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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)