets for the years ending December 31,
2000 and 1999, and a statement of the funded status as of December 31, 2000 and
1999:
Pension Benefits Other Benefits
---------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
RECONCILIATION OF BENEFIT OBLIGATION
Obligation at January 1 $ 114,693 $ 113,430 $ 42,647 $ 43,416
Service cost 7,861 8,101 2,036 2,189
Interest cost 9,911 8,321 3,785 3,067
Actuarial loss (gain) 10,542 (13,203) 6,406 (5,594)
Benefit payments (3,735) (1,956) (763) (431)
--------- --------- -------- --------
Obligation at December 31 $ 139,272 $ 114,693 $ 54,111 $ 42,647
========= ========= ======== ========
RECONCILIATION OF FAIR VALUE OF PLAN ASSETS
Fair value of plan assets at January 1 $ 118,897 $ 99,757 $ - $ -
Actual return on plan assets (7,186) 21,078 - -
Employer contributions 190 18 763 431
Benefit payments (3,735) (1,956) (763) (431)
--------- --------- -------- --------
Fair value of plan assets at December 31 $ 108,166 $ 118,897 $ - $ -
========= ========= ======== ========
FUNDED STATUS
Funded status at December 31 $ (31,106) $ 4,204 $ (54,111) $ (42,647)
Unrecognized transition obligation 1,741 1,990 - -
Unrecognized prior-service cost 1,797 2,379 (1,077) (1,227)
Unrecognized (gain) loss (1,946) (32,121) 5,469 (937)
--------- --------- -------- --------
Net amount recognized $ (29,514) $ (23,548) $ (49,719) $ (44,811)
========= ========= ======== ========
The following table provides the amounts recognized in the consolidated
balance sheets as of December 31, 2000 and 1999:
Pension Benefits Other Benefits
---------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
Accrued benefit liability $ (29,514) $ (23,548) $ (49,719) $ (44,811)
Additional minimum liability (51) (107) - -
Intangible asset 51 107 - -
--------- --------- --------- ---------
Net amount recognized $ (29,514) $ (23,548) $ (49,719) $ (44,811)
========= ========= ========= =========
The Company's nonqualified pension plan was the only pension plan with an
accumulated benefit obligation in excess of plan assets. The plan's accumulated
benefit obligation was $1,142 and $900 at December 31, 2000 and 1999,
respectively. There are no plan assets in the nonqualified plan due to the
14
nature of the plan. The Company's plans for postretirement benefits other than
pensions also have no plan assets. The aggregate benefit obligation for those
plans was $54,111 and $42,647 as of December 31, 2000 and 1999, respectively.
The following table provides the components of net periodic benefit cost
for the plans for years ended December 31, 2000, 1999, and 1998:
Pension Benefits Other Benefits
---------------- --------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Service cost $ 7,861 $ 8,101 $ 6,964 $ 2,036 $ 2,189 $ 1,910
Interest cost 9,911 8,321 7,178 3,785 3,067 2,733
Expected return on plan assets (11,165) (9,376) (7,500) - - -
Amortization of transition
obligation 249 249 249 - - -
Amortization of prior-service cost 582 582 582 (150) (150) (259)
Amortization of net loss (gain) (1,281) 21 16 - 41 -
------- ------- ------- ------- ------- -------
Net periodic benefit cost $ 6,157 $ 7,898 $ 7,489 $ 5,671 $ 5,147 $ 4,384
======= ======= ======= ======= ======= =======
The prior-service costs are amortized on a straight-line basis over the
average remaining service period of active participants. Gains and losses in
excess of 10% of the greater of the benefit obligation and the market-related
value of assets are amortized over the average remaining service period of
active participants.
The assumptions used in the measurement of the Company's benefit obligation
are shown in the following table:
Pension Benefits Other Benefits
---------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
Weighted average assumptions
as of December 31:
Discount rate 7.50% 7.75% 7.50% 7.75%
Expected return on plan assets 9.50% 9.50% N/A N/A
Rate of compensation increase 4.50% 4.75% N/A N/A
The health care trend rate used to determine the accumulated postretirement
benefit obligation was 10% for 2000, decreasing by 1% each year until reaching
4% for the year 2006 and beyond.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A 1% change in assumed health care
cost trend rates would have the following effects:
1% Increase 1% Decrease
----------- -----------
Effect on total of service and interest cost components
of net periodic postretirement health care benefit cost $ 240 $ (212)
Effect on the health care component of the accumulated
postretirement benefit obligation 1,990 (1,848)
15
The Company has a defined contribution pension plan covering a majority of
the United Kingdom employees which requires the Company to annually contribute
approximately 10% of eligible employee compensation on behalf of each
participant. The Company's contributions to the plan were $1,007, $1,661, and
$2,319 during the years ended December 31, 2000, 1999, and 1998, respectively.
The Company offers its U.S.-based employees a 401(k) savings plan.
Employees can elect to contribute pretax earnings, as limited by the Internal
Revenue Code, to their account and can determine how the money is invested from
a selection of options offered by the Company. The Company's contributions,
matching participating employees' contributions up to a designated level, were
$2,972, $2,818, and $2,705 during the years ended December 31, 2000, 1999, and
1998, respectively.
4. SPECIAL CHARGES
(See Note 9 for discussion of the special charges related to the services
agreements.)
The Company recorded a special charge of $1,736 ($972 after tax) during the
year ended December 31, 2000 related to the integration of Galileo UK into the
Company's operations. The special charge was comprised of $1,457 in severance
costs related to the termination of 29 employees, and $279 in facilities
expenses. As of December 31, 2000, $620 of severance related costs have been
paid and charged against the liability and 15 employees have been terminated.
The estimated remaining liability at December 31, 2000 related to the
integration of Galileo UK was $1,139 and is included in the accompanying
consolidated balance sheet.
The Company recorded a special charge of $7,000 (non-tax deductible) during
the year ended December 31, 2000 to write off in-process research and
development costs related to the acquisition of TRIP.com.
The Company recorded special charges of $26,460 ($15,902 after tax) during
the year ended December 31, 1998 related to a strategic realignment of the
Company's operations in the United Kingdom and, to a lesser degree, other
realignments within the Company. These special charges were comprised primarily
of $15,025 in severance costs related to the termination of 399 employees,
primarily in the development and marketing groups, and $11,435 of other costs,
principally related to the closing of the remaining Swindon, U.K. facilities. As
of December 31, 2000, $16,202 of severance costs have been paid and charged
against the liability and 373 employees have been terminated. The realignment
activities have been completed as of December 31, 2000. Also related to the
closing of Swindon, U.K. facilities, in 1993 the Company, formerly Covia
Partnership, combined with The Galileo Company Ltd. and consolidated its two
data center facilities resulting in the closing of the Swindon, U.K. data
center. In connection therewith, the estimated cost of the consolidation was
charged to expense. During 1999, the Company was successful in assigning a
Swindon, U.K. facility lease at market rates, resulting in recognition of an
$11,359 one-time recovery of previously reserved facilities expenses. At
December 31, 2000 and 1999, the estimated remaining liabilities for all of the
above-mentioned restructuring activities, principally related to facility
closure costs, were $6,990 and $10,220, respectively, and are included in the
accompanying consolidated balance sheets.
16
5. INCOME TAXES
For financial reporting purposes, income before income taxes includes the
following components:
2000 1999 1998
---------- ---------- ----------
Domestic operations $ 252,318 $ 353,208 $ 317,862
Foreign operations 13,556 8,064 7,619
---------- ---------- ----------
Total income before income taxes $ 265,874 $ 361,272 $ 325,481
========== ========== ==========
The provisions for income taxes consist of the following:
2000 1999 1998
--------- --------- ---------
Current taxes:
Federal $ 97,820 $ 117,167 $ 112,799
State 12,441 18,582 20,803
Foreign 2,444 799 1,432
--------- --------- ---------
Total 112,705 136,548 135,034
Deferred taxes:
Federal 6,182 5,542 (3,834)
State (1,902) 974 (1,333)
--------- --------- ---------
Total 4,280 6,516 (5,167)
--------- --------- ---------
Provision for income taxes $ 116,985 $ 143,064 $ 129,867
========= ========= =========
17
Deferred tax assets (liabilities) are comprised of the following at
December 31, 2000 and 1999:
2000 1999
-------- ---------
Current:
Productivity payments $ 8,110 $ 7,598
Bad debt reserves 2,725 2,364
Compensation accruals 1,616 458
Special charges - 392
Other 5,343 4,526
-------- --------
$ 17,794 $ 15,338
======== ========
Noncurrent:
Software amortization $ (49,766) $ (57,375)
Other liabilities (26,693) (8,999)
Rights agreements (13,122) (6,248)
Postretirement medical and pension accruals 30,911 26,681
Services agreements 11,101 10,619
Other assets 5,084 4,024
Depreciation 4,353 14,348
Facilities reserves 2,734 2,294
-------- ---------
$ (35,398) $ (14,656)
========== ==========
The following table reconciles the U.S. statutory rate with the effective
rate for the years ended December 31, 2000, 1999, and 1998:
2000 1999 1998
--------- --------- --------
Tax at U.S. federal income tax rate $ 93,056 $ 126,445 $ 113,918
Increase (decrease) in taxes resulting from:
State income taxes, net of U.S. federal income
tax benefit 6,851 12,711 13,522
Amortization of excess of cost over net assets
acquired and related purchase accounting adjustments 15,721 2,111 2,111
Tax effect of non-deductible expenses 2,957 373 344
Foreign and U.S. tax effects attributable to
foreign operations 1,533 1,792 323
Other (3,133) (368) (351)
--------- --------- ---------
Taxes on income at effective rate $ 116,985 $ 143,064 $ 129,867
========= ========= =========
Undistributed earnings of the Company's corporate foreign subsidiaries
amounted to approximately $3,931 and $3,237 at December 31, 2000 and 1999,
respectively. Those earnings are considered to be indefinitely reinvested, and
accordingly, no provision for U.S. federal and state income taxes and foreign
withholding taxes have been made. Upon distribution of those earnings, the
Company would be subject to U.S. income taxes (subject to a reduction for
foreign tax credits) and withholding taxes payable to the various foreign
countries. Determination of the amount of unrecognized deferred U.S. income tax
liability is not practicable; however, unrecognized foreign tax credit
carryovers would be available to reduce some portion of the U.S. liability.
Withholding taxes of approximately $381 and $314 would be payable upon
remittance of all previously unremitted earnings at December 31, 2000 and 1999,
respectively.
18
6. INVESTMENTS
Investments in equity securities at December 31, 2000 and December 31, 1999
are as follows:
December 31, 2000
---------------------------------------
Gross Unrealized
Amortized ---------------- Fair
Cost Gains (Losses) Value
--------- ----- ---------- -----
Marketable equity securities:
Available-for-sale securities $ 1,334 $ 1,125 $ - $ 2,459
------- -------- ------- --------
Total marketable securities 1,334 $ 1,125 $ - $ 2,459
======= ======= =======
Other equity securities 15,567
-------
Total $ 16,901
========
December 31, 1999
---------------------------------------
Gross Unrealized
Amortized ---------------- Fair
Cost Gains (Losses) Value
--------- ----- ---------- -----
Marketable equity securities:
Trading securities $ 1,000 $ 10,492 $ - $ 11,492
Available-for-sale securities 3,274 - (1,838) 1,436
------- -------- ------- --------
Total marketable securities 4,274 $ 10,492 $ (1,838) $ 12,928
======= ======= ========
Other equity securities 27,597
-------
Total $ 31,871
========
At December 31, 2000, all of the Company's marketable equity securities are
classified as available-for-sale. Of these investments, $2,320 is included in
other current assets, and $139 is included in long-term investments.
In December 2000, the Company recorded impairment charges of $10,186 to
write down certain of the Company's investments in technology and travel related
companies to estimated fair value. The write-downs consisted of $3,135 for one
of the Company's marketable equity investments and $7,051 for several
non-marketable equity investments. The estimated fair values established for the
non-marketable investments were determined by using management's estimates of
the net proceeds the Company expects to recover upon the eventual disposition of
the investments. The decline in the estimated fair values of these investments
was considered to be other than temporary.
In December 1999, the Company entered into an agreement to sell its entire
equity investment in Stamps.com for $11,492. This investment was classified as
trading at December 31, 1999 and was included in other current assets. The
remaining marketable equity securities were classified as available-for-sale and
were included in long-term investments at December 31, 1999.
Unrealized holding gains of $686 (net of deferred taxes of $439) and
unrealized holding losses of $1,122 (net of deferred taxes of $716) on
available-for-sale securities were included in accumulated other comprehensive
income in 2000 and 1999, respectively. Unrealized gains of $10,492 on trading
securities were included in earnings in 1999 related to the Stamps.com
investment. The Company completed the sale
19
of its entire equity investment in Stamps.com for $11,492 in January 2000. There
were no other sales of marketable equity securities in 2000 or 1999.
Other equity securities represent non-marketable securities that are
restricted or not publicly traded. These securities are included in long-term
investments. Included in this category are non-marketable depository
certificates representing beneficial ownership of common stock of Equant N.V.
("Equant"), a telecommunications company affiliated with Societe Internationale
de Telecommunications Aeronautiques ("SITA"). In July 1999, SITA notified the
Company of a reallocation of depository certificates among SITA members. Due to
the Company's higher usage of the SITA network over the four years ended
December 31, 1998, the Company received 708,335 additional depository
certificates. In connection with secondary offerings of Equant common stock in
1999, the Company liquidated 696,151 of these certificates. The Company received
proceeds of $58,725 from these transactions, resulting in gains of $58,574. In
November 2000, Equant announced a planned merger with France Telecom's Global
One business. In connection with this planned merger, the SITA Foundation signed
an agreement to exchange all of its Equant shares for France Telecom shares. As
a result, each of the Company's depository certificates are expected to
represent the right to receive the economic benefit of approximately .4545
France Telecom shares. France Telecom is listed on the New York Stock Exchange
under the ticker: FTE. This merger is expected to be completed by June 30, 2001,
at which time the Company will have the option to participate in an orderly
resale process. As of December 31, 2000 and 1999, the Company owned 1,106,564 of
these depository certificates. The Company's carrying value of these depository
certificates was nominal at December 31, 2000 and 1999.
7. LEASES AND COMMITMENTS
The Company leases various office facilities and equipment under operating
leases with remaining terms of up to 23 years. Rental expense under operating
leases was $22,778, $22,806, and $25,756 for the years ended December 31, 2000,
1999, and 1998, respectively.
The Company also leases data processing equipment under capital leases.
Equipment, at cost, includes $8,906, $4,819, and $26,027 relating to capital
leases at December 31, 2000, 1999, and 1998, respectively. Accumulated
depreciation includes $4,559, $4,613, and $21,842 relating to capital leases at
December 31, 2000, 1999, and 1998, respectively, with lease amortization
included in depreciation expense.
20
Future minimum lease payments under capital leases and noncancelable
operating leases at December 31, 2000 are as follows:
Capital Operating
------------ ------------
2001 $ 1,778 $ 24,758
2002 1,667 19,112
2003 1,042 16,946
2004 - 13,334
2005 - 9,377
Thereafter - 60,857
------------ ------------
Total minimum lease payments 4,487 144,384
Less sublease income - (12,314)
------------
Net rental payments $ 132,070
============
Less amount representing interest (230)
------------
Present value of future minimum lease payments 4,257
Current portion of present value of future
minimum lease payments 1,638
------------
Long-term portion of present value of future
minimum lease payments $ 2,619
============
8. LONG-TERM DEBT
Outstanding long-term debt consists of the following at December 31, 2000
and 1999:
2000 1999
------------ ------------
Five-year credit agreement $ 400,000 $ 400,000
16-month credit agreement 212,000 -
Term loan 34,392 34,392
364-day credit agreement - 121,000
Other 654 -
------------ ------------
647,046 555,392
Less current portion of long-term debt 212,654 121,000
------------ ------------
Long-term debt $ 434,392 $ 434,392
============ ============
The Company is party to a $400,000 five-year credit agreement and a
$500,000 16-month credit agreement (collectively, the "Credit Agreements") with
a group of banks. In March 2000, the Company entered into a $200,000 16-month
credit agreement, which was partially utilized to fund the acquisition of the
remaining ownership interest in TRIP.com. In April 2000, the Company entered
into the new $500,000 credit agreement that expires in July 2001. This new
$500,000 16-month credit agreement replaces the $200,000 16-month credit
agreement entered into in March 2000 and the $200,000 364-day credit agreement
that was due to expire in July 2000. Facility fees range from 10.0 to 22.5 basis
points under each of the Credit Agreements. Interest on the borrowings may be
either Base Rate, CD Rate or LIBOR based. At December 31, 2000, the nominal
interest rate for loans outstanding under the Credit Agreements was 7.2%.
On June 5, 1998, in connection with the acquisition of Galileo Canada, the
Company incurred $34,392 of debt under a five-year term loan agreement (the
"Term Loan"). In addition, on June 5, 1998,
21
the Company entered into an interest rate swap agreement for a notional amount
of $34,392 to fix the effective interest rate of the Term Loan until maturity in
June 2003, subject to pricing adjustments based on changes in certain financial
ratios of the Company. At December 31, 2000, the notional interest rate on the
Term Loan was 7.11% and the effective interest rate was 6.30%. The Term Loan
requires quarterly interest payments throughout the five-year term.
On March 8, 2000, in connection with the acquisition of Terren, the Company
assumed a $1,131 note payable (the "Terren Note") due in two installments, and
$56 of accrued interest. The first installment was paid with accrued interest in
July 2000. A final payment of $654 plus accrued interest is due July 31, 2001.
The Terren Note carries an interest rate of 7%. The outstanding balance on the
note as of December 31, 2000 was $654.
At December 31, 2000, borrowings totaled $400,000 under the five-year
credit agreement with no required repayments until maturity in July 2002, and
$212,000 under the 16-month credit agreement with required payment in entirety
in July 2001. The outstanding balance on the Term Loan was $34,392, with no
required repayments until maturity in June 2003. Under the Credit Agreements and
the Term Loan, the Company is required to maintain certain financial ratios and
is restricted from paying dividends and repurchasing its Common Stock above
certain thresholds.
The Company has entered into an interest rate swap agreement to reduce the
impact of changes in interest rates on its outstanding borrowings. At December
31, 2000 and 1999, the Company had an outstanding interest rate swap agreement
having a total notional value of $34,392, with fixed interest rates averaging
5.87% for both years. The fair value of the outstanding swap agreement at
December 31, 2000 and 1999 was $(77) and $999, respectively. For the years ended
December 31, 2000, 1999, and 1998, the effective interest rate on the Company's
outstanding debt under the Credit Agreements was 6.92%, 5.89%, and 5.89%,
respectively.
Total interest, including interest under capital leases, of $49,639,
$17,528, and $11,876 was incurred for the years ended December 31, 2000, 1999,
and 1998, respectively.
9. COMMITMENTS & CONTINGENCIES
The Company's wholly owned subsidiaries, Galileo International, L.L.C.
("GILLC") and Apollo Galileo USA Partnership ("Apollo"), as well as United
Airlines and one of its subsidiaries, are defendants in a lawsuit captioned
Osband, et al. v. United Air Lines, Inc., et al. The lawsuit, which was filed on
March 1, 1996 in the District Court for Arapahoe County, Colorado, currently
consists of 99 plaintiffs, all of whom were employed by United Airlines prior to
1988, and were subsequently employed by the United Airlines subsidiary, one of
the Company's predecessors, and GILLC or Apollo since that time. The plaintiffs
allege that the defendants promised the plaintiffs that they would receive
lifetime flight benefits at a level equivalent to the flight benefits that
United Airlines provides to its employees. The plaintiffs brought claims for
specific performance and injunctive relief seeking reinstatement of their
benefits and damages under theories of breach of contract, promissory estoppel
and breach of express covenant of good faith and fair dealing. After defeating
the plaintiffs' motion for preliminary injunction, the trial court granted the
defendants' Motion to Dismiss for Lack of Subject Matter Jurisdiction on the
ground that all issues relating to free passes granted by common carriers where
they are adjuncts to employees are preempted by federal law. On appeal, the
Court of Appeals upheld the dismissal of the plaintiffs' promissory estoppel
claim as preempted by federal law, but reversed and remanded to the trial court
on the plaintiffs' other claims. The claims of six of the 99 plaintiffs were
tried before a jury in a five-week trial commencing October 30, 2000. The jury
returned a verdict in favor of the plaintiffs in the total amount of $3,270, an
aggregate of $710 of which the jury found GILLC and Apollo liable for.
Post-trial motions
22
have been filed and are pending. The Company intends to appeal the verdict,
which has been certified as a final judgment. The Court has requested the
parties brief the issue of whether the verdict for the six plaintiffs should be
a liability finding in favor of the remaining 93 plaintiffs. The Company
continues to dispute the plaintiffs' claims and intends to defend the lawsuit
vigorously.
The Company is a party in various other suits and claims that arise in the
ordinary course of business. Management currently believes that the ultimate
disposition of these matters, including the matter described above, will not
have a material adverse effect on the Company's consolidated financial position,
liquidity or results of operations.
In connection with NDC acquisitions in 1997 of Apollo Travel Services
Partnership ("ATS"), Traviswiss AG ("Traviswiss") and Galileo Nederland BV
("Galileo Nederland") and the 1998 acquisition of Galileo Canada, the Company
entered into agreements (the "Services Agreements") with United Airlines, US
Airways, Air Canada, SAirGroup, and KLM (collectively, the "Service Providers")
to provide certain marketing services to the Company. During the sixth year
(eighth year for a portion of Galileo Canada) following the effective date of
the Services Agreements, the Company is contractually required to pay the
Service Providers a fee of up to $232,000 (on a present value basis as of the
date of the agreements), contingent upon improvements in the Company's airline
booking fee revenue in the seller's respective territories over the five-year
period immediately following the acquisitions, as measured by the annual price
increase rate and over the five-year period (seven-year period in the case of
Galileo Canada) immediately following the acquisitions, as measured by the
annual air segment growth rate.
On December 30, 1999, the Company was released by United Airlines from the
price increase obligation under the Services Agreement between the two
companies. In turn, GIO Services, L.L.C. ("GIO Services"), a qualified
special-purpose entity, was created to assume the liability and pay United
Airlines in July 2002. The Company contributed $97,325 of assets to GIO
Services. These assets are projected to yield cash proceeds on the payment date
at least equal to the maximum amount owed. The Company recorded a special charge
of $83,226 related to this transaction. During 2000, the Company reassessed the
future benefit of the services provided by US Airways under the Services
Agreement between the two companies. As a result, the Company recorded a special
charge of $19,725 and transferred $27,157 to GIO Services to provide for payment
of the price-related obligation to US Airways in July 2002. The activities of
GIO Services are strictly limited to payment of these Services Agreement
obligations. As a result of these transactions, the Company has no further
payment obligations to United Airlines and US Airways related to booking fee
price increases under the Services Agreements.
For the remainder of the ATS services agreement and all other Services
Agreements, the Company continues to estimate the probable future liabilities
based on an evaluation of the likelihood that the revenue goals required under
the terms of these agreements will be met. The Company ratably records these
liabilities over the remaining contract periods. The Company does not expect to
incur any liability related to the air segment growth component of the ATS,
Traviswiss, or Galileo Canada Services Agreements. At December 31, 2000 and
1999, the estimated liability related to the Services Agreements was $18,578 and
$13,874, respectively, and is included in other noncurrent liabilities in the
accompanying consolidated balance sheets.
In connection with the 1998 acquisition of Shepherd Systems, the Company is
contractually required to make additional payments up to an aggregate of $5,040
due ratably over five years, based on a calculation of the relevant calendar
year's annual cash flow of Shepherd Systems. Accordingly, in 1998 the Company
recorded a contingent liability for the additional payments which was accounted
for as part of the purchase price. At December 31, 1999 the liability related to
these payments was included in other noncurrent liabilities. During 2000, based
upon an analysis of Shepherd Systems' historical and projected
23
cash flow results, the Company determined that no payments will be required.
Accordingly, the contingent liability was written off against the
acquisition-related goodwill of Shepherd Systems.
10. STOCKHOLDERS' EQUITY
Common Stock
Each share of Common Stock entitles the holder thereof to one vote in
elections of independent and management directors and all other matters
submitted to a vote of stockholders. Each share also has an equal and ratable
right to receive dividends paid from the Company's assets, when and if declared
by the Board of Directors.
Special Voting Preferred Stock
The Company's Special Voting Preferred Stock (the "Special Preferred")
permits, under certain circumstances, each holder of a share of Special
Preferred to elect one director to the Company's Board of Directors, provided
certain Common Stock ownership thresholds are met. The Special Preferred shares
do not provide the holder with any further stockholder voting privileges nor
does the holder receive dividends on such shares. In the event of liquidation,
dissolution or winding-up of the Company, holders of the Special Preferred are
entitled to $100 per share, but holders are not entitled to any further payment.
Substantial restrictions exist as to the transferability of the Special
Preferred shares by the holders.
Preferred Stock
The Board of Directors of the Company is authorized, without further
stockholder action, to divide any or all shares of its authorized Preferred
Stock into one or more series and to fix and determine the rights and
qualifications, limitations or restrictions thereon of each such series,
including voting powers, dividend rights, liquidation preferences, redemption
rights and conversion or exchange privileges.
Common Stock Held in Treasury
During 2000, the Board of Directors of the Company authorized an additional
$250,000 share repurchase program. The Company began purchasing shares under
this program after completion of a $750,000 program which had been authorized in
1999. Repurchased shares are held in treasury for the purpose of providing
available shares for possible resale in future public or private offerings, and
for other general corporate purposes. The purchases are funded through the
Company's available working capital and borrowing facilities. The amount, timing
and price of any repurchases of the Company's Common Stock depends on market
conditions and other factors. The Company repurchased a total of 7,402,948 and
14,869,500 of its shares at a cost of $154,640 and $635,523 during the years
ended December 31, 2000 and 1999, respectively.
Also during 2000, the Company issued 5,499,630 shares of Common Stock,
previously held in treasury, in connection with its acquisition of TRIP.com.
These treasury shares had a fair value of $98,925 and an accumulated cost of
$226,842. As of December 31, 2000 and 1999, the Company held a total of
16,920,719 and 15,038,600 shares in treasury, respectively.
24
Stock-Based Compensation
During 1999, the Company adopted the 1999 Equity and Performance Incentive
Plan (the "1999 Plan") to attract and retain officers and other key employees of
the Company and to award such persons with incentives and rewards for superior
performance. The 1999 Plan provides for the grant of Common Stock in the form of
stock options, stock appreciation rights, stock awards or such other forms as
determined to be consistent with the purposes of the 1999 Plan. The 1999 Plan
superceded and replaced the 1997 Stock Incentive Plan. Options outstanding under
these two plans have been granted at prices which are either equal to or above
the market value of the stock on the date of the grant, vest over a three- or
five-year period, and expire nine or ten years after the grant date.
An aggregate of 13,000,000 shares of Common Stock are reserved for issuance
under the 1999 Plan. The number of shares available for issuance under the 1999
Plan may be adjusted in the event of changes in the Company's capital structure.
Shares issued pursuant to the 1999 Plan may be authorized but unissued shares,
treasury shares or any combination thereof.
The Company also adopted the 1997 Non-Employee Director Stock Plan (the
"Director Plan") to retain the services of qualified individuals who are not
employees of the Company to serve as members of the Board of Directors. The
Director Plan authorizes awards of options, based on the director's term, which
generally vest six months after the date of grant, have an exercise price equal
to the fair market value at the date of grant, and expire ten years from date of
grant. Directors who are employees of an airline stockholder (or the airline
stockholder at the option of the airline stockholder) will receive, in lieu of
such options, a cash payment equal to the value of the option calculated on the
basis of the Black-Scholes option valuation model. An aggregate of 500,000
shares of Common Stock are reserved for issuance under the Director Plan.
In connection with its acquisition of TRIP.com, in March 2000 the Company
converted existing options to acquire 1,244,725 shares of TRIP.com common stock
into 1,073,331 options to acquire Common Stock of the Company. The Converted
Options were granted with exercise prices ranging from $0.16 to $19.71 and had a
weighted average remaining vesting period of 3.25 years. On the date of grant,
the Converted Options had an estimated aggregate fair value of $10,879 which was
recorded as part of the purchase price of the TRIP.com acquisition. The
estimated fair value was obtained by using the Black-Scholes option pricing
model with the following assumptions: expected term of 4.25 years, expected
volatility of 40.0%, expected dividend yield of 1.0%, and a risk-free interest
rate of 6.0%. The Company's Common Stock had an approximate market value of
$18.00 per share on the date the Converted Options were granted.
During 2000, the Company adopted the Employee Stock Purchase Plan (the
"Stock Purchase Plan"). The Stock Purchase Plan provides eligible employees with
the opportunity to purchase shares of Common Stock at a 15% discount from fair
market value pursuant to a payroll deduction program, based on offering periods
consisting of each calendar quarter. The number of shares of Common Stock
available for issuance under the Stock Purchase Plan is 500,000 and may be
authorized but unissued shares, treasury shares or any combination thereof. As
of December 31, 2000, the Company had issued 21,199 shares of Common Stock under
the Stock Purchase Plan.
During 1998, the Company's Board of Directors approved the issuance of
97,900 shares of restricted Common Stock to the Company's President and Chief
Executive Officer. Half of these shares vest in equal installments over a
five-year period from the date of grant and the remaining shares vest in equal
installments over a four-year period beginning one year from the date of grant.
During 2000, vested shares of restricted stock totaling 31,818 were converted
into an equal number of shares of Common Stock.
25
During 2000, 1999, and 1998, $798, $798, and $433, respectively, of compensation
cost for restricted shares was recognized in the consolidated financial
statements.
During 2000, 1999, and 1998, stock appreciation rights totaling 47,600,
1,500, and 34,550, respectively, were granted under the 1999 and 1997 Plans. The
weighted average fair value on the grant date for the stock appreciation rights
granted in 2000, 1999 and 1998 were $10.35, $11.75 and $14.54. Compensation cost
for stock appreciation rights of zero, $(53), and $57 was recognized in the
consolidated financial statements for the years ended December 31, 2000, 1999,
and 1998, respectively.
Stock option activity during 2000, 1999, and 1998 is as follows (number of
shares in thousands):
2000 1999 1998
---------------------- ---------------------- -----------------------
Number Weighted Number Weighted Number Weighted
of Average of Average of Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding at January 1 2,893 $ 37.45 2,824 $ 35.51 1,064 $ 25.40
Granted- TRIP.com acquisition 1,073 10.29 - - - -
Granted- all other 1,662 24.43 451 48.02 1,889 40.75
Exercised (195) 2.59 (107) 30.34 (33) 24.57
Forfeited (969) 27.17 (275) 37.52 (96) 30.56
Expired - - - - - -
----- ----- -----
Outstanding at December 31 4,464 $ 29.82 2,893 $ 37.45 2,824 $ 35.51
===== ===== =====
Exercisable at December 31 1,513 34.85 884 34.44 188 24.76
Weighted average fair value of
options granted during the year:
Upon TRIP.com acquisition $ 10.14 $ - $ -
All other grants 10.31 19.52 14.53
26
The following table summarizes information about stock options outstanding
at December 31, 2000 (number of shares in thousands):
Options Outstanding Options Exercisable
--------------------------------------------- --------------------------
Weighted
Range of Average Weighted Weighted
Exercise Number Remaining Average Number Average
Prices of Shares Contractual Life Exercise Price of Shares Exercise Price
------ --------- ---------------- -------------- --------- --------------
$0.16 to $12 246 8.2 $ 3.69 53 $ 6.00
$17 to $25 2,335 8.8 23.90 405 24.50
$28 to $38 245 6.7 28.81 121 29.35
$40 to $46 1,291 7.5 40.78 817 40.78
$48 to $55 347 8.5 48.10 117 48.14
----- -----
4,464 8.3 $ 29.82 1,513 $ 34.85
===== =====
The Company applies APB Opinion No. 25 in accounting for its stock-based
compensation plans and, accordingly, no compensation cost has been recognized
for its stock options in the consolidated financial statements. The following
table presents pro forma information had the Company determined compensation
cost based on the fair value at the grant date for its stock options under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation":
2000 1999 1998
--------- --------- ---------
Valuation assumptions:
Expected option term (years) 5.0 5.0 5.0
Expected volatility 40.0% 40.0% 35.0%
Expected dividend yield 1.0% 1.0% 1.0%
Risk-free interest rate 7.0% 6.0% 5.0%
Pro forma effects (1):
Net income as reported $ 148,889 $ 218,208 $ 195,614
Pro forma effect (9,003) (7,328) (4,118)
--------- --------- ---------
Net income as adjusted $ 139,886 $ 210,880 $ 191,496
========= ========= =========
Basic earnings per share as adjusted $ 1.55 $ 2.15 $ 1.83
========= ========= =========
Diluted earnings per share as adjusted $ 1.55 $ 2.13 $ 1.82
========= ========= =========
(1) Estimated using Black-Scholes option pricing model.
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option pricing models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value
27
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
11. SUPPLEMENTAL INFORMATION
Supplemental cash flow information and noncash investing and financing
activities are as follows:
2000 1999 1998
----------- ---------- ----------
Supplemental cash flow information
Cash paid during the period for:
Interest $ 53,612 $ 11,471 $ 11,994
Income taxes 114,862 148,300 123,508
Supplemental noncash investing and financing
activities
Capital lease obligations and accounts
payable from acquisition of equipment $ 30,298 $ 8,394 $ 901
12. BUSINESS AND CREDIT CONCENTRATIONS
The Company derives substantially all of its revenues from the travel
industry. Accordingly, events affecting the travel industry, particularly
airline travel and participating airlines, can significantly affect the
Company's business, financial condition and results of operations.
United Airlines is the largest single travel supplier utilizing the
Company's systems, generating revenues that accounted for approximately 12% of
total revenues in 2000. No other travel supplier accounted for 10% or more of
the Company's revenues in 2000.
Travel agencies are the primary channel of distribution for the services
offered by travel vendors. Bookings generated by the Company's five largest
travel agency customers constituted 22% of the bookings made through the
Company's systems in 2000. If the Company were to lose and not replace the
bookings generated by any significant travel agencies, its business, financial
condition and results of operations could be materially adversely affected.
28
13. GEOGRAPHIC AND BUSINESS SEGMENT INFORMATION
The Company's business is divided into operating segments, defined as
components of an enterprise about which discrete financial information is
available and regularly evaluated by the chief operating decision maker in
deciding how to allocate resources to an individual segment and in assessing
performance of the segment. The Company's chief operating decision maker is the
Chairman, President and Chief Executive Officer. The Company has identified
three operating segments based on similarities in products, services and
customers: electronic global distribution services, information services and
enterprise networking services. However, based on the quantitative thresholds in
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information," electronic global distribution
services is the Company's only reportable segment as of December 31, 2000, 1999
and 1998.
Data relating to the Company's operations by geographic area is set forth
below:
United States United Kingdom Other
Market Market Markets Total
----------- ------------- ------------ ----------
2000
----
Revenues $ 605,838 $ 161,307 $ 794,319 $ 1,561,464
Identifiable assets 181,842 9,841 18,994 210,677
1999
----
Revenues $ 603,776 $ 126,169 $ 722,156 $ 1,452,101
Identifiable assets 165,990 1,163 23,724 190,877
1998
----
Revenues $ 588,312 $ 114,182 $ 640,211 $ 1,342,705
Identifiable assets 162,912 7,258 24,799 194,969
Revenues consist of electronic global distribution revenues only. The
location of the travel agent making the booking determines the geographic region
credited with the related revenues. The United Kingdom is the only country
outside the United States that contributed more than 10% of revenues or had more
than 10% of the identifiable assets in any of the years presented. Providing
geographic area data for information services revenues and enterprise networking
services would be impracticable.
29
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following tables set forth an unaudited summary of quarterly financial
data (in thousands, except share data) for the years ended December 31, 2000 and
1999. This quarterly information has been prepared on the same basis as the
annual consolidated financial statements and, in management's opinion, reflects
all adjustments necessary for a fair presentation of the information for the
periods presented. The operating results for any quarter are not necessarily
indicative of results for a full fiscal year.
2000
----
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Total revenues $ 440,738 $ 425,344 $ 405,935 $ 371,281
Operating expenses 341,463 330,789 323,622 319,786
Operating income 99,275 94,555 82,313 51,495
Net income 47,400 43,160 37,899 20,430
Basic earnings per share 0.52 0.47 0.42 0.23
Diluted earnings per share 0.52 0.47 0.42 0.23
1999
----
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Total revenues $ 403,991 $ 398,822 $ 384,692 $ 338,597
Operating expenses 283,175 294,807 288,120 347,098
Operating income (loss) 120,816 104,015 96,572 (8,501)
Net income 78,006 62,249 54,248 23,705
Basic earnings per share 0.75 0.60 0.58 0.26
Diluted earnings per share 0.74 0.59 0.58 0.26
The Company typically experiences a seasonal pattern in its operating
results, with the fourth quarter typically having the lowest total revenues and
operating income due to early bookings by customers for holiday travel and due
to a decrease in business travel during the holiday season.
In the first quarter of 2000, the Company recognized a $19,725 ($11,046
after tax) special charge related to the extinguishment of a portion of its
liability arising from a services agreement with US Airways, and a $7,000
(non-tax deductible) special charge to write off in-process research and
development costs related to the TRIP.com acquisition. In the third quarter of
2000, the Company recognized a $1,736 special charge ($972 after tax) related to
the integration of Galileo UK. (See Note 9 and Note 4, respectively, for further
discussion.) The fourth quarter of 2000 includes the retroactive impact ($4,512)
of a 1.9 percentage point decrease in the Company's 2000 effective tax rate
recorded during the quarter.
In the fourth quarter of 1999, the Company recognized an $83,226 ($50,269
after tax) special charge to extinguish the price-increase component of its
liability arising from its services agreement with United Airlines, and an
$11,359 ($6,861 after tax) recovery of expenses previously reserved for the
realignment of its United Kingdom operations. (See Note 9 and Note 4,
respectively, for further discussion.)
30
Earnings per share amounts for each quarter are required to be computed
independently and, as a result, their sum does not equal the total year earnings
per share amounts for 2000 and 1999.
15. SUBSEQUENT EVENTS
On February 22, 2001, the Board of Directors of the Company declared a
dividend distribution of one right (a "Right") for each share of Common Stock of
the Company outstanding at the close of business on March 8, 2001 (the "Record
Date"), pursuant to the terms of a Rights Agreement, dated as of February 22,
2001 (the "Rights Agreement"). The Rights Agreement also provides, subject to
specified exceptions and limitations, that shares of Common Stock issued or
delivered from the Company's treasury after the Record Date will be entitled to
and accompanied by Rights. The Rights are in all respects subject to and
governed by the provisions of the Rights Agreement.
31