=============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ Form 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------ JULY 23, 2001 (JULY 19, 2001) (Date of Report (date of earliest event reported)) CENDANT CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 1-10308 06-0918165 (State or other jurisdiction (Commission File No.) (I.R.S. Employer of incorporation or Identification Number) organization) 9 WEST 57TH STREET NEW YORK, NY 10019 (Address of principal (Zip Code) executive office) (212) 413-1800 (Registrant's telephone number, including area code) ===============================================================================
ITEM 5. OTHER EVENTS This Current Report on Form 8-K/A of the Company is being filed to make available preliminary pro forma financial information with respect to the Company's planned acquisition of Galileo International, Inc. ("Galileo") for purposes of incorporating such information by reference into certain other filings of the Company. This Report also makes available pro forma financial data giving effect to the following transactions for the year ended December 31, 2000 and as of and for the quarter ended March 31, 2001: the acquisition of Avis Group Holdings, Inc. ("Avis") on March 1, 2001 and various finance-related activities which occurred during the first and second quarters of 2001, including the issuances of debt and equity securities and the conversion of the Company's Feline PRIDES into CD common stock.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS (a) Financial Statements of Business Acquired. See Exhibit 99.1 attached hereto for the audited Financial Statements of Galileo as of December 31, 2000 and 1999 and for each of the years in the three-year period ended December 31, 2000. See Exhibit 99.2 attached hereto for the unaudited Financial Statements of Galileo as of March 31, 2001 and for the three months ended March 31, 2001 and 2000. The Financials Statements of Avis are incorporated by reference from Avis' Annual Report on Form 10-K for the year ended December 31, 2000 and Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2001, previously filed with the Commission on March 28, 2001 and May 15, 2001, respectively, and incorporated by reference herein. (b) Pro Forma Financial Information. See Exhibit 99.3 attached hereto for Pro Forma Financial Information giving effect to the planned acquisition of Galileo, the March 1, 2001 acquisition of Avis and various finance-related activities which occurred during the first and second quarters of 2001. (c) Exhibits. See Exhibit Index.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CENDANT CORPORATION /s/ Kevin M. Sheehan -------------------------- Kevin M. Sheehan Senior Executive Vice President and Chief Financial Officer /s/ Tobia Ippolito -------------------------- Tobia Ippolito Executive Vice President, Finance and Date: July 23, 2001 Chief Accounting Officer
CENDANT CORPORATION CURRENT REPORT ON FORM 8-K/A EXHIBIT INDEX Exhibit No. Description - ------- ----------- 23.1 Consent of Deloitte & Touche LLP, relating to Avis Group Holdings, Inc. 23.2 Consent of KPMG LLP, relating to Galileo International, Inc. 99.1 Audited Financial Statements of Galileo International, Inc. as of December 31, 2000 and 1999 and for each of the years in the three-year period ended December 31, 2000 99.2 Unaudited Financial Statements of Galileo International, Inc. as of March 31, 2001 and for the three months ended March 31, 2001 and 2000 99.3 Pro Forma Financial Information (unaudited)
EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 333-11035, 333-17323, 333-17411, 333-20391, 333-23063, 333-26927, 333-35707, 333-35709, 333-45155, 333-45227, 333-49405, 333-78447, 333-86469, 333-59244, 333-59246 and 333-59742 of Cendant Corporation on Form S-3, Registration Statement Nos. 33-74066, 33-91658, 333-00475, 333-03237, 33-58896, 33-91656, 333-03241, 33-26875, 33-75682, 33-93322, 33-93372, 33-75684, 33-80834, 33-74068, 33-41823, 33-48175, 333-09633, 333-09655, 333-09637, 333-22003, 333-30649, 333-42503, 333-34517-2, 333-42549, 333-45183, 333-47537, 333-69505, 333-75303, 333-78475, 333-38638, 333-51544 and 333-58670 of Cendant Corporation on Form S-8 and Registration Statement No. 333-64738 on Form S-4 of our report dated January 29, 2001 (March 2, 2001 as to Note 27) relating to the consolidated financial statements of Avis Group Holdings, Inc. for the years ended December 31, 2000, 1999 and 1998 appearing in the Annual Report on Form 10-K of Avis Group Holdings, Inc. for the year ended December 31, 2000 and included in the Current Report on Form 8-K of Cendant Corporation dated April 18, 2001. /s/ Deloitte & Touche LLP New York, New York July 19, 2001
EXHIBIT 23.2 CONSENT OF KPMG LLP We consent to the inclusion of our report dated January 26, 2001, except as to Note 15 which is as of February 22, 2001, with respect to the consolidated balance sheets of Galileo International, Inc. and subsidiaries as of December 31, 2000 and 1999 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2000, and to the incorporation by reference in Registration Statement Nos. 333-11035, 333-17323, 333-17411, 333-20391, 333-23063, 333-26927, 333-35707, 333-35709, 333-45155, 333-45227, 333-49405, 333-78447, 333-86469, 333-59244, 333-59246, and 333-59742 of Cendant Corporation on Form S-3, Registration Statement Nos. 33-74066, 33-91658, 333-00475, 333-03237, 33-58896, 33-91656, 333-03241, 33-26875, 33-75682, 33-93322, 33-93372, 33-75684, 33-80834, 33-74068, 33-41823, 33-48175, 333-09633, 333-09655, 333-09637, 333-22003, 333-30649, 333-42503, 333-34517-2, 333-42549, 333-45183, 333-47537, 333-69505, 333-75303, 333-78475, 333-38638, 333-51544, and 333-58670 of Cendant Corporation on Form S-8, and Registration Statement No. 333-64738 of Cendant Corporation on Form S-4 under the Securities Act of 1933 of such report which appears in the Form 8-K/A of Cendant Corporation dated July 23, 2001. /s/ KPMG, LLP - ------------- Chicago, Illinois July 23, 2001
EXHIBIT 99.1 GALILEO INTERNATIONAL, INC. YEAR ENDED DECEMBER 31, 2000 INDEX PAGE ---- Independent Auditors' Report 2 Consolidated Balance Sheets as of December 31, 2000 and 1999 3 Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998 5 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 6 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998 7 Notes to Consolidated Financial Statements 8
Independent Auditors' Report The Board of Directors Galileo International, Inc.: We have audited the accompanying consolidated balance sheets of Galileo International, Inc. and subsidiaries (the "Company") as of December 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Galileo International, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Chicago, Illinois January 26, 2001, except as to Note 15, which is as of February 22, 2001. 2
GALILEO INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data) December 31, -------------------------- 2000 1999 ---- ---- ASSETS ------ Current assets: Cash and cash equivalents $ 2,460 $ 1,794 Accounts receivable: Trade receivables and other 178,549 166,885 Due from affiliates 23,001 19,057 ----------- ----------- 201,550 185,942 Less allowances 9,351 7,819 ----------- ----------- Net accounts receivable 192,199 178,123 Deferred tax assets 17,794 15,338 Prepaid expenses 18,158 13,240 Other current assets 14,084 21,955 ----------- ----------- Total current assets 244,695 230,450 Property and equipment, at cost: Land 6,470 6,470 Buildings and improvements 76,452 72,219 Equipment 416,406 354,686 ----------- ----------- 499,328 433,375 Less accumulated depreciation 288,651 242,498 ----------- ----------- Net property and equipment 210,677 190,877 Computer software, at cost 480,598 430,706 Less accumulated amortization 320,328 269,912 ----------- ----------- Net computer software 160,270 160,794 Intangible assets, at cost: Customer lists 426,564 406,614 Goodwill 380,014 189,097 Other 87,214 64,167 ----------- ----------- 893,792 659,878 Less accumulated amortization 173,580 87,742 ----------- ----------- Net intangible assets 720,212 572,136 Long-term investments 15,706 29,033 Other noncurrent assets 127,699 71,903 ----------- ----------- $ 1,479,259 $ 1,255,193 =========== =========== (Continued) See accompanying notes to consolidated financial statements. 3
GALILEO INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (continued) (in thousands, except share data) December 31, -------------------------- 2000 1999 ---- ---- LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable: Trade payables and other $ 73,825 $ 45,676 Due to affiliates 3,088 2,358 ----------- ----------- 76,913 48,034 Accrued commissions 34,471 33,722 Accrued compensation and benefits 20,709 19,939 Income taxes payable 1,234 2,785 Other accrued liabilities 89,283 93,663 Capital lease obligations, current portion 1,638 110 Long-term debt, current portion 212,654 121,000 ----------- ----------- Total current liabilities 436,902 319,253 Pension and postretirement benefits 79,285 68,466 Deferred tax liabilities 35,398 14,656 Other noncurrent liabilities 25,427 24,741 Capital lease obligations, less current portion 2,619 92 Long-term debt, less current portion 434,392 434,392 ----------- ----------- Total liabilities 1,014,023 861,600 Stockholders' equity: Special voting preferred stock: $.01 par value; 7 shares authorized; 3 shares issued and outstanding --- --- Preferred stock: $.01 par value; 25,000,000 shares authorized; no shares issued --- --- Common stock: $.01 par value; 250,000,000 shares authorized; 105,232,696 and 105,038,035 shares issued; 88,311,977 and 89,999,435 shares outstanding 1,052 1,050 Additional paid-in capital 682,988 671,615 Retained earnings 357,008 368,843 Unamortized restricted stock grants (1,963) (2,761) Accumulated other comprehensive income (4,493) (2,866) Common stock held in treasury, at cost: 16,920,719 and 15,038,600 shares (569,356) (642,288) ----------- ----------- Total stockholders' equity 465,236 393,593 ----------- ----------- $ 1,479,259 $ 1,255,193 =========== =========== See accompanying notes to consolidated financial statements. 4
GALILEO INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except share data) Year ended December 31, ------------------------------------- 2000 1999 1998 ---- ---- ---- Revenues: Electronic global distribution services $ 1,561,464 $ 1,452,101 $ 1,342,705 Information services 81,834 74,001 138,113 ----------- ----------- ----------- 1,643,298 1,526,102 1,480,818 Operating expenses: Cost of operations 585,752 527,716 568,271 Commissions, selling and administrative 701,447 613,617 554,509 Special charges (Recovery of) - restructurings 1,736 (11,359) 26,460 Special charges - services agreements 19,725 83,226 --- Special charge - in-process research and development write-off 7,000 --- --- ----------- ----------- ----------- 1,315,660 1,213,200 1,149,240 ----------- ----------- ----------- Operating income 327,638 312,902 331,578 Other income (expense): Interest expense, net (44,925) (16,004) (9,629) Other, net (16,839) 64,374 3,532 ----------- ----------- ----------- Income before income taxes 265,874 361,272 325,481 Income taxes 116,985 143,064 129,867 ----------- ----------- ----------- Net income $ 148,889 $ 218,208 $ 195,614 =========== =========== =========== Weighted average shares outstanding 89,972,364 98,140,621 104,796,282 =========== =========== =========== Basic earnings per share $ 1.65 $ 2.22 $ 1.87 =========== =========== =========== Diluted weighted average shares outstanding 90,350,120 98,813,522 105,186,241 =========== =========== =========== Diluted earnings per share $ 1.65 $ 2.21 $ 1.86 =========== =========== =========== See accompanying notes to consolidated financial statements. 5
GALILEO INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year ended December 31, ------------------------------------ 2000 1999 1998 ---- ---- ---- Operating activities: Net income $ 148,889 $ 218,208 $ 195,614 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 217,651 166,299 172,537 Loss (gain) on sale of assets 324 (58,347) (419) Impairment write-down of minority ownership investments 10,186 --- --- Write-off of in-process research and development 7,000 --- --- Unrealized gain on trading securities --- (10,492) --- Deferred income taxes, net 4,280 6,516 (5,167) Changes in operating assets and liabilities, net of effects from acquisition of businesses: Accounts receivable, net (3,861) (1,209) (8,149) Other current assets 8,148 3,194 (2,826) Noncurrent assets (33,919) (18,299) (28,428) Accounts payable and accrued commissions (456) 3,111 2,903 Accrued liabilities (9,871) (13,848) 30,258 Income taxes payable (1,534) (8,794) 10,140 Noncurrent liabilities 16,178 (5,962) 12,615 Other 2,036 798 --- ----------- ---------- ----------- Net cash provided by operating activities 365,051 281,175 379,078 Investing activities: Purchase of property and equipment (55,498) (84,445) (89,442) Purchase and capitalization of computer software (52,955) (20,657) (23,496) Proceeds on sale of assets 1,441 60,470 3,750 Acquisition of businesses, net of cash acquired in 2000 and 1998 of $15,551 and $3,576, respectively (128,861) --- (50,433) Purchase of debt and equity securities (32,421) (35,290) (5,076) ----------- ---------- ----------- Net cash used in investing activities (268,294) (79,922) (164,697) Financing activities: Borrowings under credit agreements 190,000 574,000 49,392 Repayments under credit agreements (99,000) (88,128) (230,004) Repurchase of common stock for treasury (154,640) (635,523) (6,765) Dividends paid to stockholders (32,356) (33,940) (29,871) Payments of capital lease obligations (510) (27,701) (7,311) Other financing activities 298 3,363 787 ----------- ---------- ----------- Net cash used in financing activities (96,208) (207,929) (223,772) Effect of exchange rate changes on cash 117 (1,358) (148) ----------- ---------- ----------- Increase (decrease) in cash and cash equivalents 666 (8,034) (9,539) Cash and cash equivalents at beginning of year 1,794 9,828 19,367 ----------- ---------- ----------- Cash and cash equivalents at end of year $ 2,460 $ 1,794 $ 9,828 =========== ========== =========== See accompanying notes to consolidated financial statements. 6
GALILEO INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share data) Special Voting Additional Preferred Common Paid - in Retained Stock Stock Capital Earnings ----- ----- ------- -------- Balance at December 31, 1997 $ - $ 1,048 $ 663,688 $ 18,832 Comprehensive income: Net income - - - 195,614 Foreign currency translation adjustments - - - - Comprehensive income Issuance of 97,900 shares of restricted stock - 1 3,991 - Amortization of restricted stock grants - - - - Issuance of 33,150 shares of Common stock under employee stock option plans - - 787 - Repurchase of 169,100 shares of Common stock for treasury - - - - Dividends paid ($0.285 per share) - - - (29,871) ------- ------- --------- --------- Balance at December 31, 1998 - 1,049 668,466 184,575 Comprehensive income: Net income - - - 218,208 Unrealized holding losses on marketable securities - - - - Foreign currency translation adjustments - - - - Other comprehensive income (loss) Comprehensive income Amortization of restricted stock grants - - - - Issuance of 107,285 shares of Common stock under employee stock option plans - 1 3,149 - Repurchase of 14,869,500 shares of Common stock for treasury - - - - Retirement of 4 shares of Special voting preferred stock - - - - Dividends paid ($0.345 per share) - - - (33,940) ------- ------- --------- --------- Balance at December 31, 1999 - 1,050 671,615 368,843 Comprehensive income: Net income - - - 148,889 Unrealized holding gains on marketable securities - - - - Reclassification adjustment for losses included in net income - - - - Foreign currency translation adjustments - - - - Other comprehensive income (loss) Comprehensive income Amortization of restricted stock grants - - - - Issuance of 194,661 shares of Common stock under employee stock option plans - 2 494 - Issuance of stock options upon acquisition of TRIP.com - - 10,879 - Issuance of 5,499,630 shares of Common stock from treasury to acquire TRIP.com - - - (127,917) Issuance of 21,199 shares of Common stock from treasury under employee stock purchase plan - - - (451) Repurchase of 7,402,948 shares of Common stock for treasury - - - - Dividends paid ($0.36 per share) - - - (32,356) ------- ------- --------- --------- Balance at December 31, 2000 $ - $ 1,052 $ 682,988 $ 357,008 ======= ======= ========= ========= GALILEO INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share data) Accumulated Unamortized Other Restricted Comprehensive Treasury Stock Grants Income Stock Total ---------- ----------- ---------------------- Balance at December 31, 1997 $ - $ 128 $ - $ 683,696 Comprehensive income: Net income - - - 195,614 Foreign currency translation adjustments - (1,267) - (1,267) ---------- Comprehensive income 194,347 Issuance of 97,900 shares of restricted stock (3,992) - - - Amortization of restricted stock grants 433 - - 433 Issuance of 33,150 shares of Common stock under employee stock option plans - - - 787 Repurchase of 169,100 shares of Common stock for treasury - - (6,765) (6,765) Dividends paid ($0.285 per share) - - - (29,871) ---------- ----------- --------- ---------- Balance at December 31, 1998 (3,559) (1,139) (6,765) 842,627 Comprehensive income: Net income - - - 218,208 Unrealized holding losses on marketable securities - (1,122) - (1,122) Foreign currency translation adjustments - (605) - (605) ---------- Other comprehensive income (loss) (1,727) ---------- Comprehensive income 216,481 Amortization of restricted stock grants 798 - - 798 Issuance of 107,285 shares of Common stock under employee stock option plans - - - 3,150 Repurchase of 14,869,500 shares of Common stock for treasury - - (635,523) (635,523) Retirement of 4 shares of Special voting preferred stock - - - - Dividends paid ($0.345 per share) - - - (33,940) ---------- ----------- --------- ---------- Balance at December 31, 1999 (2,761) (2,866) (642,288) 393,593 Comprehensive income: Net income - - - 148,889 Unrealized holding gains on marketable securities - 686 - 686 Reclassification adjustment for losses included in net income - 1,122 - 1,122 Foreign currency translation adjustments - (3,435) - (3,435) ---------- Other comprehensive income (loss) (1,627) ---------- Comprehensive income 147,262 Amortization of restricted stock grants 798 - - 798 Issuance of 194,661 shares of Common stock under employee stock option plans - - - 496 Issuance of stock options upon acquisition of TRIP.com - - - 10,879 Issuance of 5,499,630 shares of Common stock from treasury to acquire TRIP.com - - 226,842 98,925 Issuance of 21,199 shares of Common stock from treasury under employee stock purchase plan - - 730 279 Repurchase of 7,402,948 shares of Common stock for treasury - - (154,640) (154,640) Dividends paid ($0.36 per share) - - - (32,356) ---------- ----------- --------- ---------- Balance at December 31, 2000 $ (1,963) $ (4,493) $ (569,356) $ 465,236 ========== =========== ========== ========== See accompanying notes to consolidated financial statements. 7
GALILEO INTERNATIONAL, INC. Notes to Consolidated Financial Statements (in thousands, except share data) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations Galileo International, Inc. (the "Company"), incorporated in the state of Delaware, is one of the world's leading providers of electronic global distribution services for the travel industry utilizing a computerized reservation system ("CRS"). The Company provides travel agencies and other subscribers with the ability to access schedule and fare information, book reservations and issue tickets for airlines. The Company also provides subscribers with information and booking capability covering car rental companies and hotel properties throughout the world. Through its wholly owned subsidiary, Quantitude, Inc. ("Quantitude"), the Company also provides enterprise networking services to customers both in and outside of the travel industry. The Company distributes its products and services in 107 countries on six continents. Principles of Consolidation and Business Acquisitions The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. In 1999, the Company acquired a minority equity interest in TRIP.com, Inc. ("TRIP.com"), an online travel services and technology provider. On March 10, 2000, the Company purchased the remaining 81% ownership interest in TRIP.com for $214,390 in a combined cash and stock transaction. The Company paid $104,586 in cash and issued 5,499,630 shares of Common Stock, previously held in treasury, valued at $98,925. In addition, the Company converted all outstanding stock options of TRIP.com into the Company's stock options (the "Converted Options") at an estimated fair value of $10,879. The following unaudited pro forma financial information presents a summary of consolidated results of operations of the Company and TRIP.com as if the acquisition had occurred on January 1, 1999: Year ended December 31, ----------------------- 2000 1999 ---- ---- Revenues $ 1,645,870 $ 1,536,776 Net income 142,459 153,688 Basic earnings per share 1.57 1.48 Diluted earnings per share 1.56 1.47 These unaudited pro forma results include adjustments for additional amortization of goodwill and other intangible assets. Additionally, the pro forma operating results include pro forma interest expense on the assumed acquisition borrowings to finance the cash portion of the TRIP.com acquisition; pro forma adjustments to the provision for income taxes to reflect the effect of non-deductible amortization of goodwill and other intangible assets; and pro forma adjustments to the weighted average shares outstanding and diluted weighted average shares outstanding used in the earnings per share calculations for the issuance of the Company's Common Stock and the dilutive effect of the Converted Options outstanding, respectively. 8
The results of operations reflected in the pro forma information are not necessarily indicative of the results which would have been reported if the TRIP.com acquisition had occurred at the beginning of the periods presented, or of the future operations of the consolidated entities. Also during 2000, the Company acquired Terren Corporation ("Terren"), a developer of client-server software for business databases, data communications and information management, and Travel Automation Services Limited ("Galileo UK"), the Company's national distribution company ("NDC") in the United Kingdom. Terren and Galileo UK were acquired on March 8 and April 14, 2000 at purchase prices of $2,592 and $19,992, respectively. The purchase price for Terren consisted of $1,405 in cash payments and the assumption of a note payable and accrued interest totaling $1,187. The purchase price for Galileo UK consisted entirely of cash. In connection with the acquisition of Galileo UK, the Company terminated certain revenue sharing obligations in exchange for $10,051 in cash paid on the acquisition date. The related intangible asset is being amortized over 17 years. The pro forma effects of these acquisitions are not significant. In connection with all of the 2000 acquisitions, the Company incurred expenses of $8,378, which have been accounted for as part of the purchase prices. The Company accounted for these acquisitions using the purchase method of accounting. Accordingly, the costs of these acquisitions were allocated to the assets acquired and liabilities assumed based on their respective fair values. Goodwill and other intangible assets related to the cost of these acquisitions are being amortized over 3 to 20 years. The resulting amortization is included in cost of operations expenses. The results of operations and cash flows of TRIP.com, Terren and Galileo UK have been consolidated with those of the Company from the date of each acquisition. During 1998, the Company acquired a Florida-based airline information systems company, S. D. Shepherd Systems, Inc. ("Shepherd Systems") and two NDCs: Galileo Nordiska AB ("Nordiska") and Galileo Canada Distributions Systems, Inc. ("Galileo Canada"). Nordiska, Galileo Canada and Shepherd Systems were acquired on January 1, June 1 and November 19, 1998 at purchase prices of $2,066, $34,392, and $16,740, respectively. In connection with the acquisitions, the Company also incurred expenses of $811, which have been accounted for as part of the purchase prices. The Company accounted for the acquisitions using the purchase method of accounting. Accordingly, the costs of the acquisitions were allocated to the assets acquired and liabilities assumed based on their respective fair values. Goodwill related to the cost of the acquisitions is being amortized over 10 to 25 years and is included in cost of operations expenses. The results of operations and cash flows of the acquired companies have been consolidated with those of the Company from the date of each acquisition. In connection with the acquisition of Galileo Canada, the Company incurred $34,392 of debt under a five-year term loan agreement. Uses of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain prior-year amounts have been reclassified to conform to the 2000 presentation. 9
Foreign Currency Translation The Company uses the U.S. dollar for financial reporting purposes as substantially all of the Company's billings are in U.S. dollars. The balance sheets of the Company's foreign subsidiaries are translated into U.S. dollars using the balance sheet date exchange rate, and revenues and expenses are translated using the average exchange rate. The resulting translation gains and losses are recorded as a separate component of stockholders' equity. Foreign currency transaction gains and losses are reflected in the consolidated statements of income. Cash and Cash Equivalents Cash in excess of operating requirements is invested daily in liquid, income-producing investments, having maturities of three months or less. The carrying amounts reported on the consolidated balance sheets for cash equivalents include cost and accrued interest, which approximate fair value. Fair Value of Financial Instruments The carrying values of the Company's financial instruments, excluding non-marketable equity securities (as discussed in Note 6) and derivative financial instruments, are reasonable estimates of their fair value. Allowance for Doubtful Accounts Receivable The allowance for doubtful accounts receivable was $9,351, $7,819, and $13,747 at December 31, 2000, 1999, and 1998, respectively. Provisions for bad debts were $5,371, $2,569, and $(3,862) for the years ended December 31, 2000, 1999, and 1998, respectively. Write-offs of uncollectible accounts were $5,948, $9,763, and $5,124 for the years ended December 31, 2000, 1999, and 1998, respectively. The 1998 provision includes a $7,548 recovery settlement related to a contractual dispute from a prior year. Accounting for the Impairment of Long-Lived Assets Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," requires that long-lived assets and certain identifiable intangibles to be held and used by any entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If an indication of a potential impairment exists, recoverability of the respective assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate, to the carrying amount, including associated intangible assets, of such operation. If the operation is determined to be unable to recover the carrying amount of its assets, then intangible assets are written down first, followed by the other long-lived assets of the operation, to fair value. Fair value is determined based on discounted cash flows or appraised values, depending upon the nature of the assets. In determining the estimated future cash flows, the Company considers current and projected future levels of income as well as business trends, prospects and market and economic conditions. The carrying amount of the Company's long-lived assets at December 31, 2000 and 1999 primarily represents the original amounts invested less the recorded depreciation and amortization. Management believes the carrying amount of these investments is not impaired. 10
Property and Equipment Depreciation of property and equipment is provided on the straight-line method over the following estimated useful lives of the assets: Buildings and improvements 3-31 years Equipment 3-10 years Depreciation expense for the years ended December 31, 2000, 1999, and 1998 was $77,979, $79,111, and $83,724, respectively. Computer Software Effective January 1, 1998, the Company adopted the provisions of Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Accordingly, certain costs to develop internal-use computer software are being capitalized. Prior to 1998, the Company capitalized certain software development costs in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed." The ongoing assessment of recoverability of capitalized software development costs requires considerable judgment by management with respect to certain external factors, including but not limited to estimated economic life and changes in software and hardware technology. Computer software consists principally of purchased computer software and capitalized computer software development costs. Amortization is provided on a straight-line method over estimated useful lives of 3 to 10 years. Amortization expense for the years ended December 31, 2000, 1999, and 1998 was $53,740, $49,384, and $52,688, respectively. Intangible Assets Intangible assets are amortized on the straight-line method over the following useful lives: Customer lists 3-17 years Goodwill 3-25 years Other 3-17 years Amortization expense for the years ended December 31, 2000, 1999, and 1998 was $85,932, $37,804, and $35,692, respectively. Investments The Company strategically invests in certain equity securities of technology, travel and Internet-related companies in order to strengthen its core product offerings or to enhance its technological infrastructure. The Company classifies its marketable equity securities into trading and available-for-sale categories in accordance with the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company's trading securities are reported at fair value with unrealized gains and losses reported in other income or expense. Available-for-sale securities are reported at fair value, with unrealized gains and losses, net of tax, recorded in stockholders' equity. Realized gains or losses, and other than temporary declines in value, if any, on equity securities are reported in other income or expense as incurred. Investments in equity securities are accounted for under the cost or equity method as appropriate under APB Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock." For non-quoted investments, the Company's 11
policy is to regularly review the assumptions underlying the operating performance and cash flow forecasts in assessing the carrying values. The Company identifies and records impairment on these investments in privately-held companies when events and circumstances indicate that such assets might be impaired. Revenue Recognition Fees are charged to airline, car rental, hotel and other travel suppliers for bookings made through the Company's CRS and are dependent upon the level and usage of functionality within the CRS at which the supplier participates. Booking fee revenue is recognized at the time the reservation is made for air bookings, at the time of pick-up for car bookings, and at the time of check-out for hotel bookings. Research and Development Research and development costs, excluding amortization of computer software, are expensed as incurred and were $7,052, $6,205, and $4,786 for the years ended December 31, 2000, 1999, and 1998, respectively. Derivative Financial Instruments In the normal course of business, portions of the Company's expenses are subject to fluctuations in currency values and interest rates. The Company addresses these risks through a controlled program of risk management that includes the use of derivative financial instruments. To some degree, the Company is exposed to credit-related losses in the event of nonperformance by counterparties to financial instruments, but management does not expect any counterparties to fail to meet their obligations given their high credit ratings. The Company does not hold or issue derivative financial instruments for trading purposes. The Company enters into foreign exchange forward contracts to manage exposure to fluctuations in foreign exchange rates related to the funding of its European and Canadian operations. The Company accounts for such contracts by recording any unrealized gains or losses in income each reporting period. At December 31, 2000, the Company had no foreign exchange forward contracts outstanding. At December 31, 1999 and 1998, the notional principal amounts of outstanding forward contracts were $19,635 and $31,123, respectively. The fair value of outstanding forward contracts at December 31, 1999 and 1998 was $32 and $821, respectively. The Company has also entered into interest rate swap agreements to convert portions of its variable rate debt to fixed rate. The Company accounts for its interest rate swap agreements as a hedge of its interest rate exposure. (See Note 8 for further information regarding the Company's interest rate agreements.) Income Taxes The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("Statement 109"). Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to the difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 12
Earnings per Share Basic earnings per share data for the years ended December 31, 2000, 1999 and 1998 is calculated based on the weighted average shares outstanding for the period. Diluted earnings per share is calculated as if the Company had additional Common Stock outstanding from the beginning of the year or the date of grant for all dilutive stock options, net of assumed repurchased shares using the treasury stock method. This resulted in increases in the weighted average number of shares outstanding for the years ended December 31, 2000, 1999 and 1998 of 377,756, 672,901, and 389,959, respectively. At December 31, 2000, 1999 and 1998, options totaling 4,208,528, 2,051,981, and 1,837,900, respectively, were excluded from the calculations as their effect was antidilutive. 2. TRANSACTIONS WITH AFFILIATES Airline stockholders, in aggregate, owned 64.9% of the Company's outstanding Common Stock at December 31, 1998, with only United Air Lines, Inc. ("United Airlines") and KLM deemed to be affiliates due to indirect ownership, individually, greater than 10% of the Company's outstanding Common Stock. In June 1999, the Company completed a secondary offering of its Common Stock, and also repurchased shares from an airline stockholder. As of December 31, 2000 and 1999, the percentage of the Company's outstanding Common Stock owned by airline stockholders was 27.5% and 27.0%, respectively, with only United Airlines deemed to be an affiliate. (See Note 10 for further information regarding the secondary offering and repurchase of shares by the Company.) The Company recognized electronic global distribution services revenues, primarily in the form of booking fees, from affiliates totaling $133,333, $138,361, and $170,346 for the years ended December 31, 2000, 1999, and 1998, respectively. The Company also received information services revenues from affiliates totaling $70,922, $65,392, and $128,839 for the years ended December 31, 2000, 1999, and 1998, respectively. Total revenues from United Airlines of $204,255, $203,753, and $269,942 were greater than 10% of the Company's revenues for the years ended December 31, 2000, 1999, and 1998, respectively. The Company, in the ordinary course of business, purchases services from affiliates. Services purchased from affiliates and classified within commissions, selling and administrative expenses totaled $3,669, $4,715, and $15,623 for the years ended December 31, 2000, 1999, and 1998, respectively. In July 1997, the Company entered into certain services agreements with airline stockholders to provide fare quotation services, internal reservation services, other internal management services and software development services. The Company will provide the fare quotation services under existing pricing arrangements for a period of approximately five years. In December 1999, the Company amended the agreement under which it provides certain of the above mentioned services to United Airlines. This amendment, which went into effect on January 1, 2000, extends the length of the agreement for an additional five years. 3. EMPLOYEE PENSION AND OTHER POSTRETIREMENT BENEFITS The Company has defined benefit pension plans and other postretirement benefit plans that cover substantially all U.S. employees. Other benefits include health care benefits provided to retired U.S. employees and retiree flight benefits provided to certain former United Airlines employees. The Company has no significant postretirement health care benefit plans outside of the United States. The majority of its 13
U.S. employees may become eligible for these benefits if they reach normal retirement age while working for the Company. The following tables provide a reconciliation of the changes in the plans' benefit obligations and fair value of assets for the years ending December 31, 2000 and 1999, and a statement of the funded status as of December 31, 2000 and 1999: Pension Benefits Other Benefits ---------------- -------------- 2000 1999 2000 1999 ---- ---- ---- ---- RECONCILIATION OF BENEFIT OBLIGATION Obligation at January 1 $ 114,693 $ 113,430 $ 42,647 $ 43,416 Service cost 7,861 8,101 2,036 2,189 Interest cost 9,911 8,321 3,785 3,067 Actuarial loss (gain) 10,542 (13,203) 6,406 (5,594) Benefit payments (3,735) (1,956) (763) (431) --------- --------- -------- -------- Obligation at December 31 $ 139,272 $ 114,693 $ 54,111 $ 42,647 ========= ========= ======== ======== RECONCILIATION OF FAIR VALUE OF PLAN ASSETS Fair value of plan assets at January 1 $ 118,897 $ 99,757 $ - $ - Actual return on plan assets (7,186) 21,078 - - Employer contributions 190 18 763 431 Benefit payments (3,735) (1,956) (763) (431) --------- --------- -------- -------- Fair value of plan assets at December 31 $ 108,166 $ 118,897 $ - $ - ========= ========= ======== ======== FUNDED STATUS Funded status at December 31 $ (31,106) $ 4,204 $ (54,111) $ (42,647) Unrecognized transition obligation 1,741 1,990 - - Unrecognized prior-service cost 1,797 2,379 (1,077) (1,227) Unrecognized (gain) loss (1,946) (32,121) 5,469 (937) --------- --------- -------- -------- Net amount recognized $ (29,514) $ (23,548) $ (49,719) $ (44,811) ========= ========= ======== ======== The following table provides the amounts recognized in the consolidated balance sheets as of December 31, 2000 and 1999: Pension Benefits Other Benefits ---------------- -------------- 2000 1999 2000 1999 ---- ---- ---- ---- Accrued benefit liability $ (29,514) $ (23,548) $ (49,719) $ (44,811) Additional minimum liability (51) (107) - - Intangible asset 51 107 - - --------- --------- --------- --------- Net amount recognized $ (29,514) $ (23,548) $ (49,719) $ (44,811) ========= ========= ========= ========= The Company's nonqualified pension plan was the only pension plan with an accumulated benefit obligation in excess of plan assets. The plan's accumulated benefit obligation was $1,142 and $900 at December 31, 2000 and 1999, respectively. There are no plan assets in the nonqualified plan due to the 14
nature of the plan. The Company's plans for postretirement benefits other than pensions also have no plan assets. The aggregate benefit obligation for those plans was $54,111 and $42,647 as of December 31, 2000 and 1999, respectively. The following table provides the components of net periodic benefit cost for the plans for years ended December 31, 2000, 1999, and 1998: Pension Benefits Other Benefits ---------------- -------------- 2000 1999 1998 2000 1999 1998 ---- ---- ---- ---- ---- ---- Service cost $ 7,861 $ 8,101 $ 6,964 $ 2,036 $ 2,189 $ 1,910 Interest cost 9,911 8,321 7,178 3,785 3,067 2,733 Expected return on plan assets (11,165) (9,376) (7,500) - - - Amortization of transition obligation 249 249 249 - - - Amortization of prior-service cost 582 582 582 (150) (150) (259) Amortization of net loss (gain) (1,281) 21 16 - 41 - ------- ------- ------- ------- ------- ------- Net periodic benefit cost $ 6,157 $ 7,898 $ 7,489 $ 5,671 $ 5,147 $ 4,384 ======= ======= ======= ======= ======= ======= The prior-service costs are amortized on a straight-line basis over the average remaining service period of active participants. Gains and losses in excess of 10% of the greater of the benefit obligation and the market-related value of assets are amortized over the average remaining service period of active participants. The assumptions used in the measurement of the Company's benefit obligation are shown in the following table: Pension Benefits Other Benefits ---------------- -------------- 2000 1999 2000 1999 ---- ---- ---- ---- Weighted average assumptions as of December 31: Discount rate 7.50% 7.75% 7.50% 7.75% Expected return on plan assets 9.50% 9.50% N/A N/A Rate of compensation increase 4.50% 4.75% N/A N/A The health care trend rate used to determine the accumulated postretirement benefit obligation was 10% for 2000, decreasing by 1% each year until reaching 4% for the year 2006 and beyond. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1% change in assumed health care cost trend rates would have the following effects: 1% Increase 1% Decrease ----------- ----------- Effect on total of service and interest cost components of net periodic postretirement health care benefit cost $ 240 $ (212) Effect on the health care component of the accumulated postretirement benefit obligation 1,990 (1,848) 15
The Company has a defined contribution pension plan covering a majority of the United Kingdom employees which requires the Company to annually contribute approximately 10% of eligible employee compensation on behalf of each participant. The Company's contributions to the plan were $1,007, $1,661, and $2,319 during the years ended December 31, 2000, 1999, and 1998, respectively. The Company offers its U.S.-based employees a 401(k) savings plan. Employees can elect to contribute pretax earnings, as limited by the Internal Revenue Code, to their account and can determine how the money is invested from a selection of options offered by the Company. The Company's contributions, matching participating employees' contributions up to a designated level, were $2,972, $2,818, and $2,705 during the years ended December 31, 2000, 1999, and 1998, respectively. 4. SPECIAL CHARGES (See Note 9 for discussion of the special charges related to the services agreements.) The Company recorded a special charge of $1,736 ($972 after tax) during the year ended December 31, 2000 related to the integration of Galileo UK into the Company's operations. The special charge was comprised of $1,457 in severance costs related to the termination of 29 employees, and $279 in facilities expenses. As of December 31, 2000, $620 of severance related costs have been paid and charged against the liability and 15 employees have been terminated. The estimated remaining liability at December 31, 2000 related to the integration of Galileo UK was $1,139 and is included in the accompanying consolidated balance sheet. The Company recorded a special charge of $7,000 (non-tax deductible) during the year ended December 31, 2000 to write off in-process research and development costs related to the acquisition of TRIP.com. The Company recorded special charges of $26,460 ($15,902 after tax) during the year ended December 31, 1998 related to a strategic realignment of the Company's operations in the United Kingdom and, to a lesser degree, other realignments within the Company. These special charges were comprised primarily of $15,025 in severance costs related to the termination of 399 employees, primarily in the development and marketing groups, and $11,435 of other costs, principally related to the closing of the remaining Swindon, U.K. facilities. As of December 31, 2000, $16,202 of severance costs have been paid and charged against the liability and 373 employees have been terminated. The realignment activities have been completed as of December 31, 2000. Also related to the closing of Swindon, U.K. facilities, in 1993 the Company, formerly Covia Partnership, combined with The Galileo Company Ltd. and consolidated its two data center facilities resulting in the closing of the Swindon, U.K. data center. In connection therewith, the estimated cost of the consolidation was charged to expense. During 1999, the Company was successful in assigning a Swindon, U.K. facility lease at market rates, resulting in recognition of an $11,359 one-time recovery of previously reserved facilities expenses. At December 31, 2000 and 1999, the estimated remaining liabilities for all of the above-mentioned restructuring activities, principally related to facility closure costs, were $6,990 and $10,220, respectively, and are included in the accompanying consolidated balance sheets. 16
5. INCOME TAXES For financial reporting purposes, income before income taxes includes the following components: 2000 1999 1998 ---------- ---------- ---------- Domestic operations $ 252,318 $ 353,208 $ 317,862 Foreign operations 13,556 8,064 7,619 ---------- ---------- ---------- Total income before income taxes $ 265,874 $ 361,272 $ 325,481 ========== ========== ========== The provisions for income taxes consist of the following: 2000 1999 1998 --------- --------- --------- Current taxes: Federal $ 97,820 $ 117,167 $ 112,799 State 12,441 18,582 20,803 Foreign 2,444 799 1,432 --------- --------- --------- Total 112,705 136,548 135,034 Deferred taxes: Federal 6,182 5,542 (3,834) State (1,902) 974 (1,333) --------- --------- --------- Total 4,280 6,516 (5,167) --------- --------- --------- Provision for income taxes $ 116,985 $ 143,064 $ 129,867 ========= ========= ========= 17
Deferred tax assets (liabilities) are comprised of the following at December 31, 2000 and 1999: 2000 1999 -------- --------- Current: Productivity payments $ 8,110 $ 7,598 Bad debt reserves 2,725 2,364 Compensation accruals 1,616 458 Special charges - 392 Other 5,343 4,526 -------- -------- $ 17,794 $ 15,338 ======== ======== Noncurrent: Software amortization $ (49,766) $ (57,375) Other liabilities (26,693) (8,999) Rights agreements (13,122) (6,248) Postretirement medical and pension accruals 30,911 26,681 Services agreements 11,101 10,619 Other assets 5,084 4,024 Depreciation 4,353 14,348 Facilities reserves 2,734 2,294 -------- --------- $ (35,398) $ (14,656) ========== ========== The following table reconciles the U.S. statutory rate with the effective rate for the years ended December 31, 2000, 1999, and 1998: 2000 1999 1998 --------- --------- -------- Tax at U.S. federal income tax rate $ 93,056 $ 126,445 $ 113,918 Increase (decrease) in taxes resulting from: State income taxes, net of U.S. federal income tax benefit 6,851 12,711 13,522 Amortization of excess of cost over net assets acquired and related purchase accounting adjustments 15,721 2,111 2,111 Tax effect of non-deductible expenses 2,957 373 344 Foreign and U.S. tax effects attributable to foreign operations 1,533 1,792 323 Other (3,133) (368) (351) --------- --------- --------- Taxes on income at effective rate $ 116,985 $ 143,064 $ 129,867 ========= ========= ========= Undistributed earnings of the Company's corporate foreign subsidiaries amounted to approximately $3,931 and $3,237 at December 31, 2000 and 1999, respectively. Those earnings are considered to be indefinitely reinvested, and accordingly, no provision for U.S. federal and state income taxes and foreign withholding taxes have been made. Upon distribution of those earnings, the Company would be subject to U.S. income taxes (subject to a reduction for foreign tax credits) and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable; however, unrecognized foreign tax credit carryovers would be available to reduce some portion of the U.S. liability. Withholding taxes of approximately $381 and $314 would be payable upon remittance of all previously unremitted earnings at December 31, 2000 and 1999, respectively. 18
6. INVESTMENTS Investments in equity securities at December 31, 2000 and December 31, 1999 are as follows: December 31, 2000 --------------------------------------- Gross Unrealized Amortized ---------------- Fair Cost Gains (Losses) Value --------- ----- ---------- ----- Marketable equity securities: Available-for-sale securities $ 1,334 $ 1,125 $ - $ 2,459 ------- -------- ------- -------- Total marketable securities 1,334 $ 1,125 $ - $ 2,459 ======= ======= ======= Other equity securities 15,567 ------- Total $ 16,901 ======== December 31, 1999 --------------------------------------- Gross Unrealized Amortized ---------------- Fair Cost Gains (Losses) Value --------- ----- ---------- ----- Marketable equity securities: Trading securities $ 1,000 $ 10,492 $ - $ 11,492 Available-for-sale securities 3,274 - (1,838) 1,436 ------- -------- ------- -------- Total marketable securities 4,274 $ 10,492 $ (1,838) $ 12,928 ======= ======= ======== Other equity securities 27,597 ------- Total $ 31,871 ======== At December 31, 2000, all of the Company's marketable equity securities are classified as available-for-sale. Of these investments, $2,320 is included in other current assets, and $139 is included in long-term investments. In December 2000, the Company recorded impairment charges of $10,186 to write down certain of the Company's investments in technology and travel related companies to estimated fair value. The write-downs consisted of $3,135 for one of the Company's marketable equity investments and $7,051 for several non-marketable equity investments. The estimated fair values established for the non-marketable investments were determined by using management's estimates of the net proceeds the Company expects to recover upon the eventual disposition of the investments. The decline in the estimated fair values of these investments was considered to be other than temporary. In December 1999, the Company entered into an agreement to sell its entire equity investment in Stamps.com for $11,492. This investment was classified as trading at December 31, 1999 and was included in other current assets. The remaining marketable equity securities were classified as available-for-sale and were included in long-term investments at December 31, 1999. Unrealized holding gains of $686 (net of deferred taxes of $439) and unrealized holding losses of $1,122 (net of deferred taxes of $716) on available-for-sale securities were included in accumulated other comprehensive income in 2000 and 1999, respectively. Unrealized gains of $10,492 on trading securities were included in earnings in 1999 related to the Stamps.com investment. The Company completed the sale 19
of its entire equity investment in Stamps.com for $11,492 in January 2000. There were no other sales of marketable equity securities in 2000 or 1999. Other equity securities represent non-marketable securities that are restricted or not publicly traded. These securities are included in long-term investments. Included in this category are non-marketable depository certificates representing beneficial ownership of common stock of Equant N.V. ("Equant"), a telecommunications company affiliated with Societe Internationale de Telecommunications Aeronautiques ("SITA"). In July 1999, SITA notified the Company of a reallocation of depository certificates among SITA members. Due to the Company's higher usage of the SITA network over the four years ended December 31, 1998, the Company received 708,335 additional depository certificates. In connection with secondary offerings of Equant common stock in 1999, the Company liquidated 696,151 of these certificates. The Company received proceeds of $58,725 from these transactions, resulting in gains of $58,574. In November 2000, Equant announced a planned merger with France Telecom's Global One business. In connection with this planned merger, the SITA Foundation signed an agreement to exchange all of its Equant shares for France Telecom shares. As a result, each of the Company's depository certificates are expected to represent the right to receive the economic benefit of approximately .4545 France Telecom shares. France Telecom is listed on the New York Stock Exchange under the ticker: FTE. This merger is expected to be completed by June 30, 2001, at which time the Company will have the option to participate in an orderly resale process. As of December 31, 2000 and 1999, the Company owned 1,106,564 of these depository certificates. The Company's carrying value of these depository certificates was nominal at December 31, 2000 and 1999. 7. LEASES AND COMMITMENTS The Company leases various office facilities and equipment under operating leases with remaining terms of up to 23 years. Rental expense under operating leases was $22,778, $22,806, and $25,756 for the years ended December 31, 2000, 1999, and 1998, respectively. The Company also leases data processing equipment under capital leases. Equipment, at cost, includes $8,906, $4,819, and $26,027 relating to capital leases at December 31, 2000, 1999, and 1998, respectively. Accumulated depreciation includes $4,559, $4,613, and $21,842 relating to capital leases at December 31, 2000, 1999, and 1998, respectively, with lease amortization included in depreciation expense. 20
Future minimum lease payments under capital leases and noncancelable operating leases at December 31, 2000 are as follows: Capital Operating ------------ ------------ 2001 $ 1,778 $ 24,758 2002 1,667 19,112 2003 1,042 16,946 2004 - 13,334 2005 - 9,377 Thereafter - 60,857 ------------ ------------ Total minimum lease payments 4,487 144,384 Less sublease income - (12,314) ------------ Net rental payments $ 132,070 ============ Less amount representing interest (230) ------------ Present value of future minimum lease payments 4,257 Current portion of present value of future minimum lease payments 1,638 ------------ Long-term portion of present value of future minimum lease payments $ 2,619 ============ 8. LONG-TERM DEBT Outstanding long-term debt consists of the following at December 31, 2000 and 1999: 2000 1999 ------------ ------------ Five-year credit agreement $ 400,000 $ 400,000 16-month credit agreement 212,000 - Term loan 34,392 34,392 364-day credit agreement - 121,000 Other 654 - ------------ ------------ 647,046 555,392 Less current portion of long-term debt 212,654 121,000 ------------ ------------ Long-term debt $ 434,392 $ 434,392 ============ ============ The Company is party to a $400,000 five-year credit agreement and a $500,000 16-month credit agreement (collectively, the "Credit Agreements") with a group of banks. In March 2000, the Company entered into a $200,000 16-month credit agreement, which was partially utilized to fund the acquisition of the remaining ownership interest in TRIP.com. In April 2000, the Company entered into the new $500,000 credit agreement that expires in July 2001. This new $500,000 16-month credit agreement replaces the $200,000 16-month credit agreement entered into in March 2000 and the $200,000 364-day credit agreement that was due to expire in July 2000. Facility fees range from 10.0 to 22.5 basis points under each of the Credit Agreements. Interest on the borrowings may be either Base Rate, CD Rate or LIBOR based. At December 31, 2000, the nominal interest rate for loans outstanding under the Credit Agreements was 7.2%. On June 5, 1998, in connection with the acquisition of Galileo Canada, the Company incurred $34,392 of debt under a five-year term loan agreement (the "Term Loan"). In addition, on June 5, 1998, 21
the Company entered into an interest rate swap agreement for a notional amount of $34,392 to fix the effective interest rate of the Term Loan until maturity in June 2003, subject to pricing adjustments based on changes in certain financial ratios of the Company. At December 31, 2000, the notional interest rate on the Term Loan was 7.11% and the effective interest rate was 6.30%. The Term Loan requires quarterly interest payments throughout the five-year term. On March 8, 2000, in connection with the acquisition of Terren, the Company assumed a $1,131 note payable (the "Terren Note") due in two installments, and $56 of accrued interest. The first installment was paid with accrued interest in July 2000. A final payment of $654 plus accrued interest is due July 31, 2001. The Terren Note carries an interest rate of 7%. The outstanding balance on the note as of December 31, 2000 was $654. At December 31, 2000, borrowings totaled $400,000 under the five-year credit agreement with no required repayments until maturity in July 2002, and $212,000 under the 16-month credit agreement with required payment in entirety in July 2001. The outstanding balance on the Term Loan was $34,392, with no required repayments until maturity in June 2003. Under the Credit Agreements and the Term Loan, the Company is required to maintain certain financial ratios and is restricted from paying dividends and repurchasing its Common Stock above certain thresholds. The Company has entered into an interest rate swap agreement to reduce the impact of changes in interest rates on its outstanding borrowings. At December 31, 2000 and 1999, the Company had an outstanding interest rate swap agreement having a total notional value of $34,392, with fixed interest rates averaging 5.87% for both years. The fair value of the outstanding swap agreement at December 31, 2000 and 1999 was $(77) and $999, respectively. For the years ended December 31, 2000, 1999, and 1998, the effective interest rate on the Company's outstanding debt under the Credit Agreements was 6.92%, 5.89%, and 5.89%, respectively. Total interest, including interest under capital leases, of $49,639, $17,528, and $11,876 was incurred for the years ended December 31, 2000, 1999, and 1998, respectively. 9. COMMITMENTS & CONTINGENCIES The Company's wholly owned subsidiaries, Galileo International, L.L.C. ("GILLC") and Apollo Galileo USA Partnership ("Apollo"), as well as United Airlines and one of its subsidiaries, are defendants in a lawsuit captioned Osband, et al. v. United Air Lines, Inc., et al. The lawsuit, which was filed on March 1, 1996 in the District Court for Arapahoe County, Colorado, currently consists of 99 plaintiffs, all of whom were employed by United Airlines prior to 1988, and were subsequently employed by the United Airlines subsidiary, one of the Company's predecessors, and GILLC or Apollo since that time. The plaintiffs allege that the defendants promised the plaintiffs that they would receive lifetime flight benefits at a level equivalent to the flight benefits that United Airlines provides to its employees. The plaintiffs brought claims for specific performance and injunctive relief seeking reinstatement of their benefits and damages under theories of breach of contract, promissory estoppel and breach of express covenant of good faith and fair dealing. After defeating the plaintiffs' motion for preliminary injunction, the trial court granted the defendants' Motion to Dismiss for Lack of Subject Matter Jurisdiction on the ground that all issues relating to free passes granted by common carriers where they are adjuncts to employees are preempted by federal law. On appeal, the Court of Appeals upheld the dismissal of the plaintiffs' promissory estoppel claim as preempted by federal law, but reversed and remanded to the trial court on the plaintiffs' other claims. The claims of six of the 99 plaintiffs were tried before a jury in a five-week trial commencing October 30, 2000. The jury returned a verdict in favor of the plaintiffs in the total amount of $3,270, an aggregate of $710 of which the jury found GILLC and Apollo liable for. Post-trial motions 22
have been filed and are pending. The Company intends to appeal the verdict, which has been certified as a final judgment. The Court has requested the parties brief the issue of whether the verdict for the six plaintiffs should be a liability finding in favor of the remaining 93 plaintiffs. The Company continues to dispute the plaintiffs' claims and intends to defend the lawsuit vigorously. The Company is a party in various other suits and claims that arise in the ordinary course of business. Management currently believes that the ultimate disposition of these matters, including the matter described above, will not have a material adverse effect on the Company's consolidated financial position, liquidity or results of operations. In connection with NDC acquisitions in 1997 of Apollo Travel Services Partnership ("ATS"), Traviswiss AG ("Traviswiss") and Galileo Nederland BV ("Galileo Nederland") and the 1998 acquisition of Galileo Canada, the Company entered into agreements (the "Services Agreements") with United Airlines, US Airways, Air Canada, SAirGroup, and KLM (collectively, the "Service Providers") to provide certain marketing services to the Company. During the sixth year (eighth year for a portion of Galileo Canada) following the effective date of the Services Agreements, the Company is contractually required to pay the Service Providers a fee of up to $232,000 (on a present value basis as of the date of the agreements), contingent upon improvements in the Company's airline booking fee revenue in the seller's respective territories over the five-year period immediately following the acquisitions, as measured by the annual price increase rate and over the five-year period (seven-year period in the case of Galileo Canada) immediately following the acquisitions, as measured by the annual air segment growth rate. On December 30, 1999, the Company was released by United Airlines from the price increase obligation under the Services Agreement between the two companies. In turn, GIO Services, L.L.C. ("GIO Services"), a qualified special-purpose entity, was created to assume the liability and pay United Airlines in July 2002. The Company contributed $97,325 of assets to GIO Services. These assets are projected to yield cash proceeds on the payment date at least equal to the maximum amount owed. The Company recorded a special charge of $83,226 related to this transaction. During 2000, the Company reassessed the future benefit of the services provided by US Airways under the Services Agreement between the two companies. As a result, the Company recorded a special charge of $19,725 and transferred $27,157 to GIO Services to provide for payment of the price-related obligation to US Airways in July 2002. The activities of GIO Services are strictly limited to payment of these Services Agreement obligations. As a result of these transactions, the Company has no further payment obligations to United Airlines and US Airways related to booking fee price increases under the Services Agreements. For the remainder of the ATS services agreement and all other Services Agreements, the Company continues to estimate the probable future liabilities based on an evaluation of the likelihood that the revenue goals required under the terms of these agreements will be met. The Company ratably records these liabilities over the remaining contract periods. The Company does not expect to incur any liability related to the air segment growth component of the ATS, Traviswiss, or Galileo Canada Services Agreements. At December 31, 2000 and 1999, the estimated liability related to the Services Agreements was $18,578 and $13,874, respectively, and is included in other noncurrent liabilities in the accompanying consolidated balance sheets. In connection with the 1998 acquisition of Shepherd Systems, the Company is contractually required to make additional payments up to an aggregate of $5,040 due ratably over five years, based on a calculation of the relevant calendar year's annual cash flow of Shepherd Systems. Accordingly, in 1998 the Company recorded a contingent liability for the additional payments which was accounted for as part of the purchase price. At December 31, 1999 the liability related to these payments was included in other noncurrent liabilities. During 2000, based upon an analysis of Shepherd Systems' historical and projected 23
cash flow results, the Company determined that no payments will be required. Accordingly, the contingent liability was written off against the acquisition-related goodwill of Shepherd Systems. 10. STOCKHOLDERS' EQUITY Common Stock Each share of Common Stock entitles the holder thereof to one vote in elections of independent and management directors and all other matters submitted to a vote of stockholders. Each share also has an equal and ratable right to receive dividends paid from the Company's assets, when and if declared by the Board of Directors. Special Voting Preferred Stock The Company's Special Voting Preferred Stock (the "Special Preferred") permits, under certain circumstances, each holder of a share of Special Preferred to elect one director to the Company's Board of Directors, provided certain Common Stock ownership thresholds are met. The Special Preferred shares do not provide the holder with any further stockholder voting privileges nor does the holder receive dividends on such shares. In the event of liquidation, dissolution or winding-up of the Company, holders of the Special Preferred are entitled to $100 per share, but holders are not entitled to any further payment. Substantial restrictions exist as to the transferability of the Special Preferred shares by the holders. Preferred Stock The Board of Directors of the Company is authorized, without further stockholder action, to divide any or all shares of its authorized Preferred Stock into one or more series and to fix and determine the rights and qualifications, limitations or restrictions thereon of each such series, including voting powers, dividend rights, liquidation preferences, redemption rights and conversion or exchange privileges. Common Stock Held in Treasury During 2000, the Board of Directors of the Company authorized an additional $250,000 share repurchase program. The Company began purchasing shares under this program after completion of a $750,000 program which had been authorized in 1999. Repurchased shares are held in treasury for the purpose of providing available shares for possible resale in future public or private offerings, and for other general corporate purposes. The purchases are funded through the Company's available working capital and borrowing facilities. The amount, timing and price of any repurchases of the Company's Common Stock depends on market conditions and other factors. The Company repurchased a total of 7,402,948 and 14,869,500 of its shares at a cost of $154,640 and $635,523 during the years ended December 31, 2000 and 1999, respectively. Also during 2000, the Company issued 5,499,630 shares of Common Stock, previously held in treasury, in connection with its acquisition of TRIP.com. These treasury shares had a fair value of $98,925 and an accumulated cost of $226,842. As of December 31, 2000 and 1999, the Company held a total of 16,920,719 and 15,038,600 shares in treasury, respectively. 24
Stock-Based Compensation During 1999, the Company adopted the 1999 Equity and Performance Incentive Plan (the "1999 Plan") to attract and retain officers and other key employees of the Company and to award such persons with incentives and rewards for superior performance. The 1999 Plan provides for the grant of Common Stock in the form of stock options, stock appreciation rights, stock awards or such other forms as determined to be consistent with the purposes of the 1999 Plan. The 1999 Plan superceded and replaced the 1997 Stock Incentive Plan. Options outstanding under these two plans have been granted at prices which are either equal to or above the market value of the stock on the date of the grant, vest over a three- or five-year period, and expire nine or ten years after the grant date. An aggregate of 13,000,000 shares of Common Stock are reserved for issuance under the 1999 Plan. The number of shares available for issuance under the 1999 Plan may be adjusted in the event of changes in the Company's capital structure. Shares issued pursuant to the 1999 Plan may be authorized but unissued shares, treasury shares or any combination thereof. The Company also adopted the 1997 Non-Employee Director Stock Plan (the "Director Plan") to retain the services of qualified individuals who are not employees of the Company to serve as members of the Board of Directors. The Director Plan authorizes awards of options, based on the director's term, which generally vest six months after the date of grant, have an exercise price equal to the fair market value at the date of grant, and expire ten years from date of grant. Directors who are employees of an airline stockholder (or the airline stockholder at the option of the airline stockholder) will receive, in lieu of such options, a cash payment equal to the value of the option calculated on the basis of the Black-Scholes option valuation model. An aggregate of 500,000 shares of Common Stock are reserved for issuance under the Director Plan. In connection with its acquisition of TRIP.com, in March 2000 the Company converted existing options to acquire 1,244,725 shares of TRIP.com common stock into 1,073,331 options to acquire Common Stock of the Company. The Converted Options were granted with exercise prices ranging from $0.16 to $19.71 and had a weighted average remaining vesting period of 3.25 years. On the date of grant, the Converted Options had an estimated aggregate fair value of $10,879 which was recorded as part of the purchase price of the TRIP.com acquisition. The estimated fair value was obtained by using the Black-Scholes option pricing model with the following assumptions: expected term of 4.25 years, expected volatility of 40.0%, expected dividend yield of 1.0%, and a risk-free interest rate of 6.0%. The Company's Common Stock had an approximate market value of $18.00 per share on the date the Converted Options were granted. During 2000, the Company adopted the Employee Stock Purchase Plan (the "Stock Purchase Plan"). The Stock Purchase Plan provides eligible employees with the opportunity to purchase shares of Common Stock at a 15% discount from fair market value pursuant to a payroll deduction program, based on offering periods consisting of each calendar quarter. The number of shares of Common Stock available for issuance under the Stock Purchase Plan is 500,000 and may be authorized but unissued shares, treasury shares or any combination thereof. As of December 31, 2000, the Company had issued 21,199 shares of Common Stock under the Stock Purchase Plan. During 1998, the Company's Board of Directors approved the issuance of 97,900 shares of restricted Common Stock to the Company's President and Chief Executive Officer. Half of these shares vest in equal installments over a five-year period from the date of grant and the remaining shares vest in equal installments over a four-year period beginning one year from the date of grant. During 2000, vested shares of restricted stock totaling 31,818 were converted into an equal number of shares of Common Stock. 25
During 2000, 1999, and 1998, $798, $798, and $433, respectively, of compensation cost for restricted shares was recognized in the consolidated financial statements. During 2000, 1999, and 1998, stock appreciation rights totaling 47,600, 1,500, and 34,550, respectively, were granted under the 1999 and 1997 Plans. The weighted average fair value on the grant date for the stock appreciation rights granted in 2000, 1999 and 1998 were $10.35, $11.75 and $14.54. Compensation cost for stock appreciation rights of zero, $(53), and $57 was recognized in the consolidated financial statements for the years ended December 31, 2000, 1999, and 1998, respectively. Stock option activity during 2000, 1999, and 1998 is as follows (number of shares in thousands): 2000 1999 1998 ---------------------- ---------------------- ----------------------- Number Weighted Number Weighted Number Weighted of Average of Average of Average Shares Exercise Price Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- ------ -------------- Outstanding at January 1 2,893 $ 37.45 2,824 $ 35.51 1,064 $ 25.40 Granted- TRIP.com acquisition 1,073 10.29 - - - - Granted- all other 1,662 24.43 451 48.02 1,889 40.75 Exercised (195) 2.59 (107) 30.34 (33) 24.57 Forfeited (969) 27.17 (275) 37.52 (96) 30.56 Expired - - - - - - ----- ----- ----- Outstanding at December 31 4,464 $ 29.82 2,893 $ 37.45 2,824 $ 35.51 ===== ===== ===== Exercisable at December 31 1,513 34.85 884 34.44 188 24.76 Weighted average fair value of options granted during the year: Upon TRIP.com acquisition $ 10.14 $ - $ - All other grants 10.31 19.52 14.53 26
The following table summarizes information about stock options outstanding at December 31, 2000 (number of shares in thousands): Options Outstanding Options Exercisable --------------------------------------------- -------------------------- Weighted Range of Average Weighted Weighted Exercise Number Remaining Average Number Average Prices of Shares Contractual Life Exercise Price of Shares Exercise Price ------ --------- ---------------- -------------- --------- -------------- $0.16 to $12 246 8.2 $ 3.69 53 $ 6.00 $17 to $25 2,335 8.8 23.90 405 24.50 $28 to $38 245 6.7 28.81 121 29.35 $40 to $46 1,291 7.5 40.78 817 40.78 $48 to $55 347 8.5 48.10 117 48.14 ----- ----- 4,464 8.3 $ 29.82 1,513 $ 34.85 ===== ===== The Company applies APB Opinion No. 25 in accounting for its stock-based compensation plans and, accordingly, no compensation cost has been recognized for its stock options in the consolidated financial statements. The following table presents pro forma information had the Company determined compensation cost based on the fair value at the grant date for its stock options under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation": 2000 1999 1998 --------- --------- --------- Valuation assumptions: Expected option term (years) 5.0 5.0 5.0 Expected volatility 40.0% 40.0% 35.0% Expected dividend yield 1.0% 1.0% 1.0% Risk-free interest rate 7.0% 6.0% 5.0% Pro forma effects (1): Net income as reported $ 148,889 $ 218,208 $ 195,614 Pro forma effect (9,003) (7,328) (4,118) --------- --------- --------- Net income as adjusted $ 139,886 $ 210,880 $ 191,496 ========= ========= ========= Basic earnings per share as adjusted $ 1.55 $ 2.15 $ 1.83 ========= ========= ========= Diluted earnings per share as adjusted $ 1.55 $ 2.13 $ 1.82 ========= ========= ========= (1) Estimated using Black-Scholes option pricing model. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option pricing models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value 27
estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 11. SUPPLEMENTAL INFORMATION Supplemental cash flow information and noncash investing and financing activities are as follows: 2000 1999 1998 ----------- ---------- ---------- Supplemental cash flow information Cash paid during the period for: Interest $ 53,612 $ 11,471 $ 11,994 Income taxes 114,862 148,300 123,508 Supplemental noncash investing and financing activities Capital lease obligations and accounts payable from acquisition of equipment $ 30,298 $ 8,394 $ 901 12. BUSINESS AND CREDIT CONCENTRATIONS The Company derives substantially all of its revenues from the travel industry. Accordingly, events affecting the travel industry, particularly airline travel and participating airlines, can significantly affect the Company's business, financial condition and results of operations. United Airlines is the largest single travel supplier utilizing the Company's systems, generating revenues that accounted for approximately 12% of total revenues in 2000. No other travel supplier accounted for 10% or more of the Company's revenues in 2000. Travel agencies are the primary channel of distribution for the services offered by travel vendors. Bookings generated by the Company's five largest travel agency customers constituted 22% of the bookings made through the Company's systems in 2000. If the Company were to lose and not replace the bookings generated by any significant travel agencies, its business, financial condition and results of operations could be materially adversely affected. 28
13. GEOGRAPHIC AND BUSINESS SEGMENT INFORMATION The Company's business is divided into operating segments, defined as components of an enterprise about which discrete financial information is available and regularly evaluated by the chief operating decision maker in deciding how to allocate resources to an individual segment and in assessing performance of the segment. The Company's chief operating decision maker is the Chairman, President and Chief Executive Officer. The Company has identified three operating segments based on similarities in products, services and customers: electronic global distribution services, information services and enterprise networking services. However, based on the quantitative thresholds in Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," electronic global distribution services is the Company's only reportable segment as of December 31, 2000, 1999 and 1998. Data relating to the Company's operations by geographic area is set forth below: United States United Kingdom Other Market Market Markets Total ----------- ------------- ------------ ---------- 2000 - ---- Revenues $ 605,838 $ 161,307 $ 794,319 $ 1,561,464 Identifiable assets 181,842 9,841 18,994 210,677 1999 - ---- Revenues $ 603,776 $ 126,169 $ 722,156 $ 1,452,101 Identifiable assets 165,990 1,163 23,724 190,877 1998 - ---- Revenues $ 588,312 $ 114,182 $ 640,211 $ 1,342,705 Identifiable assets 162,912 7,258 24,799 194,969 Revenues consist of electronic global distribution revenues only. The location of the travel agent making the booking determines the geographic region credited with the related revenues. The United Kingdom is the only country outside the United States that contributed more than 10% of revenues or had more than 10% of the identifiable assets in any of the years presented. Providing geographic area data for information services revenues and enterprise networking services would be impracticable. 29
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following tables set forth an unaudited summary of quarterly financial data (in thousands, except share data) for the years ended December 31, 2000 and 1999. This quarterly information has been prepared on the same basis as the annual consolidated financial statements and, in management's opinion, reflects all adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for a full fiscal year. 2000 ---- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Total revenues $ 440,738 $ 425,344 $ 405,935 $ 371,281 Operating expenses 341,463 330,789 323,622 319,786 Operating income 99,275 94,555 82,313 51,495 Net income 47,400 43,160 37,899 20,430 Basic earnings per share 0.52 0.47 0.42 0.23 Diluted earnings per share 0.52 0.47 0.42 0.23 1999 ---- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Total revenues $ 403,991 $ 398,822 $ 384,692 $ 338,597 Operating expenses 283,175 294,807 288,120 347,098 Operating income (loss) 120,816 104,015 96,572 (8,501) Net income 78,006 62,249 54,248 23,705 Basic earnings per share 0.75 0.60 0.58 0.26 Diluted earnings per share 0.74 0.59 0.58 0.26 The Company typically experiences a seasonal pattern in its operating results, with the fourth quarter typically having the lowest total revenues and operating income due to early bookings by customers for holiday travel and due to a decrease in business travel during the holiday season. In the first quarter of 2000, the Company recognized a $19,725 ($11,046 after tax) special charge related to the extinguishment of a portion of its liability arising from a services agreement with US Airways, and a $7,000 (non-tax deductible) special charge to write off in-process research and development costs related to the TRIP.com acquisition. In the third quarter of 2000, the Company recognized a $1,736 special charge ($972 after tax) related to the integration of Galileo UK. (See Note 9 and Note 4, respectively, for further discussion.) The fourth quarter of 2000 includes the retroactive impact ($4,512) of a 1.9 percentage point decrease in the Company's 2000 effective tax rate recorded during the quarter. In the fourth quarter of 1999, the Company recognized an $83,226 ($50,269 after tax) special charge to extinguish the price-increase component of its liability arising from its services agreement with United Airlines, and an $11,359 ($6,861 after tax) recovery of expenses previously reserved for the realignment of its United Kingdom operations. (See Note 9 and Note 4, respectively, for further discussion.) 30
Earnings per share amounts for each quarter are required to be computed independently and, as a result, their sum does not equal the total year earnings per share amounts for 2000 and 1999. 15. SUBSEQUENT EVENTS On February 22, 2001, the Board of Directors of the Company declared a dividend distribution of one right (a "Right") for each share of Common Stock of the Company outstanding at the close of business on March 8, 2001 (the "Record Date"), pursuant to the terms of a Rights Agreement, dated as of February 22, 2001 (the "Rights Agreement"). The Rights Agreement also provides, subject to specified exceptions and limitations, that shares of Common Stock issued or delivered from the Company's treasury after the Record Date will be entitled to and accompanied by Rights. The Rights are in all respects subject to and governed by the provisions of the Rights Agreement. 31
EXHIBIT 99.2 GALILEO INTERNATIONAL, INC. QUARTER ENDED MARCH 31, 2001 INDEX PAGE ---- Condensed Consolidated Balance Sheets as of March 31, 2001 (unaudited) and December 31, 2000 2 Condensed Consolidated Statements of Income for the quarters ended March 31, 2001 and 2000 (unaudited) 3 Condensed Consolidated Statements of Cash Flows for the quarters ended March 31, 2001 and 2000 (unaudited) 4 Condensed Consolidated Statement of Stockholders' Equity for the quarter ended March 31, 2001 (unaudited) 5 Notes to Condensed Consolidated Financial Statements 6
GALILEO INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data) March 31, December 31, 2001 2000 ---------- ------------- (Unaudited) ASSETS ------ Current assets: Cash and cash equivalents $ 10,580 $ 2,460 Accounts receivable, net 271,249 192,199 Other current assets 51,798 50,036 ---------- ---------- Total current assets 333,627 244,695 Property and equipment, at cost: Land 6,470 6,470 Buildings and improvements 76,499 76,452 Equipment 424,721 416,406 ---------- ---------- 507,690 499,328 Less accumulated depreciation 298,623 288,651 ---------- ---------- Net property and equipment 209,067 210,677 Computer software, net 164,359 160,270 Intangible assets, net 694,279 720,212 Other noncurrent assets 141,661 143,405 ---------- ---------- $1,542,993 $1,479,259 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable $ 72,262 $ 76,913 Accrued commissions 44,671 34,471 Income taxes payable 49,656 1,234 Other accrued liabilities 120,392 111,630 Long-term debt, current portion 187,654 212,654 ---------- ---------- Total current liabilities 474,635 436,902 Pension and postretirement benefits 83,531 79,285 Deferred tax liabilities 28,902 35,398 Other noncurrent liabilities 30,420 28,046 Long-term debt, less current portion 434,392 434,392 ---------- ---------- Total liabilities 1,051,880 1,014,023 Stockholders' equity: Special voting preferred stock: $.01 par value; 7 shares authorized; 3 shares issued and outstanding - - Preferred stock: $.01 par value; 25,000,000 shares authorized; no shares issued - - Common stock: $.01 par value; 250,000,000 shares authorized; 105,344,901 and 105,232,696 shares issued; 87,737,783 and 88,311,977 shares outstanding 1,053 1,052 Additional paid-in capital 684,024 682,988 Retained earnings 399,639 357,008 Unamortized restricted stock grants (1,763) (1,963) Accumulated other comprehensive income (7,462) (4,493) Common stock held in treasury, at cost: 17,607,118 and 16,920,719 shares (584,378) (569,356) ---------- ---------- Total stockholders' equity 491,113 465,236 ---------- ---------- $1,542,993 $1,479,259 ========== ========== See accompanying notes to condensed consolidated financial statements. 2
GALILEO INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited, in thousands, except share data) Quarter Ended March 31, -------------------------- 2001 2000 ---- ---- Revenues: Electronic global distribution services $ 442,546 $ 421,306 Information and network services 23,307 19,432 ------------ ------------ 465,853 440,738 Operating expenses: Cost of operations 163,645 134,004 Commissions, selling and administrative 197,990 180,734 Special charge - services agreement - 19,725 Special charge - in-process research and development write-off - 7,000 ------------ ------------ 361,635 341,463 ------------ ------------ Operating income 104,218 99,275 Other income (expense): Interest expense, net (10,488) (9,275) Other, net (3,444) (2,384) ------------ ------------ Income before income taxes 90,286 87,616 Income taxes 39,726 40,216 ------------ ------------ Net income $ 50,560 $ 47,400 ============ ============ Weighted average shares outstanding 87,978,305 90,678,954 ============ ============ Basic earnings per share $ 0.57 $ 0.52 ============ ============ Diluted weighted average shares outstanding 88,236,155 90,902,545 ============ ============ Diluted earnings per share $ 0.57 $ 0.52 ============ ============ < See accompanying notes to condensed consolidated financial statements. 3
GALILEO INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands) Quarter Ended March 31, ----------------------- 2001 2000 ---- ---- Operating activities: Net income $ 50,560 $ 47,400 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 60,299 42,969 Write-off of in-process research and development - 7,000 Gain on sale of assets (783) (169) Deferred income taxes, net (9,244) (13,978) Changes in operating assets and liabilities, net of effects from acquisition of businesses: Accounts receivable, net (77,959) (76,410) Other current assets (597) 12,089 Noncurrent assets (2,446) (418) Accounts payable and accrued commissions 8,491 23,845 Accrued liabilities 10,509 (226) Income taxes payable 48,490 53,780 Noncurrent liabilities 6,630 (383) Other 3,649 1,437 ---------- ---------- Net cash provided by operating activities 97,599 96,936 Investing activities: Purchase of property and equipment (25,815) (6,276) Purchase and capitalization of computer software (18,388) (7,735) Proceeds on sale of assets 2,287 169 Acquisition of businesses, net of $11,613 cash acquired - (101,214) Other investing activities - (5,000) ---------- ---------- Net cash used in investing activities (41,916) (120,056) Financing activities: Borrowings under credit agreements 19,000 135,000 Repayments under credit agreements (44,000) - Dividends paid to stockholders (7,929) (8,091) Repurchase of common stock for treasury (15,022) (57,393) Payments of capital lease obligations (416) (29) Other financing activities 1,037 21 ---------- ---------- Net cash (used in) provided by financing activities (47,330) 69,508 Effect of exchange rate changes on cash (233) (297) ---------- ---------- Increase in cash and cash equivalents 8,120 46,091 Cash and cash equivalents at beginning of period 2,460 1,794 ---------- ---------- Cash and cash equivalents at end of period $ 10,580 $ 47,885 ========== ========== See accompanying notes to condensed consolidated financial statements. 4
GALILEO INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited, in thousands, except share data) Special Voting Additional Preferred Common Paid - in Retained Stock Stock Capital Earnings ------------- ------------- ------------ ------------- Balance at December 31, 2000 $ - $ 1,052 $ 682,988 $ 357,008 Comprehensive income: Net income - - - 50,560 Other comprehensive income (loss), net of tax: Unrealized holding losses on marketable securities - - - - Reclassification adjustment for gains included in net income - - - - Foreign currency translation adjustments - - - - Cash flow hedge- net derivative losses - - - - Other comprehensive income (loss) Comprehensive income Amortization of restricted stock grants - - - - Issuance of 84,505 shares of common stock under employee stock option plans - 1 683 - Issuance of 27,700 shares of common stock under employee stock purchase plan - - 353 - Repurchase of 686,399 shares of common stock for treasury - - - - Dividends paid ($0.09 per share) - - - (7,929) ------------- ------------- ------------ -------------- Balance at March 31, 2001 $ - $ 1,053 $ 684,024 $ 399,639 ============= ============= ============ ============= Accumulated Unamortized Other Restricted Comprehensive Treasury Stock Grants Income Stock Total ------------- ------------- ----------- -------------- Balance at December 31, 2000 $ (1,963) $ (4,493) $ (569,356) $ 465,236 Comprehensive income: Net income - - - 50,560 Other comprehensive income (loss), net of tax: Unrealized holding losses on marketable securities - (427) - (427) Reclassification adjustment for gains included in net income - (686) - (686) Foreign currency translation adjustments - (1,364) - (1,364) Cash flow hedge- net derivative losses - (492) - (492) ------------- Other comprehensive income (loss) (2,969) ------------- Comprehensive income 47,591 Amortization of restricted stock grants 200 - - 200 Issuance of 84,505 shares of common stock under employee stock option plans - - - 684 Issuance of 27,700 shares of common stock under employee stock purchase plan - - - 353 Repurchase of 686,399 shares of common stock for treasury - - (15,022) (15,022) Dividends paid ($0.09 per share) - - - (7,929) ------------- ------------ ------------ -------------- Balance at March 31, 2001 $ (1,763) $ (7,462) $(584,378) $ 491,113 ============= ============= ============ ============== See accompanying notes to condensed consolidated financial statements. 5
GALILEO INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited interim condensed consolidated financial statements of Galileo International, Inc. (herein referred to as the "Company", "we", "us", and "our") have been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America. The information furnished herein includes all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of results for the interim periods presented. The results of operations for the quarter ended March 31, 2001 are not necessarily indicative of the results to be expected for the year ending December 31, 2001. These financial statements should be read in conjunction with the audited financial statements and notes to the audited financial statements for the year ended December 31, 2000 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 13, 2001. NOTE 2 - EARNINGS PER SHARE Basic earnings per share for the quarters ended March 31, 2001 and 2000 is calculated based on the weighted average shares outstanding for the period. Diluted earnings per share is calculated as if the Company had additional Common Stock outstanding from the beginning of the year or the date of grant for all dilutive stock options, net of assumed repurchased shares using the treasury stock method. This resulted in an increase in the weighted average number of shares outstanding for the quarters ended March 31, 2001 and 2000 of 257,850 and 223,591, respectively. NOTE 3 - SPECIAL CHARGES The Company recorded a special charge of $1.7 million during the quarter ended September 30, 2000 related to the integration of Travel Automation Services Limited ("Galileo UK") into the Company's operations. The special charge was comprised of $1.4 million in severance costs related to the termination of 29 employees, and $0.3 million in facilities expenses. As of March 31, 2001, $0.9 million of severance related costs have been paid and charged against the liability and 19 employees have been terminated. The estimated remaining liabilities at March 31, 2001 and December 31, 2000 were $0.8 million and $1.1 million, respectively, and are included in the accompanying condensed consolidated balance sheets. 6
In 1993 the Company, formerly Covia Partnership, combined with The Galileo Company Ltd. and consolidated its two data center facilities resulting in the closing of the Swindon, U.K. data center. In connection therewith, the estimated cost of the consolidation was charged to expense. At March 31, 2001 and December 31, 2000, the estimated remaining liabilities, principally related to facility closure costs, were $6.7 million and $7.0 million, respectively, and are included in the accompanying condensed consolidated balance sheets. NOTE 4 - DEBT Outstanding long-term debt consists of the following at March 31, 2001 and December 31, 2000: (In millions) March 31, December 31, 2001 2000 ------------ ------------ Five-year credit agreement $ 400.0 $ 400.0 16-month credit agreement 187.0 212.0 Term loan 34.4 34.4 Other 0.7 0.7 ------------ ------------ 622.1 647.1 Less current portion of long-term debt 187.7 212.7 ------------ ------------ Long-term debt $ 434.4 $ 434.4 ============ ============ As of March 31, 2001, the effective interest rate for amounts outstanding under the two credit agreements was 5.7%. NOTE 5 - STOCKHOLDERS' EQUITY On February 22, 2001, the Board of Directors of the Company adopted a stockholder rights plan (the "Plan"). Under the Plan, the Company declared a dividend distribution of one Preferred Stock Purchase Right (a "Right") for each share of Common Stock of the Company outstanding at the close of business on March 8, 2001 (the "Record Date"), pursuant to the terms of a Rights Agreement, dated as of February 22, 2001 (the "Rights Agreement"). The Rights Agreement also provides, subject to specified exceptions and limitations, that shares of Common Stock issued or delivered from the Company's treasury after the Record Date will be entitled to and accompanied by Rights. The Rights are in all respects subject to and governed by the provisions of the Rights Agreement. The Rights initially trade together with the Company's Common Stock and are not exercisable. Under certain circumstances specified in the Rights Agreement, and in the absence of further action by the Company's Board of Directors, the rights generally will become exercisable and allow the holder to purchase from the Company one one-hundredth of a share of Series H Junior Participating Ordinary Preferred Stock at an initial purchase price of $90. The Board authorized the issuance of 2,500,000 preferred shares under the Plan, none of which has been issued. The Rights will become exercisable at a specified period of time after any person becomes the beneficial owner of 15% or more of the outstanding shares of 7
Common Stock or commences a tender or exchange offer which, if consummated, would result in any person becoming the beneficial owner of 15% or more of the Common Stock, in each case, without the approval of the Board. If any person becomes the beneficial owner of 15% or more of the outstanding Common Stock, each Right will entitle the holder, other than the acquiring person, to purchase, for $90, a number of shares of the Common Stock having a market value of $180. For persons who, as of February 22, 2001, beneficially owned 15% or more of the outstanding Common Stock, the Plan "grandfathers" their current level of ownership, so long as they do not purchase additional shares that result in ownership of 20% or more of the outstanding Common Stock. The Company's Board of Directors may, at its option, redeem all rights for $0.01 per Right at any time prior to the time the Rights become exercisable. The Rights will expire on March 8, 2011, unless earlier redeemed, exchanged or amended by the Board of Directors. For the quarter ended March 31, 2001, the Company accounted for a $0.7 million unrealized holding loss on available-for-sale marketable equity securities in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The after tax effect of $0.4 million is included as a separate component of Stockholders' Equity. The Company also accounted for a $0.8 million net derivative loss on cash flow hedges in accordance with Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). The after tax effect of $0.5 million is included as a separate component of Stockholders' Equity. During 2000, the Board of Directors authorized an additional $250.0 million share repurchase program. The Company began purchasing shares under this program in June 2000, after completion of a $750.0 million program which had been authorized in 1999. Repurchased shares are held in treasury for the purpose of providing available shares for possible resale in future public or private offerings, and for other general corporate purposes. The purchases are funded through the Company's available working capital and borrowing facilities. The amount, timing and price of any repurchases of the Company's Common Stock depend on market conditions and other factors. For the quarter ended March 31, 2001, the Company repurchased 686,399 of its shares in the open market at a total cost of $15.0 million. As of March 31, 2001, the Company held a total of 17,607,118 shares in treasury. Comprehensive income for the quarter ended March 31, 2000 was $46.8 million, comprised of net income of $47.4 million, unrealized holding gains on securities of $0.3 million, and foreign currency translation adjustments of $(0.9) million. NOTE 6 - INTEREST IN EQUANT At March 31, 2001, the Company owned 1,106,564 non-marketable depository certificates representing beneficial ownership of common stock of Equant N.V. ("Equant"), a telecommunications company affiliated with Societe Internationale de Telecommunications 8
Aeronautiques ("SITA"). In November 2000, Equant announced a planned merger with France Telecom's Global One business. In connection with this planned merger, the SITA Foundation signed an agreement to exchange all of its Equant shares for France Telecom shares. As a result, each of the Company's depository certificates are expected to represent the right to receive the economic benefit of approximately .4545 France Telecom shares. France Telecom is listed on the New York Stock Exchange under the ticker: FTE. This merger is expected to be completed by June 30, 2001, at which time the Company will have the option to participate in an orderly resale process. The Company's carrying value of these depository certificates was nominal at March 31, 2001 and December 31, 2000. Any future disposal of such depository certificates may result in significant gains to the Company. NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION Quarter Ended (In millions) March 31, -------------------------- 2001 2000 Cash paid for: ---- ---- Interest $ 9.8 $ 13.5 Income taxes 0.7 0.6 9
EXHIBIT 99.3 PRO FORMA FINANCIAL INFORMATION (unaudited) The following Unaudited Pro Forma Condensed Combined Balance Sheet gives effect to the planned acquisition of Galileo International, Inc. ("Galileo"). The following Unaudited Pro Forma Condensed Combined Statements of Operations give effect to the planned acquisition of Galileo and the Company's March 1, 2001 acquisition of Avis Group Holdings, Inc. ("Avis"). Both transactions have been accounted for under the purchase method of accounting. Since the acquisition of Avis occurred prior to March 31, 2001, the financial position of Avis has been included in the Company's historical balance sheet as of March 31, 2001. The Unaudited Pro Forma Condensed Combined Balance Sheet assumes the acquisition of Galileo occurred on March 31, 2001. The Unaudited Pro Forma Condensed Combined Statements of Operations assume the acquisitions of Avis and Galileo occurred on January 1, 2000. The unaudited pro forma financial data is based on the historical consolidated financial statements of the Company, Avis and Galileo under the assumptions and adjustments set forth in the accompanying explanatory notes. The Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 2000 also gives effect to various significant finance-related activities that occurred during the first quarter of 2001 (the "Financing Activities"), which comprise the issuance of debt securities (net of debt retirements) and equity securities, the conversion of PRIDES to CD common stock and the issuance of zero-coupon senior convertible notes. The Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 2000 assumes the Financing Activities occurred on January 1, 2000. In addition, the Unaudited Pro Forma Condensed Combined Balance Sheet also gives effect to the May 2001 issuance of zero-coupon zero-yield senior convertible notes, which are assumed to be issued on March 31, 2001. For purposes of developing the Unaudited Pro Forma Condensed Combined Balance Sheet, Galileo's assets and liabilities were recorded at their estimated fair market values and the excess purchase price was assigned to goodwill and other identifiable intangibles. The fair market values were based on preliminary estimates which are subject to revision upon consummation of the acquisition of Galileo. Since Avis was consolidated with the Company as of March 1, 2001, the results of operations of Avis between January 1, 2001 and February 28, 2001 were combined with the Company's results of operations to report the combined pro forma results of operations for the three months ended March 31, 2001. The pro forma results of the combined company were then added to Galileo's results of operations for the three months ended March 31, 2001 and for the year ended December 31, 2000, subject to certain pro forma adjustments, to provide the Unaudited Pro Forma Condensed Combined Statements of Operations. All intercompany transactions were eliminated on a pro forma basis. Historically, Avis paid the Company for services the Company provided related to call centers and information technology and for the use of the Company's trademarks and Avis paid Galileo for services Galileo provided related to reservations for vehicle rentals. The Unaudited Pro Forma Condensed Combined Balance Sheet reflects the disbursement of $33 in cash to Avis stockholders for each share of Avis common stock acquired. The Company made payments totaling approximately $994 million, including payments of $937 million to Avis stockholders, direct expenses of $40 million related to the transaction and the net cash obligation of $17 million related to Avis stock options settled prior to consummation. The purchase price also included the fair value of CD common stock options exchanged with certain fully-vested Avis stock options. The Unaudited Pro Forma Condensed Combined Balance Sheet reflects the purchase price being funded by the issuance of $600 million in debt, with the remaining amount provided by cash. The pro forma adjustments relating to the acquisition of Galileo assume a combination of a disbursement of CD common stock and cash aggregating an expected value of $33 for each share of Galileo common stock outstanding and the conversion of Galileo stock options to CD common stock options. Cendant will pay aggregate consideration and expenses totaling $3,052 million, including payments of cash and stock totaling $2,895 million to Galileo stockholders, expenses of $48 million related to the conversion of Galileo stock options to CD common stock options and estimated transaction expenses of $109 million directly related to the acquisition of Galileo.
Approximately $2,330 million of the merger consideration is expected to be funded through the issuance of CD common stock, with the remainder being financed by debt issuances. The Unaudited Pro Forma Condensed Combined Statements of Operations reflect incremental interest expense based upon an assumed rate of 7.5% for any new debt issuances. In addition, Cendant's assumption of Galileo's debt of approximately $620 million is reflected in the Unaudited Pro Forma Condensed Combined Balance Sheet. The unaudited pro forma financial information has been prepared assuming that the price of CD common stock is $19 on the date of the acquisition of Galileo, which reflects the market value of CD common stock on the date the planned acquisition of Galileo was announced. The purchase price may change based on fluctuations in the price of CD common stock, but is subject to a collar as described in Notes (k) and (p) to the Unaudited Pro Forma Condensed Combined Statements of Operations for the three months ended March 31, 2001 and for the year ended December 31, 2000, respectively. In August 2000, Avis contributed its European vehicle management and leasing business ("PHH Europe") to a newly formed joint venture in exchange for cash, settlement of intercompany debt and a 20% interest in the venture (the "PHH Europe Transaction"). The accompanying Supplemental Unaudited Pro Forma Condensed Combined Statement of Operations of Avis for the year ended December 31, 2000 has been adjusted to reflect the PHH Europe Transaction. In connection with various acquisitions, the Company intends to review acquired operations, which may result in a plan to realign or reorganize certain of those operations. The cost of implementing such a plan, if it were to occur, have not been reflected in the accompanying pro forma financial information. The impact of a potential realignment could increase or decrease the amount of goodwill and intangible assets and the related amortization in the accompanying pro forma financial information. The Unaudited Pro Forma Condensed Combined Statements of Operations exclude any benefits that might result from the acquisitions due to synergies that may be derived or from the elimination of duplicate efforts. The Company's management believes that the assumptions used provide a reasonable basis on which to present the unaudited pro forma financial information. The Company has completed other acquisitions and dispositions which are not significant and, accordingly, have not been included in the accompanying unaudited pro forma financial information. The unaudited pro forma financial information may not be indicative of the financial position or results of operations that would have occurred if the acquisition of Avis, the planned acquisition of Galileo and the Financing Activities had been in effect on the dates indicated or which might be obtained in the future. The unaudited pro forma financial information should be read in conjunction with the historical consolidated financial statements and accompanying notes thereto for the Company, Avis and Galileo, which have been incorporated by reference or included herein. Certain reclassifications have been made to the historical amounts of Galileo to conform with the Company's classification. 2
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF MARCH 31, 2001 (IN MILLIONS) PURCHASE HISTORICAL HISTORICAL AND OTHER COMBINED CENDANT GALILEO ADJUSTMENTS PRO FORMA ---------- ---------- ----------- --------- ASSETS Current assets Cash and cash equivalents $ 2,092 $ 11 $ 986 (a) $ 3,089 Receivables, net 1,380 271 - 1,651 Other current assets 1,030 52 - 1,082 -------- ------- ------- -------- Total current assets 4,502 334 986 5,822 Property and equipment, net 1,508 373 22 (c) 1,903 Stockholder litigation settlement trust 600 - - 600 Deferred income taxes 1,358 - - 1,358 Franchise agreements, net 1,514 - - 1,514 Goodwill, net 4,950 300 2,313 (c) 7,563 Other intangibles, net 764 455 308 (c) 1,527 Other assets 1,738 81 14 (b) 1,833 -------- ------- ------- -------- Total assets exclusive of assets under programs 16,934 1,543 3,643 22,120 -------- ------- ------- -------- Assets under management and mortgage programs Relocation receivables 329 - - 329 Mortgage loans held for sale 917 - - 917 Mortgage servicing rights 1,667 - - 1,667 Vehicle-related, net 7,747 - - 7,747 -------- ------- ------- -------- 10,660 - - 10,660 -------- ------- ------- -------- TOTAL ASSETS $ 27,594 $ 1,543 $ 3,643 $ 32,780 ======== ======= ======= ======== Liabilities and stockholders' equity Current liabilities Accounts payable and other current liabilities $ 2,258 $ 287 $ - $ 2,545 Current portion of long-term debt 267 188 1,000 (a) 1,455 Deferred income 1,046 - - 1,046 Deferred income taxes 227 - 82 (c) 309 -------- ------- ------- -------- Total current liabilities 3,798 475 1,082 5,355 Long-term debt 3,903 434 674 (d) 5,011 Stockholder litigation settlement 2,850 - - 2,850 Other liabilities 706 143 - 849 -------- ------- ------- -------- Total liabilities exclusive of liabilities under programs 11,257 1,052 1,756 14,065 -------- ------- ------- -------- Liabilities under management and mortgage programs Debt 9,589 - - 9,589 Deferred income taxes 1,030 - - 1,030 -------- ------- ------- -------- 10,619 - - 10,619 -------- ------- ------- -------- Mandatorily redeemable preferred interest in a subsidiary 375 - - 375 -------- ------- ------- -------- Stockholders' equity 5,343 491 1,887 (e) 7,721 -------- ------- ------- -------- Total liabilities and stockholders' equity $ 27,594 $ 1,543 $ 3,643 $ 32,780 ======== ======= ======= ======== See accompanying Notes to Unaudited Pro Forma Condensed Combined Balance Sheet. 3
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF MARCH 31, 2001 (DOLLARS IN MILLIONS) The accompanying Unaudited Pro Forma Condensed Combined Balance Sheet was prepared to reflect the planned acquisition of Galileo, which will be accounted for under the purchase method of accounting, and the issuance of zero-coupon zero-yield senior convertible notes. The purchase price of $3,052 (including $109 of estimated expenses directly attributable to the acquisition of Galileo and $48 of the estimated fair value of CD common stock options issued in exchange for Galileo stock options) was based on acquiring 100% of the Galileo common stock outstanding at $33 per share. (a) Represents debt associated with the May 2001 issuance of the zero-coupon zero-yield senior convertible notes for gross proceeds of $1,000 (net proceeds of $986). (b) Represents deferred financing costs of $14 associated with the May 2001 issuance of the zero-coupon zero-yield senior convertible notes. (c) Represents the excess of the cost over the preliminary estimate of the fair value of the identifiable net assets acquired, calculated as follows: Calculation of acquisition goodwill Cash consideration $ 674 Issuance of CD common stock 2,330 Preliminary estimate of fair value of CD common stock options issued in exchange for Galileo stock options 48 ------- Total purchase price 3,052 ------- Preliminary estimate of fair value of identifiable net assets acquired Book value of Galileo 491 Elimination of Galileo goodwill (300) Preliminary estimate of adjustments to fair value of identifiable intangible assets 308 Preliminary estimate of adjustment to fair value of computer software 22 Deferred tax liability on fair value adjustments and transaction costs (82) ------- Preliminary estimate of fair value of identifiable net assets acquired 439 ------- Acquisition goodwill $ 2,613 ======= Calculation of acquisition goodwill adjustment Acquisition goodwill $ 2,613 Historical Galileo goodwill (300) ------- Acquisition goodwill adjustment $ 2,313 ======= (d) Represents the issuance of $674 of debt to finance a portion of the acquisition price ($565) and to pay fees directly associated with the acquisition of Galileo ($109). (e) Represents the issuance of CD common stock valued at $2,330 in exchange for outstanding shares of Galileo common stock, the issuance of CD common stock options valued at $48 in exchange for Galileo stock options and the elimination of Galileo equity balances aggregating $491. 4
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) HISTORICAL AVIS HISTORICAL AVIS PURCHASE ADJUSTED CENDANT JAN 1- FEB 28, 2001 ADJUSTMENTS CENDANT ---------- ------------------- ----------- -------- REVENUES Membership and service fees, net $ 1,076 $ 27 $ (34) (A) $ 1,069 Vehicle-related 398 594 - 992 Global distribution services - - - - Other 12 20 - (B) 32 ------- ----- ----- ------- Net revenues 1,486 641 (34) 2,093 EXPENSES Operating 451 174 (34) (A) 591 Vehicle depreciation, lease charges and interest, net 181 284 - 465 Selling, general and administrative 411 115 - 526 Non-vehicle depreciation and amortization 101 23 2 (D) 126 Other charges, net 204 - - 204 Non-vehicle interest, net 60 78 1 (C) 139 Other, net - - - - ------- ----- ----- ------- Total expenses 1,408 674 (31) 2,051 ------- ----- ----- ------- Net gain on dispositions of businesses 435 - - 435 ------- ----- ----- ------- INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTEREST AND EQUITY IN HOMESTORE.COM 513 (33) (3) 477 Provision (benefit) for income taxes 205 (10) (2) (E) 193 Minority interest, net of tax 13 - - 13 Losses related to equity in Homestore.com, net of tax 18 - - 18 ------- ----- ----- ------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 277 $ (23) $ (1) $ 253 ======= ===== ===== ======= CD COMMON STOCK INCOME PER SHARE INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE Basic $ 0.32 $ 0.29 Diluted 0.30 0.28 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 790 790 Diluted 830 830 MOVE.COM COMMON STOCK INCOME PER SHARE INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE Basic $ 10.41 $ 10.41 Diluted 10.13 10.13 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 2 2 Diluted 3 3 GALILEO HISTORICAL PURCHASE COMBINED GALILEO ADJUSTMENTS PRO FORMA ---------- ----------- --------- REVENUES Membership and service fees, net $ - $ - $ 1,069 Vehicle-related - - 992 Global distribution services 443 (3)(F) 440 Other 23 - 55 ----- ---- ------- Net revenues 466 (3) 2,556 EXPENSES Operating 104 (3)(F) 692 Vehicle depreciation, lease charges and interest, net - - 465 Selling, general and administrative 191 - 717 Non-vehicle depreciation and amortization 67 (4)(G) 189 Other charges, net - - 204 Non-vehicle interest, net 10 13 (H) 162 Other, net 4 - 4 ----- ---- ------- Total expenses 376 6 2,433 ----- ---- ------- Net gain on dispositions of businesses - 435 ----- ---- ------- INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTEREST AND EQUITY IN HOMESTORE.COM 90 (9) 558 Provision (benefit) for income taxes 40 (3)(I) 230 Minority interest, net of tax - - 13 Losses related to equity in Homestore.com, net of tax - - 18 ----- ---- ------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 50 $ (6) $ 297 ===== ==== ======= CD COMMON STOCK INCOME PER SHARE INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE Basic $ 0.30 (K) Diluted 0.29 (K) WEIGHTED AVERAGE SHARES OUTSTANDING Basic 123 (J) 913 Diluted 123 (J) 953 MOVE.COM COMMON STOCK INCOME PER SHARE INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE Basic $ 10.41 Diluted 10.13 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 2 Diluted 3 SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS. 5
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) The following pro forma adjustments relate to the acquisition of Avis and the Financing Activities. (a) Represents the elimination of amounts paid by Avis to the Company for services provided related to call centers and information technology and for the use of trademarks. (b) Represents the elimination of the Company's earnings attributable to its investment in Avis for which the combined effect is zero. (c) Represents interest expense on debt issued to finance the acquisition of Avis ($7), net of the amortization of the fair value adjustment on acquired debt ($4) and the reversal of Avis' amortization of debt-related costs ($2). (d) Represents the amortization of goodwill generated on the excess of fair value over the net assets acquired on a straight-line basis over 40 years, net of the reversal of Avis' amortization of pre-acquisition goodwill and other identifiable intangibles resulting from the allocation of purchase price on a straight-line basis over 20 years. (e) Represents the income tax effect of the purchase adjustments and other pro forma adjustments at an estimated statutory rate of 38.5% (not including adjustments for non-deductible goodwill). The following pro forma adjustments relate to the acquisition of Galileo. (f) Represents the elimination of amounts paid by Avis to Galileo for services provided related to reservations for vehicle rentals. (g) Represents the amortization of goodwill generated on the estimated excess of fair value over the net assets acquired on a straight-line basis over 40 years ($16) and the amortization of the estimated identifiable intangibles on a straight-line basis with lives ranging from 5 to 20 years ($11), net of the reversal of Galileo's amortization of pre-acquisition goodwill and other identifiable intangibles ($31). (h) Represents interest expense relating to the assumed issuance of debt used to finance a portion of the acquisition of Galileo. Assuming interest rates changed by .125%, the related interest expense and pre-tax impact on earnings would be $0.2. (i) Represents the income tax effect of the purchase adjustments and other pro forma adjustments at an estimated statutory rate of 38.5% (not including adjustments for non-deductible goodwill). (j) Represents the issuance of 123 million shares of CD common stock used to fund a portion of the acquisition of Galileo. (k) The purchase price is subject to a collar for fluctuations in the price of CD common stock between $17 and $20. The total purchase price is fixed for price fluctuations between $17 and $20, but the number of shares of CD common stock to be issued will change to equal $2,330 in value. The impact on earnings per share is approximately $.002 for each dollar movement between $17 and $20. The impact for fluctuations outside the collar would result only from changes in the annual goodwill amortization as the number of shares of CD common stock to be issued is fixed outside the collar. The related impact on earnings per share would be less than $.002 for each dollar movement outside the collar. The earnings per share reflected herein is based on an estimated price of CD common stock of $19, which reflects the market value of CD common stock on the date the planned acquisition of Galileo was announced. 6
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) AVIS HISTORICAL ADJUSTED PURCHASE CENDANT AVIS(*) ADJUSTMENTS ------------ ---------- ---------------- REVENUES Membership and service fees, net $4,512 $ 155 $ (173)(a) Vehicle-related -- 3,783 -- Global distribution services -- -- -- Other 147 151 (39)(b) ------- ------- ------- Net revenues 4,659 4,089 (212) EXPENSES Operating 1,426 966 (173)(a) Vehicle depreciation, lease charges and interest, net -- 1,671 -- Selling, general and administrative 1,508 637 -- Non-vehicle depreciation and amortization 352 74 16(c) Other charges, net 111 -- -- Non-vehicle interest, net 148 482 6(e) Other, net -- -- -- ------- ------- ------- Total expenses 3,545 3,830 (151) ------- ------- ------- Net loss on dispositions of businesses (8) -- (35)(e) --------- ------- ------- Income before income taxes, minority interest and equity in Homestore.com 1,106 259 (96) Provision for income taxes 362 117 (30)(f) Minority interest, net of tax 84 7 -- -------- ------- ------- Income before extraordinary loss and cumulative effect of accounting change $ 660 $ 135 $ (66) ======== ======= ======= CD COMMON STOCK INCOME PER SHARE INCOME BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE Basic $ 0.92 Diluted 0.89 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 724 Diluted 762 MOVE.COM COMMON STOCK LOSS PER SHARE LOSS BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE Basic $(1.76) Diluted (1.76) WEIGHTED AVERAGE SHARES OUTSTANDING Basic 3 Diluted 3 OTHER GALILEO PRO FORMA ADJUSTED HISTORICAL PURCHASE COMBINED ADJUSTMENTS CENDANT GALILEO ADJUSTMENTS PRO FORMA --------------- ---------- ------------ ------------- -------------- REVENUES Membership and service fees, net $ -- $ 4,494 $ -- $ -- $ 4,494 Vehicle-related -- 3,783 -- -- 3,783 Global distribution services -- -- 1,561 (12)(k) 1,549 Other -- 259 82 -- 341 ------- ------- ------- ------- ------- Net revenues -- 8,536 1,643 (12) 10,167 EXPENSES Operating -- 2,219 368 (12)(i) 2,575 Vehicle depreciation, lease charges and interest, net -- 1,671 -- -- 1,671 Selling, general and administrative -- 2,145 678 -- 2,823 Non-vehicle depreciation and amortization -- 442 241 2(l) 685 Other charges, net -- 111 28 -- 139 Non-vehicle interest, net 54(g,i) 690 45 51(m) 786 Other, net -- -- 17 -- 17 ------- ------- ------- ------- ------- Total expenses 54 7,278 1,377 41 8,696 ------- ------- ------- ------- ------- Net loss on dispositions of businesses -- (43) -- -- (43) ------- ------- ------- ------- ------- Income before income taxes, minority interest and equity in Homestore.com (54) 1,215 266 (53) 1,428 Provision for income taxes (20)(f) 429 117 (13)(n) 533 Minority interest, net of tax (66)(h) 25 -- -- 25 ------- ------- ------- ------- ------- Income before extraordinary loss and cumulative effect of accounting change $ 32 $ 761 $ 149 $ (40) $ 870 ======= ======= ======= ======= ======= CD COMMON STOCK INCOME PER SHARE INCOME BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE Basic $ 0.92 $ 0.92(p) Diluted 0.90 0.89 (p) WEIGHTED AVERAGE SHARES OUTSTANDING Basic 107(j) 831 123(o) 954 Diluted 107(j) 869 123(o) 992 MOVE.COM COMMON STOCK LOSS PER SHARE LOSS BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE Basic $ (1.76) $ (1.76) Diluted (1.76) (1.76) WEIGHTED AVERAGE SHARES OUTSTANDING Basic 3 3 Diluted 3 3 - ---------- (*) See Supplemental Unaudited Condensed Combined Statement of Operations and Notes included herein. SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS. 7
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) The following pro forma adjustments relate to the acquisition of Avis and the Financing Activities. (a) Represents the elimination of amounts paid by Avis to the Company for services provided related to call centers and information technology and for the use of trademarks. (b) Represents the elimination of the Company's earnings attributable to its investment in Avis. (c) Represents the amortization of goodwill generated on the excess of fair value over the net assets acquired on a straight-line basis over 40 years, net of the reversal of Avis' amortization of pre-acquisition goodwill and other identifiable intangibles resulting from the allocation of purchase price on a straight-line basis over 20 years. (d) Represents interest expense on debt issued to finance the acquisition of Avis ($44), net of amortization of the fair value adjustment on acquired debt ($25) and the reversal of Avis' amortization of debt related costs ($13). (e) Represents the reversal of a gain of $35 million recorded by the Company, which represents the recognition of a portion of its previously recorded deferred gain from the 1999 sale of its fleet business due to the disposition of PHH Europe by Avis in August 2000. (f) Represents the income tax effect of the purchase adjustments and other pro forma adjustments at an estimated statutory rate of 37.5% (not including adjustments for non-deductible goodwill), except Note (e) above where the tax effect was approximately 2%, which represented the rate at which taxes were provided on the related gain. (g) Represents interest expense relating to the issuance of the zero-coupon senior convertible notes, medium-term notes, borrowing under a $650 million term loan agreement and the repayment of an existing term loan, net of interest expense allocated to the acquisition of Avis (See Note (d) above). (h) Represents the reduction in preferred stock dividends resulting from the conversion of the PRIDES to CD common stock. (i) No adjustment has been made to reduce interest expense for interest income on the incremental cash of $1,587 raised through the Financing Activities. Assuming the incremental cash was invested at 5%, which represents the Company's current rate for cash investments, interest expense would have been reduced by $79. Additionally, income before extraordinary loss and cumulative effect of accounting change and income per share before extraordinary loss and cumulative effect of accounting change would have improved by $49 and $0.06, respectively. (j) Represents the issuance of CD common stock of 61 million shares and 46 million shares relating to the conversion of PRIDES to CD common stock and the issuance of CD common stock, respectively. The following pro forma adjustments relate to the acquisition of Galileo. (k) Represents the elimination of amounts paid by Avis to Galileo for services provided related to reservations for vehicle rentals. (l) Represents the amortization of goodwill generated on the excess of fair value over the net assets acquired on a straight-line basis over 40 years ($65) and the amortization of the estimated identifiable intangibles on a straight-line basis with lives ranging from 5 to 20 years ($46), net of the reversal of Galileo's amortization of pre-acquisition goodwill and other identifiable intangibles ($109). (m) Represents interest expense relating to the assumed issuance of debt used to fund the acquisition of Galileo. Assuming interest rates changed by .125%, the related interest expense and pre-tax impact on earnings would be $0.8. (n) Represents the income tax effect of the purchase adjustments and other pro forma adjustments at an estimated statutory rate of 37.5% (not including adjustments for non-deductible goodwill). (o) Represents the issuance of 123 million shares of CD common stock used to fund a portion of the acquisition of Galileo. (p) The purchase price is subject to a collar for fluctuations in the price of CD common stock between $17 and $20. The total purchase price is fixed for price fluctuations between $17 and $20, but the number of shares of CD common stock to be issued will change to equal $2,330 in value. The impact on earnings per share is approximately $.006 for each dollar movement between $17 and $20. The impact for fluctuations outside the collar would result only from changes in the annual goodwill amortization as the number of shares of CD common stock to be issued is fixed outside the collar. The related impact on earnings per share would be less than $.007 for each dollar movement outside the collar. The earnings per share reflected herein
is based on an estimated price of CD common stock of $19, which reflects the market value of CD common stock on the date the planned acquisition of Galileo was announced. 8
SUPPLEMENTAL UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 (IN MILLIONS) The following unaudited pro forma financial information was prepared to reflect the historical consolidated financial statements of Avis, excluding the PHH Europe Transaction. Avis will receive an annual license fee in connection with the PHH Europe Transaction from the joint venture for the license of the PHH fleet management technology, PHH interactive. Avis utilized the proceeds of the PHH Europe Transaction to reduce their indebtedness and to pay transaction costs. HISTORICAL SALE OF PRO FORMA ADJUSTED AVIS PHH EUROPE(A) ADJUSTMENTS AVIS ----------- --------------- ------------- ---------- REVENUES Service fees, net $ 241 $ (86) $ -- $ 155 Vehicle rental 2,467 -- -- 2,467 Vehicle leasing and other fees 1,389 (73) -- 1,316 Other 146 -- 5(b) 151 ------ ----- ------ ------ Net revenues 4,243 (159) 5 4,089 EXPENSES Operating 966 -- -- 966 Vehicle depreciation and lease charges 1,695 (24) -- 1,671 Selling, general and administrative 693 (56) -- 637 Interest, net 577 (37) (58)(c) 482 Depreciation and amortization 89 (12) (3)(d) 74 ------ ----- ------ ------ Total expenses 4,020 (129) (61) 3,830 INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST 223 (30) 66 259 Provision (benefit) for income taxes 95 (3) 25(e) 117 Minority interest 7 -- -- 7 ------ ------- ------ ------ INCOME (LOSS) BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 121 $ (27) $ 41 $ 135 ====== ======= ====== ====== SEE ACCOMPANYING NOTES TO SUPPLEMENTAL UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS. 9
NOTES TO SUPPLEMENTAL UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 (DOLLARS IN MILLIONS) (a) Represents adjustments to pro forma the results of operations of PHH Europe, assuming that the PHH Europe Transaction occurred on January 1, 2000. (b) Represents fleet management technology fee income and the equity in the earnings of the joint venture formed pursuant to the PHH Europe Transaction, net of the amortization of the excess of cost over the assets acquired. (c) Represents a reduction in interest expense resulting from the retirement of acquisition debt and revolving credit facilities related to the application of proceeds of $1,053 from the PHH Europe Transaction. (d) Represents a decrease in amortization expense relating to goodwill generated from the PHH Europe Transaction, net of the reversal of PHH Europe goodwill. (e) Represents the income tax effect of the pro forma adjustments at an estimated statutory rate of 39% (not including adjustments for non-deductible goodwill). 10