<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------- -----------------
Commission file number 1-13153
Galileo International, Inc.
- -------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 36-4156005
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(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
9700 West Higgins Road, Suite 400, Rosemont, Illinois 60018
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices, Including Zip Code)
(847) 518-4000
- -------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
N/A
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(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark whether the registrant: (1) had filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
At November 10, 1997, there were 104,799,700 shares of Common Stock, par value
$.01 per share (the "Common Stock"), of the registrant outstanding.
<PAGE> 2
GALILEO INTERNATIONAL, INC.
QUARTER ENDED SEPTEMBER 30, 1997
INDEX
<TABLE>
<CAPTION>
PAGE
PART I - FINANCIAL INFORMATION ----
<S> <C>
Item 1. Historical Financial Statements of Galileo International, Inc.
(Formerly Galileo International Partnership through July 30, 1997)
Condensed Consolidated Balance Sheets as of September 30, 1997
(unaudited) and December 31, 1996 3
Consolidated Statements of Income for the
quarter and nine months ended September 30, 1997
and 1996 (unaudited) 4
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1997 and 1996 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 2. Changes in Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information - Galileo International, Inc. 20
Pro Forma Condensed Combined Statements of
Income for the quarter and nine months ended
September 30, 1997 and 1996 (unaudited) 21
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Following are financial statements of Galileo International, Inc. (formerly
Galileo International Partnership through July 30, 1997). See "Part II -- Other
Information, Item 5. Other Information" for pro forma condensed combined
statements of income.
GALILEO INTERNATIONAL, INC.
(FORMERLY GALILEO INTERNATIONAL PARTNERSHIP THROUGH JULY 30, 1997)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ ------------
(Unaudited)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 58,583 $ 78,196
Accounts receivable, net 191,777 146,279
Other current assets 39,111 16,324
---------- ----------
Total current assets 289,471 240,799
Property and equipment, at cost:
Land 6,470 5,070
Buildings and improvements 72,484 63,710
Equipment 314,790 235,983
---------- ----------
393,744 304,763
Less accumulated depreciation 195,822 198,565
---------- ----------
Net property and equipment 197,922 106,198
Computer software, net 241,876 248,021
Intangible assets, net 615,530 ---
Other noncurrent assets 77,166 4,880
---------- ----------
$1,421,965 $ 599,898
========== ==========
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Accounts payable $ 51,891 $ 26,149
Accrued commissions 23,244 58,586
Other accrued liabilities 152,322 58,302
Capital lease obligations, current portion 8,212 6,600
Long-term debt, current portion --- 50,000
---------- ----------
Total current liabilities 235,669 199,637
Pension and postretirement benefits 40,887 19,012
Capital lease obligations, less current portion 29,005 34,539
Long-term debt, less current portion 340,000 70,000
Other noncurrent liabilities 107,692 21,335
Stockholders' equity and partners' capital:
Partners' capital --- 265,933
Special voting preferred stock: $.01 par value;
7 shares authorized; 7 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; 104,799,700 issued and
outstanding 1,048 ---
Additional paid-in capital 663,239 ---
Retained earnings 2,797 ---
Cumulative translation adjustments 1,628 (10,558)
---------- ----------
$1,421,965 $ 599,898
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
GALILEO INTERNATIONAL, INC.
(FORMERLY GALILEO INTERNATIONAL PARTNERSHIP THROUGH JULY 30, 1997)
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Quarter Nine Months
Ended September 30, Ended September 30,
---------------------------- -----------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Electronic global distribution services $ 302,694 $ 267,120 $ 898,078 $ 804,713
Information services 24,961 10,470 44,423 30,022
------------ ------------ ------------ ------------
327,655 277,590 942,501 834,735
Operating expenses:
Cost of operations 114,269 64,864 241,901 185,635
Commissions, selling and administrative 142,110 168,888 509,447 503,318
Special charges 20,111 --- 20,111 ---
------------ ------------ ------------ ------------
276,490 233,752 771,459 688,953
------------ ------------ ------------ ------------
Operating income 51,165 43,838 171,042 145,782
Other income (expense):
Interest income (expense), net (2,980) (1,484) (4,890) (6,678)
Other, net 526 (590) 2,442 (195)
------------ ------------ ------------ ------------
(2,454) (2,074) (2,448) (6,873)
------------ ------------ ------------ ------------
Income before income taxes 48,711 41,764 168,594 138,909
Income taxes:
Income taxes 12,654 402 13,944 1,364
Initial deferred income taxes 15,335 --- 15,335 ---
------------ ------------ ------------ ------------
27,989 402 29,279 1,364
------------ ------------ ------------ ------------
Net income $ 20,722 $ 41,362 $ 139,315 $ 137,545
============ ============ ============ ============
Weighted average number of shares outstanding 104,799,700 104,799,700
============ ============
Earnings per share $ 0.20 $ 1.33
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
GALILEO INTERNATIONAL, INC.
(FORMERLY GALILEO INTERNATIONAL PARTNERSHIP THROUGH JULY 30, 1997)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1997 1996
---------- ----------
<S> <C> <C>
Operating activities:
Net income $ 139,315 $ 137,545
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of property and equipment 35,081 24,734
Amortization of computer software and
intangible assets 42,853 36,193
Loss on disposal of property and equipment 397 164
Increase in deferred taxes, net 7,887 ---
(Increase) decrease in noncurrent assets (3,476) 1,672
Increase (decrease) in noncurrent liabilities 15,673 (6,587)
Changes in operating assets and liabilities,
net of effects from purchases of NDCs
Increase in accounts receivable, net (20,568) (57,755)
(Increase) decrease in other current
assets (445) 3,573
(Decrease) increase in accounts payable
and commissions (8,175) 9,056
Increase (decrease) in accrued
liabilities 17,831 (13,600)
Increase in income taxes payable 12,061 922
---------- ----------
Net cash provided by operating activities 238,434 135,917
Investing activities:
Purchase of property and equipment (34,129) (22,423)
Purchase and capitalization of computer
software (23,745) (22,081)
Proceeds on disposal of property and equipment 88 400
Decrease in lease deposit --- 40,461
Purchase of NDCs, net of $24,438 cash acquired (690,257) ---
---------- ----------
Net cash used in investing activities (748,043) (3,643)
Financing activities:
Proceeds from sale of stock, net of fees paid 384,288 ---
Borrowings under credit agreements 450,000 ---
Repayments under credit agreements (230,000) (43,375)
Distributions to partners of Galileo
International Partnership (112,150) (25,998)
Payments of capital lease obligations (2,067) (4,270)
---------- ----------
Net cash provided by (used in)
financing activities 490,071 (73,643)
Effect of exchange rate changes on cash (75) (633)
---------- ----------
(Decrease) increase in cash and cash equivalents (19,613) 57,998
Cash and cash equivalents at beginning of period 78,196 8,367
---------- ----------
Cash and cash equivalents at end of period $ 58,583 $ 66,365
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
GALILEO INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements of Galileo International, Inc. have been prepared pursuant to the
rules of the Securities and Exchange Commission for quarterly reports on Form
10-Q and do not include all of the information and note disclosures required by
generally accepted accounting principles. The information furnished herein
includes all adjustments, consisting of normal recurring adjustments, which
are, in the opinion of management, necessary for a fair presentation of results
for these interim periods.
Effective July 30, 1997, Galileo International Partnership merged into a
wholly owned limited liability company subsidiary of Galileo International,
Inc. (the "Merger"). Unless otherwise indicated, references to the "Company"
mean, at all times prior to the time of the Merger, Galileo International
Partnership and its consolidated subsidiaries and, at all times thereafter,
Galileo International, Inc. and its consolidated subsidiaries. In connection
with the Merger, the Company effected an initial public offering of its Common
Stock at an initial public offering price of $24.50 per share resulting in net
proceeds to the Company, after exercise of the underwriters over-allotment, of
$390.0 million after deducting underwriting discounts and commissions (the
"Offering").
The results of operations for the quarter ended September 30, 1997 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1997.
These financial statements should be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31, 1996,
included in the Registration Statement (No. 333-27495) on Form S-1 filed by
Galileo International, Inc. with the Securities and Exchange Commission on May
20, 1997, as amended.
Certain amounts in operating expenses for the nine months ended September
30, 1996 and 1997 have been reclassified between cost of operations and
commissions, selling and administrative expenses to reflect more complete
information obtained as a result of the integration of Apollo Travel Services
Partnership ("ATS"), Traviswiss AG ("Traviswiss") and Galileo Nederland BV
("Galileo Nederland") (collectively, the "Acquired NDCs") into the Company's
operations. This reclassification had no effect on overall operating expenses
for the periods.
6
<PAGE> 7
NOTE 2 - NDC ACQUISITIONS
During the quarter ended September 30, 1997, the Company acquired three
NDCs (the "NDC Acquisitions"); ATS, Traviswiss and Galileo Nederland, at
purchase prices of $700.0 million, $8.5 million and $2.0 million, respectively.
In connection with the NDC Acquisitions, the Company also incurred expenses of
approximately $4.2 million which have been accounted for as part of the
purchase prices.
The Company accounted for the NDC Acquisitions using the purchase method
of accounting. Accordingly, the costs of the NDC Acquisitions were allocated
to the assets acquired and liabilities assumed based upon their respective fair
values. Approximately $405.6 million and $19.3 million of the purchase price
of ATS was attributed to the customer list and assembled workforce,
respectively, and such amounts are being amortized over 17 years and 8 years,
respectively. The excess of the cost of the NDC Acquisitions over the fair
value of the net assets acquired of approximately $157.3 million is being
amortized over 25 years. The purchase price allocation is subject to
adjustment. The results of operations and cash flows of the Acquired NDCs have
been consolidated with those of the Company from the date of each acquisition.
In connection with the acquisitions of Traviswiss and Galileo Nederland,
the Company terminated certain revenue sharing obligations in exchange for
agreements to pay SAirGroup and KLM, in four annual installments beginning on
the acquisition dates, a total of $22.4 million and $14.8 million,
respectively. The total intangible asset of $37.2 million is being amortized
over 25 years.
NOTE 3 - CREDIT AGREEMENT
On July 23, 1997, the previous credit facility (the "Old Credit
Agreement") was terminated and replaced by a $200 million 364-day credit
agreement and a $400.0 million five-year credit agreement (collectively, the
"Credit Agreements"). Facility fees range from 5.5 to 15.0 basis points under
the 364-day credit agreement and from 8.0 to 22.5 basis points under the
five-year credit agreement, in each case depending upon the applicable cash
flow ratio of the Company. At September 30, 1997, the applicable facility fees
under the 364-day credit agreement and the five-year credit agreement were 8.0
basis points and 12.5 basis points, respectively. Borrowings under the Credit
Agreements may be either committed borrowings in which each bank participates
in proportion to their commitment, or money market borrowings in which banks
participate based upon their competitive bids. Committed borrowings may be
either Base Rate, CD Rate or Euro-dollar Rate based, with pricing determined in
accordance with applicable spreads over the underlying rate base.
At September 30, 1997, borrowings totaled $340.0 million under the
five-year agreement. No amounts were outstanding under the 364-day agreement.
7
<PAGE> 8
NOTE 4 - STOCKHOLDERS' EQUITY
The Company's Special Voting Preferred Stock (the "Special Preferred"), of
which seven shares are authorized, issued and outstanding, permits, under
certain circumstances, each holder of a share of Special Preferred to elect one
director to the Company's Board of Directors. The Special Preferred shares do
not provide the holders 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.
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. At September 30, 1997, no shares
of Preferred Stock had been issued.
The Company adopted the 1997 Stock Incentive Plan (the "Plan"), which was
approved by the Company's sole stockholder on July 24, 1997. The Plan,
whose purpose is to attract, retain and motivate officers and other key
employees and consultants of the Company, provides for the award 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 Plan.
The Company granted employees, employed by the Company on the date of the
closing of the Offering, options to purchase 612,000 shares of the Company's
Common Stock at an exercise price of $24.50 per share representing the offering
price of the Company's Common Stock. Such options vest in equal installments
over a three-year period measured from the date of the Offering. In addition,
the Company has granted to senior management options to purchase 521,400 shares
of the Company's Common Stock (the "Senior Management Options"). Fifty percent
of the Senior Management Options have an exercise price of $24.50 per share,
representing 100% of the offering price of the Company's Common Stock, and vest
in equal installments over a five-year period measured from the date of grant.
The remaining fifty-percent of such options have an exercise price of $28.18
per share, representing 115% of the offering price of the Company's Common
Stock, and vest in equal installments over a five-year period beginning on
July 30, 1998, one year following the Offering. All of the foregoing options
have a ten-year term.
NOTE 5 - SPECIAL CHARGES
The Company recorded special charges of $20.1 million ($12.1 million
after tax) during the quarter ended September 30, 1997 related to the
integration of the Acquired NDCs into the Company's operations. Special
charges are comprised primarily of $12.2 million in severance costs related to
termination of employees and $7.9 million of other integration costs,
principally related to duplicate facilities. The Company expects the
integration activities to be completed in 1998.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
GALILEO INTERNATIONAL, INC.
SUMMARY
Prior to the consummation of the Offering, the Company conducted its
business through Galileo International Partnership. Immediately prior to the
consummation of the Offering, Galileo International Partnership was merged into
a wholly owned limited liability company subsidiary of Galileo International,
Inc. As a result of this Merger, (i) the Company became subject to U.S.
federal and state income taxes that were previously borne by the partners of
Galileo International Partnership and (ii) the Company recorded a $15.3 million
nonrecurring charge to income tax expense to reflect the establishment of
deferred tax assets and liabilities arising at the time of the Merger. Upon the
Merger, the airline stockholders' partnership interests were replaced with
Common Stock of the Company in the same proportion as that of their respective
partnership interests in Galileo International Partnership.
During the quarter ended September 30, 1997, the Company recorded a
nonrecurring charge to operating expenses of $20.1 million related to the
integration of the Company and its Acquired NDCs. This special charge
consisted of $12.2 million in severance related costs and $7.9 million of other
integration costs, principally related to duplicate facilities.
THIRD QUARTER 1997 COMPARED TO THIRD QUARTER 1996
REVENUES. Revenues increased $50.1 million, or 18.0%, from $277.6 million
for the quarter ended September 30, 1996 to $327.7 million for the quarter
ended September 30, 1997. Third quarter 1996 revenues represent Galileo
International Partnership revenues whereas third quarter 1997 revenues include
the impact of the NDC Acquisitions. The NDC Acquisitions resulted in $29.0
million of additional revenues or 57.9% of the revenue growth during this
period. The remaining revenue growth resulted principally from increased
booking volumes worldwide and, to a lesser extent, from an increase in the
price per booking charged to airline travel vendors. This price increase
became effective on March 1, 1997.
OPERATING EXPENSES. Operating expenses increased $42.7 million, or 18.3%,
from $233.8 million for the quarter ended September 30, 1996 to $276.5 million
for the quarter ended September 30, 1997. Excluding the $20.1 million in
special charges related to the integration of the Acquired NDCs into the
Company's operations, operating expenses increased $22.6 million or 9.7% from
$233.8 million for the quarter ended September 30, 1996 to $256.4 million for
the quarter ended September 30, 1997. The NDC Acquisitions resulted in
additional operating expenses which were partially offset by lower commissions
as the Company does not pay commissions to Company-owned NDCs, but incurs the
cost of operating these NDCs.
9
<PAGE> 10
OTHER EXPENSES, NET. Other expenses, net include interest expense, net of
interest income, and foreign exchange gains or losses. Other expenses, net
increased $0.4 million, from $2.1 million for the quarter ended September 30,
1996 to $2.5 million for the quarter ended September 30, 1997. This increase
was primarily the result of lower interest income arising from lower cash and
cash equivalents and higher interest expense arising from higher average debt
levels over the quarter due to the NDC Acquisitions which occurred in the third
quarter of 1997.
INCOME TAXES. No provision for U.S. federal and state income taxes was
recorded prior to July 31, 1997, as such liability was the responsibility of
the partners of Galileo International Partnership, rather than of the Company.
Certain of the Company's non-U.S. subsidiaries are subject to income taxes. As
a result of the merger of Galileo International Partnership into a wholly owned
limited liability company subsidiary of Galileo International, Inc., the
Company recorded initial deferred income taxes of $15.3 million to reflect the
establishment of deferred tax assets and liabilities. The remaining provisions
for income taxes for the quarter ended September 30, 1997 relate to the period
subsequent to July 30, 1997.
NET INCOME. Net income was $41.4 million for the quarter ended September
30, 1996. Net income was $20.7 million for the quarter ended September 30,
1997. Net income in 1997 was impacted by the $15.3 million of initial deferred
income taxes, the $12.1 million after tax effect of the special charges
recorded as a result of the integration of the Acquired NDCs into the Company's
operations, as well as the on-going recognition of US federal and state income
taxes since July 30, 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
REVENUES. Revenues increased $107.8 million, or 12.9%, from $834.7
million for the nine months ended September 30, 1996 to $942.5 million for the
nine months ended September 30, 1997. 1996 revenues represent Galileo
International Partnership revenues whereas 1997 revenues include the impact of
the NDC Acquisitions. The NDC Acquisitions resulted in $29.0 million of
additional revenues or 26.9% of the revenue growth during this period. The
remaining revenue growth resulted principally from increased booking volumes
worldwide and, to a lesser extent, from an increase in the price per booking
charged to airline travel vendors. This price increase became effective on
March 1, 1997.
OPERATING EXPENSES. Operating expenses increased $82.5 million, or 12.0%,
from $689.0 million for the nine months ended September 30, 1996 to $771.5
million for the nine months ended September 30, 1997. Excluding the $20.1
million in special charges related to the integration of the Acquired NDCs into
the Company's operations, operating expenses increased $62.4 million or 9.1%
from $689.0 million for the nine months ended September 30, 1996 to $751.4
million for the nine months ended September 30, 1997. The NDC Acquisitions
resulted in additional operating expenses which were partially offset by lower
commissions as the Company does not pay commissions to Company-owned NDCs, but
incurs the cost of operating these NDCs.
10
<PAGE> 11
OTHER EXPENSES, NET. Other expenses, net include interest expense, net of
interest income, and foreign exchange gains or losses. Other expenses, net
decreased $4.4 million, from $6.9 million for the nine months ended September
30, 1996 to $2.5 million for the nine months ended September 30, 1997. This
decrease was primarily the result of lower interest expense arising from lower
debt levels and higher interest income arising from higher average levels of
cash and cash equivalents over the periods.
INCOME TAXES. No provision for U.S. federal and state income taxes was
recorded prior to July 31, 1997 as such liability was the responsibility of the
partners of Galileo International Partnership rather than of the Company.
Certain of the Company's non-U.S. subsidiaries are subject to income taxes. As
a result of the merger of Galileo International Partnership into a wholly owned
limited liability company subsidiary of Galileo International, Inc., the
Company recorded initial deferred income taxes of $15.3 million to reflect the
establishment of deferred tax assets and liabilities. The remaining
provisions for income taxes relate to the period subsequent to July 30, 1997.
NET INCOME. Net income was $137.5 million for the nine months ended
September 30, 1996. Net income was $139.3 million for the nine months ended
September 30, 1997. Net income in 1997 was impacted by the $15.3 million of
initial deferred income taxes, the $12.1 million after tax effect of the
special charges recorded as a result of the integration of the Acquired NDCs
into the Company's operations, as well as the on-going recognition of US
federal and state income taxes since July 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $58.6 million and working capital
totaled $53.8 million at September 30, 1997. At December 31, 1996, cash and
cash equivalents totaled $78.2 million and working capital totaled $41.2
million. Cash and cash equivalents decreased by $19.6 million despite the
repayment of $120.0 million of indebtedness under the Old Credit Agreement and
$112.1 million in distributions to partners of Galileo International
Partnership prior to the Merger, due principally to strong operating results.
Cash flow used in investing activities principally relates to purchases of
mainframe data processing and network equipment and purchases of computer
equipment provided to the Company's travel agency subscribers by Company-owned
NDCs. Capital expenditures, excluding the capitalization of internally
developed software, were $40.0 million for the nine months ended September 30,
1997 compared to $27.2 million for the nine months ended September 30, 1996.
Cash flow provided by financing activities includes $390.0 million in
net proceeds from the sale of stock in the initial public offering ($384.3
million after deducting related expenses) and net borrowings under the Credit
Agreements of $340.0 million, offset by the payment of distributions to the
partners of Galileo International Partnership and repayments of $120.0 million
under the Old Credit Agreement. In July 1997, prior to the Merger, final
partner distributions were paid. Total cash used for partner distributions in
1997 through the date of the Merger was $112.1 million.
11
<PAGE> 12
On July 30, 1997, the Old Credit Agreement was terminated and replaced by
the Credit Agreements with credit facilities totaling $600 million. The net
proceeds to the Company from the Offering of $390.0 million, together with a
portion of the initial borrowings under the Credit Agreements, were used by the
Company to fund the acquisitions of ATS at a purchase price of $700.0 million,
Traviswiss at a purchase price of $8.5 million and Galileo Nederland at a
purchase price of $2.0 million and to fund the initial payments to SAirGroup of
$2.6 million and to KLM of $2.8 million in connection with the termination of
certain revenue sharing obligations. As of September 30, 1997, $340.0 million
was outstanding under the Credit Agreements.
OTHER
On July 30, 1997, the Company effected an initial public offering of
31,998,000 shares of Common Stock. Of such shares, 12,000,000 were issued and
sold by the Company, resulting in $278.6 million of net proceeds to the
Company, after deducting underwriting discounts and commissions. Stockholders
of the Company selling 19,998,000 shares in the Offering received net proceeds
of $464.3 million, after deducting underwriting discounts and commissions. On
July 31, 1997, the U.S. underwriters of the Offering exercised their
over-allotment option to purchase an additional 4,799,700 shares of Common
Stock from the Company, resulting in the Company receiving additional net
proceeds of $111.4 million on August 1, 1997.
12
<PAGE> 13
PRO FORMA RESULTS OF OPERATIONS
GALILEO INTERNATIONAL, INC.
This discussion of pro forma results of operations is based on the pro
forma condensed combined statements of income presented in "Part II --- Other
Information, Item 5. Other Information".
SUMMARY
The Company generates its revenue from the provision of electronic global
distribution services and information services. During the nine months ended
September 30, 1997, the Company generated approximately 90.3% of its revenue
from electronic global distribution services and approximately 9.7% of its
revenue from information services. The following table summarizes pro forma
electronic global distribution services revenues by geographic location as a
percentage of total revenues and summarizes total booking volumes for each of
the periods indicated:
<TABLE>
<CAPTION>
Quarter Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States (1) 46.3% 48.4% 46.4% 48.5%
International (1) 53.7 51.6 53.6 51.5
----------------------------------------------------
Total Revenues 100.0% 100.0% 100.0% 100.0%
====================================================
(In millions of bookings)
Air - United States (1) 34.6 34.7 107.2 105.5
Air - International (1) 43.7 39.9 135.0 121.8
----------------------------------------------------
78.3 74.6 242.2 227.3
Car/Hotel/Leisure 6.8 5.9 19.9 17.4
----------------------------------------------------
Total Bookings 85.1 80.5 262.1 244.7
====================================================
</TABLE>
(1) The location of the travel agent making the booking determines the
geographic region credited with the related revenues.
13
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PRO FORMA THIRD QUARTER 1997 COMPARED TO PRO FORMA THIRD QUARTER 1996
REVENUES. Pro forma revenues increased $27.3 million, or 8.7%, from $315.4
million for the quarter ended September 30, 1996 to $342.7 million for the
quarter ended September 30, 1997.
Pro forma electronic global distribution services revenues related to
airline bookings increased 8.4% during the quarter ended September 30, 1997 as
compared to the quarter ended September 30, 1996. Electronic global
distribution services revenues related to bookings of car rentals and hotel
reservations increased 17.6% over the same period. Airline booking volumes in
the United States declined slightly (0.3%) for the quarter as carriers
heightened their efforts to minimize certain bookings that they feel do not add
value, while international airline volumes increased 9.5% over the same period
last year. In addition to increased bookings volumes worldwide, but to a
lesser extent, revenues increased due to a March 1, 1997 increase in the price
per booking charged to airline travel vendors.
COST OF OPERATIONS. Pro forma cost of operations expenses increased $5.0
million, or 3.8%, from $132.4 million for the quarter ended September 30, 1996
to $137.4 million for the quarter ended September 30, 1997. This increase was
primarily attributable to increased communication costs and equipment
maintenance and software costs on upgraded processors to support the Company's
revenue growth. Pro forma cost of operations expenses continue to reflect lower
increases than revenue growth due to the Company's focus on increased
productivity along with favorable supplier contracts, especially in the areas
of communications, travel and facilities. Certain amounts in pro forma
operating expenses for the quarter ended September 30, 1996 have been
reclassified between pro forma cost of operations and pro forma commissions,
selling and administrative expenses to reflect more complete information
obtained as a result of the integration of the Acquired NDCs into the Company's
operations. This reclassification had no effect on overall operating expenses
for the quarter.
COMMISSIONS, SELLING AND ADMINISTRATIVE EXPENSES. Pro forma commissions,
selling and administrative expenses increased $8.0 million, or 6.5%, from
$123.4 million for the quarter ended September 30, 1996 to $131.4 million for
the quarter ended September 30, 1997. Pro forma NDC commissions and subscriber
incentive payments increased $7.1 million, or 9.7%, from $73.2 million for the
quarter ended September 30, 1996 to $80.3 million for the quarter ended
September 30, 1997, reflecting the increase in electronic global distribution
services revenues and increased subscriber incentive payments. Subscriber
incentive payments represent costs associated with maintaining and expanding
the Company's travel agency base. NDC commissions are generally based on a
percentage of booking revenues and have, therefore, grown at a rate consistent
with the growth in booking fees by country. Remaining pro forma commissions,
selling and administrative expenses increased $0.9 million, or 1.8%, from $50.2
million to $51.1 million over the same periods. This limited growth in other
pro forma commissions, selling and administrative expenses reflects the
Company's continued focus on expense management, including lower increases in
aggregate wages and benefits, travel and facilities costs.
14
<PAGE> 15
The Company does not pay commissions to Company-owned NDCs, but incurs the
costs of operating these NDCs. Pro forma commissions, selling and
administrative expenses reflect the elimination of commissions formerly paid to
ATS, Traviswiss and Galileo Nederland and the costs of operating these NDCs
have been included in appropriate operating expense categories.
SPECIAL CHARGES. During the quarter ended September 30, 1997, the Company
incurred a nonrecurring charge of $20.1 million ($12.1 million, net of taxes)
related to the integration of the Acquired NDCs into the Company's operations.
This special charge consisted of $12.2 million in severance related costs and
$7.9 million of other integration costs, principally related to duplicate
facilities.
OPERATING INCOME. Pro forma operating income, excluding special charges,
increased $14.3 million, or 24.0%, from $59.6 million for the quarter ended
September 30, 1996 to $73.9 million for the quarter ended September 30, 1997,
resulting in an improvement in pro forma operating margin from 18.9% for the
quarter ended September 30, 1996 to 21.6% for the quarter ended September 30,
1997.
OTHER EXPENSES, NET. Pro forma other expenses, net include interest
expense, net of interest income, and foreign exchange gains or losses. Pro
forma other expenses, net decreased $3.8 million, or 51.4%, from $7.4 million
for the quarter ended September 30, 1996 to $3.6 million for the quarter ended
September 30, 1997. This decrease was primarily the result of lower interest
expense arising from lower debt levels and interest rates.
INCOME TAXES. Pro forma income taxes increased $14.1 million, or 66.5%,
from $21.2 million for the quarter ended September 30, 1996 to $35.3 million
for the quarter ended September 30, 1997. As a result of the merger of Galileo
International Partnership into a wholly owned limited liability company
subsidiary of Galileo International, Inc., the Company recorded initial
deferred income taxes of $15.3 million to reflect the establishment of deferred
tax assets and liabilities. Pro forma income taxes for the quarter ended
September 30, 1997 also reflect an $8.0 million reduction for the tax effect of
the special charge to operating expenses. The remaining net increase in
pro forma income taxes was principally due to higher pro forma net income,
excluding the special charge.
NET INCOME. Pro forma net income, excluding special charges and initial
deferred income taxes, increased $11.3 million, or 36.5%, from $31.0 million
for the quarter ended September 30, 1996 to $42.3 million for the quarter ended
September 30, 1997. Net income as a percentage of revenues, excluding special
charges and initial deferred income taxes, increased to 12.3% from 9.8% over
the same period.
15
<PAGE> 16
PRO FORMA NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO PRO FORMA NINE
MONTHS ENDED SEPTEMBER 30, 1996
REVENUES. Pro forma revenues increased $91.7 million, or 9.7%, from $946.2
million for the nine months ended September 30, 1996 to $1,037.9 million for
the nine months ended September 30, 1997.
Pro forma electronic global distribution services revenues related to
airline bookings increased 9.7% during the nine months ended September 30, 1997
as compared to the nine months ended September 30, 1996. Electronic global
distribution services revenues related to bookings of car rentals and hotel
reservations increased 16.0% over the same period. Airline booking volumes in
the United States rose 1.6% for the period as carriers heightened their efforts
to minimize certain bookings that they feel do not add value, while
international airline volumes increased 10.8% over the same period last year.
In addition to increased bookings volumes worldwide, but to a lesser extent,
revenues increased due to a March 1, 1997 increase in the price per booking
charged to airline travel vendors.
COST OF OPERATIONS. Pro forma cost of operations expenses increased $9.2
million, or 2.4%, from $389.3 million for the nine months ended September 30,
1996 to $398.5 million for the nine months ended September 30, 1997. This
increase was primarily attributable to increased communication costs and
equipment and software costs on upgraded processors to support the Company's
revenue growth. Cost of operations expenses continue to reflect lower increases
than revenue growth due to the Company's focus on increased productivity along
with favorable supplier contracts, especially in the area of communications,
equipment maintenance, travel and facilities. Certain amounts in pro forma
operating expenses for the nine months ended September 30, 1996 and 1997 have
been reclassified between pro forma cost of operations and pro forma
commissions, selling and administrative expenses to reflect more complete
information obtained as a result of the integration of the Acquired NDCs into
the Company's operations. This reclassification had no effect on overall
operating expenses for the periods.
COMMISSIONS, SELLING AND ADMINISTRATIVE EXPENSES. Pro forma commissions,
selling and administrative expenses increased $39.4 million, or 10.9%, from
$360.4 million for the nine months ended September 30, 1996 to $399.8 million
for the nine months ended September 30, 1997. Pro forma NDC commissions and
subscriber incentive payments increased $29.4 million, or 12.9%, from $228.1
million for the nine months ended September 30, 1996 to $257.5 million for the
nine months ended September 30, 1997, reflecting the increase in electronic
global distribution services revenues and increased subscriber incentive
payments. Subscriber incentive payments represent costs associated with
maintaining and expanding the Company's travel agency base. NDC commissions
are generally based on a percentage of booking revenues and have, therefore,
grown at a rate consistent with the growth in booking fees by country.
Remaining pro forma commissions, selling and administrative expenses increased
$10.0 million, or 7.6%, from $132.3 million to $142.3 million over the same
periods. This moderate growth in other pro forma commissions, selling and
administrative expenses reflects the Company's continued focus on expense
management, including lower increases in aggregate wages and benefits, travel
and facilities costs.
SPECIAL CHARGES. During the quarter ended September 30, 1997, the Company
incurred a nonrecurring charge of $20.1 million ($12.1 million, net of taxes)
related to the integration of the
16
<PAGE> 17
Acquired NDCs into the Company's operations. This special charge consisted of
$12.2 million in severance related costs and $7.9 million of other integration
costs, principally related to duplicate facilities.
OPERATING INCOME. Pro forma operating income, excluding special charges,
increased $43.1 million, or 21.9%, from $196.5 million for the nine months
ended September 30, 1996 to $239.6 million for the nine months ended September
30, 1997, resulting in an improvement in pro forma operating margin from 20.8%
for the nine months ended September 30, 1996 to 23.1% for the nine months ended
September 30, 1997.
OTHER EXPENSES, NET. Pro forma other expenses, net include interest
expense, net of interest income and foreign exchange gains or losses. Pro forma
other expenses, net decreased $8.4 million, or 35.7%, from $23.5 million for
the nine months ended September 30, 1996 to $15.1 million for the nine months
ended September 30, 1997. This decrease was primarily the result of lower
interest expense arising from lower debt levels and interest rates over the
periods.
INCOME TAXES. Pro forma income taxes increased $26.2 million, or 37.2%,
from $70.4 million for the nine months ended September 30, 1996 to $96.6
million for the nine months ended September 30, 1997. As a result of the merger
of Galileo International Partnership into a wholly owned limited liability
company subsidiary of Galileo International, Inc., the Company recorded initial
deferred income taxes of $15.3 million to reflect the establishment of deferred
tax assets and liabilities. Pro forma income taxes for the nine months ended
September 30, 1997 also reflect an $8.0 million reduction for the tax effect of
the special charge to operating expenses. The remaining net increase in pro
forma income taxes was principally due to higher pro forma net income,
excluding the special charge.
NET INCOME. Pro forma net income, excluding special charges and initial
deferred income taxes, increased $32.6 million, or 31.8%, from $102.6 million
for the nine months ended September 30, 1996 to $135.2 million for the nine
months ended September 30, 1997. Pro forma net income, excluding special
charges and initial deferred income taxes, as a percentage of pro forma
revenues increased to 13.0% from 10.8% over the same period.
17
<PAGE> 18
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Statements in this report which are not purely historical facts, including
statements regarding the Company's anticipations, beliefs, expectations, hopes,
intentions or strategies for the future, may be forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. All forward-looking statements in this report are based upon
information available to the Company on the date of this report. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Any forward-looking statements involve risks and uncertainties that could cause
actual events or results to differ materially from the events or results
described in the forward-looking statements, including the risks and
uncertainties described from time to time in the Company's filings with the
Securities and Exchange Commission including the Company's Registration
Statement (No. 333-27495) on Form S-1 filed on May 20, 1997, as amended.
Readers are cautioned not to place undue reliance on these forward-looking
statements.
18
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
In connection with the Offering, on July 30, 1997, the Certificate of
Incorporation of the Company was restated (the "Restated Certificate of
Incorporation") to provide for authorized capital stock of (i) 250,000,000
shares of Common Stock, par value $.01 per share; (ii) 7 shares of Special
Voting Preferred Stock, par value $.01 per share; and (iii) 25,000,000 shares
of Preferred Stock, par value $.01 per share. Also in connection with the
Offering, the Company issued 16,799,700 shares of Common Stock, including
4,799,700 shares issued upon the exercise of the U.S. underwriters'
over-allotment option.
In connection with the Merger, an aggregate of 88,000,000 shares of Common
Stock and 7 shares of Special Voting Preferred Stock were issued to the
partners of Galileo International Partnership. Such issuances were exempt from
registration pursuant to Section 4 (2) of the Securities Act of 1933, as
amended. No shares of the Preferred Stock were issued as of September 30,
1997.
On May 20, 1997, the Company filed a Registration Statement (No.
333-27495) with the Securities and Exchange Commission to register 36,797,700
shares of the Company's Common Stock including 19,998,000 shares to be sold by
certain selling stockholders. On July 30, 1997, the Company sold 12,000,000
shares of Common Stock, with an aggregate offering price of $294.0 million, and
the selling stockholders sold 19,998,000 shares, with an aggregate offering
price of $490.0 million, pursuant to the Registration Statement, which was
declared effective by the Securities and Exchange Commission on July 24, 1997.
The Offering was completed on July 30, 1997. On July 31, 1997 the U.S.
underwriters, represented by Morgan Stanley & Co. Incorporated, Lehman Brothers
Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan
Securities Inc. and SBC Warburg Inc., exercised their over-allotment option to
purchase an additional 4,799,700 shares of Common Stock from the Company, with
an aggregate offering price of $117.6 million. The net offering proceeds to the
Company from the Offering were $384.3 million, after deducting underwriting
discounts and commission of $21.6 million and estimated offering expenses of
$5.7 million for legal, accounting and other services payable to unaffiliated
entities. The net proceeds were used for the acquisition of the Acquired NDCs
from certain stockholders of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 24, 1997, Galileo International Partnership, as sole stockholder
of the Company, consented to a number of matters in connection with the
Offering, including the approval of the Restated Certificate of Incorporation,
the approval of the Company's Stock Incentive Plan and the approval of the
Company's 1997 Non-Employee Director Stock Plan.
19
<PAGE> 20
ITEM 5. OTHER INFORMATION
The accompanying pro forma statements of income are based on the
historical financial statements of Galileo International Partnership, ATS,
Traviswiss and Galileo Nederland. The pro forma statements of income give pro
forma effect to (i) the Merger; (ii) the Offering; (iii) the incurrence of
$328.7 million of indebtedness under the Credit Agreements; (iv) the
acquisition of ATS, Traviswiss, and Galileo Nederland; and (v) the termination
of certain revenue sharing obligations. Such transactions were assumed to be
consummated on January 1, 1996.
The accompanying pro forma condensed combined statements of income do not
purport to represent what the Company's operating results would have been had
such transactions occurred on the dates indicated or to project the Company's
operating results for any future period. The pro forma adjustments are based
upon available information and certain assumptions that the Company believes
are reasonable.
The pro forma condensed combined statements of income should be read in
conjunction with the consolidated financial statements of Galileo
International, Inc. (formerly Galileo International Partnership through July
30, 1997) included elsewhere herein as well as the Financial Statements and Pro
Forma Condensed Combined Financial Information included in the Registration
Statement. (No. 333-27495) on Form S-1 filed by Galileo International, Inc.
with the Securities and Exchange Commission on May 20, 1997, as amended.
20
<PAGE> 21
GALILEO INTERNATIONAL, INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Quarter Nine Months
Ended September 30, Ended September 30,
---------------------------- -----------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Electronic global distribution services $ 309,391 $ 282,572 $ 938,754 $ 850,495
Information services 33,327 32,874 99,158 95,706
------------ ------------ ------------ ------------
342,718 315,446 1,037,912 946,201
Operating expenses:
Cost of operations 137,339 132,355 398,464 389,269
Commissions, selling and administrative 131,431 123,441 399,856 360,441
Special charges 20,111 - 20,111 -
------------ ------------ ------------ ------------
288,881 255,796 818,431 749,710
------------ ------------ ------------ ------------
Operating income 53,837 59,650 219,481 196,491
Other income (expense):
Interest income (expense), net (4,456) (7,336) (17,981) (24,152)
Other, net 774 (87) 2,858 699
------------ ------------ ------------ ------------
(3,682) (7,423) (15,123) (23,453)
------------ ------------ ------------ ------------
Income before income taxes 50,155 52,227 204,358 173,038
Income taxes:
Income taxes 19,981 21,261 81,287 70,441
Initial deferred income taxes 15,335 - 15,335 -
------------ ------------ ------------ ------------
35,316 21,261 96,622 70,441
------------ ------------ ------------ ------------
Net income $ 14,839 $ 30,966 $ 107,736 $ 102,597
============ ============ ============ ============
Pro forma weighted average
number of shares outstanding 104,799,700 104,799,700 104,799,700 104,799,700
============ ============ ============ ============
Pro forma earnings per share $ 0.14 $ 0.30 $ 1.03 $ 0.98
============ ============ ============ ============
Pro forma operating income,
excluding special charges $ 73,948 $ 239,592
============ ============
Pro forma net income, excluding
special charges and initial
deferred income taxes $ 42,273 $ 135,170
============ ============
Pro forma earnings per share,
excluding special charges and
initial deferred income taxes $ 0.40 $ 1.29
============ ============
</TABLE>
21
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
------- ----------- ----
<S> <C> <C>
10.43 Form of Deferred Compensation Arrangements For
Senior Officers of Galileo International, Inc.
27 Financial Data Schedule
</TABLE>
___________________________________________
(b) Reports on Form 8-K - No current reports on Form 8-K were filed for the
quarter ended September 30, 1997.
22
<PAGE> 23
SIGNATURES
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.
Galileo International, Inc.
Date: November 12, 1997 By: /s/ Paul H. Bristow
-------------------------
Paul H. Bristow
Director, Senior Vice President and
Chief Financial Officer
23
<PAGE> 24
GALILEO INTERNATIONAL, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
------- ----------- ----
<S> <C> <C>
10.43 Form of Deferred Compensation Arrangements For
Senior Officers of Galileo International, Inc.
27 Financial Data Schedule
</TABLE>
24
<PAGE> 1
EXHIBIT 10.43
July 18, 1997
Dear _______________:
This letter ("Letter") sets forth the terms of the grant by Galileo
International, Inc. (the "Company") to you of phantom shares ("Phantom Shares")
relating to shares of the Company's Common Stock, par value $0.01 per ("Common
Stock").
1. Grant of Phantom Shares. Pursuant to the terms of this letter, you
are hereby granted in exchange for awards granted but not yet paid
to you ("Old Awards") under the Company's Long Term Incentive Plan
(the "Plan"), effective as of the date of effectiveness of the
Company's registration statement for its initial public offering
(the "Date of Issuance"), the number of Phantom Shares set forth
on Exhibit A attached hereto, divided among the 1995 Award, the 1996
Award and the 1997 Award (the "Grant"). Each Phantom Share shall
represent an unsecured contractual right to receive, on the
relevant date set forth below, cash in an amount equal to the Fair
Market Value of the Phantom Share as of such date. By signing this
Letter, you hereby waive all of your rights and claims under and
with respect to the Plan and the Old Awards.
2. Payment of the Value of Phantom Shares. On March 31, 1998, the
Company or one of its subsidiaries (the Company and its
subsidiaries being hereinafter referred to as the "Corporation")
shall pay you the Fair Market Value of (i) all of the unpaid
Phantom Shares comprising your 1995 Award, (ii) one half the unpaid
Phantom Shares comprising your 1996 Award, and (iii) one third of
the unpaid Phantom Shares comprising your 1997 Award. On March 31,
1999 the Corporation shall pay you the Fair Market Value of (i) all
of the unpaid Phantom Shares remaining in your 1996 Award and (ii)
one half of the Phantom Shares remaining in your 1997 Award. On
March 31, 2000 the Corporation shall pay you the Fair Market Value
of all of the Phantom Shares remaining in your 1997 Award.
Notwithstanding the above, you may defer any payment by electing to
defer such payment by submitting a completed deferral form to the
Board prior to the year in which the payment is scheduled to be
made. Notwithstanding anything in this Letter to the contrary, the
Board of Directors of the Company (the "Board"), in its sole
discretion, may accelerate the payment date with respect to any or
all Phantom Shares and pay you the Fair Market Value of such
shares as of such accelerated payment date.
<PAGE> 2
2
3. Dividend Equivalents. The Corporation shall establish a notional
bookkeeping account in your name (the "Dividend Equivalent
Account"). Each time a dividend is declared and paid on the Common
Stock, your Dividend Equivalent Account will be credited, effective
as of the relevant dividend payment date, with an amount equal to
the dividend payable on a share of Common Stock multiplied by the
number of Phantom Shares in the Grant at that time. The balance of
your Dividend Equivalent Account shall become payable to you in
cash on the same date the Phantom Shares with respect to which the
Dividend Equivalents were earned are paid to you.
Determination of Fair Market Value. As used herein, "Fair Market
Value" means the value of Common Stock determined as follows:
(a) If the Common Stock is listed on any
established stock exchange or a national market system (including
without limitation the National Market System of the National
Association of Securities Dealers, Inc. Automated Quotation
("NASDAQ") System), its Fair Market Value shall be the closing sales
price for such stock or the closing bid if no sales were reported,
as quoted on such system or exchange (or the exchange with the
greatest volume of trading in the Common Stock) for the last market
trading day prior to the date of determination, as reported in The
Wall Street Journal or such other source as the Board deems
reliable.
(b) If the Common Stock is regularly quoted on the
NASDAQ System (but not on the National Market System) or quoted by
a recognized securities dealer, but selling prices are not
reported, its Fair Market Value shall be the mean between the high
and low asked prices for the Common Stock for the last day on which
there are quoted prices prior to the time of determination.
(c) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in
good faith by the Board.
5. Termination of Employment. In the event that your employment with
the Corporation terminates on or after the date hereof for any
reason other than your retirement pursuant to the terms of the
Company's retirement policy, death or disability (as defined in the
Company's Long Term Disability Plan), or the Company's elimination
of your position for reasons unrelated to your performance, all of
your unpaid Phantom Shares and Dividend Equivalents shall be
forfeited.
6. Effect of Certain Transactions. In the event of a Change in
Control (as hereinafter defined), the Change in Control Price of
each Phantom Share held by you shall automatically be paid to you
in cash. As used in Section 6(a), a "Change of Control" shall be
deemed to have occurred if:
<PAGE> 3
3
(a) any "person" or "group" (within the meaning of
Sections 13(d) and 14(d)(2) of the Securities and Exchange Act of
1934, as amended (the "1934 Act")), other than a trustee or other
fiduciary holding securities under an employee benefit plan of the
Company or any of the Airline Shareholders (an "Acquiring Person"),
is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the 1934 Act), directly or indirectly, of more than 33-1/3%
of the then outstanding voting stock of the Company (49% of the
then outstanding voting stock of the Company if such person or
group includes any of the Airline Shareholders);
(b) the shareholders of the Company and a majority
of the non-employee directors of the Company approve a merger or
consolidation of the Company with any other corporation, other than
a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) at
least 66-2/3% of the combined voting power of the voting securities
of the Company, such surviving entity or the parent of such
surviving entity outstanding immediately after such merger or
consolidation;
(c) the shareholders of the Company approve a plan
of reorganization (other than a reorganization or liquidation under
the United States Bankruptcy Code or complete liquidation of the
Company) or an agreement for the sale or disposition by the Company
of all or substantially all of the Company's assets,
(d) during any period of two consecutive years
(beginning on or after the Date of Issuance), individuals who at
the beginning of such period constitute the Board and any new
director (other than a director who is a representative or nominee
of an Acquiring Person) whose election by the Board or nomination
for election by the Company's shareholders was approved by a vote
of at least a majority of the directors then still in office who
either were directors at the beginning of the period or whose
election or nomination for election was previously so approved no
longer constitute a majority of the Board;
provided, however, that a Change in Control shall not be deemed to have
occurred in the event of
(i) a sale or conveyance in which the Company continues
as a holding company of an entity or entities that conduct the
business or businesses formerly conducted by the Company if such
sale or conveyance does not materially affect the beneficial
ownership of the Company's capital stock; or
<PAGE> 4
4
(ii) any transaction undertaken for the purpose of
reincorporating the Company under the laws of another jurisdiction,
if such sale or conveyance does not materially affect the
beneficial ownership of the Company's capital stock.
As used in this Section 6, Change in Control Price means, as
determined by the Board, (i) the Fair Market Value on the close of
the day immediately preceding the date of determination of the Change
in Control Price by the Board, or (ii) the highest price paid, as
determined by the Board, in any bona fide transaction or bona fide
offer related to the Change in Control of the Company, at any time
within the 60-day period immediately preceding the date of
determination of the Change in Control Price, as determined by the
Board.
For the purposes of this letter, Airline Shareholders means any of
United Airlines, USA Airways or KLM Royal Dutch Airlines.
If the Board shall receive an opinion from a nationally recognized
firm of accountants to the Company that the cash-out provisions in
this Section 6 above with respect to the payment of Phantom Shares in
cash by the Company in accordance with this Section 6 above will
prohibit the utilization of "pooling of interests" accounting in
connection with the transaction resulting in the Change in Control of
the Company, then the following shall apply, but only to the extent
necessary to permit such accounting treatment, the Phantom Shares
shall be settled in shares of Common Stock on the date that such
opinion is received by the Board.
7. Restrictions on Transfer. No Phantom Share granted hereunder shall
be sold transferred, assigned, pledged or otherwise encumbered
or deposed of, and no right or interest of your Phantom Shares, shall
be subject to any lien, obligation, liability or other such
encumbrance of the Participant, except by will or the laws of descent
and distribution.
8. Stockholder Rights. The Grant shall not confer on you any rights as
a stockholder of the Company.
9. Contractual Obligation. The obligations of the Corporation to make
payments and transfers hereunder shall be contractual only, all
such payments shall be made from the general assets of the
Corporation. You, your beneficiary and any other person or persons
having or claiming a right to payments hereunder shall rely solely on
the unsecured promise of the Corporation, and nothing herein shall be
construed to give you, your beneficiary or any other person or
persons any right, title, interest or claim in or to any specific
asset, fund, reserve, account or property of any kind whatsoever
owned by the Corporation or in which it may have any right, title or
interest now or in the future. Your right to payment with respect to
your Phantom
<PAGE> 5
5
Shares and Dividend Equivalents shall be no greater than those of the
Corporation's unsecured, subordinated creditors. In the event of the
bankruptcy or the voluntary liquidation of the Company, your
distribution shall in no event be greater than the distribution to
the holders of shares of Common Stock.
10. Withholding. No later than the date as of which an amount first
becomes includable in your gross income for applicable income tax
purposes with respect to any award under this Letter, you shall pay
to the Company or make arrangements satisfactory to the Company
regarding the payment of any federal, state or local taxes of any
kind required by law to be withheld with respect to such amount. The
obligations of the Company under this Letter shall be conditioned
upon such payment or arrangements and the Company shall, to the
extent permitted by law, have the right to deduct any such taxes from
any payment of any kind otherwise due to you.
11. No Rights to Continued Employment. Nothing in this Letter shall give
you any right to continued employment with the Corporation, as the
case may be, or interfere in any way with the right of the
Corporation to terminate the employment of any of its employees at
any time, with or without cause.
12. Authority of the Company and Shareholders. The existence of this
Letter and the awards granted hereunder shall not affect or restrict
in any way the right or power of the Corporation or the shareholders
of the Corporation to make or authorize any adjustment,
recapitalization, reorganization or other change in the Company's
capital structure or its business, any merger or consolidation of the
Corporation, any issue of stock or of options, warrants or rights to
purchase stock or of bonds, debentures, preferred or prior preference
stocks whose rights are superior to or affect the Common Stock or the
rights thereof or which are convertible into or exchangeable for
Common Stock, or the dissolution or liquidation of the Corporation,
or any sale or transfer of all or any part of its assets or business,
or any other corporate act or proceeding, whether of a similar
character or otherwise.
13. Applicable Law. Except as to matter of federal law, this Letter and
all actions taken thereunder shall be governed by, and construed in
accordance with, the laws of the State of Delaware without giving
effect to conflicts of law principles.
<PAGE> 6
6
14. Miscellaneous. This Letter and the other related agreements expressly
referred to herein set forth the entire agreement and understanding
between the parties hereto and supersede all prior agreements
relating to the subject matter hereof.
GALILEO INTERNATIONAL, INC.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 58,583
<SECURITIES> 0
<RECEIVABLES> 215,758
<ALLOWANCES> 23,981
<INVENTORY> 0
<CURRENT-ASSETS> 289,471
<PP&E> 393,744
<DEPRECIATION> 195,822
<TOTAL-ASSETS> 1,421,965
<CURRENT-LIABILITIES> 235,669
<BONDS> 369,005
0
0
<COMMON> 1,048
<OTHER-SE> 667,664
<TOTAL-LIABILITY-AND-EQUITY> 1,421,965
<SALES> 0
<TOTAL-REVENUES> 942,501
<CGS> 0
<TOTAL-COSTS> 771,459
<OTHER-EXPENSES> 2,448
<LOSS-PROVISION> 4,706
<INTEREST-EXPENSE> 7,810
<INCOME-PRETAX> 168,594
<INCOME-TAX> 29,279
<INCOME-CONTINUING> 139,315
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 139,315
<EPS-PRIMARY> 0
<EPS-DILUTED> 1.33
</TABLE>
