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UNITED STATES
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 [No Fee Required]
For fiscal year ended December 31, 1998.
[ ] 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 (I.R.S. Employer Identification No.)
incorporation or organization)
4255 Amon Carter Blvd.
Fort Worth, Texas 76155
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(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (817) 963-6400
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of exchange on which registered
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Class A Common Stock, par value $.01 New York Stock Exchange
per share
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 .
- --
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 15, 1999 was approximately $945,351,834. As of March 15,
1999, 22,572,421 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 19,
1999.
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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 and American 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. As of March 15, 1999, AMR owned all
107,374,000 shares of the Company's Class B Common Stock, representing
approximately 82.6% of the economic interest and 97.9% of the combined voting
power of all classes of voting stock of the Company.
The Company is the world leader in the electronic distribution of travel
through its SABRE-Registered Trademark-(1) computer reservations system ("the
SABRE system"). In addition, the Company is a leading provider of information
technology solutions to the travel and transportation industries and fulfills
substantially all of the data processing, network and distributed systems
needs of American and AMR's other subsidiaries, Canadian Airlines
International, Ltd., ("Canadian"), US Airways, Inc. ("US Airways") and other
customers.
ELECTRONIC TRAVEL DISTRIBUTION
The SABRE system 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 the SABRE system, travel
agencies, corporate travel departments and individual consumers
("subscribers") can access information about and book reservations with
airlines and other providers of travel and travel-related products and
services ("associates"). As of December 31, 1998, travel agencies with
approximately 40,000 locations in over 100 countries on six continents
subscribed to the SABRE system. Subscribers are able to make reservations
with more than 420 airlines, more than 50 car rental companies and more than
200 hotel companies covering approximately 40,000 hotel properties worldwide.
During 1998, more airline bookings in North America were made through
the SABRE system than through any other global distribution system. In 1998,
approximately 57.4% 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
The SABRE system, 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
1998, over 850 associates displayed information about their products and
services through the SABRE system, and the Company estimates that more than
$70 billion of travel-related products and services were sold through the
SABRE system.
In addition to providing information to subscribers about airlines and
other travel-related vendors, the SABRE system reports to the travel
providers transaction data about subscriber-generated reservations, allowing
vendors to better manage inventory and revenues. The SABRE system also allows
travel agency subscribers to print airline tickets, boarding passes and
itineraries. Additionally, the SABRE system 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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(1) All marks are trademarks and/or service marks of their respective owners.
Sabre is a registered trademark of a subsidiary of the Sabre Group Holdings,
Inc.
2
ASSOCIATE PARTICIPATION
The Company derives its electronic travel distribution revenues
primarily from booking fees paid by associates for reservations made through
the SABRE system for their products and services. In addition to airlines,
associates include car rental companies, hotel companies, railroads, tour
operators, ferry companies and cruise lines.
Airlines and other associates can display, warehouse, manage and sell
their inventory in the SABRE system. The booking fee paid by an associate
depends upon several factors, including the associate's level of
participation in the SABRE system and the type of products or services
provided by the associate. Airlines are offered a wide range of participation
levels. The lowest level of participation for airlines, SABRE BASIC BOOKING
REQUEST-SM- participation level, provides schedules and electronic booking
functionality only. Higher levels of participation for airlines, such as
SABRE DIRECT CONNECT AVAILABILITY-SM- participation level, provide greater
levels of communication with the SABRE system, giving subscribers more
detailed information and associates improved inventory management. For an
associate selecting one of the higher levels of participation, the SABRE
system provides subscribers with a direct connection to the associate's
internal reservation system, allowing the SABRE system 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. The Company also provides associates,
upon request, marketing data derived from the SABRE system bookings for fees
that vary depending on the amount and type of information provided.
SUBSCRIBER ACCESS
Access to the SABRE system enables subscribers to electronically locate,
price, compare and purchase travel products and services provided by
associates. The Company tailors the interface and functionality of the SABRE
system 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 the SABRE
system, in return for fees that typically vary inversely 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, the Company has modified
the SABRE system 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 systems. For example, the
Company developed TURBO SABRE-TM- software, an advanced point-of-sale
interface and application development tool that enables advanced
functionality such as customized screens, automated quality control, database
integration, and eliminates complex commands, reducing keystrokes and
training requirements.
PLANET SABRE-SM- software, which the Company introduced in February
1997, includes a graphical launch pad, which enables 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-SM- software 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-SM- software transforms the SABRE system from a complex
command-oriented system to an all-graphic interface with continued access to
the SABRE system and its capabilities.
The SABRE system 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-Registered
Trademark-software to corporations and home-based travel agents that are
sponsored by travel agencies. Using COMMERCIAL SABRE-Registered Trademark-
software, a traveler or agent can connect to the SABRE system and make
bookings which are automatically delivered to the sponsoring agency where
travel documents are issued.
3
The Company also markets the SABRE system to corporations through the
SABRE BUSINESS TRAVEL SOLUTIONS-TM- system ("the SABRE BTS-TM- system").
Released in October 1996, the SABRE BTS-TM- system 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-support. The SABRE BTS-TM- system 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.
INDIVIDUAL CONSUMERS. Through the Company's TRAVELOCITY.COM-SM- online
travel site ("the TRAVELOCITY.COM-SM- site") and EASYSABRE-Registered
Trademark-reservations site ("the EASYSABRE-Registered Trademark- site"),
individual consumers can compare prices, make travel reservations and obtain
destination information online. These products are available to individual
consumers free of charge.
The TRAVELOCITY.COM-SM- site is accessible through the Internet and
computer on-line services. It features booking and purchase capability for
all airline, car rental and hotel companies for which booking and purchase
capability is available in the SABRE system. Vacation and cruise packages are
available as well. The TRAVELOCITY.COM-SM- site also offers access to a
database of destination and interest information, articles from travel
correspondents and interactive maps. The TRAVELOCITY.COM-SM- site has over 5
million members and averages approximately 60 million page views per month.
The Internet address for the TRAVELOCITY.COM-SM- site is www.travelocity.com.
The Company has entered into numerous co-branding agreements to provide
access to the TRAVELOCITY.COM-SM- site on complementary Internet Web sites.
These agreements include deals with Netscape Communications Corporation to
launch Netcenter Travel on the TRAVELOCITY.COM-SM- site, accessible through
the Netscape Netcenter free online service and an agreement with Yahoo! Inc.
for the TRAVELOCITY.COM-SM- site to be the exclusive co-branded travel
booking service for Yahoo! and Yahoo! Travel.
The Company receives booking fees and commissions from travel providers for
purchases of their travel products and services pursuant to reservations made
through the TRAVELOCITY.COM-SM- and EASYSABRE-Registered Trademark- sites.
INTERNATIONAL MARKETING
The Company is actively involved in marketing the SABRE system
internationally either directly or through joint venture or distributorship
arrangements. 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.
In February 1998, the Company signed long-term agreements with ABACUS
International Holdings Ltd. which created a Singapore-based joint venture
company to manage travel distribution in the Asia/Pacific region. The Company
owns 35 percent of the joint venture company, called ABACUS International Ltd.,
and provides it with transaction processing and product development services on
the SABRE system .
COMPETITION
The Company competes in electronic travel distribution primarily against
other large and well-established global distribution systems. The Company's
principal competitors in marketing to travel agents include Amadeus, Galileo and
Worldspan. Each of these competitors offers many products and services
substantially similar to those of the Company.
The Company markets the SABRE system to corporations through the SABRE
BTS-TM- system. The Company's main competitors in marketing to corporations
include American Express, Internet Travel Network, E-Travel, Inc., Xtra
Online Corporation and Travel Technologies Group.
The Company also distributes travel through the Internet and computer
on-line services to consumers directly through the TRAVELOCITY.COM-SM- site. Its
main competitors include Expedia (owned by Microsoft Corporation), Preview
Travel and Internet Travel Network. Increasingly, many travel suppliers are
developing their own web sites, some of which offer an array of products and
services, that directly target consumers.
4
The Company potentially faces many new competitors as new travel
distribution channels develop. Still, significant barriers exist for these new
players including: significant capital investment, development of global network
facilities, development or acquisition of hardware and software systems with
global scales and reach, and ability to connect to disparate travel suppliers'
and travel agents' systems.
The global market to attract and retain agency subscribers is intensely
competitive. 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 adoption of these tools is currently quite
low, but it is growing quickly. The Company believes that it has positioned its
SABRE BTS-TM- system and TRAVELOCITY.COM-SM- website products and services to
effectively compete in these emerging distribution channels.
CRS INDUSTRY REGULATION
The Company's electronic travel distribution business is subject to
regulation in the United States, the European Union, Canada, Australia and New
Zealand. These regulations address the relationships among computer reservation
systems ("CRSs"), airline associates, and travel agency subscribers. These
regulations do not currently address relationships with non-airline associates,
but the regulations in the European Union were revised effective March 15, 1999
and include rail associates in certain circumstances. In general, these
regulations are directed at ensuring fair competition among travel providers.
Among the principles addressed in the current regulations are: unbiased CRS
displays of airline information, fair treatment of airline associates by CRSs,
equal participation by airlines in non-owned CRSs, and fair competition for
subscribers. The CRS regulations in the United States are currently being
revised. In addition, the Department of Civil Aviation of Brazil is considering
the adoption of comprehensive CRS regulations. The Company does not believe that
the revisions to the European Union code, the possible revisions to the United
States code, or possible adoption of a code in Brazil will materially adversely
affect its operations.
OTHER REGULATION
The Company is subject to regulations affecting issues such as: exports of
technology, telecommunications, data privacy and electronic commerce. Some
portions of the Company's business, such as its Internet-based electronic travel
distribution, may be affected by newly-developed regulations. Regulations
affecting other areas of the Company's business may be revised from time to
time. Regulations also vary among jurisdictions. The Company believes that it is
capable of addressing these regulatory issues as they arise.
INFORMATION TECHNOLOGY SOLUTIONS
The Company is a leading provider of information technology services to the
travel and transportation industries. The Company employs its airline technology
expertise to offer information technology solutions to clients that face similar
complex operations issues, including airport, railroad, trucking and hospitality
companies. The services offered by the Company include software development and
product sales, transactions processing, consulting, as well as comprehensive
information technology outsourcing. The Company provides data processing,
network and distributed systems services to American and AMR's other
subsidiaries, Canadian, US Airways and other customers, fulfilling substantially
all of their information technology requirements. In 1998, approximately 42.6%
of the Company's revenue was generated by the provision of information
technology solutions.
The Company is aggressively pursuing strategic information technology
relationships that add a new dimension to traditional outsourcing agreements by
integrating its airline applications and business processes into customer
operations. Clients enter into strategic agreements with the Company in order to
benefit from its extensive airline industry expertise, experience with complex
operating and transaction environments and its extensive suite of software
products and services.
5
The Company offers a comprehensive set of information technology solution
services to the airline industry. These solutions include: (i) information
technology outsourcing; (ii) software development, sales and licensing; and
(iii) consulting, which includes capabilities ranging from reengineering to
functional consulting. 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.
(i) INFORMATION TECHNOLOGY OUTSOURCING: The Company offers information
technology outsourcing to airlines for desktop, data center, network and
application development. The Company extends real-time transaction processing
services by providing 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. The Company also provides services for establishing
systems security, voice networks, data center connectivity, helpdesk support and
desktop applications. Some of the major clients for the outsourcing business
include American, Canadian, Aerolineas Argentinas, US Airways, Pakistan
International Airlines, and Gulf Air.
(ii) SOFTWARE DEVELOPMENT, SALES AND LICENSING: The Company provides
software and consulting solutions to more than 170 airlines or airline
associations. These solutions have many applications for airlines. For
example, (a) with the SABRE AIRMAX-SM- revenue management system, airlines
can seek to enhance revenue using statistical and database sources that
estimate the economic implications of fare actions before they are
implemented, (b) with the SABRE AIRPRICE-SM- fares management system,
airlines can analyze and manage fares and react to competitors' changes, (c)
with the SABRE AIRFLITE-SM- flight scheduling system, airlines can determine
superior flight schedules and (d) with the SABRE AIRCREWS-SM- crew management
system, airlines can improve crew member scheduling thus reducing staffing
costs. The Company develops ready off the shelf products as well as
customized software for some of its larger clients. Some of the most popular
products support flight scheduling, flight operations, revenue management,
crew scheduling, sales automation, cargo tracking, passenger systems and
frequent flyer programs. The Company's solutions have helped American become
one of the most technologically advanced airlines in the world.
(iii) CONSULTING: The Company's consulting services assist businesses in
the travel and transportation industries in collecting and analyzing operational
and customer data in order to improve internal operations and product
distribution in the market place. These services enable businesses to improve
airport and other operations and optimally distribute their fares, schedules and
inventories through all available channels - with special emphasis on
distribution through computer reservations and global distribution systems.
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, Vancouver, London, Paris, Kuwait City, Hong Kong,
Sydney and Auckland). 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 550 clients located
in more than 85 countries.
In 1996, the Company executed an information technology services agreement
with American for a term of ten years for most services (three and five years
for others). Under this agreement, the Company provides data processing,
network, distributed systems, and applications development 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. The
Company completes nearly all of the applications development for American, as
well as manages the AMR Year 2000 project office and completes most of AMR
system's Year 2000 testing and compliance enhancements.
6
In January 1998, the Company completed the execution of a 25-year,
multibillion dollar technology agreement with US Airways to provide
substantially all of US Airways' information technology services. As a part of
the agreement, the Company purchased approximately $47 million of US Airways'
information technology assets, 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. The agreement covers the
management and operation of US Airways' systems and information technology
services. Additionally, the Company agreed to assist US Airways in making its
information systems Year 2000 compliant. For further discussion of the US
Airways transaction, see Note 4 to the Consolidated Financial Statements.
In connection with the US Airways agreement, in December 1998, the Company
successfully managed the largest information technology system migration ever
performed in the airline industry. Within a two-day timeframe more than 200 US
Airways systems were successfully converted or migrated, including all core
systems--Passenger Service System, Flight Operating System and Cargo--and other
systems such as yield management and in-flight dining. The migration included
the conversion of more than 3.5 million passenger name records and more than two
million electronic tickets to the SABRE system.
In February 1998, the Company executed a 10-year information technology
services agreement with Gulf Air. Under the terms of the agreement, the Company
will be responsible for all of Gulf Air's information technology infrastructure,
including application development and maintenance, as well as data center and
network management.
In November 1998, the Company executed a 10-year agreement with Aerolineas
Argentinas that calls for the airline to outsource the management and provision
of its information technology functions to the Company. The contract also calls
for the Company to provide specialized information technology services to
Aerolineas Argentinas' affiliate, Austral Lineas Aereas-Cielos Del Sur.
In December 1998, the Company executed a 15-year agreement with Pakistan
International Airlines in which the airline will outsource all information
technology functions to the Company. This agreement followed a three-year
consulting agreement signed between the two companies in March 1998.
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 Global
Services, Unisys, Andersen Consulting and Lufthansa Systems. The Company
believes that its competitive position in the travel and transportation
industries is enhanced by its experience in developing systems for American and
other airlines and by its ability to offer not only software applications but
also systems development, integration and maintenance and transaction processing
services.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs approximated $39 million for 1998 and $24
million for 1997. Prior to 1997, research and development costs were not
material.
SEGMENT INFORMATION
Financial information for the Company's operating segments and geographical
revenues and assets are included in Note 12 to the Consolidated Financial
Statements.
7
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, patents,
copyrights, trade secrets, trademarks and intellectual property rights, are
significant assets of the Company. The Company relies on a combination of
patent, copyright, trade secret and trademark laws, confidentiality procedures
and contractual provisions to protect these assets. The Company's software and
related documentation 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, 1998 the Company had approximately 10,800 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 employees based in the United States are represented by a
labor union.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in Fort Worth, Texas,
primarily in three buildings, two of which are owned by the Company and one of
which is leased from the Dallas/Fort Worth International Airport Board under a
lease that expires in 2019, subject to four renewal options of five years each,
exercisable at the option of the Company. The Company leases a fourth office
building in Southlake, Texas, under a lease that expires in 2006, subject to two
renewal options of five years each, exercisable at the option of the Company.
Additionally, the Company leases office facilities in Westlake, Texas under
leases expiring in 2003, subject to a three-month or a three-year option,
exercisable at the option of the Company. The Company also leases office
facilities in approximately 70 other locations worldwide.
The Company's principal 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. The SABRE system 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.
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 server based and
client/server distributed systems.
The Company's travel agency and corporate subscribers connect to the
SABRE system through leased access circuits. These leased access circuits, in
turn, connect to the domestic and international data networks leased by the
Company, such as those leased from Societe Internationale de
Telecommunications Aeronautiques ("SITA"), which is owned by a consortium of
Airlines, including American.
The Company believes that its office facilities, Data Center and Fort Worth
Center 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 network access will be adequate for its immediate and
foreseeable needs. The Company, however, continuously invests to upgrade these
facilities to meet changing technological needs.
8
ITEM 3. LEGAL PROCEEDINGS
BOOKING FEE DISPUTES
In connection with the Reorganization, the Company was 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 system booking fees that it claims were assessed in contravention of
America West's SABRE system participation agreement. In 1996, 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
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 preserved its rights in the lawsuit. In
December 1998, the parties settled the remaining issues in the lawsuit.
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 booking fees
charged by the Company on similar grounds to America West's claims. In
addition, since June 1996, ATA has withheld payment of approximately $250,000
in SABRE system 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.
In January 1999, the Company filed additional motions seeking to dismiss the
remaining issues in the case, which involve interpretation of the Department
of Transportation's CRS regulations.
WORLDSPAN DISPUTE
On January 9, 1998, Worldspan LP ("Worldspan"), the former provider of
computer reservation system services to ABACUS International Holdings
("ABACUS"), 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, which is scheduled to begin in May 1999. On September 16, 1998,
the court denied motions by the Company to dismiss Worldspan's lawsuit against
the Company or to stay the case pending arbitration between ABACUS and
Worldspan. The Company believes that Worldspan's claims are without merit and is
vigorously defending itself. No trial date has been set.
9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended December 31, 1998.
PART II
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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 15, 1999 was 355. 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.
The range of the high and low sales prices for the Company's Class A Common
Stock on the New York Stock Exchange for the two most recent fiscal years was:
High Low
---- ---
Quarter Ended:
March 31, 1998 36.50 26.062
June 30, 1998 38.625 32.50
September 30, 1998 43.125 29.312
December 31, 1998 44.875 23.00
Quarter Ended:
March 31, 1997 30.00 25.25
June 30, 1997 28.875 23.25
September 30, 1997 37.00 26.438
December 31, 1997 35.875 24.50
No cash dividends on Class A Common Stock or Class B Common Stock were
declared or paid during 1998 and 1997.
10
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------ ------------
(IN MILLIONS, EXCEPT PER SHARE DATA AND OTHER DATA WHERE INDICATED)
INCOME STATEMENT DATA (1):
Revenues $ 2,306.4 $ 1,788.4 $ 1,625.1 $ 1,530.7 $ 1,404.6
Operating expenses 1,956.0 1,475.8 1,295.2 1,149.2 1,056.5
------------- ------------- ------------- ------------ ------------
Operating income 350.4 312.6 329.9 381.5 348.1
Other income (expense), net 21.1 11.0 (24.0) (11.4) (24.0)
------------- ------------- ------------- ------------ ------------
Income before income taxes 371.5 323.6 305.9 370.1 324.1
Income taxes 139.6 123.7 119.3 144.2 126.9
------------- ------------- ------------- ------------ ------------
Net earnings $ 231.9 $ 199.9 $ 186.6 $ 225.9 $ 197.2
------------- ------------- ------------- ------------ ------------
------------- ------------- ------------- ------------ ------------
Earnings per common share, basic and
diluted $ 1.78 $ 1.53 $ 1.43 --- ---
------------- ------------- ------------- ------------ ------------
------------- ------------- ------------- ------------ ------------
BALANCE SHEET DATA
(AT END OF PERIOD) (1):
Current assets $ 944.4 $ 877.6 $ 694.5 $ 271.2 $ 404.3
Total assets 1,926.8 1,504.0 1,287.1 729.4 873.5
Current liabilities 400.8 311.5 289.8 218.6 503.2
Debenture payable to AMR 317.9 317.9 317.9 --- ---
Stockholder's net investment --- --- --- 432.1 289.5
Stockholders' equity 953.7 757.3 569.6 --- ---
OTHER DATA (1):
Operating margin 15.2% 17.5% 20.3% 24.9% 24.8%
Percentage of revenue from
unaffiliated customers 75.1% 70.6% 69.2% 64.2% 58.0%
Direct reservations booked using the
SABRE system (2) 356.5 359.3 348.8 322.8 311.6
Total reservations processed using
the SABRE system (3) 408.6 370.9 356.0 327.5 314.1
Cash flows from operating activities $ 450.8 $ 372.8 $ 415.8 $ 395.9 $ 265.3
Capital expenditures $ 320.0 $ 218.1 $ 184.3 $ 166.8 $ 168.9
- --------------------------------------------------------------------------------
(1) The Company has significant transactions with AMR and American. 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.
See Note 5 to the Consolidated Financial Statements.
(2) CRS reservations for which the Company collects a booking fee.
(3) Includes direct reservations plus reservations processed by joint venture
partners using the SABRE system.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SUMMARY
During 1998 the Company generated approximately 57.4% of its revenue from
electronic travel distribution services and approximately 42.6% of its revenue
from information technology solutions services. The following table sets forth
revenues by affiliation and geographic location as a percentage of total
revenues:
Year Ended December 31,
------------------------------------------
1998 1997 1996
----------- ----------- -----------
Affiliation:
Unaffiliated Customers 75.1% 70.6% 69.2%
Affiliated Customers 24.9 29.4 30.8
----------- ----------- -----------
Total 100.0% 100.0% 100.0%
----------- ----------- -----------
----------- ----------- -----------
Geographic:
United States 74.3% 72.4% 74.8%
International 25.7 27.6 25.2
----------- ----------- -----------
Total 100.0% 100.0% 100.0%
----------- ----------- -----------
----------- ----------- -----------
Total revenues have grown at a compound annual growth rate of 14.6% for the
three years ended December 31, 1998. Revenues from affiliated customers have
declined as a percentage of total revenues because of growth in the Company's
external business. Revenues from unaffiliated customers grew at a compound
annual growth rate of 20.8% during the three years ended December 31, 1998, to
$1,732 million in 1998. The Company expects that the amount and proportion of
revenues from unaffiliated customers will continue to increase. International
revenues grew at a compound annual growth rate of 33.2% for the three years
ended December 31, 1998, to $593 million in 1998. Revenues from the United
States grew at a compound annual rate of 10.2% over the same period, to $1,713
million in 1998.
Total operating expenses have grown at a compound annual growth rate of
19.4% for the three years ended December 31, 1998. The Company's primary
expenses consist of salaries, benefits and other employee related costs,
depreciation and amortization, communication costs and subscriber incentives,
representing approximately 76.5%, 75.1% and 74.0% of total operating expenses in
1998, 1997 and 1996, respectively. Those expenses grew at a compound annual
growth rate of 19.7% for the three years ended December 31, 1998 primarily due
to the Company's growth, the incremental costs of the Company's Year 2000
efforts, expenses associated with the US Airways agreement and other expenses
incurred to support growth in information technology outsourcing. As a result,
operating margin decreased from 20.3% in 1996 to 15.2% in 1998.
12
SEASONALITY
The following table sets forth quarterly financial data for the Company (in
millions except per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
1998
- ----
Revenues $ 554.1 $ 576.6 $ 604.3 $ 571.4
Operating income 114.5 109.3 98.4 28.2
Net earnings 71.8 68.5 71.4 20.2
Operating margin 20.7% 19.0% 16.3% 4.9%
Direct reservations booked using the
SABRE system 96.5 91.5 90.6 77.9
Total reservations booked using the
SABRE system 104.4 106.6 105.6 92.0
Earnings per common share, basic $ .55 $ .53 $ .55 $ .16
Earnings per common share, diluted $ .55 $ .52 $ .55 $ .16
1997
- ----
Revenues $ 440.3 $ 448.9 $ 457.5 $ 441.8
Operating income 108.5 94.6 89.5 20.1
Net earnings 66.7 58.5 56.2 18.4
Operating margin 24.6% 21.1% 19.6% 4.5%
Direct reservations booked using the
SABRE system 94.9 93.6 91.4 79.4
Total reservations booked using the
SABRE system 97.5 96.7 94.5 82.2
Earnings per common share, basic and
diluted $ .51 $ .45 $ .43 $ .14
The travel industry is seasonal in nature. Bookings, and thus booking
fees charged for the use of the SABRE system, 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, AMR and American have entered into various agreements,
including an agreement for the provision of information technology services to
American by the Company (the "Technology Services Agreement"), an agreement for
the provision of marketing support by American for the Company's travel agency
products and the SABRE BTS-TM- system, the TRAVELOCITY.COM-SM- site and the
EASYSABRE-Registered Trademark- site (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 "Corporate Travel
Agreement" and the "Travel Privileges Agreement"). These agreements are
collectively referred to as the "Affiliate Agreements". See Note 5 to the
Consolidated Financial Statements for a description of each agreement. The rates
under the agreements are adjusted or renegotiated from time to time, and current
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.
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. For 1998, revenues from services provided under the Technology Services
Agreement with a remaining service term of (i) three years represented
approximately 1.2% of total revenues, (ii) four years represented approximately
3.5% of total revenues and (iii) eight years represented approximately 12.5% of
total revenues.
13
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. Beginning in 1998, the formulas for annually adjusting certain rates
under the Technology Services Agreement are adjusted every two years through
negotiations of the parties which are to be guided by benchmarking procedures
set forth in the agreement.
The Company entered into a Tax-Sharing Agreement with AMR dated 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 for a description of the agreement.
The Company 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 5 to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
ELECTRONIC TRAVEL DISTRIBUTION. Electronic travel distribution revenues for the
year ended December 31, 1998 increased approximately $120 million, 10.0%,
compared to the year ended December 31, 1997, from $1,205 million to $1,325
million. This increase was primarily due to growth in booking fees from
associates from $1,081 million to $1,174 million. The growth in booking fees was
primarily driven by an overall increase in the average price per booking charged
to associates. Other revenues increased $16 million due to services provided and
equity income related to the Company's ABACUS joint venture and $11 million
related to revenues from sales of miscellaneous products and services.
Cost of revenues for electronic travel distribution increased approximately
$63 million, 7.4%, from $853 million to $916 million. This increase was
primarily attributable to increases in subscriber incentives, depreciation and
amortization, salaries and benefits and other operating expenses. Subscriber
incentive expenses increased in order to maintain and expand the Company's
travel agency subscriber base. Depreciation and amortization expense increased
primarily due to depreciating recently purchased subscriber equipment over
shorter estimated useful lives to reflect an increased rate of technological
changes coupled with an increase in capitalized software and other long-term
assets. These increases were offset by a reduction in a reserve for obsolete
computer equipment. Salaries and benefits increased primarily due 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. These increases were offset by the
effect of the prior year write-off of a capitalized software development
project.
INFORMATION TECHNOLOGY SOLUTIONS. Revenues from information technology solutions
for the year ended December 31, 1998 increased approximately $399 million,
68.4%, compared to the year ended December 31, 1997, from $583 million to $982
million. Revenues from unaffiliated customers increased approximately $360
million primarily due to 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 $39 million, primarily from Year 2000 services performed for AMR.
Cost of revenues for information technology solutions increased
approximately $397 million, 88.2%, from $450 million to $847 million. This
increase was primarily attributable to an increase in salaries, benefits and
employee related costs, depreciation and amortization expenses and other
operating 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 acquisition of
information technology assets to support the US Airways' contract and other
normal additions and replacements as well as amortization of the deferred asset
associated with the US Airways' agreement. Other operating expenses increased
primarily due to increased data processing costs, other services purchased and
facility costs.
14
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $21 million, 12.2%, from $172 million to $193
million primarily due to an increase in salaries and benefits and legal and
professional fees. Salaries and benefits 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 $37 million, 11.8%, from $313
million to $350 million. Operating margins decreased from 17.5% in 1997 to 15.2%
in 1998 due to an increase in revenues of 29.0% while operating expenses
increased 32.5%.
INTEREST INCOME. Interest income decreased $4 million due to lower average
balances maintained in the Company's short-term investment accounts.
INTEREST EXPENSE. Interest expense decreased $2 million primarily due to lower
interest rates.
OTHER, NET. Other, net increased $12 million primarily due to a one-time gain
from a favorable court judgment relating to Ticketnet Corporation, an inactive
subsidiary of the Company.
INCOME TAXES. The provision for income taxes was $140 million and $124 million
in 1998 and 1997, respectively. The increase in the provision for income taxes
primarily corresponds with the increase in income before the provision for
income taxes. See Note 7 to the Consolidated Financial Statements for additional
information regarding income taxes.
NET EARNINGS. Net earnings increased $32 million, 16.0%, from $200 million to
$232 million, primarily due to the increase in operating income and the
favorable court judgment regarding Ticketnet Corporation, an inactive subsidiary
of the Company.
1997 COMPARED TO 1996
ELECTRONIC TRAVEL DISTRIBUTION. Electronic travel distribution revenues for the
year ended December 31, 1997 increased approximately $100 million, 9.0%,
compared to the year ended December 31, 1996, from $1,105 million to $1,205
million. This increase was primarily due to growth in booking fees from $1,007
million to $1,081 million. The growth in booking fees was due to an increase in
booking volumes primarily attributable to international expansion in Europe and
Latin America and an overall increase in the price per booking charged to
associates.
Cost of revenues for electronic travel distribution increased approximately
$90 million, 11.8%, from $763 million to $853 million. This increase was
primarily attributable to increases in salaries, benefits and employee related
costs, depreciation and amortization, subscriber incentive and other operating
expenses. Salaries, benefits and employee related costs increased due to an
increase in the average number of employees necessary to support the Company's
revenue growth and annual salary increases. Employee related costs also
increased due to increased travel 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. Subscriber
incentive expenses increased in order to maintain and expand the Company's
travel agency subscriber base. Other operating expenses increased due to the
write-off of a capitalized software development project that was intended to
create a new order entry and billing system, costs associated with SabreWorld 97
(a global travel technology conference and trade show), increased software
license expenses, increased reserves for bad debt and an increase in fees paid
to American under the Marketing Cooperation Agreement.
15
INFORMATION TECHNOLOGY SOLUTIONS. Revenues from information technology solutions
for the year ended December 31, 1997 increased approximately $63 million, 12.1%,
compared to the year ended December 31, 1996, from $520 million to $583 million.
Revenues from unaffiliated customers increased approximately $39 million due to
an increase in software development, consulting and software license fee
revenues. Revenues from AMR increased $24 million due to an increase in software
development revenue and data processing volumes offset by a decrease in data
network revenues from the sale, in July 1996, of data network equipment to a
third party which began direct billing certain items to American.
Cost of revenues for information technology solutions increased
approximately $61 million, 15.7%, from $389 million to $450 million. This
increase was primarily attributable to an increase in salaries, benefits and
employee related costs, offset by a decrease in depreciation and amortization
expense. 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 decrease in depreciation and
amortization expense is primarily due to the benefits of lower price and higher
productivity of certain data center equipment and the sale, in July 1996, of
data network equipment with a net book value of approximately $25 million to a
third party.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $29 million, 20.3%, from $143 million to $172
million primarily due to an increase in salaries, benefits and employee related
costs. Salaries, benefits and employee related costs increased as a result of
sales growth initiatives for both the electronic travel distribution and the
information technology solutions lines of business. Employee related costs also
increased due to increased travel expenses.
OPERATING INCOME. Operating income decreased $17 million, 5.2%, from $330
million to $313 million. Operating margins decreased from 20.3% in 1996 to 17.5%
in 1997 due to an increase in revenues of 10.1% while operating expenses
increased 14.0%.
INTEREST INCOME. Interest income increased $17 million due to higher balances
maintained in the Company's short-term investment accounts.
INTEREST EXPENSE. Interest expense decreased $6 million primarily due to a lower
outstanding principal balance on the Debenture (as defined below) issued to
American in July 1996 and lower interest rates.
OTHER, NET. Other, net increased $13 million primarily due to nonrecurring
losses in 1996 related to an inactive subsidiary of the Company.
INCOME TAXES. The provision for income taxes was $124 million and $119 million
in 1997 and 1996, respectively. The increase in the provision for income taxes
corresponds with the increase in income before the provision for income taxes.
See Note 7 to the Consolidated Financial Statements for additional information
regarding income taxes.
NET EARNINGS. Net earnings increased $13 million, 7.0%, from $187 million to
$200 million, primarily due to the increase in interest and other income offset
by the decrease in operating income.
LIQUIDITY AND CAPITAL RESOURCES
The Company had substantial liquidity at December 31, 1998, with
approximately $538 million in cash and short-term investments and $544 million
in working capital. At December 31, 1997, cash and short-term investments and
working capital were $585 million and $566 million, respectively. 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 $451 million
in 1998 and $373 million in 1997 was primarily attributable to net earnings
before noncash charges.
16
Capital investments for 1998 and 1997 were $466 million and $232 million,
respectively. For 1998, capital investments include capital expenditures for
property and equipment of $320 million, including $111 million for information
technology assets acquired from and to support the agreement with US Airways,
and $140 million related to the Company's interest in the ABACUS joint venture.
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,
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 $275 million to $325 million for 1999. The Company
is also considering the development of a new headquarters facility and the
expansion of its data center facilities to support the Company's growth. 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 1998, the Company purchased
approximately 1.4 million treasury shares at a cost of approximately $49
million. On March 16, 1999, the Company's Board of Directors authorized, subject
to certain business and market conditions, the repurchase of up to an additional
1 million shares of the Company's Class A Common Stock.
On March 16, 1999, the Company's Board of Directors authorized a loan of
$300 million to American. The loan agreement was executed on March 17, 1999.
The principal amount of the loan will be due June 30, 1999 and will bear
interest at a rate equal to the Company's average portfolio rate for each
month in which the loan is outstanding plus an additional spread based upon
American's credit risk. The Company has the option to call the note with
ten-business day's notice to American. American may repay the principal
amount prior to June 30, 1999 without penalty. As part of this agreement, the
original Credit Agreement (as defined in Note 5 to the Consolidated Financial
Statements) was modified to terminate American's ability to borrow additional
funds under that agreement.
INTEREST IN EQUANT
At December 31, 1998, American owned approximately 3.1 million depository
certificates representing beneficial ownership of common stock of Equant N.V.
("Equant"), a telecommunications company related to Societe Internationale de
Telecommunications Aeronatiques ("SITA"). Approximately 1.7 million of these
depository certificates were held by American for the economic benefit of the
Company.
Equant completed an initial public offering in July 1998. As of December
31, 1998, the estimated value of the 1.7 million depository certificates, held
on behalf of the Company, was approximately $113 million, based upon the market
value of Equant's publicly-traded common stock. The estimated value of the
certificates was not readily determinable as of December 31, 1997. The Company's
carrying value of these depository certificates was nominal as of December 31,
1998 and 1997.
In connection with a secondary offering of Equant, in February 1999
American liquidated approximately 923,000 depository certificates.
Approximately 490,000 of these certificates, representing approximately 30%
of the Company's interest at December 31, 1998, were liquidated for the
Company's benefit. The Company received proceeds of approximately $35 million
from the transaction, resulting in a gain of approximately $35 million.
17
The remaining amount of depository certificates held by American, including
those held on behalf of the Company, are subject to change based on a final
equity reallocation among the owners of the depository certificates that will
occur during 1999. The Company anticipates the number of depository
certificates held by American for the economic benefit of the Company will
significantly increase based upon this reallocation. Any future disposal of
such depository certificates may result in additional gains to the Company.
YEAR 2000 COMPLIANCE
STATE OF READINESS. In 1995, the Company implemented a project (the
"Year 2000 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 December 31, 1999 ("Year 2000
Compliant"). The Company has assessed (i) its over 1000 information
technology applications and operating systems that will be utilized to
process dates after December 31, 1999 ("IT Systems") and (ii) its
non-information technology systems, including embedded technology, relating
to security, elevator control, HVAC and systems ("Non-IT Systems"). The Year
2000 Project consists of six phases: (i) awareness, (ii) assessment, (iii)
analysis, design and remediation, (iv) testing and validation, (v) quality
assurance review (to ensure consistency throughout the Year 2000 Project) and
(vi) creation of business continuity strategy, including contingency plans in
the event of Year 2000 failures. In developing the Company's proprietary
software analysis, remediation and testing methodology for Year 2000
compliance, it studied the best practices of the Institute of Electrical and
Electronics Engineers and the British Standards Institution.
IT SYSTEMS. The Company has completed the first three phases of the Year
2000 Project for all of its IT Systems. The Company has completed the testing
and validation phase and quality assurance review phase for 94% of its IT
applications, including its computer reservations and flight operating system
applications that perform such "mission critical" functions as passenger
bookings, ticketing, passenger check-in, aircraft weight and balance, flight
planning and baggage and cargo processing. As of February 28, 1999,
approximately 38% of the IT applications (including the computer reservations
systems) are already processing Year 2000 dates correctly.
Using dedicated testing environments and applying rigorous test standards,
the Company is actively testing its other IT Systems to determine if they are
Year 2000 Compliant or further remediation is necessary. The Company estimates
completing the testing and validation phase and quality assurance review phase
for its remaining IT Systems by June 30, 1999. All software developed by the
Company and currently being marketed is Year 2000 Compliant. The Company has
installed Year 2000 Compliant hardware and software at substantially all of its
travel agency subscriber locations worldwide. The Company will continue
upgrading certain hardware and software that support its IT Systems, which it
estimates will be completed by June 30, 1999.
NON-IT SYSTEMS. The Company has completed the first four phases of the Year
2000 Project and expects to complete the quality assurance review phase during
the second quarter of 1999 for substantially all of its Non-IT Systems. The
Company believes that its business, financial condition and results of
operations would not be materially adversely affected, and that it has adequate
contingency plans to ensure business continuity, if any of its Non-IT Systems
are not Year 2000 Compliant. Accordingly, the Company has primarily focused its
Year 2000 Project efforts on its IT Systems.
THIRD PARTY SERVICES. The Company relies on third party providers for many
services, such as telecommunications, utilities, data and credit card
transaction processing. In providing services to the Company, those providers
depend on their hardware and software systems and, in the case of
telecommunications and data service providers, on interfaces with the Company's
IT Systems. The Company received responses from substantially all of its 650
telecommunications and data service providers, other than providers of
discretionary data services that would not materially adversely affect the
Company's business, financial condition and results of operations. A majority of
the responding providers assured the Company that their software and hardware is
Year 2000 Compliant or will be before June 30, 1999. To the extent practical,
the Company intends to replace third party telecommunications and data service
providers that are not Year 2000 Compliant by June 30, 1999.
18
The Company's business is particularly dependent on its ability to transmit
data on a worldwide basis through telecommunications networks. For
telecommunications network services, the Company relies on third party service
providers throughout the world, including AT&T, SITA and MCI Worldcom. Many of
those service providers rely on other communications service providers that are
located in less developed countries and may have allocated limited resources to
Year 2000 compliance. The failure of a segment of the telecommunications network
could disrupt the Company's ability to provide services to its customers.
Depending on its severity, a disruption could have a material adverse affect on
the Company's business, financial condition, and results of operations. The
Company does not expect the Year 2000 issues it might encounter with third
parties to be materially different from those encountered by other information
technology companies, including the Company's competitors.
COSTS OF YEAR 2000 PROJECT. The Company expects to incur significant
hardware, software and 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 $95 to $105 million, of which approximately $78 million,
cumulatively, was incurred as of December 31, 1998. The total costs include
approximately $25 million for the installation of Year 2000 Compliant hardware
and software at travel agency subscriber locations, approximately $28 million
for the Company's software applications, approximately $18 million related to
the Company's hardware and software infrastructure and approximately $7 million
for project management and other labor costs. Future costs of the Year 2000
Project will primarily result from the redeployment of information technology
resources, although no significant internal IT Systems projects are being
deferred to further the Year 2000 Project. The remaining costs primarily relate
to the ongoing upgrade of certain hardware and software that support the
Company's IT Systems; the analysis, testing and verification of the Year 2000
readiness of third party service providers; and the refinement of the Company's
business continuity plans. Costs associated with the Year 2000 project will be
expensed as incurred and will be paid from operating cash flows.
RISKS OF YEAR 2000 NON-COMPLIANCE. The economy in general, and the travel
and transportation industries 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 IT Systems that
it operates or licenses to third parties, or systems that are operated by other
parties with which the Company's IT 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.
Management believes that its most likely Year 2000 risks relate to the failure
of third parties with whom it has material relationships, particularly
telecommunications network providers, to 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. There can be no assurance that the Company's insurance
coverage would be adequate to offset these and other business risks related to
the Year 2000 issue.
BUSINESS CONTINUITY PLANS. To the extent practical, the Company is
identifying the most likely Year 2000 failures in an effort to develop and
refine plans to continue its business in the event of failures of the Company's
or third parties' systems to be Year 2000 Compliant. These plans include
performing certain processes manually; maintaining dedicated staff to be
available at crucial dates to remedy unforeseen problems; installing defensive
code to protect real-time systems from improperly formatted date data supplied
by third parties; repairing or obtaining replacement systems; and reducing or
suspending certain non-critical aspects of the Company's services or operations.
Because of the pervasiveness and complexity of the Year 2000 issue, and in
particular the uncertainty concerning the efforts and success of third parties
to be Year 2000 Compliant, the Company will continue to refine its contingency
plans during 1999.
19
NEW EUROPEAN CURRENCY
In January 1999, certain European countries established fixed conversion
rates between their currencies and a new common currency unit called the "euro".
The Company conducts business in European countries. The transition period for
the introduction of the euro is between January 1, 1999 and June 30, 2002. In
1997, 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,
were designed to properly handle the euro. The Company completed the project in
1998. The Company estimates that the conversion to and use 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.
INFLATION
The Company believes that inflation has not had a material effect on its
results of operations.
OUTLOOK FOR 1999
The Company expects continued profitability and revenue growth in 1999.
Revenues from the Company's existing outsourcing customers, including US
Airways, American and Canadian, are expected to be the same as or less than 1998
revenues because the Company has completed Year 2000 efforts for American and
Canadian and most of the migration services for US Airways. The Company,
however, expects strong revenue growth from outsourcing contracts signed in
1998, from new contracts expected in 1999 and from software development and
real-time transaction processing services. As a result, the Company expects that
the amount and proportion of revenues from information technology solutions
activities to increase.
Additionally, the Company expects overall revenue growth from electronic
travel distribution activities to be consistent with prior years. The Company
anticipates a slight decline in domestic airline bookings in 1999; however, the
Company expects to compensate for the decline with growth in international
bookings, market share gains worldwide, price increases and revenues from new
promotional and marketing products.
The Company expects an improved operating margin in 1999 due to a reduction
in expenses associated with the Company's Year 2000 compliance program because
the project is nearing completion. In addition, the Company expects improved
margins on the US Airways contract as the conversion/migration services will be
completed in early 1999 and the contract will be moving to steady state. The
Company expects that selling, general and administrative expenses will increase
in 1999 as a result of sales growth initiatives and increased administrative
requirements to support the Company's growth.
20
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, 1996. 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, 1996, 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 5 to the Consolidated
Financial Statements. Amounts shown below are in thousands, with the exception
of per share amounts.
Year Ended December 31,
-----------------------------------------------------
1998 1997 1996
Actual Actual Pro Forma
--------------- --------------- ---------------
Revenues
Electronic Travel Distribution $ 1,324,795 $ 1,205,192 $ 1,104,885
Information Technology Solutions 981,592 583,271 514,148
--------------- --------------- --------------
Total revenues 2,306,387 1,788,463 1,619,033
Operating expenses
Cost of revenues
Electronic Travel Distribution 915,805 853,221 764,536
Information Technology Solutions 847,212 450,296 382,387
Selling, general and administrative 192,998 172,321 142,618
--------------- --------------- --------------
Total operating expenses 1,956,015 1,475,838 1,289,541
--------------- --------------- --------------
Operating income 350,372 312,625 329,492
Other income (expense)
Interest income 26,034 29,980 13,282
Interest expense (19,493) (21,692) (25,107)
Other, net 14,541 2,736 (9,970)
--------------- --------------- --------------
Total other income (expense) 21,082 11,024 (21,795)
--------------- --------------- --------------
Income before provision for income taxes 371,454 323,649 307,697
Provision for income taxes 139,513 123,796 120,000
--------------- --------------- --------------
Net earnings $ 231,941 $ 199,853 $ 187,697
--------------- --------------- --------------
--------------- --------------- --------------
Earnings per common share, basic and diluted $ 1.78 $ 1.53
--------------- ---------------
--------------- ---------------
Pro forma earnings per common share, basic
and diluted $ 1.44
--------------
--------------
ACTUAL 1997 COMPARED TO PRO FORMA 1996
ELECTRONIC TRAVEL DISTRIBUTION. Electronic travel distribution actual revenues
for the year ended December 31, 1997 increased approximately $100 million, 9.0%,
compared to pro forma revenues for the year ended December 31, 1996, from $1,105
million to $1,205 million. The increase was primarily due to growth in booking
fees from $1,007 million to $1,081 million. The growth in booking fees was due
to an increase in booking volumes primarily attributable to international
expansion in Europe and Latin America and an overall increase in the price per
booking charged to associates.
21
Actual cost of revenues for electronic travel distribution for the year
ended December 31, 1997 increased approximately $88 million, 11.5%, compared to
pro forma for the year ended December 31, 1996 from $765 million to $853
million. This increase was primarily attributable to an increase in salaries,
benefits and employee related costs, depreciation and amortization, subscriber
incentive and other operating expenses. Salaries, benefits and employee related
costs increased due to an increase in the average number of employees necessary
to support the Company's revenue growth and annual salary increases.
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. Subscriber incentive expenses increased in order to
maintain and expand the Company's travel agency subscriber base. Other operating
expenses increased due to the write-off of a capitalized software development
project that was intended to create a new order entry and billing system, costs
associated with SabreWorld 97 (a global travel technology conference and trade
show), increased reserves for bad debt and an increase in fees paid to American
under the Marketing Cooperation Agreement.
INFORMATION TECHNOLOGY SOLUTIONS. Actual revenues from information technology
solutions for the year ended December 31, 1997 increased approximately $69
million, 13.4%, compared to pro forma revenues for the year ended December 31,
1996, from $514 million to $583 million. Revenues from unaffiliated customers
increased approximately $39 million due to an increase in software development,
consulting and software license fee revenues. Revenues from AMR increased $30
million due to an increase in software development revenue and data processing
volumes.
Actual cost of revenues for information technology solutions for the year
ended December 31, 1997 increased approximately $68 million, 17.8%, compared to
pro forma cost of revenues for the year ended December 31, 1996, from $382
million to $450 million. This increase was primarily attributable to an increase
in salaries, benefits and employee related costs and communication expenses,
offset by a decrease in depreciation and amortization expense. 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 communication expense is primarily due
to the lease of the domestic data network from a third party. This data network
was owned by the Company until July 1996. The decrease in depreciation and
amortization expense is primarily due to the benefits of lower price and higher
productivity of certain data center equipment and the sale, in July 1996, of
data network equipment with a net book value of approximately $25 million to a
third party.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Actual selling, general and
administrative expenses increased $29 million, 20.3%, compared to pro forma
selling, general and administrative expenses, from $143 million to $172 million
primarily due to an increase in salaries, benefits and employee related costs.
Salaries, benefits and employee related costs increased as a result of sales
growth initiatives for both the electronic travel distribution and the
information technology solutions lines of business. Employee related costs also
increased due to increased travel expenses.
OPERATING INCOME. Actual operating income decreased $16 million, 4.9%, compared
to pro forma operating income, from $329 million to $313 million. Operating
margins decreased from 20.4% to 17.5% due to an increase in actual revenues of
10.5% compared to pro forma revenues, while actual operating expenses increased
14.4% compared to pro forma operating expenses.
INTEREST INCOME. Actual interest income increased $17 million, compared to pro
forma interest income, due to higher balances maintained in the Company's
short-term investment accounts.
INTEREST EXPENSE. Actual interest expense decreased $3 million, compared to pro
forma interest expense, due to a decrease in interest rates on the Debenture (as
defined below) issued to American.
OTHER, NET. Actual other, net increased $13 million, compared to pro forma other
income, primarily due to nonrecurring losses in 1996 related to an inactive
subsidiary of the Company.
22
INCOME TAXES. The actual provision for income taxes was $124 million and the pro
forma provision for income taxes was $120 million for the years ended December
31, 1997 and 1996, respectively. The increase in the provision for income taxes
corresponds with the increase in income before the provision for income taxes.
See Note 7 to the Consolidated Financial Statements for additional information
regarding income taxes.
NET EARNINGS. Actual net earnings increased $12 million, 6.4%, compared to pro
forma net earnings, from $188 million to $200 million, primarily due to the
increase in interest and other income offset by the decrease in operating
income.
NEW ACCOUNTING PRONOUNCEMENTS
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 the
Company does not currently use derivatives to a significant extent, management
does not anticipate that the adoption of Statement 133 will have a significant
effect on the earnings or the financial position of the Company. The Company
will adopt the statement effective January 1, 2000.
Effective January 1, 1999, the Company will be required to adopt the
provisions of SOP 98-1, ACCOUNTING FOR COMPUTER SOFTWARE DEVELOPED OR OBTAINED
FOR INTERNAL USE. SOP 98-1 requires the capitalization of certain costs incurred
during an internal-use software development project. Capitalizable costs consist
of (a) certain external direct costs of materials and services incurred in
developing or obtaining internal-use computer software, (b) payroll and
payroll-related costs for employees who are directly associated with and who
devote time to the project and (c) interest costs incurred. Costs that are
considered to be related to research and development activities, data conversion
activities, and training, maintenance and general and administrative or overhead
costs will continue to be expensed as incurred. Because of the Company's
existing capitalization policies, management does not anticipate that the
adoption of SOP 98-1 will have a significant effect on the earnings or the
financial position of the Company.
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, a failure of
third party suppliers to become Year 2000 Compliant and the outcome of possible
Year 2000 litigation involving the Company; 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
facilities; 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.
23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to interest rates relates primarily to its investment
portfolio and to its debenture payable to AMR. The Company does not currently
use financial derivative instruments to manage interest rate risk; however, it
does closely monitor the relationship between interest rate-sensitive assets and
liabilities.
The objectives of the Company's short-term investments are safety of principal,
liquidity maintenance, yield maximization and full investment of all available
funds. As such, the Company's investment portfolio consists primarily of high
credit quality certificates of deposit, bankers' acceptances, commercial paper
and corporate and government notes. If short-term interest rates average 10%
lower in 1999 than they were during 1998, the Company's interest income from
short-term investments would change by approximately $0.9 million. This amount
was determined by applying the hypothetical interest rate change to the
Company's short-term investments balance as of December 31, 1998.
In addition, the Company has a floating rate debenture payable to AMR (the
"Debenture") due September 30, 2004 with a principal balance of approximately
$318 million at December 31, 1998. Interest expense on the Debenture is accrued
based on the six month London Interbank Offered Rate (LIBOR rate) plus a margin
derived from 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 average interest rate on the Debenture for 1998 was 6.1%.
Consequently, if short-term interest rates average 10% higher in 1999 than they
were during 1998, the Company's interest expenses would increase by
approximately $2.0 million. This amount was determined by applying the
hypothetical interest rate change to the Company's Debenture balance as of
December 31, 1998. If the Company's mix of interest rate-sensitive assets and
liabilities changes significantly, the Company may enter into derivative
transactions to manage its net interest exposure.
FOREIGN CURRENCY RISK
The Company has various foreign operations, primarily in North America, South
America, Europe, and Asia. As a result of these business activities, the Company
is exposed to foreign currency risk. However, these exposures have historically
related to a small portion of the Company's overall operations as a substantial
majority of the Company's business is transacted in the United States dollar.
The Company had no open derivative transactions as of December 31, 1998;
however, it may enter into derivative transactions from time-to-time as foreign
currency exposures arise.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
-------------
Report of Ernst & Young LLP, Independent Auditors 26
Consolidated Balance Sheets 27
Consolidated Statements of Income 28
Consolidated Statements of Cash Flows 29
Consolidated Statements of Stockholders' Equity 30
Notes to Consolidated Financial Statements 31
25
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, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1998. Our audits
also included the financial statement schedule listed under Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Dallas, Texas
January 18, 1999,
except for Note 14, as to which
the date is March 16, 1999
26
THE SABRE GROUP HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------------
December 31,
-------------------------------------------
1998 1997
------------------- --------------------
ASSETS
CURRENT ASSETS
Cash $ 8,008 $ 11,286
Short-term investments 529,735 573,620
Accounts receivable, net 337,703 239,626
Receivable from affiliates, net 21,609 10,829
Prepaid expenses 21,559 21,148
Deferred income taxes 25,790 21,093
------------------- --------------------
Total current assets 944,404 877,602
PROPERTY AND EQUIPMENT
Buildings and leasehold improvements 329,497 321,987
Furniture, fixtures and equipment 40,286 36,904
Service contract equipment 550,951 548,706
Computer equipment 460,530 395,887
------------------- --------------------
1,381,264 1,303,484
Less accumulated depreciation and amortization (737,488) (721,917)
------------------- --------------------
Total property and equipment 643,776 581,567
Investments in joint ventures 148,683 8,198
Other assets, net 189,954 36,591
------------------- --------------------
TOTAL ASSETS $ 1,926,817 $ 1,503,958
------------------- --------------------
------------------- --------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 157,044 $ 96,041
Accrued compensation and related benefits 93,708 69,694
Other accrued liabilities 150,058 145,785
------------------- --------------------
Total current liabilities 400,810 311,520
Deferred income taxes 13,068 12,354
Pensions and other postretirement benefits 104,574 89,573
Other liabilities 136,749 15,350
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; 23,706 and 23,480
shares issued, respectively 237 235
Class B: $0.01 par value; 107,374 shares authorized; 107,374 shares
issued and outstanding 1998 and 1997 1,074 1,074
Additional paid-in capital 599,087 593,939
Retained earnings 395,800 164,004
Less treasury stock at cost; 1,240 shares and 72 shares, respectively (42,455) (1,964)
------------------- --------------------
Total stockholders' equity 953,743 757,288
------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,926,817 $ 1,503,958
------------------- --------------------
------------------- --------------------
The accompanying notes are an integral part of these financial statements.
27
THE SABRE GROUP HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------
1998 1997 1996
-------------- --------------- ---------------
REVENUES
Electronic Travel Distribution $ 1,324,795 $ 1,205,192 $ 1,104,885
Information Technology Solutions 981,592 583,271 520,246
-------------- --------------- ---------------
Total revenues 2,306,387 1,788,463 1,625,131
OPERATING EXPENSES
Cost of revenues
Electronic Travel Distribution 915,805 853,221 763,261
Information Technology Solutions 847,212 450,296 389,352
Selling, general and administrative 192,998 172,321 142,573
-------------- --------------- ---------------
Total operating expenses 1,956,015 1,475,838 1,295,186
-------------- --------------- ---------------
OPERATING INCOME 350,372 312,625 329,945
OTHER INCOME (EXPENSE)
Interest income 26,034 29,980 13,282
Interest expense (19,493) (21,692) (27,401)
Other - net 14,541 2,736 (9,970)
-------------- --------------- ---------------
Total other income (expense) 21,082 11,024 (24,089)
-------------- --------------- ---------------
INCOME BEFORE PROVISION FOR INCOME
TAXES 371,454 323,649 305,856
Provision for income taxes 139,513 123,796 119,282
-------------- --------------- ---------------
NET EARNINGS $ 231,941 $ 199,853 $ 186,574
-------------- --------------- ---------------
-------------- --------------- ---------------
EARNINGS PER COMMON SHARE
Basic $ 1.78 $ 1.53 $ 1.43
-------------- --------------- ---------------
-------------- --------------- ---------------
Diluted $ 1.78 $ 1.53 $ 1.43
-------------- --------------- ---------------
-------------- --------------- ---------------
The accompanying notes are an integral part of these financial statements.
28
THE SABRE GROUP HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
- --------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
OPERATING ACTIVITIES
Net earnings $ 231,941 $ 199,853 $ 186,574
Adjustments to reconcile net earnings to cash
provided by operating activities
Depreciation and amortization 247,734 185,175 165,064
Deferred income taxes (1,021) (2,945) (28,346)
Other 1,940 6,378 6,475
Changes in operating assets and liabilities
Accounts receivable (103,237) (42,611) (58,043)
Prepaid expenses (9,744) (6,781) (7,779)
Other assets (437) (514) 15,428
Accrued compensation and related benefits 24,014 14,147 21,851
Accounts payable and other accrued liabilities 53,288 40,259 76,226
Receivable from and payable to affiliates (10,780) (38,096) 27,267
Pensions and other postretirement benefits 15,001 19,183 4,310
Other liabilities 2,104 (1,245) 6,814
----------------- ----------------- -----------------
Cash provided by operating activities 450,803 372,803 415,841
INVESTING ACTIVITIES
Additions to property and equipment (320,031) (218,124) (184,261)
Net decrease (increase) in short-term investments 43,373 (144,716) (425,458)
Net investment in joint ventures (134,759) (203) (1,555)
Other investing activities, net (41,691) (18,485) 25,784
Proceeds from sale of equipment 30,276 4,551 33,582
----------------- ----------------- -----------------
Cash used for investing activities (422,832) (376,977) (551,908)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 1,498 771 589,089
Proceeds from exercise of stock options 9,499 661 236
Acquisition of treasury stock (49,321) (1,964) ---
Other financing activities, net 7,075 --- ---
Payments on Debenture payable to AMR --- --- (532,127)
----------------- ----------------- -----------------
Cash provided by (used for) financing activities (31,249) (532) 57,198
----------------- ----------------- -----------------
Decrease in cash and cash equivalents (3,278) (4,706) (78,869)
Cash and cash equivalents at beginning of the
period 11,286 15,992 94,861
----------------- ----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 8,008 $ 11,286 $ 15,992
----------------- ----------------- -----------------
----------------- ----------------- -----------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments to affiliates for income taxes $ 141,784 $ 121,456 $ 128,932
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Cash payments to affiliates for interest $ 19,818 $ 24,628 $ 15,524
----------------- ----------------- -----------------
----------------- ----------------- -----------------
The accompanying notes are an integral part of these financial statements.
29
THE SABRE GROUP HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
- --------------------------------------------------------------------------------
Class A Class B Additional Retained Stockholder's
Common Common Paid-in Earnings Net Treasury
Stock Stock Capital (Deficit) Investment Stock Total
-------------------------------------------------------------------------------------------
Balance at January 1, 1996 $ --- $ --- $ --- $ --- $ 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 232 --- 588,857 --- --- --- 589,089
Reclassification of shares of
common stock held by AMR
into 107,374 shares of
Class B Common Stock --- 1,074 (1,074) --- --- --- ---
Issuance of 166 shares of
Class A Common Stock
pursuant to stock option
and restricted stock
incentive plans 2 --- 4,102 --- --- --- 4,104
Net earnings subsequent to
Reorganization --- --- --- 67,524 --- --- 67,524
Unrealized gain on investments --- --- --- 32 --- --- 32
-------------------------------------------------------------------------------------------
Balance at December 31, 1996 234 1,074 591,885 (23,552) --- --- 569,641
Net earnings --- --- --- 199,853 --- --- 199,853
Assumption of net pension
liability from AMR --- --- --- (12,395) --- --- (12,395)
Issuance of 83 shares of Class
A Common Stock pursuant
to stock option, stock
purchase and restricted
stock incentive plans 1 --- 2,054 --- --- --- 2,055
Repurchase of Company stock --- --- --- --- --- (1,964) (1,964)
Unrealized gain on investments --- --- --- 98 --- --- 98
-------------------------------------------------------------------------------------------
Balance at December 31, 1997 235 1,074 593,939 164,004 --- (1,964) 757,288
Net earnings --- --- --- 231,941 --- --- 231,941
Repurchase of Company stock --- --- --- --- --- (49,321) (49,321)
Issuance of 486 shares of
Class A Common Stock
pursuant to stock option,
restricted stock incentive
and stock purchase plans 2 --- 2,278 --- --- 8,830 11,110
Tax benefit from exercise of
employee stock options --- --- 2,870 --- --- --- 2,870
Unrealized loss on investments --- --- --- (145) --- --- (145)
-------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 237 $1,074 $ 599,087 $ 395,800 $ --- $ (42,455) $ 953,743
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
30
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. These
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 5.
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 9.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The consolidated financial statements for periods
prior to the Reorganization 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
5, incurred by AMR on behalf of the Company. Certain reclassifications have
been made to the 1997 and 1996 financial statements to conform to the 1998
presentation.
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.
31
THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------------------------------------------
STATEMENT OF CASH FLOWS - Short-term investments, without regard to
remaining maturity at acquisition, are not considered cash equivalents for
purposes of the statement of cash flows.
DEPRECIATION AND AMORTIZATION - The Company's depreciation and amortization
policies are as follows:
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
Capitalized software 3 to 5 years
Other Assets:
Internally developed software 3 to 5 years
Intangible assets 3 to 20 years
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 the SABRE computer reservations system ("the SABRE
system"). Depreciation of property and equipment totaled approximately
$224 million, $178 million and $157 million in 1998, 1997 and 1996,
respectively. Amortization of other assets approximated $24 million in
1998 and $8 million in 1997 and 1996. Other assets are amortized on the
straight-line basis over the periods indicated. Accumulated amortization
of other assets approximated $43 million at December 31, 1998 and
$15 million at December 31, 1997.
REVENUE RECOGNITION - The Company provides electronic travel distribution
services using the SABRE system. As compensation for electronic travel
distribution services provided, fees are collected from airline, car
rental and hotel vendors and other providers of travel-related
products and services ("associates") for reservations booked through the
SABRE system. The fee per booking charged to associates is dependent upon
the level of functionality within the SABRE system 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, 1998 and 1997, the Company had recorded
booking fee cancellation reserves of approximately $18 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 the SABRE
system, 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, fees are fixed and determinable, no
undelivered elements are essential to the functionality of delivered
software 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, 1998 and 1997 the
Company had recorded accounts receivable of approximately $74 million and
$52 million, respectively, that had not been billed to customers. In
addition, the Company had deferred revenues of approximately $26 million
and $37 million at December 31, 1998 and 1997, respectively, related to
advance payments from customers and contractual restrictions.
ADVERTISING COSTS - The Company expenses advertising costs as incurred.
Advertising costs expensed in 1998, 1997 and 1996, including amounts paid
to American under the terms of the Marketing Cooperation Agreement (See
Note 5), totaled approximately $37 million, $44 million and $37 million,
respectively.
32
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 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 arising from operations of subsidiaries of AMR other
than the Company.
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. At December
31, 1998 and 1997, no valuation allowance was necessary.
RESEARCH AND DEVELOPMENT COSTS - All costs in the software development
process which are classified as research and development costs 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. The Company defines technological
feasibility in accordance with Statement of Financial Accounting Standards
No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED,
OR OTHERWISE MARKETED. Technological feasibility is achieved upon
completion of all planning, designing, coding and testing activities that
are necessary to establish that a product can be produced according to its
design specifications. The Company amortizes capitalized development costs
using the straight-line method over the estimated economic life of the
software. Research and development costs incurred prior to establishment of
technological feasibility approximated $39 million for 1998 and $24 million
for 1997. Prior to 1997, research and development costs were not material.
CONCENTRATION OF CREDIT RISK - The Company's customers are primarily
located in the United States, Europe, Canada and Latin America, and are
concentrated in the travel industry. Approximately 25%, 29% and 31% of
revenues in 1998, 1997 and 1996, respectively, were related to American and
other subsidiaries of AMR. Approximately 16% of revenues in 1998 were
related to US Airways, Inc. ("US Airways"). 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 $12 million
and $9 million at December 31, 1998 and 1997, respectively, based upon the
amount of accounts receivable expected to prove uncollectible.
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.
33
STOCK AWARDS AND OPTIONS - The Company accounts for stock awards and
options (including awards of AMR stock and stock options granted to
employees prior to the Reorganization) in accordance with Accounting
Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED 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.
COMPREHENSIVE INCOME - As of January 1, 1998, the Company adopted Financial
Accounting Standards Board Statement No. 130, REPORTING COMPREHENSIVE
INCOME. Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. Statement 130 establishes rules for
the reporting and display of comprehensive income and its components. For
1998, 1997 and 1996, the differences between net earnings and total
comprehensive income were not material.
EARNINGS PER COMMON SHARE - The earnings per common share data for 1996 is
calculated as though the 130,604,000 shares issued in the Reorganization
and Offering were outstanding the entire year, adjusted for the weighted
average additional shares of Class A Common Stock issued subsequent to the
Offering.
Basic earnings per share excludes any dilutive effect of options, warrants
and convertible securities. The number of shares used in the diluted
earnings per share calculations includes the dilutive effect of stock
options, restricted and career equity shares. The net earnings used in the
diluted earnings per share calculations have been adjusted for the
incremental amortization expense that would have been recognized had
options issued to US Airways qualified as equity instruments for accounting
purposes during the period.
FINANCIAL INSTRUMENTS - The carrying value of the Company's financial
instruments (excluding the Equant depository certificates discussed below),
including cash, short-term investments, accounts receivable, and the
debenture payable to AMR approximate their respective fair values at
December 31, 1998 and 1997.
At December 31, 1998, American owned approximately 3.1 million depository
certificates representing beneficial ownership of common stock of Equant
N.V. ("Equant"), a telecommunications company related to Societe
Internationale de Telecommunications Aeronatiques ("SITA"). Approximately
1.7 million of these depository certificates were held by American for the
economic benefit of the Company.
Equant completed an initial public offering in July 1998. As of December
31, 1998, the estimated value of the 1.7 million depository certificates,
held on behalf of the Company, was approximately $113 million, based upon
the market value of Equant's publicly-traded common stock. The estimated
value of the certificates was not readily determinable as of December 31,
1997. The Company's carrying value of these depository certificates was
nominal as of December 31, 1998 and 1997.
RISK MANAGEMENT - To reduce its exposure to future exchange rate
fluctuations, the Company may enter into foreign currency derivative
agreements. At December 31, 1998 and 1997 no such agreements were
outstanding.
TREASURY STOCK - The Company accounts for the purchase of treasury stock at
cost. Upon reissuance of shares of treasury stock, the Company records any
difference between the weighted-average cost of such shares and any
proceeds received as an adjustment to additional paid-in capital.
NEW ACCOUNTING PRONOUNCEMENTS - 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 the Company does not currently
use derivatives to a significant extent, management does not anticipate
that the adoption of Statement 133 will have a significant effect on the
earnings or the financial position of the Company. The Company will adopt
the statement effective January 1, 2000.
34
Effective January 1, 1999, the Company will be required to adopt the
provisions of SOP 98-1, ACCOUNTING FOR COMPUTER SOFTWARE DEVELOPED OR
OBTAINED FOR INTERNAL USE. SOP 98-1 requires the capitalization of certain
costs incurred during an internal-use software development project.
Capitalizable costs consist of (a) certain external direct costs of
materials and services incurred in developing or obtaining internal-use
computer software, (b) payroll and payroll-related costs for employees who
are directly associated with and who devote time to the project and (c)
interest costs incurred. Costs that are considered to be related to
research and development activities, data conversion activities, and
training, maintenance and general and administrative or overhead costs will
continue to be expensed as incurred. Because of the Company's existing
capitalization policies, management does not anticipate that the adoption
of SOP 98-1 will have a significant effect on the earnings or the financial
position of the Company.
3. SHORT-TERM INVESTMENTS
Short-term investments consist of (in thousands):
December 31,
--------------------------------
1998 1997
-------------- --------------
Overnight investment and time deposits $ 53,541 $ 119,303
Corporate notes 410,100 242,847
Mortgages 66,094 181,353
U.S. Treasuries --- 30,117
-------------- --------------
Total $ 529,735 $ 573,620
-------------- --------------
-------------- --------------
The following table summarizes short-term investments by contractual
maturity at December 31, 1998 and 1997, (in thousands):
December 31,
------------------------------
1998 1997
-------------- --------------
Due in one year or less $ 146,205 $ 346,540
Due after one year through three years 383,530 187,316
Due after three years --- 39,764
-------------- --------------
Total $ 529,735 $ 573,620
-------------- --------------
-------------- --------------
Short-term investments, all of which are classified as available-for-sale
in accordance with Statement of Financial Accounting Standards No. 115,
ACCOUNTING FOR CERTAIN DEBT AND EQUITY SECURITIES, are stated at fair value
based on market quotes. Net unrealized gains and losses, net of deferred
taxes, are reflected as an adjustment to stockholders' equity.
35
4. SIGNIFICANT TRANSACTIONS
In January 1998, the Company completed the execution of a 25-year
information technology services agreement with 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. As of December 31, 1998, the Company has recorded
a liability relating to these options of $105 million and a net deferred
asset of $95 million. During 1998, the Company recorded amortization
expense of approximately $10 million related to the options. 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 paid $139 million in
cash and contributed its assets related to the Company's ongoing travel
distribution activities in Asia/Pacific and other consideration. In
exchange, the Company received 35 percent of the shares of the joint
venture company. The Company accounts for its investment in the joint
venture using the equity method of accounting. The Company provides ABACUS
with transaction processing on the SABRE system. At December 31, 1998,
the Company's net investment in ABACUS totaled approximately $138 million,
which differs from the Company's net equity in the underlying assets of
ABACUS by approximately $116 million. This amount is being amortized
over 20 years.
In August 1998, the Company received a favorable court judgment related to
Ticketnet Corporation, an inactive subsidiary of the Company. As a result,
the Company recognized approximately $14 million of other income related to
the judgment.
5. CERTAIN RELATED PARTY TRANSACTIONS
DISTRIBUTIONS TO AND CONTRIBUTIONS FROM AFFILIATES - Certain of the
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%. On July 1, 1996 the note payable to AMR of
approximately $54 million was capitalized.
36
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
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 was
6.1%, 6.2% and 7.1% for 1998, 1997 and 1996, respectively. The Company may
prepay the principal balance, approximately $318 million at December 31,
1998, in whole or in part at any interest payment date.
PROPERTY AND EQUIPMENT - During 1997, the Company acquired a building from
American for approximately $6 million.
AFFILIATE AGREEMENTS - In connection with the Reorganization, the Company
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.
For example, 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; (iii)
distributed systems services until June 30, 2002; and (iv) voice network
services until June 30, 2001.
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.
37
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 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, Airline Management Services, Incorporated (AMS), a subsidiary
of AMR, and Canadian Airlines International, Ltd. ("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 unrecovered deferred costs
associated with the installation and implementation of certain systems. As
permitted by the terms of the Canadian Subcontract, in December 1996,
American paid the Company approximately $40 million, representing the
unrecovered deferred costs. Approximately $5 million of these deferred
costs were charged to operations in 1996.
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 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 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 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 the SABRE BUSINESS
TRAVEL SOLUTIONS-TM- system ("the SABRE BTS-TM- system"), the
TRAVELOCITY.COM-SM- online travel site ("the TRAVELOCITY.COM-SM- site")
and the EASYSABRE-Registered Trademark- reservations site ("the
EASYSABRE-Registered Trademark- site"). 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.
38
Under the Marketing Cooperation Agreement, American's marketing efforts
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 products, the amount of which may increase or decrease, depending
on total SABRE booking volumes generated by certain subscribers in the
U.S., the Caribbean and elsewhere and on the Company's market share of
travel agency bookings in those areas. As payment for American's support
of the Company's promotion of the SABRE BTS-TM- system, the
TRAVELOCITY.COM-SM- site and the EASYSABRE-Registered Trademark- site,
the Company pays American a marketing fee based upon booking volume.
The total fee was approximately $17 million, $22 million and $20 million
in 1998, 1997 and 1996, respectively. 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. As of December 31, 1998, the Company has recorded a
liability of approximately $7 million for this guarantee.
NON-COMPETITION AGREEMENT - The Company, AMR and American have entered into
a Non-Competition Agreement dated July 1, 1996 (the "Non-Competition
Agreement"), pursuant to which AMR and American, on behalf of themselves
and certain of their subsidiaries, have agreed to limit their competition
with the Company's businesses of (i) electronic travel distribution; (ii)
development, maintenance, marketing and licensing of software for travel
agency, travel, transportation and logistics management; (iii) computer
system integration; (iv) development, maintenance and operation of a data
processing center providing data processing services to third parties; and
(v) travel industry, transportation and logistics consulting services
relating primarily to computer technology and automation. 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 makes a lump sum payment to American each year, beginning in 1997,
for each employee retiring in that year. The payment per retiree is 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 6.
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. In 1998, the Company and American entered
into a new corporate travel agreement (the "Revised Corporate Travel
Agreement") commencing July 1, 1998 and ending June 30, 2001. The terms and
conditions of the Revised Corporate Travel Agreement are substantially the
same as the Corporate Travel Agreement.
The parties agreed to apply the financial terms of the Travel Privileges
Agreement and the Corporate Travel Agreement as of January 1, 1996.
39
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
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 under this agreement.
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.
SERVICES AGREEMENTS - The Company is party to Services Agreements with AMR
Services Corporation, AMR Combs, Inc. and TeleService Resources, Inc.
("TSR"), each effective as of July 1, 1996 (the "Services Agreements").
Under the Services Agreements, the Company will be the provider to each of
the companies of certain information technology services, including data
center services, connectivity services and network services. The base term
of the Services Agreements have a scheduled expiration date of December 31,
2002.
INFORMATION TECHNOLOGY SERVICES AGREEMENT - The Company is party to an
Information Technology Services Agreement (the "ITS Agreement") with TSR,
effective July 1, 1998. Under the ITS Agreement, the Company will provide
certain information technology services and license certain applications to
TSR with respect to the SPIRIT Multihost System ("SPIRIT") owned by the
Hyatt Corporation and marketed by the Company. The parties also agreed to
jointly market SPIRIT. The ITS Agreement has a stated term of seven years,
however, either party may terminate the ITS Agreement for convenience on or
after January 1, 2003.
REVENUES FROM AFFILIATES - Revenues from American and other subsidiaries of
AMR were $574 million, $526 million and $500 million in 1998, 1997 and
1996, respectively.
40
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. The rates negotiated with American for 1998, 1997
and 1996 under the Corporate Travel Agreement approximate corporate travel
rates offered by American to similar companies. Expenses charged to the
Company by affiliates are as follows (in thousands):
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
Employee benefits $ 41,348 $ 55,872 $ 85,538
Facilities rental 2,706 3,526 19,120
Marketing cooperation 24,044 21,779 20,436
Management services 10,069 11,276 17,143
Other administrative costs 12,732 6,799 14,767
Travel services 45,433 47,638 42,855
---------- ---------- ----------
Total expenses $ 136,332 $ 146,890 $ 199,859
---------- ---------- ----------
---------- ---------- ----------
6. EMPLOYEE BENEFIT PLANS
Effective January 1, 1997, the Company established The Sabre Group
Retirement Plan (the "SGRP"), a defined contribution plan qualified under
Section 401(k) of the Internal Revenue Code of 1986. The Company recorded
expenses related to the SGRP of approximately $16 million and $11 million
in 1998 and 1997, respectively.
Additionally, effective January 1, 1997, the Company established The Sabre
Group Legacy Pension Plan (the "LPP"), a tax-qualified defined benefit plan
for employees meeting certain eligibility requirements. Prior to 1997,
substantially all employees of the Company were eligible to participate in
American's tax-qualified defined benefit pension plan (the "American
Plan"). Costs associated with employee participation in this plan were
determined based upon employee headcount and were 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 5,
was approximately $20 million in 1996.
In October 1997, the portion of the American Plan applicable to employees
of the Company was spun-off to the LPP. At the date of spin-off, the net
obligation attributable to the Company's employees participating in the
American Plan, a liability of approximately $20 million, was charged to
stockholders' equity, net of deferred taxes of approximately $8 million.
Substantially all employees of the Company may become eligible for certain
health care and life insurance benefits provided by American to retired
employees of the Company. The amount of health care benefits is limited to
lifetime maximums as outlined in the plan. Certain employee groups make
contributions towards funding a portion of their retiree health care
benefits during their working lives. The Company funds benefits as incurred
and also matches employee prefunding.
41
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
makes a lump sum payment to American for each employee retiring in that
year. The payment per retiree is 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 retains 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.
The following tables provide a reconciliation of the changes in the plan's
benefit obligations and fair value of assets for the years ended December
31, 1998 and 1997, and a statement of funded status as of December 31, 1998
and 1997 (in thousands):
Pension Benefits Other Benefits
------------------------------ ------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
Change in benefit obligation:
Benefit obligation at January 1 $ (159,380) $ (120,020) $ (50,983) $ (42,581)
Service cost (11,257) (9,845) (5,261) (3,891)
Interest cost (12,370) (10,056) (4,065) (3,592)
Actuarial gains (losses) (28,496) (19,478) 2,426 (1,183)
Benefits paid 58 19 550 264
-------------- -------------- -------------- --------------
Benefit obligation at December 31 $ (211,445) $ (159,380) $ (57,333) $ (50,983)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Change in plan assets:
Fair value at January 1 $ 92,318 $ 77,331 $ 6,637 $ 4,440
Actual return on plan assets 7,637 13,877 742 1,087
Company contributions 7,915 --- 2,104 1,374
Transfers from affiliates 2,795 1,129 --- ---
Benefits paid (58) (19) (550) (264)
-------------- -------------- -------------- --------------
Fair value at December 31 $ 110,607 $ 92,318 $ 8,933 $ 6,637
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Funded status of the plan
(underfunded) $ (100,838) $ (67,062) $ (48,400) $ (44,346)
Unrecognized net loss (gain) 57,583 32,866 (11,574) (9,330)
Unrecognized prior service cost 220 242 (1,430) (1,580)
Unrecognized transition asset (135) (363) --- ---
-------------- -------------- -------------- --------------
Accrued benefit cost $ (43,170) $ (34,317) $ (61,404) $ (55,256)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
42
The assumptions used in the measurement of the Company's benefit
obligations as of December 31, 1998 and 1997 are as follows:
Pension Benefits Other Benefits
------------------------------ ------------------------------
Weighted-average assumptions: 1998 1997 1998 1997
------------- ------------- ------------- -------------
Discount rate 7.00% 7.25% 7.00% 7.25%
Expected return on plan assets 9.50% 9.50% 9.50% 9.50%
Rate of compensation increase 5.25% 4.00% --- ---
A 5% annual rate of increase in the per capita cost of covered health care
benefits was assumed for 1999 and the rate was assumed to remain at that
level thereafter.
The following table provides the components of net periodic benefit costs
for the two years ended December 31, 1998 for the LPP and for the three
years ended December 31, 1998 for other postretirement benefits (in
thousands). Total costs for other postretirement benefits are included in
employee benefits in the table in Note 5.
Pension Benefits Other Benefits
--------------------------- -----------------------------------------
1998 1997 1998 1997 1996
----------- ------------ ----------- ----------- -----------
Service cost $ 11,257 $ 9,845 $ 5,261 $ 3,891 $ 4,170
Interest cost 12,370 10,056 4,065 3,592 6,043
Expected return on plan assets (8,336) (7,337) (684) (460) (358)
Amortization of transition asset (228) (228) --- --- ---
Amortization of prior service cost 22 22 (150) (150) ---
Amortization of net loss (gain) 1,690 712 (241) (313) (70)
----------- ------------ ----------- ----------- -----------
Total net periodic benefit cost $16,775 $ 13,070 $ 8,251 $ 6,560 $ 9,785
----------- ------------ ----------- ----------- -----------
----------- ------------ ----------- ----------- -----------
Assumed health care cost trend rates have a significant effect on the
amounts reported for the postretirement medical benefit plans. A one
percentage point decrease in the assumed health care cost trend rates would
decrease the total service and interest cost components of total net
periodic benefit cost for 1998 and the postretirement benefit obligations
at December 31, 1998 by approximately $2 million and $8 million,
respectively. A one percentage point increase in the assumed health care
cost trend rates would increase the total service and interest cost
components of total net periodic benefit cost for 1998 and the
postretirement benefit obligations at December 31, 1998 by approximately $2
million and $7 million, respectively.
Plan assets for the LPP and for the postretirement health care and life
insurance benefits consist primarily of mutual fund shares managed by a
subsidiary of AMR invested in debt and equity securities.
43
7. INCOME TAXES
The provision (benefit) for income taxes is as follows (in thousands):
Year Ended December 31,
--------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
Current portion:
Federal $ 120,628 $ 126,805 $ 121,774
State 7,976 3,661 17,888
Foreign 11,930 5,052 2,644
--------------- --------------- ---------------
Total current 140,534 135,518 142,306
Deferred portion:
Federal (7,186) (23,141) (23,438)
State 6,165 11,419 414
--------------- --------------- ---------------
Total deferred (1,021) (11,722) (23,024)
--------------- --------------- ---------------
Total provision for income taxes $ 139,513 $ 123,796 $ 119,282
--------------- --------------- ---------------
--------------- --------------- ---------------
The provision for income taxes differs from amounts computed at the
statutory federal income tax rate as follows (in thousands):
Year Ended December 31,
--------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
Statutory income tax provision $ 130,009 $ 113,278 $ 107,050
State income taxes, net of federal benefit 9,192 9,802 11,896
Foreign tax credit --- --- 241
Other, net 312 716 95
--------------- --------------- ---------------
Total provision for income taxes $ 139,513 $ 123,796 $ 119,282
--------------- --------------- ---------------
--------------- --------------- ---------------
The components of the Company's deferred tax assets and liabilities as of
December 31, 1998 and 1997 were as follows (in thousands):
1998 1997
-------------- --------------
Deferred tax assets:
Accrued expenses $ 36,883 $ 31,626
Employee benefits other than pensions 26,975 21,201
Deferred revenue 5,151 14,778
Pension obligations 14,956 13,127
State net operating loss carryforwards 564 922
Other 789 4,424
-------------- --------------
Total deferred tax assets 85,318 86,078
Deferred tax liabilities:
Depreciation and amortization (52,578) (58,836)
Other (20,018) (18,503)
-------------- --------------
Total deferred tax liabilities (72,596) (77,339)
-------------- --------------
Net deferred tax asset $ 12,722 $ 8,739
-------------- --------------
-------------- --------------
Current deferred income tax asset $ 25,790 $ 21,093
Noncurrent deferred income tax liability (13,068) (12,354)
-------------- --------------
Net deferred tax asset $ 12,722 $ 8,739
-------------- --------------
-------------- --------------
44
8. 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, 1998 and 1997 were approximately $38 million and $36 million,
respectively.
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, 1998, 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, equipment and software licenses were as follows (in
thousands):
Year Ending December 31, Affiliates Third Parties
------------------------ ---------- -------------
1999 $ 1,389 $ 40,458
2000 761 34,024
2001 115 29,002
2002 106 26,409
2003 15 25,122
Thereafter 90 73,262
Rental expense, excluding facilities rented from affiliates, was
approximately $43 million, $36 million and $40 million for the years ended
December 31, 1998, 1997 and 1996, respectively.
In October 1998, the Company sold data center mainframe equipment to an
unrelated party for approximately $34 million. The Company recognized a
deferred gain of approximately $1 million on the transaction. The Company
then entered into an agreement to lease back the equipment from the
unrelated party. The agreement has a term of seven years; however, the
Company has the option, at its discretion, to terminate the contract as of
December 31, 2001. Minimum lease payments of approximately $59 million are
included in the schedule above. Under the agreement, the Company may lease
additional equipment at rates specified in the agreement.
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.
45
9. 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, 1998, 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 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.
46
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.
In 1997, the Board of Directors authorized, subject to certain business and
market conditions, the purchase of up to 1.5 million shares of the
Company's Class A Common Stock. The number of treasury shares purchased was
1,428,200 and 71,800 in 1998 and 1997, respectively.
10. 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 deferred stock, restricted stock, stock options, stock appreciation
rights, stock purchase rights and/or other stock based awards in common
stock, par value $1 per share, of AMR ("AMR Common Stock").
In conjunction with the AMR LTIP, 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 the officers and employees, 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 Company Career Equity Shares will be
issued upon the individual's retirement from the Company. All of the
Company Career Equity Shares issued in connection with the Offering were
outstanding at December 31, 1998, 1997 and 1996.
Effective with the Offering, the Company also established the 1996
Long-Term Incentive Plan (the "1996 Plan"). Under the 1996 Plan, officers
and other key employees of the Company may be granted restricted stock,
deferred stock, stock options, stock appreciation rights, stock purchase
rights, other stock based awards and /or performance related awards. The
1996 Plan will terminate no later than October 2006. 13 million shares of
Class A Common Stock were authorized to be issued under the 1996 Plan. At
December 31, 1998, approximately 8 million shares were available for future
grants of stock-based awards under the 1996 Plan.
47
The total charge for stock compensation expense included in wages, salaries
and benefits expense was $13 million, $6 million and $7 million for 1998,
1997 and 1996, respectively. No compensation expense was recognized for
stock option grants under the 1996 Plan since the exercise price of the
Company's stock option grants was equal to the fair market value of the
underlying stock on the date of grant.
Shares of restricted stock are awarded at no cost to employees under the
1996 plan. Restricted shares generally vest three years following the date
of grant. Restricted stock activity follows:
Year Ended December 31,
---------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
Outstanding at January 1 166,940 151,550 ---
Issued upon conversion of AMR Career Equity
and Restricted Shares --- --- 149,330
Granted 12,390 24,910 2,220
Issued (10,280) --- ---
Canceled (13,460) (9,520) ---
-------------- -------------- --------------
Outstanding at December 31 155,590 166,940 151,550
-------------- -------------- --------------
-------------- -------------- --------------
The weighted-average grant date fair values of restricted stock granted
during 1998, 1997 and 1996 were $38.49, $26.03 and $27.00, respectively.
The grant date fair values are based on the Company's stock price on the
date of grant.
In conjunction with the AMR LTIP, certain officers and key employees of the
Company were also awarded, at no cost to the officers and employees,
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, certain AMR Performance Shares awarded to
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.
Company Performance Shares are also awarded at no cost to officers and key
employees of the Company based on performance metrics of the Company as
defined in the 1996 Plan. The Company Performance Shares vest over a
three-year performance period and are settled in cash. The Company's
Performance Share activity was as follows:
Year Ended December 31,
--------------------------------------------------
1998 1997 1996
------------- ------------- -------------
Outstanding at January 1 612,100 433,860 ---
Issued upon conversion of AMR Performance
Shares --- --- 272,160
Granted 206,970 205,370 162,450
Awards settled in cash (263,040) --- ---
Canceled (51,157) (27,130) (750)
------------- ------------- -------------
Outstanding at December 31 504,873 612,100 433,860
------------- ------------- -------------
------------- ------------- -------------
The weighted-average grant date fair values of Company Performance Shares
granted during 1998, 1997 and 1996 were $36.42, $26.02 and $27.00,
respectively. The grant date fair values are based on the Company's stock
price on the date of grant.
48
In conjunction with the AMR LTIP, 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. In connection with the
Offering, the AMR Options 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.
Options granted under the 1996 Plan are granted at the market value of
Class A Common Stock on the date of grant, except as otherwise determined
by a committee appointed by the Board of Directors, generally vest over
five years and are not exercisable more than ten years after the date of
grant. Stock option activity follows:
Year Ended December 31,
---------------------------------------------------------------------------------
1998 1997 1996
------------------------- -------------------------- ----------------------------
Weighted-Average Weighted-Average Weighted-Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------------- ------------------------- ---------------------------
Outstanding at January 1 2,874,070 $ 25.43 2,384,670 $ 24.89 --- ---
Issued upon exchange of AMR
Options --- --- --- --- 728,740 $ 19.87
Issued upon exchange of AMR
Career Equity Shares --- --- --- --- 847,550 27.00
Granted 1,245,600 34.94 711,010 27.11 822,900 27.00
Exercised (433,270) 21.97 (34,540) 19.14 (14,520) 16.27
Canceled (291,010) 28.41 (187,070) 26.10 --- ---
-------------- ------------- -------------
Outstanding at December 31 3,395,390 29.10 2,874,070 25.43 2,384,670 24.89
-------------- ------------- -------------
-------------- ------------- -------------
Exercisable options outstanding
at December 31 870,670 $24.82 808,110 $ 22.64 422,920 $ 19.80
-------------- ------------- -------------
-------------- ------------- -------------
The weighted-average grant date fair value of stock options granted during
1998, 1997 and 1996 were $12.55, $9.71 and $9.24, respectively. The grant
date fair values were estimated at the date of grant using the
Black-Scholes option pricing model.
The following table summarizes information about the stock options
outstanding at December 31, 1998:
Number of Weighted-Average Number of
Range of Exercise Options Remaining Weighted-Average Options Weighted-Average
Prices Outstanding Life (years) Exercise Price Exercisable Exercise Price
--------------------- ---------------- ---------------- ------------------ ---------------- ------------------
$12.95 - $19.49 100,080 7.80 $ 16.93 69,980 $ 16.88
$19.50 - $24.49 239,590 7.80 20.99 203,070 20.92
$24.50 - $35.49 2,086,620 8.10 27.14 597,220 27.07
$35.50 - $43.60 969,100 9.30 36.61 400 35.67
---------------- ----------------
Total 3,395,390 8.40 $ 29.10 870,670 $ 24.82
---------------- ----------------
---------------- ----------------
49
For other stock-based awards, a committee established by the Board of
Directors determines 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 1996 Plan at the time of
grant.
Stock appreciation rights may be granted in conjunction with all or part of
any stock option granted under the 1996 Plan. 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.
The Company has 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 have an exercise price
equal to the market price of the Class A Common Stock on the date of grant
and vest pro rata over a five-year period. Each option expires 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 under the Directors' Stock Incentive Plan. In 1997, 78,000 options
were granted to directors at a weighted-average exercise price of $26.88.
In 1998, 18,000 options were granted to directors at a weighted-average
exercise price of $36.16. No options were exercised during 1998 and 1997.
At December 31, 1998, 254,000 shares were available for future grants under
the Directors' Stock Incentive Plan.
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
Class A Common Stock with an aggregate maximum purchase price equal to
either 1% or 2% of that employee's annual base pay, subject to limitations
under the Internal Revenue Code of 1986. Upon establishment of the ESPP,
1,000,000 shares of Class A Common Stock were reserved for issuance under
the plan. Approximately 54,000 and 34,000 shares were issued to the plan
during 1998 and 1997, respectively. Approximately 912,000 shares remain
available for future purchases under the ESPP at December 31, 1998.
During 1998, the Company granted two tranches of stock options, each to
acquire 3 million shares of the Company's Class A Common Stock, to US
Airways. See Note 4.
As required by Statement of Financial Accounting Standards No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, pro forma information regarding
net income and earnings per share have been determined as if the Company
had accounted for its employee stock options and stock-based awards under
the fair value method set forth in Statement No. 123. The fair value for
the stock options granted by 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 6.07% for 1996, 6.20% to 6.70% for
1997 and 5.45% to 5.67% for 1998; a dividend yield of 0%; a volatility
factor of the expected market price of the Company's Class A Common Stock
of .28 for 1996, .29 for 1997 and .32 for 1998; and a weighted-average
expected life of the options granted of 4.5 years.
50
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 Statement
No. 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.
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 per share amounts):
Year Ended December 31,
-----------------------------------------------------
1998 1997 1996
--------------- -------------- ---------------
Net earnings:
As reported $ 231,941 $ 199,853 $ 186,574
--------------- -------------- ---------------
--------------- -------------- ---------------
Pro forma $ 228,672 $ 198,404 $ 184,981
--------------- -------------- ---------------
--------------- -------------- ---------------
Earnings per common share, as reported
Basic and diluted $ 1.78 $ 1.53 $ 1.43
--------------- -------------- ---------------
--------------- -------------- ---------------
Earnings per common share, pro forma
Basic $ 1.76 $ 1.52 $ 1.42
--------------- -------------- ---------------
--------------- -------------- ---------------
Diluted $ 1.75 $ 1.51 $ 1.42
--------------- -------------- ---------------
--------------- -------------- ---------------
11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per common share (in thousands, except per share amounts):
Year Ended December 31,
--------------------------------------
1998 1997 1996
----------- ------------ -----------
Numerator:
Numerator for basic earnings per common share - net
earnings $231,941 $199,853 $186,574
Incremental amortization of deferred asset related
to options issued to US Airways (255) --- ---
----------- ------------ -----------
Numerator for diluted earnings per common share -
adjusted net earnings $231,686 $199,853 $186,574
----------- ------------ -----------
----------- ------------ -----------
Denominator:
Denominator for basic earnings per common share -
weighted-average shares 129,943 130,649 130,606
Dilutive effect of stock awards and options 578 339 80
----------- ------------ -----------
Denominator for diluted earnings per common share -
adjusted weighted-average shares 130,521 130,988 130,686
----------- ------------ -----------
----------- ------------ -----------
Basic and diluted earnings per common share $ 1.78 $ 1.53 $ 1.43
----------- ------------ -----------
----------- ------------ -----------
For additional information regarding stock awards and options, see Note 10.
51
Options to purchase approximately 2,470,000 and 544,000 weighted average
shares of common stock were outstanding during 1998 and 1997, respectively,
but were excluded from the computation of diluted earnings per share
because the effect would be antidilutive. In addition, options granted to
US Airways to purchase 3,000,000 shares of common stock were excluded from
the computation of diluted earnings per share in 1998 because the Company
intends to settle those options with a cash payment.
12. SEGMENT REPORTING
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
AND RELATED INFORMATION. Statement No. 131 establishes standards for
reporting information about operating segments and related disclosures
about products and services, geographical areas and major customers.
The Company has two reportable segments: electronic travel distribution and
information technology solutions. The electronic travel distribution
segment distributes travel services to travel agencies, corporate travel
departments and individual consumers ("subscribers"). Through the Company's
global distribution system, subscribers can access information about and
book reservations with airlines and other providers of travel and
travel-related products and services. The information technology solutions
segment provides information technology services including software
development and consulting, transaction processing and comprehensive
information technology outsourcing to the travel and transportation
industries. The Company's reportable segments are strategic business units
that offer different products and services and are managed separately
because each business requires different market strategies.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based upon business segment operating income, which is defined
as income before interest and non-operating income and expenses. The
Company accounts for intersegment transactions as if the transactions were
to third parties, that is, at current market prices. Intersegment
transactions are recorded as expense offsets and are not included in
segment revenues.
Personnel and related costs for the Corporate Headquarters, certain legal
and professional fees and other corporate charges are allocated to the
segments through a management fee based primarily on usage. Depreciation
expense on the Corporate Headquarters buildings and related facilities
costs are allocated to the segments through a facility fee based on
headcount. The related assets are not allocated to the segments. Benefits
expense, including pension expense, postretirement benefits, medical
insurance and workers' compensation, are allocated to the segments based on
headcount. Unallocated Corporate Headquarters operating income includes
depreciation expense and other costs associated with the Corporate
Headquarters buildings, net of facility fees allocated to the reportable
segments and affiliated companies, and certain other corporate charges
maintained at the corporate level. Other assets not allocated to the
segments include cash and short-term investments and deferred tax assets.
52
Electronic Information
Travel Technology
Distribution Solutions Total
--------------- --------------- ---------------
(in thousands)
December 31, 1998:
Revenues from external customers $ 1,315,908 $ 981,592 $ 2,297,500
Equity in net income of equity method
investees 8,887 --- 8,887
--------------- --------------- ---------------
Total revenues 1,324,795 981,592 2,306,387
--------------- --------------- ---------------
--------------- --------------- ---------------
Segment operating income 283,359 64,133 347,492
Intersegment expense transfers 10,340 373,848 384,188
Depreciation and amortization 132,697 94,782 227,479
Segment assets 616,869 501,882 1,118,751
Capital expenditures for segment assets 99,339 186,475 285,814
Investments in equity method investees 148,084 599 148,683
December 31, 1997:
Revenues from external customers $ 1,200,276 $ 583,271 $ 1,783,547
Equity in net income of equity method
investees 4,916 --- 4,916
--------------- --------------- ---------------
Total revenues 1,205,192 583,271 1,788,463
--------------- --------------- ---------------
--------------- --------------- ---------------
Segment operating income 229,888 77,288 307,176
Intersegment expense transfers 22,281 393,633 415,914
Depreciation and amortization 117,151 50,253 167,404
Segment assets 409,250 258,225 667,475
Capital expenditures for segment assets 109,295 67,195 176,490
Investments in equity method investees 6,659 1,539 8,198
December 31, 1996:
Revenues from external customers $ 1,101,791 $ 520,196 $ 1,621,987
Equity in net income of equity method
investees 3,094 50 3,144
--------------- --------------- ---------------
Total revenues 1,104,885 520,246 1,625,131
--------------- --------------- ---------------
--------------- --------------- ---------------
Segment operating income 237,675 100,034 337,709
Intersegment expense transfers --- 377,992 377,992
Depreciation and amortization 94,416 63,705 158,121
Segment assets 394,373 194,016 588,389
Capital expenditures for segment assets 117,566 47,804 165,370
Investments in equity method investees 6,031 448 6,479
53
A reconciliation of the totals reported for the operating segments to the
applicable line items in the consolidated financial statements is as
follows (in thousands):
Year Ended December 31,
----------------------------------------------
1998 1997 1996
-------------- -------------- --------------
Operating income:
Total operating income for reportable
segments $ 347,492 $ 307,176 $ 337,709
Net Corporate allocations 2,880 5,449 (7,764)
-------------- -------------- --------------
Total consolidated operating income $ 350,372 $ 312,625 $ 329,945
-------------- -------------- --------------
-------------- -------------- --------------
Assets:
Total assets for reportable segments $ 1,118,751 $ 667,475 $ 588,389
Unallocated amounts:
Cash and short-term investments 537,710 584,875 442,937
Corporate Headquarters and other 270,356 251,608 255,757
-------------- -------------- --------------
Total consolidated assets $ 1,926,817 $ 1,503,958 $ 1,287,083
-------------- -------------- --------------
-------------- -------------- --------------
Other significant items:
Depreciation and amortization for
reportable segments $ 227,479 $ 167,404 $ 158,121
Other depreciation and amortization 20,255 17,771 6,943
-------------- -------------- --------------
Total depreciation and amortization $ 247,734 $ 185,175 $ 165,064
-------------- -------------- --------------
-------------- -------------- --------------
Capital expenditures for reportable
segments $ 285,814 $ 176,490 $ 165,370
Other capital expenditures 34,217 41,634 18,891
-------------- -------------- --------------
Total capital expenditures $ 320,031 $ 218,124 $ 184,261
-------------- -------------- --------------
-------------- -------------- --------------
The Company's revenues and long-lived assets by geographic region are
summarized below (in thousands). Revenues are attributed to countries based
on the location of the customer.
Year Ended December 31,
-----------------------------------------
1998 1997 1996
------------- ------------ ------------
Revenues by geographic region:
United States $ 1,713,195 $ 1,295,606 $ 1,214,992
Foreign 593,192 492,857 410,139
------------- ------------ ------------
Total $ 2,306,387 $ 1,788,463 $ 1,625,131
------------- ------------ ------------
------------- ------------ ------------
Long-lived assets by geographic region:
United States $ 758,224 $ 552,869 $ 531,188
Cayman Islands 143,496 --- ---
Other foreign 80,693 73,487 61,367
------------- ------------ ------------
Total $ 982,413 $ 626,356 $ 592,555
------------- ------------ ------------
------------- ------------ ------------
Revenues from US Airways during 1998 were approximately $369 million which
represents approximately 16% of the Company's consolidated revenues. Revenues
from American and other subsidiaries of AMR were approximately $574 million
which represents approximately 25% of the Company's consolidated revenues.
54
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly financial information
for the years ended December 31, 1998 and 1997 (in thousands except per
share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------- -------------- -------------- ---------------
1998
----
Revenues $ 554,099 $ 576,574 $ 604,315 $ 571,399
Operating income 114,467 109,251 98,445 28,209
Net earnings 71,788 68,523 71,424 20,206
Earnings per common share,
Basic $ .55 $ .53 $ .55 $ .16
Earnings per common share,
Diluted $ .55 $ .52 $ .55 $ .16
1997
----
Revenues $ 440,310 $ 448,914 $ 457,428 $ 441,811
Operating income 108,467 94,637 89,468 20,053
Net earnings 66,685 58,536 56,199 18,433
Earnings per common share,
basic and diluted $ .51 $ .45 $ .43 $ .14
The travel industry is seasonal in nature. Bookings, and thus booking fees
charged for the use of the SABRE system, decrease significantly each year
in the fourth quarter, primarily in December.
During the third quarter of 1998, the Company recorded income of
approximately $14 million due to a one-time gain from a favorable court
judgment relating to Ticketnet Corporation, an inactive subsidiary of the
Company.
During the fourth quarter of 1998, the Company recorded amortization
expense of approximately $7 million related to options granted to US
Airways under the information technology services agreement due to changes
in the market price of the Company's stock. Additionally, a reduction was
recorded in a reserve for obsolete computer equipment at travel agency
locations of approximately $7 million.
During the fourth quarter of 1997, the Company recorded a loss of
approximately $11 million related to the write-off of a capitalized
software development project that was intended to create a new order entry
and billing system.
14. SUBSEQUENT EVENTS
At December 31, 1998, American owned approximately 3.1 million depository
certificates representing beneficial ownership of common stock of Equant, a
telecommunications company related to SITA. Approximately 1.7 million of
these depository certificates were held by American for the economic
benefit of the Company.
In connection with a secondary offering of Equant, in February 1999
American liquidated approximately 923,000 depository certificates.
Approximately 490,000 of these certificates, representing approximately
30% of the Company's interest at December 31, 1998, were liquidated for
the Company's benefit. The Company received proceeds of approximately
$35 million from the transaction, resulting in a gain of approximately
$35 million.
55
On March 16, 1999, the Company's Board of Directors authorized a loan of
$300 million to American. The loan agreement was executed on March 17,
1999. The principal amount of the loan will be due June 30, 1999 and
will bear interest at a rate equal to the Company's average portfolio
rate for each month in which the loan is outstanding plus an additional
spread based upon American's credit risk. The Company has the option to
call the note with ten-business day's notice to American. American may
repay the principal amount prior to June 30, 1999 without penalty. As
part of this agreement, the original Credit Agreement (as defined in
Note 5) was modified to terminate American's ability to borrow additional
funds under that agreement.
Additionally, on March 16, 1999, the Company's Board of Directors
authorized, subject to certain business and market conditions, the
repurchase of up to an additional 1 million shares of the Company's Class A
Common Stock.
56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
- --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference is the information set forth under the
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 19, 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their positions and ages as of
December 31, 1998 are as follows:
Michael J. Durham...................... Director, President and Chief Executive Officer since July 1996. President of
The Sabre Group division of AMR from 1995 to 1996; Senior Vice President and
Chief Financial Officer of American Airlines from 1989 to 1995; Vice President
and Treasurer of American Airlines in 1989. Age 47.
Bradford J. Boston..................... Senior Vice President and Executive Vice President--Sabre Technology Solutions
since July 1997; Senior Vice President and President--Sabre Computer Services
from June 1996 to July 1997; Senior Vice President for American Express Travel
Related Services from 1994 to 1996; Senior Vice President for Visa
International from 1993 to 1994; and Vice President for United Airlines/Covia
Partnership from 1991 to 1993. Age 44.
Thomas M. Cook......................... Senior Vice President and President--Sabre Technology Solutions since June
1997. President--Sabre Decision Technologies, a division of The Sabre Group,
from 1994 to 1996; President--American Airlines Decision Technologies from 1988
to 1994. Age 58.
Jeffery M. Jackson..................... Senior Vice President, Chief Financial Officer and Treasurer since August 1998;
Vice President and Controller for American Airlines from January 1998 to August
1998; Vice President--Corporate Development and Treasurer for American Airlines
from 1995 to 1998; Vice President and Treasurer for American Airlines from 1992
to 1995. Age 42.
Terrell B. Jones....................... Senior Vice President--Sabre Interactive and Chief Information Officer since
July 1996. President--Sabre Computer Services from 1993 to 1996; Division Vice
President--SCS Systems Planning & Development for American from 1991 to 1993;
Managing Director & Vice President--STIN Product Development for American from
1987 to 1991. Age 50.
Eric J. Speck.......................... Senior Vice President--Sabre Travel Information Network since April 1997. Vice
President--Sabre Europe from August 1995 to March 1997; Vice
President--Marketing of Sabre Travel Information Network from October 1994 to
August 1995. Age 42.
Andrew B. Steinberg.................... Senior Vice President, General Counsel and Corporate Secretary since October
1996. Associate General Counsel for American from 1994 to 1996; Senior Attorney
for American from 1991 to 1994. Age 40.
All officers serve at the discretion of the Board of Directors.
57
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 19, 1999.
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 19, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference is the information set forth under the
heading "Relationships with AMR Corporation and Affiliates" in the Company's
definitive proxy statement for the annual meeting of stockholders to be held on
May 19, 1999 and under Note 5 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.
EXHIBIT NUMBER DESCRIPTION OF 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 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,
58
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
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)
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)
10.35 The Sabre Group Holdings, Inc. Deferred Compensation
Plan. (6)
10.36 Services Agreement, dated as of July 1, 1996, between
The Sabre Group, Inc. and AMR COMBS, Inc. (7)
10.37 Services Agreement, dated as of July 1, 1996, between
The Sabre Group, Inc. and TELESERVICE RESOURCES, Inc.
(7)
59
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
10.38 Services Agreement, dated as of July 1, 1996, between
The Sabre Group, Inc. and AMR SERVICES CORPORATION (7)
10.39 Information Technology Services Agreement, dated as of
July 1, 1998, between The Sabre Group, Inc. and
TELESERVICE RESOURCES, Inc. (7)
10.40 Program Lease Agreement, dated September 30, 1998,
between The Sabre Group, Inc. and Comdisco, Inc. (7)
10.41 Corporate Travel Agreement, dated June 24, 1998,
between The Sabre Group, Inc. and American Airlines.
(7)
21.1 Subsidiaries of Registrant.
23.1 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule as of December 31, 1998.
27.2 Restated Financial Data Schedule as of December 31,
1997.
27.3 Restated Financial Data Schedule as of December 31,
1996.
(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).
(6) Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8 (Registration No. 333-51291).
(7) Confidential treatment has been requested as to a portion of this
document.
(b) Reports on Form 8-K:
None.
60
THE SABRE GROUP HOLDINGS, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
COVERED BY REPORT OF INDEPENDENT AUDITORS
[ITEM 14(a)]
FINANCIAL STATEMENTS
Page
Report of Independent Auditors 26
Consolidated Balance Sheets at December 31, 1998 and 1997 27
Consolidated Statements of Income for the Years Ended 28
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended 29
December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the Years 30
Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements 31
Schedule II - Valuation and Qualifying Accounts for the Years
Ended December 31, 1998, 1997, and 1996 62
All other schedules are omitted because the required information is included in
the financial statements or notes thereto, or because the required information
is either not present or not present in sufficient amounts.
61
CONSOLIDATED SCHEDULES FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996
THE SABRE GROUP HOLDINGS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- --------------------------------------- ------------ ---------- ---------- ---------- -----------
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT
CLASSIFICATION YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
- --------------------------------------- ------------ ---------- ---------- ---------- -----------
(1) (2)
YEAR ENDED DECEMBER 31, 1998
Allowance for uncollectible accounts $ 8,905 $ 12,199 $ --- $ (8,701) $ 12,403
Booking fee cancellation reserve 15,242 --- 2,480 --- 17,722
Associate reserves 4,686 3,629 --- (4,604) 3,711
YEAR ENDED DECEMBER 31, 1997
Allowance for uncollectible accounts 4,094 11,799 --- (6,988) 8,905
Booking fee cancellation reserve 14,342 --- 937 (37) 15,242
Associate reserves 6,884 2,090 --- (4,288) 4,686
YEAR ENDED DECEMBER 31, 1996
Allowance for uncollectible accounts 4,822 6,051 --- (6,779) 4,094
Booking fee cancellation reserve 12,596 --- 1,746 --- 14,342
Associate reserves 2,218 666 4,291 (291) 6,884
- ----------------------------------------------------------------------------------------------------------------
(1) Amounts charged against revenue.
(2) Includes write-offs for uncollectible accounts and payments to associates.
62
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 Officer and Director
(Principal Executive Officer)
/s/ Jeffery M. Jackson
------------------------------------------------
Jeffery M. Jackson
Senior Vice President, Chief Financial Officer
and Treasurer
(Principal Financial and Accounting Officer)
Date: March 19, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates noted:
Directors:
/s/ Donald J. Carty /s/ Dee J. Kelly
- ---------------------------------- ----------------------------------------
Donald J. Carty 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 19, 1999
63