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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For fiscal year ended December 31, 1996.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
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 of incorporation (I.R.S. Employer
or organization) Identification No.)
4255 Amon Carter Blvd. 76155
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (817) 931-7300
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Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of Each Class Name of exchange on which registered
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<S> <C>
Class A Common Stock, par New York Stock Exchange
value $.01 per share
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Securities registered pursuant to Section 12(g) of the Act:
NONE
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(Title of Class)
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 period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 24, 1997 was approximately $620,344,250. As of March 24,
1997, 23,409,217 shares of the registrant's Class A Common Stock and
107,374,000 shares of the registrant's Class B Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference certain information from
the Proxy Statement for the Annual Meeting of Stockholders to be held May 21,
1997.
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PART I
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ITEM 1. BUSINESS
The SABRE Group Holdings, Inc. is a holding company incorporated in
Delaware on June 25, 1996. Pursuant to a reorganization consummated on July 2,
1996 (the "Reorganization"), the Company became the successor to the businesses
of The SABRE Group which were formerly operated as divisions or subsidiaries of
American Airlines, Inc. ("American") or AMR Corporation ("AMR"). Unless
otherwise indicated, references herein to the "Company" include The SABRE Group
Holdings, Inc. and its consolidated subsidiaries and, for any period prior to
the Reorganization, the business of AMR constituting The SABRE Group. On
October 17, 1996, the Company completed an initial public offering (the
"Offering") of 23,230,000 shares of its Class A Common Stock, par value $.01
per share, constituting approximately 17.8% of the economic interest of the
Company's outstanding common equity. AMR retained all 107,374,000 shares of the
Company's Class B Common Stock, representing approximately 82.2% of the
economic interest and 97.9% of the combined voting power of all classes of
voting stock of the Company.
The Company is a world leader in the electronic distribution of travel
through its proprietary travel reservation and information system, SABRE(R),
and is the largest electronic distributor of travel in the United States. In
addition, the Company is a leading provider of solutions to the airline
industry and fulfills substantially all of the data processing, network and
distributed systems needs of American and AMR's other subsidiaries.
ELECTRONIC TRAVEL DISTRIBUTION
SABRE and other global distribution systems are the principal means of
air travel distribution in the United States and a growing means of air travel
distribution internationally. Through SABRE, travel agencies, corporate travel
departments and individual consumers ("subscribers") can access information on
and book reservations with airlines and other providers of travel and
travel-related products and services ("associates"). As of December 31, 1996,
travel agencies with more than 30,000 locations in over 70 countries on six
continents subscribed to SABRE, and three million individuals subscribed to
Travelocity(SM)and easySABRE(SM), the Company's consumer-direct products. SABRE
subscribers are able to make reservations with more than 400 airlines and more
than 50 car rental companies and more than 200 hotel companies covering
approximately 35,000 hotel properties worldwide.
During 1996, more airline bookings in the United States were made
through SABRE than through any other global distribution system. In 1996,
approximately 67.9% of the Company's revenue was generated by the electronic
distribution of travel, primarily through booking fees paid by associates.
THE SABRE GLOBAL DISTRIBUTION SYSTEM
SABRE, like other global distribution systems, creates an electronic
marketplace where travel providers display information about their products and
warehouse and manage inventory. Subscribers -- principally travel agencies but
also corporate travel departments and individual consumers -- access
information and purchase travel products and services. In 1996, more than 700
travel providers displayed information about their products and services
through SABRE, and the Company estimates that more than $40 billion in travel
products and services were reserved through SABRE.
In addition to providing information to subscribers about airlines and
other travel providers and their products and services, SABRE reports
transaction data from subscriber-generated sales to the travel providers
allowing them to manage inventory and revenues. SABRE also allows travel agency
subscribers to print airline tickets, boarding passes and itineraries.
Additionally, SABRE provides subscribers with travel information on matters
such as currency, medical and visa requirements, weather and sightseeing. By
accessing the SABRE system, a subscriber can, from a single source, obtain
schedule, availability and pricing information from multiple travel providers
for complex travel itineraries.
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ASSOCIATE PARTICIPATION
The Company derives its electronic travel distribution revenues
primarily from booking fees paid by associates for reservations made through
SABRE for their products and services. In addition to airlines, associates
include car rental companies, hotel companies, railroads, tour operators, ferry
companies and cruise lines, which participate in SABRE through products
designed for such associates, such as CARS Plus(SM), SHAARP Plus(SM),
SABRErail(SM), SABRE TourGuide(R), SABRE Navigator(SM)and SABRE
CruiseDirector(R). SABRE subscribers can also purchase travel insurance or book
theater tickets or limousines through SABRE.
Depending on the level of participation or "functionality" in SABRE,
airlines and other associates can display, warehouse, manage and sell their
inventory in SABRE. The booking fee per transaction paid by an associate to the
Company depends upon several factors, including the associate's level of
participation in SABRE and the type of products or services provided by the
associate. Airlines are provided with a wide range of participation levels from
which to choose. The lowest level of functionality for airlines -- Basic
Booking Request(SM) -- is aimed at the "no-frills" carriers and provides
schedules and electronic booking only. Higher levels of functionality for
airlines, such as Direct Connect Availability(SM), provide greater levels of
communication between SABRE and associates, thus enabling SABRE to provide
subscribers with more detailed information and associates with improved
inventory management. For an associate selecting one of the higher levels of
participation, SABRE provides subscribers with a direct connection to the
associate's internal reservation system, allowing SABRE to provide real-time
information and allowing the associate to optimize revenue for each flight.
Car rental companies and hotel operators are provided with similar
levels of participation from which to select. From 1992 to 1996, the number of
bookings for car rental companies and hotels grew at a compound annual rate of
13.6%.
The Company also provides associates, upon request, marketing data
derived from SABRE bookings for fees that vary depending on the amount and type
of information provided.
SUBSCRIBER ACCESS
Access to SABRE enables subscribers to electronically locate, price,
compare and purchase travel products and services provided by associates. The
Company tailors the interface and functionality of SABRE to the needs of its
different types of subscribers. Marketing is targeted to travel agencies,
corporations and individual consumers.
TRAVEL AGENTS. The Company provides travel agents with the hardware,
software, technical support and other services needed to use SABRE in return
for fees that typically vary with the travel agency's productivity, as measured
by the number of bookings generated. Such fees are payable over the term of the
travel agent's agreement with the Company, generally five years in the United
States and Latin America, three years in Canada and one year in Europe.
Because travel agencies have differing needs, based on, among other
things, volume and location, the Company has modified the SABRE interface to
meet the specific needs of different categories of travel agents. Travel agents
can choose interfaces that range from simple, text-based systems to
feature-laden graphical ones. For instance, using its expertise in its
solutions services business, the Company developed Turbo SABRE(TM), an advanced
point-of-sale interface that allows for customized screens and structured sales
and eliminates unique commands, reducing keystrokes and training requirements
for high-volume travel agencies who may need high levels of functionality.
Turbo SABRE also provides data sources other than SABRE, such as back office
hosts or LAN databases.
Planet SABRE(TM), which the Company introduced in February 1997, is a
graphical interface consisting of a suite of Windows(1) based applications. It
includes a graphical launch pad, which allows the user to move to any function
with one or two clicks of a mouse; a customizer feature, which allows travel
agencies to tailor Planet SABRE to meet their own specific needs; a tutorial;
online help; a place to store notes about clients, destinations or procedures;
and a suggestion system. Planet SABRE transforms SABRE from a complex
command-oriented system to an all-graphic interface with continued access to
the SABRE host system and its capabilities.
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(1) Windows is a registered trademark of Microsoft Corporation.
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SABRE interfaces are available in English, Spanish, Portuguese,
French, German, Italian and Japanese. In addition, the Company offers travel
agencies back-office accounting systems and further supports travel agencies by
offering a simplified method to develop and place their own marketing presence
on the World Wide Web.
CORPORATIONS. The Company sells Commercial SABRE(TM) to travel
agencies to supply to corporations with which they work closely. Using
Commercial SABRE, a traveler inputs booking details on a personal computer,
which are then transmitted to the SABRE travel agent who reviews the travel
plans, makes the reservations and issues the travel documents.
The Company also provides SABRE to corporations through SABRE Business
Travel Solutions(TM) ("SABRE BTS(TM)") released in October 1996. SABRE BTS is
designed for corporate travelers, travel arrangers and travel managers. It is a
fully-integrated product suite for travel planning and booking, expense
reporting and decision-making. SABRE BTS provides corporations with tools to
better manage travel costs, ensure compliance with corporate travel policies,
automate expense reporting and obtain real-time information on all aspects of
travel for a corporation. It will operate with Windows and corporate intranet
browser software.
INDIVIDUAL CONSUMERS. Through the Company's Travelocity(SM) and
easySABRE(SM) products, individual consumers can compare prices, make travel
reservations and obtain destination information. These products are available
to individual consumers free of charge (other than access fees charged by a
computer on-line service or Internet service provider).
Travelocity is accessible through the Internet and computer on-line
services. It currently features booking and purchase capability for all
airline, car rental and hotel companies for which booking and purchase
capability is available in SABRE. Travelocity also offers access to a database
of destination and interest information, chat groups and forums, articles from
travel correspondents and a merchandise mall offering a variety of
travel-related products. The Internet address for Travelocity is
http://www.travelocity.com/.
Travelocity was developed jointly by the Company and Worldview Systems
Corporation ("Worldview"). The Company recently acquired Worldview's interest
in the Travelocity brand name and Internet site. Worldview will continue to
provide the site's destination information, chat groups and forums.
The Company introduced easySABRE in 1985 as one of the world's first
home booking systems for travel. easySABRE is available through a number of
computer on-line information systems such as Prodigy and CompuServe(2) and on
the Internet. With easySABRE, consumers can view travel reservation information
and make bookings directly in SABRE for no fee (other than access fees charged
by a computer on-line service or Internet service provider). easySABRE has a
membership of more than 2.5 million, of which more than 100,000 members are
active users each month. The Internet address for easySABRE is
http://www.easySABRE.com/.
After reservations are made through either Travelocity or easySABRE,
if a ticket is needed, the consumer may have a travel agent issue the ticket,
have the Company's customer service center issue the ticket and deliver it to
the consumer or call the travel provider directly. The Company receives booking
fees from travel providers for purchases of their travel products and services
pursuant to reservations made through Travelocity and easySABRE.
INTERNATIONAL MARKETING. The Company is actively involved in marketing
SABRE internationally either directly or through joint venture or
distributorship arrangements, depending upon the dynamics of the particular
international market targeted. The Company's global marketing partners
principally include foreign airlines that have strong relationships with travel
agents in such airlines' primary markets and entities that operate smaller
global distribution systems or other travel-related network services.
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(2) Prodigy and CompuServe are the trademarks of their respective owners.
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COMPETITION
The Company competes in electronic travel distribution primarily
against other large and well-established global distribution systems. SABRE's
principal competitors include Amadeus/System One, Galileo/Apollo and Worldspan.
Amadeus/System One is owned by Air France, Continental Airlines, Iberia and
Lufthansa. Galileo/Apollo is owned by United Airlines, British Airways,
Swissair, KLM Royal Dutch and USAirways, among others. The Canadian affiliate
of Galileo/Apollo is owned by Air Canada. Worldspan is owned by Delta,
Northwest and TWA and is affiliated with ABACUS, an Asian global distribution
system. Each of these competitors offers many products and services similar to
those of the Company.
Moreover, although certain barriers exist for any new provider of
electronic commerce -- barriers such as the need for significant capital
investment to acquire or develop the hardware, software and network facilities
necessary to operate effectively a global distribution system -- the Company is
always faced with the potential of new competitors, particularly as new
channels for travel distribution develop.
Competition to attract and retain travel agent subscribers is very
intense. Factors affecting competitive success of global distribution systems
include depth and breadth of information, ease of use, reliability, service and
incentives to travel agents and range of products available to travel
providers, travel agents and consumers.
Although distribution through travel agents continues to be the
primary method of travel distribution, new channels of direct distribution to
businesses and consumers, through computer on-line services, the Internet and
private networks, are developing rapidly. The Company faces competition in
these channels not only from its principal competitors but also from possible
new entrants in the sale of travel products. Some of these new entrants may
have considerably greater financial resources than the Company and/or may be
businesses that are firmly established in these new channels of distribution.
For example, in July 1996 American Express Co. and Microsoft Corporation
announced an on- line travel booking service for corporations, which they have
scheduled for release in the first half of 1997. In addition, the Internet
permits consumers to have direct access to travel providers, thereby by-passing
both traditional travel agents and global distribution systems such as SABRE.
The Company has positioned its SABRE BTS, Travelocity and easySABRE products to
compete in these emerging distribution channels.
INDUSTRY REGULATION
Regulations promulgated by the U.S. Department of Transportation (the
"DOT") govern the relationship of SABRE with airlines and travel agencies.
Specifically, these regulations (the "U.S. Regulations") govern the
relationships of global distribution systems doing business in the United
States which are offered by an airline or an airline affiliate (like the
Company)("Airline-Affiliated Systems") with airlines doing business in the
United States that own five percent or more of a global distribution system (a
"GDS-Affiliated Airline") and with travel agencies. The U.S. Regulations do not
expressly govern the marketing of a global distribution system to consumers or
business travel departments, and the prevailing interpretation of the U.S.
Regulations is that the rules do not apply to SABRE BTS, Travelocity or
easySABRE. The current form of U.S. Regulations was adopted in 1992. The U.S.
Regulations will expire on December 31, 1997, unless they are extended.
One of the principal requirements of the U.S. Regulations is that
displays of airline services by Airline- Affiliated Systems must be
nondiscriminatory. This means that the global distribution system may not use
carrier identity in ordering the display of services or in building connecting
flights. Travel agencies, however, may utilize software to override the neutral
displays of an Airline-Affiliated System. Airline-Affiliated Systems are
required to charge the same fees to all air carriers for the same level of
service, to update information for all air carriers with the same degree of
care and timeliness and to provide, on request, detailed bills. Any product
feature offered to one or more air carriers must be offered to all other air
carriers on nondiscriminatory terms.
The U.S. Regulations also govern relationships between
Airline-Affiliated Systems and travel agents. The U.S. Regulations require,
among other things, that contracts between travel agency subscribers and an
Airline-Affiliated System be for no longer than five years. The rules also
forbid an Airline-Affiliated System from impeding a travel agent's use of
another system by, for example, making it a breach of contract for an agency to
fail to make a designated minimum number of bookings. The rules do allow,
however, systems to provide a credit against monthly fees to travel agents who
achieve certain booking thresholds, with the agency being obligated to pay the
system for any shortfall. The U.S. Regulations also forbid Airline-Affiliated
Systems from entering into
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contracts with travel agents containing exclusivity clauses or that require the
agency to maintain a certain percentage of computer terminals or bookings for a
particular system, vis-a-vis other systems.
The rules prohibit GDS-Affiliated Airlines from linking the payment of
commissions to travel agents to the travel agent's use of the system with which
the GDS-Affiliated Airline is affiliated. Further, an Airline-Affiliated System
may not ban travel agents from using software provided by third parties in
connection with the system's equipment, unless that software threatens to
impair the integrity of the system.
The U.S. Regulations require any GDS-Affiliated Airline doing business
in the United States to participate in competing Airline-Affiliated Systems at
the same level as it does in its affiliated system and to provide data on its
flights to competing Airline-Affiliated Systems that is as complete, accurate
and timely as the information given to its affiliated system, so long as the
competing system offers terms for participation that are commercially
reasonable.
The Company also has operations in Australia, Canada and the European
Union. The overall approach of the regulations for global distribution systems
in each of these three jurisdictions is similar to that of the United States.
In each of these jurisdictions, rules require nondiscriminatory displays of
airline services and nondiscriminatory booking fees, and forbid airlines
affiliated with global distribution systems from linking travel agency
commissions to the use of a particular system. Further, these rules to varying
extents forbid airlines affiliated with global distribution systems from
discriminating against competing systems with respect to the data that they
furnish.
There are, however, unique aspects of each set of rules. The European
rules dictate the precise order in which flights must be displayed and permit
travel agents to cancel their subscription agreements at the end of the first
year of the contract. The Canadian rules forbid contracts with travel agencies
of more than three years in duration and forbid certain uses of carriers' sales
forces for promoting global distribution systems. The prevailing interpretation
of the current Canadian and European Union rules is that the rules apply to
Travelocity and easySABRE. The European rules are currently under review and
are expected to be revised within the next year. The Company does not
anticipate that any revision will materially affect its operations in Europe.
The Company also has operations in the Caribbean, Latin America and
Asia. In jurisdictions in those regions, there is no regulation of global
distribution systems for travel products.
The Company currently does business in more than 70 countries outside
the U.S. The DOT, in conjunction with the U.S. Department of State, is charged
with assuring fair and open access for U.S. air carriers, and U.S. global
distribution systems owned by airlines, to overseas markets. In this regard,
the DOT has provided assistance to the Company in entering several overseas
markets. This assistance by the DOT to the Company could cease if SABRE were
not offered to travel agencies by an airline.
The regulations in Australia, Canada and the European Union also
contain, in varying degrees, remedies the Company can use to assist in the
eradication of discriminatory practices that may impede the Company's access to
the regulated market.
INFORMATION TECHNOLOGY SOLUTIONS
The Company is a leading provider of solutions to the airline
industry. The Company also employs its airline expertise to offer solutions to
other industries that face similar complex operations issues, including the
airport, railroad, logistics, hospitality and financial services industries.
The solutions offered by the Company include software development and product
sales, transactions processing and consulting. In addition, pursuant to an
information technology services agreement, the Company provides data
processing, network and distributed systems services to American and AMR's
other subsidiaries, fulfilling substantially all of their information
technology requirements. In 1996, approximately 32.1% of the Company's revenue
was generated by the provision of information technology solutions.
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SOLUTIONS
The Company offers a comprehensive set of solutions to the airline
industry. These solutions include: (i) consulting, which includes capabilities
ranging from reengineering to functional consulting; (ii) software development,
sales and licensing, which includes individual sales of specific products as
well as custom development and integration; and (iii) full solutions
outsourcing. Recruiting and retaining capable personnel, particularly those
with expertise in operations research, information technology and industrial
engineering, is vital to the provision of solutions by the Company.
The Company's solutions have helped American become one of the most
technologically advanced airlines in the world. The Company has provided
solutions to over 120 additional airlines or airline associations. These
solutions have many applications for airlines. For instance, (i) with Fare
Action Evaluator(SM), airlines can seek to enhance revenue using statistical
and database sources that estimate the economic implications of fare actions
before they are implemented, (ii) with AIRPRICE(SM), airlines can analyze and
manage fares and react to competitors' changes, (iii) with AIRFLITE(SM),
airlines can determine superior flight schedules and (iv) with AIRCREWS(SM),
airlines can improve crew member scheduling thus reducing staffing costs.
The Company also provides real-time transactions processing services
whereby the Company provides access to its hardware and software to airlines
for reservations, flight operations, departure control and other related
services. Local computer terminals at a customer's location are linked to the
Company's mainframes, and the Company maintains and operates the entire system
on a secure and confidential basis.
Building on its base of experience established in the development of
solutions for the airline industry, the Company has extended its software
solutions and consulting businesses to other industries, particularly those
that face complex operations issues similar to the airline industry, including
the airport, hospitality, logistics, railroad and financial services
industries.
The Company distributes its solutions and consulting services through
a sales and marketing organization with offices in ten cities on four
continents (Boston, Chicago, Dallas, Tulsa, Vancouver, London, Paris, Kuwait,
Hong Kong and Sydney). The Company also maintains agency relationships to
support sales efforts in key markets, including India, China and the Middle
East. To date, the Company has provided business solutions to nearly 400
clients located in more than 50 countries.
TECHNOLOGY SERVICES
The Company provides data processing, network and distributed systems
services to American and AMR's other subsidiaries. The Company fulfills
substantially all of American's data processing requirements and manages all
voice and data communication services for American and AMR's other
subsidiaries, including data networks, voice networks and radio services. The
Company also provides American with the services required to design, install,
operate and maintain its range of local area networks, desktop, mobile
computing and peripheral devices. In 1995, the Company introduced SABRE
Wireless(SM), which provides American's airport personnel the ability to access
SABRE from mobile devices.
As part of the Reorganization, the Company entered into an information
technology services agreement with American to provide these services for a
term of ten years for most services (three and five years for others).
COMPETITION
In information technology solutions, the Company competes both against
solutions companies and full-service providers of technology outsourcing, some
of which have considerably greater financial resources than the Company, and
against smaller companies that offer a limited range of products. Among the
Company's full-service competitors are Electronic Data Systems, IBM/ISSC,
Unisys, Andersen Consulting and Lufthansa Systems. Many of these competitors
have formed strategic alliances with large companies in the travel industry,
and the Company's access to these potential customers is thus limited. The
Company believes that its competitive position in the travel industry is
enhanced by its experience in developing systems for American and by its
ability to offer not only software applications but also systems development,
integration and maintenance and transactions processing services.
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INTELLECTUAL PROPERTY
In connection with the Reorganization, American transferred to the
Company the software used in the operation of the business of The SABRE Group.
This software, along with other software, proprietary information and
intellectual property rights, are significant assets of the Company. The
Company relies on a combination of copyright and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect these assets.
The Company's software and related documentation, however, are protected
principally under trade secret and copyright laws, which afford only limited
protection. In addition, the laws of some foreign jurisdictions may provide
less protection than the laws of the United States for the Company's
proprietary rights. Unauthorized use of the Company's intellectual property
could have a material adverse effect on the Company, and there can be no
assurance that the Company's legal remedies would adequately compensate it for
the damages to its business caused by such use.
EMPLOYEES
As of December 31, 1996 the Company had approximately 7,900 full-time
employees. A central part of the Company's philosophy is to attract and
maintain a highly capable staff. The Company considers its current employee
relations to be good. None of the Company's U.S.-based employees are
represented by a labor union.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in Fort Worth,
Texas, primarily in two buildings, one of which is owned by the Company and one
of which is leased from the Dallas/Fort Worth International Airport Board
pursuant to a lease that expires in 2023, subject to four renewal options,
exercisable by the Company, of five years duration each. In February 1997, the
Company purchased from American a second facility on the Fort Worth campus that
will be used to accommodate expected growth over the next few years. The
Company also leases office facilities in approximately 70 other locations
worldwide. The Company's data center is located in an underground facility in
Tulsa, Oklahoma (the "Data Center"). The land on which the Data Center is
located is leased from the Tulsa Airport Improvements Trust, a public trust
organized under the laws of the State of Oklahoma, pursuant to a lease that
expires in 2038.
SABRE and the Company's data processing services are dependent on the
Company's central computer operations and information processing facility
located in the Data Center, which contains over 120,000 square feet of space
and houses seventeen mainframes having 15.3 terabytes of storage and over 4,000
million instructions per second ("MIPS") of processing power. The SABRE system,
which is connected to nearly 200,000 computer terminals and operates 365 days a
year, constructs over one billion air fares (updated five times per business
day), averages 160 million requests for information per day and has processed
up to 5,291 requests for information per second (in March 1997). The Company
also utilizes a computer center located in one of its office buildings in Fort
Worth (the "Fort Worth Center"). At the Fort Worth Center, the Company operates
and manages a wide variety of computer systems as well as server based and
client/server distributed systems.
The Company's travel agency and corporate subscribers connect to SABRE
through leased access circuits. These leased access circuits, in turn, connect
to the domestic and international data networks leased by the Company from
Societe Internationale de Telecommunications Aeronautiques, which is owned by a
consortium of Airlines, including American, which connect to the Data Center.
The Company believes that its office facilities will be adequate for
its immediate needs and that additional or substitute space is available if
needed to accommodate expansion. The Company also believes that its Data
Center, Fort Worth Center and network access will be adequate for its immediate
and foreseeable needs. The Company, however, continuously invests in research
and development to upgrade these facilities to meet changing technological
needs.
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ITEM 3. LEGAL PROCEEDINGS
In June 1996, American Trans Air, Inc. filed suit against American in
the U.S. District Court for the Southern District of Indiana, Indianapolis
Division seeking a refund of $400,000 in booking fees it claims were assessed
for illegitimate bookings. Prior to the filing by American Trans Air of its
lawsuit, America West Airlines Inc. made a similar claim to withhold over $1.0
million in booking fees payable to American. American and SABRE Associates,
Inc., an affiliate of the Company, filed suit in the District Court of Tarrant
County, Texas, 153rd Judicial District, to recover the unpaid booking fees from
America West. In connection with the Reorganization, the Company is the
successor in interest to American in both of these cases. The claims of both
American Trans Air, Inc. and America West relate largely to booking fees
charged by the Company, and 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
either American Trans Air or America West were to prevail on these claims,
other associates may also make similar claims. The Company believes, however,
that the booking fees are properly charged pursuant to its contracts with
associates. The Company is vigorously defending its actions in this regard and
believes that the claims of American Trans Air, Inc. and America West can be
successfully defended or resolved without any material adverse effect on the
Company's financial condition or results of operations.
In 1994, Alaska Airlines filed a Petition for Rulemaking with the DOT
seeking a rule that would bar a global distribution system from requiring
airlines that are not GDS-Affiliated Airlines to participate in such system at
the same level of functionality as the airline participates in other global
distribution systems. The Company believes that this Petition for Rulemaking
was a result of a breach of contract suit brought by American against Alaska
Airlines in 1994 in the U.S. District Court for the Northern District of Texas.
In its complaint, American alleged that Alaska Airlines breached its
participating carrier agreement by obtaining greater functionality from other
global distribution systems than it obtained from SABRE. American sought
declaratory relief. In connection with the Reorganization, the Company is the
successor in interest to American in this litigation. On September 19, 1996,
the U.S. District Court for the Northern District of Texas dismissed the
lawsuit on the grounds that, as the Company's claims were based on state law,
they were preempted by federal law. The parties recently settled the dispute
and the court has vacated its earlier order.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 3, 1996, AMR, as the 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
the State of Delaware on October 8, 1996.
Also on October 3, 1996, AMR, as the 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 Employee Stock
Purchase Plan.
PART II
- --------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock is traded on the New York Stock
Exchange (symbol TSG). The approximate number of record holders of the
Company's Class A Common Stock at March 24, 1997 was 382. All of the
107,374,000 shares of the Company's Class B Common Stock are owned by AMR and
there is no public trading market for such shares.
9
<PAGE> 10
The range of closing market prices for the Company's Class A Common
Stock on the New York Stock Exchange since the Company's initial public
offering of Class A Common Stock on October 11, 1996 was:
<TABLE>
<CAPTION>
High Low
--------- ---------
<S> <C> <C>
October 11, 1996 through December 31, 1996 $ 33.00 $ 26.00
</TABLE>
No cash dividends on Class A Common Stock or Class B Common Stock were
declared or paid during 1996.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ---------- ---------- ---------- ----------
(IN MILLIONS, EXCEPT PER SHARE DATA AND OTHER DATA WHERE INDICATED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA (1):
Revenues $ 1,621.9 $ 1,529.6 $ 1,406.7 $ 1,258.2 $ 1,173.8
Operating Expenses 1,295.2 1,149.2 1,056.5 1,004.5 929.5
----------- ---------- ---------- ---------- ----------
Operating Income 326.8 380.4 350.2 253.7 244.3
Other Income (Expense), net (2) (20.9) (10.3) (26.1) (84.7) (173.2)
----------- ---------- ---------- ---------- ----------
Income Before Income Taxes 305.9 370.1 324.1 169.0 71.1
Income Taxes 119.3 144.2 126.9 69.0 38.8
----------- ---------- ---------- ---------- ----------
Income before Cumulative Effect
of Accounting Change 186.6 225.9 197.2 100.0 32.3
Cumulative Effect of Accounting
Change (3) -- -- -- -- 19.0
----------- ---------- ---------- ---------- ----------
Net Earnings $ 186.6 $ 225.9 $ 197.2 $ 100.0 $ 13.3
=========== ========== ========== ========== ==========
Earnings per common share $ 1.43
=========== ========== ========== ========== ==========
BALANCE SHEET DATA
(AT END OF PERIOD) (1):
Current Assets $ 694.5 $ 271.2 $ 404.3 $ 107.1 $ 91.1
Total Assets 1,287.1 729.4 873.5 584.3 550.1
Current Liabilities (2) 289.8 218.6 503.2 346.4 154.2
Debenture Payable to AMR 317.9 -- -- -- --
Stockholder's Net Investment -- 432.1 289.5 158.0 244.7
Stockholders' Equity 569.6 -- -- -- --
OTHER DATA (1):
Operating Income as a Percentage of
Revenue 20.1% 24.9% 24.9% 20.2% 20.8%
Percentage of Revenue from Non-
affiliated Customers 69.2% 64.2% 58.1% 56.6% 55.0%
Reservations Booked Using SABRE 348.3 323.4 311.1 275.2 255.3
Cash Flows from Operating Activities $ 417.3 $ 395.9 $ 265.3 $ 332.4 $ 328.1
Capital Expenditures $ 185.7 $ 164.6 $ 168.9 $ 176.6 $ 128.8
</TABLE>
(1) The Company has significant transactions with AMR and American. See Note 4
to the Consolidated Financial Statements as the terms of many of the agreements
with AMR and its affiliates were revised effective January 1, 1996 as a result
of the plans for the Reorganization.
(2) The operating results for the years ended December 31, 1992 and 1993
include a provision for losses of $165 million and $71 million, respectively,
associated with a reservation system project and resolution of related
litigation. The balance sheets as of December 31, 1992 and 1993 include current
liabilities for the losses of $28 million and $133 million, respectively.
(3) Effective January 1, 1992, the Company adopted FAS 106, "Accounting for
Post Retirement Benefits Other Than Pensions", changing the method of
accounting for those benefits. The cumulative effect of adopting FAS 106 as of
January 1, 1992 was a charge of $19 million, net of taxes of $10 million.
10
<PAGE> 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
SUMMARY
During 1996 the Company generated approximately 67.9% of its revenue
from electronic travel distribution services and approximately 32.1% 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>
Year ended December 31,
-----------------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Affiliation
Unaffiliated Customers 69.2% 64.2% 58.1%
Affiliated Customers 30.8 35.8 41.9
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
Geographical
United States 82.5% 83.6% 85.0%
International 17.5 16.4 15.0
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
Total revenues have grown at a compound annual growth rate of 7.4% for
1994 through 1996. Revenues from affiliated customers as a percent of total
revenues have declined as the Company's external business has grown. Revenues
from unaffiliated customers have grown at a compound annual growth rate of
17.2% for the three years ended December 31, 1996, to $1,122 million in 1996.
Revenues from affiliated customers decreased for the same time period due to
the impact of the Affiliate Agreements (described below) on revenues in 1996.
The Company expects that the proportion of revenues represented by unaffiliated
customers revenues will continue to increase. International revenues have
increased as a percent of total revenues. International revenues have grown at
a compound annual growth rate of 16.2% for the three year period ended December
31, 1996, to $284 million in 1996, while revenues from the United States have
grown at a compound annual rate of 5.8% over the same period, to $1,338 million
in 1996.
The Company's primary expenses from providing travel distribution
services and information technology solutions consist of salaries, benefits and
other employee related costs, depreciation and amortization, communication
costs, equipment maintenance costs and subscriber incentives. Salaries,
benefits and other employee related costs, depreciation and amortization and
communication costs represented over 69% of 1996 total operating expenses. From
1994 through 1996, salaries and benefits have grown at a rate higher than that
of revenues in order to support the Company's growth, while depreciation and
amortization costs have decreased primarily due to the benefits of price and
performance improvements for Data Center equipment and subscriber equipment. In
addition, communication expense has decreased due to rate reductions. Expenses
in 1996 were impacted by the Affiliate Agreements (as described below) entered
into with American, including increased employee travel costs and other
expenses, and marketing support payments to American. As a result, operating
income as a percentage of revenue decreased from 24.9% in 1994 to 20.1% in
1996.
11
<PAGE> 12
SEASONALITY
The following table sets forth quarterly financial data for the Company (in
millions):
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
1996
Revenues $427.8 $410.4 $407.4 $376.3
Operating income 115.6 82.0 87.9 41.3
Net earnings 70.0 49.1 45.1 22.4
Operating income as a percent of revenue 27.0% 20.0% 21.6% 11.0%
Reservations booked using SABRE 91.9 89.3 89.3 77.9
1995
Revenues $384.6 $383.1 $393.3 $368.3
Operating income 118.1 101.4 108.2 52.8
Net earnings 66.9 60.1 66.9 31.9
Operating income as a percent of revenue 30.7% 26.5% 27.5% 14.3%
Reservations booked using SABRE 86.0 83.7 81.6 72.3
</TABLE>
The travel industry is seasonal in nature. Bookings, and thus booking
fees charged for the use of SABRE, decrease significantly each year in the
fourth quarter, primarily in December, due to early bookings by customers for
travel during the holiday season and a decline in business travel during the
holiday season.
AFFILIATE AGREEMENTS WITH AMR AND AMERICAN
The Company and AMR and American have entered into an agreement for
the provision of information technology solutions to American by the Company
(the "Technology Services Agreement"), an agreement for the provision by
American of marketing support for the Company's products targeted toward travel
agencies and support of SABRE BTS, Travelocity and easySABRE (the "Marketing
Cooperation Agreement"), an agreement for the provision of management services
by American to the Company (the "Management Services Agreement") and agreements
for the provision of travel services by American to the Company and its
employees (the "Travel Privileges Agreement" and "Corporate Travel Agreement").
These agreements are collectively referred to as the "Affiliate Agreements".
See Note 4 to the Consolidated Financial Statements for a description of each
agreement. The resulting rates may represent an increase or decrease over
previous rates. The financial terms of the Affiliate Agreements were applied to
the Company's operations commencing January 1, 1996, and the application
thereof resulted in a reduction in revenues and an increase in expenses for
1996 as compared to 1995.
The base term of the Technology Services Agreement expires June 20,
2006. The terms of the services to be provided by the Company to American,
however, vary. For 1996, revenues from services provided under the Technology
Services Agreement with a service term of (i) three years represented
approximately 5.8% of total revenues, (ii) five years represented approximately
0.5% of total revenues and (iii) ten years represented approximately 16.6% of
total revenues.
The Affiliate Agreements generally establish pricing and service
terms, and certain agreements, including the Technology Services Agreement,
provide for periodic price adjustments that may take into account the market
for similar services. Commencing in 1998, the formulas for annually adjusting
certain rates under the Technology Services Agreement will be adjusted every
two years through negotiations of the parties which are to be guided by
benchmarking procedures set forth in the agreement.
The Company has entered into a Tax-Sharing Agreement with AMR dated as
of July 1, 1996 (the "Tax-Sharing Agreement"), which in most respects
formalizes the Company's previous arrangements with AMR. See Note 2 to the
Consolidated Financial Statements.
12
<PAGE> 13
The Company also has 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 under the
circumstances described in Note 2 to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
ELECTRONIC TRAVEL DISTRIBUTION. Electronic travel distribution revenues for the
year ended December 31, 1996 increased approximately $95 million, 9.4%,
compared to the year ended December 31, 1995, from $1,007 million to $1,102
million. The increase was primarily due to growth in booking fees from
associates from $904 million to $1,007 million. This growth was driven by an
increase in booking volumes partially attributable to international expansion
in Europe and Latin America, an overall increase in the price per booking
charged to associates and a migration of associates to higher participation
levels within SABRE.
Cost of revenues for electronic travel distribution increased
approximately $107 million, 16.3%, from $656 million to $763 million. This
increase was primarily attributable to an increase in salaries and benefits,
the Affiliate Agreements and subscriber 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 annual
salary increases. The Affiliate Agreements, entered into with American,
resulted in an increase in expenses estimated to be approximately $24 million
for 1996. Subscriber incentive expenses increased in order to maintain and
expand the Company's travel agency subscriber base.
INFORMATION TECHNOLOGY SOLUTIONS. Revenues from information technology
solutions for the year ended December 31, 1996 decreased approximately $2
million, 0.5%, compared to the year ended December 31, 1995, from $522 million
to $520 million. Revenues from unaffiliated customers increased approximately
$27 million, offset by a decrease in revenues from such services provided to
AMR of $29 million primarily due to application of the financial terms of the
Technology Services Agreement.
Cost of revenues for information technology solutions increased
approximately $12 million, 3.2%, from $377 million to $389 million. This
increase was primarily attributable to an increase in salaries and benefits and
the Affiliate Agreements, offset by a decrease in depreciation and amortization
expense. Salaries and benefits increased due to an increase of approximately 8%
in the average number of employees necessary to support the Company's business
growth and annual salary increases. The Affiliate Agreements resulted in an
increase in expenses estimated to be approximately $8 million for 1996. The
decrease in depreciation and amortization expense is primarily due to the
benefits of price and performance improvements for Data Center equipment and
the sale to a third party of certain computer network equipment during the year
with a net book value of approximately $25 million.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $26 million, 22.1%, from $117 million to $143
million primarily due to an increase in salaries and benefits, legal and
professional fees and the Affiliate Agreements. The Affiliate Agreements
resulted in an increase in selling, general and administrative expenses
estimated to be approximately $4 million for 1996.
OPERATING INCOME. Operating income decreased $54 million, 14.1%, from $381
million to $327 million. Operating margins decreased from 24.9% in 1995 to
20.1% in 1996 due to an increase in revenues of 6.0% while operating expenses
increased 12.7%.
INTEREST INCOME. Interest income increased $6 million due to higher balances
maintained in the Company's short-term investment accounts.
INTEREST EXPENSE. Interest expense increased $21 million primarily due to
interest expense incurred on the Debenture (as defined below) issued to
American in 1996.
13
<PAGE> 14
OTHER EXPENSES. Other expenses decreased $5 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 provision for income taxes was $119 million and $144 million
in 1996 and 1995, respectively. See Note 6 to the Consolidated Financial
Statements for additional information regarding taxes.
NET EARNINGS. Net earnings decreased $39 million, 17.4%, from $226 million to
$187 million, primarily due to the decrease in operating income.
1995 COMPARED TO 1994
ELECTRONIC TRAVEL DISTRIBUTION. Electronic travel distribution revenues for the
year ended December 31, 1995 increased approximately $101 million, 11.1%,
compared to the year ended December 31, 1994, from $906 million to $1,007
million. The increase was primarily due to growth in booking fees from
associates from $810 million to $904 million. This growth was driven by an
overall increase in the price per booking charged to associates, a migration of
associates to higher participation levels within SABRE and an increase in
booking volumes primarily attributable to international expansion in Europe and
Latin America.
Cost of revenues for electronic travel distribution increased
approximately $72 million, 12.4%, from $584 million to $656 million. This
increase was primarily attributable to an increase in salaries and benefits,
travel service costs from American and subscriber incentive expenses. Salaries
and benefits increased due to an increase of approximately 4% in the average
number of employees necessary to support the Company's revenue growth and
annual salary increases. Travel service costs increased due to an increase in
the number of employees and an increase in the negotiated rates with American.
See Note 4 to the Consolidated Financial Statements. Subscriber incentive
expenses increased in order to maintain and expand the Company's travel agency
subscriber base.
INFORMATION TECHNOLOGY SOLUTIONS. Revenues from information technology solutions
for the year ended December 31, 1995 increased approximately $22 million, 4.4%,
compared to the year ended December 31, 1994, from $501 million to $523 million.
Revenues from information technology solutions provided to Canadian Airlines
International ("Canadian") under the agreement between Airline Management
Services Holding, Inc. ("AMS"), an AMR subsidiary, and Canadian, which began
producing revenues in November 1994, increased $36 million due to the impact of
a full year of services provided under the agreement. These increases were
offset by a decrease in revenues from such services provided to AMR primarily
due to a change in the pricing structure implemented in 1995.
Cost of revenues for information technology solutions increased
approximately $16 million, 4.4%, from $361 million to $377 million. This
increase was primarily attributable to an increase in salaries and benefits and
travel service costs from American. Salaries and benefits increased due to an
increase of approximately 4% in the average number of employees necessary to
support the Company's revenue growth and annual salary increases. Travel
service costs increased due to an increase in the number of employees and an
increase in the negotiated rates with American. See Note 4 to the Consolidated
Financial Statements.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $5 million, 4.3%, from $112 million to $117
million primarily due to an increase in salaries and benefits. Salaries and
benefits increased due to an increase of approximately 4% in the average number
of employees necessary to support the Company's revenue growth and annual
salary increases.
OPERATING INCOME. Operating income increased $30 million, 8.6%, from $350
million to $380 million. Operating margins were 24.9% for both 1995 and 1994
due to revenues and expenses increasing at substantially the same rate.
INTEREST EXPENSE. Interest expense decreased approximately $13 million due to
a reduction in amounts payable to affiliates.
OTHER EXPENSES. Other expenses decreased $6 million due to a reduction in the
losses from joint ventures in which the Company owns an interest accounted for
under the equity method.
14
<PAGE> 15
INCOME TAXES. The provision for income taxes was $144 million and $127 million
in 1995 and 1994, respectively. See Note 6 to the Consolidated Financial
Statements for additional information regarding taxes.
NET EARNINGS. Net earnings increased $29 million, 14.6%, from $197 million to
$226 million, primarily due to the increase in operating income.
LIQUIDITY AND CAPITAL RESOURCES
The Company had substantial liquidity at December 31, 1996, with
approximately $443 million in cash and cash equivalents and short-term
investments and $405 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 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 cash in short-term
marketable securities, consisting primarily of certificates of deposit,
bankers' acceptances, commercial paper, corporate notes and government notes.
The Company has funded its operations through cash generated from
operations. The Company's cash provided by operating activities of $417 million
in 1996 and $396 million in 1995 was primarily attributable to net earnings
before noncash charges.
Capital investment principally has been related to purchases of
computer equipment to be provided to subscribers of SABRE and to be used in
data processing services. Other investments were related to cash purchases of
short-term marketable securities. Capital expenditures for 1996 were $186
million and in 1995 were $165 million.
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 (the "Canadian Subcontract"). On November
1, 1996, Canadian announced that it was taking certain actions to improve its
cash flow. Among other things, Canadian asked its vendors to reduce the pricing
of the services they provide. American has conceptually agreed to reduce its
fee to Canadian by $3 million per month. Regardless of this 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
twelve months ended December 31, 1996 were approximately $51 million. In
December 1996, American reimbursed the Company for approximately $40 million of
deferred costs associated with the installation and implementation of certain
systems under the Canadian Subcontract, which costs are included in other
investing activity.
In 1995, certain of The SABRE Group entities from which the Company
was formed distributed $394 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.
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 a
portion of a note payable by American to AMR. Because the assets and
liabilities of the divisions and subsidiaries of American
15
<PAGE> 16
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 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 and accrued interest is payable each September 30
and March 31. The average interest rate on the Debenture for 1996 was 7.1%. The
Company may prepay the principal balance in whole or in part at any interest
payment date.
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 $589
million after deducting underwriting discounts, commissions and other expenses
payable by the Company. The Company used approximately $532 million of the net
proceeds to repay a portion of the Debenture.
The Company expects that the principal use of funds in the foreseeable
future will be for capital expenditures, software product development,
acquisitions and working capital. Capital expenditures will consist of
purchases of equipment for the Data Center, as well as computer equipment,
printers, fileservers and workstations to support (i) updating subscriber
equipment primarily for travel agencies, (ii) expansion of the subscriber base
and (iii) new product capital requirements. The Company has estimated capital
expenditures of approximately $240 million to $280 million for 1997. The
Company believes available balances of cash and cash equivalents and short-term
investments combined with cash flows from operations will be sufficient to meet
the Company's capital requirements.
The Company currently intends to retain its earnings to finance future
growth and, therefore, does not anticipate paying any cash dividends on its
common stock in the foreseeable future. Any determination as to the payment of
dividends will depend upon the future results of operations, capital
requirements and financial condition of the Company and its subsidiaries and
such other factors as the Board of Directors of the Company may consider,
including any contractual or statutory restrictions on the Company's ability to
pay dividends.
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 or 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
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 successfully conclude alliances.
16
<PAGE> 17
INFLATION
The Company believes that inflation has not had a material effect on
its results of operations.
PRO FORMA STATEMENT OF INCOME DATA
The pro forma statement of income data in the table below is based
upon the historical financial statements of the Company and assumes the
Reorganization and the Offering were consummated on January 1, 1995. The pro
forma information is presented for illustrative purposes only and is not
necessarily indicative of the operating results that would have occurred if
such transactions had been consummated on January 1, 1995, nor is it
necessarily indicative of future results of operations.
The pro forma statement of income data should be read in conjunction
with the Consolidated Financial Statements and related notes thereto of the
Company included elsewhere herein. Pro forma adjustments include the impact of
the Affiliate Agreements and the Debenture as well as other adjustments
associated with the Reorganization and the Offering. See Note 4 to the
Consolidated Financial Statements. Amounts shown below are in thousands, with
the exception of per share amounts.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Revenues
Electronic travel distribution $ 1,101,791 $ 986,057
Information technology solutions 514,098 477,290
----------- -----------
Total revenues 1,615,889 1,463,347
Operating expenses
Cost of revenues
Electronic travel distribution 764,536 688,250
Information technology solutions 382,387 369,984
Selling, general and administrative 142,618 120,515
----------- -----------
Total operating expenses 1,289,541 1,178,749
----------- -----------
Operating income 326,348 284,598
Other income (expense)
Interest income 13,282 7,325
Interest expense (25,107) (23,580)
Other, net (6,826) (11,614)
Income before provision for income taxes 307,697 256,729
Provision for income taxes 120,000 100,019
----------- -----------
Net earnings $ 187,697 $ 156,710
=========== ===========
Earnings per common share $ 1.44 $ 1.20
=========== ===========
</TABLE>
PRO FORMA 1996 COMPARED TO 1995
ELECTRONIC TRAVEL DISTRIBUTION. Electronic travel distribution pro forma
revenues for the year ended December 31, 1996 increased approximately $116
million, 11.7%, compared to the year ended December 31, 1995, from $986 million
to $1,102 million. The increase was primarily due to growth in booking fees
from associates from $904 million to $1,007 million. This growth was driven by
an increase in booking volumes partially attributable to international
expansion in Europe and Latin America, an overall increase in the price per
booking charged to associates, and a migration of associates to higher
participation levels within SABRE.
Pro forma cost of revenues for electronic travel distribution
increased approximately $77 million, 11.2%, from $688 million to $765 million.
This increase was primarily attributable to an increase in salaries and
benefits and subscriber 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. Subscriber
incentive expenses increased in order to maintain and expand the Company's
travel agency subscriber base.
17
<PAGE> 18
INFORMATION TECHNOLOGY SOLUTIONS. Pro forma revenue from information technology
solutions for the year ended December 31, 1996 increased approximately $37
million, 7.7%, compared to the year ended December 31, 1995, from $477 million
to $514 million due to an increase in revenues from unaffiliated customers of
approximately $27 million and from AMR of approximately $10 million.
Pro forma cost of revenues for information technology solutions
increased approximately $12 million, 3.2%, from $370 million to $382 million.
This increase was primarily attributable to an increase in salaries and
benefits, offset by a decrease in depreciation and amortization expense.
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 decrease in depreciation expense is primarily
due to the benefits of price and performance improvements for Data Center
equipment and the sale to a third party of certain computer network equipment
during the year with a net book value of approximately $25 million.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Pro forma selling, general and
administrative expenses increased $22 million, 18.3%, from $121 million to $143
million primarily due to an increase in salaries and benefits and legal and
professional fees.
OPERATING INCOME. Pro forma operating income increased $42 million, 14.7%, from
$284 million to $326 million. Operating margins increased from 19.4% to 20.2%
due to the increase in pro forma revenues of 10.4%, while pro forma operating
expenses increased 9.4%.
INTEREST INCOME. Pro forma interest income increased $6 million due to higher
balances maintained in the Company's short-term investment accounts.
OTHER EXPENSES. Pro forma other expenses decreased $5 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 $120 million and
$100 million for 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 $31 million, 19.8%, from $157
million to $188 million due to the increase in operating income.
18
<PAGE> 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors 20
Consolidated Balance Sheets 21
Consolidated Statements of Income 22
Consolidated Statements of Cash Flows 23
Consolidated Statement of Stockholders' Equity 24
Notes to Consolidated Financial Statements 25
</TABLE>
19
<PAGE> 20
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
The SABRE Group Holdings, Inc.
We have audited the accompanying consolidated balance sheets of The
SABRE Group Holdings, Inc. and subsidiary as of December 31, 1996 and 1995, and
the related consolidated statements of income and stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe 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 consolidated financial
position of The SABRE Group Holdings, Inc. and subsidiary at December 31, 1996
and 1995, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
January 13, 1997
20
<PAGE> 21
THE SABRE GROUP HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 15,992 $ 94,861
Short-term investments 426,945 --
Accounts receivable, net 197,015 138,972
Prepaid expenses 13,630 5,851
Deferred income taxes 40,946 31,539
----------- -----------
TOTAL CURRENT ASSETS 694,528 271,223
PROPERTY AND EQUIPMENT
Buildings and leasehold improvements 302,093 12,250
Furniture, fixtures and equipment 21,050 6,049
Service contract equipment 545,302 529,918
Computer equipment 355,872 422,050
----------- -----------
1,224,317 970,267
Less accumulated depreciation and amortization (664,603) (589,549)
----------- -----------
TOTAL PROPERTY AND EQUIPMENT 559,714 380,718
OTHER ASSETS 32,841 77,465
----------- -----------
TOTAL ASSETS $ 1,287,083 $ 729,406
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 96,622 $ 53,716
Accrued compensation and related benefits 55,547 33,696
Other accrued liabilities 110,391 77,071
Payable to affiliates 27,267 54,102
----------- -----------
TOTAL CURRENT LIABILITIES 289,827 218,585
DEFERRED INCOME TAXES 43,077 30,943
OTHER POSTRETIREMENT BENEFITS 50,070 37,960
OTHER LIABILITIES 16,595 9,781
DEBENTURE PAYABLE TO AMR 317,873 --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock: $.01 par value; 20,000 shares
authorized; no shares issued -- --
Common stock
Class A: $.01 par value; 250,000 shares authorized;
23,396 shares issued and outstanding 234 --
Class B: $.01 par value; 107,374 shares authorized;
107,374 shares issued and outstanding 1,074 --
Additional paid-in capital 591,885 --
Retained deficit (23,552) --
Stockholder's net investment -- 432,137
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 569,641 432,137
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,287,083 $ 729,406
=========== ===========
</TABLE>
See notes to the consolidated financial statements.
21
<PAGE> 22
THE SABRE GROUP HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues
Electronic travel distribution $ 1,101,791 $ 1,006,926 $ 905,908
Information technology solutions 520,196 522,690 500,771
----------- ----------- -----------
Total revenues 1,621,987 1,529,616 1,406,679
Operating expenses
Cost of revenues
Electronic travel distribution 763,261 655,973 583,847
Information technology solutions 389,352 376,453 360,705
Selling, general and administrative 142,573 116,766 111,974
----------- ----------- -----------
Total operating expenses 1,295,186 1,149,192 1,056,526
----------- ----------- -----------
Operating income 326,801 380,424 350,153
Other income (expense)
Interest income 13,282 7,325 9,979
Interest expense (27,401) (6,060) (18,892)
Other, net (6,826) (11,614) (17,180)
----------- ----------- -----------
Income before provision for income taxes 305,856 370,075 324,060
Provision for income taxes 119,282 144,224 126,899
----------- ----------- -----------
Net earnings $ 186,574 $ 225,851 $ 197,161
=========== =========== ===========
Earnings per common share data
Pro forma earnings per common share $ 1.73
===========
Earnings per common share $ 1.43
===========
Common and common equivalent shares
used in per share calculations 130,758 130,604
=========== ===========
</TABLE>
See notes to the consolidated financial statements.
22
<PAGE> 23
THE SABRE GROUP HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 186,574 $ 225,851 $ 197,161
Adjustments to reconcile net earnings to cash
provided by operating activities:
Depreciation and amortization 165,064 171,471 174,953
Deferred income taxes (28,346) (12,385) 50,232
Other 7,962 7,865 7,534
Changes in operating assets and liabilities
Accounts receivable (58,043) (24,946) (28,685)
Prepaid expenses (7,779) (3,247) (1,401)
Other assets 7,194 (1,915) (1,113)
Accrued compensation and related benefits 21,851 182 14,618
Accounts payable and other accrued liabilities 76,226 29,662 8,449
Payable to affiliates 27,267 -- --
Partnership settlement -- -- (158,400)
Postretirement benefits 4,310 4,780 4,790
Other liabilities 15,048 (1,389) (2,884)
--------- --------- ---------
Cash provided by operating activities 417,328 395,929 265,254
INVESTING ACTIVITIES
Additions to property and equipment (185,713) (164,580) (168,875)
Net increase in short-term investments (426,945) -- --
Other investing activities, net 25,681 (20,405) (61,394)
Proceeds from sales of equipment 33,582 6,169 12,663
--------- --------- ---------
Cash used for investing activities (553,395) (178,816) (217,606)
FINANCING ACTIVITIES
Cash advances from (to) affiliates -- (236,367) 215,308
Contributions from affiliates -- 244,666 --
Distributions to affiliates -- (393,507) --
Proceeds from issuance of common stock 589,089 -- --
Proceeds from exercise of stock options 236 -- --
Payment on Debenture payable to AMR (532,127) -- --
--------- --------- ---------
Cash provided by (used for) financing activities 57,198 (385,208) 215,308
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (78,869) (168,095) 262,956
Cash and cash equivalents at beginning of the period 94,861 262,956 --
--------- --------- ---------
Cash and cash equivalents at end of the period $ 15,992 $ 94,861 $ 262,956
========= ========= =========
Supplemental cash flow information:
Cash payments to affiliates for income taxes $ 128,932 $ 148,322 $ 138,886
========= ========= =========
Cash payments to affiliates for interest $ 15,524 $ -- $ 8,913
========= ========= =========
</TABLE>
See notes to the consolidated financial statements.
23
<PAGE> 24
THE SABRE GROUP HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Class A Class B Additional Stockholder's
Common Common Paid-in Retained Net
Stock Stock Capital Deficit Investment Total
-------------- ---------------- ---------- --------- ------------- ---------
Shares Amount Shares Amount
------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 -- $ -- -- $ -- $ -- $ -- $ 157,966 $ 157,966
Distributions to affiliates -- -- -- -- -- -- (65,663) (65,663)
Net earnings -- -- -- -- -- -- 197,161 197,161
------ ---- ------- ------ --------- --------- --------- ---------
Balance December 31, 1994 -- -- -- -- -- -- 289,464 289,464
Contributions from affiliates -- -- -- -- -- -- 310,329 310,329
Distributions to affiliates -- -- -- -- -- -- (393,507) (393,507)
Net earnings -- -- -- -- -- -- 225,851 225,851
------ ---- ------- ------ --------- --------- --------- ---------
Balance at December 31, 1995 -- -- -- -- -- -- 432,137 432,137
Net earnings prior to the Reorganization -- -- -- -- -- -- 119,050 119,050
Capitalization of the Company in connection
with the Reorganization
Reclassification of stockholder's net
investment -- -- -- -- -- 551,187 (551,187) --
Issuance of Debenture payable to AMR -- -- -- -- -- (850,000) -- (850,000)
Transfer of fixed assets -- -- -- -- -- 159,451 -- 159,451
Other -- -- -- -- -- 48,254 -- 48,254
Issuance of 23,230 shares of Class A
Common Stock in initial public offering 23,230 232 -- -- 588,857 -- -- 589,089
Reclassification of shares of common stock
held by AMR into 107,374 shares Class B
Common Stock -- -- 107,374 1,074 (1,074) -- -- --
Issuance of Class A Common Stock pursuant
to stock option and restricted stock
incentive plans 166 2 -- -- 4,102 -- -- 4,104
Net earnings subsequent to the Reorganization -- -- -- -- -- 67,524 -- 67,524
Unrealized gain on investments -- -- -- -- -- 32 -- 32
------ ---- ------- ------ --------- --------- --------- ---------
Balance at December 31, 1996 23,396 $234 107,374 $1,074 $ 591,885 $ (23,552) $ -- $ 569,641
====== ==== ======= ====== ========= ========= ========= =========
</TABLE>
See notes to the consolidated financial statements.
24
<PAGE> 25
THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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
(as 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, the businesses of American and AMR constituting The SABRE
Group, an operating unit of AMR.
On July 2, 1996, AMR reorganized the businesses of The SABRE Group (the
"Reorganization"). As part of the Reorganization, the Company was
incorporated as a Delaware Corporation and a direct wholly-owned 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.
In connection with the Reorganization on July 2, 1996, the Company issued
1,000 shares of common stock, par value $.01 per share, to American which
shares were subsequently 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 $27.00 per share resulted in net proceeds to the Company of
approximately $589 million, after deducting underwriting discounts and
commissions and other expenses payable by the Company. The Company used
approximately $532 million of the net proceeds to repay a portion of a
debenture payable to AMR. See Note 4.
Concurrently with the Offering, the 1,000 shares of Common Stock held by
AMR were reclassified into 107,374,000 shares of Class B Common Stock of
the Company. See Note 8.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The consolidated financial statements have been
prepared using AMR's historical basis in the assets and liabilities of the
Company. The consolidated financial statements reflect the results of
operations, financial condition and cash flows of the Company as a
component and, subsequent to the Offering, a majority owned subsidiary of
AMR and may not be indicative of actual results of operations and financial
position of the Company under other ownership. Management believes the
consolidated income statements include a reasonable allocation of
administrative costs, which are described in Note 4, incurred by AMR on
behalf of the Company.
CONSOLIDATION - All significant accounts and transactions among the
consolidated entities have been eliminated. For financial reporting
purposes for periods prior to the Reorganization, the equity accounts of
the previous divisions of American and subsidiaries of AMR have been
accumulated into a single disclosure caption entitled Stockholder's Net
Investment.
CASH AND CASH EQUIVALENTS - Prior to the Reorganization, 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. Cash equivalents
are carried at cost plus accrued interest, which approximates fair value.
Effective with the Reorganization, the Company began maintaining its own
cash management system with separate cash and investment accounts from
American. Subsequent to the Reorganization, the Company does not maintain
cash equivalents.
25
<PAGE> 26
THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION - The Company's depreciation and amortization
policies are as follows:
<TABLE>
<S> <C>
Property and Equipment:
Buildings 30 years
Service contract equipment 3 to 5 years
Computer equipment 3 to 5 years
Furniture and fixtures 5 to 15 years
Leasehold improvements Lesser of lease term or useful life
Purchased software 3 to 5 years
Other Assets:
Internally developed software 3 to 5 years
</TABLE>
Property and equipment are stated at cost less accumulated depreciation and
amortization, which is calculated on the straight-line basis. Service
contract equipment consists of hardware provided primarily to subscribers
of SABRE. Depreciation of property and equipment totaled approximately $157
million, $163 million and $168 million in 1996, 1995 and 1994,
respectively. Other assets are amortized on the straight-line basis over
the periods indicated.
DEFERRED CONTRACT COSTS - Included in other assets in 1995 are costs
incurred in connection with an agreement between Airline Management
Services Holding, Inc., a subsidiary of AMR ("AMS"), and Canadian Airlines
International Ltd. ("Canadian") to provide a variety of management,
technical and administrative services. A portion of these services were
subcontracted to the Company (the "Canadian Subcontract") and in connection
therewith the Company incurred and deferred approximately $9 million and
$41 million in costs associated with the installation and implementation of
SABRE and other systems for Canadian during 1995 and 1994, respectively.
Approximately $5 million, $5 million and $0.7 million of these deferred
costs were charged to operations in 1996, 1995 and 1994, respectively. As
permitted by the terms of the Canadian Subcontract, in December 1996,
American paid the Company approximately $40 million, representing the
unrecovered contract costs. See Note 4.
REVENUE RECOGNITION - The Company provides electronic travel distribution
services using SABRE, one of the largest privately owned real-time computer
systems in the world. As compensation for electronic travel distribution
services provided, fees are collected from airline, car rental and hotel
vendors and other travel providers ("associates") for reservations booked
through SABRE. The fee per booking charged to associates is dependent upon
the level of functionality within SABRE at which the associate
participates. Revenue for airline travel reservations is recognized at the
time of the booking of the reservation, net of estimated future
cancellations. At December 31, 1996 and 1995, the Company had recorded
booking fee cancellation reserves of approximately $16 million and $15
million, respectively. Revenue for car rental and hotel bookings and other
travel providers is recognized at the time the reservation is used by the
customer. The Company also enters into service contracts with subscribers
(primarily travel agencies) to provide access to SABRE, hardware, software,
hardware maintenance and other support services. Fees billed on service
contracts are recognized as revenue in the month earned.
The Company also provides information technology solutions to AMR and
companies in the travel industry and other industries worldwide. Revenue
from data processing services is recognized in the period earned. Revenue
from software license fees for standard software products is recognized
when the software is delivered, provided no significant future vendor
obligations exist and collection is probable. The Company recognizes
revenue on long-term software development and consulting contracts under
the percentage of completion method of accounting. Losses, if any, on
long-term contracts are recognized when the current estimate of total
contract costs indicates a loss on a contract is probable. Fixed fees for
software maintenance are recognized ratably over the life of the contract.
As a result of contractual billing terms, at December 31, 1996 and 1995 the
Company had recorded accounts receivable of approximately $40 million and
$25 million, respectively, that had not been billed to customers.
26
<PAGE> 27
THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
INCOME TAXES - The entities comprising the Company are included in the
consolidated federal income tax return of AMR. Prior to July 1, 1996, under
the terms of a tax sharing agreement, the Company paid AMR an amount equal
to the income tax payments calculated as if the Company had filed separate
income tax returns.
The Company and AMR entered into a new 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 included in the
consolidated federal, state and local income tax returns filed by AMR. 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.
The Company computes its provision for deferred income taxes using the
liability method as if it were a separate taxpayer. Under the liability
method, deferred income tax assets and liabilities are determined based on
differences between financial reporting and income tax bases of assets and
liabilities and are measured using the enacted tax rates and laws. The
measurement of deferred tax assets is adjusted by a valuation allowance, if
necessary, to recognize the extent to which, based on available evidence,
the future tax benefits more likely than not will be realized.
RESEARCH AND DEVELOPMENT COSTS - All costs in the software development
process which are classified as research and development costs, which have
not been material, are expensed as incurred until technological feasibility
has been established. Once technological feasibility has been established,
such costs are capitalized until the product is ready for service.
CONCENTRATION OF CREDIT RISK - The Company's customers are worldwide,
primarily in the United States, Europe and Canada, and are concentrated in
the travel industry. Approximately 31%, 36% and 42% of revenues in 1996,
1995 and 1994, respectively, were related to American and other
subsidiaries of AMR. The Company generally does not require security or
collateral from its customers as a condition of sale. The Company
maintained an allowance for losses of approximately $4 million and $5
million at December 31, 1996 and 1995, respectively, based upon the
expected collectibility of all accounts receivable.
USE OF ESTIMATES - The preparation of these financial statements in
conformity with generally accepted accounting principles requires that
certain amounts be recorded based on estimates and assumptions made by
management. Actual results could differ from these estimates and
assumptions.
STOCK AWARDS AND OPTIONS - The Company accounts for stock awards and
options (including awards of AMR stock and stock options) in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issues to Employees." No compensation expense is recognized for stock
option grants if the exercise price is at or above the fair market value of
the underlying stock on the date of grant. Compensation expense relating to
other stock awards is recognized over the period during which the employee
renders service to the Company necessary to earn the award.
EARNINGS PER COMMON SHARE - The pro forma earnings per share data is
calculated as though the 23,230,000 shares of Class A Common Stock issued
in connection with the Offering and the reclassification of 107,374,000
shares of Class B Common Stock held by AMR were outstanding for the year
ended December 31, 1995. The earnings per common share data for 1996 is
calculated as though the 130,604,000 shares were
27
<PAGE> 28
THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
outstanding the entire year, adjusted for the weighted average additional
shares of Class A Common Stock issued subsequent to the Offering. The
dilutive impact of common equivalent shares related to stock awards and
options outstanding under the Long-Term Incentive Plan is not significant
for the periods presented.
3. SHORT-TERM INVESTMENTS
At December 31, 1996, short-term investments consisted of (in thousands):
<TABLE>
<S> <C>
Overnight investment and time deposits $ 66,848
Corporate notes 266,036
Mortgages 58,927
U.S. Treasuries 35,134
--------
$426,945
========
</TABLE>
The following table summarizes short-term investments by contractual
maturity at December 31, 1996, (in thousands):
<TABLE>
<S> <C>
Due in one year or less $281,799
Due after one year through three years 86,219
Due after three years 58,927
--------
$426,945
========
</TABLE>
Short-term investments, all of which are classified as available-for-sale
in accordance with Statement of Financial Accounting Standards (FAS) No.
115, "Accounting for Certain Debt and Equity Securities", are stated at
fair value based on market quotes. There were no significant differences
between amortized cost and estimated fair value at December 31, 1996. Net
unrealized gains and losses, net of deferred taxes, are reflected as an
adjustment to stockholders' equity. Short-term investments, without regard
to remaining maturity at acquisition, are not considered cash equivalents
for purposes of the statement of cash flows.
4. CERTAIN RELATED PARTY TRANSACTIONS
DISTRIBUTIONS TO AND CONTRIBUTIONS FROM AFFILIATES - Certain of the SABRE
Group entities from which the Company was formed distributed, in their
capacity as divisions of American, $394 million in 1995 to American. Also
during 1995, AMR contributed $245 million to the Company and a note payable
to AMR of $66 million was capitalized in order to adequately capitalize
certain of The SABRE Group entities from which the Company was formed.
Proceeds from the contribution were used to reduce cash advances from AMR.
In conjunction with the capital infusion discussed above, amounts payable
to AMR of approximately $54 million were converted to intercompany notes
payable in 1995, upon which the Company was charged interest expense at an
average rate of 9.9%. The carrying value of the notes payable to AMR is
equivalent to the fair market value. On July 1, 1996 the note payable to
AMR of approximately $54 million was capitalized.
INTEREST ON CASH EQUIVALENTS - Prior to the Reorganization, American
allocated interest income or expense monthly based on the net balance of
cash equivalents and the payable to AMR at the average rate earned by
American's portfolio of short-term marketable securities. The allocation
may not be representative of what the Company would have earned or paid if
its cash were held externally. Cash payments for interest are equivalent to
net interest expense for periods prior to the Reorganization.
DEBENTURE PAYABLE TO AMR - 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
28
<PAGE> 29
THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
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 prepaid a portion of its note payable to AMR with the
Debenture. 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, issuing the Debenture
resulted in a reduction of stockholders' equity.
The Company used approximately $532 million of the net proceeds from the
Offering to repay a portion of the Debenture held by AMR.
The interest rate on the Debenture 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 and accrued interest is payable each
September 30 and March 31. The average interest rate on the Debenture for
1996 was 7.1%. The Company may prepay the principal balance in whole or in
part at any interest payment date.
PROPERTY AND EQUIPMENT - On July 1, 1996 American contributed buildings,
furniture and fixtures in addition to those discussed above to the Company
with an original cost 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.
INFORMATION 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 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: (i) 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 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, net 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
29
<PAGE> 30
THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
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.
In addition, AMS and Canadian have entered into an agreement pursuant to
which AMR and American supply to Canadian various services, including
technology services. The Company is a principal provider of data processing
and network distributed systems services to Canadian under the terms of the
Canadian Technical Services Subcontract (the "Canadian Subcontract") with
American which expires in 2006. Under the terms of the Canadian
Subcontract, American guaranteed full payment for services actually
performed by the Company and deferred costs associated with the
installation and implementation of certain systems. See Note 2.
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. American also manages the Company's cash balances under the
terms of the Management Services Agreement. Transactions with American no
longer result in the recording of cash equivalents, but are settled through
monthly billings, with payment due in 30 days. 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 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 SABRE Business
Travel Solutions ("SABRE BTS"), Travelocity and easySABRE. The parties
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. Under the terms of the Marketing Cooperation Agreement, the
Company pays American a fee for its marketing support for professional
SABRE, the amount of which may increase or decrease, depending on total
SABRE booking volumes generated by certain professional SABRE subscribers
in the U.S., the Caribbean and elsewhere on SABRE's market share of travel
agency bookings in those areas. That fee was approximately $20 million in
1996 and will range between $10 million and $30 million annually
thereafter. As payment for American's support of the Company's promotion of
SABRE BTS, Travelocity and easySABRE, the Company pays 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
30
<PAGE> 31
THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
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 consulting about means
to mitigate the effect on the Company of American's engaging in such
activity. 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) though (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.
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 assumed by the
Company at July 1, 1996 of approximately $8 million, net of deferred taxes
of approximately $3 million, was recorded as a reduction to stockholders'
equity. The remaining cost of providing this privilege is being accrued
over the estimated service lives of the employees eligible for the
privilege. See Note 5.
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 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 Service Scale (or an equivalent
thereof) or American has excess cash, as defined, 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
31
<PAGE> 32
THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
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. No borrowings have occurred by either the Company
or American as of December 31, 1996.
INDEMNIFICATION AGREEMENT - In connection with the Reorganization, the
Company and American entered into an intercompany agreement (the
"Indemnification Agreement") pursuant to which each party indemnified the
other for certain obligations relating to the Reorganization. Pursuant to
the Indemnification Agreement, the Company indemnified American for
liabilities assumed in the Reorganization, against third party claims
asserted against American as a result of American's prior ownership of
assets or operation of businesses contributed to the Company and for losses
arising from or in connection with the Company's lease of property from
American. In exchange, American indemnified the Company for specified
liabilities retained by it in the Reorganization, against third party
claims against the Company relating to American's businesses and asserted
against the Company as a result of the ownership or possession by American
prior to the Reorganization of any asset contributed to the Company in the
Reorganization and for losses arising from or in connection with American's
lease of property from the Company.
REVENUES FROM AFFILIATES - Revenues from American and other subsidiaries of
AMR were $500 million, $548 million and $590 million in 1996, 1995 and
1994, respectively.
OPERATING EXPENSES - Operating expenses are charged to the Company by
American and other subsidiaries of AMR to cover certain employee benefits,
facilities rental, marketing services, management services, legal fees and
certain other administrative costs based on employee headcount or actual
usage of facilities and services. The Company believes amounts charged to
the Company for these expenses approximate the cost of such services
provided by third parties. Travel service costs for travel by the Company's
employees for personal and business travel are charged to the Company based
on rates negotiated with American. If the Company were not affiliated with
American, the personal travel flight privilege would most likely not be
available to employees. It is estimated that business travel costs, had the
Company not been affiliated with American, for 1996, 1995 and 1994 would
have been approximately $28 million, $34 million and $32 million,
respectively, based on corporate travel rates offered by American to
similar companies. Expenses charged to the Company by affiliates are as
follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Employee benefits $ 85,538 $ 68,743 $ 64,240
Facilities rental 17,585 29,385 30,117
Marketing cooperation 20,436 -- --
Management services 17,143 16,508 16,431
Other administrative costs 11,491 11,377 10,660
Travel services 41,004 28,761 18,056
-------- -------- --------
$193,197 $154,774 $139,504
======== ======== ========
</TABLE>
32
<PAGE> 33
THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
5. EMPLOYEE BENEFIT PLANS
The Company and AMR have entered into an agreement which permits the
employees of the Company to continue to participate in certain benefit
plans and programs sponsored by AMR until the Company establishes separate
plans and programs for its employees.
Substantially all employees of the Company are eligible to participate in
American's tax-qualified pension plan, the fixed benefit retirement plan.
The fixed benefit retirement plan provides benefits for participating
employees based on years of service and average compensation for a
specified period of time before retirement. Costs associated with employee
participation in this plan are determined based upon employee headcount and
are allocated to the Company by American. American's annual allocation of
costs to the Company for such benefits, which are included in employee
benefits in the table in Note 4, was approximately $20 million, $9 million
and $11 million in 1996, 1995 and 1994, respectively. The Company is
jointly and severally liable with AMR and other members of AMR's
consolidated group for applicable funding and termination liabilities of
the plan. The historical financial statements of the Company do not reflect
the portion of the net obligation of the defined benefit plan sponsored by
American attributable to employees of the Company.
The current intent of AMR is to spin off the portion of the defined benefit
pension plan applicable to the Company's employees to a new pension plan to
be sponsored by the Company in 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 $40
million at December 31, 1996, will be charged to stockholders' equity, net
of deferred income taxes of approximately $16 million.
Effective January 1, 1997, the Company established The SABRE Group
Retirement Plan (the "SGRP"). Commencing January 1, 1997, employees of the
Company who were under the age of 40 as of December 31, 1996 will
participate in the SGRP. Employees who were 40 or over as of December 31,
1996 and who were participants in American's fixed-benefit retirement plan
had the option of participating in either the SGRP or the Legacy Pension
Plan (the "LPP"). The LPP is similar to American's fixed benefit retirement
plan. Upon retirement, benefits under the LPP will be calculated based upon
the employee's base pay for the highest consecutive five years of the ten
years preceding retirement. Benefits earned by most of the employees of the
Company under American's fixed-benefit retirement plan will be transferred
to the LPP. The SGRP is a defined contribution plan qualified under Section
401(k) of the Internal Revenue Code of 1986 (the "Code"). For employees who
participate in the SGRP, benefits payable under the LPP will be based upon
credited years of service as of December 31, 1996. However, employees in
the SGRP will continue to earn years of service for purposes of determining
vesting and early retirement benefits under the LPP and growth in base pay
will be considered for purposes of determining retirement benefits under
the LPP. Pursuant to the SGRP, the Company will contribute 2.75% of each
employee's base pay to the SGRP. The employee will vest in the Company's
2.75% contributions after three years of service with the Company,
including prior service with AMR affiliates. In addition, the Company will
match 50 cents of each dollar contributed by an employee, up to 6% of the
employee's base pay subject to IRS limits. The employee is immediately
vested in his or her own contributions and in the Company's matching
contributions.
In addition to providing pension benefits, American provides certain health
care and life insurance benefits to retired employees. The amount of health
care benefits is limited to lifetime maximums as outlined in the plan.
Substantially all employees of the Company may become eligible for these
benefits if they satisfy eligibility requirements during their working
lives. Certain employee groups make contributions towards funding a portion
of their retiree health care benefits during their working lives. American
funds benefits as incurred and also matches employee prefunding. American's
annual allocation of costs to the Company for such benefits was
approximately $10 million, $5 million and $9 million in 1996, 1995 and
1994, respectively. The Company is jointly and severally liable with AMR
and other members of AMR's consolidated group for funding postretirement
health care and life insurance benefit liabilities.
Pursuant to the Travel Privileges Agreement, the Company is entitled to
purchase personal travel for certain retirees. To pay for the provision of
flight privileges to certain of its future retired employees, the Company
33
<PAGE> 34
THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
will make a lump sum payment 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. In connection with the Reorganization, the
accumulated benefit obligation for postretirement travel privileges at July
1, 1996 of approximately $8 million, net of deferred taxes of approximately
$3 million, was recorded as a reduction to stockholders' equity. The
remaining cost of providing this privilege is being accrued over the
estimated service lives of the employees eligible for the privilege. Prior
to the Reorganization, the flight privileges provided to retired employees
did not result in significant incremental costs for the Company and,
therefore, the cost of providing this to the Company's employees was not
included in the postretirement costs for periods prior to the
Reorganization or in the liability for postretirement benefits at December
31, 1995.
Included in employee benefits in the table in Note 4 are the following net
other postretirement benefit costs for the years ended December 31, 1996
and 1995 (in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Service cost -- benefits earned during the period $ 4,170 $ 2,620
Interest cost on accumulated other postretirement benefit obligation 6,043 2,420
Return on assets (358) (160)
Net amortization and deferral (70) (100)
------- -------
Net other postretirement benefit cost $ 9,785 $ 4,780
======= =======
</TABLE>
The following table summarizes the funded status of the plans reconciled to
the accrued postretirement benefit liabilities recognized in the
accompanying balance sheets (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Fully eligible active participants $ (4,980) $ (7,210)
Other active participants (37,601) (34,350)
-------- --------
Accumulated other postretirement benefit obligation (42,581) (41,560)
Plan assets at fair value 4,440 3,650
-------- --------
Accumulated other postretirement benefit obligation in excess of
plan assets (38,141) (37,910)
Unrecognized net (gain)/loss (10,199) 1,680
Unrecognized prior service benefit (1,730) (1,730)
-------- --------
Accrued other postretirement benefit cost $(50,070) $(37,960)
======== ========
</TABLE>
Plan assets consist primarily of shares of a mutual fund managed by AMR for
the postretirement health care and life insurance benefits.
For 1996 and 1995 future postretirement health care benefit costs were
estimated assuming per capita cost of covered medical benefits would
increase at a six and eight percent annual rate, respectively, decreasing
gradually to a four percent annual growth rate in 1999 and thereafter. A
one percent increase in this annual trend rate would have increased the
accumulated benefit obligation at December 31, 1996 by approximately $6
million and 1996 postretirement benefit cost by $1 million. The weighted
average discount rate used in estimating the accumulated postretirement
benefit obligation was 7.75% and 7.25% in 1996 and 1995, respectively.
34
<PAGE> 35
THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
6. INCOME TAXES
The provision for income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Federal, current $ 121,774 $ 133,575 $ 52,655
Federal, deferred (23,438) (11,792) 50,856
State and local, current 17,888 21,936 20,348
State and local, deferred 414 (593) (624)
Foreign, current 2,644 1,098 3,664
--------- --------- ---------
$ 119,282 $ 144,224 $ 126,899
========= ========= =========
</TABLE>
The provision for income taxes differs from amounts computed at the
statutory federal income tax rate as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Statutory income tax provision 107,050 $ 129,526 $ 113,420
State income taxes, net of federal benefit 11,896 13,581 12,275
Foreign tax credit 241 -- (719)
Valuation allowance -- 449 1,559
Other, net 95 668 364
--------- --------- ---------
$ 119,282 $ 144,224 $ 126,899
========= ========= =========
</TABLE>
The components of the Company's deferred tax assets and liabilities as of
December 31, 1996 and 1995 were as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Postretirement benefits other than pensions $ 19,477 $ 16,100
Net operating loss carryforwards 1,754 9,979
Vacation accrual 8,240 --
Equipment obsolescence reserve 6,502 8,976
Booking fee cancellation reserve 8,257 5,754
Other 14,667 18,170
-------- --------
Total deferred tax assets 58,897 58,979
Deferred tax liabilities:
Depreciation and amortization (53,324) (25,254)
Software development costs (6,263) (21,017)
Other (1,441) (740)
-------- --------
Total deferred tax liabilities (61,028) (47,011)
Valuation allowance -- (11,372)
-------- --------
Net deferred tax asset (liability) $ (2,131) $ 596
======== ========
Current deferred income tax asset $ 40,946 $ 31,539
Noncurrent deferred income tax liability (43,077) (30,943)
-------- --------
Net deferred tax asset (liability) $ (2,131) $ 596
======== ========
</TABLE>
35
<PAGE> 36
THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
7. COMMITMENTS AND CONTINGENCIES
Certain service contracts with significant subscribers contain booking fee
productivity clauses and other provisions which allow subscribers to
receive various amounts of additional equipment and other services from the
Company at no cost to the subscribers. The Company establishes liabilities
for these commitments as the subscribers satisfy the applicable contractual
terms. The service contracts are priced so that the additional airline and
other booking fees generated over the life of the contract will exceed the
cost of the equipment and other services. Accrued subscriber incentives at
December 31, 1996 and 1995 were approximately $17 million.
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 December 31, 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>
Year ending December 31,
------------------------
1997 $1,608,000 $19,111,000
1998 1,441,000 12,019,000
1999 1,488,000 8,228,000
2000 1,241,000 6,234,000
2001 713,000 6,393,000
Thereafter 7,991,000 36,054,000
</TABLE>
Rental expense, excluding facilities rented from affiliates, was
approximately $28 million, $25 million and $27 million for the years ended
December 31, 1996, 1995 and 1994, respectively.
The Company is involved in certain disputes arising in the normal course of
business. Although the ultimate resolution of these matters cannot be
reasonably estimated at this time, management does not believe that they
will have a material adverse effect on the financial condition or results
of operations of the Company.
8. CAPITAL STOCK
The authorized capital stock of the Company consists of 250,000,000 shares
of Class A Common Stock, par value $.01 per share, 107,374,000 shares of
Class B Common Stock, par value $.01 per share, and 20,000,000 shares of
preferred stock, par value $.01 per share. As of December 31, 1996, no
shares of preferred stock have been issued.
The holders of Class A Common Stock and Class B Common Stock generally have
identical rights, except that the holders of Class A Common Stock are
entitled to one vote per share while holders of Class B Common Stock are
entitled to 10 votes per share on all matters to be voted on by
stockholders. Holders of shares of Class A Common Stock and Class B Common
Stock are not entitled to cumulate their votes in the election of
directors. Generally, all matters to be voted on by stockholders must be
approved by a majority (or in the case of election of directors, by a
plurality) of the votes entitled to be cast by all shares of Class A Common
Stock and Class B Common Stock present in person or represented by proxy,
voting together as a single class, subject to any voting rights granted to
holders of any preferred stock. Except as otherwise provided by law, and
subject to any voting rights granted to holders of any outstanding
preferred stock, amendments to the Company's Certificate of Incorporation
generally must be approved by a majority of the combined voting power of
all Class A Common Stock and Class B Common Stock voting together as a
single class. However, amendments to the Company's Certificate of
Incorporation that would alter or change the powers, preferences
36
<PAGE> 37
THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
or special rights of the Class A Common Stock or the Class B Common Stock
so as to affect them adversely also must be approved by a majority of the
votes entitled to be cast by the holders of the shares affected by the
amendment voting as a separate class. Notwithstanding the foregoing, any
amendment to the Company's Certificate of Incorporation to increase the
authorized shares of any class or authorize the creation, authorization or
issuance of any securities convertible into, or warrants or options to
acquire, shares of any such class or classes of stock must be approved by
the affirmative vote of the holders of a majority of the common stock,
voting together as a single class.
Effective as of the first time at which AMR ceases to be the beneficial
owner of an aggregate of at least a majority of the voting power of the
Voting Stock (as defined) of the Company then outstanding, amendments to
certain provisions of the Certificate of Incorporation will require the
approval of 80% of the combined voting power of all Class A Common Stock
and Class B Common Stock, voting together as a single class.
Holders of Class A Common Stock and Class B Common Stock will share in an
equal amount per share in any dividend declared by the Board of Directors,
subject to any preferential rights of any outstanding preferred stock.
Except as provided below, any shares of Class B Common Stock transferred to
a person other than AMR or any of its subsidiaries or the Class B
Transferee (as defined below) shall automatically convert to Class A Common
Stock upon such disposition. Shares of Class B Common Stock representing
more than 50% economic interest in the Company transferred by AMR or any of
its subsidiaries in a single transaction to one unrelated person (the
"Class B Transferee") or any subsidiary of the Class B Transferee shall not
automatically convert to shares of Class A Common Stock upon such
disposition. Any shares of Class B Common Stock retained by AMR or its
subsidiaries following any such transfer of shares of Class B Common Stock
to the Class B Transferee shall automatically convert into shares of Class
A Common Stock upon such transfer. Shares of Class B Common Stock
transferred to stockholders of AMR or stockholders of the Class B
Transferee in a transaction intended to be on a tax-free basis (a "Tax-Free
Spin-Off") under the Internal Revenue Code shall not convert to shares of
Class A Common Stock upon the occurrence of such Tax- Free Spin-Off.
Following a Tax-Free Spin-Off, shares of Class B Common Stock shall be
transferred as Class B Common Stock, subject to applicable laws; provided,
however that shares of Class B Common Stock shall automatically convert
into shares of Class A Common Stock on the fifth anniversary of the
Tax-Free Spin-Off, unless prior to such Tax-Free Spin-Off, AMR, or the
Class B Transferee, as the case may be, delivers to the Company an opinion
of counsel reasonably satisfactory to the Company to the effect that such
conversion could adversely affect the ability of AMR, or the Class B
Transferee, as the case may be, to obtain a favorable ruling from the
Internal Revenue Service that such transfer would be a Tax-Free Spin-Off.
If such an opinion is received, approval of such conversion shall be
submitted to a vote of holders of the common stock as soon as practicable
after the fifth anniversary of the Tax-Free Spin-Off, unless AMR or the
Class B Transferee, as the case may be, delivers to the Company an opinion
of counsel reasonably satisfactory to the Company prior to such anniversary
that such vote could adversely affect the status of the Tax- Free Spin-Off,
including the ability to obtain a favorable ruling from the Internal
Revenue Service; if such opinion is so delivered, such vote shall not be
held. Approval of such conversion will require the affirmative vote of the
holders of a majority of the shares of both Class A Common Stock and Class
B Common Stock present and voting, voting together as a single class, with
each share entitled to one vote for such purposes.
On liquidation, dissolution or winding up of the Company, after payment in
full of the amounts required to be paid to holders of preferred stock, if
any, all holders of common stock, regardless of class, are entitled to
share ratably in any assets available for distribution to holders of shares
of common stock.
No shares of either class of common stock are subject to redemption or have
preemptive rights to purchase additional shares of common stock.
37
<PAGE> 38
THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
9. STOCK AWARDS AND OPTIONS
Prior to the Offering, officers and key employees of the Company were
eligible, under AMR's 1988 Long-Term Incentive Plan (the "AMR LTIP"), to be
granted stock options, stock appreciation rights, restricted stock,
deferred stock, stock purchase rights and/or other stock based awards in
common stock, par value $1 per share, of AMR ("AMR Common Stock").
Options to purchase shares of AMR Common Stock ("AMR Options") were granted
to officers and key employees of the Company. Options granted were
exercisable at the market value upon grant, generally becoming exercisable
over one to five years following the date of grant, and expiring ten years
from the date of grant. At December 31, 1995, there were 309,000 AMR
Options outstanding held by officers and key employees of the Company, of
which 209,000 were exercisable.
In connection with the Offering, the AMR Options granted to officers and
key employees of the Company were exchanged for options to purchase 728,740
shares of Class A Common Stock of the Company. The exercise prices of the
options to purchase Class A Common Stock were computed by multiplying the
initial public offering price of Class A Common Stock 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 Offering. The number of options was
increased to maintain the aggregate intrinsic value of each holder's
options. These options will continue to vest in equal annual installments
over the original vesting period.
Prior to the Offering, certain officers and key employees of the Company
were awarded 217,000 shares of deferred AMR Common Stock ("AMR Career
Equity Shares") at no cost, to be issued upon the individuals' retirement
from AMR. In connection with the Offering, the AMR Career Equity Shares
awarded to certain officers and key employees of the Company were exchanged
for 142,690 restricted shares of Class A Common Stock, options to purchase
847,550 shares of Class A Common Stock and 75,600 deferred shares of Class
A Common Shares ("Company Career Equity Shares"). 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 Offering and the
initial public offering price of Class A Common Stock. The restricted
shares will vest over a three-year period following the date of grant. The
stock options, which have an exercise price equal to the initial public
offering price of the Class A Common Stock, will vest over a five-year
period 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. All of the restricted shares and
Company Career Equity Shares issued in connection with the Offering were
outstanding at December 31, 1996.
In conjunction with AMR's 1988 Long-Term Incentive Plan, certain officers
and key employees of the Company were also awarded, at no cost, 140,000
shares of deferred AMR Common Stock performance shares ("AMR Performance
Shares"). The AMR Performance Shares vest over a three-year performance
period based on performance metrics of AMR and the Company, as defined in
the plan.
In connection with the Offering, the AMR Performance Shares awarded to
certain officers and key employees of the Company were converted into
272,160 deferred Class A Common Stock performance shares ("Company
Performance Shares") based on the initial public 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 Offering. Following the Offering, the
Company granted 162,450 Company Performance Shares for 1996. The Company
Performance Shares vest over a three-year performance period based on
performance metrics of the Company, as defined in the LTIP (as hereinafter
defined).
38
<PAGE> 39
THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
Company Performance Share activity during 1996 was as follows:
<TABLE>
<CAPTION>
Number of
Shares
---------
<S> <C>
Outstanding at January 1, 1996 --
Issued upon conversion of AMR Performance Shares 272,160
Granted 162,450
Canceled (750)
-------
Outstanding at December 31, 1996 433,860
=======
</TABLE>
The weighted average grant date fair value of Company Performance Shares
granted during 1996 was $27.00.
Effective with the Offering, the Company 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. 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. In connection with the Offering, the
Company issued options to purchase 822,900 shares of the Company's Class A
Common Stock.
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 the date of grant,
except as otherwise determined by a committee appointed by the Board of
Directors, and no such options are exercisable more than ten 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.
For other 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 the 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.
The Board of Directors has adopted a Directors' 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 also
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 market price of 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. 350,000 shares of Class A Common Stock
are reserved for issuance pursuant to the Directors' Stock Incentive Plan.
39
<PAGE> 40
THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
Stock option activity for the year ended December 31, 1996 was:
<TABLE>
<CAPTION>
Number of Weighted-Average
Shares Exercise Price
---------------------------
<S> <C> <C>
Outstanding at January 1, 1996 -- --
Issued upon exchange of AMR Options 728,740 $ 19.87
Issued upon exchange of AMR Career Equity Shares 847,550 $ 27.00
Granted 822,900 $ 27.00
Exercised (14,520) $ 16.27
---------
Outstanding at December 31, 1996 2,384,670 $ 24.89
=========
Exercisable options outstanding at December 31, 1996 422,920 $ 19.80
=========
</TABLE>
The weighted-average grant date fair value of stock options granted during
1996 was $9.24. Options outstanding at December 31, 1996 had a
weighted-average remaining contractual life of approximately nine years,
and exercise prices ranging from $12.95 to $29.00.
At December 31, 1996 there were 14,350,000 shares of Class A Common Stock
reserved for issuance upon exercise of options and issuance of restricted
stock and deferred stock. At December 31, 1996 approximately 11,300,000
shares were available for future grants of stock-based awards under the
LTIP.
Effective January 1, 1997, the Company established The SABRE Group
Holdings, Inc. Employee Stock Purchase Plan (the "ESPP"). The ESPP allows
eligible employees the right to purchase Class A Common Stock on a monthly
basis at the lower of 85% of the market price at the beginning or the end
of each monthly offering period. The ESPP allows each employee to acquire
annually Class A Common Stock with an aggregate maximum purchase price
equal to either 1% or 2% of that employee's base pay, subject to
limitations under the Internal Revenue Code of 1986. As of January 1, 1997,
1,000,000 shares of Class A Common Stock have been reserved for the
issuance under the ESPP.
The Company has adopted the pro forma disclosure provisions of the
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS 123). As required by FAS 123, pro forma
information regarding net income and earnings per share has been determined
as if the Company had accounted for its employee stock options and
stock-based awards granted subsequent to December 31, 1994 under the fair
value method set forth in FAS 123. The fair value for the stock options
granted by AMR or the Company to officers and key employees of the Company
after January 1, 1995 was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rate of 6.46% for 1995 and 6.07% for 1996;
a dividend yield of 0%; volatility factors of the expected market price of
AMR Common Stock of .25 for 1995; a volatility factor of the expected
market price of the Company's Class A Common Stock of .28; and a
weighted-average expected life of the options granted of 4.5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options. In addition, because FAS 123 is
applicable only to options and stock-based awards granted subsequent to
December 31, 1994, the pro forma impact does not reflect the pro forma
effect of all previous stock based awards to the Company's employees.
40
<PAGE> 41
THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
For purposes of the pro forma disclosures, the estimated fair value of the
options and stock-based awards is amortized to expense over the vesting
period. The Company's pro forma information is as follows (in thousands,
except for earnings per common share information):
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Net earnings
As reported $ 186,574 $ 225,851
=========== ===========
Pro forma $ 184,981 $ 225,764
=========== ===========
Earnings per common share
As reported $ 1.43 $ 1.73
=========== ===========
Pro forma $ 1.41 $ 1.73
=========== ===========
</TABLE>
10. GEOGRAPHICAL ANALYSIS
The Company is a global company, deriving revenues from worldwide
operations. Data relating to the Company's operations by geographic area is
set forth below (in thousands).
<TABLE>
<CAPTION>
United
States Foreign Total
---------- ---------- ----------
<S> <C> <C> <C>
1996
----------
Revenues $1,338,021 $ 283,966 $1,621,987
Operating income 308,529 18,272 326,801
Identifiable assets 1,184,770 61,367 1,246,137
1995
----------
Revenues $1,279,471 $ 250,145 $1,529,616
Operating income 345,262 35,162 380,424
Identifiable assets 534,626 61,080 595,706
1994
----------
Revenues $1,196,291 $ 210,388 $1,406,679
Operating income 313,636 36,517 350,153
Identifiable assets 533,163 52,923 586,086
</TABLE>
Operating income from operations consists of revenues less operating
expenses, including an allocation of corporate expenses. Operating income
excludes interest income, interest expense and other income (expense) net.
Cash equivalents and deferred tax assets are excluded from identifiable
assets.
41
<PAGE> 42
THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly financial information
for the years ended December 31, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1996
- ----
Revenues $427,844 $410,445 $407,420 $376,278
Operating income 115,591 81,998 87,914 41,298
Net earnings 69,987 49,063 45,151 22,373
1995
- ----
Revenues $384,466 $383,065 $393,148 $368,937
Operating income 118,091 101,359 108,192 52,782
Net earnings 69,927 60,130 66,855 31,939
</TABLE>
The travel industry is seasonal in nature. Bookings, and thus booking fees
charged for the use of SABRE, decrease significantly each year in the
fourth quarter, primarily in December.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
42
<PAGE> 43
PART III
- -------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference is the information set forth under
the headings "Nominees for Election as Directors" and "Continuing Directors" in
the Company's definitive proxy statement for the annual meeting of stockholders
to be held on May 21, 1997.
EXECUTIVE OFFICERS
The executive officers of the Company, their positions and ages as of
December 31, 1996, are as follows:
Michael J. Durham ... Mr. Durham was elected a director, President and Chief
Executive Officer of the Company in July 1996. Mr.
Durham was also elected President and Chief Executive
Officer of The SABRE Group in 1995. Mr. Durham was
Senior Vice President and Treasurer of AMR and Senior
Vice President -- Finance and Chief Financial Officer of
American from 1989 to 1995. Age 45.
Bradford J. Boston... Mr. Boston was elected Senior Vice President--SABRE
Computer Services of the Company in July 1996. Mr.
Boston was also elected President--SABRE Computer
Services for The SABRE Group, Inc. in July 1996. Mr.
Boston was President--SABRE Computer Services, a
division of The SABRE Group, from June 1996 to July 1996.
Prior to that time, Mr. Boston was Senior Vice President
for American Express Travel Related Services from 1994 to
1996, was Senior Vice President of Visa International's
Visanet operations from 1993 to 1994, and was Vice
President of Systems Development for United
Airlines/Covia Partnership from 1991 to 1993. Age 42.
Thomas M. Cook ...... Mr. Cook was elected Senior Vice President--SABRE
Decision Technologies of the Company in July 1996. Mr.
Cook was also elected President--SABRE Decision
Technologies for The SABRE Group, Inc. in July 1996.
Mr. Cook was President--SABRE Decision Technologies, a
division of The SABRE Group, from its formation in 1994
to 1996. For American, Mr. Cook was President--Decision
Technologies from 1988 to 1994. Age 56.
Terrell B. Jones .... Mr. Jones was elected Senior Vice President--SABRE
Interactive and Chief Information Officer of the Company
in July 1996. Mr. Jones was also elected
President--SABRE Interactive and Chief Information
Officer for The SABRE Group, Inc. in July 1996. Mr.
Jones served as President--SABRE Computer Services, a
division of The SABRE Group, from 1993 to 1996 and as
President--SABRE Interactive, a division of The SABRE
Group, from 1995 to 1996. For American, Mr. Jones served
as Managing Director and Division Vice President--SCS
Systems Planning & Development from 1991 to 1993, and as
Managing Director & Vice President--STIN Product
Development from 1987 to 1991. Age 48.
Jeffrey G. Katz ..... Mr. Katz was elected Senior Vice President--SABRE Travel
Information Network of the Company in July 1996. Mr.
Katz was also elected President--SABRE Travel Information
Network for The SABRE Group, Inc. in July 1996. Mr. Katz
was President--SABRE Travel Information Network, a
division of The SABRE Group, from 1993 to July 1996. For
American, Mr. Katz served as Division Managing
Director-Passenger Sales from 1991 to 1993. Age 41. Mr.
Katz resigned from the Company in March 1997.
Eric J. Speck ....... Mr. Speck has been nominated to replace Jeffrey Katz as
Senior Vice President--SABRE Travel Information Network
of the Company, subject to election by the Board of
Directors. Mr. Speck has also been nominated to replace
Mr. Katz
43
<PAGE> 44
as President--SABRE Travel Information Network for The
SABRE Group, Inc. Mr. Speck has been Vice
President--SABRE Europe since August 1995 and was Vice
President--Marketing of SABRE Travel Information Network
before assuming that position. Age 40.
T. Patrick Kelly .... Mr. Kelly was elected Senior Vice President, Chief
Financial Officer and Treasurer of the Company and of The
SABRE Group, Inc. in July 1996. Mr. Kelly was Senior
Vice President--SABRE Group Planning from 1995 to July
1996. For American, Mr. Kelly served as Vice
President--Financial Planning & Analysis from 1993 to
1995, Managing Director--SABRE Development Services from
1992 to 1993, and Managing Director--Financial Planning
from 1990 to 1992. Age 39.
Andrew B. Steinberg.. Mr. Steinberg was elected Senior Vice President, General
Counsel and Corporate Secretary of the Company in October
1996. Mr. Steinberg was an associate general counsel of
American from 1994 to 1996. From 1991 to 1994, Mr.
Steinberg was a senior attorney with American. Age 38.
All officers serve at the discretion of the Board of Directors.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference is the information set forth under
the heading "Executive Compensation" in the Company's definitive proxy
statement for the annual meeting of stockholders to be held on May 21, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference is the information set forth under
the heading "Ownership of Securities" from the Company's definitive proxy
statement for the annual meeting of stockholders to be held on May 21, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference is the information set forth under
the heading "Relationship with AMR Corporation and Affiliates" in the Company's
definitive proxy statement for the annual meeting of stockholders to be held on
May 21, 1997 and under Note 4 to the Consolidated Financial Statements in Item
8 of this report.
PART IV
- -------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The financial statements listed in the accompanying index to
financial statements and the schedules are filed as part of
this report.
(2) The schedules listed in the accompanying index to financial
statements and schedules are filed as part of this report.
(3) Exhibits required to be filed by Item 601 of Regulation S-K.
44
<PAGE> 45
EXHIBIT
3.1 Restated Certificate of Incorporation of Registrant.1
3.2 Restated Bylaws of Registrant.(1)
4.1 Registration Rights Agreement between Registrant and
AMR Corporation.(1)
4.2 Specimen Certificate representing Class A Common
Stock.(1)
10.1 Registration Rights Agreement between Registrant and
AMR Corporation (See Exhibit 4.1).
10.2 Intercompany Agreement, dated as of July 2, 1996, among
Registrant, The SABRE Group, Inc., TSGL Holding, Inc.,
TSGL-SCS, Inc., TSGL, Inc., SABRE International, Inc., SABRE
Servicios 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)(4)
10.4 Credit Agreement, dated as of July 1, 1996, between
Registrant, The SABRE Group, Inc., AMR Corporation and
American Airlines, Inc.(1)
10.5 $850,000,000 Subordinated Debenture, dated July 2, 1996,
executed by Registrant 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)(4)
10.7 Non-competition Agreement, dated July 1, 1996, among
Registrant, 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)(4)
10.9 Tax Sharing Agreement, dated July 1, 1996, between The SABRE
Group, Inc. and American Airlines, Inc1
10.10 Travel Privileges Agreement, dated as of July 1, 1996,
between The SABRE Group, Inc. and American Airlines,
Inc(1)(4)
10.11 Corporate Travel Agreement, dated July 25, 1996, between The
SABRE Group, Inc. and American Airlines, Inc.(1)(4)
10.12 Software Marketing Agreement, dated September 10, 1996,
among Registrant, The SABRE Group, Inc. and AMR
Corporation.(1)(4)
10.13 Canadian Technical Services Subcontract, dated as of July 1,
1996, between The SABRE Group Inc. and American Airlines,
Inc.(1)(4)
10.14 Form of Participating Carrier Agreement between The SABRE
Group, Inc. and American Airlines, Inc1
10.15 Investment Agreement, dated September 11, 1996, between The
SABRE Group, Inc. and AMR Investment Services, Inc.(1)(4)
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 January 19, 1996, between
American Airlines, Inc. and Maguire/Thomas Partners --
Westlake/Southlake Partnership(1)
45
<PAGE> 46
10.24 American Airlines, Inc. Supplemental Executive Retirement
Plan dated November 16, 1994.(2)
10.25 The SABRE Group Holdings, Inc. Long-Term Incentive Plan.(1)
10.26 The SABRE Group Holdings, Inc. 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 Registrant
and Thomas M. Cook.(1)
10.32 Letter Agreement, dated July 15, 1996, between Registrant
and Terrell B. Jones.(1)
10.33 The SABRE Group Holdings, Inc. Employees Stock Purchase
Plan.(3)
21.1 Subsidiaries of Registrant.(1)
23.1 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule.
- ----------
(1) Incorporated by reference to exhibits 3.1 through 10.32 to the
Company's Registration Statement on Form S-1 (Registration No.
333-09747).
(2) Incorporated by reference to Exhibit 10(mmm) to AMR's report on
Form 10-K for the year ended December 31, 1994 (File No. 1-8400).
(3) Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8 (Registration No. 333-18851).
(4) Confidential treatment was granted as to a portion of this
document.
(b) Reports on Form 8-K:
None.
THE SABRE GROUP HOLDINGS, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
COVERED BY REPORT OF INDEPENDENT AUDITORS
[ITEM 14(a)]
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS Page
----
<S> <C>
Report of Independent Auditors 20
Consolidated Balance Sheets at December 31,1996 and 1995 21
Consolidated Statements of Income for the Years Ended 22
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended 23
December 31, 1996, 1995 and 1994
Consolidated Statement of Stockholders' Equity for the Years 24
Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements 25
</TABLE>
46
<PAGE> 47
CONSOLIDATED SCHEDULES FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994
None.
All other schedules are omitted since the required information is included in
the financial statements or notes thereto, or since the required information is
either not present or not present in sufficient amounts.
47
<PAGE> 48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE SABRE GROUP HOLDINGS, INC.
/s/ Michael J. Durham
----------------------------------------------
Michael J. Durham
President, Chief Executive Office and Director
(Principal Executive Officer)
/s/ T. Patrick Kelly
----------------------------------------------
T. Patrick Kelly
Senior Vice President, Chief Financial Officer
and Treasurer
(Principal Financial and Accounting Officer)
Date: March 31, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below the following persons on behalf of the registrant
and in the capacities and on the dates noted:
Directors:
/s/ Robert L. Crandall /s/ Dee J. Kelly
- -------------------------------- ---------------------------------
Robert L. Crandall Dee J. Kelly
/s/ Gerard J. Arpey /s/ Glenn W. Marschel, Jr.
- -------------------------------- ---------------------------------
Gerard J. Arpey Glenn W. Marschel, Jr.
/s/ Anne H. McNamara /s/ Bob L. Martin
- -------------------------------- ---------------------------------
Anne H. McNamara Bob L. Martin
/s/ Edward A. Brennan /s/ Richard L. Thomas
- -------------------------------- ---------------------------------
Edward A. Brennan Richard L. Thomas
/s/ Paul C. Ely, Jr.
- --------------------------------
Paul C. Ely, Jr.
DATE: March 31, 1997
<PAGE> 49
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
23.1 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-13917, 333-13751, and 333-18851) pertaining to The SABRE
Group Holdings, Inc. 1996 Long-Term Incentive Plan, 1996 Directors Stock
Incentive Plan, and the Employee Stock Purchase Plan, respectively, of our
report dated January 13, 1997, with respect to the consolidated financial
statements and schedule of The SABRE Group Holdings, Inc. included in the
Annual Report (Form 10- K) for the year ended December 31, 1996.
ERNST & YOUNG LLP
Dallas, Texas
March 31, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 15,992
<SECURITIES> 426,945
<RECEIVABLES> 201,109
<ALLOWANCES> 4,094
<INVENTORY> 0
<CURRENT-ASSETS> 694,528
<PP&E> 1,224,317
<DEPRECIATION> 664,603
<TOTAL-ASSETS> 1,287,083
<CURRENT-LIABILITIES> 289,827
<BONDS> 0
0
0
<COMMON> 1,308
<OTHER-SE> 568,333
<TOTAL-LIABILITY-AND-EQUITY> 1,287,083
<SALES> 0
<TOTAL-REVENUES> 1,621,987
<CGS> 0
<TOTAL-COSTS> 1,152,613
<OTHER-EXPENSES> 142,573
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,401
<INCOME-PRETAX> 305,856
<INCOME-TAX> 119,282
<INCOME-CONTINUING> 186,574
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 186,574
<EPS-PRIMARY> 1.43
<EPS-DILUTED> 1.43
</TABLE>
