<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended June 30, 1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period From to
.
Commission file number 1-12175.
The SABRE Group Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-2662240
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
4255 Amon Carter Blvd.
Fort Worth, Texas 76155
(Address of principal (Zip Code)
executive offices)
Registrant's telephone (817) 931-7300
number, including area code
Not Applicable
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter periods that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No ___.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class A Common Stock, $.01 par value - 22,613,887 as of August 10,
1998
Class B Common Stock, $.01 par value - 107,374,000 as of August 10,
1998
<PAGE> 2
INDEX
THE SABRE GROUP HOLDINGS, INC.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1998 and December 31, 1997
Consolidated Statements of Income -- Three and six months ended
June 30, 1998 and 1997
Condensed Consolidated Statement of Stockholders' Equity -- Six
months ended June 30, 1998
Consolidated Statements of Cash Flows -- Six months ended June 30,
1998 and 1997
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SABRE GROUP HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, December
31,
1998 1997
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 8,560 $ 11,286
Short-term investments 366,916 573,620
Accounts receivable, net 336,208 239,626
Receivable from affiliates 28,246 10,829
Prepaid expenses 13,845 17,708
Deferred income taxes 26,576 21,093
Total current assets 780,351 874,162
PROPERTY AND EQUIPMENT
Buildings and leasehold improvements 327,790 321,987
Furniture, fixtures and equipment 38,623 36,904
Service contract equipment 548,204 548,706
Computer equipment 493,242 395,887
1,407,859 1,303,484
Less accumulated depreciation and
amortization (747,179) (721,917)
Total property and equipment 660,680 581,567
Investments in joint ventures 146,820 8,198
Computer software, net 88,263 41,386
Other assets, net 135,855 18,645
TOTAL ASSETS $1,811,969 $ 1,523,958
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 114,264 $ 96,041
Accrued compensation and related benefits 66,579 69,694
Other accrued liabilities 188,403 150,785
Total current liabilities 369,246 316,520
Deferred income taxes 3,139 12,354
Pensions and other postretirement benefits 101,086 89,573
Other liabilities 150,885 30,350
Debenture payable to AMR 317,873 317,873
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred Stock: $0.01 par value;
20,000 shares authorized; no shares issued --- ---
Common stock:
Class A: $0.01 par value; 250,000 shares
authorized; 23,664 and 23,480
shares issued, respectively 236 235
Class B: $0.01 par value; 107,374 shares
authorized; 107,374 shares
issued and outstanding 1,074 1,074
Additional paid-in capital 599,023 593,939
Retained earnings 304,272 164,004
Less treasury stock at cost; 1,057 and 72
shares, respectively (34,865) (1,964)
Total stockholders' equity 869,740 757,288
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,811,969 $1,523,958
</TABLE>
The accompanying notes are an integral part of these
financial statements.
<PAGE> 4
THE SABRE GROUP HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES
Electronic Travel
Distribution $338,513 $310,841 $683,542 $619,636
Information Technology
Solutions 238,061 138,073 447,131 269,588
Total revenues 576,574 448,914 1,130,673 889,224
OPERATING EXPENSES
Cost of revenues
Electronic Travel
Distribution 221,041 208,013 448,322 404,978
Information Technology
Solutions 200,064 106,097 366,028 205,521
Selling, general and
administrative 46,218 40,167 92,605 75,621
Total operating expense 467,323 354,277 906,955 686,120
OPERATING INCOME 109,251 94,637 223,718 203,104
OTHER INCOME (EXPENSE)
Interest income 5,493 7,014 12,330 13,167
Interest expense (4,812) (5,743) (9,597) (11,040)
Other - net (14) 29 191 50
667 1,300 2,924 2,177
INCOME BEFORE PROVISION FOR
INCOME TAXES 109,918 95,937 226,642 205,281
Provision for income taxes 41,395 37,401 86,331 80,060
NET EARNINGS $ 68,523 $ 58,536 $ 140,311 $ 125,221
EARNINGS PER COMMON SHARE DATA
Earnings per common
share, basic $ .53 $ .45 $ 1.08 $ .96
Earnings per common
share, diluted $ .52 $ .45 $ 1.07 $ .96
Common shares used in per
share calculations
Basic 130,056 130,640 130,215 130,630
Dilutive effect of stock
awards and options 701 254 616 263
Diluted 130,757 130,894 130,831 130,893
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
THE SABRE GROUP HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998
(Unaudited) (In thousands)
<TABLE>
<CAPTION>
Class A Class B Additional
Common Common Paid-in Retained Treasury
Stock Stock Capital Earnings Stock
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1997 $ 235 $ 1,074 $ 593,939 $ 164,004 $ (1,964)
Net earnings 140,311
Issuance of Class A
Common Stock pursuant
to stock option,
restricted stock
incentive, and
stock purchase plans 1 3,965
Tax benefit from
exercise of employee
stock options 1,119
Repurchase of Company
stock (32,901)
Unrealized loss on
investments, net of
deferred taxes (43)
Balance at June 30,
1998 $ 236 $ 1,074 $599,023 $304,272 $(34,865)
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
THE SABRE GROUP HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $140,311 $125,221
Adjustments to reconcile net earnings to cash
provided by operating activities
Depreciation and amortization 120,935 89,164
Deferred income taxes (13,550) 7,548
Other 3,094 (3,269)
Changes in operating assets and liabilities
Accounts receivable (98,059) (36,102)
Prepaid expenses 2,624 (845)
Other assets 1,956 3,689
Accrued compensation and related benefits (3,115) 1,675
Accounts payable and other accrued
liabilities 31,828 2,604
Receivable from and payable to affiliates (17,417) (4,762)
Pensions and other postretirement
benefits 11,513 10,117
Other liabilities 115 (470)
Cash provided by operating activities 180,235 194,570
INVESTING ACTIVITIES
Additions to property and equipment (194,467) (121,121)
Net decrease (increase) in short-term
investments 206,551 (72,474)
Net investment in joint ventures (137,590) ---
Other investing activities, net (29,580) (13,869)
Proceeds from sale of equipment 1,013 2,436
Cash used for investing activities (154,073) (205,028)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 669 287
Proceeds from exercise of stock options 3,344 387
Purchases of treasury stock (32,901) ---
Cash provided by (used for)
financing activities (28,888) 674
Decrease in cash (2,726) (9,784)
Cash at beginning of the period 11,286 15,992
Cash at end of the period $ 8,560 $ 6,208
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 7
THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL INFORMATION
The SABRE Group Holdings, Inc. is a holding company. Its sole direct
subsidiary is The SABRE Group, Inc., which 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The accompanying unaudited consolidated
financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Securities and Exchange
Commission Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, these financial statements contain all adjustments,
consisting of normal recurring accruals, necessary to present fairly
the financial position, results of operations and cash flows for the
periods indicated. The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results may differ from these
estimates. The Company's quarterly financial data should be read in
conjunction with the consolidated financial statements of the Company
for the year ended December 31, 1997 (including the notes thereto), set
forth in The SABRE Group Holdings, Inc. Annual Report on Form 10-K.
EARNINGS PER COMMON SHARE - In 1997, the Financial Accounting Standards
Board issued Statement No. 128, Earnings Per Share. Statement 128
replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike previously reported
primary earnings per share, basic earnings per share excludes any
dilutive effect of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. The number of shares used in the diluted earnings
per share calculations includes the dilutive effect of stock options,
restricted and career equity shares. All earnings per share amounts for all
periods have been presented, and where appropriate, restated to conform to
the Statement 128 requirements.
RECLASSIFICATIONS - Certain reclassifications have been made to
the 1997 financial statements to conform to the 1998 presentation.
3. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130, Reporting Comprehensive Income. Statement 130
establishes rules for the reporting and display of comprehensive income
and its components. For the three and six months ended June 30, 1998 and
1997, the differences between net earnings and total comprehensive
income were not material.
<PAGE> 8
THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Unaudited)
4. SIGNIFICANT TRANSACTIONS
In January 1998, the Company completed the execution of a 25-year information
technology services agreement with US Airways, Inc. ("US Airways"). Under
the terms of the agreement, the Company will provide substantially all
of US Airways' information technology services. Additionally, the Company
agreed to assist US Airways in making its information systems Year 2000
compliant. In connection with the agreement, the Company purchased
substantially all of US Airways' information technology assets for
approximately $47 million, hired more than 600 former employees of US
Airways, and granted to US Airways two tranches of stock options, each to
acquire 3 million shares of the Company's Class A Common Stock.
During certain periods, US Airways may select an alternative vehicle of
substantially equivalent value in place of receiving stock. The first
tranche of options is exercisable during the six month period ending two
years after the transfer of US Airways' information technology
assets, has an exercise price of $27 per share and is subject to a cap on
share price of $90. The second tranche of options is exercisable during the
ten year period beginning on the fifth anniversary of the asset transfer
date, has an exercise price of $27 per share, and is subject to a cap on
share price of $127. The Company has recorded a long-term liability and a
related deferred asset equal to the number of options outstanding
multiplied by the difference between the exercise price of the options and
the market price of the Company's Class A Common Stock. The asset and
liability are adjusted for changes in the market price of the Company's
stock at each month-end. The deferred asset is being amortized over the
eleven-year non-cancelable portion of the agreement.
In February 1998, the Company signed long-term agreements with ABACUS
International Holdings Ltd. which created a Singapore-based joint
venture company, called ABACUS International Ltd. ("ABACUS"), to
manage travel distribution in the Asia-Pacific region. The Company received
35 percent of the shares of the joint venture company and accounts for its
investment under the equity method. The Company paid $139 million in cash
and contributed its assets related to the Company's ongoing travel
distribution activities in Asia-Pacific and other consideration. The
Company provides ABACUS with transaction processing on the SABRE
computer reservations system.
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
THE SABRE GROUP HOLDINGS, INC.
RESULTS OF OPERATIONS
SUMMARY The Company generates it revenue from providing electronic travel
distribution services and information technology solutions services. During
the six months ended June 30, 1998, the Company generated approximately 60.5%
of its revenue from electronic travel distribution services and approximately
39.5% of its revenue from information technology solution services. The
following table sets forth revenues by affiliation and geographic location as
a percent of total revenues:
<TABLE>
<CAPTION>
Three months Six months ended
ended June 30,
June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Affiliation:
Unaffiliated Customers 74.2% 70.9% 73.6% 70.5%
Affiliated Customers 25.8 29.1 26.4 29.5
Total 100.0% 100.0% 100.0% 100.0%
Geographical:
United States 82.4% 80.5% 81.5% 81.2%
International 17.6 19.5 18.5 18.8
Total 100.0% 100.0% 100.0% 100.0%
</TABLE>
The Company's operating income as a percentage of revenue was 19.8% and
22.8% for the six months ended June 30, 1998 and 1997, respectively. Gross
margins for electronic travel distribution services and information
technology solutions were 34.4% and 18.1%, respectively, for the six months
ended June 30, 1998, and 34.6% and 23.8%, respectively, for the six months
ended June 30, 1997.
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
ELECTRONIC TRAVEL DISTRIBUTION. Electronic travel distribution revenues
for the three months ended June 30, 1998 increased approximately $28 million,
9.0%, compared to the three months ended June 30, 1997, from $311 million to
$339 million. The increase was primarily due to growth in booking fees from
associates from $281 million to $304 million. This growth was primarily
driven by an overall increase in the price per booking charged to associates.
Other revenues increased $5 million partially due to services provided
related to the Company's ABACUS joint venture.
Cost of revenues for electronic travel distribution increased approximately $13
million, 6.3%, from $208 million to $221 million. This increase was primarily
attributable to increases in depreciation and amortization and other
operating expenses. Depreciation and amortization expense increased primarily
due to growth in the subscriber equipment base, shorter depreciable
lives on purchased subscriber equipment reflecting increased technological
changes and an increase in capitalized software and other long-term assets.
Other operating expenses increased primarily due to equipment maintenance
costs and other software development expenses associated with the Company's
Year 2000 compliance program and increased communication costs.
INFORMATION TECHNOLOGY SOLUTIONS.
Revenues from information technology solutions for the three months ended
June 30, 1998 increased approximately $100 million, 72.5%, compared to the
three months ended June 30, 1997, from $138 million to $238 million. Revenues
from unaffiliated customers increased approximately $83 million, primarily
related to the commencement of services performed under the information
technology services agreement with US Airways and Year 2000 testing and
compliance enhancements for Canadian Airlines. Revenues from affiliated
customers increased approximately $17 million, primarily related to Year 2000
services performed for AMR.
<PAGE> 10
THE SABRE GROUP HOLDINGS, INC.
RESULTS OF OPERATIONS (Continued)
Cost of revenues for information technology solutions increased
approximately $94 million, 88.7%, from $106 million to $200 million. This
increase was primarily attributable to an increase in salaries, benefits and
employee related costs and depreciation and amortization expenses. Salaries,
benefits and employee related costs increased due to an increase in the
average number of employees necessary to support the Company's business growth
and annual salary increases. The increase in depreciation and
amortization expense is primarily due to the purchase of US Airways' information
technology assets for approximately $47 million in January 1998 and other normal
additions and replacements.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $6 million, 15.0%, from $40 million to $46
million primarily due to an increase in salaries, benefits and employee related
costs and legal and professional fees. Salaries, benefits and employee related
costs increased as a result of sales growth initiatives and increased
administrative requirements to support the Company's growth. Legal and
professional fees increased primarily related to the formation of the ABACUS
joint venture and the growth of outsourcing activity.
OPERATING INCOME. Operating income increased $14 million, 14.7%, from $95
million to $109 million. Operating margins decreased from 21.1% in 1997 to
18.9% in 1998 due to an increase in revenues of 28.4% while operating
expenses increased 31.9%.
INTEREST INCOME. Interest income decreased $2 million due to lower
average balances maintained in the Company's short-term investment
accounts.
INTEREST EXPENSE. Interest expense decreased $1 million due to lower
interest rates.
INCOME TAXES. The provision for income taxes was $41 million and $37 million
for the three months ended June 30, 1998 and 1997, respectively. The increase
in the provision for income taxes corresponds with the increase in net
income before the provision for income taxes.
NET EARNINGS. Net earnings increased $10 million, 16.9%, from $59 million to
$69 million, primarily due to the increase in operating income.
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
ELECTRONIC TRAVEL DISTRIBUTION. Electronic travel distribution revenues
for the six months ended June 30, 1998 increased approximately $64 million,
10.3%, compared to the six months ended June 30, 1997, from $620 million to $684
million. The increase was primarily due to growth in booking fees from
associates from $564 million to $612 million. This growth was primarily
driven by an overall increase in the price per booking charged to associates.
Other revenues increased $16 million primarily due to services provided
related to the Company's ABACUS joint venture.
Cost of revenues for electronic travel distribution increased approximately $43
million, 10.6%, from $405 million to $448 million. This increase was
primarily attributable to increases in depreciation and amortization,
subscriber incentives, salaries, benefits and employee related costs and
other operating expenses. Depreciation and amortization expense increased
primarily due to growth in the subscriber equipment base, shorter
depreciable lives on purchased subscriber equipment reflecting
increased technological changes and an increase in capitalized software and
other long-term assets. Subscriber incentive expenses increased in order to
maintain and expand the Company's travel agency subscriber base. Salaries,
benefits and employee related costs increased due primarily to annual salary
increases. Other operating expenses increased primarily due to equipment
maintenance costs and other software development expenses related to the
Company's Year 2000 compliance program, software development expenses related to
the Company's ABACUS joint venture and increased communication costs.
<PAGE> 11
THE SABRE GROUP HOLDINGS, INC.
RESULTS OF OPERATIONS (Continued)
INFORMATION TECHNOLOGY SOLUTIONS. Revenues from information technology
solutions for the six months ended June 30, 1998 increased approximately $177
million, 65.6%, compared to the six months ended June 30, 1997, from $270
million to $447 million. Revenues from unaffiliated customers increased
approximately $144 million, primarily related to the commencement of services
performed under the information technology services agreement with US
Airways and Year 2000 testing and compliance enhancements for Canadian
Airlines. Revenues from affiliated customers increased approximately $33
million, primarily related to Year 2000 services performed for AMR.
Cost of revenues for information technology solutions increased
approximately $160 million, 77.7%, from $206 million to $366 million. This
increase was primarily attributable to an increase in salaries, benefits and
employee related costs and depreciation and amortization expenses. Salaries,
benefits and employee related costs increased due to an increase in the
average number of employees necessary to support the Company's business growth
and annual salary increases. The increase in depreciation and
amortization expense is primarily due to the purchase of US Airways'
information technology assets for approximately $47 million in January 1998
and other normal additions and replacements.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $17 million, 22.4%, from $76 million to $93
million primarily due to an increase in salaries, benefits and employee related
costs and legal and professional fees. Salaries, benefits and employee related
costs increased as a result of sales growth initiatives and increased
administrative requirements to support the Company's growth. Legal and
professional fees increased primarily due to the formation of the ABACUS joint
venture and the growth of outsourcing activity.
OPERATING INCOME. Operating income increased $21 million, 10.3%, from $203
million to $224 million. Operating margins decreased from 22.8% in 1997 to
19.8% in 1998 due to an increase in revenues of 27.2% while operating
expenses increased 32.2%.
INTEREST INCOME. Interest income decreased $1 million due to lower
average balances maintained in the Company's short-term investment
accounts.
INTEREST EXPENSE. Interest expense decreased $1 million due to lower
interest rates.
INCOME TAXES. The provision for income taxes was $86 million and $80 million
for the six months ended June 30, 1998 and 1997, respectively. The increase in
the provision for income taxes corresponds with the increase in net
income before the provision for income taxes.
NET EARNINGS. Net earnings increased $15 million, 12.0%, from $125 million to
$140 million, primarily due to the increase in operating income.
LIQUIDITY AND CAPITAL RESOURCES
The Company had substantial liquidity at June 30, 1998, with approximately $375
million in cash and short-term investments and $411 million in working
capital. At December 31, 1997, cash and short-term investments and working
capital were $585 million and $558 million, respectively.
AMR 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 $180 million and $195
million for the six months ended June 30, 1998 and 1997, respectively, was
primarily attributable to net earnings before non-cash charges.
<PAGE> 12
THE SABRE GROUP HOLDINGS, INC.
LIQUIDITY AND CAPITAL RESOURCES
(Continued)
Capital investments for the six months ended June 30, 1998 and 1997 were $361
million and $133 million, respectively. For the six months ended June 30, 1998,
capital investments included capital expenditures for property and equipment
of $194 million, including $47 million for information technology assets
acquired from US Airways, and $140 million related to the Company's
interest in the ABACUS joint venture. The Company has estimated capital
investments of approximately $500 to $550 million for 1998.
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 primarily
consist of purchases of equipment for the data center, as well as computer
equipment to support (i) updating existing subscriber equipment, (ii)
expansion of the subscriber base and (iii) new product capital requirements.
The Company believes available balances of cash 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.
In 1997, the Company's Board of Directors authorized, subject to certain
business and market conditions, the repurchase of up to 1.5 million shares
of the Company's Class A Common Stock. During the six months ended June 30,
1998, the Company purchased approximately 1 million treasury shares
at a cost of approximately $33 million.
YEAR 2000 COMPLIANCE
STATE OF READINESS. In 1995, the Company implemented a project intended
to ensure that hardware and software systems operated or licensed in the
Company's business, including systems provided to its travel agency subscribers
and its outsourcing customers, are designed to operate and properly manage
dates beyond 1999 ("Year 2000 Compliant"). Substantially all of the
Company's core systems are either completed or in the final testing phases
of the Year 2000 project. The Company expects its Year 2000 project to be
substantially completed in the first quarter of 1999 and believes that it
has allocated adequate resources to meet this goal.
Using dedicated testing environments and applying rigorous test standards,
the Company is actively testing its hardware and software systems, including
those provided by third parties, and system interfaces with its principal
data suppliers, subscribers and participants, to determine it they are Year
2000 Compliant.
The advance booking and planning needs of many of the Company's customers make
it desirable for the Company's computer systems to be Year 2000 Compliant in
the first quarter of 1999. The Company's realtime computer systems, including
the SABRE computer reservations system, are now Year 2000 Compliant, with only
testing of minor subsystems remaining to be completed. The Company has also
substantially completed testing of the other software systems that it operates.
The Company has begun installing at its subscriber locations Year 2000 Compliant
hardware and software, and it expects installation to be completed by the first
quarter of 1999. The Company expects software marketed by SABRE Technology
Solutions to be substantially Year 2000 Compliant in the second quarter of
1999.
COSTS OF YEAR 2000 PROJECT. The Company expects to incur significant internal
labor costs, as well as consulting and other expenses in its Year 2000
project. The Company's total estimated cost of the project is approximately
$80 to $95 million, of which approximately $44 million, cumulatively, was
incurred as of June 30, 1998. The Company expects to incur most of the
remaining expenses, principally related to subscriber implementation efforts,
during the remainder of 1998. A portion of these costs will not be incremental
costs to the Company, but rather will represent the re-deployment of information
technology resources. Costs associated with the Year 2000 project will be
expensed as incurred and will be paid from operating revenues.
<PAGE> 13
THE SABRE GROUP HOLDINGS, INC.
LIQUIDITY AND CAPITAL RESOURCES (Continued)
RISKS OF YEAR 2000 NON-COMPLIANCE. The economy in general, and the travel
and transportation industry in particular, may be adversely affected by risks
associated with the Year 2000. The Company's business, financial condition,
and results of operations could be materially adversely affected if systems
that it operates or licenses to third parties, or systems that are operated
by other parties (e.g., utilities, telecommunications service providers, data
providers, associates, credit card transaction processors) with which the
Company's systems interface, are not Year 2000 Compliant in time. There can
be no assurance that these systems will continue to properly function and
interface and will otherwise be Year 2000 Compliant. Although the Company is
not aware of any threatened claims related to the Year 2000, the Company may
be subject to litigation arising from such claims and, depending on the outcome,
such litigation could have a material adverse affect on the Company. It is
not clear whether the Company's insurance coverage would be adequate to offset
these and other business risks related to the Year 2000.
The expected costs and completion dates for the Year 2000 project are forward
looking statements based on management's best estimates, which were derived
using numerous assumptions of future events, including the continued
availability of resources, third party modification plans and other factors.
Actual results could differ materially from these estimates as a result of
factors such as the availability and cost of trained personnel, the ability
to locate and correct all relevant computer codes, and similar uncertainties.
CONTINGENCY PLANS. To the extent possible, the Company will develop and
implement contingency plans designed to allow continued operations in the
event of failure of the Company's or third parties' systems to be Year 2000
Compliant. For example, the Company plans to have dedicated staff available
at crucial dates to remedy unforeseen problems and is installing defensive
code to protect it real-time systems from improperly formatted date data
supplied by third parties.
NEW EUROPEAN CURRENCY
In January 1999, certain European countries are scheduled to introduce a
new currency unit called the "euro". The Company has implemented a project
intended to ensure that hardware and software systems operated or licensed
in the Company's business, including systems provided to its travel agency
subscribers and its outsourcing customers, are designed to properly handle
the euro. The Company expects its euro project to be substantially completed
in the fourth quarter of 1998 and believes that it has allocated adequate
resources to meet this goal. The Company estimates that the introduction of
the euro, including the total cost for the euro project, will not have a
material effect on the Company's business, financial condition, and results
of operations. The projected costs and completion dates for the Company's
euro project are forward looking statements that are based on management's
best estimates. Actual results could differ materially from these estimates.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities,
which is required to be adopted in years beginning after June 15, 1999. Because
of the Company's minimal use of derivatives, management does not
anticipate that the adoption of the new Statement will have a significant effect
on the earnings or the financial position of the Company.
<PAGE> 14
THE SABRE GROUP HOLDINGS, INC.
CAUTIONARY STATEMENT
Statements in this report which are not purely historical facts, including
statements regarding the Company's anticipations, beliefs, expectations,
hopes, intentions or strategies for the future, may be forward looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. All forward looking statements in this report are based upon
information available to the Company on the date of this report. The Company
undertakes no obligation to publicly update or revise any forward looking
statements, whether as a result of new information, future events or otherwise.
Any forward looking statements involve risks and uncertainties that could cause
actual events or results to differ materially from the events or results
described in the forward looking statements. Readers are cautioned not
to place undue reliance on these forward looking statements.
Risks associated with the Company's forward looking statements include, but
are not limited to: risks related to the Company's relationships with American
and US Airways and their affiliates, including risks that they may terminate
any of the agreements with the Company, or fail or otherwise become unable to
fulfill their 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 the Company's
technology, such as a failure to timely achieve Year 2000 or Euro currency
compliance; 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.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In connection with the Reorganization, the Company is the successor in interest
to American in the following two civil proceedings concerning disputed booking
fees.
In 1995, America West Airlines, Inc. ("America West") began withholding
SABRE booking fees that it claims were assessed in contravention of America
West's SABRE participation agreement. American and SABRE Associates, Inc.,
filed a lawsuit against America West in the District Court of Tarrant County,
Texas, 153rd Judicial District, to recover the unpaid booking fees from
America West. On April 10, 1997, the District Court of Tarrant County, Texas
granted the Company's motion of summary judgment as to the proper interpretation
of the contract, upholding the Company's position. On April 21, 1997, America
West paid the Company $2.9 million in past due booking fees, with a
stipulation that preserves its rights in the lawsuit. America West has pending
counter-claims against the Company claiming breach of contract.
In June 1996, American Trans Air, Inc. ("ATA") filed a lawsuit against
American in the U.S. District Court for the Southern District of Indiana,
Indianapolis Division seeking a refund of over $400,000 in SABRE booking fees
on similar grounds to America West's claims. In addition, since June 1996,
ATA has withheld payment of more than $300,000 in SABRE booking fees. The
Company filed a motion for summary judgment in the ATA lawsuit which is
similar to the one granted in the America West lawsuit. ATA filed a
cross-motion for summary judgment similar to the one filed by America West
claiming its interpretation of the contract is the correct one. On August 12,
1998, the District Court denied ATA's motion in its entirety and granted the
Company's motion as to the definition of a "booking" and the validity of the
charges under the participation agreement.
If either ATA or America West were to prevail on their claims, other
associates might make similar claims. Nevertheless, the Company believes that
the booking fees are properly charged pursuant to its contracts and that the
claims of ATA and America West can be successfully defended or resolved
without a material adverse effect on the Company's financial position or results
of operations.
<PAGE> 15
THE SABRE GROUP HOLDINGS, INC.
OTHER INFORMATION (Continued)
On November 18, 1997, the Canadian Court of Appeals affirmed a 1993 lower
court judgment awarding the Company damages from Air Canada for actions
taken by Air Canada relating to the Company's purchase of Ticketnet
Corporation. The Court of Appeals reduced the damages awarded to CAD
$10,160,000. With interest and costs, the judgment is now approximately CAD
$26,000,000. Air Canada filed an appeal to the Supreme Court of Canada.
On January 9, 1998, Worldspan LP, the former provider of computer
reservation system services to ABACUS International Holdings, filed a lawsuit
against the Company in the United States District Court for the Northern
District of Georgia, Atlanta Division, seeking damages and an injunction, and
alleging, among other things, that the Company interfered with Worldspan's
relationship with ABACUS, violated the U.S. antitrust laws, and
misappropriated Worldspan's confidential information. The same day,
Worldspan filed a parallel lawsuit in the same court against ABACUS. On
February 26, 1998, the court denied Worldspan's motion for a preliminary
injunction against ABACUS. Thereafter, the court stayed the ABACUS case
pending arbitration between ABACUS and Worldspan. The Company believes
that Worldspan's claims are without merit and is vigorously defending itself.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The owners of 17,217,901 shares of Class A Common Stock and 107,374,000
shares of Class B Common Stock, representing more than 99% of the voting
power of all of the Registrant's shares issued and outstanding at March 24,
1998, were represented at the annual meeting of stockholders on May 20, 1998
at the American Airlines Training and Conference Center at 4501 Highway 360,
Fort Worth, Texas 76155. Each share of Class A Common Stock was entitled to
one vote, and each share of Class B Common Stock was entitled to ten votes,
at the annual meeting.
Gerard J. Arpey, Paul C. Ely, Jr. and Glenn W. Marschel, Jr. were elected as
directors of the Company for a three year term, with each director receiving
at least 1,090,886,553 votes in favor. The appointment of Ernst & Young LLP
as independent auditors for the Company for 1998 was ratified, with
1,090,940,555 votes in favor, 9,289 votes against, and 8,057 votes withheld.
<PAGE> 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are included herein:
<TABLE>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
<S> <C>
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 Colombia, 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, Inc. (1)
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, Inc. (1)
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)
</TABLE>
<PAGE>17
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
<TABLE>
<S> <C>
10.21 Amended and Restated Sublease Agreement,
dated May, 1996, between American Airlines,
Inc. and the Tulsa Airports Improvement
Trust. (1)
10.22 Assignment Agreement, dated as of July 1,
1996, between The SABRE Group, Inc. and
American Airlines, Inc. (1)
10.23 Office Lease Agreement, dated as of January
19, 1996, between American Airlines, Inc.
and Maguire/Thomas Partners -
Westlake/Southlake Partnership. (1)
10.24 American Airlines, Inc. Supplemental
Executive Retirement Plan dated November 16,
1994. (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. Employee
Stock Purchase Plan (3)
10.34 Option Issuance Agreement, dated January 1,
1998 between Registrant and US Airways,
Inc.(5)
21.1 Subsidiaries of Registrant.
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule as of June
30, 1997.
</TABLE>
(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.
(5) Incorporated by reference to Exhibit 10.34 to the Company's
report on Form 10-K for the year ended December 31, 1997, (File No.
1-12175).
On April 21, 1998, the Company filed a report on Form 8-K relative to a
press release issued by the Company. The press release was issued to announce
that Robert L. Crandall, Chairman of the Company would retire on May 20, 1998.
<PAGE> 18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE SABRE GROUP HOLDINGS, INC.
Date: August 14, 1998 BY: /s/ T. Patrick Kelly
T. Patrick Kelly
Senior Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting
Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 8,560
<SECURITIES> 366,916
<RECEIVABLES> 347,919
<ALLOWANCES> 11,711
<INVENTORY> 0
<CURRENT-ASSETS> 780,351
<PP&E> 1,407,859
<DEPRECIATION> 747,179
<TOTAL-ASSETS> 1,811,969
<CURRENT-LIABILITIES> 369,246
<BONDS> 317,873
0
0
<COMMON> 1,310
<OTHER-SE> 868,430
<TOTAL-LIABILITY-AND-EQUITY> 1,811,969
<SALES> 0
<TOTAL-REVENUES> 1,130,673
<CGS> 0
<TOTAL-COSTS> 814,350
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,597
<INCOME-PRETAX> 226,642
<INCOME-TAX> 86,331
<INCOME-CONTINUING> 140,311
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 140,311
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.07
</TABLE>
<PAGE> 1
Exhibit 21.1
SUBSIDIARIES
THE SABRE GROUP HOLDINGS, INC.
The SABRE Group Holdings, Inc. SUBSIDIARY
(All subsidiaries are wholly-owned unless otherwise noted in
parenthesis. Each subsidiary's subsidiaries outlined further below.)
The SABRE Group, Inc. (Delaware)
The SABRE Group, Inc. SUBSIDIARIES
Axess International Network, Inc. (Japan) (25%)
ENCOMPASS Holding, Inc. (Delaware)
Prize Ltd. (Latvia) (50%)
SABRE Decision Technologies International, Inc. (Delaware)
SABRE Decision Technologies Licensing, Inc. (Delaware)
SABRE Enterprises, Inc. (Delaware)
SABRE International, Inc. (Delaware)
SABRE International Holdings, Inc. (Delaware)
SABRE Limited (New Zealand)
SABRE Soluciones de Viaje S. de R.L. de C.V. (99%)
SABRE Technology Enterprises, Ltd. (Cayman Islands)
SABRE Technology Holland B.V. (The Netherlands)
SST Finance, Inc. (Delaware)
SST Holding, Inc. (Delaware)
TSGL, Inc. (Delaware)
The SABRE Group Sales (Barbados), Ltd.
Ticketnet Corporation (Canada)
SABRE Decision Technologies International, Inc. SUBSIDIARY
SABRE Decision Technologies (Australia) Pty Ltd.
SABRE International, Inc. SUBSIDIARIES
SABRE Belgium (Belgium) (99%)
SABRE Computer-Reservierungssystem GmbH (Austria)
SABRE Danmark ApS (Denmark)
SABRE Deutschland Marketing GmbH (Germany)
SABRE Deutschland Services GmbH (Germany)
SABRE Espana Marketing, S.A. (Spain) (99%)
SABRE Europe Management Services Ltd. (UK) (99%)
SABRE France Sarl (France)
SABRE Hellas SA (Greece)
SABRE Ireland Limited (Ireland)
SABRE Italia S.r.l. (Italy) (99%)
SABRE Marketing Nederland B.V. (The Netherlands)
SABRE Norge AS (Norway)
SABRE Portugal Servicos LDA (Portugal) (99%)
<PAGE> 2
SABRE International, Inc. SUBSIDIARIES - Continued
SABRE Servicios Colombia LTDA (Colombia) (99%)
SABRE Suomi Oy (Finland)
SABRE Sverige AB (Sweden)
SABRE UK Marketing Ltd. (UK) (99%)
STIN Luxembourg S.A. (Luxembourg) (99%)
SABRE International Holdings, Inc. SUBSIDIARIES
SABRE Belgium (Belgium) (1%)
SABRE Espana Marketing, S.A. (Spain) (1%)
SABRE Europe Management Services Ltd. (UK) (1%)
SABRE Italia S.r.l. (Italy) (1%)
SABRE Portugal Servicos LDA (Portugal) (1%)
SABRE Servicios Colombia LTDA (Colombia) (1%)
SABRE UK Marketing Ltd. (UK) (1%)
STIN Luxembourg S.A. (Luxembourg) (1%)
The SABRE Group International (Bahrain) W.L.L. (1%)
SABRE Soluciones de Viaje S. de R.L. de C.V. SUBSIDIARY
SABRE Informacion S.A. de C.V. (99%)
SABRE Technology Enterprises, Ltd. SUBSIDIARIES
SABRETechnology Enterprises II, Ltd. (Cayman Islands)
The SABRE Group International (Bahrain) W.L.L. (99%)
SABRE Technology Holland B.V. SUBSIDIARIES
SABRE Informacion S.A. de C.V. (1%)
SABRE Soluciones de Viaje S. de R.L. de C.V. (1%)
SST Holding, Inc. SUBSIDIARY
SABRE Sociedad Tecnologica S.A. (Mexico) (51%)
SABRE Sociedad Tecnologica S.A. (Mexico) SUBSIDIARY
SABRE Services Administration (Mexico)
TSGL, Inc. SUBSIDIARY
TSGL Holding, Inc. (Delaware)
Ticketnet Corporation SUBSIDIARY
148548 Canada, Inc. (Canada)
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 6,208
<SECURITIES> 501,047
<RECEIVABLES> 239,586
<ALLOWANCES> 6,469
<INVENTORY> 0
<CURRENT-ASSETS> 789,355
<PP&E> 1,288,459
<DEPRECIATION> 699,377
<TOTAL-ASSETS> 1,415,915
<CURRENT-LIABILITIES> 281,675
<BONDS> 317,873
0
0
<COMMON> 1,308
<OTHER-SE> 694,541
<TOTAL-LIABILITY-AND-EQUITY> 1,415,915
<SALES> 0
<TOTAL-REVENUES> 889,224
<CGS> 0
<TOTAL-COSTS> 610,499
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,040
<INCOME-PRETAX> 205,281
<INCOME-TAX> 80,060
<INCOME-CONTINUING> 125,221
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 125,221
<EPS-PRIMARY> .96
<EPS-DILUTED> .96
</TABLE>
