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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From to .
--------------------- --------------------
Commission file number 1-12175.
THE SABRE GROUP HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 75-2662240
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4255 Amon Carter Blvd.
Fort Worth, Texas 76155
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (817) 931-7300
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No X .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class A Common Stock, $.01 par value - 23,394,980 as of November 8, 1996
Class B Common Stock, $.01 par value - 107,374,000 as of November 8, 1996
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INDEX
THE SABRE GROUP HOLDINGS, INC.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet -- September 30, 1996 and
December 31, 1995
Consolidated Statement of Income -- Three months ended September 30,
1996 and 1995; Nine months ended September 30, 1996 and 1995
Condensed Consolidated Statement of Stockholder's Equity
Consolidated Statement of Cash Flows -- Nine months ended September 30,
1996 and 1995
Notes to Condensed Consolidated Financial Statements -- September 30,
1996
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other information
Pro forma Condensed Consolidated Financial Information
Pro forma Condensed Consolidated Balance Sheet -- September 30, 1996
Pro forma Consolidated Statement of Income -- Three months ended
September 30, 1996 and 1995; Nine months ended September 30, 1996 and
1995
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SABRE GROUP HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
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<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 10,656 $ 94,861
Short-term investments 215,392 ---
Accounts receivable, net 220,775 138,972
Receivable from AMR 54,193 ---
Prepaid expenses 13,516 5,851
Deferred income taxes 39,858 31,539
------------- ------------
Total current assets 554,390 271,223
PROPERTY AND EQUIPMENT
Buildings and leasehold improvements 292,886 12,250
Furniture, fixtures and equipment 20,821 6,049
Service contract equipment 534,462 529,918
Computer equipment 327,942 422,050
------------- ------------
1,176,111 970,267
Less accumulated depreciation and amortization (642,404) (589,549)
------------- ------------
Total property and equipment 533,707 380,718
Other assets, net 70,237 77,465
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$ 1,158,334 $ 729,406
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 75,213 $ 53,716
Accrued compensation and related benefits 47,419 33,696
Other accrued liabilities 116,776 77,071
Note payable to AMR --- 54,102
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Total current liabilities 239,408 218,585
Deferred income taxes 52,597 30,943
Other postretirement benefits 47,509 37,960
Other liabilities 14,777 9,781
Debenture payable to AMR 850,000 ---
Commitments and contingencies
STOCKHOLDER'S EQUITY
Preferred Stock: $0.01 par value; 20,000,000 shares authorized at
September 30, 1996; no shares issued ---
---
Common stock $0.01 par value; 1,000 shares authorized, issued
and outstanding at September 30, 1996 ---
---
Stockholder's net investment --- 432,137
Retained deficit (45,957) ---
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(45,957) 432,137
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$ 1,158,334 $ 729,406
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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THE SABRE GROUP HOLDINGS, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited) (In thousands, except per share amounts)
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Electronic travel distribution $ 280,998 $ 261,151 $ 855,980 $ 772,890
Information technology solutions 126,422 131,997 389,729 387,789
------------ ------------ ------------ ------------
Total operating revenues 407,420 393,148 1,245,709 1,160,679
OPERATING EXPENSES
Cost of sales 283,235 253,145 856,257 747,568
Selling, general and administrative 36,271 31,811 103,949 85,468
------------ ------------ ------------ ------------
Total operating expenses 319,506 284,956 960,206 833,036
------------ ------------ ------------ ------------
OPERATING INCOME 87,914 108,192 285,503 327,643
OTHER INCOME (EXPENSE)
Interest income 2,155 1,579 7,774 5,462
Interest expense (15,340) (1,639) (20,019) (4,408)
Other - net (783) 825 (4,121) (10,703)
------------ ------------ ------------ ------------
(13,968) 765 (16,366) (9,649)
------------ ------------ ------------ ------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 73,946 108,957 269,137 317,994
Provision for income taxes 28,795 42,102 104,936 124,080
------------ ------------ ------------ ------------
NET EARNINGS $ 45,151 $ 66,855 $ 164,201 $ 193,914
============ ============ ============ ============
PRO FORMA EARNINGS PER COMMON SHARE DATA:
Earnings per common share $ .35 $ .51 $ 1.26 $ 1.48
============ ============ ============ ============
Average common and common
equivalent shares outstanding 130,604 130,604 130,604 130,604
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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THE SABRE GROUP HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1996
(Unaudited) (In thousands)
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<TABLE>
Common Stockholder's Net
Stock Retained Deficit Investment
-------------- ---------------- -----------------
<S> <C> <C> <C>
Balance December 31, 1995 $ --- $ --- $ 432,137
Net earnings prior to the Reorganization --- --- 119,050
Capitalization of the Company in connection
with the Reorganization:
Reclassification of stockholder's net
investment --- 551,187 (551,187)
Issuance of Debenture --- (850,000) ---
Transfer of fixed assets --- 159,451 ---
Other --- 48,254 ---
-------------- ---------------- -----------------
--- (91,108) (551,187)
Net earnings subsequent to the Reorganization --- 45,151 ---
-------------- ---------------- -----------------
Balance September 30, 1996 $ --- $ (45,957) $ ---
============== ================ =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
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THE SABRE GROUP HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited) (In thousands)
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<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 164,201 $ 193,914
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 126,986 129,542
Deferred income taxes (17,738) ---
Other 4,444 6,712
Changes in operating assets and liabilities:
Accounts receivable (81,803) (39,845)
Receivable from AMR (54,193) ---
Prepaid expenses (7,665) (5,072)
Other assets 5,276 (6,924)
Accrued compensation and related benefits 13,723 (2,575)
Accounts payable and other accrued liabilities 61,202 26,680
Postretirement benefits 1,749 3,585
Other liabilities 7,436 (1,840)
------------ ------------
Net cash provided by operating activities 223,618 304,177
INVESTING ACTIVITIES:
Additions to property and equipment (126,345) (133,372)
Increase in short-term investments (215,392) ---
Proceeds from sale of equipment 41,331 4,886
Acquisitions of other investments (7,417) (9,508)
------------ ------------
Net cash used for investing activities (307,823) (137,994)
FINANCING ACTIVITIES:
Net cash advances to affiliates --- (237,722)
Contributions from affiliates --- 244,666
Contributions to affiliates --- (369,076)
------------ ------------
Net cash used for financing activities --- (362,132)
------------ ------------
Net decrease in cash or cash equivalents (84,205) (195,949)
Cash and cash equivalents at beginning of period 94,861 262,956
------------ ------------
Cash and cash equivalents at end of period $ 10,656 $ 67,007
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest payments to affiliates $ 20,019 $ 4,408
============ ============
Income tax payments to affiliates
$ 116,336 $ 124,080
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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1. GENERAL INFORMATION
The SABRE Group Holdings, Inc. is a holding company. Its sole direct
subsidiary is The SABRE Group, Inc., which, pursuant to the Reorganization
(defined below), is the successor to the businesses of The SABRE Group
which were previously operated as subsidiaries or divisions of American
Airlines, Inc. ("American") or AMR Corporation ("AMR"). The SABRE Group
was formed by AMR to capitalize on synergies of combining AMR's information
technology businesses under common management. Unless otherwise indicated,
references herein to the "Company" include The SABRE Group Holdings, Inc.
and its consolidated subsidiaries and, for the period prior to the
Reorganization (defined below) of the businesses of AMR, the businesses of
AMR constituting The SABRE Group, an operating unit of AMR.
On July 2, 1996, AMR completed a reorganization of the businesses of The
SABRE Group (the "Reorganization"). As part of the Reorganization, the
Company was formed as a subsidiary of American, the businesses of The SABRE
Group formerly operated as divisions and subsidiaries of American or AMR
were combined under the Company and the Company and its subsidiaries were
dividended by American to AMR. See Note 3.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, these financial statements
contain all adjustments, consisting of normal recurring accruals, necessary
to present fairly the financial position, results of operations and cash
flows for the periods indicated. The preparation of financial statements in
accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results may differ from these estimates. Certain reclassifications have
been made to conform with the current presentation. The Company's
quarterly financial data should be read in conjunction with the
consolidated financial statements of the Company for the year ended
December 31, 1995 (including the notes thereto), set forth in The SABRE
Group Holdings, Inc. Registration Statement on Form S-1 (No. 333-09747)
(the "Registration Statement").
INCOME TAXES - The Company and AMR have entered into a tax sharing
agreement, effective July 1, 1996 (the "Tax Sharing Agreement"), which
provides for the allocation of tax liabilities during the tax periods the
Company is part of the consolidated federal, state and local income tax
returns filed by AMR. In addition, the Tax Sharing Agreement sets out
certain benefits and obligations of the Company and AMR for tax matters
relating to periods before the Reorganization and for certain benefits and
obligations that would affect the Company or AMR in the future if the
Company ceased to be a member of AMR's consolidated group for federal
income tax purposes. The Tax Sharing Agreement generally requires the
Company to pay to AMR the amount of federal, state and local income taxes
that the Company would have paid had it ceased to be a member of the AMR
consolidated tax group for periods after the Reorganization. The Company
is jointly and severally liable for the federal income tax of AMR and the
other companies included in the consolidated return for all periods in
which the Company is included in the AMR consolidated group. AMR has
agreed, however, to indemnify the Company for any liability for taxes
reported or required to be reported on a consolidated return.
Except for certain items specified in the Tax Sharing Agreement, AMR
generally retains any potential tax benefit carryforwards, and remains
obligated to pay all taxes, attributable to periods before the
Reorganization. The Tax Sharing Agreement also grants the Company certain
limited participation rights in any disputes with tax authorities.
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THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SHORT-TERM INVESTMENTS - Short-term investments consist primarily of short-
term marketable securities such as certificates of deposit, bankers'
acceptances, commercial paper, corporate notes and government notes.
Short-term investments are carried at cost plus accrued interest which
approximates fair value. American manages the Company's cash balances
under the terms of the Management Services Agreement (See Note 3.)
3. REORGANIZATION, AFFILIATE AGREEMENTS AND INITIAL PUBLIC OFFERING
CAPITALIZATION AND INITIAL PUBLIC OFFERING - The Company was incorporated
as a Delaware corporation and a direct wholly-owned subsidiary of American,
which subsequently dividended capital stock of the Company to AMR. At the
time of the Reorganization the Company had 1,000 authorized shares of
Common Stock with a par value of $0.01 per share, of which 1,000 shares of
Common Stock were issued to American and dividended to AMR. The Company
completed its initial public offering (the "Offering") of 23,230,000 shares
of Class A Common Stock, par value $.01 per share on October 17, 1996. The
offering price of $27 per share resulted in net proceeds to the Company of
approximately $593 million, after deducting underwriting discounts and
commissions. The Company used approximately $532 million of the net
proceeds to repay a portion of a debenture payable to AMR.
In anticipation of the Offering, AMR converted its existing 1,000 shares of
Common Stock into 107,374,000 shares of Class B Common Stock, par value
$.01 per share, of the Company. These shares constitute 82.2% of the total
shares outstanding and 97.9% of the combined voting power of the Company's
outstanding Common Stock. The Company also has 20,000,000 authorized
shares of preferred stock with a par value of $.01 per share. No preferred
shares have been issued.
LONG-TERM DEBT-- On July 2, 1996, in connection with the Reorganization,
American transferred to the Company certain divisions and subsidiaries of
American through which AMR previously conducted its information technology
businesses, and in return the Company issued to American a floating rate
subordinated debenture due September 30, 2004 with a principal amount of
$850 million (the "Debenture") and common stock representing 100% of the
equity ownership interest in the Company. American subsequently exchanged
the Debenture for retirement of a portion of a note payable by American to
AMR. Because the assets and liabilities of the divisions and subsidiaries
of American transferred to the Company are included in the historical
financial statements of the Company, this transaction resulted in a
reduction of Stockholder's Equity.
The interest rate on the Debenture was 7.2% through September 30, 1996
and thereafter is based on the sum of the London Interbank Offered Rate
(LIBOR rate) plus a margin determined based upon the Company's senior
unsecured long-term debt rating or, if such debt rating is not available,
upon the Company's ratio of net debt to total capital. The interest rate is
determined monthly beginning October 1 and accrued interest is payable each
September 30 and March 31. For October and November 1996, the interest rate
is 7.35%. The Company may prepay the principal balance in whole or in part
at any time prior to December 31, 1996 and thereafter at any interest
payment date.
The Company used approximately $532 million of the net proceeds from the
Offering to repay a portion of the Debenture.
CASH AND CASH EQUIVALENTS-- Effective with the Reorganization, the Company
began maintaining a separate cash management system and separate cash and
investment accounts from American. Transactions with American no longer
result in immediate charges and credits to the Company's cash equivalents,
but are settled through intercompany billings with payment due in 30 days.
American manages the Company's cash management system under the Management
Services Agreement discussed below.
NOTE PAYABLE TO AMR-- On July 1, 1996 a note payable to AMR at June 30,
1996 of approximately $54 million was capitalized.
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<PAGE> 9
THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY AND EQUIPMENT-- On July 1, 1996 American contributed buildings,
furniture and fixtures to the Company with a cost value of approximately
$298 million and a net book value of $193 million.
AFFILIATE AGREEMENTS-- In connection with the Reorganization, the Company
has entered into certain agreements with AMR and its affiliates (the
"Affiliate Agreements"), which are discussed below.
TECHNOLOGY SERVICES AGREEMENT-- The Company is party to the Information
Technology Services Agreement with American, dated July 1, 1996 (the
"Technology Services Agreement"), to provide American with certain
information technology services. The parties have agreed to apply the
financial terms of the Technology Services Agreement as of January 1, 1996.
The base term of the Technology Services Agreement expires June 30, 2006.
The terms of the services to be provided by the Company to American,
however, vary. The Company will provide: (1) Data Center services, data
network services, application development and existing application
maintenance enhancement services until June 30, 2006; (ii) services
relating to existing client server operations until June 30, 2001; and
(iii) device support, distributed systems services, radio services and
reservations and flight information network services until June 30, 1999.
The Technology Services Agreement provides for annual price adjustments.
For certain prices, adjustments are made according to formulas which,
commencing in 1998, are reset every two years and which may take into
account the market for similar services provided by other companies. The
resulting rates may reflect an increase or decrease over the previous
rates.
With limited exceptions, under the Technology Services Agreement, the
Company will continue to be the exclusive provider of all information
technology services provided by the Company to American immediately prior
to the execution of the Technology Services Agreement. Any new information
technology services, including most new application development services,
requested by American can be outsourced pursuant to competitive bidding by
American or performed by American on its own behalf. With limited
exceptions, the Company has the right to bid on all new services for which
American solicits bids. Additionally, American may continue to perform
development and enhancement work that it is currently performing on its own
behalf.
After July 1, 2000, American may terminate the Technology Services
Agreement for convenience if American determines the agreement is no longer
advantageous for any reason. If it does so, American will be required to
pay a termination fee equal to the sum of all amounts then due under the
Technology Services Agreement, including wind-down costs, book value of
dedicated assets and a significant percentage of estimated lost profits.
American may also terminate the Technology Services Agreement without
penalty, in whole or in part depending upon circumstances, for egregious
breach by the Company of its obligations or for serious failure to perform
critical or significant services. If the Company is acquired by another
Company other than AMR or American with more than $1 billion in annual
airline transportation revenue, then American may terminate the Technology
Services Agreement without paying any termination fee. Additionally, if
American were to dispose of any portion of its businesses or any affiliate
accounting for more than 10% of the Company's fees from American, then
American shall either cause such divested business or affiliate to be
obligated to use the Company's services in accordance with the Technology
Services Agreement or pay a proportionate termination fee.
The Company provides data processing and network and distributed systems
services to Canadian Airlines International ("Canadian") through
subcontracting arrangements with American which are scheduled to expire in
2006 (the "Canadian Subcontract"). On November 1, 1996, Canadian announced
that it was taking certain actions to improve its cash flow. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Other.
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THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MANAGEMENT SERVICES AGREEMENT-- The Company and American are parties to a
Management Services Agreement, dated July 1, 1996 (the "Management Services
Agreement"), pursuant to which American performs various management
services for the Company, including treasury, risk management and tax, and
similar administrative services that American has historically provided to
the Company. The Management Services Agreement will expire on June 30,
1999 unless terminated earlier if American and the Company are no longer
under common control or if the Technology Services Agreement is terminated
early. Amounts charged to the Company under this agreement approximate
American's cost of providing the services plus a margin. The parties have
agreed to apply the financial terms of the Management Services Agreement as
of January 1, 1996.
MARKETING COOPERATION AGREEMENT-- The Company and American are parties to
the Marketing Cooperation Agreement, dated as of July 1, 1996 (the
"Marketing Cooperation Agreement"), pursuant to which American will provide
marketing support for 10 years for the Company's Professional SABRE
products targeted to travel agencies and for five years for Business Travel
Solutions ("BTS"), Travelocity and easySABRE. The parties have agreed to
apply the financial terms of the Marketing Cooperation Agreement as of
January 1, 1996. The Marketing Cooperation Agreement may be terminated by
either party prior to June 30, 2006 only if the other party fails to
perform its obligations thereunder.
Under the Marketing Cooperation Agreement, American's marketing efforts
will include ongoing promotional programs to assist in the sale of those
SABRE products, development with the Company of an annual sales plan,
sponsorship of sales/promotional events and the targeting of potential
customers. For calendar year 1996, the Company will pay American for its
marketing support for Professional SABRE a fee, the amount of which may
increase or decrease, depending on total SABRE booking volumes generated by
certain Professional SABRE subscribers in the U.S. and the Caribbean on
SABRE's market share of travel agency bookings in those areas. That fee
will range between $20 million and $30 million for 1996 and between $10
million and $30 million thereafter. As payment for American's support of
the Company's promotion of BTS, Travelocity and easySABRE, the Company will
pay American a marketing fee based upon booking volume. Additionally, the
Company has guaranteed to American certain cost savings in the fifth year
of the Marketing Cooperation Agreement. If American does not achieve those
savings, the Company will pay American any shortfall, up to a maximum of
$50 million.
NON-COMPETITION AGREEMENT-- The Company, AMR and American have entered into
a Non-Competition Agreement, dated July 1, 1996 (the "Non-Competition
Agreement"), pursuant to which AMR and American, on behalf of themselves
and certain of their subsidiaries, have agreed to limit their competition
with the Company's businesses of (i) electronic travel distribution, (ii)
development, maintenance, marketing and licensing of software for travel
agency, travel, transportation and logistics management, (iii) computer
system integration, (iv) development, maintenance and operation of a data
processing center providing data processing services to third parties and
(v) travel industry, transportation and logistics consulting services
relating primarily to computer technology and automation. Under the Non-
Competition Agreement, American and AMR may develop, operate, market and
provide in compliance with all applicable laws an American Airlines branded
electronic travel distribution system that gives a display preference to
American's flights. The Non-Competition Agreement prohibits American or
AMR, however, from providing such system to any travel agency that
generated 25% or more of its bookings through SABRE during the preceding
six calendar months. Additionally, in the event any airline competing with
American engages in an activity in connection with such airline's
transportation business, and if the restrictions imposed by the Non-
Competition Agreement would prevent American from engaging in the same
activity and place American at a disadvantage, then American may engage in
such activity, subject to American and the Company negotiating means to
mitigate the effect on the Company of American's engaging in such activity.
American and AMR may also license to third parties any software that is
owned by AMR, American or other AMR affiliates in response to a request or
offer from such third parties. The Non-Competition Agreement expires on
December 31, 2001. American may terminate the Non-Competition Agreement,
however, as to the activities described in clauses (ii) through (v) of this
paragraph upon 90 days notice to the Company if the Technology Services
Agreement is terminated as a result of an egregious breach thereof by the
Company.
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<PAGE> 11
THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TRAVEL AGREEMENTS-- The Company and American are parties to a Travel
Privileges Agreement, dated July 1, 1996, (the "Travel Privileges
Agreement"), pursuant to which the Company is entitled to purchase personal
travel for its employees and retirees at reduced fares. The Travel
Privileges Agreement will expire on June 30, 2008. To pay for the
provision of flight privileges to certain of its future retired employees,
the Company will make a lump sum payment to American beginning in 1997 for
each employee retiring in that year. The payment per retiree will be based
on the number of years of service with the Company and AMR over the prior
ten years of service. Service years accrue for the Company beginning on
January 1, 1993. AMR will retain the obligation for the portion of
benefits attributable to service years prior to January 1, 1993. The
accumulated benefit obligation for postretirement travel privileges at July
1, 1996 of approximately $8 million, net of deferred taxes of approximately
$3 million, has been recorded as a reduction to Stockholder's Equity. The
remaining cost of providing this privilege will be accrued over the
estimated service lives of the employees eligible for the privilege.
The Company and American are also parties to a Corporate Travel Agreement,
dated July 1, 1996 and ending June 30, 1998, (the "Corporate Travel
Agreement"), pursuant to which the Company receives discounts for certain
flights purchased on American. In exchange, the Company must fly a certain
percentage of its travel on American as compared to all other air carriers
combined. If the Company fails to meet the applicable percentage on an
average basis over any calendar quarter, American may terminate the
agreement upon 60 days' notice.
The parties have agreed to apply the financial terms of the Travel
Privileges Agreement and the Corporate Travel Agreement as of January 1,
1996.
CREDIT AGREEMENT-- On July 1, 1996, the Company and American entered into a
Credit Agreement pursuant to which the Company is required to borrow from
American, and American is required to lend to the Company, amounts required
by the Company to fund its daily cash requirements. In addition, American
may, but is not required to, borrow from the Company to fund its daily cash
requirements. The maximum amount the Company may borrow at any time from
American under the Credit Agreement is $300 million. The maximum amount
that American may borrow at any time from the Company under the Credit
Agreement is $100 million. Loans under the Credit Agreement are not
intended as long-term financing. If the Company's credit rating is better
than "B" on the Standard & Poor's Rating Services scale (or an equivalent
thereof) or American has excess cash to lend the Company, the interest rate
to be charged to the Company is the sum of (a) the higher of (i) American's
average rate of return on short-term investments for the month in which the
borrowing occurred or (ii) the actual rate of interest paid by American to
borrow funds to make the loan to the Company under the Credit Agreement,
plus (b) an additional spread based upon the Company's credit risk. If the
Company's credit rating is "B" or below on the Standard & Poor's Rating
Service Scale (or an equivalent thereof) and American does not have excess
cash to lend to the Company, the interest rate to be charged to the Company
is the lower of (a) the sum of (i) the borrowing cost incurred by American
to draw on its revolving credit facility to make the advance plus (ii) an
additional spread based on the Company's credit risk or (b) the sum of (i)
the cost at which the Company could borrow Funds from an independent party
plus (ii) one half of the margin American pays to borrow under its
revolving credit facility. The Company believes that the interest rate it
will be charged by American could, at times, be slightly above the rate at
which the Company could borrow externally; however, no standby fees for the
line of credit will be required to be paid by either party. The interest
rate to be charged to American is the Company's average portfolio rate for
the months in which borrowing occurred plus an additional spread based upon
American's credit risk. At the end of each quarter, American must pay all
amounts owing under the Credit Agreement to the Company.
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<PAGE> 12
THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMMITMENTS-- On July 1, 1996 the Company entered into an operating lease
agreement with AMR for certain facilities and AMR assigned its rights and
obligations under certain leases to the Company. Also on July 1, 1996 the
Company entered into an operating lease agreement with a third party for
the lease of other facilities. At October 1, 1996, the future minimum
lease payments required under these operating lease agreements along with
various other operating lease agreements with terms in excess of one year
for facilities and equipment were as follows:
<TABLE>
<CAPTION>
Affiliates Third Parties
---------- -------------
<S> <C> <C>
Three months ending
December 31, 1996 $ 488,000 $ 5,802,000
Year ending December 31,
1997 1,540,000 11,942,000
1998 1,370,000 9,278,000
1999 1,416,000 7,513,000
2000 1,173,000 5,938,000
2001 647,000 6,119,000
Thereafter 7,368,000 31,898,000
</TABLE>
PENSION BENEFITS-- The Company and AMR have entered into an agreement which
permits the employees of the Company to continue to participate in the
benefit plans and programs sponsored by AMR until the Company establishes
separate plans and programs for employees. The current intent of the
Company is to spin-off the portion of the AMR sponsored defined benefit
pension plan applicable to the Company's employees from the AMR pension
plan to a new pension plan to be sponsored by the Company on January 1,
1997. At the date of the spin-off, the unrecognized net obligation
attributable to the Company's employees participating in the plan,
estimated to be a liability of approximately $50 million at December 31,
1995, will be charged to Stockholders' Equity, net of deferred income taxes
of approximately $19 million.
STOCK AWARDS AND OPTIONS-- Effective with the Offering, the Company has
established the 1996 Long Term Incentive Plan (the "LTIP"), whereby
officers and other key employees of the Company may be granted stock
options, stock appreciation rights, restricted stock, deferred stock, stock
purchase rights and/or other stock based awards. Initially 13,000,000
shares of Class A Common Stock are authorized to be issued under the LTIP.
The LTIP will terminate no later than ten years from the date of its
establishment.
For stock-based awards, a committee established by the Board of Directors
will determine the eligible persons to whom awards will be made, the times
at which awards will be made, the number of shares to be awarded, the
price, if any, to be paid by the recipient and all other terms and
conditions of the award under the terms of the LTIP at the time of grant.
Options granted under the LTIP will be exercisable at a price which is not
less than the market value of Class A Common Stock upon grant, except as
otherwise determined by a committee appointed by the Board of Directors,
and no such options are exercisable more than 10 years after the date of
grant.
Stock appreciation rights may be granted in conjunction with all or part of
any stock option granted under the LTIP. All appreciation rights will
terminate upon termination or exercise of the related option and will be
exercisable only during the time that the related option is exercisable.
If an appreciation right is exercised, the related stock option will be
deemed to have been exercised.
In connection with the Offering, options to purchase shares of AMR Common
Stock ("AMR Options") granted to officers and key employees of the Company
have been exchanged for approximately 730,000 options to purchase shares of
Class A Common Stock of the Company. The exercise prices of the options to
purchase Class A Common Stock were computed as the initial offering price
of Class A Common Stock multiplied by the ratio of the exercise prices of
the AMR Options to the previous day's closing price of AMR Common Stock at
the date of the Offerings. The number of options was increased to maintain
the option holders' aggregate spread value between the exercise price of
the option and the previous day's closing price of AMR common stock. These
options will continue to vest in equal annual installments over five years
following the date of AMR's grant.
-10-
<PAGE> 13
THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In connection with the Offering, certain deferred $1 par value AMR Common
Stock ("AMR Performance Shares") awarded to certain officers and key
employees of the Company at no cost to them, were converted into
approximately 270,000 deferred Class A Common Stock performance shares
("Company Performance Shares") based on the initial offering price of
shares of Class A Common Stock and the previous day's closing price of the
AMR Common Stock on the date of the Offerings. The Company Performance
Shares will continue to vest over a three year period ending December 31,
1997 based on the Company's average change in business value and free cash
flow generated.
In connection with the Offering, shares of deferred AMR Common Stock ("AMR
Career Equity Shares") awarded to certain officers and key employees of the
Company at no cost to them, to be issued upon the individual's retirement
from AMR, were exchanged for approximately 140,000 shares of restricted
shares of Class A Common Stock, approximately 850,000 options to purchase
shares of Class A Common Stock and approximately 75,000 deferred shares of
Class A Common Shares ("Company Career Equity"). The number of restricted
shares, stock options and deferred shares issued was dependent on, among
other things, election by the individuals as to the mix of restricted
shares, stock options and deferred shares to be received, the previous
day's closing price of AMR Common Stock at the date of the Offerings and
the initial offering price of Class A Common Stock. The restricted shares
will vest over a three year period. The stock options, which have an
exercise price equal to the initial offering price of the Class A Common
Stock, will vest over five years following the date of grant and will
expire ten years from the date of grant. The Company Career Equity shares
will be issued upon the individual's retirement from the Company.
The Board of Directors has adopted a Director's Stock Incentive Plan which
provides for an annual award of options to purchase 3,000 shares of the
Company's Class A Common Stock to each non-employee director. The plan
provides for a one time award of options to purchase 10,000 shares of the
Company's Class A Common Stock to a new non-employee director upon his or
her initial election to the Board of Directors. The options, which will
have an exercise price equal to the Class A Common Stock on the date of
grant, will vest pro rata over a five-year period. Each option will expire
on the earlier of (i) the date the non-employee director ceases to be a
director of the Company, if for any reason other than due to death,
disability or retirement or (ii) three years from the date the non-employee
director ceases to be a director of the Company due to death, disability or
retirement.
4. PRO FORMA EARNINGS PER COMMON SHARE
Pro forma earnings per common share data is calculated as though there were
130,604,000 shares (the number of common shares of the Company outstanding
after the Offering) outstanding throughout the periods presented. The
dilutive impact of common equivalent shares related to stock awards and
options outstanding under the LTIP is not significant for the periods
presented.
-11-
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE SABRE GROUP HOLDINGS, INC.
RESULTS OF OPERATIONS
SUMMARY The Company generates its revenue from providing electronic travel
distribution services and information technology solutions services. During
the nine months ended September 30, 1996, the Company generated approximately
68.7% of its revenue from electronic travel distribution services and
approximately 31.3% of its revenue from information technology solution
services. The following table sets forth revenues by affiliation and
geographic location as a percent of total revenues:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------- ----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Affiliation:
------------
Non-affiliated Customers 70.2% 64.6% 69.3% 64.5%
Affiliated Customers 29.8 35.4 30.7 35.5
----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Geographical:
-------------
United States 80.5% 83.3% 82.1% 83.7%
International 19.5 16.7 17.9 16.3
----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
The Company's operating income as a percentage of revenue was 22.9% and 28.2%
for the nine months ended September 30, 1996 as compared to 1995. Operating
income as a percentage of revenue for both electronic travel distribution
services and information technology solutions was approximately the same as the
combined percentage for the nine months ended September 30, 1995. However, for
the nine months ended September 30, 1996, operating income as a percentage of
revenue for information technology solutions declined to approximately 20.0% of
revenues principally as a result of the Technology Services Agreement with
American, while operating income as a percentage of revenue for electronic
travel distribution services was at approximately 24.0%.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Revenues. Revenues for the three months ended September 30, 1996 compared to
the three months ended September 30, 1995 increased approximately $15 million,
3.8%, from $393 million to $408 million.
Electronic travel distribution revenues increased approximately $20 million,
7.7%, from $261 million to $281 million primarily due to growth in booking fees
from associates from $207 million to $225 million. This growth was driven by
an increase in booking volumes worldwide, an overall increase in the price per
booking charged to associates and a migration of associates to higher
participation levels within the Company's proprietary computer reservation
system, SABRE.
Revenue from information technology solutions decreased approximately $5
million, 4.5%, from $132 million to $127 million. Revenues from AMR decreased
approximately $12 million primarily due to the application of the financial
terms of the Technology Services Agreement effective January 1, 1996, offset by
an increase in revenues from non-affiliated customers of approximately $6
million.
Operating expenses. Operating expenses increased $34 million, 11.9%, from $285
million to $319 million during the three months ended September 30, 1996 as
compared to the three months ended September 30, 1995. This increase was
primarily attributable to an increase in salaries and benefits, the application
of the financial terms of the Affiliate Agreements and customer incentive
expenses. Salaries and benefits increased due to an increase of approximately
5% in the average number of employees necessary to support the Company's
revenue growth and new product development.
-12-
<PAGE> 15
THE SABRE GROUP HOLDINGS, INC.
RESULTS OF OPERATIONS (CONTINUED)
The Affiliate Agreements, including the Marketing Cooperation Agreement, Travel
Privileges Agreement and Corporate Travel Agreement, entered into with
American, resulted in an increase in operating expenses of approximately $11
million for the three months ended September 30, 1996. Customer incentive
expenses increased in order to maintain and grow the Company's customer base.
Operating Income. Operating income decreased $20 million, 18.7%, from $108
million to $88 million. Operating margins decreased from 27.5% to 21.6% due to
the impact of the Affiliate Agreements.
Other Expenses. Other expenses increased $15 million due to interest expense
incurred on the Debenture.
Income Taxes. The provision for income taxes was $29 million and $42 million
for the three months ended September 30, 1996 and 1995, respectively. The
decrease in the provision for income taxes corresponds with the decrease in net
income before the provision for income taxes.
Net Earnings. Net earnings decreased $22 million, 32.8%, from $67 million to
$45 million due to the decrease in operating income and the increase in
interest expense.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Revenues. Revenues for the nine months ended September 30, 1996 compared to
the nine months ended September 30, 1995 increased approximately $85 million,
7.3%, from $1,161 million to $1,246 million.
Electronic travel distribution revenues increased approximately $83 million,
10.7%, from $773 million to $856 million primarily due to growth in booking
fees from associates from $620 million to $715 million. This growth was driven
by an increase in booking volumes worldwide, an overall increase in the price
per booking charged to associates and a migration of associates to higher
participation levels within SABRE.
Revenue from information technology solutions increased approximately $2
million, 0.5%, from $388 million to $390 million. Revenues from non-affiliated
customers increased approximately $18 million, offset by a decrease in revenues
from AMR of approximately $16 million primarily due to the application of the
financial terms of the Technology Services Agreement.
Operating expenses. Operating expenses increased $127 million, 15.2%, from
$833 million to $960 million during the nine months ended September 30, 1996 as
compared to the nine months ended September 30, 1995. This increase was
primarily attributable to an increase in salaries and benefits, the Affiliate
Agreements and customer incentive expenses. Salaries and benefits increased
due to an increase of approximately 8% in the average number of employees
necessary to support the Company's revenue growth and new product development.
The Affiliate Agreements, including the Marketing Cooperation Agreement, Travel
Privileges Agreement and Corporate Travel Agreement, entered into with
American, resulted in an increase in operating expenses of approximately $30
million for the nine months ended September 30, 1996. Customer incentive
expenses increased in order to maintain and grow the Company's customer base.
Operating Income. Operating income decreased $42 million, 12.8%, from $328
million to $286 million. Operating margins decreased from 28.2% to 22.9%
primarily due to the impact of the Affiliate Agreements. Other Expenses.
Other expenses increased $7 million due to interest expense incurred on the
Debenture, offset by a reduction in the losses from joint ventures in which the
Company owns an interest accounted for under the equity method.
-13-
<PAGE> 16
THE SABRE GROUP HOLDINGS, INC.
RESULTS OF OPERATIONS (CONTINUED)
Income Taxes. The provision for income taxes was $105 million and $124 million
for the nine months ended September 30, 1996 and 1995, respectively. The
decrease in the provision for income taxes corresponds with the decrease in net
income before the provision for income taxes.
Net Earnings. Net earnings decreased $30 million, 15.5%, from $194 million to
$164 million due to the decrease in operating income and the increase in
interest expense.
PRO FORMA RESULTS OF OPERATIONS
The discussion of pro forma results of operations is based on the pro forma
condensed consolidated financial information presented in Part II: Other
Information, Item 5. Other Information. These financial statements assume the
Reorganization, Affiliate Agreements and Offering were consummated on January
1, 1995 with respect to the unaudited pro forma condensed consolidated
statements of income.
PRO FORMA FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Revenues. Pro forma revenues for the three months ended September 30, 1996
compared to the three months ended September 30, 1995 increased approximately
$32 million, 8.4%, from $376 million to $408 million.
Electronic travel distribution pro forma revenues increased approximately $25
million, 9.8%, from $256 million to $281 million primarily due to growth in
booking fees from associates from $207 million to $225 million. This growth
was driven by an increase in booking volumes worldwide, an overall increase in
the price per booking charged to associates and a migration of associates to
higher participation levels within SABRE.
Pro forma revenue from information technology solutions increased approximately
$6 million, 5.4%, from $120 million to $126 million due to an increase in
revenues from non-affiliated customers.
Operating expenses. Pro forma operating expenses increased $27 million, 9.1%,
from $293 million to $319 million during the three months ended September 30,
1996 as compared to the three months ended September 30, 1995. This increase
was primarily attributable to an increase in salaries and benefits and customer
incentive expenses. Salaries and benefits increased due to an increase of
approximately 5% in the average number of employees necessary to support the
Company's revenue growth and new product development. Customer incentive
expenses increased in order to maintain and grow the Company's customer base.
Operating Income. Pro forma operating income increased $5 million, 5.9%, from
$83 million to $88 million. Operating margins decreased from 22.1% to 21.6%
due to the increase in pro forma revenues of 5.4%, while pro forma operating
expenses increased 9.1%.
Income Taxes. The pro forma provision for income taxes was $33 million and $31
million for the three months ended September 30, 1996 and 1995, respectively.
The increase in the provision for income taxes corresponds with the increase in
net income before the provision for income taxes.
Net Earnings. Pro forma net earnings increased $2 million, 4.4%, from $49
million to $51 million due to the increase in operating income.
-14-
<PAGE> 17
THE SABRE GROUP HOLDINGS, INC.
RESULTS OF OPERATIONS (CONTINUED)
PRO FORMA FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Revenues. Pro forma revenues for the nine months ended September 30, 1996
compared to the nine months ended September 30, 1995 increased approximately
$127 million, 11.4%, from $1,113 million to $1,240 million.
Electronic travel distribution pro forma revenues increased approximately $99
million, 13.1%, from $757 million to $856 million primarily due to growth in
booking fees from associates from $620 million to $715 million. This growth was
driven by an increase in booking volumes worldwide, an overall increase in the
price per booking charged to associates and a migration of associates to higher
participation levels within SABRE.
Pro forma revenue from information technology solutions increased approximately
$29 million, 8.2%, from $355 million to $384 million. Revenues from non-
affiliated customers increased approximately $18 million and revenues from AMR
increased approximately $10 million.
Operating expenses. Pro forma operating expenses increased $101 million,
11.8%, from $854 million to $955 million during the nine months ended September
30, 1996 as compared to the nine months ended September 30, 1995. This
increase was primarily attributable to an increase in salaries and benefits and
customer incentive expenses. Salaries and benefits increased due to an
increase of approximately 8% in the average number of employees necessary to
support the Company's revenue growth and new product development. Customer
incentive expenses increased in order to maintain and grow the Company's
customer base.
Operating Income. Pro forma operating income increased $26 million, 10.3%,
from $259 million to $285 million. Operating margins decreased from 23.2% to
23.0% due to the increase in pro forma revenues of 11.4%, while pro forma
operating expenses increased 11.8%.
Other Expenses. Pro forma other expenses decreased $7 million due to a
reduction in the losses from joint ventures in which the Company owns an
interest accounted for under the equity method.
Income Taxes. The pro forma provision for income taxes was $105 million and
$92 million for the nine months ended September 30, 1996 and 1995,
respectively. The increase in the provision for income taxes corresponds with
the increase in net income before the provision for income taxes.
Net Earnings. Pro forma net earnings increased $20 million, 13.9%, from $144
million to $164 million primarily due to the increase in operating income .
LIQUIDITY AND CAPITAL RESOURCES
The Company had substantial liquidity at September 30, 1996, with approximately
$226 million in cash and cash equivalents and short-term investments and $315
million in working capital. At December 31, 1995, cash and cash equivalents
and working capital were $95 million and $53 million, respectively. Prior to
July 2, 1996, the Company's cash and cash equivalents were held for the Company
by American. Cash and cash equivalents were immediately charged or credited to
the Company upon recording certain transactions, including transactions with
American for airline booking fees and purchases of goods and services.
Effective with the Reorganization on July 2, 1996, the Company began
maintaining a separate cash management system and cash and investment accounts
separate from American. Transactions with American no longer result in the
recording of cash equivalents, but are settled through intercompany billings,
with payment due in 30 days. American performs cash management services for
the Company under the Management Services Agreement. The Company invests the
cash in short-term marketable securities, consisting primarily of certificates
of deposit, bankers' acceptances, commercial paper, corporate notes and
government notes.
-15-
<PAGE> 18
THE SABRE GROUP HOLDINGS, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company has financed its operations through cash generated from operations.
The Company's net cash provided by operating activities of $224 million for the
nine months ended September 30, 1996 was primarily attributable to net
earnings, offset by the impact of the change in the method of recording and
settling of transactions with American described above. The Company's net cash
provided by operating activities for the nine months ended September 30, 1995
of $304 million was primarily attributable to net earnings.
Investing activities have primarily been related to purchases of computer
equipment to be provided to subscribers of SABRE and for use in data processing
services. Capital expenditures for the nine months ended September 30, 1996
were $126 million and in 1995 were $133 million.
In the nine months ended September 30, 1995, certain of The SABRE Group
entities from which the Company was formed distributed $369 million to
American, in their capacity as divisions or subsidiaries of American or AMR.
Also during 1995, AMR contributed $245 million to the Company in order to
adequately capitalize certain of The SABRE Group entities from which the
Company was formed. In addition, a note payable to AMR of $54 million was
established during 1995, which was capitalized in 1996 in connection with the
Reorganization. Proceeds from the contribution and note payable were used to
reduce cash advances from AMR.
OTHER
The Company completed its Offering of 23,230,000 shares of Class A common
stock, par value $.01 per share on October 17, 1996. The offering price of $27
per share resulted in net proceeds to the Company of approximately $593 million
after deducting underwriting discounts and commissions. The Company used
approximately $532 million of the net proceeds to repay a portion of the
Debenture payable to AMR.
The Company provides data processing and network and distributed systems
services to Canadian through subcontracting arrangements with American which
are scheduled to expire in 2006. On November 1, 1996, Canadian announced that
it was taking certain actions to improve its cash flow. Among other things,
Canadian has asked its vendors to reduce the pricing of the services they
provide. American is considering Canadian's request.
Regardless of any decision by American about its pricing, American has
guaranteed to the Company full payment under the terms of the Canadian
Subcontract for services actually performed. There is, however, no guarantee
of revenues in the event of the termination of the Canadian Subcontract.
Revenues under the Canadian Subcontract for the nine months ended September 30,
1996 were approximately $39 million.
The Company currently has approximately $41 million of deferred costs
associated with the installation and implementation of certain systems under
the Canadian Subcontract. Those deferred costs were to be recovered over the
next eight years. American has agreed to reimburse the Company for unrecovered
deferred costs in the event of the termination or expiration of the Canadian
Subcontract or the write-down of those deferred costs.
-16-
<PAGE> 19
THE SABRE GROUP HOLDINGS, INC.
CAUTIONARY STATEMENT
Statements in this report which are not purely historical facts, including
statements regarding the Company's anticipations, beliefs, expectations, hopes,
intentions or strategies for the future, may be forward looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. All forward looking statements in this report are based upon
information available to the Company on the date of this report. The Company
undertakes no obligation to publicly update or revise any forward looking
statements, whether as a result of new information, future events or otherwise.
Any forward looking statements involve risks and uncertainties that could cause
actual events or results to differ materially from the events or results
described in the forward looking statements. Readers are cautioned not to
place undue reliance on these forward looking statements.
Risks associated with the Company's forward looking statements include, but are
not limited to: risks related to the Company's relationships with American and
its affiliates, including risks that American may terminate any of the
agreements with the Company, or fail or otherwise become unable to fulfill its
principal obligations thereunder, or determine not to renew certain of the
agreements; risks associated with competition, and technological innovation by
competitors, which could require the Company to reduce prices, to change
billing practices, to increase spending on marketing or product development or
otherwise to take actions that might adversely affect its operations or
earnings; risks related to seasonality of the travel industry and booking
revenues; risks of the Company's sensitivity to general economic conditions and
events that affect airline travel and the airlines that participate in the
SABRE system; risks of a natural disaster or other calamity that may cause
significant damage to the Company's data center facility; risks of failure or
inability of telecommunications suppliers to provide and maintain network
access; risks associated with the Company's international operations, such as
currency fluctuations, governmental approvals, tariffs and trade barriers;
risks of new or different legal and regulatory requirements; and risks
associated with the Company's growth strategy, including investments in
emerging markets and the ability to sucessfully conclude alliances. For a more
detailed discussion of these factors, please consult the Risk Factors section
in the Registration Statement.
-17-
<PAGE> 20
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 1996, American Trans Air, Inc. filed a lawsuit against American in the
U.S. District Court for the Southern District of Indiana, Indianapolis
Division, seeking a refund of $400,000 in SABRE booking fees it claimed were
charged for illegitimate bookings. Prior to the filing, America West Airlines
Inc., using a similar claim of illegitimate bookings, had withheld over $1.0
million in booking fees payable to American. In June 1996, American and SABRE
Associates, Inc. filed a lawsuit against America West in the District Court of
Tarrant County, Texas, 153rd Judicial District, seeking to recover the unpaid
booking fees. Following the Reorganization, the Company is the successor to
American and SABRE Associates in both of these lawsuits. The claims of both
American Trans Air and America West relate to booking fees charged by the
Company, and commonly charged by other providers in the electronic travel
distribution industry, for "passive bookings," which are bookings initially
made directly with a travel provider (rather than through a travel agent) and
subsequently ticketed through SABRE or another global distribution system. If
America Trans Air and America West prevail on their claims, other carriers
participating in SABRE may make similar claims. The Company believes, however,
that passive booking fees are properly charged pursuant to its contracts with
SABRE participants. The Company intends to vigorously defend its actions in
this regard and believes that the claims of American Trans Air and America West
can be successfully defended or resolved without any material adverse effect on
the Company's financial position or results of operations.
In 1994, Alaska Airlines filed a Petition for Rulemaking with the United States
Department of Transportation ("DOT") seeking a rule that would ban the use of
"parity clauses" contractually requiring an airline to participate in a global
distribution system at the same level of functionality as the airline
participates in other global distribution systems, unless the airline is
affiliated with a global distribution system. The Company believes that the
Petition for Rulemaking was motivated by a lawsuit brought in 1994 by American
against Alaska Airlines in the U.S. District Court for the Northern District of
Texas. In its complaint, American alleged that Alaska Airlines breached its
SABRE participating carrier agreement by obtaining greater functionality from
other global distribution systems than it obtained from SABRE. American sought
declaratory relief. Following the Reorganization, the Company is the successor
to American in that lawsuit. On September 19, 1996, the U.S. District Court for
the Northern District of Texas dismissed the lawsuit on grounds that the
Company's claims, because they were based on state law, were preempted by
federal law. The Company currently plans to appeal the dismissal. On August
14, 1996, the DOT issued a notice of proposed rulemaking proposing to ban the
use of parity clauses, but suggesting that such clauses could still be enforced
against airlines that own or market a global distribution system. The Company
has filed comments with the DOT in which the Company states its opposition to
the ban on parity clauses.
-18-
<PAGE> 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 2, 1996, AMR Corporation, as sole stockholder of the Company, consented
to the appointment of Robert L. Crandall, Gerard J. Arpey, and Michael J.
Durham to the Company's Board of Directors.
On August 5, 1996, AMR Corporation, as sole stockholder of the Company,
consented to an amendment to the Company's certificate of incorporation
changing the name of the Company to The SABRE Group Holdings, Inc. The
certificate of amendment of the Company's certificate of incorporation was
filed with the Secretary of State of Delaware on August 6, 1996.
On October 3, 1996, AMR Corporation, as sole stockholder of the Company,
consented to amendments to the Company's certificate of incorporation and to a
restated certificate of incorporation that included those amendments. The
restated certificate of incorporation was filed with the Secretary of State of
Delaware on October 8, 1996.
On October 3, 1996, AMR Corporation, as sole stockholder of the Company,
consented to the adoption of the Company's 1996 Long-Term Incentive Plan and
Directors' Stock Incentive Plan and approved the creation of an employees'
stock purchase plan.
-19-
<PAGE> 22
ITEM 5. OTHER INFORMATION
THE SABRE GROUP HOLDINGS, INC.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(In thousands)
The accompanying pro forma condensed consolidated financial statements are
based upon the historical financial statements of the Company and assume the
Offering was consummated at September 30, 1996, with respect to the unaudited
pro forma condensed consolidated balance sheet and assume the Reorganization,
Affiliate Agreements and Offering were consummated on January 1, 1995 with
respect to the unaudited pro forma condensed consolidated statements of income.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the transactions had been consummated as presented in
the accompanying pro forma condensed consolidated financial statements, nor is
it necessarily indicative of future results of operations.
The pro forma condensed consolidated financial statements should be read in
conjunction with the Consolidated Financial Statements and related notes
thereto of the Company included elsewhere herein as well as the Consolidated
Financial Statements and related notes thereto and Pro forma Condensed
Consolidated Financial Information included in the Registration Statement.
-20-
<PAGE> 23
THE SABRE GROUP HOLDINGS, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited) (In thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30,
1996
-------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 69,780
Short-term investments 215,392
Accounts receivable, net 220,775
Receivable from AMR 54,193
Prepaid expenses 13,516
Deferred income taxes 39,858
-------------
Total current assets 613,514
PROPERTY AND EQUIPMENT
Buildings and leasehold improvements 292,886
Furniture, fixtures and equipment 20,821
Service contract equipment 534,462
Computer equipment 327,942
-------------
1,176,111
Less accumulated depreciation and amortization (642,404)
-------------
Total property and equipment 533,707
Other assets, net 70,237
-------------
$ 1,217,458
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 75,213
Accrued compensation and related benefits 47,419
Other accrued liabilities 116,776
-------------
Total current liabilities 239,408
Deferred income taxes 33,097
Other postretirement benefits 97,509
Other liabilities 14,777
Debenture payable to AMR 317,877
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred Stock: $0.01 par value; 20,000,000 shares authorized;
no shares issued ---
Common stock
Class A: $0.01 par value; 250,000,000 shares authorized;
23,230,000 shares issued and outstanding
232
Class B: $0.01 par value; 107,374,000 shares authorized; 1,074
107,374,000 shares issued and outstanding
Additional paid-in capital 589,941
Retained deficit (76,457)
-------------
Total stockholders' equity 514,790
-------------
$ 1,217,458
=============
</TABLE>
-21-
<PAGE> 24
THE SABRE GROUP HOLDINGS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(Unaudited) (In thousands, except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -----------------------------
1996 1995 1996 1995
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES
Electronic travel distribution $280,998 $255,838 $ 855,980 $ 757,313
Information technology solutions 126,422 119,998 383,631 355,259
-------- -------- ---------- ----------
Total operating revenues 407,420 375,836 1,239,611 1,112,572
OPERATING EXPENSES
Cost of sales 283,235 259,809 850,567 765,862
Selling, general and administrative 36,271 32,991 103,994 88,182
-------- -------- ---------- ----------
Total operating expenses 319,506 292,800 954,561 854,044
OPERATING INCOME 87,914 83,036 285,050 258,528
OTHER INCOME (EXPENSE)
Interest income 2,155 1,579 7,774 5,462
Interest expense (5,769) (6,028) (19,396) (17,552)
Other - net (783) 825 (4,121) (10,703)
-------- -------- ---------- ----------
(4,397) (3,624) (15,743) (22,793)
-------- -------- ---------- ----------
EARNINGS BEFORE PROVISION FOR INCOME TAXES
83,517 79,412 269,307 235,735
Provision for income taxes 32,543 30,579 105,017 92,017
-------- -------- ---------- ----------
NET EARNINGS $ 50,974 $ 48,833 $ 164,290 $ 143,718
======== ======== ========== ==========
PRO FORMA EARNINGS PER COMMON SHARE DATA:
Earnings per common share $ .39 $ .37 $ 1.26 $ 1.10
======== ======== ========== ==========
Average common and common
equivalent shares outstanding 130,604 130,604 130,604 130,604
======== ======== ========== ==========
</TABLE>
-22-
<PAGE> 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are included herein:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
3.1 Restated Certificate of Incorporation of The SABRE Group Holdings,
Inc. (1)
3.2 Restated Bylaws of The SABRE Group Holdings, Inc. (1)
4.1 Registration Rights Agreement between The SABRE Group Holdings, Inc. and
AMR Corporation. (1)
4.2 Specimen Certificate representing Class A Common Stock (1)
10.1 Registration Rights Agreement between The SABRE Group Holdings, Inc. and
AMR Corporation (See Exhibit 4.1).
10.2 Intercompany Agreement, dated as of July 2, 1996, among The SABRE Group
Holdings, Inc., The SABRE Group Inc., TSGL, Inc., TSGL Holding, Inc.,
TSGL-SCS, Inc., SABRE International, Inc., SABRE Services Columbia, LTDA
and American Airlines, Inc.(1)
10.3 Management Services Agreement, dated as of July 1, 1996, between The
SABRE Group, Inc. and American Airlines, Inc. (1)(2)
10.4 Credit Agreement, dated as of July 1, 1996, between The SABRE Group
Holdings, Inc., The SABRE Group, Inc., AMR Corporation and American
Airlines, Inc.(1)
10.5 $850,000,000 Subordinated Debenture, dated July 2, 1996, executed by
The SABRE Group Holdings, Inc. and payable to AMR Corporation.(1)
10.6 Information Technology Services Agreement, dated July 1, 1996, between
The SABRE Group, Inc. and American Airlines, Inc. (1)(2)
10.7 Non-competition Agreement, dated July 1, 1996, among The SABRE Group
Holdings, Inc., The SABRE Group, Inc., AMR Corporation and American
Airlines, Inc. (1)
10.8 Marketing Cooperation Agreement, dated as of July 1, 1996, between The
SABRE Group, Inc. and American Airlines, Inc. (1)(2)
10.9 Tax Sharing Agreement, dated July 1, 1996, between The SABRE Group, Inc.
and American Airlines, Inc.(1)
10.10 Travel Privileges Agreement, dated as of July 1, 1996, between The SABRE
Group, Inc. and American Airlines, Inc. (1)(2)
10.11 Corporate Travel Agreement, dated July 25, 1996, between The SABRE
Group, Inc. and American Airlines, Inc. (1)(2)
10.12 Software Marketing Agreement, dated September 10, 1996, among The SABRE
Group Holdings, Inc., The SABRE Group, Inc. and AMR Corporation. (1)(2)
10.13 Canadian Technical Services Subcontract, dated as of July 1, 1996,
between The SABRE Group, Inc. and American Airlines, Inc. (1)(2)
10.14 Form of Participating Carrier Agreement between The SABRE Group, Inc.
and American Airlines, Inc.(1)
10.15 Investment Agreement, dated September 11, 1996, between The SABRE Group,
Inc. and AMR Investment Services, Inc. (1)(2)
10.16 Assignment and Amendment Agreement, dated as of July 1, 1996, among The
SABRE Group, Inc., American Airlines, Inc. and the Dallas-Fort Worth
International Airport Board. (1)
10.17 American Airlines Special Facilities Lease Agreement, dated October 1,
1972, between American Airlines, Inc. and the Dallas-Fort Worth Regional
Airport Board, as amended by Supplemental Agreements Nos. 1-5.(1)
10.18 Assignment Agreement, dated as of July 1, 1996, between The SABRE Group,
Inc. and American Airlines, Inc.(1)
10.19 Sublease, dated June 1, 1958, between American Airlines, Inc. and The
Trustees of the Tulsa Municipal Airport Trust, as amended by Amendments
Nos. 1-12.(1)
10.20 Assignment Agreement, dated as of July 1, 1996, between The SABRE Group,
Inc. and American Airlines, Inc.(1)
10.21 Amended and Restated Sublease Agreement, dated May, 1996, between
American Airlines, Inc. and the Tulsa Airports Improvement Trust.(1)
10.22 Assignment Agreement, dated as of July 1, 1996, between The SABRE Group,
Inc. and American Airlines, Inc. (1)
10.23 Office Lease Agreement, dated as of January 19, 1996, between American
Airlines, Inc. and Maguire/Thomas Partners - Westlake/Southlake
Partnership.(1)
10.24 American Airlines, Inc. Supplemental Executive Retirement Plan dated
November 16, 1994.(3)
10.25 The SABRE Group Holdings, Inc. 1996 Long-Term Incentive Plan.(1)
10.26 The SABRE Group Holdings, Inc. 1996 Directors Stock Incentive Plan.(1)
10.27 Form of Executive Termination Benefits Agreement.(1)
10.28 Employment Agreement, dated August 30, 1996, between The SABRE Group,
Inc. and Michael J. Durham.(1)
10.29 Employment Agreement, dated September 7, 1995, between American
Airlines, Inc. and Thomas M. Cook.(1)
10.30 Employment Agreement, dated May 7, 1996, between American Airlines, Inc.
and Terrell B. Jones.(1)
10.31 Letter Agreement, dated July 15, 1996, between The SABRE Group Holdings,
Inc. and Thomas M. Cook.(1)
10.32 Letter Agreement, dated July 15, 1996, between The SABRE Group Holdings,
Inc. and Terrell B. Jones.(1)
27.1 Financial Data Schedule.
(1) Incorporated by reference to The SABRE Group Holdings, Inc.'s
Registration Statement on Form S-1 originally filed with the Securities and
Exchange Commission on August 8, 1996, File No. 333-09747.
(2) Confidential treatment has been requested for portions of this
agreement and the omitted information has been filed separately with the
Securities and Exchange Commission pursuant to an application for confidential
treatment.
(3) Incorporated by reference to Exhibit 10(mmm) to AMR Corporation's Report
on Form 10-K for the year ended December 31, 1994, file number 1-8400.
-23-
<PAGE> 26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE SABRE GROUP HOLDINGS, INC.
Date: November 21, 1996 BY: /s/ T. Patrick Kelly
----------------------------------------
T. Patrick Kelly
Senior Vice President and Chief
Financial Officer and Treasurer
-24-
<PAGE> 27
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
3.1 Restated Certificate of Incorporation of The SABRE Group Holdings,
Inc. (1)
3.2 Restated Bylaws of The SABRE Group Holdings, Inc. (1)
4.1 Registration Rights Agreement between The SABRE Group Holdings, Inc. and
AMR Corporation. (1)
4.2 Specimen Certificate representing Class A Common Stock (1)
10.1 Registration Rights Agreement between The SABRE Group Holdings, Inc. and
AMR Corporation (See Exhibit 4.1).
10.2 Intercompany Agreement, dated as of July 2, 1996, among The SABRE Group
Holdings, Inc., The SABRE Group Inc., TSGL, Inc., TSGL Holding, Inc.,
TSGL-SCS, Inc., SABRE International, Inc., SABRE Services Columbia, LTDA
and American Airlines, Inc.(1)
10.3 Management Services Agreement, dated as of July 1, 1996, between The
SABRE Group, Inc. and American Airlines, Inc. (1)(2)
10.4 Credit Agreement, dated as of July 1, 1996, between The SABRE Group
Holdings, Inc., The SABRE Group, Inc., AMR Corporation and American
Airlines, Inc.(1)
10.5 $850,000,000 Subordinated Debenture, dated July 2, 1996, executed by
The SABRE Group Holdings, Inc. and payable to AMR Corporation.(1)
10.6 Information Technology Services Agreement, dated July 1, 1996, between
The SABRE Group, Inc. and American Airlines, Inc. (1)(2)
10.7 Non-competition Agreement, dated July 1, 1996, among The SABRE Group
Holdings, Inc., The SABRE Group, Inc., AMR Corporation and American
Airlines, Inc. (1)
10.8 Marketing Cooperation Agreement, dated as of July 1, 1996, between The
SABRE Group, Inc. and American Airlines, Inc. (1)(2)
10.9 Tax Sharing Agreement, dated July 1, 1996, between The SABRE Group, Inc.
and American Airlines, Inc.(1)
10.10 Travel Privileges Agreement, dated as of July 1, 1996, between The SABRE
Group, Inc. and American Airlines, Inc. (1)(2)
10.11 Corporate Travel Agreement, dated July 25, 1996, between The SABRE
Group, Inc. and American Airlines, Inc. (1)(2)
10.12 Software Marketing Agreement, dated September 10, 1996, among The SABRE
Group Holdings, Inc., The SABRE Group, Inc. and AMR Corporation. (1)(2)
10.13 Canadian Technical Services Subcontract, dated as of July 1, 1996,
between The SABRE Group, Inc. and American Airlines, Inc. (1)(2)
10.14 Form of Participating Carrier Agreement between The SABRE Group, Inc.
and American Airlines, Inc.(1)
10.15 Investment Agreement, dated September 11, 1996, between The SABRE Group,
Inc. and AMR Investment Services, Inc. (1)(2)
10.16 Assignment and Amendment Agreement, dated as of July 1, 1996, among The
SABRE Group, Inc., American Airlines, Inc. and the Dallas-Fort Worth
International Airport Board. (1)
10.17 American Airlines Special Facilities Lease Agreement, dated October 1,
1972, between American Airlines, Inc. and the Dallas-Fort Worth Regional
Airport Board, as amended by Supplemental Agreements Nos. 1-5.(1)
10.18 Assignment Agreement, dated as of July 1, 1996, between The SABRE Group,
Inc. and American Airlines, Inc.(1)
10.19 Sublease, dated June 1, 1958, between American Airlines, Inc. and The
Trustees of the Tulsa Municipal Airport Trust, as amended by Amendments
Nos. 1-12.(1)
10.20 Assignment Agreement, dated as of July 1, 1996, between The SABRE Group,
Inc. and American Airlines, Inc.(1)
10.21 Amended and Restated Sublease Agreement, dated May, 1996, between
American Airlines, Inc. and the Tulsa Airports Improvement Trust.(1)
10.22 Assignment Agreement, dated as of July 1, 1996, between The SABRE Group,
Inc. and American Airlines, Inc. (1)
10.23 Office Lease Agreement, dated as of January 19, 1996, between American
Airlines, Inc. and Maguire/Thomas Partners - Westlake/Southlake
Partnership.(1)
10.24 American Airlines, Inc. Supplemental Executive Retirement Plan dated
November 16, 1994.(3)
10.25 The SABRE Group Holdings, Inc. 1996 Long-Term Incentive Plan.(1)
10.26 The SABRE Group Holdings, Inc. 1996 Directors Stock Incentive Plan.(1)
10.27 Form of Executive Termination Benefits Agreement.(1)
10.28 Employment Agreement, dated August 30, 1996, between The SABRE Group,
Inc. and Michael J. Durham.(1)
10.29 Employment Agreement, dated September 7, 1995, between American
Airlines, Inc. and Thomas M. Cook.(1)
10.30 Employment Agreement, dated May 7, 1996, between American Airlines, Inc.
and Terrell B. Jones.(1)
10.31 Letter Agreement, dated July 15, 1996, between The SABRE Group Holdings,
Inc. and Thomas M. Cook.(1)
10.32 Letter Agreement, dated July 15, 1996, between The SABRE Group Holdings,
Inc. and Terrell B. Jones.(1)
27.1 Financial Data Schedule.
(1) Incorporated by reference to The SABRE Group Holdings, Inc.'s
Registration Statement on Form S-1 originally filed with the Securities and
Exchange Commission on August 8, 1996, File No. 333-09747.
(2) Confidential treatment has been requested for portions of this
agreement and the omitted information has been filed separately with the
Securities and Exchange Commission pursuant to an application for confidential
treatment.
(3) Incorporated by reference to Exhibit 10(mmm) to AMR Corporation's Report
on Form 10-K for the year ended December 31, 1994, file number 1-8400.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF EQUITY AND CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 10,656
<SECURITIES> 215,392
<RECEIVABLES> 224,858
<ALLOWANCES> 4,083
<INVENTORY> 0
<CURRENT-ASSETS> 554,390
<PP&E> 1,176,111
<DEPRECIATION> 642,404
<TOTAL-ASSETS> 1,158,334
<CURRENT-LIABILITIES> 239,408
<BONDS> 850,000
0
0
<COMMON> 0
<OTHER-SE> (45,957)
<TOTAL-LIABILITY-AND-EQUITY> 1,158,334
<SALES> 0
<TOTAL-REVENUES> 1,245,709
<CGS> 0
<TOTAL-COSTS> 856,257
<OTHER-EXPENSES> 103,949
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,019
<INCOME-PRETAX> 269,137
<INCOME-TAX> 104,936
<INCOME-CONTINUING> 164,201
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 164,201
<EPS-PRIMARY> 1.26
<EPS-DILUTED> 1.26
</TABLE>
