-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EmymQ9LfuFNR5pPtR+dZJNrGYjZhrBc//2aidep4jF5Y+AXSfSfHWKAusj4mPy+B mipGelD92+UpAtR1vFD0YQ== 0000950131-98-001753.txt : 19980318 0000950131-98-001753.hdr.sgml : 19980318 ACCESSION NUMBER: 0000950131-98-001753 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980317 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GALILEO INTERNATIONAL INC CENTRAL INDEX KEY: 0001039300 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 364156005 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-27495 FILM NUMBER: 98567089 BUSINESS ADDRESS: STREET 1: 9700 WEST HIGGINS ROAD CITY: ROSEMONT STATE: IL ZIP: 60018 BUSINESS PHONE: 8475184000 MAIL ADDRESS: STREET 1: 9700 WEST HIGGINS ROAD CITY: ROSEMONT STATE: IL ZIP: 60018 10-K405 1 GALILEO INTERNATIONAL, INC. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ---------------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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 (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 (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Stock, par value $.01 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE 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 [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 9, 1998 was approximately $2,182,000,000. At March 9, 1998, there were 104,799,700 shares of Common Stock, par value $.01 per share, of the registrant outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part III of this Form 10-K incorporates by reference certain information from the Proxy Statement for the Annual Meeting of Stockholders to be held April 23, 1998. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- GALILEO INTERNATIONAL, INC. YEAR ENDED DECEMBER 31, 1997 INDEX
PAGE ---- PART I ITEM 1. BUSINESS........................................................ 1 ITEM 2. PROPERTIES...................................................... 7 ITEM 3. LEGAL PROCEEDINGS............................................... 8 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 8 ITEM 4A. LIST OF EXECUTIVE OFFICERS..................................... 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ........................................................ 9 ITEM 6. SELECTED FINANCIAL DATA......................................... 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .......................................... 12 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................... 22 ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............................................ 22 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 22 ITEM 11. EXECUTIVE COMPENSATION......................................... 22 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. 23 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 23 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8- K.............................................................. 23
PART I ITEM 1. BUSINESS Galileo International, Inc. 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 at approximately 37,000 locations, as well as other subscribers, with the ability to access schedule and fare information, book reservations and issue tickets for more than 500 airlines. Galileo International, Inc. also provides subscribers with information and booking capability covering 45 car rental companies and more than 200 major hotel chains with approximately 37,000 properties throughout the world. The Company completed more than 300 million bookings in 1997, representing an estimated $55 billion in travel services. The Company's travel agency subscribers operate more than 153,000 computer terminals, all of which are linked to the Company's Data Center, one of the world's largest commercial data processing complexes, with a system uptime performance record of better than 99.9%. 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 option, of $384.3 million after deducting underwriting discounts, commissions and other expenses (the "Offering"). The Company believes that, based on revenues, it is currently the most internationally diversified provider of electronic global distribution services for the travel industry. More than one-half of the Company's 1997 revenues were derived from bookings made by subscribers outside of the United States. The Company believes that is has attained significant market share in many of the most important and competitive markets for travel services, including the United States and markets in Europe, Asia/Pacific, Canada, the Middle East, Africa, and Latin America. The Company competes in many of these markets using its network of national distribution companies ("NDCs"), a distribution structure that has enabled the Company to work closely with associates that possess detailed knowledge of local travel market conditions. The Company believes that its extensive international business experience, as well as its experience in operating with an internationally diverse group of airline stockholders, provides a firm base for expansion into new overseas markets, many of which offer strong growth potential. In addition to its core electronic global distribution services business, the Company offers travel industry-related information services that draw upon the Company's in-depth knowledge of the industry and its expertise in developing and operating complex, mission-critical transaction processing systems. The Company provides the internal reservation system used by United Air Lines, Inc. ("United Airlines") and operates GlobalFares, a fares quotation system used by over 100 airlines worldwide. The Company intends to explore ways to apply its technological expertise in new lines of business, including consulting for airlines and other travel service providers and providing information processing and network management for travel-related businesses that are increasingly outsourcing such non-core functions. STRATEGY The Company intends to reinforce its position as a leading provider of electronic global distribution services and to continue to capitalize on its competitive advantages, the key elements of which are: (i) a well-balanced and global presence, (ii) established relationships with a diverse group of travel vendors and subscribers, (iii) a technologically advanced information system operated by a highly skilled technical staff, (iv) a comprehensive offering of innovative products and (v) a strong business partnership, reinforced through equity ownership, with 11 of the world's leading airlines. 1 The Company operates globally and believes that in-depth knowledge of the local travel markets in which it distributes its products is essential to developing and strengthening its ties to travel vendors and the local travel agencies which generate high booking volumes. The Company will therefore continue to attempt to expand its influence in local markets by building alliances with influential associates that understand the local travel market and are positioned to design and implement successful sales and marketing programs and, in certain mature CRS markets, by seeking opportunities to vertically integrate its operations through the acquisition of NDCs. Consistent with this strategy, with funds provided in part by the Offering, the Company acquired three NDCs in mid-1997 that market the Company's products in the United States, Mexico, certain islands of the Caribbean, Switzerland and The Netherlands. The Company strives to provide superior customer service in order to strengthen relationships with its established base of travel vendors and subscribers and to attract new travel vendors and subscribers to its core electronic global distribution services business. The Company also intends to accelerate the development and deployment of its products in the marketplace. To this end, the Company has established a rapid application development program that is characterized by a set of protocols which identify speed-to- market as a primary objective. The Company refines its information technology on a regular basis in order to maintain a cost-effective system that is fully integrated from travel vendor to subscriber and is tailored to individual customer needs. The Company utilizes an architecture with standard open interfaces and protocols to ensure the efficient distribution of information among users. Corporate travel departments and individual consumers are demonstrating an increased interest in directly accessing the information and services provided by a CRS. In response, the Company is developing new product offerings for travel agencies and travel vendors which will enable their customers to access travel information through a variety of media. Among the Company's initiatives are Travelpoint, a desk-top software and network package that links corporate travel departments and individuals to travel agencies, and Travelpoint.com, an Internet-based version of this software, and a variety of direct access products branded and distributed by airlines that use the Company's systems. ELECTRONIC GLOBAL DISTRIBUTION SERVICES--MARKETS As of December 31, 1997, the Company provided electronic global distribution services for the travel industry in 84 countries via a network of on-line terminals operated at approximately 37,000 travel agency locations worldwide. The geographic breadth of the Company is demonstrated by the table below which shows the approximate number of travel agency locations and terminals by region.
TRAVEL AGENCY LOCATIONS AT TERMINALS AT DECEMBER 31, DECEMBER 31, 1997 1997 ------------ ------------- REGION NUMBER % NUMBER % ------ ------ ----- ------- ----- United States and Mexico..................... 12,800 34.3 59,800 39.0 Europe....................................... 12,400 33.2 53,300 34.7 Asia/Pacific................................. 4,800 12.9 18,800 12.3 Canada....................................... 3,200 8.6 10,800 7.0 Middle East/Africa........................... 2,600 7.0 8,000 5.2 Latin America................................ 1,500 4.0 2,800 1.8 ------ ----- ------- ----- 37,300 100.0% 153,500 100.0% ====== ===== ======= =====
Through an alliance with GETS Marketing Company entered into in March 1997, the Company is further strengthening its base in a diverse group of developing new CRS markets. GETS members, consisting primarily 2 of national airlines representing 22 markets in which the Company did not have a presence, signed agreements to distribute the Company's systems to subscribers in Africa, the Middle East, Eastern Europe, Asia and Latin America. ELECTRONIC GLOBAL DISTRIBUTION SERVICES--CUSTOMER BASE: TRAVEL VENDORS The Company derives substantially all of its revenues from booking fees paid by travel vendors. Travel vendors store, display, manage and sell their services through the Company's system. Airlines and other travel vendors are offered varying levels of functionality at which they can participate in the Company's systems, known as Apollo in North America and Japan and Galileo in the rest of the world. In 1997, approximately 92% of the Company's booking fee revenues were generated from airlines. The booking fee structure for airlines varies based upon the location of the subscriber generating the booking. For bookings made in the United States, Canada, Mexico, certain islands of the Caribbean and Japan, the Company charges airlines a fee per transaction and, thereby, earns a separate fee for each booking and for each cancellation. In the rest of the world, the Company charges airlines a booking fee per "net segment." In that case, the Company earns a fee for net bookings (gross bookings, less cancellations). Globally, non-air travel vendors are generally charged a fee per net booking. The Company charges premiums for higher levels of functionality selected by the travel vendors. ELECTRONIC GLOBAL DISTRIBUTION SERVICES--CUSTOMER BASE: SUBSCRIBERS The Company offers products to travel agencies and other subscribers that enable them to electronically locate, price, compare and purchase travel vendors' services through the Company's systems. By accessing the electronic marketplace created by the Company's systems, the subscriber is able to obtain schedule, availability and pricing information, and purchase travel services from multiple travel vendors for complex travel itineraries. Travel agencies access the Company's systems using hardware and software typically provided by the Company or an NDC. The Company and the NDCs also provide technical support and other assistance to the travel agencies. Through the NDCs and its internal sales and marketing organization, the Company has relationships with travel agencies of all sizes throughout the world. Multinational travel agencies constitute an important category of subscribers because of the high volume of business that can be generated through a single relationship. Bookings generated by the Company's five multinational travel agencies constituted 18.6% of the bookings made through the Company's systems in 1997. With the rise in popularity of personal computers, commercial on-line services and other means of Internet access, individual consumers increasingly have the ability to purchase services directly from travel vendors that have electronic distribution capability. Because of the highly complex nature of the travel industry, with hundreds of competing providers, constantly changing schedules and often confusing fare structures, the Company believes the consumer's need for experienced and well-informed intermediaries will continue despite growing consumer acceptance of and demand for electronic commerce. The Company has therefore developed or facilitated the use of direct access products for travel vendors and travel agencies to target individual consumers. The Company provides software products to travel vendors and travel agencies which these entities can then distribute to their end-user customers. ELECTRONIC GLOBAL DISTRIBUTION SERVICES--PRODUCT DISTRIBUTION The Company distributes its products to subscribers primarily through its internal sales and marketing organization and its NDCs. In markets not supported directly by the Company's sales and marketing organization, the Company prefers to use the NDC structure, where feasible, in order to take advantage of the NDCs' local market knowledge, as well as its travel vendor and subscriber relationships. The NDC is responsible for cultivating the initial relationship with subscribers in its territory, installing subscribers' computer equipment, 3 maintaining the hardware and software supplied to the subscribers and providing ongoing customer support. The NDC earns a share of the booking fees generated from the NDC's territory, as well as subscriber fees. The Company's local sales and marketing groups distribute the Company's products in the United States, Mexico, certain islands of the Caribbean, Belgium, France, Germany, Spain, Portugal, The Netherlands, Switzerland, Hong Kong, Singapore, The Philippines, and Brazil, which collectively account for approximately 58% of the Company's 1997 bookings. Affiliates of certain airlines stockholders own the NDCs whose distribution territories cover Austria, Canada, Greece, Ireland, Italy, Japan and the United Kingdom. Collectively, these NDCs manage subscriber accounts that generated approximately 27% of the Company's 1997 bookings. Associate NDCs, typically the national airline of the relevant country or a local travel-related business, own or operate NDCs that accounted for approximately 15% of the Company's booking volume in 1997. The Company and its NDCs distribute direct access products such as Travelpoint and Travelpoint.com to travel agencies for use by their corporate and individual customers. The Company and its NDCs also distribute the Company's products to certain Internet-based travel service providers. The World Wide Web sites of those travel service providers allow individual consumers direct access to the Company's systems and provide the Company with an additional means of generating booking fees. The Company has also developed or facilitated the development of branded direct access products for certain airlines (such as Priority TravelWorks for US Airways and United Connection for United Airlines). The Company has adopted this approach in marketing and distributing direct access products that are branded by the sponsoring airline and marketed directly by the airline to its corporate and individual customers. These products provide access to the Company's systems and, therefore, generate booking fees for the Company. INFORMATION SERVICES As a result of developing and operating one of the world's largest CRSs, the Company has acquired significant knowledge of, and experience in, both the travel business and the information technology business. This knowledge and experience has created a basis from which the Company has been able to provide a range of specialized information technology solutions to airlines throughout the world. The Company currently provides fares quotation services, internal reservation services, other internal management services and software development services to such airlines. The Company currently provides fares quotation services through its GlobalFares fares quotation system to airlines throughout the world. GlobalFares is used in conjunction with each airline's internal reservation system, and provides pricing information which meets the challenges and complexities of real-time fares quotation processing. GlobalFares is currently utilized by over 100 airlines in approximately 120 countries, and the Company plans to continue to market GlobalFares to other airlines. The Company also provides internal reservation services to United Airlines. Such services include the display of schedules and availability, the reservation, sale and ticketing of travel services and the display of other travel-related information to United Airlines' airport offices, city ticket offices and reservation centers throughout the world. In addition, the Company provides certain other internal management services to United Airlines and to other airline stockholders. Other internal management services include network management, departure control, availability displays, inventory management, database management and systems and software operations. The Company is exploring opportunities to expand its offering of these services to other airlines. 4 TECHNOLOGY Since 1994, the Company has made significant investments in technology and related equipment. The Company believes that it will benefit from operating economies of scale as its technology is easily expandable and can support incremental volume with minimal additional investment. The Company's computer systems provide real-time, high-volume transaction processing and are supported by 20 mainframes, providing 31 processor images with a combined processing capacity of 4,136 MIPS (millions of instructions per second). Additional peripheral hardware provides approximately 10.4 terabytes of disk information storage. The Company's computer systems are operational 24 hours a day, every day of the year. They process, on average, over 98 million requests for information per day. At peak times, the Company has processed over 5,000 messages per second. The Company's global communications network provides a fast, resilient and reliable method for travel agencies and travel vendors to access the Company's systems. The Company's sites near Denver and London use a meshed backbone network to provide direct connections from the Company to certain locations in North America and Europe. This backbone network provides automatic rerouting in the event of a circuit failure. In addition to the meshed backbone network, the Company makes extensive use of independent international network service providers to increase its reach into the global market. The Company's data and transaction processing services are dependent on the Company's Data Center. The Company maintains comprehensive security and backup systems in order to deliver consistent, reliable service to customers. Although the Company believes it has taken sufficient precautions to protect this facility and to achieve network security, a natural or manmade disaster or other calamity that causes significant damage to the facility or the Company's systems would have a material adverse effect on the business, financial condition and results of operations of the Company. COMPETITION--ELECTRONIC GLOBAL DISTRIBUTION SERVICES The Company competes in the provision of electronic global distribution services primarily against other well-established CRSs. The Company's principal competitor in the United States is SABRE, and its competitors in the rest of the world include Abacus, Amadeus/System One, SABRE and Worldspan. To a lesser extent, the Company also competes, on a regional basis, against Axess, Infini and Topas. Many of these competitors offer products which are similar to the products of the Company. Competition to attract and retain travel agency subscribers is intense. In highly competitive markets, the Company and other CRSs offer incentive payments to travel agency subscribers if certain productivity or booking volume growth targets are achieved. Although expansion of the use of such incentive payments could adversely affect the Company's profitability, the Company's failure to continue to make such incentive payments could result in the loss of some travel agency subscribers. If the Company were to lose a significant portion of its current base of travel agencies to a competing CRS or if the Company were forced to increase the amounts of such incentive payments significantly, the Company's business, financial condition and results of operations could be materially adversely affected. COMPETITION--INFORMATION SERVICES Competition within the information services market is segmented by the type of service offering. Internal reservation services competitors include SABRE, EDS and British Airways (through Speedwing). Competitors for data center and network outsourcing include IBM, EDS and niche suppliers such as SABRE and Speedwing. The primary competitors for information technology consulting include IBM, EDS and Andersen Consulting for full service consulting, as well as SABRE and Speedwing which provide specialized consulting within the information technology arena. 5 RELATIONSHIP WITH AIRLINE STOCKHOLDERS As of December 31, 1997, the airline stockholders owned, in the aggregate, approximately 64.9% of the Company's outstanding Common Stock. The airline stockholders controlled by United Airlines and KLM Royal Dutch Airlines ("KLM") are the Company's two largest stockholders, owning approximately 31.9% and 10.2% of the outstanding Common Stock, respectively. No other airline stockholder owns more than 10% of the outstanding Common Stock. In addition, Special Voting Preferred Stock allows certain of the airline stockholders to elect a total of seven of the 13 members of the Company's Board of Directors. The airline stockholder controlled by United Airlines owns three shares of such Special Voting Preferred Stock and the airline stockholders controlled by KLM, US Airways, Inc. ("US Airways"), British Airways plc and SAirGroup each own one share, each such share entitling the holder thereof (or in certain circumstances, such holder's transferee) to elect one director. As to the remaining six directors, the airline stockholders have agreed, pursuant to an agreement with the Company (the "Stockholders' Agreement"), to vote their shares of Common Stock in favor of the election of three independent directors who will be nominated by the Board of Directors and three management directors. As a result, as long as the Stockholders' Agreement remains in effect and the airline stockholders own in the aggregate more than 50% of the outstanding Common Stock, the airline stockholders will control the election of the entire Board of Directors. Effective July 1997, the Company entered into sales representation agreements with United Airlines and US Airways pursuant to which these airlines supply the sales force for the Company's Apollo brand reservations products to subscribers in the United States and Mexico. The Company also entered into non-competition agreements with each of the airline stockholders which prohibit the airline stockholders and their affiliates from competing with the Company in providing reservation services to neutral travel agencies. However, the non-competition agreements include certain exceptions that permit the airline stockholders and their affiliates to, among other things, provide and market certain reservation services to certain customers of the airline stockholders. United Airlines is the largest single travel vendor utilizing the Company's systems generating revenues that accounted for approximately 16.6% of total revenues in 1997. No other travel vendor accounted for 10% or more of the Company's revenue in 1997. INDUSTRY REGULATION The Company's business is subject to regulation in the United States, the European Union, Canada, Australia and New Zealand. Each jurisdiction's rules are largely based on the same set of core premises: that a CRS must treat all participating airlines equally, whether or not they are owners of the system; that airlines owning CRSs must not discriminate against the CRSs they do not own; and that CRS relationships with travel agencies should not be an impediment to competition from other CRSs or to the provision of service to the traveler. While each jurisdiction has focused on the CRS industry's role in the airline industry, the U.S. CRS Rules and the EU CRS Rules have the greatest impact on the Company because of the volume of business transacted by the Company in the United States and the European Union. Neither jurisdiction currently seeks to regulate CRS relationships with non-airline participants such as hotel and car rental companies, although discussions have taken place in Europe about whether rail services should be incorporated into CRS displays and it is expected that future European Union regulations will address this issue. The U.S. CRS Rules, among other things, prohibit a CRS that is owned by an airline or an airline affiliate from entering into contracts with travel agencies that contain exclusivity clauses or that require the agency to maintain a certain percentage of computer terminals or bookings for a particular CRS. In several respects, the United States and European Union regulators have reached similar conclusions regarding the appropriate means of ensuring the achievement of the desired results. Both jurisdictions recognize that there is a possibility that subscribers will book flights which appear early on in availability displays, as they may be reluctant to read through all information presented in such displays. Accordingly, both jurisdictions require systems to provide airline displays for travel agencies which are ordered on the basis of neutral principles 6 and that all airlines must be charged the same fees for the same level of participation. The EU CRS Rules go further and require that fees must be reasonably structured and reasonably related to the cost of the service provided and used. Moreover, under EU CRS Rules, airlines have the ability to disallow certain types of bookings, unless they have already been accepted. Both the United States and European Union regulators seek to redress the potential that a CRS used for internal reservation purposes would offer a travel agency subscriber superior access to the hosted airline and inferior access to all other airlines. The EU CRS Rules mandate a separation between the internal reservations functionality and the functionality used by travel agencies to provide neutral information, and require annual confirmation of compliance with this rule, among others, by independent auditors. While the U.S. CRS Rules contain several principles outlining the requirement of unbiased displays, the EU CRS Rules prescribe a specific formula which a CRS must use to order its display of flights. The U.S. CRS Rules also require functional equivalence between the functionality offered to airlines whose internal reservation systems are hosted in CRS and those provided to all other airlines. The EU CRS Rules require the CRS owner airlines must provide the same data, and accept and confirm bookings with equal timeliness in all CRSs, when requested to do so. The U.S. CRS Rules contain no counterpart to the European requirement that subscribers be offered access to the CRS on a nondiscriminatory basis. Although the U.S. CRS Rules extend only to use of CRSs by travel agencies (and do not apply to products distributed directly to corporate travel departments and individual consumers), European, Canadian and Australian rules apply to all subscriber uses of CRSs, whether by travel agencies, individuals or corporate travel departments. The U.S. CRS Rules and the EU CRS Rules are currently under review by their respective promulgating authorities. In its historical role as provider of two distinct systems, Apollo in North America and Japan, and Galileo in the rest of the world, the Company has developed familiarity with the requirements and approval procedures of each regulatory jurisdiction, and is experienced in addressing regulatory issues as they arise. RESEARCH & DEVELOPMENT Research and development costs consist of expenditures incurred during the course of planned research and investigation aimed at discovery of new knowledge useful in developing new products or processes, or significantly enhancing existing products or production processes, and the implementation of such through design, testing of product alternatives or construction of prototypes. Research and development costs, excluding amortization of computer software, are expensed as incurred and approximated $8.6 million, $8.2 million and $10.1 million for the years ended December 31, 1997, 1996 and 1995, respectively. EMPLOYEES The Company believes that its success is due in large part to its employees. The Company strives to hire and retain highly skilled and motivated personnel. As of December 31, 1997, the Company employed approximately 2,800 people. Approximately 70% of the Company's employees are located in the United States, 25% in Europe and 5% in Latin America and countries throughout the Asia/Pacific region. In some countries outside the United States, terms and conditions for the Company's employees are determined in part by industry-wide collective bargaining arrangements. The Company's employees in Brazil, representing less than 1% of the Company's workforce, are unionized in accordance with local regulations. The Company believes that its relationship with its employees is good. ITEM 2. PROPERTIES The Company's principal executive offices are located in Rosemont, Illinois, a suburb of Chicago, where the Company leases approximately 120,000 square feet of office space pursuant to a lease that expires in the year 2000. The Company's Data Center is located in Englewood, Colorado, a suburb of Denver, in two adjacent buildings owned by the Company. The Data Center contains approximately 236,000 square feet of space, 7 including approximately 130,000 square feet of raised floor computer room space. The Company also leases office space in various other worldwide locations, including development and marketing offices located near Denver, London and Hong Kong. The Company believes that its offices and Data Center are adequate for its immediate needs and that additional or substitute space is available if needed to accommodate growth and expansion. ITEM 3. LEGAL PROCEEDINGS On September 8, 1997, The Galileo Company, the Company's United Kingdom subsidiary, instituted proceedings against Weir Systems Ltd. ("Weir") in the High Court of Justice, Queen's Bench Division, London, England, seeking damages and other relief in respect of certain computer software and services supplied by Weir to The Galileo Company from approximately 1994 to 1997 pursuant to contracts made in or about 1994 or 1995. The Galileo Company's claim includes, among other things, breach of contract and alleged misrepresentations by Weir. The Galileo Company is currently unable to quantify its claim for loss and damages. On January 30, 1998, Weir served on The Galileo Company a Defense and Counterclaim. The Counterclaim relates to, among other things, lost sales opportunities, breach of contract, breach of fiduciary duty and/or misrepresentation. Weir's Counterclaim amounts to a total of approximately $46.5 million, plus interest. The Company is vigorously pursuing its claim and defending its actions in this regard and believes that the Counterclaim of Weir can be successfully defended or resolved without any material adverse effect on the Company's financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 4A. LIST OF EXECUTIVE OFFICERS DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of the Company, their positions with the Company and their ages, as of the date of this filing, are as set forth below. There are no family relationships among any directors or officers.
NAME AGE POSITION - ---- --- -------- James E. Barlett........ 54 Chairman, President, Chief Executive Officer and Director Paul H. Bristow......... 55 Senior Vice President, Chief Financial Officer, Treasurer and Director Lyn Bulman.............. 38 Senior Vice President, Human Resources and Corporate Relations Michael G. Foliot....... 43 Senior Vice President, Global Vendor Marketing Babetta R. Gray......... 39 Senior Vice President Legal, General Counsel, Secretary and Director James E. Lubinski....... 42 Senior Vice President, Information Services and Operations David A. Near........... 39 Senior Vice President, Subscriber Marketing
Mr. Barlett has been President and Chief Executive Officer since November 1994 and Chairman since May 1997. Prior to joining the Company, he served as Executive Vice President of Worldwide Operations and Systems of MasterCard International Corporation ("MasterCard") and was a member of the MasterCard International Operations Committee. Prior to his employment at MasterCard, Mr. Barlett served as Executive Vice President of Operations for NBD Bancorp where from 1979 to 1992 he managed the redevelopment of core banking systems and directed the development, implementation and operation of the Cirrus International automated teller switching system and served as Vice Chairman of Cirrus Inc. Mr. Bristow has been Senior Vice President and Chief Financial Officer since February 1993 and Treasurer since May 1997. Prior to joining the Company, Mr. Bristow served as financial advisor to various companies in the United Kingdom before which he had spent two years as a member of a buy-in group involved in corporate finance as intermediaries, and as advisors. From 1980 to 1988 he worked for London International Group plc, a 8 listed international consumer products company in London, initially as Division Finance Director and then on the Main Board as Group Finance Director. Prior to 1980, Mr. Bristow worked for ITT in Canada, Norway and Singapore; with Philip Morris in Switzerland; and with Arthur Andersen & Co. in the United States and Canada. Ms. Bulman has been Senior Vice President, Human Resources and Corporate Relations since May 1995. From 1990 to March 1993, she served as Manager of Compensation and Benefits and from April 1993 to May 1995, she served as Director of Human Resources--Europe. Prior to joining the Company, Ms. Bulman held executive positions in the United Kingdom at Dun & Bradstreet Corporation and Fisons (Pharmaceutical Division) plc. Mr. Foliot has been Senior Vice President, Global Vendor Marketing since January 1997. In this position he is responsible for all airline, car, hotel, leisure and GlobalFares sales and marketing as well as managing all airline stockholder relationships. From 1993 to 1996, he served as Senior Vice President Asia/Pacific and the Americas of the Company. From 1990 to 1993, Mr. Foliot was Vice President and General Manager for all American Express activities in Canada related to corporate card, corporate travel and leisure travel business and prior to that he held various positions with American Express International in Singapore, Indonesia and Korea. Ms. Gray has been Senior Vice President, Legal and General Counsel since March 1996 and Secretary since May 1997. Prior to that she was Vice President, Legal and General Counsel since September 1995 and joined the Company as Senior Counsel in April 1990. Before joining the Company, Ms. Gray was Counsel for Reebok International Ltd. from 1989 to 1990 and an associate with the Boston law firm of Foley Hoag & Eliot from 1984 through 1988. Mr. Lubinski has been Senior Vice President, Information Services and Operations since July 1995. In this position, Mr. Lubinski is responsible for ensuring technological leadership in systems development for the Company. Prior to joining the Company, Mr. Lubinski served since 1994 as Senior Vice President and Division Head of Systems and Operations for Boatmen's Trust Company. From 1978 to 1994, Mr. Lubinski held several technical positions at NBD Bancorp, including First Vice President and Development Manager. Mr. Lubinski is a member of the Board of Trustees of Stichting "the SITA Foundation" and also a member of the Board of Trustees for the PorterCare Foundation. Mr. Near has been Senior Vice President, Subscriber Marketing since January 1997. In this position, Mr. Near is responsible for all subscriber marketing and direct access products. Prior to assuming these responsibilities, Mr. Near served as Senior Vice President of Intuitive Products and Interactive Services and as Director of Car, Hotel, Leisure and Advertising Product Management for the Company and Covia Partnership. Prior to joining the Company in 1987, Mr. Near held a number of management positions at United Airlines and B.F. Goodrich. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK The Company's Common Stock, $.01 par value, is traded on the New York Stock Exchange under the symbol "GLC." The following table sets forth, for the quarters indicated, the range of high and low closing sale prices for the Company's Common Stock on the New York Stock Exchange.
HIGH LOW -------- ------- Year Ended December 31, 1997: Third Quarter.......................................... 27 15/16 25 1/16 Fourth Quarter......................................... 29 1/4 23 3/8
On February 24, 1998, the Company's stock was held by approximately 240 holders of record. 9 DIVIDEND POLICY The Company paid a $.06 per share cash dividend on November 21, 1997, to stockholders of record as of November 7, 1997. The Company also declared a $.06 per share cash dividend payable on February 20, 1998, to stockholders of record as of February 6, 1998. Although the Company expects to reinvest a substantial portion of its earnings in its business, the Company currently intends to pay regular quarterly cash dividends. However, the declaration and payment of dividends, as well as the amount thereof, are subject to the discretion of the Board of Directors of the Company and will depend upon the Company's results of operations, financial condition, cash requirements, future prospects and other factors deemed relevant by the Board of Directors. There can be no assurance that the Company will declare and pay any future dividends. USE OF PROCEEDS On July 30, 1997, Galileo International, Inc. (SEC file number 333-27495) effected an initial public offering of 31,998,000 shares of Common Stock at an offering price of $24.50 per share (the "Offering"). 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. Airline 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 (Morgan Stanley & Co. Inc., Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Inc., 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, resulting in the Company receiving additional net proceeds of $111.4 million on August 1, 1997. The net proceeds to the Company from the Offering, together with a portion of initial borrowings under credit agreements, were used to acquire three national distribution companies; Apollo Travel Services Partnership ("ATS"), Traviswiss AG ("Traviswiss") and Galileo Nederland BV ("Galileo Nederland"). ATS, Traviswiss and Galileo Nederland were acquired at purchase prices of $700.0 million, $8.5 million and $2.0 million, respectively. The Company also incurred expenses of approximately $4.2 million which have been accounted for as part of the purchase price of these NDCs. 10 ITEM 6. SELECTED FINANCIAL DATA
PROFORMA (1) ------------------ YEAR ENDED DECEMBER 31, ------------------ 1997 1996 -------- -------- (UNAUDITED) INCOME STATEMENT DATA: Revenues....................... $1,351.5 $1,230.8 Operating income (loss)........ 280.1 227.6 Income (loss) before cumulative effect of accounting change... 157.5 117.1 Cumulative effect of accounting change (3). -- -- Net income (loss).............. 157.5 117.1 Adjusted net income (4)........ -- -- Adjusted basic and diluted earnings per share (4)........ -- -- Pro forma basic and diluted earnings per share............ $ 1.50 $ 1.12 Dividends per common share..... $ 0.06 -- BALANCE SHEET DATA: Current assets................. $ 224.3 $ 304.0 Total assets................... 1,268.5 1,408.0 Current liabilities............ 201.4 294.5 Long-term debt................. 250.0 398.7 Other long-term obligations.... 133.4 123.9 Partners' capital (deficit).... -- -- Stockholders' equity........... 683.7 590.9 OTHER DATA: Operating income (loss) as a percentage of revenue......... 20.7% 18.5% Reservations booked using the Company's CRS systems (5)..... 336.1 316.1 Net cash provided by operating activities.................... -- -- Capital expenditures (6)....... $ 109.0 -- HISTORICAL -------------------------------------------------------------------------- PERIOD SEPTEMBER 16 PERIOD YEAR ENDED DECEMBER 31, TO JANUARY 1 TO ----------------------------------------------- DECEMBER 31, SEPTEMBER 15, 1997 (1) 1996 1995 1994 1993 (2) 1993 (2) --------- ------------- ----------- ----------- ------------ ------------- (IN MILLIONS, EXCEPT SHARE DATA) INCOME STATEMENT DATA: Revenues....................... $1,256.1 $ 1,088.3 $ 966.4 $ 813.8 $ 188.4 $398.3 Operating income (loss)........ 211.5 175.4 140.3 69.3 (124.2) 64.4 Income (loss) before cumulative effect of accounting change... 161.6 165.2 121.1 48.8 (140.6) 64.4 Cumulative effect of accounting change (3). -- -- -- -- -- 17.4 Net income (loss).............. 161.6 165.2 121.1 48.8 (140.6) 47.0 Adjusted net income (4)........ 123.4 -- -- -- -- -- Adjusted basic and diluted earnings per share (4)........ $ 1.30 -- -- -- -- -- Pro forma basic and diluted earnings per share............ -- -- -- -- -- -- Dividends per common share..... $ 0.06 -- -- -- -- -- BALANCE SHEET DATA: Current assets................. $ 224.3 $ 240.8 $ 187.3 $ 133.8 $ 141.1 $167.6 Total assets................... 1,268.5 599.9 569.0 555.5 608.2 479.9 Current liabilities............ 201.4 199.6 227.6 191.5 170.2 76.8 Long-term debt................. 250.0 70.0 134.2 239.8 340.0 -- Other long-term obligations.... 133.4 74.9 77.6 84.7 102.8 49.7 Partners' capital (deficit).... -- 255.4 129.6 39.5 (4.8) 353.4 Stockholders' equity........... 683.7 -- -- -- -- -- OTHER DATA: Operating income (loss) as a percentage of revenue......... 16.8% 16.1% 14.5% 8.5% (65.9%) 16.2% Reservations booked using the Company's CRS systems (5)..... 336.1 316.1 285.4 255.0 59.7 159.7 Net cash provided by operating activities.................... $ 324.7 $ 214.1 $ 172.6 $ 135.8 $ 26.3 $ 74.3 Capital expenditures (6)....... $ 65.9 $ 40.0 $ 64.5 $ 33.2 $ 14.9 $ 33.9
- -------- (1) Effective July 30, 1997, Galileo International Partnership merged into a wholly owned limited liability company subsidiary of Galileo International, Inc. (the "Merger"), the Company effected an initial public offering of its Common Stock (the "Offering"), and the Company incurred debt related to the purchase of three national distribution companies (the "NDC Acquisitions"). For the historical year ended December 31, 1997, the results of the acquired NDCs have been consolidated with those of the Company from the date of each acquisition. 1997 operating expenses include $20.1 million ($12.1 million after tax) of special charges related to the integration of the acquired NDCs and a $15.3 million nonrecurring charge to reflect the establishment of initial deferred tax assets and liabilities. Pro forma amounts reflect the Merger, the Offering, the incurrence of debt and the NDC Acquisitions as if they had occurred on December 31, 1996 for 1996 balance sheet data and as of January 1, 1996 for income statement data. Pro forma amounts exclude the special charges related to the NDC Acquisitions and the establishment of initial deferred income taxes. (2) On September 16, 1993, Galileo International Partnership was formed by combining Covia Partnership and The Galileo Company Ltd., and distributing certain operations to United Airlines and Apollo Travel Services Partnership, a newly formed entity. For the period September 16 to December 31, 1993, operating expenses include $120.7 million related to this business combination. (3) Effective January 1, 1993, the Company adopted FAS 106, "Accounting for Postretirement Benefits Other Than Pensions," changing the method of accounting for these benefits. The cumulative effect of adopting FAS 106 as of January 1, 1993 was a charge of $17.4 million. 11 (4) Adjusted net income and basic and diluted earnings per share have been calculated assuming the Company had operated in a corporate form for the entire year and, accordingly, was subject to federal and state income taxes. (5) Transactions in respect of bookings made in the United States, Canada, Mexico, certain islands of the Caribbean and Japan have been converted to a net segment basis. Bookings made in the rest of the world are reported on a net segment basis. (6) Capital expenditures include purchases of property and equipment and purchases of computer software. In addition, the capitalization of internally developed computer software was $21.2 million, $21.6 million, $24.5 million, and $25.7 million for the years ended December 31, 1997, 1996, 1995, and 1994, respectively, $7.0 million for the period ended December 31, 1993, and $12.7 million for the period ended September 15, 1993. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Effective July 30, 1997 Galileo International Partnership merged into a wholly owned limited liability company subsidiary of Galileo International, Inc. (the "Merger") and effected an initial public offering of its Common Stock (the "Offering"). 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. 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 exchanged for the Company's Common Stock in the same proportion as that of their respective partnership interests in Galileo International Partnership. The Company generates most of its revenues from the provision of electronic global distribution services. Booking fees are the primary source of this revenue and are charged to travel vendors for reservations made through the Company. Booking fees depend on several factors, including the type of reservation booked (primarily air, car rental or hotel), the location of the booking and the level of travel vendor participation in the Company's systems. In addition to booking fees and related premiums paid by travel vendors, subscribers generally pay fees for hardware, software and certain services. Such fees are often discounted or waived for travel agency subscribers, depending upon the level of bookings generated by the travel agency. In highly competitive markets, the Company often makes incentive payments to travel agency subscribers that achieve defined productivity or booking volume growth objectives. The Company also provides information services to airlines, including certain of its airline stockholders. The Company currently provides fares quotation services, internal reservation services, other internal management services and software development services to such airlines. The Company's expenses consist primarily of local sales and marketing costs, commissions paid to national distribution companies ("NDCs"), costs associated with the operation of the Data Center and wages and benefits payable to employees of the Company. Substantially all of the Company's expenses are denominated and paid in U.S. dollars, with the exception of operating expenses incurred outside of the United States. Costs of operations shown on the Company's statements of income consist primarily of the costs of operating the Data Center (including wages and benefits of Data Center and other technical services personnel, and hardware, software and communications costs). Commissions, selling and administrative expenses shown on the Company's statements of income consist primarily of commissions payable to NDCs and other costs of the Company's selling and administrative functions. 12 The Company's earnings can be significantly impacted by events that affect the travel industry. Such impact is typically caused by economic and other conditions that decrease the number of bookings made through the Company's systems as a result of decreased demand for airline seats and other travel services. Other events, such as increased airline competition from low cost carriers, excess capacity or deterioration of an airline's financial condition, can often cause fare promotions within the airline industry. This may result in an increased number of transactions and bookings for the Company, thereby stimulating the Company's revenue-earning capability. During 1997 the Company acquired three national distribution companies (the "NDC Acquisitions"); Apollo Travel Services Partnership ("ATS"), Traviswiss AG ("Traviswiss") and Galileo Nederland BV ("Galileo Nederland"). In connection with the NDC Acquisitions, 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 $12.3 million in severance-related costs and $7.8 million of other integration costs, principally related to duplicate facilities. 1997 COMPARED TO 1996 Revenues. Revenues increased $167.8 million, or 15.4%, to $1,256.1 million for the year ended December 31, 1997 from $1,088.3 million for the year ended December 31, 1996. 1997 revenues include the impact of the NDC Acquisitions whereas 1996 revenues represent Galileo International Partnership revenues. The NDC Acquisitions resulted in $72.6 million of additional revenues or 43.3% 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 $131.7 million, or 14.4%, to $1,044.6 million for the year ended December 31, 1997 from $912.9 million for the year ended December 31, 1996. Excluding $20.1 million in special charges related to the integration of the acquired NDCs into the Company's operations, operating expenses increased $111.6 million or 12.2% to $1,024.5 million for the year ended December 31, 1997 from $912.9 million for the year ended December 31, 1996. The NDC Acquisitions resulted in additional operating expenses which were partially offset by lower commissions as the Company no longer pays commissions, but instead incurs the direct costs of distributing its products in these markets. Other Expenses, Net. Other expenses, net include interest expense, net of interest income, and foreign exchange gains or losses. Other expenses, net decreased $2.4 million, to $5.9 million for the year ended December 31, 1997 from $8.3 million for the year ended December 31, 1996. This decrease was primarily the result of currency fluctuation gains 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. The Company's effective tax rate is approximately 40%. Net Income. Net income was $161.6 million for the year ended December 31, 1997. Net income was $165.2 million for the year ended December 31, 1996. 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 U.S. federal and state income taxes since July 30, 1997. 13 1996 COMPARED TO 1995 Revenues. Revenues increased $121.9 million, or 12.6%, to $1,088.3 million in 1996 from $966.4 million in 1995. Electronic global distribution services revenues related to airline bookings increased 13.3% during the period. Electronic global distribution services revenues related to bookings of car rentals and hotel reservations increased 15.9% and 33.0%, respectively, over the same period. This revenue growth was principally the result of increased worldwide booking volumes and participation by travel vendors in the Company's systems at increased levels of functionality. Information services revenues decreased from 1995 to 1996 primarily as a result of the Company's decision to discontinue a line of business during 1995. Operating Expenses. Operating expenses increased $86.8 million, or 10.5%, to $912.9 million in 1996 from $826.1 million in 1995 while revenues increased 12.6%, resulting in an improved operating margin and a decrease in operating expenses as a percentage of revenues to 83.9% in 1996 from 85.5% in 1995. This improvement in operating margin reflected the Company's continued focus on expense management, including lower increases in aggregate wages and benefits resulting from increased productivity along with the negotiation of favorable supplier contracts, especially in the categories of equipment maintenance, communications, travel and facilities. NDC commissions and subscriber incentive payments increased $67.5 million, or 14.0%, to $549.0 million in 1996 from $481.5 million in 1995, reflecting the increase in electronic global distribution services revenues and increased subscriber incentive payments. Although a relatively small portion of total operating expenses, subscriber incentive payments represent costs associated with maintaining and expanding the Company's travel agency base. Other Expenses, Net. In 1996, interest expense was $11.3 million, a decline of $7.6 million, or 40.2%, from $18.9 million in 1995 as a result of repayment of $81.4 million of indebtedness early in 1996 and 1995 debt repayments of $68.6 million. Net Income. Net income increased $44.1 million, or 36.4%, to $165.2 million in 1996 from $121.1 million in 1995. Net income as a percentage of revenues increased to 15.2% from 12.5% over the same period. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents totaled $19.4 million and working capital totaled $22.9 million at December 31, 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 $58.8 million as the Company carefully monitors cash requirements and utilizes excess cash generated by operations to pay down outstanding debt and pay dividends to its stockholders. Cash flow used in investing activities, other than the NDC Acquisitions, principally relates to purchases of mainframe data processing and network equipment and purchases of computer equipment provided to the Company's travel agency subscribers in markets where the Company directly distributes its products. Capital expenditures, excluding the capitalization of internally developed software, were $65.9 million for the year ended December 31, 1997 compared to $40.0 million for the year ended December 31, 1996. Cash flow provided by financing activities includes $384.3 million in net proceeds from the sale of stock in the initial public offering, after deducting related expenses, and net borrowings of $340.0 million, offset by the payment of distributions of $112.1 million to the partners of Galileo International Partnership and debt repayments of $210.0 million. In July 1997, prior to the Merger, final partner distributions were paid. On July 30, 1997, the Company's previous credit agreement was terminated and replaced by new credit facilities totaling $600.0 million. The net proceeds to the Company from the Offering of $390.0 million, together with a portion of initial borrowings under the new 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 14 Galileo Nederland at a purchase price of $2.0 million and to fund initial payments to SAirGroup of $2.6 million and to KLM Royal Dutch Airlines ("KLM") of $2.8 million in connection with the termination of certain revenue sharing obligations. As of December 31, 1997, $250.0 million of debt was outstanding. The Company expects that future cash requirements will principally be for capital expenditures, repayments of indebtedness, acquisitions of additional NDCs, potential new initiatives in the information services business and working capital requirements. The Company believes that cash generated by operating activities will be sufficient to fund its future cash requirements, except that significant NDC acquisitions may require additional borrowings. In connection with the NDC Acquisitions, the Company has entered into agreements to provide certain marketing services (the "Services Agreements") with the sellers (or affiliates of such sellers) of ATS, Traviswiss and Galileo Nederland whereby such sellers (or such affiliates) will provide services to the Company related to growing the respective business operations of the acquired NDCs. Pursuant to the Services Agreements, the Company will be required to pay the sellers (or such affiliates of the sellers) of ATS, Traviswiss and Galileo Nederland fees of up to $200.0 million, $6.8 million and $4.7 million (each on a present value basis), respectively, in the sixth year following the NDC acquisitions, contingent upon improvements in the Company's airline booking fee revenue in the sellers' respective NDC territories over the five-year period following the NDC acquisitions, as measured by the weighted average annual air segment growth rate and the weighted average annual price increase rate. The Company will review and, to the extent deemed appropriate, establish accruals for these payments based on an evaluation of the likelihood that the revenue goals required under the terms of these agreements will be met. The Company cannot currently estimate how much, if any, of such maximum fee will be paid. In addition to reinvesting a substantial portion of earnings in its business, the Company currently intends to pay regular quarterly dividends. However, the declaration and payment of dividends, as well as the amount thereof, are subject to the discretion of the Board of Directors of the Company and will depend upon the Company's results of operations, financial condition, cash requirements, future prospects and other factors deemed relevant by the Board of Directors. There can be no assurance that the Company will declare and pay any future dividends. 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. PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS The following pro forma financial statements are based on the historical financial statements of Galileo International Partnership, ATS, Traviswiss and Galileo Nederland. The pro forma financial statements give pro forma effect to (i) the Merger; (ii) the Offering; (iii) the incurrence of $340.0 million, net, of indebtedness; and (iv) the NDC Acquisitions. The pro forma condensed combined financial statements 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 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 financial statements should be read in conjunction with the consolidated financial statements of Galileo International, Inc. included elsewhere herein. 15 GALILEO INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEET (1997) AND PRO FORMA CONDENSED COMBINED BALANCE SHEET (1996) (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, --------------------- 1997 1996 PRO ASSETS ACTUAL FORMA ------ ---------- ---------- (UNAUDITED) Current assets: Cash and cash equivalents............................. $ 19,367 $ 100,692 Accounts receivable, net.............................. 165,407 173,403 Deferred tax asset.................................... 19,167 15,366 Prepaid expenses...................................... 9,643 7,363 Other current assets.................................. 10,691 7,155 ---------- ---------- Total current assets................................ 224,275 303,979 Property and equipment, at cost: Land.................................................. 6,470 6,470 Buildings and improvements............................ 74,038 64,958 Equipment............................................. 330,112 338,580 ---------- ---------- 410,620 410,008 Less accumulated depreciation......................... 221,439 198,346 ---------- ---------- Net property and equipment.............................. 189,181 211,662 Computer software, net.................................. 224,575 250,148 Intangible assets, net.................................. 606,187 624,186 Other noncurrent assets................................. 24,279 18,032 ---------- ---------- $1,268,497 $1,408,007 ========== ========== LIABILITIES AND EQUITY ---------------------- Current liabilities: Accounts payable...................................... $ 56,954 $ 70,598 Accrued commissions................................... 31,175 29,715 Other accrued liabilities............................. 103,595 131,350 Income taxes payable.................................. 1,721 5,811 Capital lease obligations, current portion............ 7,918 7,067 Long-term debt, current portion....................... -- 50,000 ---------- ---------- Total current liabilities........................... 201,363 294,541 Pension and postretirement benefits..................... 44,399 34,918 Other noncurrent liabilities............................ 61,263 54,370 Capital lease obligations, less current portion......... 27,776 34,539 Long-term debt, less current portion.................... 250,000 398,695 ---------- ---------- Total liabilities....................................... 584,801 817,063 Stockholders' equity: 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 shares issued and outstanding. 1,048 1,048 Additional paid-in capital............................ 663,688 594,983 Retained earnings..................................... 18,832 (5,087) Cumulative translation adjustments.................... 128 -- ---------- ---------- Total stockholders' equity.......................... 683,696 590,944 ---------- ---------- $1,268,497 $1,408,007 ========== ==========
See accompanying notes to pro forma condensed combined financial statements. 16 GALILEO INTERNATIONAL, INC. PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME (UNAUDITED, IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED DECEMBER 31, -------------------------- 1997 1996 ------------ ------------ Revenues: Electronic global distribution services.......... $ 1,220,790 $ 1,109,762 Information services............................. 130,724 121,040 ------------ ------------ 1,351,514 1,230,802 Operating expenses: Cost of operations............................... 541,861 521,619 Commissions, selling and administrative.......... 529,573 481,540 Special charges.................................. 20,111 -- ------------ ------------ 1,091,545 1,003,159 ------------ ------------ Operating income................................... 259,969 227,643 Other income (expense): Interest expense, net............................ (21,933) (31,401) Other, net....................................... 3,341 1,298 ------------ ------------ Income before income taxes......................... 241,377 197,540 Income taxes..................................... 95,984 80,415 ------------ ------------ Net income......................................... $ 145,393 $ 117,125 ============ ============ Pro forma weighted average number of shares outstanding....................................... 104,799,700 104,799,700 ============ ============ Pro forma basic and diluted earnings per share..... $ 1.39 $ 1.12 ============ ============ Pro forma operating income, excluding special charges........................................... $ 280,080 ============ Pro forma net income, excluding special charges.... $ 157,492 ============ Pro forma basic and diluted earnings per share, excluding special charges......................... $ 1.50 ============
See accompanying notes to pro forma condensed combined financial statements. 17 NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS 1. BALANCE SHEETS Principles of Consolidation The accompanying December 31, 1996 pro forma condensed combined balance sheet reflects pro forma adjustments as if the transactions described above had been consummated on December 31, 1996. Deferred Income Taxes The initial deferred income taxes resulting from the Merger have been recorded and are reflected as an opening equity adjustment, therefore, are not reflected in the pro forma condensed combined statements of income as income tax expense. Final Partnership Distributions The distributions to Galileo International Partnership's partners of undistributed earnings of Galileo International Partnership through July 30, 1997 have been reflected in the pro forma balance sheet. 2. STATEMENTS OF INCOME Principles of Consolidation The accompanying pro forma condensed combined statements of income for the years ended December 31, 1997 and 1996 reflect pro forma adjustments as if the transactions described above had been consummated on January 1, 1996. 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. A portion of the purchase price of ATS was attributed to the customer list and assembled workforce, 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 is being amortized over 25 years. Income Tax Expense Income tax expense has been recorded at the Company's estimated effective tax rate of approximately 40%. Earnings Per Share The pro forma basic and diluted earnings per share assumes the weighted average number of shares outstanding at the completion of the Offering were outstanding since January 1, 1996. PRO FORMA 1997 COMPARED TO PRO FORMA 1996 Revenues. The Company generates its revenue from the provision of electronic global distribution services and information services. During the year ended December 31, 1997, the Company generated 90.3% of its revenue from electronic global distribution services and 9.7% of its revenue from information services. The 18 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 years indicated:
1997 1996 ----- ----- United States (1)........................................... 46.2% 48.4% International (1)........................................... 53.8 51.6 ----- ----- Total Revenues............................................ 100.0% 100.0% ===== ===== (in millions of bookings) Air--United States (1)...................................... 135.8 134.8 Air--International (1)...................................... 173.8 158.0 ----- ----- 309.6 292.8 Car/Hotel/Leisure........................................... 26.5 23.3 ----- ----- Total Bookings.............................................. 336.1 316.1 ===== =====
- -------- (1) The location of the travel agent making the booking determines the geographic region credited with the related revenues. Pro forma revenues increased $120.7 million, or 9.8%, to $1,351.5 million for the year ended December 31, 1997 from $1,230.8 million for the year ended December 31, 1996. Pro forma electronic global distribution services revenues related to airline bookings increased 8.8% during the year ended December 31, 1997 as compared to the year ended December 31, 1996. Electronic global distribution services revenues related to bookings of car rentals and hotel reservations increased 15.8% over the same period. Airline booking volumes in the United States rose 0.7% for the period as carriers heightened their efforts to minimize certain passive bookings that they feel do not add value, while international airline booking volumes increased 10.0% 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 $20.3 million, or 3.9%, to $541.9 million for the year ended December 31, 1997 from $521.6 million for the year ended December 31, 1996. 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, and the timing of communication expenses related to the information services business. 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. Certain amounts in pro forma operating expenses for the years ended December 31, 1997 and 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 periods. Commissions, Selling and Administrative Expenses. Pro forma commissions, selling and administrative expenses increased $47.9 million, or 10.0%, to $529.5 million for the year ended December 31, 1997 from $481.6 million for the year ended December 31, 1996. Pro forma NDC commissions and subscriber incentive payments increased $39.1 million, or 13.2%, to $334.6 million for the year ended December 31, 1997 from $295.5 million for the year ended December 31, 1996, 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 $8.8 million, or 4.7%, to $194.9 million from $186.1 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 19 management, particularly wages and benefits, travel and facilities costs, and includes a decrease in expenses for the U.S. sales force, due to the decline in domestic airline booking volumes. Special Charges. During 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 $12.3 million in severance-related costs and $7.8 million of other integration costs, principally related to duplicate facilities. Operating Income. Pro forma operating income, excluding special charges, increased $52.5 million, or 23.0%, to $280.1 million for the year ended December 31, 1997 from $227.6 million for the year ended December 31, 1996, resulting in an improvement in pro forma operating margin to 20.7% for the year ended December 31, 1997 from 18.5% for the year ended December 31, 1996. 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 $11.5 million, or 38.2%, to $18.6 million for the year ended December 31, 1997 from $30.1 million for the year ended December 31, 1996. This decrease was primarily the result of lower interest expense arising from lower debt levels and interest rates over the periods and currency fluctuation gains. Income Taxes. Pro forma income taxes increased $15.6 million, or 19.4%, to $96.0 million for the year ended December 31, 1997 from $80.4 million for the year ended December 31, 1996. Pro forma income taxes for the year ended December 31, 1997 reflect an $8.0 million reduction for the tax effect of the special charges to operating expenses. The net increase in pro forma income taxes was principally due to higher pro forma net income. Net Income. Pro forma net income, excluding special charges, increased $40.4 million, or 34.5%, to $157.5 million for the year ended December 31, 1997 from $117.1 million for the year ended December 31, 1996. Pro forma net income, excluding special charges, as a percentage of pro forma revenues increased to 11.7% from 9.5% over the same period. 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. Readers are cautioned not to place undue reliance on these forward-looking statements. Risks associated with the Company's forward-looking statements include, but are not limited to: risks related to the loss and inability to replace the bookings generated by one or more of its five largest travel agency customers; risks associated with the competition, and technological innovation by competitors, which could require the Company to reduce prices, to change billing practices, to increase spending or marketing or product development or otherwise to take actions that might adversely affect its operations or earnings; risks of the Company's sensitivity to general economic conditions and events that affect airline travel and the airlines that participate in the Company's Apollo and Galileo systems; and risks of a natural disaster or other calamity that may cause significant damage to the Company's Data Center facility. QUARTERLY COMPARISONS The following tables set forth an unaudited summary of quarterly financial data. This quarterly information has been prepared on the same basis as the annual consolidated financial statements and, in management's 20 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 any future period. Pro forma amounts reflect the Merger, the Offering, the incurrence of debt and the NDC Acquisitions as if they had occurred as of January 1, 1996. Pro forma amounts exclude special charges related to the NDC Acquisitions and establishment of initial deferred income taxes. The Company 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.
1997 PRO FORMA DATA ------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- Total revenues.............................. $346,875 $348,319 $342,718 $313,602 Operating expenses.......................... 258,118 271,432 268,770 273,114 Operating income............................ 88,757 76,887 73,948 40,488 Net income.................................. 49,771 43,126 42,273 22,322 Net income per share........................ .48 .41 .40 .21
1996 PRO FORMA DATA ------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- Total revenues.............................. $315,175 $315,580 $315,446 $284,601 Operating expenses.......................... 243,425 250,489 255,796 253,449 Operating income............................ 71,750 65,091 59,650 31,152 Net income.................................. 38,142 33,489 30,966 14,528 Net income per share........................ .36 .32 .30 .14
1997 HISTORICAL DATA -------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- Total revenues.............................. $307,646 $307,200 $327,655 $313,602 Operating expenses.......................... 241,335 253,634 276,490 273,114 Operating income............................ 66,311 53,566 51,165 40,488 Net income.................................. 65,492 53,101 20,722 22,322 Net income per share........................ -- -- .20 .21
1996 HISTORICAL DATA -------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- Total revenues.............................. $279,177 $277,968 $277,590 $253,524 Operating expenses.......................... 227,155 228,046 233,752 223,967 Operating income............................ 52,022 49,922 43,838 29,557 Net income.................................. 49,490 46,693 41,362 27,671 Net income per share........................ -- -- -- --
EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS The Company will implement the provisions of Statement of Financial Accounting Standards No. 130, ("Statement 130") "Reporting Comprehensive Income Summary" for financial statements issued for fiscal years beginning after December 15, 1997. Statement 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose 21 financial statements. Management believes that adoption of Statement 130 will have no material impact on the Company's financial statements. The Company will implement the provisions of Statement of Financial Accounting Standards No. 131, ("Statement 131") "Disclosures about Segments of an Enterprise and Related Information" for financial statements issued for periods beginning after December 15, 1997. Statement 131, which is based on the management approach to segment reporting, includes requirements to report selected segment information, quarterly and entity-wide, disclosures about products and services, major customers, and the material countries in which the entity holds assets and reports revenues. Management believes that adoption of Statement 131 will have no material impact on the Company's financial statements. Year 2000 The Company has implemented a program designed to ensure that all software used in connection with the Company's products will manage and manipulate data involving the transition of dates from 1999 to 2000 without functional or data abnormality and without inaccurate results related to such dates. However, with regard to bookings for travel beginning in the year 2000, any failure on the part of the Company, its travel vendor customers or NDCs to ensure that any such software complies with Year 2000 requirements, regardless of when such bookings occur, could have a material adverse effect on the business, financial condition and results of operations of the Company. The Company has incurred $4.4 million of expenses in 1997 related to Year 2000 conversions, and expects future expenditures to total approximately $17.0 million. Management believes that these activities will be substantially complete in 1998 and will not have a material impact on the Company's results of operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information in response to this item is included in the Company's consolidated financial statements, together with the report thereon of KPMG Peat Marwick LLP, appearing in this Form 10-K, and in Item 7 under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations--Quarterly Comparisons." ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated herein by reference is the information set forth under the heading "Proposal 1: Election of Directors" on pages 3-6 in the Company's definitive Proxy Statement for its 1998 Annual Meeting of Stockholders, filed on or before April 30, 1998. ITEM 11. EXECUTIVE COMPENSATION Incorporated herein by reference is the information set forth under the heading "Executive Compensation" on pages 9-15 in the Company's definitive Proxy Statement for its 1998 Annual Meeting of Stockholders, filed on or before April 30, 1998. 22 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference is the information set forth under the heading "Ownership of Common Stock by Directors and Executive Officers" on pages 8-9 in the Company's definitive Proxy Statement for its 1998 Annual Meeting of Stockholders, filed on or before April 30, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference is the information set forth under the heading "Certain Relationships and Related Transactions" on pages 17-19 in the Company's definitive Proxy Statement for its 1998 Annual Meeting of Stockholders, filed on or before April 30, 1998. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
PAGE ---- (a)(1) and (a)(2) Index to the Financial Statements....................... Historical Financial Statements of Galileo International, Inc. (Formerly Galileo International Partnership through July 30, 1997)................. Independent Auditors' Report.............................................. 27 Consolidated Balance Sheets as of December 31, 1997 and 1996.............. 28 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995............................................................ 30 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995...................................................... 31 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995......................................... 32 Notes to Consolidated Financial Statements................................ 33 (a)(3) Exhibits required to be filed by Item 601 of Regulation S-K........
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------------------- 2.1 General Partnership Interest Purchase Agreement among United Air Lines, Inc., Covia LLC, U.S. Airways, Inc., USAM Corp., Air Canada, Resnet Holdings, Inc., Apollo Travel Services Partnership and Galileo International Partnership(2) 2.2 Share Purchase Agreement between SAirGroup (LTD.) and Galileo International Partnership(2) 2.3 General Share Purchase Agreement among Koninklijke Luchtvaart Maatschappij N.V., Galileo Nederland BV and Galileo International Partnership(1) 2.4 Merger Agreement among Galileo International Partnership, Galileo International, L.L.C. and Galileo International, Inc.(2) 3.1 Restated Certificate of Incorporation of Galileo International, Inc.(2) 3.2 Restated By-Laws of Galileo International, Inc.(2) 4.1 Registration Rights Agreement among Galileo International, Inc., Covia LLC, USAM Corp., RESNET Holdings, Inc., Distribution Systems Inc., Roscor A.G., Travel Industry Systems B.V., Retford Limited, Racom Teledata S.p.A., Travidata Inc., Olynet Inc. and Coporga, Inc.(2) 4.2 Specimen Certificate representing Common Stock(1)
23
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------------------- 10.1 Stockholders' Agreement among Galileo International, Inc., certain of its STOCKHOLDERS and certain RELATED PARTIES OF SUCH STOCKHOLDERS(2) 10.2 Services Agreement among Galileo International, L.L.C., United Air Lines, Inc., US Airways, Inc. and Air Canada(2) 10.3 Services Agreement between Galileo International, L.L.C. and SwissAir Swiss Air Transport Ltd.(2) 10.4 Form of Services Agreement between the Registrant and Koninklijke Luchtvaart Maatschappij N.V.(1) 10.5 Amended and Restated Non-Competition Agreement among Galileo International, Inc., Galileo International, L.L.C., and United Air Lines, Inc., UAL Corporation, Covia LLC, Air Wisconsin, Inc. and Air Wis Services, Inc. together with Schedule 1 indicating other substantially similar agreements(2)(4) 10.6 Marketing Cooperation and Sales Representation Agreement between US Airways, Inc. and Galileo International, L.L.C.(2)(4) 10.7 Marketing Cooperation and Sales Representation Agreement between United Air Lines, Inc. and Galileo International, L.L.C.(2)(4) 10.8 Rights Waiver Agreement between SAirGroup and Galileo International Partnership(2) 10.9 Form of Rights Waiver Agreement between Koninklijke Luchtvaart Maatschappij N.V. and Galileo International Partnership(1) 10.10 Credit Agreements: (a) $200,000,000 364-Day Credit Agreement(2) (i) Assignment and Assumption Agreement (ii) Amendment No. 1 (b) $400,000,000 Five-Year Credit Agreement(2) (i) Assignment and Assumption Agreement (ii) Amendment No. 1 10.11 Hillmead Underlease(1) 10.12 Underlease, dated 1996, between The Galileo Company and Lucent Technologies Network Systems UK Limited(1) 10.13 Lease, dated March 1, 1994, between St. Martins Property Investments Limited and The Galileo Company(1) 10.14 Lease, dated December 2, 1987, between St. Martins Property Investments Limited and Galileo Distribution Systems Limited(1) 10.15 Englewood, Colorado Office Lease, dated April 18, 1988(1) 10.16 First Amendment to Englewood, Colorado Office Lease, dated June 23, 1988(1) 10.17 Rosemont Office Lease, dated March 31, 1995(1) 10.18 Term Lease Master Agreement, dated May 9, 1988, between IBM Credit Corporation and Covia Partnership(1) 10.19 Master Lease Agreement, dated November 11, 1988, between Comdisco, Inc. and Covia Partnership(1) 10.20 Software License Agreement, dated August 1, 1994 between Allen Systems Group, Inc. and Galileo International(1) 10.21 Program Product Master License Agreement between Candle Corporation and Galileo International Partnership(1)
24
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------------------- 10.22 Foundation License Addendum to Order Form between Galileo International and Computer Associates International, Inc.(1) 10.23 Software License Agreement and Addendum, dated August 19, 1994, between Sterling Software (U.S.A.), Inc. and Galileo International(1) 10.24 Master Equipment Lease, dated November 19, 1991, between General Electric Capital Computer Leasing Corporation and Covia Partnership(1) 10.25 Master Equipment Lease, dated April 4, 1996, between AT&T Systems Leasing Corporation and Galileo International Partnership(1) 10.26 Dun & Bradstreet Software Services Inc. License Agreement(1) 10.27 Cover Agreement, dated October 8, 1996, between Sprint Communications Company L.P. and Galileo International Partnership(1) 10.28 Agreement for Telecommunications Services, dated January 1, 1996, between Societe International de Telecommunications Aeronautiques and Galileo International Partnership(1) 10.29 Master Agreement for MCI Enhanced Services, dated February 14, 1996, between MCI Telecommunications Corporation and Galileo International Partnership(1) (a) Second Amendment to the Master Agreement for MCI Enhanced Services (b) Amendment Number Three to Master Agreement for Enhanced Services 10.30 Communications Services Agreement, dated April 1, 1997, between Galileo International and AT&T Corp.(1) *10.31 Galileo International Severance Plan(1) *10.32 Galileo International Savings and Investment Plan(1) *10.33 Galileo International car policy(1) *10.34 Galileo Retirement and Death Benefit Scheme(1) *10.35 Galileo International Employee Pension Plan(1) *10.36 Galileo International Flextrack Benefits Plan(1) 10.37 Form of Galileo International Distributor Sales and Service Agreement(1) 10.38 Form of Global Airline Distribution Agreement(1) 10.39 Agreement for the Provision of Services between The Galileo Company and Galileo International Partnership(1) *10.40 Galileo International Retiree Medical Plan(1) *10.41 Form of Galileo International, Inc. 1997 Stock Incentive Plan as revised March 1, 1998 *10.42 Galileo International, Inc. 1997 Non-Employee Director Stock Plan(1) *10.43 Form of Deferred Compensation Arrangements For Senior Officers of Galileo International, Inc.(3) *10.44 Galileo UK Health Benefit Policy(1) *10.45 Employment Agreement of James E. Barlett(1) 11.1 Computation of Earnings Per Share 21.1 List of Subsidiaries 27.1 Financial Data Schedule
25 - -------- (1) Incorporated by reference to exhibits 1.1, 2.2, 4.2, 10.4, 10.9, 10.11 through 10.40, 10.42 , 10.44, 10.45 and 23.2 to the Company's Registration Statement on Form S-1, including all amendments (Registration No. 333- 27495). (2) Incorporated by reference to exhibits 2.1, 2.3, 2.4 through 4.1, 10.1 through 10.3, 10.5 through 10.8, 10.10 and 10.41 to the Company's Form 10- Q for the quarterly period ended June 30, 1997 (3) Incorporated by reference to exhibit 10.43 to the Company's Form 10-Q for the quarterly period ended September 30, 1997. (4) Portions of these Exhibits have been omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission. * Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the quarter ended December 31, 1997. 26 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"), formerly Galileo International Partnership through July 30, 1997, as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ending December 31, 1997. 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 generally accepted auditing standards. 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 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, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Chicago, Illinois February 2, 1998 27 GALILEO INTERNATIONAL, INC. (FORMERLY GALILEO INTERNATIONAL PARTNERSHIP THROUGH JULY 30, 1997) CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ------------------- ASSETS 1997 1996 ------ ---------- -------- Current assets: Cash and cash equivalents................................ $ 19,367 $ 78,196 Accounts receivable: Trade receivables and others........................... 154,263 104,592 Due from affiliates.................................... 33,156 56,434 ---------- -------- 187,419 161,026 Less allowances........................................ 22,012 14,747 ---------- -------- Net accounts receivable.................................. 165,407 146,279 Deferred tax asset....................................... 19,167 -- Prepaid expenses......................................... 9,643 5,603 Other current assets..................................... 10,691 10,721 ---------- -------- Total current assets................................... 224,275 240,799 Property and equipment, at cost: Land..................................................... 6,470 5,070 Buildings and improvements............................... 74,038 63,710 Equipment................................................ 330,112 235,983 ---------- -------- 410,620 304,763 Less accumulated depreciation............................ 221,439 198,565 ---------- -------- Net property and equipment................................. 189,181 106,198 Computer software, at cost................................. 420,458 414,932 Less accumulated amortization............................ 195,883 166,911 ---------- -------- Net computer software...................................... 224,575 248,021 Intangible assets, at cost: Customer list............................................ 405,600 -- Goodwill................................................. 158,446 -- Other.................................................... 56,500 -- ---------- -------- 620,546 -- Less accumulated amortization............................ 14,359 -- ---------- -------- Net intangible assets...................................... 606,187 -- Other noncurrent assets.................................... 24,279 4,880 ---------- -------- $1,268,497 $599,898 ========== ========
See accompanying notes to consolidated financial statements. 28 GALILEO INTERNATIONAL, INC. (FORMERLY GALILEO INTERNATIONAL PARTNERSHIP THROUGH JULY 30, 1997) CONSOLIDATED BALANCE SHEETS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ------------------- LIABILITIES AND EQUITY 1997 1996 ---------------------- ---------- -------- Current liabilities: Accounts payable: Trade payables and other.............................. $ 49,649 $ 20,136 Due to affiliates..................................... 7,305 6,013 ---------- -------- 56,954 26,149 Accrued commissions: Due to non-affiliated NDCs............................ 31,175 10,288 Due to affiliated NDCs................................ -- 48,298 ---------- -------- 31,175 58,586 Accrued compensation and benefits....................... 15,077 9,540 Income taxes payable.................................... 1,721 5,811 Other accrued taxes..................................... 12,724 8,620 Other accrued liabilities............................... 75,794 34,331 Capital lease obligations, current portion.............. 7,918 6,600 Long-term debt, current portion......................... -- 50,000 ---------- -------- Total current liabilities............................. 201,363 199,637 Pension and postretirement benefits....................... 44,399 19,012 Other noncurrent liabilities.............................. 61,263 21,335 Capital lease obligations, less current portion........... 27,776 34,539 Long-term debt, less current portion...................... 250,000 70,000 ---------- -------- Total liabilities......................................... 584,801 344,523 Stockholders' equity and partners' capital: Special voting preferred stock: $.01 par value; 7 shares authorized; 7 shares issued and outstanding in 1997................................................... -- -- 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 shares issued and outstanding in 1997...... 1,048 -- Additional paid-in capital.............................. 663,688 -- Retained earnings....................................... 18,832 -- Cumulative translation adjustments...................... 128 (10,558) Partners' capital....................................... -- 265,933 ---------- -------- Total stockholders' equity and partners' capital...... 683,696 255,375 ---------- -------- $1,268,497 $599,898 ========== ========
See accompanying notes to consolidated financial statements. 29 GALILEO INTERNATIONAL, INC. (FORMERLY GALILEO INTERNATIONAL PARTNERSHIP THROUGH JULY 30, 1997) CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED DECEMBER 31, --------------------------------- 1997 1996 1995 ----------- ---------- -------- Revenues: Electronic global distribution services... $1,180,114 $1,050,635 $921,338 Information services...................... 75,989 37,624 45,072 ----------- ---------- -------- 1,256,103 1,088,259 966,410 Operating expenses: Cost of operations........................ 385,298 254,600 224,925 Commissions, selling and administrative... 639,164 658,320 588,799 Special charges........................... 20,111 -- 12,388 ----------- ---------- -------- 1,044,573 912,920 826,112 ----------- ---------- -------- Operating income............................ 211,530 175,339 140,298 Other income (expense): Interest expense, net..................... (8,842) (8,060) (14,406) Other, net................................ 2,925 (181) (2,177) ----------- ---------- -------- Income before income taxes.................. 205,613 167,098 123,715 Income taxes: Income taxes.............................. 28,641 1,882 2,664 Initial deferred income taxes............. 15,335 -- -- ----------- ---------- -------- 43,976 1,882 2,664 ----------- ---------- -------- Net income.................................. $ 161,637 $ 165,216 $121,051 =========== ========== ======== Income before income taxes as reported...... $ 205,613 Pro forma income tax expense................ 82,245 ----------- Adjusted net income......................... $ 123,368 =========== Weighted average number of shares outstanding................................ 94,999,875 =========== Adjusted basic earnings per share........... $ 1.30 =========== Diluted weighted average number of shares outstanding................................ 95,024,199 =========== Adjusted diluted earnings per share......... $ 1.30 ===========
See accompanying notes to consolidated financial statements. 30 GALILEO INTERNATIONAL, INC. (FORMERLY GALILEO INTERNATIONAL PARTNERSHIP THROUGH JULY 30, 1997) CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- Operating activities: Net income.................................. $ 161,637 $ 165,216 $ 121,051 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............. 134,073 80,369 80,151 Loss on disposal of property and equipment................................ 728 973 2,472 Deferred income taxes, net................ 15,284 -- -- (Increase) decrease in noncurrent assets.. (10,281) 2,260 (1,789) Increase (decrease) in noncurrent liabilities.............................. 21,374 (420) (8,887) Changes in operating assets and liabilities, net of effects from purchases of NDCs: Decrease (increase) in accounts receivable, net........................ 6,998 (27,820) (29,412) Decrease (increase) in other current assets................................. 1,377 4,763 (5,843) Increase in accounts payable and accrued commissions............................ 6,057 4,812 18,581 Decrease in accrued liabilities......... (8,536) (15,715) (5,078) (Decrease) increase in income taxes payable................................ (3,973) (360) 1,304 --------- --------- --------- Net cash provided by operating activities..... 324,738 214,078 172,550 Investing activities: Purchase of property and equipment.......... (53,696) (32,572) (56,726) Purchase and capitalization of computer software................................... (33,449) (28,978) (32,287) Proceeds on disposal of property and equipment.................................. 322 408 2,883 Refund of lease deposit..................... -- 40,461 -- Purchase of NDCs, net of $26,244 cash acquired................................... (688,451) -- -- --------- --------- --------- Net cash used in investing activities......... (775,274) (20,681) (86,130) Financing activities: Borrowings under credit agreements.......... 450,000 158,000 -- Repayments under credit agreements.......... (320,000) (239,375) (68,625) Distributions to partners of Galileo International Partnership.................. (112,150) (36,599) (26,594) Payments of capital lease obligations....... (4,149) (5,559) (13,318) Dividends paid to stockholders.............. (6,288) -- -- Proceeds from sale of stock, net of fees paid....................................... 384,288 -- -- --------- --------- --------- Net cash provided by (used in) financing activities................................... 391,701 (123,533) (108,537) Effect of exchange rate changes on cash....... 6 (35) (168) --------- --------- --------- (Decrease) increase in cash and cash equivalents.................................. (58,829) 69,829 (22,285) Cash and cash equivalents at beginning of year......................................... 78,196 8,367 30,652 --------- --------- --------- Cash and cash equivalents at end of year...... $ 19,367 $ 78,196 $ 8,367 ========= ========= =========
See accompanying notes to consolidated financial statements. 31 GALILEO INTERNATIONAL, INC. (FORMERLY GALILEO INTERNATIONAL PARTNERSHIP THROUGH JULY 30, 1997) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
SPECIAL VOTING PREFERRED STOCK COMMON STOCK ADDITIONAL CUMULATIVE PARTNERS' ------------- ------------------ PAID-IN RETAINED TRANSLATION CAPITAL SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENTS TOTAL --------- ------ ------ ----------- ------ ---------- -------- ----------- --------- Balance at December 31, 1994................... $ 42,859 -- $-- -- $ -- $ -- $ -- $ (3,377) $ 39,482 Net income.............. 121,051 -- -- -- -- -- -- -- 121,051 Distributions to partners............... (26,594) -- -- -- -- -- -- -- (26,594) Change in cumulative translation adjustments............ -- -- -- -- -- -- -- (4,386) (4,386) --------- --- ---- ----------- ------ -------- ------- -------- --------- Balance at December 31, 1995................... 137,316 -- -- -- -- -- -- (7,763) 129,553 Net income.............. 165,216 -- -- -- -- -- -- -- 165,216 Distributions to partners............... (36,599) -- -- -- -- -- -- -- (36,599) Change in cumulative translation adjustments............ -- -- -- -- -- -- -- (2,795) (2,795) --------- --- ---- ----------- ------ -------- ------- -------- --------- Balance at December 31, 1996................... 265,933 -- -- -- -- -- -- (10,558) 255,375 Net income prior to the Merger................. 136,517 -- -- -- -- -- -- -- 136,517 Distributions to partners............... (112,150) -- -- -- -- -- -- -- (112,150) Change in cumulative translation adjustments prior to the Merger.... -- -- -- -- -- -- -- 706 706 Conversion of partners' net investment into Common stock and Special voting preferred stock........ (290,300) 7 -- 88,000,000 880 279,568 -- 9,852 -- Issuance of 16,799,700 shares of Common stock in initial public offering............... -- -- -- 16,799,700 168 384,120 -- -- 384,288 Net income subsequent to the Merger............. -- -- -- -- -- -- 25,120 -- 25,120 Dividends declared ($.06 per share)............. -- -- -- -- -- -- (6,288) -- (6,288) Change in cumulative translation adjustments subsequent to the Merger................. -- -- -- -- -- -- -- 128 128 --------- --- ---- ----------- ------ -------- ------- -------- --------- Balance at December 31, 1997................... $ -- 7 $-- 104,799,700 $1,048 $663,688 $18,832 $ 128 $ 683,696 ========= === ==== =========== ====== ======== ======= ======== =========
See accompanying notes to consolidated financial statements. 32 GALILEO INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE DATA) 1. SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Galileo International, Inc. (the "Company"), formerly Galileo International Partnership, 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. The Company distributes its products in 84 countries on six continents. Principles of Consolidation and NDC Acquisitions The consolidated financial statements include the accounts of Galileo International, Inc. and all majority-owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. Effective July 30, 1997, Galileo International Partnership merged into a wholly owned limited liability company subsidiary of Galileo International, Inc. (the "Merger"). 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, par value $.01 per share (the "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 option, of $384,288 after deducting underwriting discounts, commissions and other expenses (the "Offering"). During 1997 the Company acquired three national distribution companies (the "NDC Acquisitions"); Apollo Travel Services Partnership ("ATS"), Traviswiss AG ("Traviswiss") and Galileo Nederland BV ("Galileo Nederland"), (ATS and Traviswiss were acquired on July 30, 1997 and Galileo Nederland on September 17, 1997) at purchase prices of $700,000, $8,502 and $2,000, respectively. In connection with the NDC Acquisitions, the Company also incurred expenses of $4,193, 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 on their respective fair values. Goodwill related to the cost of the NDC Acquisitions is being amortized over 25 years and is included in commissions, selling and administrative expenses. 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 NDC Acquisitions, the Company incurred $340,000, net, of debt under a five-year credit agreement. 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 Royal Dutch Airlines ("KLM"), in four annual installments beginning on the acquisition dates, a total of $22,400 and $14,800, respectively. The remaining liability was $31,800 at December 31, 1997. The related intangible asset of $37,200 is being amortized over 17 years. The following pro forma financial information reflects the Merger, the Offering, the incurrence of debt, and the NDC Acquisitions as if they had occurred January 1, 1996, after giving effect to certain adjustments, including amortization of goodwill, increased interest expense on debt related to the acquisitions and related income tax effects. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the acquisitions actually occurred on January 1, 1996. 33 GALILEO INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Pro forma revenues for the years ended December 31, 1997 and 1996 were $1,351,514 and $1,230,802, respectively. Pro forma net income for the years ended December 31, 1997 and 1996 were $145,393 and $117,125, respectively. Pro forma basic and diluted earnings per share for the years ended December 31, 1997 and 1996 were $1.39 and $1.12, respectively. Uses of Estimates The preparation of financial statements in conformity with generally accepted accounting principles 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. 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 balance sheet for cash equivalents include cost and accrued interest, which approximate fair value. Fair Value of Financial Instruments The Company's financial instruments are valued at their carrying amounts, which, except for derivative financial instruments, are reasonable estimates of fair value due to the relatively short period to maturity of the instruments, or variable interest rates, in the case of long-term debt. Allowance for Doubtful Accounts Receivable The allowance for doubtful accounts receivable was $22,012, $14,747 and $11,713 at December 31, 1997, 1996 and 1995, respectively. Provisions for bad debts were $4,219, $5,671 and $1,558 for the years ended December 31, 1997, 1996 and 1995, respectively. Write-offs of uncollectible accounts, net of recoverables and allowance adjustments, were $652, $2,637 and $4,791 for the years ended December 31, 1997, 1996 and 1995, respectively. Accounting for the Impairment of Long-Lived Assets Statement of Financial Accounting Standards No. 121, ("Statement 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 wherever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Statement 121 also requires that long- lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. The carrying amount of the Company's long-lived assets at December 31, 1997 and 1996 primarily represents the original amounts invested less the recorded depreciation and amortization. Management believes the carrying amount of these investments is not impaired. 34 GALILEO INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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..................................... 5-35 years Equipment...................................................... 3-10 years
Depreciation expense for the years ended December 31, 1997, 1996 and 1995 was $54,591, $31,533 and $33,280, respectively. Computer Software In accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed," certain software development costs are capitalized upon the establishment of technological feasibility. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs require considerable judgment by management with respect to certain external factors, including but not limited to, anticipated future gross revenues, 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 3-10 years. Amortization expense for the years ended December 31, 1997, 1996 and 1995 was $62,820, $47,611 and $46,225, respectively. Intangible Assets Intangible assets are amortized on the straight-line method over the following useful lives: Customer list.................................................. 17 years Goodwill....................................................... 25 years Other.......................................................... 8-17 years
The Company assesses the recoverability of these intangible assets by determining whether the carrying amount of the assets are recoverable over their remaining lives. Amortization expense for the year ended December 31, 1997 was $14,356. Revenue Recognition Fees are charged to airline, car rental, hotel and other travel vendors for bookings made through the Company's CRS and are dependent upon the level and usage of functionality within the CRS at which the vendor 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 $8,550, $8,185 and $10,094 for the years ended December 31, 1997, 1996 and 1995, respectively. 35 GALILEO INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 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 United Kingdom operations. The Company accounts for such contracts by recording any unrealized gains or losses in income each reporting period. At December 31, 1997, the Company had entered into foreign exchange forward contracts which provide for purchases of approximately (Pounds)3,250 per month through December 31, 1998. At December 31, 1997 and 1996, the notional principal amounts of outstanding forward contracts were $62,421 and $68,562, respectively. The fair value of outstanding forward contracts at December 31, 1997 and 1996 were $1,417 and $6,744, 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 4 for further information regarding the Company's interest rate agreements. Income Taxes Subsequent to the Merger, the Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109 ("Statement 109"), "Accounting for Income Taxes". 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. Prior to the Merger, the Company operated in the form of a partnership and accordingly the Company's income tax liabilities were the responsibility of its partners. Adjusted Earnings per Share Adjusted basic earnings per share data for 1997 is calculated as though (i) the partners' capital was converted in the Merger into 88,000,000 shares of Common Stock as of the beginning of the year and the 16,799,700 shares issued to the public were outstanding from July 30, 1997 and, (ii) the Company had operated in a corporate form for the entire year and accordingly was subject to federal and state income taxes. Adjusted diluted earnings per share for 1997 is calculated as if the Company's dilutive stock options were outstanding from July 30, 1997, net of assumed repurchased shares using the treasury stock method, causing a 24,324 increase in the weighted average number of shares outstanding. 36 GALILEO INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Reclassifications Certain operating expenses in 1996 and 1995 have been reclassified between cost of operations and commissions, selling and administrative expenses to conform to the 1997 presentation. This reclassification had no effect on overall operating expenses of the Company. 2. TRANSACTIONS WITH AFFILIATES Prior to the Merger, for financial reporting purposes, affiliates were considered to be all airline owners of Galileo International Partnership, with individual ownership percentages ranging from 38.0% to 0.10%. Subsequent to the Offering, the airline stockholders, in aggregate, own 64.9% of the Company's outstanding Common Stock, with only United Air Lines, Inc. ("United Airlines") and KLM defined as affiliates due to indirect ownership, individually, greater than 10% of the Company's outstanding Common Stock. The Company recognized electronic global distribution services revenues, primarily in the form of booking fees, from affiliates totaling $63,820 for the five months ended December 31, 1997, $236,015 for the seven months ended July 30, 1997 and, $355,535 and $336,808 for the years ended December 31, 1996 and 1995, respectively. The Company also received information services revenues from affiliates totaling $50,126 for the five months ended December 31, 1997, $19,805 for the seven months ended July 30, 1997 and, $34,335 and $34,460 for the years ended December 31, 1996 and 1995, respectively. Total revenues from United Airlines of approximately $209,106, $164,179 and $161,542 were greater than 10% of the Company's revenues for the years ended December 31, 1997, 1996 and 1995, respectively. The Company, in the ordinary course of business, purchases services from affiliates. Services purchased from affiliates and classified within cost of operations in the accompanying consolidated statements of income totaled zero for the five months ended December 31, 1997, $2,051 for the seven months ended July 30, 1997 and, $14,232 and $14,638 for the years ended December 31, 1996 and 1995, respectively. Services purchased from affiliates and classified within commissions, selling and administrative expenses totaled $5,399 for the five months ended December 31, 1997, $267,935 for the seven months ended July 30, 1997 and, $424,536 and $365,422 for the years ended December 31, 1996 and 1995, respectively. At the time of the Merger, the Company entered into Computer Services Agreements with certain airline stockholders pursuant to which the Company will provide certain fares quotation services, internal reservation services, other internal management services and software development services. The Company has agreed to provide the fares quotation services under existing pricing arrangements for a period of approximately five years. The Company has agreed to provide the remaining above mentioned services to United Airlines for a minimum period of four or six years for the internal reservation services and a minimum of six years for the internal management services, generally at prices in effect immediately prior to the Offering, which are based upon a fully allocated cost methodology. The software development services will be provided to United Airlines for a minimum of six years at prices based upon a fully allocated cost methodology. 3. LEASES AND COMMITMENTS The Company leases various office facilities and equipment under operating leases with remaining terms of up to 16 years. Rental expense under operating leases was $24,493, $23,935 and $16,510 for the years ended December 31, 1997, 1996 and 1995, respectively. The Company also leases data processing equipment under capital leases. Equipment, at cost, includes $25,969, $21,930 and $36,139 relating to capital leases at December 31, 1997, 1996 and 1995, respectively. 37 GALILEO INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Accumulated depreciation includes $15,616, $8,831 and $18,620 relating to capital leases at December 31, 1997, 1996 and 1995, respectively, with lease amortization included in depreciation expense. During 1996, the Company issued a letter of credit in exchange for the refund of a $40,461 lease deposit held by the lessor of the Company's United Kingdom facility. Future minimum lease payments under capital leases and noncancelable operating leases at December 31, 1997 are as follows:
CAPITAL OPERATING ------- --------- 1998......................................................... $10,357 $ 21,188 1999......................................................... 7,393 15,015 2000......................................................... 6,620 10,615 2001......................................................... 6,620 8,756 2002......................................................... 6,620 8,305 Thereafter................................................... 6,621 48,498 ------- -------- Total minimum lease payments................................. $44,231 $112,377 ======== Less amount representing interest............................ 8,537 ------- Present value of future minimum lease payments............... 35,694 Current portion of present value of future minimum lease payments.................................................... 7,918 ------- Long-term portion of present value of future minimum lease payments.................................................... $27,776 =======
4. LONG-TERM DEBT Outstanding long-term debt consists of the following at December 31, 1997 and 1996:
1997 1996 -------- -------- Five-year revolving credit agreement......................... $250,000 $ -- Revolving credit facility.................................... -- 120,000 -------- -------- 250,000 120,000 Less current portion of long-term debt....................... -- 50,000 -------- -------- Long-term debt............................................... $250,000 $ 70,000 ======== ========
On July 23, 1997, the Company's $200,000 revolving credit facility was terminated and replaced by a $200,000 364-day credit agreement and a $400,000 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. Interest on the borrowings may be either Base Rate, CD Rate or Euro-dollar Rate based and is reset in six month intervals. At December 31, 1997, the nominal interest rate for outstanding debt was 6.21%. At December 31, 1997, borrowings totaled $250,000 under the five-year credit agreement with no required repayments until maturity in July 2002. No amounts were outstanding under the 364-day credit agreement. The Company has entered into interest rate swap agreements to reduce the impact of changes in interest rates on its outstanding borrowings. At December 31, 1997 and 1996, the Company had outstanding interest rate swap agreements having a total notional value of $89,009 and $120,326, respectively, with fixed interest rates 38 GALILEO INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) averaging 5.03% and 5.08%, respectively. The fair value of outstanding swap agreements at December 31, 1997 and 1996 were $547 and $1,346, respectively. For the years ended December 31, 1997, 1996 and 1995, the effective interest rate on the Company's outstanding debt was 5.31%, 5.73% and 6.55%, respectively. The interest rate swap agreements mature in December 1998. Total interest, including interest under capital leases, of $12,266, $11,307 and $18,882 was incurred for the years ended December 31, 1997, 1996, and 1995, respectively. At December 31, 1996, the Company had $120,000 outstanding against a $200,000 revolving credit facility to mature in July 2001. The Company paid a quarterly commitment fee on the entire facility (13.75 basis points annually at December 31, 1996). Interest on the outstanding debt was based on the London Interbank Offer Rate (LIBOR), 5.5% at December 31, 1996, plus a fluctuating margin, that was 0.2625% at December 31, 1996. The Company classified $50,000 of non-required debt payments as current debt in the accompanying consolidated balance sheet at December 31, 1996. This classification reflected the Company's intent to retire such debt. 5. EMPLOYEE BENEFIT PLANS The Company has defined benefit pension plans that cover substantially all U.S. employees, including, in 1997, the employees of ATS. Plan benefits are based on the participants' years of service and average compensation for a specified period before retirement. The Company's funding policy is to contribute annually an amount which satisfies ERISA funding standards. The assets of the plans at December 31, 1997 and 1996 are principally comprised of marketable equity securities, U.S. Government and government agency bonds, and short-term securities. In addition to the plans above, the Company sponsors a nonqualified supplemental defined benefit pension plan ("Supplemental Plan") covering certain highly compensated employees. The Supplemental Plan benefits are based on years of service and annual compensation upon termination or retirement. The Company's policy is to fund Supplemental Plan benefits as they become payable to participants. The following table sets forth the plans' obligations, funded status, and pension costs related to all defined benefit plans at December 31, 1997 and 1996:
1997 1996 -------- -------- Actuarial present value of accumulated benefit obligation: Vested..................................................... $ 60,039 $ 25,799 Nonvested.................................................. 11,641 5,294 -------- -------- $ 71,680 $ 31,093 ======== ======== Projected benefit obligation for service rendered to date... $ 90,304 $ 42,593 Plan net assets at fair value............................... (79,781) (34,768) -------- -------- Plan net assets less than projected benefit obligation...... 10,523 7,825 Unrecognized net gain....................................... 3,705 688 Unrecognized prior service cost............................. (3,324) (3,639) Unrecognized net transition obligation...................... (2,487) (2,736) -------- -------- Net pension liability....................................... $ 8,417 $ 2,138 ======== ========
39 GALILEO INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Net pension costs for the years ended December 31, 1997, 1996 and 1995 included the following components:
1997 1996 1995 ------- ------- ------- Interest cost on projected benefit obligation........ $ 4,654 $ 3,093 $ 2,744 Service cost......................................... 4,384 3,725 3,038 Actual investment return on plan assets.............. (9,381) (5,089) (4,789) Net amortization and deferral........................ 5,452 3,391 3,884 ------- ------- ------- $ 5,109 $ 5,120 $ 4,877 ======= ======= =======
The discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.25% and 4.25%, respectively, in 1997, 7.75% and 4.75%, respectively, in 1996, and 7.25% and 4.25%, respectively, in 1995. The expected long-term rate of return on assets as of December 31, 1997, 1996 and 1995 was 9.50%. The Company has a defined contribution pension plan covering a majority of the United Kingdom employees which requires the Company to annually contribute 10% of eligible employee compensation on behalf of each participant. The Company's contributions to the plan were $2,410, $2,289 and $1,970 during the years ended December 31, 1997, 1996 and 1995, 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 up to a designated level, were $1,982 and $1,983 during the years ended December 31, 1997 and 1996, respectively. 6. POSTRETIREMENT HEALTH CARE BENEFITS The Company provides certain health care benefits to its retired U.S. employees. The Company has no significant postretirement health care benefit plans outside of the United States. The majority of its U.S. employees may become eligible for these benefits if they reach normal retirement age while working for the Company. In addition, the Company provides retiree flight benefits to certain former United employees. The discount rate used to develop the accumulated postretirement benefit obligation for the retiree health care plan was 7.25%, 7.75% and 7.25% for 1997, 1996 and 1995, respectively. The Company's plan is unfunded. The following table sets forth the plan's funded status, reconciled with amounts recognized in the Company's consolidated balance sheets at December 31, 1997 and 1996:
1997 1996 ------- ------- Accumulated postretirement benefit obligation: Retirees................................................... $ 6,460 $ 4,730 Fully eligible active plan participants.................... 9,638 3,645 Other active plan participants............................. 24,022 13,122 ------- ------- 40,120 21,497 Plan assets at fair value.................................... -- -- ------- ------- Accumulated postretirement benefit obligation in excess of plan assets................................................. 40,120 21,497 Unrecognized net loss from past experience different from that assumed and from changes in assumptions................ (4,138) (4,622) ------- ------- Accrued postretirement benefit cost.......................... $35,982 $16,875 ======= =======
40 GALILEO INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Components of the expense recognized for the years ended December 31, 1997, 1996 and 1995 for the retiree health care plan were as follows:
1997 1996 1995 ------ ------ ------ Service cost.............................................. $1,337 $1,169 $ 909 Interest cost on projected benefit obligation............. 2,062 1,542 1,362 Amortization of losses.................................... 51 274 127 ------ ------ ------ Net retiree health care expense........................... $3,450 $2,985 $2,398 ====== ====== ======
The health care trend rate used to determine the accumulated postretirement benefit obligation was 12% for 1997, decreasing by 1% each year until reaching 4% for the year 2005 and beyond. Increasing the health care trend rate by one percentage point would increase the accumulated postretirement benefit obligation by $586 in 1997 and would increase the 1997 net retiree health care expense by $21. 7. GEOGRAPHIC AND SEGMENT INFORMATION The Company derives substantially all of its revenues from the global travel industry. Revenues are generated domestically from both U.S. and non-U.S. travel vendors. Revenues received by the Company's U.S. operations from services provided to non-U.S. travel vendors were approximately $663,500, $561,900 and $474,500 for the years ended December 31, 1997, 1996 and 1995, respectively. 8. SPECIAL CHARGES The Company recorded special charges of $20,111 ($12,099 after tax) during the year ended December 31, 1997 related to the integration of the acquired NDCs into the Company's operations. The special charges were comprised primarily of $12,315 in severance costs related to termination of 202 employees and $7,796 of other integration costs, principally related to the closing of duplicate facilities. As of December 31, 1997, $6,440 of severance costs have been paid and charged against the liability and 82 employees have been terminated. The Company expects the integration activities to be substantially complete in 1998. At December 31, 1997, the estimated remaining liability related to the integration was $10,427 and is included in the accompanying consolidated balance sheet. During 1995, the Company decided to discontinue the operations of Covia Technologies. A charge of $12,388 was taken for disposal costs related to this discontinuance and the write-off of intangible assets as of December 31, 1995. In 1993, the Company, formerly Covia Partnership, combined with The Galileo Company Ltd. (the "Combination") and consolidated its two data center facilities resulting in the closing of the Swindon, United Kingdom data center. In connection therewith, the estimated cost of the consolidation was charged to expense. At December 31, 1997 and 1996, the estimated remaining liabilities, principally for vacated leased facilities, related to the consolidation were $20,908 and $25,045, respectively, and are included in the accompanying consolidated balance sheets. 41 GALILEO INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 9. SUPPLEMENTAL INFORMATION Supplemental cash flow information and noncash investing and financing activities are as follows:
1997 1996 1995 ------- ------- ------- Supplemental cash flow information-- Cash paid during the period for: Interest........................................... $12,786 $11,517 $19,299 Income taxes....................................... 32,001 -- -- Supplemental noncash investing and financing activities-- Capital lease obligations and accounts payable from acquisition of equipment............................ $ 7,295 $ 3,705 $ 9,029
10. INCOME TAXES No provision for U.S. federal and state income taxes was recorded prior to July 30, 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, the Company recorded initial deferred income taxes of $15,335 to reflect the establishment of deferred tax assets and liabilities. The remaining provisions for income taxes for the year ended December 31, 1997 relate to the period subsequent to July 30, 1997. The provision for income taxes consists of the following for the year ended December 31, 1997: Current taxes: Federal.............................................................. $26,867 State................................................................ 5,317 Foreign.............................................................. (3,501) ------- Total.............................................................. 28,683 Deferred taxes: Federal.............................................................. (36) State................................................................ (6) ------- Total.............................................................. (42) ------- Provision for income taxes............................................. $28,641 =======
Deferred tax assets (liabilities) are comprised of the following at December 31, 1997: Current: Bad debt reserves.................................................. $ 7,294 Compensation accruals.............................................. 6,045 Other.............................................................. 5,828 -------- $ 19,167 ======== Noncurrent: Software amortization.............................................. $(65,430) Postretirement medical and pension accruals........................ 17,158 Depreciation....................................................... 11,552 Other assets....................................................... 9,780 Facilities reserves................................................ 8,651 Other.............................................................. (1,329) -------- $(19,618) ========
42 GALILEO INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The 1997 provision for income taxes is based on income earned for the period July 31 through December 31, 1997 of $67,627, and includes foreign tax expense incurred for the period January 1, 1997 through July 30, 1997 of $1,469. The effective tax rate on this income before taxes differs from the U.S. statutory rate. The following table reconciles the U.S. statutory rate with the effective rate for the year ended December 31, 1997: Tax at U.S. Federal income tax rate.................................... $23,669 Increase in taxes resulting from: State income taxes, net of U.S. Federal income tax benefit........... 3,457 Amortization of excess of cost over net assets acquired and related purchase accounting adjustments..................................... 880 Tax effect of non-deductible expenses................................ 175 Foreign and U.S. tax effects attributable to foreign operations...... 110 Other................................................................ 350 ------- Taxes on income at effective rate.................................. $28,641 =======
11. STOCKHOLDERS' EQUITY Special Voting Preferred Stock 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 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 Each share of Common Stock entitles the holder thereof to one vote in elections of 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, as and if declared by the Board of Directors. Stock Incentive Plan During 1997, the Company adopted the 1997 Stock Incentive Plan (the "Plan"). 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 the Company's Common Stock. Such options vest in equal installments over a three-year period measured from the date of the Offering. In 43 GALILEO INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) addition, the Company has granted to senior management options to purchase the Company's Common Stock, which vest in equal installments over a five-year period. All of the foregoing options have a ten-year term. An aggregate of 8,140,000 shares of Common Stock are reserved for issuance under the Plan. The number of shares available for issuance under the Plan will be proportionately adjusted in the event of certain changes in the Company's capitalization or a similar transaction. Shares issued pursuant to the 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 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. Stock option activity during 1997 is as follows (in thousands except share prices):
WEIGHTED NUMBER AVERAGE OF SHARES EXERCISE PRICE --------- -------------- Outstanding at January 1, 1997................... -- -- Granted.......................................... 1,107 $25.37 Exercised........................................ -- -- Forfeited........................................ (43) 24.50 Expired.......................................... -- -- ----- Outstanding at December 31, 1997................. 1,064 $25.40 ===== Options exercisable at December 31, 1997......... -- --
The following table summarizes information about stock options outstanding at December 31, 1997 (number of shares in thousands):
WEIGHTED AVERAGE NUMBER OF REMAINING EXERCISE PRICES SHARES CONTRACTUAL LIFE --------------- --------- ---------------- $24.50......................................... 803 9.4 years $28.18......................................... 261 9.4 years
The per share weighted average fair value of stock options granted during 1997 was $6.73 on the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions: expected dividend yield of 0.98%, expected volatility of 25%, risk-free interest rate of 5%, and expected life of five years. The Black-Scholes option valuation 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 valuation 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 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. 44 GALILEO INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company applies APB Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. 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 ("Statement 123"), "Accounting for Stock-Based Compensation", the Company's net income would have been reduced to the adjusted amounts below:
1997 -------- Net Income As reported.................................................... $161,637 As adjusted.................................................... 161,013
The application of Statement 123 to the Company's adjusted net income and basic and diluted earnings per share would have had no material effect. 12. COMMITMENTS & CONTINGENCIES The Company is involved in various matters of litigation as both plaintiff and defendant. In the opinion of management, none of these matters, individually or in the aggregate, if determined against the Company would have a material adverse effect on the business, consolidated financial condition or results of operations of the Company. In connection with the NDC Acquisitions, 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 following the effective date of the Services Agreements, the Company is contractually required to pay the Service Providers a fee of up to $211,500 (on a present value basis), based on improvements in the Company's air booking fee revenue over the five-year period immediately following the acquisitions, as measured by the weighted average annual air segment growth rate and the weighted average annual price increase rate over such period. The Company cannot currently estimate how much, if any, of such maximum fee will be paid. 13. 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. Travel agencies are the primary channel of distribution for the services offered by travel vendors. 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. 45 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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, ON THE 9TH DAY OF MARCH, 1998. Galileo International, Inc. /s/ James E. Barlett By: _________________________________ James E. Barlett Chairman, President and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- /s/ James E. Barlett Chairman, President, Chief February 23, 1998 ____________________________________ Executive Officer and James E. Barlett Director (Principal Executive Officer) /s/ Frederic F. Brace Director February 23, 1998 ____________________________________ Frederic F. Brace /s/ Paul H. Bristow Senior Vice President, Chief February 23, 1998 ____________________________________ Financial Officer, Paul H. Bristow Treasurer and Director (Principal Financial and Accounting Officer) /s/ David A. Coltman Director February 23, 1998 ____________________________________ David A. Coltman /s/ James E. Goodwin Director February 23, 1998 ____________________________________ James E. Goodwin /s/ Babetta R. Gray Senior Vice President Legal, February 23, 1998 ____________________________________ General Counsel, Secretary Babetta R. Gray and Director Director ____________________________________ John W. Harper /s/ Frank H. Rovekamp Director February 23, 1998 ____________________________________ Frank H. Rovekamp /s/ Georges P. Schorderet Director February 23, 1998 ____________________________________ Georges P. Schorderet /s/ Derek M. Stevens Director February 23, 1998 ____________________________________ Derek M. Stevens /s/ Kenneth Whipple Director February 23, 1998 ____________________________________ Kenneth Whipple
(c) Exhibit Index
Exhibit Number Exhibit Description - ------ ------------------- 2.1 General Partnership Interest Purchase Agreement among United Air Lines, Inc., Covia LLC, U.S. Airways, Inc., USAM Corp., Air Canada, Resnet Holdings, Inc., Apollo Travel Services Partnership and Galileo International Partnership (2) 2.2 Share Purchase Agreement between SAirGroup (LTD.) and Galileo International Partnership (2) 2.3 General Share Purchase Agreement among Koninklijke Luchtvaart Maatschappij N.V., Galileo Nederland BV and Galileo International Partnership (1) 2.4 Merger Agreement among Galileo International Partnership, Galileo International, L.L.C. and Galileo International, Inc. (2) 3.1 Restated Certificate of Incorporation of Galileo International, Inc. (2) 3.2 Restated By-Laws of Galileo International, Inc. (2) 4.1 Registration Rights Agreement among Galileo International, Inc., Covia LLC, USAM Corp., RESNET Holdings, Inc., Distribution Systems Inc., Roscor A.G., Travel Industry Systems B.V., Retford Limited, Racom Teledata S.p.A., Travidata Inc., Olynet Inc. and Coporga, Inc. (2) 4.2 Specimen Certificate representing Common Stock (1) 10.1 Stockholders' Agreement among Galileo International, Inc., certain of its STOCKHOLDERS and certain RELATED PARTIES OF SUCH STOCKHOLDERS (2) 10.2 Services Agreement among Galileo International, L.L.C., United Air Lines, Inc., US Airways, Inc. and Air Canada (2) 10.3 Services Agreement between Galileo International, L.L.C. and SwissAir Swiss Air Transport Ltd. (2) 10.4 Form of Services Agreement between the Registrant and Koninklijke Luchtvaart Maatschappij N.V. (1) 10.5 Amended and Restated Non-Competition Agreement among Galileo International, Inc., Galileo International, L.L.C., and United Air Lines, Inc., UAL Corporation, Covia LLC, Air Wisconsin, Inc. and Air Wis Services, Inc. together with Schedule 1 indicating other substantially similar agreements (2)(4) 10.6 Marketing Cooperation and Sales Representation Agreement between US Airways, Inc. and Galileo International, L.L.C.(2)(4) 10.7 Marketing Cooperation and Sales Representation Agreement between United Air Lines, Inc. and Galileo International, L.L.C.(2)(4) 10.8 Rights Waiver Agreement between SAirGroup and Galileo International Partnership (2) 10.9 Form of Rights Waiver Agreement between Koninklijke Luchtvaart Maatschappij N.V. and Galileo International Partnership (1) 10.10 Credit Agreements: (a) $200,000,000 364-Day Credit Agreement (2) (i) Assignment and Assumption Agreement (ii) Amendment No. 1 (b) $400,000,000 Five-Year Credit Agreement (2) (i) Assignment and Assumption Agreement (ii) Amendment No. 1 10.11 Hillmead Underlease (1) 10.12 Underlease, dated 1996, between The Galileo Company and Lucent Technologies Network Systems UK Limited (1) 10.13 Lease, dated March 1, 1994, between St. Martins Property Investments Limited and
The Galileo Company (1) 10.14 Lease, dated December 2, 1987, between St. Martins Property Investments Limited and Galileo Distribution Systems Limited (1) 10.15 Englewood, Colorado Office Lease, dated April 18, 1988 (1) 10.16 First Amendment to Englewood, Colorado Office Lease, dated June 23, 1988 (1) 10.17 Rosemont Office Lease, dated March 31, 1995 (1) 10.18 Term Lease Master Agreement, dated May 9, 1988, between IBM Credit Corporation and Covia Partnership (1) 10.19 Master Lease Agreement, dated November 11, 1988, between Comdisco, Inc. and Covia Partnership (1) 10.20 Software License Agreement, dated August 1, 1994 between Allen Systems Group, Inc. and Galileo International (1) 10.21 Program Product Master License Agreement between Candle Corporation and Galileo International Partnership (1) 10.22 Foundation License Addendum to Order Form between Galileo International and Computer Associates International, Inc. (1) 10.23 Software License Agreement and Addendum, dated August 19, 1994, between Sterling Software (U.S.A.), Inc. and Galileo International (1) 10.24 Master Equipment Lease, dated November 19, 1991, between General Electric Capital Computer Leasing Corporation and Covia Partnership (1) 10.25 Master Equipment Lease, dated April 4, 1996, between AT&T Systems Leasing Corporation and Galileo International Partnership (1) 10.26 Dun & Bradstreet Software Services Inc. License Agreement (1) 10.27 Cover Agreement, dated October 8, 1996, between Sprint Communications Company L.P. and Galileo International Partnership (1) 10.28 Agreement for Telecommunications Services, dated January 1, 1996, between Societe International de Telecommunications Aeronautiques and Galileo International Partnership (1) 10.29 Master Agreement for MCI Enhanced Services, dated February 14, 1996, between MCI Telecommunications Corporation and Galileo International Partnership (1) (a) Second Amendment to the Master Agreement for MCI Enhanced Services (b) Amendment Number Three to Master Agreement for Enhanced Services 10.30 Communications Services Agreement, dated April 1, 1997, between Galileo International and AT&T Corp. (1) *10.31 Galileo International Severance Plan (1) *10.32 Galileo International Savings and Investment Plan (1) *10.33 Galileo International car policy (1) *10.34 Galileo Retirement and Death Benefit Scheme (1) *10.35 Galileo International Employee Pension Plan (1) *10.36 Galileo International Flextrack Benefits Plan (1) 10.37 Form of Galileo International Distributor Sales and Service Agreement (1) 10.38 Form of Global Airline Distribution Agreement (1) 10.39 Agreement for the Provision of Services between The Galileo Company and Galileo International Partnership (1) *10.40 Galileo International Retiree Medical Plan (1) *10.41 Form of Galileo International, Inc. 1997 Stock Incentive Plan as revised March 1, 1998 *10.42 Galileo International, Inc. 1997 Non-Employee Director Stock Plan (1) *10.43 Form of Deferred Compensation Arrangements For Senior Officers of Galileo International, Inc. (3) *10.44 Galileo UK Health Benefit Policy (1) *10.45 Employment Agreement of James E. Barlett (1) 11.1 Computation of Earnings Per Share 21.1 List of Subsidiaries
27.1 Financial Data Schedule
- ---------- (1) Incorporated by reference to exhibits 1.1, 2.2, 4.2, 10.4, 10.9, 10.11 through 10.40, 10.42, 10.44, 10.45 and 23.2 to the Company's Registration Statement on Form S-1, including all amendments (Registration No. 333-27495). (2) Incorporated by reference to exhibits 2.1, 2.3, 2.4 through 4.1, 10.1 through 10.3, 10.5 through 10.8, 10.10 and 10.41 to the Company's Form 10-Q for the quarterly period ended June 30, 1997. (3) Incorporated by reference to exhibit 10.43 to the Company's Form 10-Q for the quarterly period ended September 30, 1997. (4) Portions of these Exhibits have been omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission. * Management contract or compensatory plan or arrangement. EX-10.10.A.I 2 ASSIGNMENT AND ASSUMPTION AGREEMENT Exhibit 10.10 (a)(i) ASSIGNMENT AND ASSUMPTION AGREEMENT AGREEMENT dated as of December 5, 1997 among ABN AMRO BANK N.V. (the "Assignor"), BANK AUSTRIA AKTIENGESELLSCHAFT, New York Branch (the "Assignee"), GALILEO INTERNATIONAL, INC. (the "Borrower") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the "Agent"). WHEREAS, this Assignment and Assumption Agreement (the "Agreement") relates to the 364-Day Credit Agreement dated as of July 23, 1997 among the Borrower, the Assignor and the other Banks parties thereto, as Banks, the Letter of Credit Issuing Banks parties thereto and the Agent (as amended from time to time, the "Credit Agreement"); WHEREAS, as provided under the Credit Agreement, the Assignor has a Commitment to make Loans to the Borrower and participate in Letters of Credit in an aggregate principal amount at any time outstanding not to exceed $16,666,667.00; and WHEREAS, the Assignor proposes to assign to the Assignee all of the rights of the Assignor under the Credit Agreement in respect of a portion of its Commitment thereunder in an amount equal to $8,333,333.50 (the "Assigned Amount"), together with a corresponding portion of its outstanding Committed Loans and Letter of Credit Liabilities, and the Assignee proposes to accept assignment of such rights and assume the corresponding obligations from the Assignor on such terms; NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows: SECTION 1. Definitions. All capitalized terms not otherwise defined herein shall have the respective meanings set forth in the Credit Agreement. SECTION 2. Assignment. The Assignor hereby assigns and sells to the Assignee all of the rights of the Assignor under the Credit Agreement to the extent of the Assigned Amount, and the Assignee hereby accepts such assignment from the Assignor and assumes all of the obligations of the Assignor under the Credit Agreement to the extent of the Assigned Amount, including the purchase from the Assignor of the corresponding portion of the principal amount of the Committed Loans and Letter of Credit Liabilities made by the Assignor outstanding at the date hereof. Upon the execution and delivery hereof by the Assignor, the Assignee, the Borrower, the Agent and the Issuing Banks and the payment of the amounts specified in Section 3 required to be paid on the date hereof (i) the Assignee shall, as of the date hereof, succeed to the rights and be obligated to perform the obligations of a Bank under the Credit Agreement with a Commitment in an amount equal to the Assigned Amount, and (ii) the Commitment of the Assignor shall, as of the date hereof, be reduced by a like amount and the Assignor released from its obligations under the Credit Agreement to the extent such obligations have been assumed by the Assignee. The assignment provided for herein shall be without recourse to the Assignor. SECTION 3. Payments. As consideration for the assignment and sale contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the date hereof in Federal funds the amount heretofore agreed between them. It is understood that facility fees and/or letter of credit fees accrued to the date hereof are for the account of the Assignor and such fees accruing from and including the date hereof are for the account of the Assignee. Each of the Assignor and the Assignee hereby agrees that if it receives any amount under the Credit Agreement which is for the account of the other party hereto, it shall receive the same for the account of such other party to the extent of such other party's interest therein and shall promptly pay the same to such other party. SECTION 4. Consent of the Borrower the Agent and the Issuing Banks. This Agreement is conditioned upon the consent of the Borrower, the Agent and the Issuing Banks pursuant to Section 9.06(c) of the Credit Agreement. The execution of this Agreement by the Borrower, the Agent and the Issuing Banks is evidence of this consent. Pursuant to Section 9.06(c), the Borrower agrees to execute and deliver a Note payable to the order of the Assignee to evidence the assignment and assumption provided for herein. SECTION 5. Non-Reliance on Assignor. The Assignor makes no representation or warranty in connection with, and shall have no responsibility with respect to, the solvency, financial condition, or statements of the Borrower, or the validity and enforceability of the obligations of the Borrower in respect of the Credit Agreement or any Note or Letter of Credit. The Assignee acknowledges that it has, independently and without reliance on the Assignor, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and will continue to be responsible for making its own independent appraisal of the business, affairs and financial condition of the Borrower. SECTION 6. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. SECTION 7. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. ABN AMRO BANK N.V. By:___________________________ Name: Title: By:___________________________ Name: Title: BANK AUSTRIA AKTIENGESELLSCHAFT, New York Branch By:___________________________ Name: Title: By:___________________________ Name: Title: CONSENTED TO: GALILEO INTERNATIONAL, INC. By:___________________________ Name: Title: CONSENTED TO: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent By:___________________________ Name: Title: CONSENTED TO: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Issuing Bank By:___________________________ Name: EX-10.10.A.II 3 AMEND NO. 1 TO 364-DAY CREDIT AGREEMENT Exhibit 10.10 (a)(ii) CONFORMED COPY AMENDMENT NO. 1 TO 364-DAY CREDIT AGREEMENT AMENDMENT dated as of December 12, 1997 to the 364-Day Credit Agreement dated as of July 23, 1997, (the "Credit Agreement") among GALILEO INTERNATIONAL INC. (the "Borrower"), the BANKS party thereto (the "Banks") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the "Agent"). W I T N E S S E T H : WHEREAS, the parties hereto desire to amend the Credit Agreement to modify the definition of Interest Period; NOW, THEREFORE, the parties hereto agree as follows: Section 1. Defined Terms; References. Unless otherwise specifically defined herein, each term used herein which is defined in the Credit Agreement has the meaning assigned to such term in the Credit Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Credit Agreement shall, after this Amendment becomes effective, refer to the Credit Agreement as amended hereby. Section 2. Definition of Interest Period. The definition of "Interest Period" in Section 1.01 of the Credit Agreement is amended by (i) adding the words "14, 45 or 75 days thereafter or" immediately following the word "ending" in the third line of clause (3); and (ii) by replacing the number "30" in clause (4) with the number "14." SECTION 3. Amendment to Exhibit B and Exhibit D to the Credit Agreement. The final footnote to Exhibit B and the third footnote to Exhibit D to the Credit Agreement are hereby amended by substituting "14 days" for (i) "one month (LIBOR Auction) or not less than 30 days (Absolute Rate Auction)" in Exhibit B; and (ii) "one month or not less than 30 days" in Exhibit D. Section 4. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. Section 5. Counterparts. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. Section 6. Effectiveness. This Amendment shall become effective on the date when the Agent shall have received from each of the Borrower and the Required Banks a counterpart hereof signed by such party or facsimile or other written confirmation (in form satisfactory to the Agent) that such party has signed a counterpart hereof. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. GALILEO INTERNATIONAL, INC. By: /s/ Paul H. Bristow --------------------------------- Title: Senior Vice President and Chief Financial Officer AGENT ----- MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: /s/ Robert Bottamedi --------------------------------- Title: Vice President CO-ARRANGERS ------------ BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By:/s/ Bridget Garavalia ---------------------------- Title: Managing Director BANK OF MONTREAL By:/s/ Cecily M. Mistarz ---------------------------- Title: Managing Director CO-AGENTS --------- MIDLAND BANK PLC By:/s/ Christopher M. Samms ---------------------------- Title: Corporate Banking Manager THE BANK OF TOKYO-MITSUBISHI, LTD., CHICAGO BRANCH By:/s/ Tokutaro Sekine ---------------------------- Title: General Manager THE SUMITOMO BANK, LIMITED CHICAGO BRANCH By:/s/ John H. Kemper ---------------------------- Title: Senior Vice President 3 ABN AMRO BANK N.V. By:/s/ Angela Reitz ---------------------------- Title: Vice President By:/s/ John L. Church ---------------------------- Title: Vice President BANK AUSTRIA AKTIENGESELLSCHAFT, NEW YORK BRANCH By:/s/ J. Anthony Seay ---------------------------- Title: Vice President By:/s/ Karen L. Jill ---------------------------- Title: Assistant Vice President PARTICIPANTS ------------ CREDIT LYONNAIS NEW YORK BRANCH By:/s/ Philippe Soustra ---------------------------- Title: Senior Vice President ROYAL BANK OF CANADA By:/s/ Brian Bolotin ---------------------------- Title: Manager 4 SOCIETE GENERALE CHICAGO BRANCH By: /s/ Jose A. Moreno --------------------------------------- Title: Vice President and Team Leader SWISS BANK CORPORATION, STAMFORD BRANCH By: /s/ Reto Jenal --------------------------------------- Title: Director Banking Finance By: /s/ Dorothy L. McKinley --------------------------------------- Title: Associate Director Banking Products Support, N.A. THE NORTHERN TRUST COMPANY By: /s/ James F. T. Monhart --------------------------------------- Title: Vice President 5 THE SANWA BANK, LIMITED, CHICAGO BRANCH By: /s/ Tomomi Omura ------------------------------------ Title: Assistant General Manager WESTDEUTSCHE LANDESBANK GIROZENTRALE By: /s/ Salvatore Battinelli ------------------------------------ Title: Vice President By: /s/ Lisa Walker ------------------------------------ Title: Associate THE LONG-TERM CREDIT BANK OF JAPAN, LTD. By: /s/ Armund J. Schoen, Jr. ------------------------------------ Title: Senior Vice President 6 MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent By: /s/ James E. Condon ----------------------------- Title: Vice President 7 EX-10.10.B.I 4 ASSIGNMENT AND ASSUMPTION AGREEMENT Exhibit 10.10 (b)(i) ASSIGNMENT AND ASSUMPTION AGREEMENT AGREEMENT dated as of December 5, 1997, among ABN AMRO BANK N.V. (the "Assignor"), BANK AUSTRIA AKTEINGESELLSCHAFT, New York Branch (the "Assignee"), GALILEO INTERNATIONAL, INC. (the "Borrower") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the 'Agent"). WHEREAS, this Assignment and Assumption Agreement (the "Agreement") relates to the 364-Day Credit Agreement dated as of July 23, 1997 among the Borrower, the Assignor and the other Banks parties thereto, as Banks, the Letter of Credit Issuing Banks parties thereto and the Agent (as amended from time to time, the "Credit Agreement"); WHEREAS, as provided under the Credit Agreement, the Assignor has a Commitment to make Loans to the Borrower and participate in Letters of Credit in an aggregate principal amount at any time outstanding not to exceed $33,333,333.00; WHEREAS, Committed Loans made to the Borrower by the Assignor under the Credit Agreement in the aggregate principal amount of $18,333,333,16 are outstanding at the date hereof; and WHEREAS, the Assignor proposes to assign to the Assignee all of the rights of the Assignor under the Credit Agreement in respect of a portion of its Commitment thereunder in an amount equal to $16,666,666.50 (the "Assigned Amount) together with a corresponding portion of its outstanding Committed Loans and Letter of Credit Liabilities, and the Assignee proposes to accept assignment of such rights and assume the corresponding obligations from the Assignor on such terms; NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows: SECTION 1. Definitions. All capitalized terms not otherwise defined herein shall have the respective meanings set forth in the Credit Agreement. SECTION 2. Assignment. The Assignor hereby assigns and sells to the Assignee all of the rights of the Assignor under the Credit Agreement to the extent of the Assigned Amount, and the Assignee hereby accepts such assignment from the Assignor and assumes all of the obligations of the Assignor under the Credit Agreement to the extent of the Assigned Amount, including the purchase from the Assignor of the corresponding portion of the principal amount of the Committed Loans and Letter of Credit Liabilities made by the Assignor outstanding at the date hereof. Upon the execution and delivery hereof by the Assignor, the Assignee, [the Borrower, the Agent] and the Issuing Banks and the payment of the amounts specified in Section 3 required to be paid on the date hereof (i) the Assignee shall, as of the date hereof, succeed to the rights and be obligated to perform the obligations of a Bank under the Credit Agreement with a Commitment in an amount equal to the Assigned Amount, and (ii) the Commitment of the Assignor shall, as of the date hereof, be reduced by a like amount and the Assignor released from its obligations under the Credit Agreement to the extent such obligations have been assumed by the Assignee. The assignment provided for herein shall be without recourse to the Assignor. SECTION 3. Payments. As consideration for the assignment and sale contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the date hereof in Federal funds the amount heretofore agreed between them.''' It is understood that facility fees and/or letter of credit fees accrued to the date hereof are for the account of the Assignor and such fees accruing from and including the date hereof are for the account of the Assignee. Each of the Assignor and the Assignee hereby agrees that if it receives any amount under the Credit Agreement which is for the account of the other party hereto. it shall receive the same for the account of such other party to the extent of such other party's interest therein and shall promptly pay the same to such other party. SECTION 4. Consent of the Borrower the Agent and the Issuing Banks. This Agreement is conditioned upon the consent of the Borrower, the Agent and the Issuing Banks pursuant to Section 9.06(c) of the Credit Agreement. The execution of this Agreement by the Borrower. the Agent and the Issuing Banks is evidence of this consent. Pursuant to Section 9.06(c). the Borrower agrees to execute and deliver a Note payable to the order of the Assignee to evidence the assignment and assumption provided for herein. SECTION 5. Non-Reliance on Assignor. The Assignor makes no representation or warranty in connection with, and shall have no responsibility with respect to, the solvency, financial condition, or statements of the Borrower, or the validity and enforceability of the obligations of the Borrower in respect of the Credit Agreement or any Note or Letter of Credit. The Assignee acknowledges that it has, independently and without reliance on the Assignor, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and will continue to be responsible for making its own independent appraisal of the business, affairs and financial condition of the Borrower. SECTION 6. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. SECTION 7. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as is the signatures thereto and hereto were upon the same instrument. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. ZZZZZZZZZZZZZZ ABN AMRO BANK N.V. By:__________________ Name: Title: By:__________________ Name: Title: BANK AUSTRIA AKTIENGESELLSCHAFT, New York Branch By:_________________ Name: Title: By:_________________ Name: Title: EX-10.10.B.II 5 AMEND NO. 1 TO FIVE-YEAR CREDIT AGREEMENT Exhibit 10.10 (b)(ii) CONFORMED COPY AMENDMENT NO. 1 TO FIVE-YEAR CREDIT AGREEMENT AMENDMENT dated as of January 7, 1998 to the Five-Year Credit Agreement dated as of July 23, 1997, (the "Credit Agreement") among GALILEO INTERNATIONAL INC. (the "Borrower"), the BANKS party thereto (the "Banks") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the "Agent"). W I T N E S S E T H : WHEREAS, the parties hereto desire to amend the Credit Agreement to modify the definition of Interest Period; NOW, THEREFORE, the parties hereto agree as follows: Section 1. Defined Terms; References. Unless otherwise specifically defined herein, each term used herein which is defined in the Credit Agreement has the meaning assigned to such term in the Credit Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Credit Agreement shall, after this Amendment becomes effective, refer to the Credit Agreement as amended hereby. Section 2. Definition of Interest Period. The definition of "Interest Period" in Section 1.01 of the Credit Agreement is amended by (i) adding the words "14, 45 or 75 days thereafter or" immediately following the word "ending" in the third line of clause (3); and (ii) by replacing the number "30" in clause (4) with the number "14." Section 3. Amendment to Exhibit B and Exhibit D to the Credit Agreement. The final footnote to Exhibit B and the third footnote to Exhibit D to the Credit Agreement are hereby amended by substituting "14 days" for (i) "one month (LIBOR Auction) or not less than 30 days (Absolute Rate Auction)" in Exhibit B; and (ii) "one month or not less than 30 days" in Exhibit D. Section 4. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. Section 5. Counterparts. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. Section 6. Effectiveness. This Amendment shall become effective on the date when the Agent shall have received from each of the Borrower and the Required Banks a counterpart hereof signed by such party or facsimile or other written confirmation (in form satisfactory to the Agent) that such party has signed a counterpart hereof. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. GALILEO INTERNATIONAL, INC. By: /s/ Paul H. Bristow ----------------------------- Title: Senior Vice President and Chief Financial Officer AGENT ----- MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: /s/ James E. Condon ----------------------------- Title: Vice President CO-ARRANGERS ------------ BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: /s/ Craig S. Munro ----------------------------- Title: Managing Director 2 BANK OF MONTREAL By: /s/ Cecily M. Mistarz ----------------------------- Title: Managing Director CO-AGENTS --------- MIDLAND BANK PLC By: /s/ Christopher M. Samms ----------------------------- Title: Corporate Banking Manager THE BANK OF TOKYO-MITSUBISHI, LTD., CHICAGO BRANCH By: /s/ Hajime Watanabe ----------------------------- Title: Deputy General Manager THE SUMITOMO BANK, LIMITED CHICAGO BRANCH By: /s/ John H. Kemper ----------------------------- Title: Senior Vice President 3 ABN AMRO BANK N.V. By: /s/ John L. Church -------------------------------------- Title: Vice President By: /s/ Angela Reitz -------------------------------------- Title: Vice President BANK AUSTRIA AKTIENGESELLSCHAFT, NEW YORK BRANCH By: /s/ J. Anthony Seay -------------------------------------- Title: Vice President By: /s/ Karen L. Jill -------------------------------------- Title: Assistant Vice President PARTICIPANTS ------------ CREDIT LYONNAIS NEW YORK BRANCH By: /s/ Philippe Soustra -------------------------------------- Title: Senior Vice President ROYAL BANK OF CANADA By: /s/ Brian Bolotin -------------------------------------- Title: Manager SOCIETE GENERALE 4 CHICAGO BRANCH By: /s/ Jose A. Moreno -------------------------------------- Title: Vice President and Team Leader SWISS BANK CORPORATION, STAMFORD BRANCH By: /s/ Reto Jenal -------------------------------------- Title: Director Banking Finance By: /s/ Dorothy L. McKinley -------------------------------------- Title: Associate Director Banking Products Support, N.A. THE NORTHERN TRUST COMPANY By: /s/ James F. T. Monhart -------------------------------------- Title: Vice President 5 THE SANWA BANK, LIMITED, CHICAGO BRANCH By: /s/ Gordon R. Holtby -------------------------------------- Title: Vice President and Manager WESTDEUTSCHE LANDESBANK GIROZENTRALE By: /s/ Salvatore Battinelli -------------------------------------- Title: Vice President By: /s/ Lisa Walker -------------------------------------- Title: Associate THE LONG-TERM CREDIT BANK OF JAPAN, LTD. By: /s/ Armund J. Schoen, Jr. -------------------------------------- Title: Senior Vice President 6 MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent By: /s/ James E. Condon -------------------------------------- Title: Vice President 7 EX-10.29.A 6 MCI TELECOMMUNICATIONS CORPORATION Exhibit 10.29(a) MCI TELECOMMUNICATIONS CORPORATION SECOND AMENDMENT TO THE MASTER AGREEMENT FOR MCI ENHANCED SERVICES AGREEMENT No. ___________________ Date: September 10, 1997 with: Galileo International, L.L.C. 5350 S. Valentia Way Englewood, CO 80111 This Second Amendment, made as of the above date, (the "Amendment"), is entered into by and between MCI Telecommunications Corporation, a Delaware corporation ("MCI"), having a principal place of business at MCI Center Three Ravinia Drive, Atlanta, Georgia 30346-2102 and Galileo International, L.L.C., formerly doing business as Galileo International Partnership ("Galileo") with offices at 5350 S. Valentia Way, Englewood, Colorado 80111. MCI and Galileo have entered into the Master Agreement for MCI Enhanced Service dated April 2, 1996, (the "Master Service Agreement") under which MCI has agreed, in exchange for volume commitment with minimum charges, to make available for Galilee's use, certain services including by reference MCI CPE Service, management of assets, installation, and maintenance of machinery, equipment, other personal property, software. Galileo agrees to pay for Equipment and Services set forth in this Second Amendment (including Schedule No. 5 below) and the Master Agreement under the terms set forth herein. Now therefore, MCI and Galileo agree as follows: EXCEPT FOR THE TERMS FOUND SECTION 3, TITLED PAYMENT OF MCI INVOICES, SECTION 5. TITLED NO OFFSET, SECTION 10, TITLED TAXES, SECTION 12 TITLED INDEMNIFICATION, SECTION 14, TITLED ASSIGNMENT, SECTION 15, TITLED ASSIGNMENT BY MCI, SECTION 17 TITLED DEFAULT, AND SECTION 19, TITLED REMEDIES, IN THE EVENT OF A CONFLICT BETWEEN THIS AMENDMENT AND THE MASTER SERVICE AGREEMENT, OR ANY OTHER WRITTEN OR ORAL AGREEMENT BETWEEN MCI AND GALILEO CONCERNING THE SUBJECT MATTER HEREIN, THE TERMS AND CONDITIONS OF THE MASTER SERVICE AGREEMENT SHALL TAKE PRECEDENCE. 1. The last sentence of Section 1 to the Master Services Agreement shall be deleted. 2. Section 4.2 to the Master Services Agreement shall be deleted and the following new Section 4.2 shall be inserted in its place; 4.2 ESA Schedules. Each MCI Enhanced Service provided under this Agreement shall have a corresponding ESA Schedule specifying the applicable rates, discounts and other terms and conditions on which MCI will provide such MCI Enhanced Service. Except as expressly set forth in this Second Amendment (including ISA Schedule No. 5 below), to the extent that the terms and conditions of any other ESA Schedule are inconsistent with the terms and conditions of the Master Agreement, the ESA Schedule shall govern with respect to the corresponding MCI Enhanced Service. 3. The following new Section 16.11 shall be added to the Master Service Agreement: 16.1.1 Notice. Any notice or other communication required to be given to the other part under this Agreement shall be given in writing, in the English language and either (1) delivered in person, (2)sent by United States certified or registered mail, postage prepaid, or (3) sent by an overnight courier service, to the following addresses: MCI/Galileo International - Confidential 1 If to MCI: MCI Telecommunications Corporation 3 Ravinia Drive Atlanta, Georgia 30346 Attention: Legal Affairs With a copy to: MCI Telecommunications Corporation 205 N. Michigan Ave. Chicago, IL 60601 Attention: CNA Legal Affairs-Director If to Galileo: Galileo International, L.L.C. 5350 S. Valentia Way Englewood, Colorado 80111 Attention: Purchasing Manager The address for notice may be changed by giving written notice in accordance with this Section. If mailed in accordance with this Section, notice shall be deemed given three (3) days after mailing. If sent by an overnight courier service, notice shall be deemed given one (1) day after deposit with the courier service. 4. Except for the Certificate dated August 9, 1996, Schedule No. 5, titled MCI Telecommunications Master Payment Agreement is hereby deleted in its entirety and replaced with the following. Equipment leased under the terms and conditions of the deleted Schedule No. 5 shall be governed by the terms and conditions of the new Schedule No. 5. SCHEDULE NO. 5 Pursuant to the terms of this Schedule No. 5, MCI will, within the payment term (as hereinafter defined) of this Schedule No. 5 provide to Galileo the certain machinery, equipment, other personal property (the "Equipment") listed in the Equipment Schedule attached hereto and incorporated by reference (the "Equipment Schedule"). Capitalized terms used and not defined herein shall mean and refer to the corresponding items on the Equipment Schedule. 1. TERM: This Schedule No. 5 shall be effective as of the above date, provided MCI accepts this Schedule No. 5 in writing and shall continue as long as the Master Services Agreement is in effect. The payment term of this Schedule No. 5 (the "Payment Term") shall be defined in the Equipment Schedule and shall continue for the number of months set forth therein, unless such term has been extended or otherwise modified in a writing executed by MCI and Galileo. Galileo's execution of the Equipment Schedule shall evidence its binding commitment of acceptance of the Equipment described therein upon the terms and conditions of this Schedule No. 5 and the Equipment Schedule. Equipment not listed on the original Equipment Schedule shall be provided pursuant to the terms of this Schedule No. 5 only upon mutual agreement of the parties evidenced by the execution of additional Equipment Schedules signed by an officer of MCI and an authorized representative of Galileo. MCI/Galileo International - Confidential 2 2. PAYMENT OF MCI INVOICES: Unless otherwise agreed, all amounts due to supplied Equipment shall be billed and paid in U.S. Dollars. Galileo shall pay, within in thirty (30) calendar days after receipt of MCI's invoice, a payment or use of the Equipment. Each monthly payment shall be billed at least thirty (30) calendar days in advance of the actual due date in order for Galileo to meet the due date specified in the prior sentence. Failure of MCI to invoice Galileo in a timely manner for any amounts due hereunder shall not be deemed a waiver by MCI of its rights to payment therefor. Such payments shall be subject to Section 5 below. 3. ORDER AND ACCEPTANCE OF EQUIPMENT, SOFTWARE: Galileo has agreed to the selection of all of the Equipment, Software and Services identified on the Equipment Schedule and approves the manufacturer, supplier or licenser thereof (the "Supplier(s)"). As soon as practicable after the date on which the Equipment is delivered, Galileo will execute an acknowledgment of delivery of each delivered Equipment through a mutually agreeable electronic form. 4. DISCLAIMER: GALILEO ACKNOWLEDGES THAT (A) MCI REPRESENTS THAT THE SIZE, DESIGN, CAPACITY OF THE NETWORK AND THE MANUFACTURER OF THE EQUIPMENT HAVE BEEN PROVIDED BY MCI BASED UPON INFORMATION AND REQUIREMENTS PROVIDED BY GALILEO; (B) MCI IS NOT A MANUFACTURER, DEALER, OR DISTRIBUTOR OF ANY EQUIPMENT; (C) NO MANUFACTURER OR SUPPLIER OR ANY OF THEIR REPRESENTATIVES IS AN AGENT OF MCI OR AUTHORIZED TO WAIVE OR ALTER ANY TERM OR CONDITION OF THIS SCHEDULE NO. 5 AND (D) MCI'S WARRANTY OBLIGATIONS, IF ANY, WITH RESPECT TO THE EQUIPMENT ARE SET FORTH IN THIS SCHEDULE NO. 5. EXCEPT AS SPECIFICALLY SET FORTH IN THIS SCHEDULE NO. 5, MCI MAKES NO WARRANTIES, EXPRESS OR IMPLIED, AS TO ANY EQUIPMENT. MCI SPECIFICALLY DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING WITHOUT LIMITATION ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. THIS WRITING SHALL, IN NO WAY, RESTRICT GALILEO FROM SEEKING ALTERNATIVE SUPPLIERS OF SUCH EQUIPMENT AS GALILEO SPECIFIES UNDER ITS OWN NORMAL BUSINESS PRATICES AND FOR WHICH IT ENTERS INTO AN AGREEMENT INDEPENDENT OF THIS SCHEDULE NO. 5. NO REPRESENTATION BY ANY SUPPLIER(S) SHALL IN ANY WAY AFFECT GALILEO'S DUTY TO PAY THE PAYMENTS (AS DEFINED IN THE EQUIPMENT SCHEDULE) AND PERFORM ITS OBLIGATIONS UNDER THIS SCHEDULE NO.5. 5. NO OFFSET: GALILEO'S OBLIGATIONS TO PAY ALL AMOUNTS UNDER THIS SCHEDULE NO. 5 SHALL BE ABSOLUTE AND UNCONDITIONAL, AND SHALL NOT BE SUBJECT TO ANY SET-OFF, COUNTERCLAIM, ABATEMENT, REDUCTION, RECOUPMENT, INTERRUPTION OR DEFENSE FOR ANY REASON WHATSOEVER, INCLUDING DEFECTS OR FAILURE IN, LOSS OF USE OR POSSESSION OF, DISCONTINUANCE OF THE EQUIPMENT, SOFTWARE OR SERVICES. THE PAYMENTS UNDER THIS SCHEDULE NO. 5 CANNOT BE PREPAID BY GALILEO UNLESS AGREED IN WRITING BY MCI. THIS AMENDMENT AND GALILEO'S OBLIGATIONS HEREUNDER WILL SURVIVE UNMODIFIED, ANY AMENDMENT, MODIFICATION, TERMINATION OR CONCLUSION OF MASTER SERVICE AGREEMENT, EXCEPT IN THE EVENT OF A PROPER TERMINATION OF THE MASTER SERVICES AGREEMENT BY GALILEO PURSUANT TO SECTION 8.3 OF THE MASTER SERVICE'S AGREEMENT, THIS AMENDMENT SHALL ALSO TERMINATE. MCI/Galileo International - Confidential 3 6. TITLE TO AND LOCATION OF EQUIPMENT AND SOFTWARE: (a) Title to each item of Equipment shall remain with MCI or its assigns at all times and Galileo shall have no right, title or interest therein except as expressly set forth in this Schedule No. 5. Galileo, at its expense, will keep the Equipment free and clear of all claims, liens and encumbrances, other than those which result from acts of MCI or its assigns. (b) The equipment shall be delivered to the location specified in the Equipment Schedule or to such locations otherwise directed in writing by Galileo to MCI. Once installed at a location, Galileo may request MCI in writing to relocate, displace or move the Equipment. Such relocation, displacement or move shall be at the charges set forth in the Master Service Agreement and below, if any. In no event shall Galileo use any other entity to relocate, displace or move the Equipment without the prior written consent of MCI. Galileo agrees to pay the monthly amount specified in the Equipment Schedule during each month of the Payment Term for the use of the Equipment as of the installation date in the Equipment Schedule. It is agreed by the parties that the monthly charge for all Equipment identified on the Equipment Schedule has been determined based upon the expected installation date and location for each piece of Equipment identified in the Equipment Schedule. Within thirty days from the last installation date identified in the Equipment Schedule, the monthly amount shall be adjusted based upon any changed in MCI's costs resulting from the difference between the expected installation date and location and the actual installation date and location of such Equipment. 7. USE OF EQUIPMENT; INSPECTION: During the Payment Term, MCI, Galileo or Galileo's customer may possess and use the Equipment in accordance with this Schedule No. 5 free and clear of any claims arising by, through or under MCI, provided that Galileo is in compliance with the terms of this Schedule No. 5. MCI shall have the right, upon reasonable prior notice to Galileo and during regular business hours, to inspect and service the Equipment. 8. FURTHER ASSURANCES: MCI is authorized to file financing statements (with respect to the Equipment and this Schedule No. 5), at the expense of MCI, signed only by MCI or signed by MCI on behalf of Galileo, as Galileo's attorney in fact, with respect, only, to this matter under this Schedule No. 5. Any such filings shall not be deemed evidence of any intent to create a security interest under the Uniform Commercial Code. At the expiration or termination of this Schedule No. 5, subject to Galileo's payment of all amounts due or return of the Equipment to MCI as described herein, all such filed financing statements shall be released at MCI's expense. Galileo agrees to promptly notify MCI in writing of any change in Galileo's financial standing or corporate or business name or in the location of its principal place of business. 9. EVENT OF LOSS: If any item of Equipment is lost, stolen, destroyed or otherwise rendered permanently unfit or unavailable for use from any cause whatsoever (an "Event of Loss") after its delivery to Galileo, Galileo shall promptly notify MCI. MCI shall replace the item of Equipment in a commercially reasonable manner. MCI shall be responsible for insuring the Equipment, whether through itself or through a commercial insurance carrier. DESPITE AN EVENT OF LOSS, GALILEO'S OBLIGATIONS TO PAY ALL AMOUNT UNDER THIS AMENDMENT SHALL CONTINUE TO BE ABSOLUTE AND UNCONDITIONAL, AND SHALL NOT BE SUBJECT TO ANY SET-OFF, COUNTERCLAIM, ABATEMENT, REDUCTION, RECOUPMENT, INTERRUPTION OR DEFENSE FOR ANY REASON WHATSOEVER, INCLUDING MCI'S FAILURE TO REPLACE THE EQUIPMENT. MCI/Galileo International - Confidential 4 10. TAXES: (a) With the single exception of point 10(b); Galileo shall timely pay all assessments, license fees, taxes (including sales, use excise, ad valorem, stamp, documentary and other taxes) and all other governmental charges, fees, fines, or penalties whatsoever, whether payable by MCI or Galileo, on or relating to the Payments, Equipment, Software or Services, or the use, registration, rental, shipment, transportation, delivery, ownership or operation thereof, and on or relating to this Schedule No. 5; excluding, however, MCI's net income taxes or fees, fines or penalties due solely to the negligence of MCI. Applicable sales and use taxes shall be billed by MCI subject to Section 3, hereof, and paid with the Payments unless Galileo provides evidence of direct payment authority or an exemption certificate valid in the state where the Equipment and/or Software is located. (b) Galileo agrees that it will not list or report any Equipment for property tax purposes. MCI or its assigns will list, report and pay the property taxes. 11. LATE CHARGES: TIME IS OF THE ESSENCE. A charge on any Payments or other sums due hereunder which are past due shall accrue at the rate of twelve percent (12%) per annum, or if such rate exceeds the maximum rate allowed by law, then at such maximum rate, and shall be payable on demand. 12. INDEMNIFICATION: MCI and Galileo agree to indemnify each other and each of their respective employees, officers, directors, and agents for any damages arising out of or relating to personal injury, death or property damage incurred by the other arising out of the indemnifying parties acts, omissions or breach of its obligations hereunder provided, however, the party seeking indemnification shall promptly notify the indemnifying part of any such claims, liabilities, actions, suits or proceedings so as not to prejudice the indemnifying party's ability to defend such claims, liabilities, actions, suits or proceedings. In the event the failure of the part seeking indemnification to promptly notify the indemnifying part prejudices the defense of any such claim, liability, action, suit or proceeding, the indemnifying part shall be relieved of any obligation under this section to provide such indemnification. MCI agrees to defend, indemnify and hold Galileo, its owners, officers and employees, harmless against any liability or claim that any Equipment, or component thereof, is in violation of any U.S., European Community or Canadian patent, copyright, or trademark and MCI will pay resulting costs, damages and attorney's fees finally awarded, provided that (1) Galileo promptly notifies MCI of any such claim; (2) Galileo, at MCI's expense, provides MCI with all reasonable information and assistance necessary to defend or settle such liability or claim; and (3) MCI has sole control of the defense and related settlement negotiations. If such liability or claim occurs or, in MCI's opinion, is likely to occur, Galileo agrees to permit MCI, at MCI's option and expense, either to procure for Galileo the right to continue using the Equipment in question or replace or modify the same so that it becomes non-infringing and provides a reasonably similar level of service, as is possible under the circumstances. MCI shall have no obligation to defend Galileo or to pay any costs, damages or attorney's fees for any claim based upon the use of the Equipment with products or services obtained independently of MCI, or based upon the use of the Equipment, or any component thereof, unless such combination or use has been suggested by MCI to Galileo as set forth in a manual, marketing collateral or other document specifically provided by MCI to Galileo. This indemnity shall apply to the use of all Equipment identified on an executed Equipment Schedule, except to the extent there is a conflicting indemnity provision in the Equipment Schedule for a particular make, model or type of Equipment, the indemnity in the applicable Equipment Schedule shall apply to such Equipment in lieu of the one above. This section states the entire obligation of MCI with respect to the infringement of any proprietary rights. MCI/Galileo International - Confidential 5 13. REPRESENTATIONS AND WARRANTIES: Galileo and MCI represent and warrant to the other that as of the date of each Equipment Schedule and delivery of the Equipment: (a) Galileo has adequate power and capacity to enter into this Second Amendment, including this Schedule No. 5, the Equipment Schedule, the acknowledgment of delivery of the Equipment and any other documents required to be delivered in connection with this Schedule No. 5 (collectively, the "Documents"), Galileo's execution, delivery and performance of the Documents have been duly authorized by all necessary corporate or partnership action and constitute valid, legal and binding agreements, enforceable in accordance with their terms; there are no proceedings presently pending or threatened against Galileo which will impair its ability to perform under this Schedule No. 5; and all information supplied to MCI by Galileo is complete, accurate and not materially misleading. (b) MCI or its agents and representatives hereby assert that during the term of this Schedule No. 5 and each Equipment Schedule that MCI or its agents or representatives will enforce the manufacturers' and licensers' warranties and MCI shall hold harmless Galileo from MCI's failure to use reasonable efforts to enforce such warranties. (c) MCI or its agents and representatives hereby assert that so long as Galileo shall not be in default of any of the provisions of this Schedule No. 5 or Equipment Schedule or the Master Agreement, MCI or its agents and representative will not disturb Galileo's quiet and peaceful possession of the Equipment and Galileo's unrestricted use thereof for its intended purposes. (d) The Equipment and Software shall only be used in Galileos trade or business, in accordance with applicable law. (e) The product(s) identified in the Equipment Schedule that will record, store, process and present calendar dates falling or on after January 1, 2000 in the same manner and with the same functionally and performance levels as did such product(s) on or before December 31, 1999, product(s) functionality and performance levels will not be degraded in anyway by the introduction of records containing or combining records and/or logic before December 31, 1999 and/or on or after January 1, 2000. In the event that the identified products are not as described in this paragraph, Galileo's sole and exclusive remedy and MCI's sole obligation shall be the repair or replacement of the products In the event that the products cannot be repaired or replaced, then MCI shall accept return of the product(s) and release Galileo of its obligations hereunder with respect to any further payment for such returned Equipment. This Section 13(e) shall apply to all Equipment identified on an executed Equipment Schedule, unless there is a conflicting provision in the Equipment Schedule relating to Year 2000 capabilities of a particular make, model or type of Equipment in which case the Year 2000 provision of the applicable Equipment Schedule shall apply to such Equipment in lieu of the terms of this Section 13(e). IN NO EVENT SHALL MCI BE UNDER ANY OBLIGATION TO PROVIDE ADDITIONAL EQUIPMENT, PURSUANT TO THIS AGREEMENT IF MIC, IN ITS SOLE DISCRETION, DETERMINES THAT SUCH EQUIPMENT IS NOT COMPLIANT WITH THE REPRESENTATIONS IDENTIFIED IN THIS SECTION 13(E). 14. ASSIGNMENT: EXCEPT AS OTHERWISE PROVIDED HEREIN, AND IN SECTION 15 BELOW, NEITHER PARTY MAY, WIHOUT THE OTHER PARTY'S PRIOR WRITTEN CONSENT, BY OPERATION OF LAW OR OTHERWISE, (A) ASSIGN, TRANSFER, PLEDGE, ENCUMBER OR OTHERWISE DISPOSE OF THIS SCHEDULE, NO. 5, OR THE EQUIPMENT OR ANY INTEREST THEREIN, OR (B) SUBLEASE OR LEND THE EQUIPMENT OR PERMIT THIS EQUIPMENT TO BE USED BY ANYONE OTHER THAN GALILEO OR GALILEO'S EMPLOYEES; PROVIDED, HOWEVER, THAT GALILEO MAY ASSIGN ALL, BUT NOT LESS THAN ALL, OF THE EQUIPMENT TO GALILEO, INC. IN CONJUNCTION WITH AN INITIAL PUBLIC OFFERING (PO) OR TO AN ENTITY NOT A MCI/Galileo International - Confidential 6 COMPETITOR OF MCI THAT IS CONTROLLED BY, CONTROLS OR IS UNDER COMMON CONTROL WITH GALILEO, INCLUDING BUT NOT LIMITED TO A SUCCESSOR ENTITY ("AFFILIATE"), PROVIDED. FURTHER (1) GALILEO, INC. OR SUCH AFFILIATE HAS ON THE DATE OF SUCH ASSIGNMENT, AND SHALL MAINTAIN AT ALL TIMES AFTER ASSIGNMENT, A NET WOTH (EXCLUDING INTERCOMPANY BALANCES) EQUAL TO OR GREATER THAN FOUR TIMES MINIMUM PAYMENTS REMAINING UNDER THIS SCHEDULE NO. 5; (LL) GALILEO, INC. OR SUCH AFILIATE SHALL ASSUME PURSUANT TO AN AGREEMENT AGREEABLE TO MCI ANY AND ALL OF GALILEO'S RIGHTS AND OBLIGATIONS UNDER THIS SCHEDULE NO. 5; (LLL) SUCH ASSIGNMENT SHALL NOT RELEASE GALILEO OF ANY CLAIM WHICH MCI HAS AGAINST GALILEO; AND (LV) GALILEO RETAINS UNINTERRUPTED POSSESSION AND CONTROL OF THE EQUIPMENT. 15. ASSIGNMENT BY MCI: UPON NOTIFICATION TO GALILEO, MCI MAY ASSIGN, SELL OR ENCUMBER ALL OR ANY PART OF THIS SCHEDULE NO. 5, THE EQUIPMENT AND THE PAYMENTS AND OTHER AMOUNTS DUE HEREUNDER. ANY SUCH ASSIGNEE SHALL HAVE ALL OF THE RIGHTS, BUT NONE OF THE OBLIGATIONS, OF MCI UDNER THIS AMENDMENT, AND GALILEO SHALL NOT ASSERT AGAINST ANY SUCH ASSIGNEE ANY DEFENSE, COUNTERCLAIMS OR SET-OFF WHICH GALILEO MAY HAVE AGAINST MCI. Any such assignment (a) shall be subject to Galilee's right to possess and use the Equipment pursuant to Sections 7, and 13; and (b) shall not release any of Mica's obligations hereunder or any claim which Galileo has against MCI. 16. RETURN OF EQUIPMENT: Upon expiration of the payment terms in the Equipment Schedule, Galileo, at its own risk and expense, will immediately allow MCI to have the Equipment deinstalled and returned to MCI in the same condition as when delivered, ordinary wear and tear excepted. If upon expiration of the payment terms in the Equipment Schedule, MCI does not arrange the deinstallation, pick up, or warehousing of the Equipment for return within 45 days of such expiration, Galileo may, at MCI's expense, arrange such deinstall, packing and shipping of the Equipment to MCI's Reno Distribution Center at 4950 Joule St., Reno, Nevada 89502, using industry standards for such deinstallation and shipment. 17. DEFAULT Either party shall be in default under this Schedule No. 5 upon the happening of any of the following events or conditions (each, an "Event of Default"): (i) Either party fails to perform or breaches any other term, provision, representation or warranty contained in this Schedule No. 5, and such failure continues for thirty (30) days after written notice, or (ii) the rejection or revocation of acceptance of this Schedule No. 5 or any Equipment, by Galileo thereto; or (iii) the dissolution, termination of existence or discontinuance of business, or insolvency, business failure, or failure to pay debts as they mature; or (iv) the appointment of a receiver or assignment for the benefit of creditors of any substantial part of property, or the commencement of any proceedings under any bankruptcy, insolvency, reorganization or arrangement laws by or against Galileo or MCI, and if commenced against Galileo or MCI, such proceedings are not vacated within sixty (60) days. 18. PAYMENT DEFAULT Galileo shall be in default under this Schedule No. 5 upon Galileo's failure to make any Payment when due under this Schedule No. 5 and such failure continues for twenty (20) business days after receipt of written notice thereof by MCI ("Event of Default"). MCI/Galileo International - Confidential 7 19. REMEDIES Upon the occurrence of any Event of Default identified in Sections 17 or 18 above, and at any time thereafter, MCI may, without any further notice, do any one or more of the following in its sole discretion: (i) terminate this Schedule No. 5; (ii) personally, or by its agents, taken immediate possession from Galileo of any or all items of Equipment wherever found and for this purpose enter upon Galileo's premises where any item of Equipment is located and remove such items of Equipment with due process of law, and free from all claims by Galileo, including but not limited to claims for storage fees or for any data or information remaining in or accompanying any such repossessed Equipment, and (iii) declare all future payments, together with all other sums then due and payable hereunder (including, but not limited to, accrued and unpaid payments, late charges, indemnity amounts, legal fees and costs), to be immediately due and payable without any presentment, demand or protest (all of which are hereby waived by Galileo). The defaulting party shall be liable for , and reimburse the other for, all reasonable and necessary legal fees and all commercially reasonable costs and expenses incurred by the other as a result of an Event of Default hereunder or the exercise of its remedies. No remedy referred to in this Section is intended to be exclusive, but each shall be cumulative and in addition to any other remedy referred to above or otherwise available at law or in equity. 20. SURVIVAL/SEVERABILITY: All indemnities and assumptions of liability shall continue in full force and effect notwithstanding the expiration or termination of any Payment Term. Any provision of this Schedule No. 5 which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability, without invalidating the remaining provisions hereof. Such remaining provisions shall be construed to effectuate the intent of the parties as set forth herein. 21. NOTICES, PARTIES: All notices or demands required or permitted hereunder shall be given to the parties, as provided in Section 16.1.1 titled Notice of the Master Service Agreement. 22. CONSTRUCTION: This Schedule No. 5 shall in all respects be governed by and construed in accordance with the laws of the State of Illinois. The titles of the Sections of this Schedule No. 5 are for convenience only and shall not define or limit any of the terms or provisions hereof. Galileo acknowledges that MCI would not enter into this Schedule No. 5 unless the laws of the State of Illinois applied hereto. All parties hereby submit to the non-exclusive jurisdiction of any Federal or state court in the State of Illinois in any action or proceeding arising out of or relating to this Schedule No. 5, waives all objections to venue or based on inconvenience of forum with respect to any, such court and agreed that all claims in respect to such action or proceeding may be heard and determined in any such court. 23. FINANCING, SECURITY INTEREST: In the event that this Schedule No. 5 is deemed to constitute a secured transaction, Galileo grants to MCI a first priority security interest in the Equipment and any additions, attachments, upgrades, accessions, repairs, modifications, replacements thereto and proceeds thereof, including insurance proceeds, to secure Galileo's payment of the Payments and all other payment obligations when due, and Galileo's performance of all of the terms and conditions of this Schedule No. 5. 24. NO ACCORD AND SATISFACTION: No payment by Galileo or receipt by MCI of a lesser or greater amount than the Payments specified in the Equipment Schedule shall be deemed to be other than on account of the Payments, nor shall any MCI/Galileo International - Confidential 8 endorsement or statement on any check or letter accompanying any check or payment be deemed an accord and satisfaction. MCI may accept any such check or payment without prejudice to MCI's right to recover the balance of Payments or any other amount then due and owing hereunder or to pursue any other remedy provided in this Schedule No. 5. 25. ENTIRE AGREEMENT, AMENDMENTS AND WIVERS: This Schedule No. 5 and the Equipment Schedule executed by MCI and Galileo constitute the entire agreement between MCI and Galileo with respect to the Equipment, its use, the Payments and other amounts due hereunder, and the Software, Services, and Fees, and supersede all prior proposals, communications and agreements, both written and oral, between the parties. NO TERM OR PROVISION OF THIS AMENDMENT OR ANY SCHEDULE MAY BE CHANGED, WAIVED, AMENDED OR TERMINATED EXCEPT BY A WRITTEN AGREEMENT SIGNED BY BOTH MCI AND GALILEO, except that MCI may insert the serial numbers of any Equipment into the applicable Equipment Schedule. Either parties failure at any time to require strict performance under any provisions of this Schedule No. 5 shall not waive or diminish the others right thereafter to demand strict performance. Waiver of any Event of Default shall not be a waiver of any other or further Event of Default. GALILEO HEREBY ACKNOWLEDGES THAT IT HAS READ, RECEIVED, RETAINED A COPY OF, AND UNDERSTAND THIS AMENDMENT, AND AGREES TO BE BOUND BY ALL OF ITS TERMS AND CONDITIONS UPON MCI SIGNING AND RETURNING SUCH COUNTER SIGNED COPY TO GALILEO. IN WITNESS WHEREOF, MCI and Galileo have each caused this Amendment, including the terms of the Master Payment Schedule No. 5 identified herein, to be duly executed as of the date first above written. Accepted at MCI's office: MCI Telecommunications Corporation Galileo International, L.L.C. By: /s/ Edward W. Smith By: /s/ James E. Barlett (Signature) (Signature) For: Jon McGuire James E. Barlett (Printed Name) (Printed Name) V.P. Finance President & CEO (Title) (Title) MCI/Galileo International - Confidential 9 MCI GLOBAL RESOURCES, INC. By: Anthony Cirielo Name: Anthony Cirielo Title: V.P. Date: 9/30/97 MCI/Galileo International - Confidential 10 MCI TELECOMMUNICATIONS CORPORATION EQUIPMENT SCHEDULE TO SECOND AMENDMENT TO THE MASTER AGREEMENT FOR MCI ENHANCED SERVICES, SCHEDULE NO. 5 1. DESCRIPTION OF THE EQUIPMENT:
- --------------------------------------------------------------------------------------------------------------------------------- Site No. Site Description Serial Number (if available) - --------------------------------------------------------------------------------------------------------------------------------- 1 American Airlines (2) Motorola 6520 Router(s) 4000 North Mingo Tulsa, OK 74116 2 - 35 Next 34 Sites and Equipment Descriptions are identified on the Document "Galileo Roll-up". "Galileo Roll-up" is attached hereto and incorporated by reference. - ---------------------------------------------------------------------------------------------------------------------------------
2. PAYMENT TERM: 36 months. 3. MONTHLY PAYMENT FOR USE OF THE EQUIPMENT: $12,391.42 4. THE TERMS AND PROVISIONS OF SCHEDULE NO. 5 (OTHER THAN TO THE EXTENT THAT THEY RELATE SOLELY TO OTHER SCHEDULES OR EQUIPMENT LISTED ON OTHER SCHEDULES) ARE HEREBY INCORPORATED BY REFERENCE AND MADE A PART HEREOF. GALILEO PERMITS MCI TO INSERT SERIAL NUMBERS OF EQUIPMENT WHEN DETERMINED BY MCI. 5. GALILEO'S EXECUTION OF THIS EQUIPMENT SCHEDULE SHALL EVIDENCE ITS BINDING COMMITMENT OF ACCEPTANCE OF THE EQUIPMENT DESCRIBED ABOVE AND BY REFERENCE, UPON THE TERMS AND CONDITIONS OF SCHEDULE NO. 5. GALILEO WILL BEGIN MAKING THE MONTHLY PAYMENT FOR USE OF THE EQUIPMENT WITHIN THIRTY DAYS OF ITS ACCEPTANCE OF THIS EQUIPMENT SCHEDULE. 6. ACCEPTANCE OF THIS SCHEDULE SHALL CAUSE GALILEO'S PAYMENT OBLIGATION UNDER MASTER PAYMENT AGREEMENT NO. 01740926 TO CEASE AFTER SEPTEMBER 30TH, 1997. ANY PAYMENT OBLIGATION INCURRED BEFORE SEPTEMBER 30, 1997 SHALL CONTINUE TO BE DUE AND PAYABLE. PAYMENT OBLIGATIONS UNDER MASTER PAYMENT AGREEMENT 01740926 SHALL NOT CEASE IF THIS SCHEDULE IS NOT EXECUTED BY SEPTEMBER 30, 1997. MCI TELECOMMUNICATIONS CORPORATION GALILEO INTERNATIONAL, L.L.C. By Edward W. Smith By James E. Barlett for Printed Name Jon McGuire Printed Name James E. Barlett Title V.P. Finance Title President and CEO Date 12-2-97 Execution Date: September 10, 1997 MCI/Galileo International - Confidential 11
- ---------------------------------------------------------------------------------------------------- Router MCI Equipment SITE Type Install Date Cost - ---------------------------------------------------------------------------------------------------- American Airlines Motorola 6520 Router 7/2/96 A $ 7,329.07 4000 North Mingo Motorola 6520 Router 7/2/96 $ 7,329.07 Tulsa OK 74116 Bill O'Brien 918-292-4583 - ---------------------------------------------------------------------------------------------------- Choice Hotels Motorola Vanguard 300 FRAD 7/2/96 A $ 2,876.64 4225 East Windrose Drive Phoenix AZ 85032 Chester Grooms 602-953-4428 - ---------------------------------------------------------------------------------------------------- Galileo Data Center HP Workstation 10/10/96 A $46,249.81 5350 South Valentia Way Motorola 6520 Router 10/10/96 A $ 8,253.70 Englewood Motorola 6560 Router 8/8/96 A $15,679.30 CO Motorola 6560 Router 8/8/96 A $12,949.30 80111 Motorola 6560 Router 8/8/96 A $11,039.60 Joe Chaney Motorola 6560 Router 8/8/96 A $10,981.10 303-773-4189 Cisco 2509 Terminal Server 9/20/96 A $ 4,838.60 Cisco 2509 Terminal Server 9/20/96 A $ 4,838.60 Motorola 6560 Router 8/8/96 A $14,359.80 Motorola 6560 Router 8/8/96 A $12,695.80 Motorola 6560 Router 8/8/96 A $10,766.60 Motorola 6560 Router 8/8/96 A $10,708.10 Cisco 2509 Terminal Server 9/20/96 A $ 4,838.60 Cisco 2509 Terminal Server 9/20/96 A $ 4,838.60 Motorola 6520 Router 10/18/96 A $ 8,205.60 - ---------------------------------------------------------------------------------------------------- Carnival Cruise Lines Motorola Vanguard 200 FRAD 10/3/96 A $ 2,860 3655 North West 87th Avenue Miami FL 33178 Bob Shamblin - ext. 5069 305-599-2600 - ---------------------------------------------------------------------------------------------------- USAir Motorola 6520 Router 10/15/96 A $ 6,626.10 5642 University Parkway Motorola 6520 Router 10/15/96 A $ 7,135.70 Winston-Salem NC 27105 Randolf Cole 910-744-6068 - ----------------------------------------------------------------------------------------------------
MCI/Galileo International - Confidential 12
- ---------------------------------------------------------------------------------------------------- Router MCI Equipment SITE Type Install Date Cost - ---------------------------------------------------------------------------------------------------- EDS/System One Motorola 6520 Router 11/21/96 A $ 5,030.85 9014 Research Drive Motorola 6520 Router 11/22/96 A $ 4,130.10 Charlotte Motorola 6520 Router 6/1/97 A $ 5,259.70 NC 28213 Larry Molloy 704-549-5353 - ---------------------------------------------------------------------------------------------------- Delta Airlines Motorola 6520 Router 10/17/96 A $ 4,659.20 1030 Delta Blvd. Motorola 6520 Router 11/22/96 A $ 5,385.90 Atlanta Motorola 6520 Router 6/1/97 A $ 5,259.70 GALILEO Motorola 6520 Router 6/1/97 A $ 5,259.70 30320 Russ Larvenz 404-715-6360 - ---------------------------------------------------------------------------------------------------- Hertz Corporation Motorola 6520 Router 1/28/97 A $ 5,170.10 10401 North Pennsylvania Okalahoma City OK 73120 Ron Hudson 405-280-4002 - ---------------------------------------------------------------------------------------------------- Worldspan/TWA Motorola 6520 Router 6/1/97 A $ 5,259.70 760 Doug Davis Drive, Suite B Motorola Vanguard 200 FRAD 6/1/97 A $ 2,347.70 Atlanta Motorola 6520 Router 2/5/97 A $ 5,259.70 GALILEO Motorola 6520 Router 2/14/97 A $ 5,259.70 30354 Steve Frangopoulos 404-209-3734 - ---------------------------------------------------------------------------------------------------- Holland American Cruise Motorola Vanguard 200 FRAD 1/6/97 A $ 2,809.30 300 Elliott Avenue West Seattle A 98119 Mat Jozwiak 206-286-3405 - ---------------------------------------------------------------------------------------------------- Amtrak Motorola Vanguard 200 FRAD 5/5/97 A $ 2,560.90 9500 Godwin Drive Bldg 250 Manassas VA 22110 Kolleen Byrd 703-367-5404 - ----------------------------------------------------------------------------------------------------
MCI/Galileo International - Confidential 13
- ------------------------------------------------------------------------------------------------------------------------ MCI Router Install Date Equipment SITE Type Cost - ------------------------------------------------------------------------------------------------------------------------ Norwegian Cruise Line Motorola 6520 Router 1/24/97 A $5,259.70 7665 Corporate Ctr. Drive, Bldg #6 Miami FL 33126 Kevin Turner 305-460-4764 - ------------------------------------------------------------------------------------------------------------------------ Wizcom (Avis/Budget) Motorola 6520 Router 4/3/97 A $5,259.70 900 Old Country Road Garden City NY 11530 Frank Carrao ###-##-#### - ------------------------------------------------------------------------------------------------------------------------ British Airways Motorola Vanguard 200 FRAD 5/15/97 A $2,560.90 75-20 Astoria Blvd. IPC Frame Room Jackson Heights NY 11320 Kevin Foskett 718-397-4065 - ------------------------------------------------------------------------------------------------------------------------ HMHF Motorola Vanguard 200 FRAD 5/7/97 A $2,560.90 29566 Nrthwestern Hwy., Syst. Dept. Southfield MI 48083 Mike Hooper 810-827-4050 - ------------------------------------------------------------------------------------------------------------------------ Princess Cruise Lines Motorola Vanguard 200 FRAD 4/11/97 A $3,240.80 1801 Century Park East Los Angeles CA 90067 Lou Fournier 310-553-6330 - ------------------------------------------------------------------------------------------------------------------------ Hilton Hotels Motorola Vanguard 200 FRAD 3/17/97 A $3,240.80 5490 Canoga Avenue Woodland Hills CA 91367 Ray Rivera 818-715-5393 - ------------------------------------------------------------------------------------------------------------------------
MCI/Galileo International - Confidential 14
- ------------------------------------------------------------------------------------------------------------------------ MCI Router Install Date Equipment SITE Type Cost - ------------------------------------------------------------------------------------------------------------------------ Key Tours Motorola Vanguard 200 FRAD 6/1/97 A $2,466.00 525 Winsor Avenue Windsor Ontario Canada N9A6X2 Greg Mitchell 519-258-7044 - ------------------------------------------------------------------------------------------------------------------------ Marriott Hotels Motorola Vanguard 200 FRAD 12/18/96 A $2,809.30 7300 Crestwood Blvd. Fredrick MD 21701 Stephen Wang 301-380-1130 - ------------------------------------------------------------------------------------------------------------------------ Holiday Inn Motorola Vanguard 200 FRAD 2/26/97 A $3,240.80 1200 Windward Concourse Alpharetta GA 30202 Norm Singleton 770-442-7100 - ------------------------------------------------------------------------------------------------------------------------ ITT Sheraton Motorola Vanguard 200 FRAD 2/27/97 A $3,240.80 1505 Washington Street Braintree MA 02184 Andrew Zanier 617-849-4166 - ------------------------------------------------------------------------------------------------------------------------ Royal Caribbean Cruise Line Motorola Vanguard 200 FRAD 6/15/97 $2,560.90 1050 Caribbean Way, 6th floor Miami FL 33132 Tim Hawkins 305-539-6534 - ------------------------------------------------------------------------------------------------------------------------ Aero Mexicana Motorola Vanguard 200 FRAD 6/15/97 $2,560.90 9841 Airport Blvd., Suite 200 Los Angeles CA 90293 Oscar Ocampo Trujillo 310-646-0403 - ------------------------------------------------------------------------------------------------------------------------
MCI/Galileo International - Confidential 15
- ---------------------------------------------------------------------------------------------------------------------- MCI Router Install Date Equipment SITE Type Cost - ---------------------------------------------------------------------------------------------------------------------- Thisco Motorola 6520 Router 6/1/97 A $3,997.00 7500 North Dreamy Draw, Suite 120 Phoenix AZ 85020 Paul Coit 602-861-7638 - ---------------------------------------------------------------------------------------------------------------------- Trafalgar Tours NYC Motorola Vanguard 200 FRAD 2/27/97 A $ 753.90 11 East 26th Street New York NY 10010 John Warren, Ext. 290 212-689-8977 - ---------------------------------------------------------------------------------------------------------------------- Crystal Cruise Lines Motorola Vanguard 200 FRAD 2/24/97 A $2,562.00 2121 Avenue of the Stars, Suite 200 Los Angeles CA 90067 John Zimmerman 310-785-9300 - ---------------------------------------------------------------------------------------------------------------------- Premier Cruise Lines Motorola Vanguard 200 FRAD 3/14/97 A $3,068.55 400 Challenger Road Cape Canaveral FL 32920 Tom Maggers 407-783-5061 - ---------------------------------------------------------------------------------------------------------------------- Logibro, Inc. Motorola Vanguard 200 FRAD 2/28/97 A $2,560.90 2 Place Alexis Nihon, Suite 1400 Montreal Ontario Canada Alan Levielle 514-931-4433 - ---------------------------------------------------------------------------------------------------------------------- Regent Holidays Ltd. Motorola Vanguard 200 FRAD 3/10/97 A $2,560.90 6205 Airport Road, Bldg. A, Ste. 200 Missassagua Ontario Canada Michelle Dookie 905-673-0777 - ----------------------------------------------------------------------------------------------------------------------
MCI/Galileo International - Confidential 16
- ------------------------------------------------------------------------------------------------------------------------- MCI Router Install Date Equipment SITE Type Cost - ------------------------------------------------------------------------------------------------------------------------- Terren Motorola Vanguard 200 FRAD 6/10/97 A $ 2,466.00 4110 Yonge Street, Suite 509 North York Ontario Canada Randy Boles 416-590-060 - ------------------------------------------------------------------------------------------------------------------------- Hilton (LCS) Motorola 6520 Router 6/15/97 $ 5,259.70 2085Midway Road Carrollton TX 75006 Herb Boling 972-788-7428 - ------------------------------------------------------------------------------------------------------------------------- Levy and Associates Motorola Vanguard 200 FRAD 6/15/97 $ 2,347.70 - ------------------------------------------------------------------------------------------------------------------------- Value Car Motorola Vanguard 200 FRAD 6/15/97 $ 2,347.70 621 NW53rd St., Ste. 700 Boca Raton FL 33487 Jack Greene 561-998-7334 - ------------------------------------------------------------------------------------------------------------------------- Preferred Holidays Motorola Vanguard 200 FRAD 6/15/97 $ 2,347.70 3502 Woodview Trase Indianapolis IN 46268 Ken Davis 317-334-8230 - ------------------------------------------------------------------------------------------------------------------------- Preferred Holidays Motorola Vanguard 200 FRAD 6/15/97 $ 2,347.70 1203 SW 41st Ct. Ft. Lauderdale FL 33315 Ray Kincaid 954-359-700 ext 7005 - ------------------------------------------------------------------------------------------------------------------------- TOTAL $350,673.19 - -------------------------------------------------------------------------------------------------------------------------
MCI/Galileo International - Confidential 17 EX-10.29.B 7 AMEND NO. 3 TO MASTER AGREEMENT Exhibit 10.29 (b) AMENDMENT NUMBER THREE TO MASTER AGREEMENT FOR ENHANCED SERVICES This Amendment Number Three to the Master Agreement for Enhanced Services ("Amendment Number Three") amends the Master Agreement For MCI Enhanced Services, executed by Lori M. Tobin on behalf of Galileo International on February 14, 1996, as previously amended by the parties ("ESA") between MCI Telecommunications Corporation, and its appropriate affiliated companies, including MCI Global Resources, Inc. ("MCI") and Galileo International, L.L.C., formerly doing business as Galileo International Partnership ("Customer"). This Amendment Number Three shall be binding upon execution by MCI and Customer and the modifications to the rates and charges identified herein shall be effective as of the first day of the second billing cycle after this Amendment Number Three has been fully executed ("Amendment Number Three Effective Date"). 1. Commencing on Amendment Number Three Effective Date, the first full sentence of the first full paragraph of Section 2 of the ESA shall be deleted in its entirety and the following new sentence shall be inserted in its place: Service Term. After the Ramp Period, this Agreement is for a forty eight (48) month service term (the "Term"). The expiration date of this Agreement shall be October 1, 2000. 2. Commencing on the Amendment Number Three Effective Date, the first full sentence of the first full paragraph of Section 3.1 of the ESA shall be deleted in its entirety and the following new sentence shall be inserted in its place: Minimum Volume Requirement. During each monthly billing period of the Term (following the Ramp Period), Customer's Net Usage under this Agreement shall equal or exceed Thirty Five Thousand Dollars ($35,000) (the "MVR"). 3. Commencing on the Amendment Number Three Effective Date, the words "Domestic MCI HyperStream Frame Relay Service - Schedule 2" and "Canadian Cross- Border HyperStream Frame Relay Service - Schedule 4" shall be deleted from Section 4.1 of the ESA. 4. Commencing on the Amendment Number Three Effective Date, Section 4.6 "Mid- Term Review" shall be deleted in its entirety and the following new Section 4.6 shall be inserted in its place: 4.6 Monthly Credit. During each month of the Term, Customer shall receive a credit in the amount of Three Thousand Seven Hundred Dollars ($3,700) to be applied to Customer's monthly recurring charges for MCI Enhanced Services. MCI CONFIDENTIAL 1 5. Commencing on the Amendment Number Three Effective Date, the first full sentence of Section 16.1 shall be deleted in its entirety and the following new sentence shall be inserted in its place: Neither party may assign this Agreement or any of its rights hereunder, without the prior written consent of the other party, which consent shall not be unreasonably withheld; provided, however, Customer may assign this Agreement to an entity not a competitor of MCI that is controlled by, or controls or is under common control with Customer, including but not limited to a successor entity. 5. Commencing on the Amendment Number Three Effective Date, ESA Schedule No. 1 "MCI Domestic HyperStream Frame Relay Service", ESA Schedule No. 4 "Canadian Cross-Border HyperStream Frame Relay Service" and Appendix B "Domestic HyperStream Service Level Agreement" shall be deleted in their entirety. This Amendment Number Three together with the ESA is the complete agreement of the parties and supersedes all other prior agreements and representations concerning its subject matter. Any and all prior offers made to Customer, whether written or oral, shall be superseded by this Amendment. Once this Amendment Number Three has been fully executed, any further amendments must be in writing and signed by both parties.
GALILEO INTERNATIONAL, L.L.C. MCI TELECOMMUNICATIONS CORPORATION By: By: ------------------------------- ------------------------------- Name: Name: ----------------------------- ----------------------------- Title: Title: ---------------------------- ---------------------------- Date: Date: ----------------------------- ----------------------------- MCI GLOBAL RESOURCES, INC. By: ------------------------------- Name: ----------------------------- Title: ---------------------------- Date: -----------------------------
MCI CONFIDENTIAL 2 EX-10.41 8 FORM OF GALILEO INTERNAT'L INC 1997 STOCK INCENTIVE EXHIBIT 10.41 ================================================================================ GALILEO INTERNATIONAL, INC. 1997 STOCK INCENTIVE PLAN AS OF MARCH 1, 1998 Established Effective July 30, 1997 ================================================================================ GALILEO INTERNATIONAL, INC. 1997 STOCK INCENTIVE PLAN TABLE OF CONTENTS -----------------
Page ---- ARTICLE I--INTRODUCTION...................................................... - ----------------------- Section 1.1 Establishment............................................ Section 1.2 Purpose.................................................. Section 1.3 Structure................................................ Section 1.4 Shares Available......................................... ARTICLE II--ADMINISTRATION................................................... - -------------------------- Section 2.1 Administrative Committee................................. Section 2.2 Authority................................................ Section 2.3 Protection............................................... ARTICLE III--ELIGIBILITY..................................................... - ------------------------ Section 3.1 Eligibility for Stock Options............................ Section 3.2 Eligibility for Other Awards............................ Section 3.3 Eligibility of Foreign Employees........................ Section 3.4 Factors to Consider..................................... ARTICLE IV--AWARD OF STOCK OPTIONS.......................................... - ---------------------------------- Section 4.1 Option Awards........................................... Section 4.2 Incentive Options....................................... (a) Exercise Price.......................................... (b) Maximum Term............................................ (c) Time of Exercise........................................ (d) Limits on Incentive Awards.............................. (e) Payment................................................. (f) Reload.................................................. (g) Loans................................................... (h) Employee Status......................................... (i) Minimum Exercise Amount................................. Section 4.3 Nonqualified Stock Options.............................. (a) Exercise Price..........................................
-ii- (b) Maximum Term.............................................. (c) Employee Status........................................... (d) Taxation.................................................. [Optional] Section 4.4 Grants to Nonemployee Directors....................... ARTICLE V--STOCK APPRECIATION RIGHTS.......................................... - ------------------------------------ Section 5.1 SAR Awards................................................ Section 5.2 Price..................................................... Section 5.3 Number of Shares.......................................... Section 5.4 Maximum Term.............................................. Section 5.5 Time of Exercise.......................................... Section 5.6 Benefit Amount............................................ Section 5.7 Payment of the Benefit.................................... ARTICLE VI--STOCK AWARDS...................................................... - ------------------------ Section 6.1 Stock Awards.............................................. Section 6.2 Grant or Sale............................................. Section 6.3 Issuance of Stock......................................... Section 6.4 Shareholder Rights........................................ Section 6.5 Purchase and Taxation..................................... Section 6.6 Forfeiture or Resale...................................... Section 6.7 Adjustments............................................... Section 6.8 Cash or Stock............................................. ARTICLE VII--PERFORMANCE SHARE AWARDS......................................... - ------------------------------------- Section 7.1 Awards Authorized......................................... Section 7.2 Performance Shares........................................ Section 7.3 Performance Goals......................................... Section 7.5 Taxation.................................................. ARTICLE VIII--OTHER AWARDS.................................................... - -------------------------- Section 8.1 Other Awards.............................................. ARTICLE IX--ADJUSTMENTS....................................................... - ----------------------- Section 9.1 Affecting Stock........................................... Section 9.2 Affecting the Company.....................................
-iii- ARTICLE X--CHANGES IN CONTROL................................................ - ----------------------------- Section 10.1 Consequences............................................. Section 10.2 Changes in Control....................................... ARTICLE XI--TERMINATION OF EMPLOYMENT........................................ - ------------------------------------- Section 11.1 Termination.............................................. Section 11.2 Termination for Cause.................................... Section 11.3 Non-Employees............................................ ARTICLE XII--TERMS AND CONDITIONS OF AWARDS.................................. - ------------------------------------------- Section 12.1 Contracts and Legends.................................... Section 12.2 Stock Registration and Rights............................ ARTICLE XIII--NONTRANSFERABILITY............................................. - -------------------------------- Section 13.1............................................................ Section 13.2............................................................ ARTICLE XIV--AMENDMENT AND TERMINATION OF PLAN............................... - ---------------------------------------------- Section 14.1 Board Authority.......................................... Section 14.2 Effect................................................... ARTICLE XV--MISCELLANEOUS.................................................... - ------------------------- Section 15.1 No Contract of Employment................................ Section 15.2 Effective Date of Plan................................... Section 15.3 Leaves of Absence........................................ Section 15.4 Governing Law............................................ Section 15.5 Successors............................................... Section 15.6 Notices..................................................
GALILEO INTERNATIONAL, INC. 1997 STOCK INCENTIVE PLAN ARTICLE I--INTRODUCTION ----------------------- Section 1.1 Establishment. Galileo International, Inc. (the "Company") has adopted the Galileo International, Inc. 1997 Stock Incentive Plan (the "Plan"), as set forth in this document, effective as of the consummation of the initial public offering of common stock by the Company on July 30, 1997. Section 1.2 Purpose. The purposes of the Plan are to attract, retain and motivate officers, other key and non-key employees, directors, and consultants of the Company, by compensating them for their contributions to the growth and profitability of the Company and by encouraging their ownership of Company common stock. Section 1.3 Structure. To achieve those purposes, the Plan is structured to provide participating individuals with one or more forms of stock-based benefits, including incentive stock options, nonqualified stock options, stock appreciate rights, awards of restricted stock, performance share awards and such other stock-based or cash awards as may from time to time be deemed appropriate under the Plan. Section 1.4 Shares Available. The maximum aggregate number of shares of common stock, par value $.01 per share, of the Company (the "Common Stock") as to which -2- awards may be granted under the Plan is 8,140,000 shares. The shares so awarded may be authorized but unissued shares, treasury shares (issued shares reacquired by the Company) or any combination of such shares, as determined from time to time by the Committee authorized to administer the Plan, which Committee is described in Article II. Such total available number of shares shall be adjusted in accordance with Article IX below. A share of Common Stock subject to an option which is accompanied by tandem stock appreciation rights shall only be counted once (not as two shares--an option share and an SAR share) towards that maximum. In the event that any shares of Common Stock for any reason cease to be subject to an award without being issued to or on behalf of a Participant in the Plan, or are reacquired in any way by the Company from the recipient of an award under the Plan, such shares shall be added to the remaining number of shares of Common Stock then available for subsequent awards under the Plan. The following limits on available awards under the Plan shall also apply: (i) in accordance with applicable regulations under Section 162(m) of the Internal Revenue Code of 1986 -3- (the "Code"), no participant may be awarded, in any five- year period, stock options or stock appreciation rights which in aggregate relate to more than 750,000 shares of Common Stock; (ii) in accordance with applicable Code Section 162(m) regulations, no participant may be awarded restricted stock (subject to performance requirements) or performance share units which in aggregate relate to more than 50,000 shares of Common stock for any one performance period; and (iii) aggregate awards of restricted stock that are not subject to performance requirements shall not exceed 814,000 shares of Common Stock. -4- ARTICLE II--ADMINISTRATION -------------------------- Section 2.1 Administrative Committee. The Plan shall be administered by the Compensation Committee of the Company's Board of Directors (the "Board"), except to the following extent: (i) The entire Board shall have exclusive authority to grant and set the terms and conditions of stock options for officers and any other individuals who are subject to Section 16(b) of the Securities Exchange Act of 1934 (the "Exchange Act"); (ii) The Board may, from time to time, assume administration of the Plan or assign to another committee responsibility for administration of all or designated portions of the Plan; (iii) whatever Board or committee is responsible for administration of the Plan, or any portion thereof, may delegate some or all of its authority to one or more -5- officers of the Company; provided, however, that the administration of stock options to officers and other individuals who are subject to Section 16(b) of the Exchange Act shall at all times rest with either the Board (as provided in (i) above) or a committee designated by the Board consisting of not less than two disinterested nonemployee directors of the Company. For this purpose, a disinterested nonemployee director is a member of the Board who: (i) is not employed by the Company or by any Airline Shareholder of the Company (as defined in Section 10.2 below), (ii) has not (except as permitted by Rule 16b-3, or any successor rule, under Section 16(b) of the Exchange Act) received an Award entitling him to stock, restricted stock, stock options, stock appreciation rights, other rights to stock or any other derivative -6- security of the Company under this Plan or any similar plan of the Company during his tenure on said administrative committee or during the 12-month period prior to commencing service on said committee, and (iii) satisfies any and all other conditions and restrictions necessary for disinterested administration of that stock option aspect of the Plan as set forth in said Rule 16b-3, or any successor thereto. For purposes of this Plan, the term "Committee" shall refer to whatever committee, entity or individual is then authorized to administer the subject portion of the Plan. Section 2.2 Authority. The Committee shall have complete authority and power, to be exercised in its discretion, to administer the Plan according to its terms and applicable law, including, without limitation, the following responsibilities: (a) to select who shall be eligible for stock options, to grant stock options and to set the terms and conditions of those options, to designate options as incentive or -7- nonqualified options and to determine what other stock-based rights, if any, will be awarded to accompany particular options; (b) to select who shall be eligible for stock appreciation rights, to grant such rights and to set the terms and conditions of those awards; (c) to select who shall be eligible for awards of restricted stock, to grant such awards and to set the terms and conditions of those awards; (d) to select who shall be eligible for performance share awards, to grant such awards and to set the terms and conditions of those awards, including establishing and amending performance periods, measures and objectives on which such awards are based; (e) to determine eligibility for and the terms and conditions of any other Common Stock-based or other awards, and to make any such awards, under the Plan; (f) to interpret the Plan and all options, rights and awards and agreements entered into in connection with awards made under the Plan; -8- (g) to make such rules, regulations and procedures (including benefit claim and appeal procedures) as it deems necessary or appropriate for administering the Plan; (h) to make such other determinations as it deems necessary or appropriate for administering the Plan; and (i) to employ such professional and clerical assistance as it deems necessary for administering the Plan, including attorneys, consultants, accountants and other persons (any or each of whom may also serve the Company). The determinations of the Committee shall be final and binding on all interested persons, subject to reconsideration only through the benefit claim and appeal procedures established for the Plan. Section 2.3 Protection. The Committee shall be entitled to rely on: (i) Company records relating to eligible individuals, to financial performance and to other matters pertinent to the Plan, and -9- (ii) advice, opinions and other work product of any professionals employed by the Committee. No member of the Committee shall be personally liable for any action, determination or interpretation taken or made in good faith with respect to the Plan or awards made thereunder, and all Committee members shall be fully indemnified and protected by the Company for any and all reasonable expenses and liabilities (including settlement payments) incurred by them with respect to good faith conduct of the Committee. ARTICLE III--ELIGIBILITY ------------------------ Section 3.1 Eligibility for Stock Options. All full-time employees on the domestic United States payroll of the Company shall be eligible for awards of stock options under the Plan. Options may be awarded from time to time in the Committee's discretion to one or more officers or other employees in the Company's Executive Group. Options may be awarded to employees not in the Executive Group only when the Committee determines to award stock options to all such employees at the same time. Nonemployee Directors also shall be eligible for the Plan to the extent they receive automatic grants of nonqualified stock options pursuant to Article ___. Nonemployee consultants shall be eligible for stock options on the same individualized basis as members of the Executive Group. -10- For purposes of Plan eligibility, the term "Executive Group" of the Company shall mean all officers of the Company and such other management employees as the Committee shall designate from time to time. For the same purpose, the term "Non-Executive Employees" shall refer to all full-time employees on the Company's domestic payroll who are not members of the Executive Group. The term "Nonemployee Directors" shall mean those members of the Board who are not employed by the Company or by any airline which is a Company stockholder. Section 3.2 Eligibility for Other Awards. Only members of the Executive Group are eligible for any awards other than stock options under the Plan, except that the Committee may award stock appreciate rights in tandem with any grant of stock options to any individual who is eligible for stock options. Section 3.3 Eligibility of Foreign Employees. [Reserved] Section 3.4 Factors to Consider. In determining who shall receive what awards and when under the Plan, the Committee shall take into account the nature of the individual's duties, the person's past, present and potential contributions to the Company's growth and success, and such other factors as it shall deem relevant for accomplishing the purposes of the Plan. -11- Awards may be granted singly, in combination or in tandem and may be made in combination or in tandem with, in replacement of, or as alternatives to, awards or grants previously made under this Plan or under any other plan or agreement maintained by the Company (including its parents, its affiliates, subsidiaries and successors). The Committee may grant to any eligible individual a new award under this Plan, in exchange for the surrender and cancellation of any prior award under this Plan or any other plan, having such terms and conditions as the Committee deems appropriate. ARTICLE IV--AWARD OF STOCK OPTIONS ---------------------------------- Section 4.1 Option Awards. The Committee shall be authorized to grant stock options from time to time to any one or more individuals or groups eligible for stock options as described in Article III. Each option shall be evidenced by a written agreement specifying the type of option granted, the number of shares of Common Stock to which the option pertains, the option exercise price, the terms for payment of the exercise price, the vesting schedule for eligibility to exercise the option, the duration of the option, the terms of any related stock appreciation rights or other awards granted in tandem with the option, and such additional provisions as the Committee shall determine. The terms and conditions of option grants and related option agreements need not be identical or uniform, even as to options granted at the same time to individuals within the same eligible class. Examples of -12- additional option provisions the Committee may choose to include, from time to time, shall include, without limitation, a noncompetition agreement, a confidentiality provision, and provisions for forfeiture in the event of termination of employment involuntarily for Cause or voluntarily without Good Reason, as those capitalized terms are defined elsewhere in this Plan. The Committee also shall have the power, in its discretion, to accelerate the dates for exercise of any or all options, or any part thereof. Section 4.2 Incentive Options. All options granted in accordance with the following terms shall, unless otherwise specified by the Committee in the option agreement, be incentive stock options intended and interpreted to comply with Section 422 of the Code and the regulations thereunder. (a) Exercise Price. Except as provided below, the purchase price of the Common Stock covered by each option shall be no less than 100% of the fair market value of the Common Stock on the date the option is granted. That fair market value shall equal the mean between the highest and lowest sales prices of the Common Stock as reported on the New York Stock Exchange for the date on which the option is granted. If there are no sales on such date, then the fair market value shall be the same mean value based on sales for the next preceding day for which sales were reported on the NYSE. The exercise price shall be subject to adjustment as provided in Article IX. The date the option is granted shall -13- be the date on which the Committee adopts a resolution granting the option, provided the recipient is promptly notified and an option agreement is duly executed as of such date; otherwise the Committee shall determine the grant date in a manner consistent with any applicable requirements of the Code and regulations thereunder. If the recipient of a stock option grant is, at the time of the grant, the owner (directly or by attribution) of stock of the Company (or its parents or subsidiaries) possessing more than 10% of the combined voting power of all classes of stock issued by any such corporation, then the exercise price instead shall be at least 110% of the fair market value of the Common Stock covered by the option, determined in the same manner as specified above. In no event may the exercise price for any option awarded under the Plan be less than the par value of the Common Stock covered by the option. (b) Maximum Term. Subject to earlier termination as provided in Articles IX - XI, each stock option shall expire on the date set in the applicable option agreement. No option may continue more than ten (10) years from the date it is granted. However, no option to any 10% owner described in (a) above may continue more than five (5) years from the date it is granted. -14- (c) Time of Exercise. Subject to acceleration at the Committee's discretion or in the event of a change in control, as defined in Section 10.2, each stock option may be exercised, in whole or in part, within such periods or after such dates (but only during its term) as set forth in the applicable option agreement. In no event, however, will any option be exercisable before the one (1) year anniversary of the date of its grant, unless the option has been accelerated as mentioned above. Unless otherwise required by the option agreement, multiple options awarded to the same individual need not be exercised in the order in which they were granted, but the individual exercising an option must specify, at the time of exercise, which option or portion of an option is being exercised. Absent such designation by the individual, his options will be treated as though exercised in chronological order. (d) Limits on Incentive Awards. The aggregate fair market value (determined at the time of grant in the manner described in 4.2(a) above) of Common Stock covered by any and all incentive stock options which become exercisable for the first time by any particular individual during a calendar year shall not exceed $100,000. Incentive stock options granted under any other plans of the Company, its parents, subsidiaries, predecessors or successors also shall be counted for purposes of applying this $100,000 limit. To the extent any options granted under this Plan cause that limit to be exceeded for any -15- particular individual during any calendar year, such excess portion of the option(s) shall be considered a nonqualified stock option rather than an incentive stock option. The most recently granted options shall be converted to nonqualified status for this purpose before any longer-standing options. Other than this change to nonqualified status, the option agreement for any such affected option, or portion thereof, shall remain in full force and effect. (e) Payment. The exercise price shall be paid in full at the time of exercise. Payment may be made: (i) in cash, using a personal, certified or cashier's check or other instrument acceptable to the Company; (ii) in shares of Common Stock; valued on the date of exercise using the same mean value method described in (a) above; (iii) by surrender of any other outstanding awards under this Plan or any other plan of the Company (or any parent, subsidiary, predecessor or successor) to such -16- extent and in such manner as is acceptable to the Committee; or (iv) by any combination of those three methods. The Committee may allow and approve arrangements for "cashless" exercise and payment of stock options. In accordance with Section 4.2(g) below, the Company may, but is not obligated to, issue loans to selected substantial option holders, on such terms and conditions as it deems appropriate, to provide them with cash for exercising options under the Plan. (f) Reload. In the discretion of the Committee, the grant of any option may be accompanied by a reload option. A reload option may be granted for use by any option holder who satisfies all or part of the exercise price with shares of Common Stock. The reload option represents an additional option to acquire the same number of shares of Common Stock as is used to pay the exercise price on the original option. The reload option will be subject to all the same terms and conditions as the original option, except that: (i) the exercise price of the shares of Common Stock subject to the reload option will be determined using -17- the mean value on the date the original option is exercised, and (ii) the reload option will conform to all provisions of the Plan in effect at the time the original option is exercised. (g) Loans. The Company may make loans to such option holders as the Committee, in its discretion, recommends to the Company (including an option holder who is an officer or director of the Company) in connection with the option holder's exercise of one or more options granted under the Plan. No such loan shall be made where it would constitute a "modification" (as defined in Code Section 424) of any incentive stock option. Such loans shall be subject to the following terms and conditions and such other terms and conditions as the Committee shall determine and which are not inconsistent with the Plan. Such loans shall bear interest at such rates as the Committee shall determine from time to time, which rates may be below then current market rates (except in the case of incentive stock options). In no event may any such loan exceed the fair market value, at the date of exercise, of the shares covered by the option, or portion thereof, exercised by the option holder. No loan shall have an initial term exceeding five years, but any such loan may -18- be renewable at the discretion of the Committee. When a loan shall have been made, shares of Common Stock having a fair market value at least equal to the principal amount of the loan shall be pledged by the option holder to the Company as security for payment of the unpaid balance of the loan. Every loan shall comply with all applicable laws, regulations and rules of the Board of Governors of the Federal Reserve System and any other governmental agency having jurisdiction. (h) Employee Status. Except as provided in Article XI below, no incentive stock option may be exercised at a time when the option holder is not an employee of the Company, its parent, subsidiary or successor, as determined in accordance with applicable regulations under Code Section 421. (i) Minimum Exercise Amount. Subject to the terms of the option agreement, during any period in which an option may be exercised the option holder may exercise his option to purchase any or all of the shares of Common Stock as to which the option has become exercisable. However, the smallest number of shares that can be exercised at any one time under an option shall be 100 shares (or the full number of shares then exercisable under the option, if less than 100). -19- Section 4.3 Nonqualified Stock Options. The provisions of Section 4.2 above shall apply equally to the award of nonqualified stock options under the Plan, with the following exceptions: (a) Exercise Price. If the Committee so chooses, the exercise price of a nonqualified stock option can be set at less than the fair market value of the shares of Common Stock covered by the option, determined as of the date of the grant. (b) Maximum Term. The term of a nonqualified stock option, as set forth in the option agreement, need not be limited to the five (5) and ten (10) year maximums stated in Section 4.3(a) above. In no event, however, shall the term exceed twenty-five (25) years from the date of the grant. (c) Employee Status. Nonqualified stock options may be awarded to eligible individuals under Section 3.1 who are not employees of the Company, or its parent, subsidiary or any successor. Hence, at the time of exercise the option holder also need not be such an employee. However, such options shall expire shortly after the option holder ceases his or her service relationship with the Company as though the option holder had been an employee and his employment terminated when the service relationship ended, applying the rules stated in Article XI. -20- (d) Taxation. Upon exercise of a nonqualified stock option, any federal, state or local income tax withholding obligations of the Company relating to income becoming taxable to the option holder in connection with such exercise shall be satisfied: (i) by withholding any portion of the cash benefit, or (ii) by withholding from the option holder's allotment of purchased shares a number of full shares of Common Stock. Such withholding shall be sufficient in fair market value to meet the amount of such withholding obligation. The Company shall pay cash to the option holder for the value of any fractional share remaining purchased but withheld and not needed to satisfy the withholding amount. Such tax withholding may be satisfied instead by any other method authorized in Section 6.5 for such purpose. [Optional] Section 4.4 Grants to Nonemployee Directors. Each nonemployee director shall automatically be granted an award consisting of a nonqualified stock option to purchase _____ shares of Common Stock. That award shall be made on the later of (i) the first anniversary of the Plan's effective date, or (ii) the date the individual first becomes a -21- nonemployee director of the Company. The terms of the award shall be governed by Section 4.3, except as provided in this Section. The exercise price shall be 100% of the fair market value per share, determined as of the date of grant. Each such option shall have a ten (10) year term. ARTICLE V--STOCK APPRECIATION RIGHTS ------------------------------------ Section 5.1 SAR Awards. The Committee shall be authorized to grant awards of stock appreciation rights ("SARs") from time to time, in accordance with this Article, to any one or more of the same individuals or groups who are eligible for stock options as described in Article III, subject to Section 3.2. Each SAR will be evidenced by a written agreement specifying such features as the number of shares of Common Stock to which the SAR pertains, the base price per share, the vesting schedule for eligibility to exercise the SAR, the duration of the SAR, whether the SAR is freestanding or is granted in tandem with a stock option, the terms for payment and settlement of the SAR benefits upon exercise, and such additional provisions as the Committee shall determine, including the sort of additional provisions and discretionary acceleration as may apply to stock options under Section 4.1 above. The terms and conditions of SAR awards and related SAR agreements (which may consist of part of the stock option agreement where the SAR is granted in tandem with a stock option) need not be identical or uniform even as to SARs granted at the same time to -22- individuals within the same eligible class. SAR awards may be granted in tandem with stock option awards or may be freestanding. Section 5.2 Price. The base price per share for any SAR award shall be set by the Committee at not less than 100% of the fair market value per share of the Common Stock which is subject to the SAR. That fair market value shall equal the mean between the highest and lowest sales price of the Common Stock as reported on the NYSE for the date on which the SAR is granted. As with the value of stock options, determined under Section 4.2(a) above, if there are no sales on the date of grant then the fair market value shall be the mean value, determined the same way, based on sales for the next preceding day for which sales of the Common Stock were reported on the NYSE. The date an SAR is granted shall be the date on which the Committee adopts a resolution awarding the SAR, provided the recipient is promptly ratified and an SAR agreement is duly executed as of such date; otherwise the Committee shall determine and declare the grant date in the SAR agreement. Section 5.3 Number of Shares. The number of shares of Common Stock to which the SAR is subject shall be determined by the Committee and stated in the SAR agreement. If the SAR is granted in tandem with a stock option award, the number of shares covered by the SAR shall equal the number of shares covered by the stock option. -23- Section 5.4 Maximum Term. Subject to earlier termination or acceleration as provided in Articles IX - XI, each SAR shall expire on the date set by the Committee in the applicable SAR agreement. No SAR may continue more than twenty-five (25) years from the date it is granted. Each tandem SAR shall have the same duration as the stock option to which it is linked. Section 5.5 Time of Exercise. Subject to acceleration at the Committee's discretion, or as provided in Articles IX - XI below, each SAR may be exercised, in whole or in part, within such periods or after such dates (but only during its term) as set forth in the applicable SAR agreement. In no event, however, will any SAR be exercisable before the one (1) year anniversary of the date of its grant unless the SAR has been accelerated by the Committee or as otherwise mandated by the Plan. Unless otherwise required by the SAR agreement, multiple SARs awarded to the same individual need not be exercised in the order in which they were granted, but the individual exercising an SAR must specify, at the time of exercise, which SAR or portion of an SAR is being exercised. Absent such designation by the individual, his SARs will be treated as though exercised in chronological order. -24- If a freestanding SAR has not been exercised, or neither a tandem SAR nor the related stock option has been exercised, before the end of the day on which the SAR ceases to be exercisable, then the SAR shall be deemed exercised in full on such expiration date, provided that the fair market value (as determined under Section 5.6 below) of the SAR shares exceeds (i) the base price set for the freestanding SAR or (ii) the option exercise price in the case of a tandem SAR. A tandem SAR shall be exercisable only at such time(s) as the stock option to which it relates is exercisable, and shall be subject to the restrictions, conditions and other terms of exercise that are applicable to that stock option. Upon the exercise of a tandem SAR, the unexercised option, or the portion of the option to which the exercised portion of the tandem SAR is related, shall simultaneously expire and shall be surrendered unexercised by the tandem SAR holder. Similarly, the exercise of all or any part of the stock option shall cause the simultaneous expiration of the corresponding portion of the tandem SAR, which shall be surrendered unexercised by the holder. The exercise of any part of a tandem SAR shall cause the corresponding option to expire with respect to the same number of shares of Common Stock as was subject to the exercised portion of the SAR, and the same one-to-one relationship holds true for shares under a tandem SAR expiring when all or part of the corresponding stock option is exercised. -25- Notwithstanding the foregoing: (i) no right shall be exercisable by an SAR holder who is subject to Section 16(b) of the Exchange Act without the prior consent of the Committee if such exercise would take place within one year after the date of the initial sale of shares of Common Stock of the Company to the public; and (ii) a tandem SAR related to an incentive stock option may only be exercised if the fair market value of a share of Common Stock on the exercise date exceeds the option price. Section 5.6 Benefit Amount. Upon exercise of an SAR, its holder shall be entitled to receive from the Company a benefit having an aggregate value equal to: -26- (a) the excess of: (i) the fair market value on the exercise date of one share of Common Stock, over (ii) the base price per share of the freestanding SAR or the option exercise price where the SAR was granted in tandem with a stock option, as appropriate, times (b) the number of shares of Common Stock with respect to which the SAR at that time is being exercised. Such benefit, once so determined, shall then be adjusted (before payment) for any tax withholding in accordance with Section 5.7 below. The fair market value of a share of Common Stock on the date of exercise of an SAR shall be the mean between the highest and lowest sales price of the Common Stock as reported on the NYSE for that date, or if no sales are reported on that date then the mean value, determined the same way, based on sales for the next preceding day for which sales of Common Stock were reported on the NYSE. The date of exercise shall be the date on which the SAR holder releases for delivery to the Committee his written election to exercise, -27- provided delivery follows promptly in the normal course; otherwise the Committee shall determine the exercise date based on consideration of all relevant facts and circumstances. Section 5.7 Payment of the Benefit. The benefit determined under Section 5.6 above may be paid in the form of cash, full shares of Common Stock having the equivalent fair market value (with cash paid in lieu of any fractional share) or any combination thereof, as elected by the SAR holder. If the SAR holder is subject to Section 16(b) of the Exchange Act, then no part of his benefit may be paid in cash unless: (i) his exercise of the SAR and his election to receive cash both occur more than six (6) months after the grant date of the SAR and both occur during the window period beginning on the third business day following the date of release by the Company for publication of its quarterly or annual statement of sales and earnings and ending on the twelfth business day following such release date, and (ii) the Committee approves such cash form of payment. -28- Upon exercise of an SAR, any federal, state or local income tax withholding obligations of the Company relating to income becoming taxable to the SAR holder in connection with such exercise shall be satisfied by withholding from the benefit payment, in cash or an appropriate value of Common Stock as determined by the Committee, a sufficient amount to satisfy the tax withholding obligation. The benefit shall consist of the net amount after such tax withholding. Tax withholding may be satisfied instead by any other method described for that purpose in Section 6.5 below. ARTICLE VI--STOCK AWARDS ------------------------ Section 6.1 Stock Awards. The Committee shall be authorized to grant stock awards from time to time, in accordance with this Article, to any one or more of the same individuals or groups who are eligible for stock options as described in Article III, subject to Section 3.2. Each stock award shall be evidenced by a written agreement specifying such features as the number of shares of Common Stock being awarded, the price per share (if any), whether the stock award is freestanding or is granted in tandem with or in substitution of any other award under this Plan, and such other terms and conditions as the Committee shall determine; including any restrictions on vesting of the award and on transferability of the shares so awarded. The terms and conditions of stock awards may vary with each individual recipient and with each award. -29- Section 6.2 Grant or Sale. Common Stock may be awarded by grant or sale to any eligible individual, either separately from or in tandem with any other award under this Plan. If granted, the award shall be considered a bonus for services rendered to the Company. If offered for sale, the Committee shall set the purchase price at the date the award is made, and such price may be less than the fair market value of the Common Stock on such date. The Committee shall set the other terms of the offer, including the exercise period and payment terms. If the award is made in tandem with another award under the Plan: (i) the exercise of the stock award (if an offer to purchase Common Stock) shall cause the simultaneous forfeiture of the tandem award as to the same number of shares as are then purchased under the stock award; (ii) the lapse of restrictions on vesting of the stock award shall cause the simultaneous forfeiture and expiration of the tandem award as to the number of shares of Common Stock which then became vested; and (iii) any exercise of the tandem award shall cause the simultaneous forfeiture of any unvested or unexercised rights under the related stock award as to the same number of shares of Common Stock as were subject to the exercise of the tandem award. Stock awards not granted or sold in tandem with another award under the Plan shall have no effect on, and shall not be affected by, the exercise of any other award under the Plan. -30- Section 6.3 Issuance of Stock. Upon the declaration of a stock award, a stock certificate representing the number of shares of Common Stock so awarded shall be registered in the name of the award recipient but shall be held in custody by the Secretary of the Company for that individual's account until such time as those shares are forfeited, reacquired by the Company, or any restrictions on their vesting lapse; as provided in Section 6.4 below. In no event, however, may the Committee impose restrictions on stock awards to employees not in the Company's Executive Group that would lapse on or after termination of such employee's employment. Upon the release of shares of Common Stock from custody due to the lapse of restrictions, the Secretary of the Company shall deliver to the award recipient (or the recipient's beneficiary or estate, as the case may be), as directed by the Committee, a certificate for the number of shares so released. The Company shall not be required to deliver any fractional share but will pay in lieu thereof cash equal to the fair market value (using the closing price of the Common Stock as of the date restrictions lapsed) of such fractional share. -31- Section 6.4 Shareholder Rights. The recipient of a stock award, upon purchasing Common Stock pursuant to the award or upon grant of an award without a purchase price, generally shall have the rights and privileges of a stockholder to the shares of Common Stock being held in custody for the recipient under Section 6.3 above, including the right to vote such shares, except that the following restrictions will apply: (i) the recipient shall not be entitled to delivery of the stock certificates until the Committee instructs the Secretary of the Company that all appropriate restrictions and conditions for such delivery have lapsed or been satisfied; (ii) none of the shares awarded subject to any restrictions may be sold, transferred, assigned, pledged or otherwise encumbered or disposed of by or in respect of the award recipient until such restrictions on vesting and transferability, and any other conditions specified by the Committee, have lapsed or been satisfied; and (iii) all of the shares awarded subject to any restrictions on vesting and transferability, and all rights of the award recipient to -32- such shares, shall be forfeited and terminated without further obligation on the part of the Company unless the award recipient has remained in service to the Company (or its parents, subsidiaries or successor) until the lapse of all restrictions and the satisfaction of all other conditions applicable to such shares as prescribed by the Committee. At the discretion of the Committee, dividends with respect to any shares being held in custody under this Article may be either currently paid to the award recipient or withheld by the Company for the recipient's account, and interest may be credited on the amount of cash dividends withheld at a rate and subject to such terms as determined by the Committee. Upon the forfeiture of any shares still held in custody, such shares and any withheld dividends related thereto shall be transferred to the ownership and account of the Company without further action by the award recipient who incurred the forfeiture. Any shares on which dividends are currently paid may not, if later forfeited, be available for reuse in subsequent awards under the Plan. Section 6.5 Purchase and Taxation. No payment will be required for an award recipient upon the issuance or delivery of any shares under a stock award, except: -33- (i) any purchase price prescribed by the Committee, and (ii) any amount necessary to satisfy applicable federal, state or local tax requirements shall be withheld or paid promptly upon notification to the Committee of the amount due. The Committee may permit such amounts to be paid in: (i) shares of Common Stock previously owned by the award recipient, (ii) withholding a portion of the shares of Common Stock that would otherwise be distributed to the award recipient in connection with the award, or (iii) a combination of cash and shares of Common Stock. -34- Unless otherwise approved by the Committee, an election by an award recipient who is subject to Section 16(b) of the Exchange Act to use shares of Common Stock withheld from his award distribution under clause (ii) above shall be made only during the window period described in Section 5.7(i) above and the Committee shall have sole discretion to consent to or disapprove of any such election (which consent or disapproval may be given at any time after the election to which it relates). Section 6.6 Forfeiture or Resale. Any share of stock awarded under this Article shall be forfeited, and any share of Common Stock sold under this Article shall, at the Company's option, be resold to the Company for an amount equal to the purchase price paid therefore, and in either case such forfeited or resold shares shall revert to the Company, if: (i) the award recipient violates any noncompetition or confidentiality provision of his stock award agreement, or breaches any other provision of said agreement; (ii) the award recipient's employment or service with the Company (or its parents, subsidiaries and successors) terminates before restrictions on his rights to vesting and -35- transferability of the shares have lapsed, which date cannot be earlier than the first anniversary of his award; or (iii) the award recipient's employment with the Company (or its parents, subsidiaries and successors) terminated for Cause. Section 6.7 Adjustments. Stock awards shall be adjusted, in accordance with Section 9.1, to reflect any changes in the number of shares, class or features of Common Stock occurring while the award remains in effect. Thus, additional or replacement shares of Common Stock shall be made subject to an outstanding stock award as needed upon a material change in the Common Stock to give that award the same proportionate Common Stock rights as it had when first awarded. The Committee may accelerate the vesting or lapse of restrictions on stock awards at any time in its sole discretion. Section 6.8 Cash or Stock. [Reserved] -36- ARTICLE VII--PERFORMANCE SHARE AWARDS ------------------------------------- Section 7.1 Awards Authorized. The Committee shall be authorized to grant performance share awards from time to time, in accordance with this Article, to any one or more of the same individuals or groups who are eligible for stock options as described in Article III, subject to Section 3.2. Each performance share award shall be governed by a written agreement specifying such features as the number of shares of Common Stock being awarded, whether the award is freestanding or is granted in tandem with or in substitution of any other award under this Plan, the performance targets, goals, periods and measures for determining whether, when and to what extent the shares subject to the award will be delivered to the award recipient, and such other terms and conditions as the Committee shall determine, including any restrictions on vesting of the award and transferability of the shares so awarded. The terms and conditions of performance share awards may vary with each individual recipient and with each award. Section 7.2 Performance Shares. Performance shares represent the right to receive shares of Common Stock, by grant from the Company, at a future time, provided the performance goals specified in the award agreement are satisfied. The award agreement may provide for grants of less than all the shares made subject to the award where the targeted performance goals are not met but lesser stated goals are met. No stock certificate shall be -37- held in custody during the performance period as with stock awards during the restriction period. The award recipient shall have no rights of a shareholder with respect to any shares subject to a performance share award unless and until such shares are actually delivered in accordance with the terms of the award agreement and this Plan. Section 7.3 Performance Goals. The Committee shall determine the period over which performance shall be measured, the measures of performance, the performance goals, the weighting of multiple performance goals where applicable, and the levels of performance at which partial and full delivery of shares subject to the award will become deliverable. The Committee shall have sole discretion to modify performance goals in response to changing circumstances during the term of an award, to determine the extent to which goals have been met and to determine the number of shares, if any, to be distributed under an award in recognition of the achieved levels of performance. Performance goals may be based on Company-wide financial performance, based on performance by smaller units of the Company's business, based on individual performance, or based on any combination of such areas of performance. Performance periods shall not be based on the individual award recipient's duration of employment, but if an award recipient terminates employment before the end of a performance period, that recipient may, if the award agreement so provides, receive a pro rata share of any benefit that is earned for the entire performance period based on the relative duration of his employment under an award in that performance period. Any -38- shares not earned and distributable under the terms of a performance share award shall be forfeited and remain with the Company for reuse under this Plan. Section 7.4 Settlement in Cash or Stock. Within sixty (60) days after the end of the performance period, or if later within thirty (30) days after consolidated financial statements for such period are completed and accepted by the Company, the Committee shall determine and declare any shares of Common Stock earned and deliverable under any performance share awards for that performance period. Distribution of such declared benefit shall be made as promptly as practicable thereafter; provided, however, that each award recipient entitled to a distribution may receive such benefit all or in part in cash equal to the fair market value of the Common Stock, determined by its closing price on the NYSE as of the last day of the performance period. The Committee has sole discretion to determine the extent to which such benefit shall be distributed in cash or in shares of Common Stock. Section 7.5 Taxation. Any amount necessary to satisfy applicable federal, state or local tax requirements shall be withheld and paid promptly upon the award recipient's notification to the Committee of the amount due. Such tax withholding and payment shall be made in the same manner as provided under Section 6.5 above. -39- ARTICLE VIII--OTHER AWARDS -------------------------- Section 8.1 Other Awards. The Committee has the authority and discretion to declare and make from time to time other forms of awards based on Common Stock rights and values, on such terms and conditions as the Committee deems appropriate and consistent with the purposes of this Plan and the interests of the Company. Such awards may provide for deferral of compensation through equity-based units, for cash payments based in whole or in part on the value or future value of Common Stock, for the grant or acquisition (currently or in the future) of Common Stock, for any combination of such awards, or for any other equity-related awards. Other awards may also include cash benefits based on one or more criteria determined by the Committee which may be unrelated to the value of the Common Stock. Each award shall be evidenced and governed by a separate award agreement. ARTICLE IX--ADJUSTMENTS ----------------------- Section 9.1 Affecting Stock. Appropriate adjustment in the maximum number of shares of Common Stock issuable pursuant to the Plan, the number of shares subject to awards under the Plan, the exercise price with respect to options and tandem SARs and the base price with respect to freestanding SARs, shall be made to give effect to any increase or -40- decrease in the number of shares of issued Common Stock resulting from a subdivision or consolidation of shares whether through reorganization, recapitalization, stock split, reverse stock split, spin-off, split-off, spin- out, or other distribution of assets to stockholders, stock distributions or combination of shares, assumption and conversion of outstanding awards due to an acquisition by the Company of the stock or assets of any other corporation, payment of stock dividends, other increase or decrease in the number of shares with respect to which awards may be granted under the Plan, or in the number of shares subject to outstanding awards, shall be made except in the event, and then only to the extent that such adjustment, together with all respective prior adjustments which were not made as a result of this provision, involves a net change of more than ten (10) percent: (i) from the number of shares of Common Stock with respect to which awards may be granted under the Plan, or (ii) with respect to each outstanding option, from the respective number of shares of Common Stock subject thereto on the date of grant thereof. -41- If the number of shares of Common Stock subject to an option has been adjusted pursuant to this paragraph, and tandem SARs or freestanding SARs have been granted to the holder of such option, or restricted stock has been granted or sold to the holder of such option in tandem with the grant of such option, then the number of such SARs or of such shares of restricted stock shall be adjusted as necessary to maintain the ratio between the number of shares subject to such option and the number of such SARs or shares of restricted stock. The decision of the Committee as to the amount and timing of any such adjustments shall be conclusive. Section 9.2 Affecting the Company. In the case of dissolution of the Company, (i) every option and SAR granted to an Executive Group member outstanding hereunder shall terminate, notwithstanding any restrictions and conditions that may be contained in his option agreement, and (ii) the restrictions and conditions on restricted stock held by such employee shall lapse and the holders of such restricted stock shall have all the rights of a -42- stockholder with respect to participation in the dissolution. Each such option and SAR holder shall have 30 days prior written notice of such event, during which time he shall have a right, subject to the $100,000 limit in Section 4.2(d), to exercise his partly or wholly unexercised option and SAR (without regard to installment exercise limitations, if any). ARTICLE X--CHANGES IN CONTROL ----------------------------- Section 10.1 Consequences. In the event of termination of a participant's employment by the Company without Cause or, in certain cases, by the participant for Good Reason, as such terms may be defined in the applicable award agreements, within two years of a change in control, all such participant's outstanding stock options and stock appreciation rights will become fully exercisable, all restrictions and conditions of all stock awards then held by such participant will lapse, and all performance share awards held by such participant will be deemed to have been fully earned. In the case of a change in control involving a merger or consolidation involving the Company in which the Company is not the surviving corporation or becomes a wholly owned subsidiary of another entity, outstanding and unexercised stock options held by a participant will be converted into options to acquire -43- common stock of the survivor on substantially the same terms and conditions as the original option, with appropriate adjustments as to the number and kind of shares and exercise prices. Section 10.2 Changes in Control. For purposes of this Plan, a "change in control" shall be deemed to have occurred when: (a) any "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange 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 Exchange Act), directly or indirectly, or 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 stockholders 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 -44- surviving entity or the parent of such surviving entity outstanding immediately after such merger or consolidation; (c) the stockholders 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 effective date of the Plan), 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 stockholders 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 -45- conducted by the Company if such sale or conveyance does not materially affect the beneficial ownership of the Company's capital stock; or (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. For this purpose of this definition of change in control, "Airline Shareholder" means any of United Airlines, US Airways or KLM Royal Dutch Airlines. ARTICLE XI--TERMINATION OF EMPLOYMENT ------------------------------------- Section 11.1 Termination. In the event that the employment of an employee to whom an award has been granted under this Plan shall be terminated, such outstanding award may be exercised (to the extent the employee was entitled to do so at the termination of his employment), subject to all applicable provisions of this Plan, by the earlier of: -46- (i) ninety (90) days after such termination date, or (ii) the date such award would otherwise expire according to the award agreement. The earlier of those dates shall become the new expiration date of the award and the award shall become vested and exercisable as of such employment termination date. However, if the award involves restricted stock, any shares as to which the restrictions have not lapsed as of the date the employee's employment terminates shall be forfeited immediately and reclaimed by the Company. If termination of employment is due to the employee's death or total disability, then the ninety (90) day period for exercise under clause (i) above shall instead be one year. The employee's designated beneficiary may exercise an award during the remaining exercise period following the employee's death. For this purpose, "total disability" shall mean the permanent inability of an employee, as a result of accident or illness, to perform any and every duty pertaining to such employee's occupation or employment for which the employee is suited by reason of previous training, education and experience. -47- Section 11.2 Termination for Cause. If an employee's termination of employment is for "Cause," then any outstanding awards granted to the employee shall expire unexercised on the date his employment is terminated. For this purpose, the term "Cause" shall mean that the Committee has determined, in its sole discretion, that one or more of the following has occurred: (i) The employee is considered to have engaged in conduct that has had or could have an adverse effect on the Company, including (but not limited to): endangering the welfare of the public or other employees; misappropriation or misuse of Company funds, property or confidential information; interference with the Company's relationships with customers, suppliers and others; insubordination; gross negligence; dishonesty or criminality; (ii) The employee is considered to have breached any material terms and conditions of employment, such as any Company policy regarding safety, security, confidentiality, courtesy, attendance, new ideas or -48- inventions, other business activity, or any other Company policy deemed material under the circumstances; (iii) The employee is considered to have breached, in any material respect, any agreement with the Company (including affiliates and business units) regarding any terms and conditions relating to his employment or separation from employment; or (iv) For reasons of poor job performance, attitude, lack of skills or other inability to perform the duties expected of him in a satisfactory manner, it is determined at an appropriate level within the Company that the employee's employment should not continue. Section 11.3 Non-Employees. The service for the Company (or any of its parents, affiliates, subsidiaries or successors) of a non-employee who has received an award under the Plan, such as a consultant or nonemployee director, shall be treated under this Plan as though it were employment by an employee of the Company under this Article. Thus, -49- Sections 12.1 and 12.2 also shall apply to such nonemployees in the event their service is terminated. ARTICLE XII--TERMS AND CONDITIONS OF AWARDS ------------------------------------------- Section 12.1 Contracts and Legends. Each Key Employee shall agree to such restrictions and conditions and other terms in connection with the exercise of any award, including restrictions and conditions on the disposition of the Common Stock acquired upon the exercise, grant or sale thereof, as the Committee may deem appropriate. The certificates delivered to a participant or to the Secretary of the Company evidencing the shares of Common Stock acquired upon exercise of an award may, and in the case of a grant or a sale under a stock award shall, bear a legend referring to the restrictions and conditions and other terms contained in the respective option agreement or award agreement and the Plan, and the Company may place a stop transfer order with its transfer agent against the transfer of such shares. If requested to do so by the Committee at the time of exercise of an option or sale of restricted stock, each participant shall execute a written instrument stating that he is purchasing the Common Stock for investment and not with any present intention to sell the same. -50- Section 12.2 Stock Registration and Rights. The obligation of the Company to sell and deliver Common Stock under the Plan shall be subject to all applicable laws, regulations, rules and approvals, including, but not by way of limitation, the effectiveness of a registration statement under the Securities Act of 1933, if deemed necessary or appropriate by the Committee, for the Common Stock, options, SARs, and other securities reserved for issuance or that may be offered under the Plan. A participant shall have no rights as a stockholder with respect to any shares covered by an option granted to, or exercised by, him until the date of delivery of a stock certificate to him for such shares, or with respect to restricted stock granted or sold to him under a stock award, until the date of delivery of a stock certificate representing such vested restricted stock to the Secretary of the Company on his behalf. No adjustment other than pursuant to Article IX hereof shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is delivered. ARTICLE XIII--NONTRANSFERABILITY -------------------------------- Section 13.1 Except as provided in Section 13.2 below, or in connection with unrestricted Common Stock issued pursuant to an award, awards granted under the Plan and any rights and privileges pertaining thereto, may not be transferred, assigned, pledged or hypotheticated in any manner, by operation of law or otherwise, other than by will or by the -51- laws of descent and distribution and shall not be subject to execution, attachment or similar process. The granting of an option or other award shall impose no obligation upon the award recipient to exercise such option or award. Section 13.2 Notwithstanding the provisions of Section 13.1 above, a participant, at any time prior to his death, may assign all or any portion of an award granted to him (other than an incentive stock option) to: (i) his spouse or lineal descendant, (ii) the trustee of a trust for the primary benefit of his spouse or lineal descendant, (iii) a partnership of which his spouse and lineal descendants are the only partners, or (iv) a tax exempt organization as described in Section 501(c)(3) of the Code. -52- In such event, the spouse, lineal descendant, trustee, partnership or tax exempt organization will be entitled to all of the rights of the participant with respect to the assigned portion of such award, and such portion of the award will continue to be subject to all of the terms, conditions and restrictions applicable to the award, as set forth herein and in the related award agreement immediately prior to the effective date of the assignment. Any such assignment will be permitted only if: (i) the Participant does not receive any consideration therefor, and (ii) the assignment is expressly permitted by the applicable award agreement as approved by the Committee. Any such assignment shall be evidenced by an appropriate written document executed by the participant, and a copy thereof shall be delivered to the Company on or prior to the effective date of the assignment. -53- ARTICLE XIV--AMENDMENT AND TERMINATION OF PLAN ---------------------------------------------- Section 14.1 Board Authority. The Board may at any time terminate, suspend or modify (by written amendment) the Plan without the authorization of stockholders to the extent allowed by law, including without limitation any rules issued by the Securities and Exchange Commission under Section 16 of the Exchange Act. The Committee may amend in writing any award agreement made under the Plan. Section 14.2 Effect. No termination, suspension or modification of the Plan shall adversely affect any right acquired by any participant under an award granted before the date of such termination, suspension or modification, unless such participant shall consent; but it shall be conclusively presumed that any adjustment for changes in capitalization as provided for herein does not adversely affect any such right. Any member of the Board who is an officer or employee of the Company shall be without vote on any proposed amendment to the Plan, or on any other matter which might affect that member's individual interest under the Plan. -54- ARTICLE XV--MISCELLANEOUS ------------------------- Section 15.1 No Contract of Employment. Neither the adoption of the Plan nor the grant of any award shall be deemed to obligate the Company or any subsidiary to continue the employment of any employee for any particular period, nor shall the granting of an award constitute a request or consent to postpone the retirement date of any employee. Section 15.2 Effective Date of Plan. The Plan shall become effective upon adoption by the Board; provided, however, that it shall be submitted for approval by the holders of a majority of the outstanding shares of common stock of the Company present, or represented, and entitled to vote at a stockholders' meeting held within 12 months thereafter, and awards granted prior to such stockholder approval shall become null and void if such stockholder approval is not obtained. Section 15.3 Leaves of Absence. The Committee shall be entitled to make such rules, regulations and determinations as it deems appropriate under the Plan regarding any leave of absence taken by an employee who is the recipient of any award. Without limiting the generality of the foregoing, the Committee shall be entitled to determine: -55- (i) whether or not any such leave of absence shall constitute a termination of employment within the meaning of the Plan, and (ii) the impact, if any, of any such leave of absence on awards under the Plan theretofore made to any employee who takes such leave of absence. Section 15.4 Governing Law. The Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Illinois and, where applicable, the federal laws and regulations referenced herein. Section 15.5 Successors. In the event of a sale of substantially all of the assets of the Company, or a merger, consolidation or share exchange involving the Company, all obligations of the Company under the Plan with respect to awards granted hereunder shall be binding on the successor to the transaction. Employment of an employee with such a successor shall be considered employment of the employee with the Company for purposes of the Plan. -56- Section 15.6 Notices. Notices given pursuant to the Plan shall be in writing and shall be deemed received when personally delivered or five days after mailed by United States registered or certified mail, return receipt requested, addressee only, postage prepaid. Notice to the Company shall be directed to: --------------------------- --------------------------- --------------------------- IN WITNESS WHEREOF, this 1997 Stock Incentive Plan, having been first duly adopted, is hereby executed below by a duly authorized officer, to take effect as provided herein. GALILEO INTERNATIONAL, INC. By: --------------------------- Its: --------------------------- EX-11.1 9 COMPUTATION OF EARNINGS PER SHARE COMPUTATION OF EARNINGS PER SHARE Exhibit 11.1 (in thousands, except per share data)
1997 -------- Average shares outstanding 95,000 Effect of dilutive options 24 Treasury stock - -------- Total 95,024 ======== Earnings before income taxes $205,613 Proforma income tax expense 82,245 -------- Adjusted net earnings 123,368 ======== Earnings per common share: Adjusted basic earnings per share 1.30 ======== Adjusted diluted earnings per share 1.30 ========
EX-21.1 10 SCHEDULE OF SUBSIDIARIES Exhibit 21.1 GALILEO INTERNATIONAL, INC. Schedule of Subsidiaries Name of Subsidiary Country - ------------------ ------- Galileo International, L.L.C. United States Apollo Travel Services Partnership United States The Galileo Company United Kingdom Galileo International Limited United Kingdom Galileo Belgium SA/NV Belgium Galileo France SARL France Galileo Deutschland GmbH Germany Galileo International B.V. The Netherlands Galileo Nederland B.V. The Netherlands Galileo Portugal Limited Portugal Galileo Espana SA Spain Galileo Technologies, Inc. United States Galileo Switzerland Switzerland Galileo Asia Limited Hong Kong Galileo Brasil Limited Brazil Galileo do Brasil & CIA Brazil Galileo Latin America, L.L.C. United States Galileo Venezuela C.A. Venezuela Apollo Communication Services, L.L.C. United States CCRM L.L.C. United States Apollo Travel Services Mexico, S. de R.L. de C.V. Mexico ATS Sub I, Inc. United States ATS Sub II, Inc. United States EX-27 11 FDS - GALILEO INTERNATIONAL, INC.
5 This schedule contains summary financial information extracted from the Annual Report on Form 10-K for the year ended December 31, 1997 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 19,367 0 187,419 22,012 0 224,275 410,620 221,439 1,268,497 201,363 277,776 0 0 1,048 682,648 1,268,497 0 1,256,103 0 1,044,573 5,917 4,219 12,266 205,613 43,976 161,637 0 0 0 161,637 1.30 1.30
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