-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FigTFrmBD5J+5Pvq3PHhCcYeQ11mQj/GGX0q+WCLNboHkYicHcKhe4S8bsU40pOT YPWaorn7xMkuR2U/4s3EzA== 0000950134-96-005299.txt : 19961010 0000950134-96-005299.hdr.sgml : 19961010 ACCESSION NUMBER: 0000950134-96-005299 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19961009 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SABRE GROUP HOLDINGS INC CENTRAL INDEX KEY: 0001020265 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 752662240 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-09747 FILM NUMBER: 96640921 BUSINESS ADDRESS: STREET 1: 4255 AMON CARTER BLVD CITY: FORT WORTH STATE: TX ZIP: 76155 BUSINESS PHONE: 8179631234 MAIL ADDRESS: STREET 1: 4200 AMERICAN BLVD CITY: FORT WORTH STATE: TX ZIP: 76155 S-1/A 1 AMENDMENT NO. 4 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 9, 1996 REGISTRATION NO. 333-09747 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- THE SABRE GROUP HOLDINGS, INC. (Exact name of registrant as specified in its charter) DELAWARE 7375 75-2662240 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification incorporation or organization) Classification Code Number) Number)
4255 AMON CARTER BOULEVARD FORT WORTH, TEXAS 76155 (817) 931-7300 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) MICHAEL J. DURHAM PRESIDENT AND CHIEF EXECUTIVE OFFICER THE SABRE GROUP HOLDINGS, INC. 4255 AMON CARTER BOULEVARD FORT WORTH, TEXAS 76155 (817) 931-7300 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------------- Copies to: Anne H. McNamara, Esq. John B. Brady, Jr., Esq. Andrew D. Soussloff, Esq. Senior Vice President Debevoise & Plimpton Sullivan & Cromwell and General Counsel 875 Third Avenue 125 Broad Street AMR Corporation New York, New York 10022 New York, New York 10004 4333 Amon Carter Blvd. (212) 909-6000 (212) 558-4000 Fort Worth, Texas 76155 (817) 963-1234
--------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this registration statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / --------------------- CALCULATION OF REGISTRATION FEE ============================================================================================================ PROPOSED MAXIMUM TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED OFFERING PRICE(1)(2) REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------ Class A Common Stock, $.01 par value.............................. $627,210,000 $213,053(3) ============================================================================================================
(1) The shares of Class A Common Stock are not being registered for the purpose of sales outside the United States. (2) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(o). (3) $189,656 previously paid. --------------------- THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ 2 *************************************************************************** * * * Information contained herein is subject to completion or amendment. A * * registration statement relating to these securities has been filed * * with the Securities and Exchange Commission. These securities may not * * be sold and offers to buy may not be accepted prior to the time the * * registration statement becomes effective. This prospectus shall not * * constitute an offer to sell or the solicitation of an offer to buy * * and there shall not be any sale of these securities in any State in * * which such offer, solicitation or sale would be unlawful prior to * * registration or qualification under the securities laws of such * * State. * * * *************************************************************************** SUBJECT TO COMPLETION, DATED OCTOBER 9, 1996 [SABRE LOGO] 20,200,000 SHARES THE SABRE GROUP HOLDINGS, INC. CLASS A COMMON STOCK (PAR VALUE $.01 PER SHARE) ------------------- Of the 20,200,000 shares of Class A Common Stock offered, 16,160,000 shares are being offered hereby in the United States and 4,040,000 shares are being offered in a concurrent international offering outside the United States. The initial public offering price and the aggregate underwriting discount per share will be identical for both Offerings. See "Underwriting." All of the shares of Class A Common Stock offered hereby are being issued and sold by the Company. The Company is a wholly-owned subsidiary of AMR Corporation and, upon completion of the Offerings, AMR will own 100% of the outstanding Class B Common Stock of the Company, which will represent approximately 84.2% of the economic interest in the Company (approximately 82.2% if the Underwriters' over-allotment options are exercised in full). See "Use of Proceeds" and "Relationship with AMR and Certain Transactions." Holders of Class A Common Stock generally have rights identical to those of holders of Class B Common Stock, except that holders of Class A Common Stock are entitled to one vote per share while holders of Class B Common Stock are entitled to 10 votes per share on all matters submitted to a vote of stockholders. Holders of Class A Common Stock are generally entitled to vote with the holders of Class B Common Stock as one class on all matters as to which the holders of Class B Common Stock are entitled to vote. Following the Offerings, the shares of Class B Common Stock will represent approximately 98.2% of the combined voting power of all classes of voting stock of the Company (approximately 97.9% if the Underwriters' over-allotment options are exercised in full). See "Description of Capital Stock." Prior to the Offerings, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price of the Class A Common Stock will be between $25.00 and $27.00 per share. For factors to be considered in determining the initial public offering price, see "Underwriting." Shares of Class A Common Stock are being reserved for sale to directors, officers and employees of the Company, directors of AMR and certain other persons at the initial public offering price. See "Underwriting." Such directors, officers, employees and other persons will purchase, in the aggregate, less than 10% of the Class A Common Stock offered in the Offerings. SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE CLASS A COMMON STOCK. The Class A Common Stock has been approved for listing on the New York Stock Exchange under the symbol "TSG," subject to official notice of issuance. ------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. -------------------
INITIAL PUBLIC UNDERWRITING PROCEEDS TO OFFERING PRICE DISCOUNT(1) COMPANY(2) --------------------- ----------------- ------------------ Per Share......................... $ $ $ Total(3).......................... $ $ $
- --------------- (1) The Company and AMR have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. See "Underwriting." (2) Before deducting estimated expenses of $1,350,000 payable by the Company. (3) The Company has granted the U.S. Underwriters an option for 30 days to purchase up to an additional 2,424,000 shares of Class A Common Stock at the initial public offering price per share, less the underwriting discount, solely to cover over-allotments. Additionally, the Company has granted the International Underwriters a similar option with respect to an additional 606,000 shares as part of the concurrent international offering. If such options are exercised in full, the total initial public offering price, underwriting discount and proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------- The shares offered hereby are offered severally by the U.S. Underwriters, as specified herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that the certificates for the shares will be ready for delivery in New York, New York on or about , 1996, against payment therefor in immediately available funds. GOLDMAN, SACHS & CO. MERRILL LYNCH & CO. J.P. MORGAN & CO. SALOMON BROTHERS INC ------------------- The date of this Prospectus is , 1996. 3 INSIDE GATEFOLD SPREAD COPY: The SABRE Group is a world leader in electronic distribution of travel and is a leading provider of information technology solutions for the airline industry. The SABRE Group's business is focused on: 1. Electronic distribution of travel and travel-related services around the globe, through one of the world's largest privately-owned, real-time computer systems. 2. Information technology solutions, including software development and product sales, transactions processing, and consulting. More than 350 airlines, 55 car rental agencies, and 30,000 hotel properties use the comprehensive electronic marketplace created by SABRE to reach more than 29,000 travel agency locations in over 70 countries and, through the Internet and On Line Services, over two million individual consumers worldwide. CAPTIONS TRAVEL AGENCIES Planet SABRE is designed to be a low cost, high performance, Windows-based tool for the professional travel agent. CORPORATIONS SABRE Business Travel Solutions (BTS), scheduled for release in fourth quarter of 1996, will give corporations integrated control over travel booking, policy management, expense reporting and more. INDIVIDUAL CONSUMERS Through Travelocity, millions of consumers can access the power of SABRE on the Internet at HTTP://WWW.TRAVELOCITY.COM IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED THROUGH THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements, including notes thereto, appearing elsewhere in this Prospectus. 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 July 2, 1996 reorganization (the "Reorganization") of the businesses of AMR Corporation ("AMR"), the businesses of AMR constituting The SABRE Group, an operating unit of AMR. THE COMPANY OVERVIEW The Company is a world leader in the electronic distribution of travel through its proprietary travel reservation and information system, SABRE(R), and is the largest electronic distributor of travel in the United States. In addition, the Company is a leading provider of solutions to the airline industry and fulfills substantially all of the data processing, network and distributed systems needs of American Airlines, Inc. ("American") and AMR's other subsidiaries. The Company believes that its competitive strengths give it a leadership position in its markets and a foundation from which to pursue further growth. During the last 20 years, the Company has developed core competencies that include a comprehensive knowledge of the travel industry, the capability to perform high-volume, high-reliability, real-time transactions processing and expertise in the application of operations research, information technology and industrial engineering skills to solve complex operations problems. These core competencies enable the Company to create an efficient electronic marketplace for the sale and purchase of travel and to offer a broad and deep array of technological solutions to the airline industry. In providing its products and services, the Company operates one of the largest, privately-owned, real-time transactions processing systems in the world in its underground central computer facility (the "Data Center"), which is connected to over 120,000 computer access terminals and operates 24 hours a day, seven days a week. The SABRE system maintains over 50 million air fares (updated five times per business day), processes an average of 93 million requests for information per day and has processed up to 4,969 requests for information per second (in July 1996). The Company has generated consistent annual revenue growth, from $1,097 million in 1991 to $1,530 million in 1995, and operating earnings growth, from $220 million in 1991 to $380 million in 1995. A majority of the Company's revenues, 59.1%, is attributable to bookings made by travel agents using SABRE. The Company has had long-standing relationships with most of its travel agency subscribers. For example, approximately 97% of the travel agency locations that were SABRE subscribers at the beginning of 1995 were SABRE subscribers at the end of 1995. In addition, a significant portion of the Company's revenues, 24.2% in 1995, is derived from information technology solutions provided to American and its affiliates. Such services are currently provided to American and its affiliates pursuant to an Information Technology Services Agreement, dated as of July 1, 1996 (the "Technology Services Agreement"), which has a term of 10 years for most services (three and five years for other services). See "Relationship with AMR and Certain Transactions -- Contractual Arrangements." The Company's non-affiliated customer revenues have grown at a 13.5% compound annual rate during the last five years, to $982 million in 1995, and have grown from 53.9% of total revenues in 1991 to 64.2% in 1995. The Company expects that the proportion of its revenues represented by non-affiliated customer revenues will continue to increase. The Company has identified several opportunities for future revenue growth, including increasing the use of SABRE outside of the United States, offering new products in emerging distribution channels, such as corporate direct distribution and the Internet, expanding participation of travel providers in SABRE and providing technology solutions products and services more broadly. 3 5 ELECTRONIC TRAVEL DISTRIBUTION SABRE and other global distribution systems are the principal means of air travel distribution in the United States and a growing means of air travel distribution internationally. Through SABRE, travel agencies, corporate travel departments and individual consumers ("subscribers") can access information on and book reservations with airlines and other providers of travel and travel- related products and services ("associates"). As of June 30, 1996, travel agencies with more than 29,000 locations in over 70 countries on six continents subscribed to SABRE, and more than 2.5 million individuals subscribed to Travelocity(sm) and easySABRE(sm), the Company's consumer-direct products. SABRE subscribers are able to book reservations with more than 350 airlines and to make reservations with more than 55 car rental companies and more than 190 hotel companies covering approximately 30,000 hotel properties worldwide. During 1995, more airline bookings in the United States were made through SABRE than through any other global distribution system. The Company estimates that in 1995 over 40% of all airline bookings made through travel agencies in the United States were made through SABRE. In 1995, 65.8% of the Company's revenues was generated by the electronic distribution of travel, primarily through booking fees paid by associates. INFORMATION TECHNOLOGY SOLUTIONS The Company is a leading provider of solutions to the airline industry. The Company also employs its airline expertise to offer solutions to other industries that face similar complex operations issues, including the airport, railroad, logistics, hospitality and financial services industries. The solutions offered by the Company include software development and product sales, transactions processing and consulting. The Company believes that its suite of airline-related software solutions is the most comprehensive in the world. In addition, pursuant to the Technology Services Agreement, the Company provides data processing, network and distributed systems services to American and AMR's other subsidiaries, fulfilling substantially all of their information technology requirements. In 1995, 34.2% of the Company's revenues was generated by the provision of information technology solutions. MARKET POSITION AND STRATEGY The Company intends to maintain its leadership positions and to expand its product offerings in electronic travel distribution and information technology solutions. The Company believes that it has many competitive strengths, including (i) a strong market position as a world leader in, and the largest provider in the United States of, the electronic distribution of travel, (ii) established relationships with travel agencies and providers of travel products and services, (iii) comprehensive product and service offerings in electronic travel distribution and information technology solutions, (iv) a comprehensive knowledge of the travel industry and (v) economies of scale and sizable investments in its technological infrastructure and network. The Company intends to use these strengths to achieve continued revenue and earnings growth. Key components of this strategy include: o INCREASING PENETRATION IN INTERNATIONAL TRAVEL DISTRIBUTION MARKETS. The Company believes that the international market for travel and travel-related products and services presents opportunities for the Company to expand by building on its existing base in Europe and Latin America and by pursuing additional opportunities in Asia. The Company will pursue international opportunities directly and through the formation of international alliances. The Company's revenues from its travel distribution products outside the United States have grown at a compound annual rate of 29.8% during the last five years, to $250 million in 1995. o EXPANDING AND CUSTOMIZING ASSOCIATE PARTICIPATION. The Company plans to continue to expand participation in SABRE by associates, such as air charters, car rental companies, hotels, railroads and tour operators, and has initiated an effort to increase the value provided 4 6 to associates by tailoring available participation options to the needs of different travel providers. o ENHANCING THE VALUE OF THE TRAVEL DISTRIBUTION PRODUCT TO TRAVEL AGENTS. The Company plans to maximize the value of its products to travel agents by increasing the depth and breadth of information available through SABRE and the ease of use and reliability of its products. The Company will also continue to develop products to enhance the competitiveness of its travel agent subscribers. For example, the Company has developed two user interface products, Turbo SABRE(sm) and Planet SABRE(sm), that provide travel agencies with greater productivity through data integration and increased ease of use, respectively. o PARTICIPATING IN EMERGING DISTRIBUTION CHANNELS. With products such as Business Travel Solutions(sm) ("BTS"), which is scheduled for release in the fourth quarter of 1996, and Travelocity, the Company intends to continue to compete in emerging distribution channels, such as corporate direct distribution, the Internet and computer on-line services. o ENHANCING TECHNOLOGY AND OPERATING CAPABILITIES. The Company has budgeted capital expenditures of over $210 million for 1996, which the Company anticipates funding with operating cash flow. In addition, the Company has begun a multi-year development effort, for which the Company has budgeted over $100 million during the next five years, to improve SABRE's core operating capabilities. The goals of this development effort are to accelerate new product development, increase flexibility, power and functionality for subscribers and associates, improve data management capabilities, raise capacity levels and lower operating costs. o ENHANCING THE COMPANY'S POSITION IN INFORMATION TECHNOLOGY SOLUTIONS. The Company intends to expand its information technology solutions in the airline industry and to employ its airline industry expertise to continue to expand into other industries with similar complex operations issues. o PURSUING STRATEGIC ACQUISITIONS AND ALLIANCES. The Company expects to enhance its competitive position through strategic acquisitions of and alliances with businesses that augment the Company's product offerings or provide entry into new markets or access to new technologies. The Company believes that it will generate sufficient cash flow beyond internal capital requirements to fund significant acquisitions and alliances in the future. During 1995, the Company generated approximately $217 million of net cash flow from operating activities, after its internal capital requirements were met. RELATIONSHIP WITH AMR The Company is a newly-formed Delaware corporation and, prior to the Offerings, a direct wholly-owned subsidiary of AMR. AMR is also the parent corporation of American and other subsidiaries. Upon completion of the Offerings, AMR will own 100% of the outstanding Class B common stock, par value $.01 per share, of the Company (the "Class B Common Stock"), representing approximately 98.2% of the combined voting power of all classes of voting stock of the Company (approximately 97.9% if the Underwriters' over-allotment options are exercised in full). As long as AMR beneficially owns a majority of the combined voting power, it will have the ability to elect all of the members of the Board of Directors of the Company (the "Board of Directors") and thereby ultimately to control the management and affairs of the Company. Pursuant to the Reorganization consummated on July 2, 1996, the Company became the successor to the businesses of The SABRE Group which were formerly operated as divisions or subsidiaries of American or AMR. In connection with the Reorganization, the Company issued an $850 million subordinated debenture (the "Debenture") payable to American, which was transferred to AMR and the amount of which exceeds the historical book value of the assets contributed by American and AMR to the Company by $120.9 million. The Company will have $405 million of 5 7 long-term indebtedness outstanding after approximately $445 million of the net proceeds of the Offerings is used to repay a portion of such indebtedness. See "Use of Proceeds" and Pro Forma Condensed Consolidated Financial Information. The Company in the past has been and will continue to be dependent upon American and its affiliates for a substantial portion of the Company's business. In connection with the Reorganization, the Company has entered into certain agreements with AMR and its affiliates (the "Affiliate Agreements"), the financial terms of which were generally effective as of January 1, 1996. Those agreements include the Technology Services Agreement pursuant to which the Company will provide information technology services to American for a term of 10 years for most services (three and five years for others). On a pro forma basis, giving effect to the Reorganization and the Affiliate Agreements as though effective as of January 1, 1995, the Company's revenues for 1995 were $1,463 million, representing a decrease of $66 million from historical 1995 revenues, and net income was $133 million, representing a decrease of $92 million from historical 1995 net income. See "Risk Factors -- Dependence on American Airlines," "Risk Factors -- Relationship with AMR," "Relationship with AMR and Certain Transactions -- Contractual Arrangements" and Pro Forma Condensed Consolidated Financial Information. 6 8 THE OFFERINGS The offering hereby of 16,160,000 shares of Class A common stock, par value $.01 per share, of the Company (the "Class A Common Stock" and, collectively with the Class B Common Stock, the "Common Stock") initially being offered in the United States (the "U.S. Offering") and the offering of 4,040,000 shares of Class A Common Stock initially being offered in a concurrent international offering outside of the United States (the "International Offering") are collectively referred to as the "Offerings." The closing of each Offering is conditioned upon the closing of the other Offering. Class A Common Stock offered by the Company(1) U.S. Offering......................... 16,160,000 shares International Offering................ 4,040,000 shares Total......................... 20,200,000 shares Common Stock to be outstanding after the Offerings(1) Class A Common Stock.................. 20,200,000 shares Class B Common Stock.................. 107,374,000 shares Total......................... 127,574,000 shares Use of proceeds(2)...................... Approximately $445 million will be used to repay a portion of the Debenture to AMR. The remaining net proceeds will be used for general corporate purposes. Proposed NYSE symbol.................... TSG Voting rights........................... The holders of Class A Common Stock generally have rights identical to holders of Class B Common Stock, except that holders of Class A Common Stock are entitled to one vote per share and holders of Class B Common Stock are entitled to 10 votes per share. The Class A Common Stock and Class B Common Stock generally will vote together as a single class on all matters except as otherwise required by Delaware law. See "Description of Capital Stock -- Common Stock -- Voting Rights." Under certain circumstances, Class B Common Stock will automatically convert to Class A Common Stock. See "Relationship with AMR and Certain Transactions" and "Description of Capital Stock -- Common Stock -- Con- version."
- --------------- (1) Exclusive of up to 3,030,000 shares of Class A Common Stock subject to over-allotment options granted by the Company to the Underwriters. See "Underwriting." (2) After deducting the underwriting discount and estimated expenses of the Offerings, and assuming no exercise of the Underwriters' over-allotment options. 7 9 SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION Set forth below are the summary historical consolidated financial and other data of the Company for the periods and dates indicated. This information should be read in conjunction with the Consolidated Financial Statements, and the related notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996(4) -------- -------- --------- -------- --------- --------- ------- (IN MILLIONS, EXCEPT OTHER DATA WHERE INDICATED) INCOME STATEMENT DATA(1): Revenues........................... $1,097.1 $1,173.8 $ 1,258.2 $1,406.7 $ 1,529.6 $ 767.5 $838.3 Operating Expenses................. 876.9 929.5 1,004.5 1,056.5 1,149.2 548.0 640.7 -------- -------- --------- -------- --------- --------- ------- Operating Income................... $ 220.2 $ 244.3 $ 253.7 $ 350.2 $ 380.4 $ 219.5 $197.6 Other Income (Expense), net(2)..... (7.6) (173.2) (84.7) (26.1) (10.3) (10.4) (2.4 ) -------- -------- --------- -------- --------- --------- ------- Income Before Income Taxes......... $ 212.6 $ 71.1 $ 169.0 $ 324.1 $ 370.1 $ 209.1 $195.2 Income Taxes....................... 77.6 38.8 69.0 126.9 144.2 82.0 76.1 -------- -------- --------- -------- --------- --------- ------- Income Before Cumulative Effect of Accounting Change................ $ 135.0 $ 32.3 $ 100.0 $ 197.2 $ 225.9 $ 127.1 $119.1 Cumulative Effect of Accounting Change(3)........................ -- 19.0 -- -- -- -- -- -------- -------- --------- -------- --------- --------- ------- Net Earnings....................... $ 135.0 $ 13.3 $ 100.0 $ 197.2 $ 225.9 $ 127.1 $119.1 ======== ======== ========= ======== ========= ========= ======= BALANCE SHEET DATA (AT END OF PERIOD)(1): Current Assets..................... $ 55.1 $ 91.1 $ 107.1 $ 404.3 $ 271.2 $ 259.2 $449.6 Total Assets....................... 558.8 550.1 584.3 873.5 729.4 737.8 855.8 Current Liabilities(2)............. 108.5 154.2 346.4 503.2 218.6 176.5 225.8 Stockholders' Equity............... 411.0 244.7 158.0 289.5 432.1 477.8 551.2 OTHER DATA(1): Operating Income as a Percentage of Revenue.......................... 20.1% 20.8% 20.2% 24.9% 24.9% 28.6% 23.6% Percentage of Revenue from Non-affiliated Customers......... 53.9% 55.0% 56.6% 58.1% 64.2% 64.4% 68.8% Reservations Booked Using SABRE............................ 220.2 255.3 275.2 311.1 325.5 170.6 181.2 Net Cash Provided by Operating Activities............. $ 315.3 $ 328.1 $ 332.4 $ 224.9 $ 391.8 $ 168.3 $143.2 Net Cash Used for Investing Activities....................... $ (183.0) $ (122.4) $ (171.7) $ (177.3) $ (174.7) $ (105.4) $(41.5 ) Net Cash Provided by (Used for) Financing Activities(5).......... $ (130.9) $ (204.7) $ (160.7) $ 215.3 $ (385.2) $ (246.4) $ (9.4 ) Capital Expenditures............... $ 171.0 $ 128.8 $ 176.6 $ 168.9 $ 164.6 $ 104.4 $ 82.0
- --------------- (1) The Company has significant transactions with AMR and American. See Notes 3 and 11 to the Consolidated Financial Statements. (2) The operating results for the years ended December 31, 1992 and 1993 include a provision for losses of $165 million and $71 million, respectively, associated with a reservations system project and resolution of related litigation. The balance sheets as of December 31, 1992 and 1993 include current liabilities for the losses of $28 million and $133 million, respectively. See Note 5 to the Consolidated Financial Statements. (3) Effective January 1, 1992, the Company adopted FAS 106, "Accounting for Postretirement Benefits Other Than Pensions," changing the method of accounting for these benefits. The cumulative effect of adopting FAS 106 as of January 1, 1992 was a charge of $19 million, net of income taxes of $10 million. (4) The operating results for the six months ended June 30, 1996 reflect the impact of the Affiliate Agreements, the financial terms of which were effective as of January 1, 1996. See Note 11 to the Consolidated Financial Statements. (5) Consists of advances to or from affiliates and contributions from or distributions to affiliates. 8 10 SUMMARY PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION Set forth below are the summary pro forma consolidated financial and other data of the Company for the periods indicated. This information should be read in conjunction with the Consolidated Financial Statements, and the related notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Pro Forma Condensed Consolidated Financial Information, and the related notes thereto, included elsewhere in this Prospectus. The pro forma financial information below assumes the Reorganization and Offerings were consummated, and the Affiliate Agreements were effective, on January 1, 1995 with respect to the income statement data and at June 30, 1996 with respect to the balance sheet data. The pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the transactions had been consummated at the assumed dates, nor is it necessarily indicative of future results of operations.
PRO FORMA AS ADJUSTED FOR THE REORGANIZATION, THE AFFILIATE AGREEMENTS AND THE OFFERINGS ---------------------------------- SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, ----------------- 1995 1995 1996 ------------ ------ ------ (IN MILLIONS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA(1): Revenues.................................................... $1,463.3 $736.7 $832.2 Operating Expenses.......................................... 1,178.7 561.2 635.1 -------- ------ ------ Operating Income............................................ $ 284.6 $175.5 $197.1 Other Income (Expense), net................................. (34.2) (22.3) (14.5) -------- ------ ------ Income Before Income Taxes.................................. $ 250.4 $153.2 $182.6 Income Taxes................................................ 97.5 60.2 71.2 -------- ------ ------ Net Earnings................................................ $ 152.9 $ 93.0 $111.4 ======== ====== ====== Pro Forma Earnings Per Share(2)............................. $ 1.20 $ .73 $ .87 ======== ====== ======
JUNE 30, 1996 ----------------------------- AS ADJUSTED FOR THE REORGANIZATION AS FURTHER AND THE ADJUSTED AFFILIATE FOR THE AGREEMENTS OFFERINGS -------------- ---------- (IN MILLIONS) BALANCE SHEET DATA(1): Current Assets.................................................... $ 449.6 $ 499.1 Total Assets...................................................... 1,049.0 1,098.5 Current Liabilities............................................... 171.7 171.7 Debenture Payable to AMR.......................................... 850.0 404.5 Stockholders' Equity (Deficit).................................... (120.9) 374.1
PRO FORMA AS ADJUSTED FOR THE REORGANIZATION, THE AFFILIATE AGREEMENTS AND THE OFFERINGS ------------------------------- SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, --------------- 1995 1995 1996 ------------ ----- ----- OTHER DATA(1): Operating Income as a Percentage of Revenue.................... 19.4% 23.8% 23.7% Percentage of Revenue from Non-affiliated Customers............ 67.1% 67.1% 69.3%
- --------------- (1) The Company has significant transactions with AMR and American. See Notes 3 and 11 to the Consolidated Financial Statements. (2) The Company was formed on June 25, 1996 and became a wholly-owned subsidiary of AMR on July 2, 1996 in connection with the Reorganization. As part of the Reorganization, AMR caused to be transferred to the Company the subsidiaries and divisions through which AMR has historically conducted its electronic travel distribution and information technology solutions operations. The pro forma earnings per common share calculation is based upon weighted average common shares outstanding after the Reorganization and the Offerings. See Notes 10 and 11 to the Consolidated Financial Statements. 9 11 RISK FACTORS In addition to the other information in this Prospectus, prospective investors should carefully consider the following risk factors: DEPENDENCE ON AMERICAN AIRLINES The Company's revenues and earnings are highly dependent on its business with American and its affiliates. In 1995, 35.8% of the Company's revenues was generated by information technology solutions provided to American and its affiliates and through booking fees paid by American for bookings on American through SABRE (32.9% on a pro forma basis after giving effect to the financial impact of the Affiliate Agreements). Pursuant to certain of the Affiliate Agreements, the Company provides information technology solutions to American, gains access to SABRE subscribers such as travel agencies and corporations through marketing services provided by American and, under certain circumstances, lends to and borrows from American. See "Relationship with AMR and Certain Transactions." American is the largest single travel provider in SABRE, generating booking fees that account for a substantial portion of the Company's revenues. The Company derives a substantial portion of its revenues from the Technology Services Agreement, which has a base term that expires on June 30, 2006 for a majority of the services performed by the Company, with terms expiring June 30, 1999 and June 30, 2001 for services that represented 5.7% and 0.5%, respectively, of the Company's total revenues for the six months ended June 30, 1996. American is generally required to continue purchasing from the Company services currently performed under the Technology Services Agreement for the term applicable to such service, as specified in the preceding sentence. New services, however, including most new applications development work, can be competitively bid by American, with the Company having a right to bid on most of such services. There can be no assurance that American will purchase new services from the Company or that it will continue to purchase services from the Company upon expiration of the Technology Services Agreement. The Technology Services Agreement also provides for annual price adjustments. For certain prices, adjustments are made according to formulas that, commencing in 1998, are reset every two years and that may take into account the market for similar services provided by other companies. Consequently, downward market pressures on fees generally charged by computer outsourcers or increased price competition for provision of services to the airline industry, both of which the Company believes could occur, would have a negative impact on the Company's future revenues under the Technology Services Agreement. Through subcontracting arrangements with American (the "Canadian Subcontract"), the Company provides data processing and network and distributed systems services to Canadian Airlines International ("Canadian"). American has guaranteed payment to the Company of the fees the Company will be entitled to receive pursuant to the terms of the Canadian Subcontract from Canadian in payment for all such services actually performed by the Company. In addition, American has agreed to reimburse the Company for any capitalized costs incurred in connection with the implementation of such systems that remain unamortized in the event of the termination or expiration of such subcontracting arrangement or for a write down of such costs. Pursuant to a Marketing Cooperation Agreement (the "Marketing Cooperation Agreement"), American will provide marketing support for the Company's products targeted to travel agencies until June 30, 2006 and will support the Company's promotion of BTS until September 30, 2001 and the Company's promotion of Travelocity and easySABRE until June 30, 2001. The Company relies on these services to support its relationship with travel agents who may utilize SABRE and to promote its products to those corporations and individuals who are customers of American. With limited exceptions, however, American is not restricted from distributing its airline products and services directly to corporate or individual consumers through the Internet or otherwise. For example, American has recently announced AAccess, an Internet product designed to allow 10 12 American to electronically distribute its products directly. American also participates in other global distribution systems. Under a credit agreement between the Company and American, dated as of July 1, 1996 (the "Credit Agreement"), designed to permit AMR to manage efficiently the cash needs of its subsidiaries, the Company is required to lend to American up to $100 million of excess cash if required by American to meet American's daily cash needs, and American is required to lend to the Company (either from its excess cash or from external borrowing facilities) up to $300 million if required by the Company to meet the Company's daily cash needs. The Company will be subject to the credit risk of American to the extent American makes borrowings under the Credit Agreement. American's collective bargaining agreement with the Allied Pilots Association, the union that represents all of American's pilots (the "APA"), became amendable on August 31, 1994. In January 1996, the APA filed a petition with the National Mediation Board (the "NMB") to appoint a federal mediator. A mediator was appointed and meetings with the APA, NMB and American were held commencing in March 1996. On September 2, 1996, American and the APA announced that they had concluded negotiations on a new labor agreement, subject to ratification by the Board of Directors of the APA and the APA's members. If American were to terminate early any of the Affiliate Agreements discussed above, fail or otherwise become unable to fulfill its principal obligations thereunder or determine not to renew certain of the Affiliate Agreements, the Company's financial condition and results of operations would be materially adversely affected. COMPETITION COMPETITION IN ELECTRONIC TRAVEL DISTRIBUTION The markets in which the Company's electronic travel distribution business operates are highly competitive. The Company's electronic travel distribution business competes primarily against other large and well-established global distribution systems. SABRE's principal competitors include Amadeus/System One, Galileo/Apollo and Worldspan*, each of which is owned by a separate consortium of airlines and offers many services similar to the Company's services. Moreover, although certain barriers exist for any new global distribution system -- barriers such as the need for significant capital investment to acquire or develop the hardware, software and network facilities necessary to operate effectively a global distribution system -- the Company is always faced with the potential of new competitors, particularly as new channels for travel distribution develop. Factors affecting competitive success of global distribution systems include depth and breadth of information, ease of use, reliability, subscriber and booking fees, service and incentives to travel agents and range of products available to travel providers, travel agents and consumers. The Company believes it competes effectively with respect to each of these factors. Increased competition, however, could require the Company to reduce prices, to increase spending on marketing or product development or otherwise to take actions that might adversely affect its operating earnings. Competitive factors could also lead the Company to change its billing practices in response to pressure from travel providers who list their products and services in SABRE. A change in billing practices might adversely affect the Company's financial condition and results of operations. Competition to attract and retain travel agent subscribers is particularly intense. If the Company were unable to compete effectively and a portion of the Company's travel agency subscribers accounting for a significant percentage of bookings through SABRE were to cease using SABRE and begin utilizing other systems, the Company's financial condition and results of operations would be materially adversely affected. - --------------- * Amadeus, System One, Galileo, Apollo and Worldspan are trademarks of their respective owners and are not trademarks of the Company. 11 13 The Company believes that the potential for growth in the number of new travel agent subscribers exists primarily outside the United States, where the Company's market recognition is not as well developed as in the United States. A number of trade barriers erected by foreign travel providers -- often government-owned -- have restricted the ability of the Company to gain market share abroad. These providers have on occasion precluded SABRE from offering their products and services, thus making SABRE's product less attractive to travel agencies in those markets than other global distribution systems that have such capability. Additionally, some international markets are served by other global distribution systems that have substantially greater market presence than the Company or long-standing relationships with travel agency subscribers or associates. Although distribution through travel agents continues to be the primary method of travel distribution, new channels are developing for distribution directly to businesses and consumers through computer on-line services, the Internet and private networks. The Company faces competition in these channels not only from its principal competitors but also from possible new entrants in the sale of travel products and also from travel providers, including American, who distribute their products directly. For example, in July 1996, American Express Co. and Microsoft Corp. announced an on-line travel booking service for corporations, which they have scheduled for release in the first half of 1997. The Company expects that this on-line travel booking service, while only in the developmental stage, will eventually directly compete with BTS. In addition, the Internet permits consumers to have direct access to travel providers, thereby by-passing both traditional travel agents and global distribution systems such as SABRE. Although the Company has positioned its BTS, Travelocity and easySABRE products to compete in the emerging distribution channels, there can be no assurance that the Company's products will compete successfully or that the failure to compete successfully will not have a material adverse effect on the financial condition and results of operations of the Company. COMPETITION IN INFORMATION TECHNOLOGY SOLUTIONS The Company's solutions business competes both against full-service providers of technology outsourcing services and solutions companies, some of which have considerably greater financial resources than the Company, and against smaller companies that offer a limited range of services. Among the Company's full service competitors are Electronic Data Systems, IBM/ISSC, Unisys, Andersen Consulting and Lufthansa Systems. Many of these competitors have formed strategic alliances with large companies in the travel industry, and the Company's access to such potential customers is thus limited. DEPENDENCE UPON TRAVEL INDUSTRY; SEASONALITY The Company's earnings can be significantly affected by events in the travel industry, from which the Company derives substantially all of its revenues. Because a significant portion of those revenues are derived from airline bookings, the Company's earnings are especially sensitive to events that affect airline travel and the airlines that participate in the SABRE system. Any event, including political instability, armed hostilities, recession, excessive inflation, strikes, lockouts or other labor disturbances or other adverse occurrence, that results in a significant decline in sales of travel products through SABRE or in an overall downturn in the business and operations of the Company's customers in the travel industry could have a material adverse effect on the financial condition and results of operations of the Company. The travel industry is seasonal in nature. Bookings, and thus fees charged for bookings through SABRE, decrease significantly each year in the fourth quarter, primarily in December, due to early bookings by customers for travel during the holiday season and due to a decrease in business travel during the holiday season. 12 14 CHANGING TECHNOLOGY The Company's future results will depend in part upon its ability to make timely and cost-effective enhancements and additions to its technology and to introduce new products and services that meet customer demands. The success of current and new product and service offerings is dependent on several factors, including proper identification of customer needs, cost, timely completion and introduction, differentiation from offerings of the Company's competitors and market acceptance. In addition, maintaining flexibility to respond to technological and market dynamics may require substantial expenditures and lead time. There can be no assurance that the Company will successfully identify and develop new products or services in a timely manner, that products, technologies or services developed by others will not render the Company's offerings obsolete or noncompetitive or that the technologies in which the Company focuses its research and development investments will achieve broad acceptance in the marketplace. DEPENDENCE ON FACILITIES AND NETWORK SABRE and the Company's data processing and transactions processing services are dependent on the Data Center. Although the Company has taken what it considers to be sufficient precautions to protect this facility, a natural disaster or other calamity that causes significant damage to the facility would have a material adverse effect on the financial condition and results of operations of the Company. See "Business -- Facilities." The Company relies on several communications companies, both in the United States and internationally, to provide network access between the Data Center and SABRE access terminals. In particular, the Company relies upon Societe Internationale de Telecommunications Aeronautiques ("SITA"), which is owned by a consortium of airlines, including American, to maintain and develop its data communications in the United States and Canada and to provide network services in almost all locations served by the Company. Any failure or inability of SITA or other companies to provide and maintain network access could have a material adverse effect on the financial condition and results of operations of the Company. ACQUISITIONS AND INVESTMENTS One component of the Company's strategy is to make strategic acquisitions and to form strategic alliances. There can be no assurance that any acquisition will be made, that any alliance will be formed, and, if any acquisitions or alliances are so made or formed, that they will be successful. In addition, acquisitions that the Company may make will involve risks, including the successful integration and management of acquired technology, operations and personnel. The integration of acquired businesses may also lead to the loss of key employees of the acquired companies and diversion of management attention from ongoing business concerns. RELATIONSHIP WITH AMR AMR currently owns all of the outstanding capital stock of the Company. See "Relationship with AMR and Certain Transactions." Upon completion of the Offerings, AMR will own 100% of the Company's outstanding Class B Common Stock, representing approximately 98.2% of the combined voting power of all classes of voting stock of the Company (approximately 97.9% if the Underwriters' over-allotment options are exercised in full). As long as AMR beneficially owns a majority of the combined voting power, it will have the ability to elect all of the members of the Board of Directors and thereby ultimately to control the management and affairs of the Company, including any determinations with respect to acquisitions, dispositions, borrowings, issuances of Common Stock or other securities of the Company or the declaration and payment of any dividends on the Common Stock. In addition, AMR will be able to determine the outcome of any matter submitted to a vote of the Company's stockholders for approval and to cause or prevent a change in control of the Company. 13 15 Although, in negotiating the Affiliate Agreements between the Company and AMR, American and AMR's other subsidiaries, the parties endeavored to implement market-based agreements, as a result of AMR's control of the Company, none of such agreements resulted from "arm's-length" negotiations. There can be no assurance that the Company would not have received more favorable terms from an unaffiliated party. For a description of the Affiliate Agreements, see "Relationship with AMR and Certain Transactions." The Restated Certificate of Incorporation of the Company (the "Certificate of Incorporation") provides that any amendment or termination of any agreement or arrangement, or any new agreement or arrangement, between the Company and AMR or its affiliates effected with the approval of a majority of the Company's directors who are not officers of either the Company or AMR or directors of AMR (the "Disinterested Directors"), or consistent with guidelines or standards approved by the Disinterested Directors, or approved by the holders of a majority of the Company's outstanding voting stock (not including that owned by AMR) shall be deemed fair to the Company and its stockholders, provided that, if such approval is not obtained, no presumption shall arise that such amendment or termination (or new agreement) is not fair to the Company and its stockholders. The Certificate of Incorporation also contains provisions allocating corporate opportunities between AMR and the Company based primarily on the relationship to the Company and AMR of the individual to whom an opportunity is presented. See "Description of Capital Stock -- Certificate of Incorporation and Bylaw Provisions." Conflicts of interest may arise between the Company and AMR in a number of areas relating to their past and ongoing relationships, including the nature and quality of services rendered by the Company to AMR and its affiliates or by AMR and its affiliates to the Company, potential competitive business activities, shared marketing functions, tax and employee benefit matters, indemnity agreements, registration rights, sales or distributions by AMR of all or any portion of its ownership interest in the Company or AMR's ability to control the management and affairs of the Company. There can be no assurance that AMR and the Company will be able to resolve any potential conflict or that, if resolved, the Company would not receive more favorable resolution if it were dealing with an unaffiliated party. In addition, certain of the Affiliate Agreements contain specific procedures for resolving disputes between the Company and AMR with respect to the subject matter of those agreements. There can be no assurance that more favorable results to the Company would not be obtained under different procedures. For as long as AMR desires to include the Company in its consolidated group for federal income tax purposes, which requires that AMR own at least 80% of the total voting power and stock with a value equal to at least 80% of the total value of the Company, the Company may be constrained in its ability to raise equity capital or to issue Common Stock in connection with acquisitions. For any period of time that the Company continues to be part of AMR's consolidated group, it will be jointly and severally liable for the federal income tax liability of other members of the consolidated group and for funding and termination liabilities applicable to the group's tax-qualified employee benefit plans. AMR could decide to sell or otherwise dispose of all or a portion of its Class B Common Stock (or, upon conversion of the Class B Common Stock, the resulting Class A Common Stock) at some future date, and there can be no assurance that, in any transfer by AMR of a controlling interest in the Company, any holders of Class A Common Stock will be allowed to participate in such transaction or will realize any premium with respect to their shares of Class A Common Stock. Sales or distribution by AMR of substantial amounts of Class B Common Stock (or Class A Common Stock) in the public market or to its stockholders could adversely affect prevailing market prices for the Class A Common Stock. See "-- Shares Available for Future Sale," "Relationship with AMR and Certain Transactions" and "Shares Eligible for Future Sale." 14 16 INTERNATIONAL EXPANSION AND OPERATIONS Pursuit of international growth opportunities may require significant investments for an extended period before returns on such investments, if any, are realized, and may require support of United States or local government authorities. See "Business -- Electronic Travel Distribution -- Industry Regulation." There can be no assurance as to the extent, if at all, that the Company's plans to expand in international markets will be successful. The Company's current international activities and prospects could be adversely affected by factors such as reversals or delays in the opening of foreign markets, exchange controls, currency and political risks and taxation. In addition, the laws and policies of the United States affecting foreign trade, investment and taxation could also adversely affect the Company's international operations and growth. UNITED STATES REGULATIONS; FUTURE PARTICIPATION OF CERTAIN AIRLINE ASSOCIATES IN SABRE Regulations promulgated by the U.S. Department of Transportation (the "DOT") govern the relationship of SABRE with airlines and travel agencies. These regulations (the "U.S. Regulations") generally require airlines affiliated with global distribution systems to participate in the United States in other global distribution systems that are affiliated with other airlines. More specifically, the U.S. Regulations require any airline doing business in the United States that owns five percent or more of a global distribution system (a "GDS-Affiliated Airline"), to participate in any other global distribution system doing business in the United States which is offered by an airline or an airline affiliate (an "Airline-Affiliated System") at the same level as it does in the system it owns and to provide data on its flights to the other Airline-Affiliated System that is as complete, accurate and timely as the information given to its own system, as long as the other Airline-Affiliated System offers terms for participation that are commercially reasonable. Although the Company believes the U.S. Regulations will be extended, the U.S. Regulations are currently scheduled to expire on December 31, 1997. See "Business -- Electronic Travel Distribution -- Industry Regulation." If (i) SABRE were no longer offered or marketed to travel agents by any airline or airline affiliate or (ii) the U.S. Regulations were to expire (or were to be revised to eliminate the participation requirement described above), GDS-Affiliated Airlines, such as Delta Air Lines, United Airlines, USAir, Continental Airlines and British Airways, would no longer be legally required to participate in SABRE at any level. Although the Company does not anticipate that any of these airlines would, as a practical matter, discontinue listing their flights in SABRE under such circumstances, there can be no assurance that any of the airlines would continue to participate in SABRE, absent any legal requirement, on the same commercial terms that prevail today. Decisions by several airlines to discontinue listing their services in SABRE or a significant reduction in revenues resulting from such decisions or resulting from the absence of any legal requirement compelling participation could materially adversely affect the financial condition and results of operations of the Company. NEWLY FORMED LEGAL ENTITY; HOLDING COMPANY STRUCTURE The Company has existed in its present form only since July 2, 1996. Prior to such time, although the businesses of the Company had been accounted for as a separate unit of AMR, the Company had not operated as a separate legal entity. The financial information included herein may not necessarily reflect what the results of operations, financial position and cash flows would have been had the Company been a separate entity during the periods presented. In addition, the Company is a holding company and will thus rely primarily on dividends and other intercompany transfers of funds from its subsidiaries for any repayment of debt or, in the event dividends are declared, any payment of dividends to the Company's stockholders. See "Dividend Policy." Although the Company intends to retain its earnings to finance future growth and not to declare any cash dividends in the foreseeable future, and although there are currently no material contractual restrictions or legal prohibitions on dividends or other intercompany transfers of funds to the Company by its subsidiaries, the Company's subsidiaries could become subject to 15 17 contractual restrictions or legal or regulatory impediments to the making of dividends or such other transfers to the Company. INTELLECTUAL PROPERTY RIGHTS Some of the Company's significant assets are its software and other proprietary information and intellectual property rights. The Company relies on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect these assets. The Company's software and related documentation, however, are protected principally under trade secret and copyright laws, which afford only limited protection. In addition, the laws of some foreign jurisdictions may provide less protection than the laws of the United States for the Company's proprietary rights. Unauthorized use of the Company's intellectual property could have a material adverse effect on the Company, and there can be no assurance that the Company's legal remedies would adequately compensate it for the damages to its business caused by such use. The Company does not believe that any of its products infringe upon the proprietary rights of third parties in any material respect. There can be no assurance, however, that third parties will not claim infringement by the Company with respect to current or future products. Any such claim, with or without merit, could result in substantial costs and diversion of management resources, and a successful claim could effectively block the Company's ability to use or license its products in the United States or abroad or otherwise have a material adverse effect on the financial condition and results of operations of the Company. Licenses for a number of software products have been granted to the Company. Certain of these licenses, individually and in the aggregate, are material to the business of the Company. Although management believes that the risk that the Company will lose any material license is remote, any such loss could have a material adverse effect on the financial condition and results of operations of the Company. See "Business -- Intellectual Property." POTENTIAL ANTI-TAKEOVER CONSIDERATIONS Under the Company's Certificate of Incorporation, the Board of Directors has the authority, without action by the Company's stockholders, to fix certain terms and issue shares of Preferred Stock, par value $.01 per share (the "Preferred Stock"), and to issue rights to purchase securities or other property from the Company. Actions of the Board of Directors pursuant to this authority may have the effect of delaying, deterring or preventing a change in control of the Company. Other provisions in the Company's Certificate of Incorporation and in the Restated Bylaws (the "Bylaws") impose procedural and other requirements, including the requirement that a vote of more than 80% of the voting stock of the Company is necessary for stockholders to amend the Bylaws and certain provisions of the Certificate of Incorporation. These requirements could make it more difficult to effect certain corporate actions, including replacing incumbent directors. In addition, the Board of Directors is divided into three classes, each of which is to serve for a staggered three-year term after the initial classification and election, and, after AMR ceases to be the beneficial owner of an aggregate of at least a majority of the voting power of the Company, incumbent directors may not be removed without cause, all of which may make it more difficult for a third party to gain control of the Board of Directors. With certain exceptions, Section 203 of the Delaware General Corporation Law (the "DGCL") imposes certain restrictions on mergers and other business combinations between the Company and any holder of 15% or more of the voting stock of the Company. Section 203 does not apply to AMR's interest in the Company. See "Description of Capital Stock -- Certificate of Incorporation and Bylaw Provisions." SHARES AVAILABLE FOR FUTURE SALE Subject to applicable law, AMR will be free to sell any and all of the shares of Common Stock it owns after completion of the Offerings. AMR and the Company have agreed, however, subject to 16 18 certain exceptions, not to sell or otherwise dispose of any shares of Common Stock (other than the shares offered hereby or pursuant to employee stock option plans which exist on, or are described herein to be implemented after, the date of this Prospectus, or on conversion or exchange of convertible or exchangeable securities outstanding on the date of this Prospectus) for a period of 180 days after the date of this Prospectus without the prior written consent of Goldman, Sachs & Co., on behalf of the Underwriters. In connection with the Offerings, the Company and AMR have entered into an agreement which provides that AMR will have certain rights to have shares of Common Stock owned by it after the Offerings registered by the Company under the Securities Act of 1933, as amended (the "Securities Act"), in order to permit the public sale of such shares. In addition, beginning two years after AMR acquired its shares of Common Stock, AMR will be permitted to sell in the public market specified amounts of such Common Stock without registration pursuant to Rule 144 under the Securities Act ("Rule 144"). No prediction can be made as to the effect, if any, that future sales of Common Stock by AMR, or the availability of Common Stock for future sale, will have on the market price of the Class A Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock, or the perception that such sales could occur, could adversely affect prevailing market prices for the Class A Common Stock. See "Shares Eligible for Future Sale." ABSENCE OF A PRIOR PUBLIC MARKET; VOLATILITY OF PRICE Prior to the Offerings, there has been no public market for the Class A Common Stock and there can be no assurance that an active trading market will develop or be sustained. The initial public offering price of the Class A Common Stock will be determined through negotiation between the Company and the Underwriters and may not be indicative of the market price for the Class A Common Stock after the Offerings. See "Underwriting." The market price for the Class A Common Stock may be highly volatile. The Company believes that factors such as announcements by it, or by its competitors or travel providers, of quarterly variances in financial results could cause the market price of the Class A Common Stock to fluctuate substantially. In addition, the stock market may experience extreme price and volume fluctuations which often are unrelated to the operating performance of specific companies. Market fluctuations or perceptions regarding the Company's industry, as well as general economic or political conditions, may adversely affect the market price of the Class A Common Stock. 17 19 THE COMPANY The Company is a holding company incorporated in Delaware on June 25, 1996. The SABRE Group, Inc. is the sole direct subsidiary of the Company and, pursuant to the Reorganization, is the successor to the businesses of The SABRE Group, which were previously operated as divisions or subsidiaries of American or AMR. Upon completion of the Offerings, AMR will own 100% of the outstanding Class B Common Stock, representing approximately 84.2% of the economic interest in the Company and approximately 98.2% of the combined voting power of all classes of voting stock of the Company (approximately 82.2% of the economic interest and 97.9% of the combined voting power if the Underwriters' over-allotment options are exercised in full). As long as AMR beneficially owns a majority of the combined voting power, it will have the ability to elect all of the members of the Board of Directors of the Company and thereby ultimately to control the management and affairs of the Company. In connection with the Reorganization, the Company issued the $850 million Debenture to American, which was transferred to AMR as a dividend. Approximately $445 million of the net proceeds of the Offerings will be used to repay a portion of such indebtedness. See "Use of Proceeds" and Pro Forma Condensed Consolidated Financial Information. The Company has been and will continue to be dependent upon American and its affiliates for a substantial portion of the Company's business. In connection with the Reorganization, the Company entered into the Affiliate Agreements, including the Technology Services Agreement pursuant to which the Company will provide information technology services to American for a term of 10 years for most services (three and five years for other services). See "Risk Factors -- Dependence on American Airlines," "Risk Factors -- Relationship with AMR" and "Relationship with AMR and Certain Transactions -- Contractual Arrangements." The Company's executive offices are located at 4255 Amon Carter Boulevard, Fort Worth, Texas 76155, and its telephone number is (817) 931-7300. USE OF PROCEEDS The Company will receive approximately $495.0 million from the sale of the 20.2 million shares of Class A Common Stock in the Offerings based on an assumed price to the public of $26.00 per share (after deducting underwriting commissions and estimated expenses payable by the Company). Approximately $445 million of the net proceeds of the Offerings will be used to repay a portion of the indebtedness represented by the Debenture payable by the Company to AMR. The Debenture, which matures on September 30, 2004, bears interest, payable semiannually, at a rate based on the sum of the six-month London Interbank Offered Rate plus a margin determined by the Company's senior unsecured long-term debt rating or, if such debt rating is not available, upon the Company's ratio of debt to total capital. The Debenture was issued as part of the Reorganization in connection with the transfer of the businesses of The SABRE Group to the Company. In the judgment of the Company, the fair market value of such businesses is at least equal to the Debenture, although the Debenture exceeds the historical book value of the Company's assets by $120.9 million. See "Relationship with AMR and Certain Transactions." The remaining net proceeds will be used for general corporate purposes. 18 20 DIVIDEND POLICY 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 future determination as to the payment of dividends will depend upon the future results of operations, capital requirements and financial condition of the Company and such other factors as the Board of Directors may consider, including any contractual or statutory restrictions on the Company's ability to pay dividends. DILUTION The pro forma net tangible book value of the Company at June 30, 1996, giving effect to the Reorganization, was a deficit of approximately $120.9 million, or $1.13 per share of Common Stock. Net tangible book value per share of Common Stock represents the amount of total tangible assets less total liabilities, divided by the total number of shares of Common Stock outstanding. Dilution per share represents the difference between the amount per share paid by purchasers of shares of Class A Common Stock in the Offerings and the pro forma net tangible book value per share of Common Stock immediately after the completion of the Offerings. After giving effect to the assumed sale of approximately 20.2 million shares of Class A Common Stock at a price of $26.00 per share by the Company in the Offerings and the application of the estimated net proceeds therefrom, the pro forma net tangible book value of the Company as of June 30, 1996 would have been approximately $374.1 million, or $2.93 per share. This represents an immediate dilution in pro forma net tangible book value per share of $23.07 to investors who purchase shares of Class A Common Stock in the Offerings. The following table illustrates the dilution in pro forma net tangible book value per share to such investors: Initial public offering price per share................ $26.00 Pro forma net tangible book value per share as of June 30, 1996 after giving effect to the Reorganization... $(1.13) ------ Increase per share attributable to new investors....... $ 4.06 ------ Pro forma net tangible book value per share as of June 30, 1996 after giving effect to the Offerings........ $ 2.93 ------ Dilution per share to new investors.................... $23.07 ======
19 21 CAPITALIZATION The following table sets forth information regarding the consolidated long-term debt and capitalization of the Company (i) at June 30, 1996, (ii) as adjusted for the pro forma effects of the Reorganization and the financial impact of the Affiliate Agreements and (iii) as further adjusted to reflect (x) the reclassification of 1,000 shares of common stock, $.01 par value, of the Company held by AMR into 107,374,000 shares of Class B Common Stock and (y) the sale of 20,200,000 shares of Class A Common Stock in the Offerings at an assumed initial public offering price of $26.00 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds." This table should be read in conjunction with the Consolidated Financial Statements of the Company included elsewhere in this Prospectus.
JUNE 30, 1996 ---------------------------------------------------- PRO FORMA AS ADJUSTED FOR THE PRO FORMA AS REORGANIZATION AND FURTHER ADJUSTED AFFILIATE FOR THE HISTORICAL AGREEMENTS(1) OFFERINGS(2)(3) ---------- ------------------ ---------------- (DOLLARS IN THOUSANDS) Note Payable to AMR............................. $ 54,102 $ -- $ -- Long-Term Debenture Payable to AMR.............. -- 850,000 404,532 Stockholders' Equity: Preferred Stock: $.01 par value, 20,000,000 shares authorized; no shares issued........ -- -- -- Common Stock: $.01 par value; 1,000 shares authorized; 1,000 shares issued and outstanding................................ -- -- -- Class A Common Stock: $.01 par value; 250,000,000 shares authorized; 20,200,000 shares issued and outstanding, as adjusted................................... -- -- 202 Class B Common Stock: $.01 par value; 107,374,000 shares authorized; 107,374,000 shares issued and outstanding, as adjusted................................... -- -- 1,074 Additional Paid-in Capital.................... -- -- 493,688 Retained Earnings (Deficit)................... (120,876) (120,876) Stockholder's Net Investment.................. 551,187 -- -- --------- ---------- ---------- Total Stockholders' Equity (Deficit)........................... $ 551,187 $ (120,876) $ 374,088 --------- ---------- ---------- Total Capitalization.................. $ 605,289 $ 729,124 $ 778,620 ========= ========== ==========
- --------------- (1) Adjusted to reflect the Reorganization, including the issuance of the Debenture to American, and the financial impact of the Affiliate Agreements. American subsequently transferred the Debenture to AMR. (2) Adjusted to reflect the transactions described in note (1) above, the reclassification of 1,000 shares of common stock, $.01 par value, of the Company held by AMR into 107,374,000 shares of Class B Common Stock and the issuance of 20,200,000 shares of Class A Common Stock, assuming an offering price of $26.00 per share, pursuant to the Offerings, resulting in net proceeds of approximately $495 million after deducting underwriting commissions and estimated expenses of the Offerings and to reflect the use of approximately $445 million of the proceeds of the Offerings to repay a portion of the Debenture. (3) Excludes options to purchase the Company's Class A Common Stock outstanding under the Company's Long-Term Incentive Plan. See Note 11 to the Consolidated Financial Statements. 20 22 SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION The selected financial information and other data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements, notes thereto and other financial information included elsewhere in this Prospectus. The income statement data for the two years ended December 31, 1992, and the balance sheet data as of December 31, 1991, 1992 and 1993, have been derived from financial statements of the Company which have been audited by Ernst & Young LLP, independent auditors. The income statement data for the three years ended December 31, 1995, and the balance sheet data as of December 31, 1994 and 1995, have been derived from the Consolidated Financial Statements of the Company included elsewhere in this Prospectus, which also have been audited by Ernst & Young LLP, independent auditors, whose report thereon appears elsewhere in this Prospectus. The selected financial data set forth below for the six months ended June 30, 1995 and 1996 is derived from unaudited consolidated interim financial statements of the Company. The unaudited interim consolidated financial statements have been prepared on a basis consistent with the Consolidated Financial Statements and, in the opinion of management, include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of such data. The results for the six month period ended June 30, 1996 are not necessarily indicative of the results to be expected for the full fiscal year.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------------------------------- ------------------- 1991 1992 1993 1994 1995 1995 1996(4) -------- -------- -------- -------- -------- ------- ------- (IN MILLIONS, EXCEPT OTHER DATA WHERE INDICATED) INCOME STATEMENT DATA(1): Revenues............................... $1,097.1 $1,173.8 $1,258.2 $1,406.7 $1,529.6 $ 767.5 $838.3 Operating Expenses..................... 876.9 929.5 1,004.5 1,056.5 1,149.2 548.0 640.7 -------- -------- -------- -------- -------- ------ ------ Operating Income....................... $ 220.2 $ 244.3 $ 253.7 $ 350.2 $ 380.4 $ 219.5 $197.6 Other Income (Expense), net(2)......... (7.6) (173.2) (84.7) (26.1) (10.3) (10.4) (2.4) -------- -------- -------- -------- -------- ------ ------ Income Before Income Taxes............. $ 212.6 $ 71.1 $ 169.0 $ 324.1 $ 370.1 $ 209.1 $195.2 Income Taxes........................... 77.6 38.8 69.0 126.9 144.2 82.0 76.1 -------- -------- -------- -------- -------- ------ ------ Income Before Cumulative Effect of Accounting Change.................... $ 135.0 $ 32.3 $ 100.0 $ 197.2 $ 225.9 $ 127.1 $119.1 Cumulative Effect of Accounting Change(3)............................ -- 19.0 -- -- -- -- -- -------- -------- -------- -------- -------- ------ ------ Net Earnings........................... $ 135.0 $ 13.3 $ 100.0 $ 197.2 $ 225.9 $ 127.1 $119.1 ======== ======== ======== ======== ======== ====== ====== BALANCE SHEET DATA (AT END OF PERIOD)(1): Current Assets......................... $ 55.1 $ 91.1 $ 107.1 $ 404.3 $ 271.2 $ 259.2 $449.6 Total Assets........................... 558.8 550.1 584.3 873.5 729.4 737.8 855.8 Current Liabilities(2)................. 108.5 154.2 346.4 503.2 218.6 176.5 225.8 Stockholder's Net Investment........... 411.0 244.7 158.0 289.5 432.1 477.8 551.2 OTHER DATA(1): Operating Income as a Percentage of Revenue.............................. 20.1% 20.8% 20.2% 24.9% 24.9% 28.6% 23.6% Percentage of Revenue from Non-affiliated Customers............. 53.9% 55.0% 56.6% 58.1% 64.2% 64.4% 68.8% Reservations Booked Using SABRE........ 220.2 255.3 275.2 311.1 325.5 170.6 181.2 Net Cash Provided by Operating Activities........................... $ 315.3 $ 328.1 $ 332.4 $ 224.9 $ 391.8 $ 168.3 $143.2 Net Cash Used for Investing Activities........................... $ (183.0) $ (122.4) $ (171.7) $ (177.3) $ (174.7) $(105.4) $(41.5) Net Cash Provided by (Used For) Financing Activities(5).............. $ (130.9) $ (204.7) $ (160.7) $ 215.3 $ (385.2) $(246.4) $ (9.4) Capital Expenditures................... $ 171.0 $ 128.8 $ 176.6 $ 168.9 $ 164.6 $ 104.4 $ 82.0
- --------------- (1) The Company has significant transactions with AMR and American. See Notes 3 and 11 to the Consolidated Financial Statements. (2) The operating results for the years ended December 31, 1992 and 1993 include a provision for losses of $165 million and $71 million, respectively, associated with a reservation system project and resolution of related litigation. The balance sheets as of December 31, 1992 and 1993 include current liabilities for the losses of $28 million and $133 million, respectively. See Note 5 to the Consolidated Financial Statements. (3) Effective January 1, 1992, the Company adopted FAS 106, "Accounting for Postretirement Benefits Other Than Pensions," changing the method of accounting for those benefits. The cumulative effect of adopting FAS 106 as of January 1, 1992 was a charge of $19 million, net of income taxes of $10 million. (4) The operating results for the six months ended June 30, 1996 reflect the impact of the Affiliate Agreements, the financial terms of which the parties agreed to apply as of January 1, 1996. See Note 11 to the Consolidated Financial Statements. (5) Consists of advances to or from affiliates and contributions from or distribution to affiliates. 21 23 SELECTED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION The pro forma financial information and other data below assume the Reorganization and Offerings were consummated, and the Affiliate Agreements were effective, on January 1, 1995. The pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the transactions had been consummated at the assumed dates, nor is it necessarily indicative of future results of operations. The unaudited interim and quarterly consolidated financial statements have been prepared on a basis consistent with the Consolidated Financial Statements and, in the opinion of management, include all adjustments, consisting of only normal recurring adjustments, necessary for fair presentation of such data. The pro forma information should be read in conjunction with the Pro Forma Condensed Consolidated Financial Information, and the related notes thereto, and the Consolidated Financial Statements, and the related notes thereto.
YEAR ENDED DECEMBER 31, 1995 ------------------------------------------------------ ADJUSTMENTS AS ADJUSTED FOR THE FOR THE REORGANIZATION, REORGANIZATION, THE AFFILIATE THE AFFILIATE AGREEMENTS AGREEMENTS AND THE AND THE HISTORICAL OFFERINGS OFFERINGS ---------- --------------- --------------- (IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA) INCOME STATEMENT DATA(1): Revenues...................................... $ 1,529.6 $ (66.3)(3) $ 1,463.3 Operating Expenses............................ 1,149.2 29.5(4) 1,178.7 --------- ------- --------- Operating Income.............................. $ 380.4 $ (95.8) $ 284.6 Other Income (Expense), net................... (10.3) (23.9)(5) (34.2) --------- ------- --------- Income Before Income Taxes.................... $ 370.1 $(119.7) $ 250.4 Income Taxes.................................. 144.2 (46.7) 97.5 --------- ------- --------- Net Earnings.................................. $ 225.9 $ (73.0) $ 152.9 ========= ======= ========= Pro Forma Earnings Per Share(2)............... $ 1.20 ========= OTHER DATA(1): Operating Income as a Percentage of Revenue..................................... 24.9% 19.4% Percentage of Revenue from Non-affiliated Customers................................... 64.2 67.1
22 24 SELECTED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1995 --------------------------------------------------- ADJUSTMENTS AS ADJUSTED FOR THE FOR THE REORGANIZATION, REORGANIZATION, THE AFFILIATE THE AFFILIATE AGREEMENTS AGREEMENTS AND THE AND THE HISTORICAL OFFERINGS OFFERINGS ---------- --------------- --------------- (IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA) INCOME STATEMENT DATA(1): Revenues.......................................... $767.5 $ (30.8)(3) $ 736.7 Operating Expenses................................ 548.0 13.2(4) 561.2 ------ ------- ------ Operating Income.................................. $219.5 $ (44.0) $ 175.5 Other Income (Expense), net....................... (10.4) (11.9)(5) (22.3) ------ ------- ------ Income Before Income Taxes........................ $209.1 $ (55.9) $ 153.2 Income Taxes...................................... 82.0 (21.8) 60.2 ------ ------- ------ Net Earnings...................................... $127.1 $ (34.1) $ 93.0 ====== ======= ====== Pro Forma Earnings Per Share(2)................... $ .73 ======= OTHER DATA(1): Operating Income as a Percentage of Revenue....... 28.6% 23.8% Percentage of Revenue from Non-affiliated Customers....................................... 64.4 67.1
SIX MONTHS ENDED JUNE 30, 1996 --------------------------------------------------- ADJUSTMENTS AS ADJUSTED FOR THE FOR THE REORGANIZATION, REORGANIZATION, THE AFFILIATE THE AFFILIATE AGREEMENTS AGREEMENTS AND THE AND THE HISTORICAL OFFERINGS OFFERINGS ---------- --------------- --------------- (IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA) INCOME STATEMENT DATA(1): Revenues.......................................... $838.3 $ (6.1) $ 832.2 Operating Expenses................................ 640.7 (5.6)(4) 635.1 ------ ------- ------ Operating Income.................................. $197.6 $ (0.5) $ 197.1 Other Income (Expense), net....................... (2.4) (12.1)(5) (14.5) ------ ------- ------ Income Before Income Taxes........................ $195.2 $ (12.6) $ 182.6 Income Taxes...................................... 76.1 (4.9) 71.2 ------ ------- ------ Net Earnings...................................... $119.1 $ (7.7) $ 111.4 ====== ======= ======= Pro Forma Earnings Per Share(2)................... $ .87 ======= OTHER DATA(1): Operating Income as a Percentage of Revenue....... 23.6% 23.7% Percentage of Revenue from Non-affiliated Customers....................................... 68.8 69.3
23 25 SELECTED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION -- (CONCLUDED)
QUARTER ENDED: -------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1995 1995 1995 1995 1996 1996 --------- -------- ------------- ------------ --------- -------- (IN MILLIONS, EXCEPT PER SHARE DATA AND OTHER DATA WHERE INDICATED) INCOME STATEMENT DATA(1): Revenues...................... $ 368.6 $368.1 $ 375.8 $350.8 $ 420.8 $411.4 Operating Expenses............ 272.4 288.8 292.8 324.7 311.2 323.9 ------- ------ ------- ------ ------- ------ Operating Income.............. $ 96.2 $ 79.3 $ 83.0 $ 26.1 $ 109.6 $ 87.5 Other Income (Expense), net......................... (14.3) (8.0) (5.2) (6.7) (7.1) (7.4) ------- ------ ------- ------ ------- ------ Income Before Income Taxes.... $ 81.9 $ 71.3 $ 77.8 $ 19.4 $ 102.5 $ 80.1 Income Taxes.................. 31.9 28.3 30.0 7.3 39.9 31.3 ------- ------ ------- ------ ------- ------ Net Earnings.................. $ 50.0 $ 43.0 $ 47.8 $ 12.1 $ 62.6 $ 48.8 ======= ====== ======= ====== ======= ====== Pro Forma Earnings Per Share(2).................... $ .39 $ .34 $ .38 $ .09 $ .49 $ .38 ======= ====== ======= ====== ======= ====== OTHER DATA(1): Operating Income as a Percentage of Revenue....... 26.1% 21.5% 22.1% 7.4% 26.0% 21.3% Reservations Booked Using SABRE....................... 86.5 84.1 82.1 72.8 91.9 89.3
- --------------- (1) The Company has significant transactions with AMR and American. See Notes 3 and 11 to the Consolidated Financial Statements. (2) The Company was formed on June 25, 1996 and became a wholly owned subsidiary of AMR on July 2, 1996 in connection with the Reorganization. As part of the Reorganization, AMR caused to be transferred to the Company the subsidiaries and divisions through which AMR has historically conducted its electronic travel distribution and information technology solutions operations. The pro forma earnings per common share calculation is based upon weighted average common shares outstanding after the Reorganization and the Offerings, including equivalent shares related to options outstanding under the Company's Long-Term Incentive Plan. See Notes 10 and 11 to the Consolidated Financial Statements. (3) Adjustments include a reduction in marketing support payments from American and the effect of the Technology Services Agreement with American. See the notes to the Pro Forma Condensed Consolidated Financial Information. (4) Adjustments include the following items as applicable: employee travel costs, marketing support payments, additional general expenses and a reduction in rent expense. See the notes to the Pro Forma Condensed Consolidated Financial Information. (5) Adjustment represents additional interest expense resulting from the issuance of the Debenture. See the notes to the Pro Forma Condensed Consolidated Financial Information. 24 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company generated approximately 65.8% of its revenues in 1995 from providing electronic travel distribution services using SABRE. As compensation for services provided, fees are collected from associates for reservations booked through SABRE. The booking fee per transaction that an associate pays to the Company depends upon several factors, including the associate's level of participation in SABRE and the types of products or services provided by the associate. Booking fees in 1995 represented approximately 89.7% of revenues from electronic travel distribution services. See "Business -- Electronic Travel Distribution -- Associate Participation." The Company also derives revenues from service contracts with subscribers, principally travel agencies, pursuant to which the Company provides access to SABRE, hardware, software, hardware maintenance and other support services. Approximately 34.2% of the Company's revenues in 1995 was generated from information technology solutions. Although solutions services have been provided to more than 120 airlines or airline associations, approximately 79.5% of the Company's revenues in 1995 from information technology solutions was from American, other AMR affiliates and Canadian. The following table sets forth revenues by affiliation and geographic location as a percent of total revenues:
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------- ----------------- 1993 1994 1995 1995 1996(1) ----- ----- ----- ----- ------- Affiliation: Non-affiliated Customers............. 56.6% 58.1% 64.2% 64.4% 68.8% Affiliated Customers................. 43.4 41.9 35.8 35.6 31.2 ----- ----- ----- ----- ----- Total........................ 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== ===== Geographical: United States........................ 85.9% 85.0% 83.6% 83.9% 82.8% International........................ 14.1 15.0 16.4 16.1 17.2 ----- ----- ----- ----- ----- Total........................ 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
- --------------- (1) Revenues for the six months ended June 30, 1996 reflect the financial impact of the Affiliate Agreements entered into in connection with the Reorganization, the financial terms of which were effective as of January 1, 1996. Total revenues have grown at a compound annual growth rate of 10.3% for 1993 through 1995. Revenues from affiliated customers as a percent of total revenues have declined as the Company's external business has grown. Revenues from non-affiliated customers have grown at a compound annual growth rate of 17.4% for the three years ended December 31, 1995, to $982 million in 1995. Revenues from affiliated customers remained relatively unchanged for the same time period. The Company expects that the proportion of its revenues represented by non-affiliated customer revenues will continue to increase. International revenues have increased as a percent of total revenues. International revenues have grown at a compound annual growth rate of 18.6% for the three-year period ended December 31, 1995, to $250 million in 1995, while revenues from the United States have grown at a compound annual growth rate of 8.8% over the same period, to $1,279 million in 1995. The Company's primary expenses from providing electronic travel distribution services and information technology solutions consist of salaries, benefits and other employee related costs, depreciation and amortization, communication costs, equipment maintenance costs and subscriber 25 27 incentives. Salaries, benefits and other employee related costs, depreciation and amortization and communication costs represented over 70% of 1995 total operating expenses. While salaries and benefits have grown at a rate similar to that for revenues in order to support the Company's growth, depreciation and amortization costs have grown at a rate slower than that for revenues primarily due to the benefits of price and performance improvements for Data Center equipment and subscriber equipment. In addition, communication expense decreased due to rate reductions. As a result, operating income as a percentage of revenue increased from 20.2% in 1993 to 24.9% in 1995. Operating income as a percentage of revenue for both electronic travel distribution and information technology solutions was approximately the same as the combined percentages for 1993, 1994 and 1995. However, for the six months ended June 30, 1996, operating income as a percentage of revenue from information technology solutions declined to approximately 20% of revenues principally as a result of the new Technology Services Agreement with American discussed below, while operating income as a percentage of revenue for electronic travel distribution remained at approximately 25%. SEASONALITY The following table sets forth quarterly financial and other data for the Company:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- (IN MILLIONS, EXCEPT WHERE INDICATED) 1994 Reservations Booked Using SABRE........... 80.3 80.7 80.4 70.1 Revenues.................................. $ 353.6 $ 349.9 $ 361.4 $ 341.8 Operating Income.......................... 97.9 93.3 108.0 50.9 Net Earnings.............................. 58.4 54.0 59.2 25.5 Operating Income as a Percent of Revenue.. 27.7% 26.7% 29.9% 14.9% 1995 Reservations Booked Using SABRE........... 86.5 84.1 82.1 72.8 Revenues.................................. $ 384.6 $ 383.1 $ 393.3 $ 368.6 Operating Income.......................... 118.1 101.4 108.2 52.8 Net Earnings.............................. 66.9 60.1 66.9 31.9 Operating Income as a Percent of Revenue.. 30.7% 26.5% 27.5% 14.3%
The travel industry is seasonal in nature. Bookings, and thus fees charged for bookings through SABRE, decrease significantly each year in the fourth quarter, primarily in December, due to early bookings by customers for travel during the holiday season and a decline in business travel during the holiday season. Operating margins also decrease in the fourth quarter as revenues decrease and expenses remain constant. RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995 REVENUES. Revenues for the six months ended June 30, 1996 compared to the six months ended June 30, 1995 increased approximately $71 million, 9.2%, from $767 million to $838 million. Electronic travel distribution revenues increased approximately $63 million, 12.4%, from $512 million to $575 million primarily due to growth in booking fees from associates from $460 million to $536 million. This growth was driven by an overall increase in the price per booking charged to associates and an increase in booking volumes worldwide. Revenue from information technology solutions increased approximately $7 million, 2.9%, from $256 million to $263 million. Revenues from non-affiliated customers increased approximately $11 million, offset by a decrease in revenues from AMR of approximately $7 million for these services primarily due to application of the financial terms of the Technology Services Agreement. 26 28 OPERATING EXPENSES. Operating expenses increased $93 million, 16.9%, from $548 million to $641 million during the six months ended June 30, 1996 as compared to the six months ended June 30, 1995. This increase was primarily attributable to an increase in salaries and benefits, the Affiliate Agreements as discussed above and subscriber incentive expenses. Salaries and benefits increased primarily due to an overall increase of 8% in the average number of employees necessary to support the Company's revenue growth and new product development. The Company and AMR and American agreed to apply the financial terms of the Marketing Cooperation Agreement, Travel Privileges Agreement and Corporate Travel Agreement as of January 1, 1996, which resulted in an increase in operating expenses of approximately $19 million for the six months ended June 30, 1996. Subscriber incentive expenses increased in order to maintain and expand the Company's travel agency subscriber base. OPERATING INCOME. Operating income decreased $22 million, 10.0%, from $219 million to $197 million. Operating margins decreased from 28.6% to 23.6% primarily due to the impact of the Affiliate Agreements. OTHER EXPENSES. Other expenses decreased $8 million due to a reduction in the losses from joint ventures in which the Company owns an interest accounted for under the equity method. INCOME TAXES. The provision for income taxes was $76 million and $82 million for the six months ended June 30, 1996 and 1995, respectively. The decrease in the provision for income taxes corresponds with the decrease in net income before the provision for income taxes. NET EARNINGS. Net earnings decreased $8 million, 6.3%, from $127 million to $119 million, primarily due to the decrease in operating income. 1995 COMPARED TO 1994 REVENUES. Revenues for 1995 as compared to 1994 increased approximately $123 million, 8.7%, from $1,407 million to $1,530 million. Electronic travel distribution revenues increased approximately $101 million, 11.1%, from $906 million to $1,007 million. The increase was primarily attributable to growth in booking fees from associates from $810 million to $904 million. This growth was driven by an overall increase in the price per booking charged to associates, a migration of associates to higher participation levels within SABRE and an increase in booking volumes primarily attributable to international expansion in Europe and Latin America. Revenues from information technology solutions increased approximately $22 million, 4.4%, from $501 million to $523 million. Revenues from information technology solutions provided to Canadian under the agreement between AMS Holdings, Inc., an AMR subsidiary, and Canadian, which began generating revenues in November 1994, increased $36 million due to the impact of a full year of services provided under the agreement. These increases were offset by a decrease in revenues from such services provided to AMR primarily due to a change in the pricing structure implemented in 1995. OPERATING EXPENSES. Operating expenses increased $93 million, 8.8%, from $1,056 million to $1,149 million. The increase was primarily attributable to an increase in salaries and benefits, travel service costs from American and subscriber incentive expenses. Salaries and benefits increased due to an overall increase of 4% in the average number of employees necessary to support the Company's revenue growth, annual salary increases and an increase in the provision for incentive compensation. Travel service costs from American increased due to the increase in the number of employees and an increase in the negotiated rates with American. See Note 3 to the Consolidated Financial Statements. Subscriber incentive expenses increased in order to maintain and expand the Company's travel agency subscriber base. 27 29 INTEREST EXPENSE. Interest income or expense was credited or charged to the Company by AMR based on the balance at the end of each month in cash equivalents and note payable to AMR. Cash equivalents represented cash held by American for the Company or advanced from American to the Company. Interest expense decreased $10 million primarily due to a capital infusion from AMR during 1995. See Note 3 to the Consolidated Financial Statements. OPERATING INCOME. Operating income increased $30 million, 8.6%, from $350 million to $380 million. Operating margins were at 24.9% for both 1995 and 1994 due to revenues and expenses increasing at substantially the same rate. OTHER EXPENSES. Other expenses decreased $6 million due to a reduction in the losses from joint ventures in which the Company owns an interest accounted for under the equity method. INCOME TAXES. The provision for income taxes was $144 million and $127 million in 1995 and 1994, respectively. See Note 4 to the Consolidated Financial Statements for additional information regarding taxes. NET EARNINGS. Net earnings increased $29 million, 14.6%, from $197 million to $226 million, primarily due to the increase in operating income. 1994 COMPARED TO 1993 REVENUES. Revenues for 1994 as compared to 1993 increased approximately $149 million, 11.8%, from $1,258 million to $1,407 million. Electronic travel distribution revenues increased approximately $121 million, 15.4%, from $785 million to $906 million. The increase was primarily attributable to growth in booking fees from associates from $676 million to $810 million. This growth was driven by increases in booking volumes and increases in the price per booking charged to associates. The increase in booking volumes was related to fare initiatives by domestic air carriers which increased travel and, thus, reservations made through SABRE. Revenues from information technology solutions increased $28 million, 5.9%, from $473 million to $501 million. Revenues from information technology solutions provided to AMR increased due to a change in the pricing structure implemented in 1994. Revenues for information technology solutions provided to Canadian under the agreement between AMS Holdings, Inc., a subsidiary of AMR, and Canadian, which began producing revenues in November 1994, were $8 million in 1994. OPERATING EXPENSES. Operating expenses increased $52 million, 5.2%, from $1,004 million to $1,056 million, due to an increase in salaries and benefits, travel service costs from American, subscriber incentive expenses, legal and professional fees and management service fees charged to the Company by AMR. Salaries and benefits increased due to an increase of 6% in the average number of employees necessary to support the Company's revenue growth, annual salary increases and an increase in the provision for incentive compensation. Travel service costs increased due to the increase in the number of employees and an increase in the negotiated rates with American. See Note 3 to the Consolidated Financial Statements. Subscriber incentive expenses increased in order to maintain and expand the Company's travel agency subscriber base. Legal and professional fees increased due to a nonrecurring restructuring charge recorded in 1994. Management service fees charged to the Company by AMR increased primarily due to the increase in the number of employees and growth in legal services provided to the Company by AMR. OPERATING INCOME. Operating income increased $96 million, 38.0%, from $254 million to $350 million. Operating margins increased from 20.2% to 24.9% due to the increase in revenues of 11.8%, while expenses increased only 5.2%. LOSS ON PARTNERSHIP SETTLEMENT. Loss on the partnership settlement of $71 million in 1993 represented a nonrecurring cost related to the settlement of litigation regarding a partnership 28 30 formed to design and develop a computer reservation system for the auto rental and hotel industries. See Note 5 to the Consolidated Financial Statements. INTEREST EXPENSE. Interest expense increased $8 million primarily due to cash advances from American for the loss on the partnership settlement mentioned above. OTHER EXPENSES. Other expenses increased $5 million due to additional losses incurred by joint ventures in which the Company owns an interest accounted for under the equity method. INCOME TAXES. The provision for income taxes was $127 million and $69 million in 1994 and 1993, respectively. See Note 5 to the Consolidated Financial Statements for additional information regarding taxes. NET EARNINGS. Net earnings increased $97 million, 97.2%, from $100 million to $197 million, primarily due to the increase in operating income. LIQUIDITY AND CAPITAL RESOURCES The Company had substantial liquidity at June 30, 1996, with $187 million and $224 million in cash and cash equivalents and working capital, respectively. At December 31, 1995, cash and cash equivalents and working capital were $95 million and $53 million, respectively. Prior to July 2, 1996, the Company's cash and cash equivalents were held for the Company by American. Cash equivalents were immediately charged or credited to the Company upon recording certain transactions, including transactions with American for airline booking fees and purchases of goods and services. Effective with the Reorganization on July 2, 1996, the Company began maintaining a cash management system and cash and investment accounts separate from American. Transactions with American no longer result in the recording of cash equivalents, but are settled through intercompany billings, with payment due in 30 days. American performs cash management services for the Company under the Management Services Agreement. The Company invests the cash in short-term marketable securities, consisting primarily of certificates of deposit, bankers' acceptances, commercial paper, corporate notes and government notes. For cash management purposes, the Company and American have entered into the Credit Agreement. The Company has financed its operations through cash generated from operations. The Company's net cash provided by operating activities of $143 million for the six months ended June 30, 1996 was primarily attributable to net income partially offset by an increase in accounts receivable partially due to the seasonality of bookings in the fourth quarter. The Company's net cash provided by operating activities of $392 million in 1995 was primarily attributable to net income. Net cash provided by operating activities in 1994 was $225 million, which included expenditures of $158 million relating to the partnership settlement discussed in "-- Results of Operations -- 1994 Compared to 1993 -- Loss on Partnership Settlement" and Note 5 to the Consolidated Financial Statements. Investing activities have primarily been related to purchases of computer equipment to be provided to subscribers of SABRE and for use in data processing services, and investments in joint ventures primarily associated with international expansion in Mexico and Japan. Capital expenditures for the six months ended June 30, 1996 were $82 million and for the year ended December 31, 1995 were $165 million. Net property and equipment as shown on the balance sheet as of June 30, 1996 decreased approximately $34 million from December 31, 1995. This decrease was primarily due to the sale of certain computer network equipment with a cost of approximately $100 million and a net book value of approximately $25 million to a third party at a price approximating net book value. The sale of this equipment is not expected to have a significant impact on the Company's future results of operations. 29 31 In 1995, certain of The SABRE Group entities, from which the Company was formed, distributed $394 million to American, in their capacity as divisions or subsidiaries of American or AMR. Also during 1995, AMR contributed $245 million to the Company in order to adequately capitalize certain of The SABRE Group entities. In addition, a note payable to AMR of $54 million was established during 1995, which was capitalized in 1996 in connection with the Reorganization. Proceeds from the contribution and note payable were used to reduce cash advances from AMR. The Company expects that the principal use of funds in the foreseeable future will be for capital expenditures, software product development, acquisitions and working capital. Capital expenditures will consist of purchases of equipment for the Data Center, as well as computer equipment, printers, fileservers and workstations to support (i) updating subscriber equipment primarily for travel agencies, (ii) expansion of the subscriber base and (iii) new product capital requirements. The Company has budgeted capital expenditures of approximately $210 million for 1996. Beyond 1996, the Company expects that capital expenditures will range from $210 million to $240 million annually. The Company expects to incur approximately $40 million of nonrecurring capital expenditures in 1997 for the refurbishment of its facilities and the scheduled replacement of a major computer processor at the Data Center. The Company believes available balances of cash and cash equivalents combined with cash flows from operations are 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. AFFILIATE AGREEMENTS WITH AMR AND AMERICAN The Company and AMR and American have entered into the Affiliate Agreements, which include the Technology Services Agreement for the provision of information technology services to American by the Company, the Marketing Cooperation Agreement for the provision by American of marketing support for the Company's products targeted toward travel agencies and American's support of the Company's promotion of BTS, Travelocity and easySABRE, an agreement for the provision of management services by American to the Company (the "Management Services Agreement") and agreements for the provision of travel services by American to the Company and its employees (the "Travel Privileges Agreement" and "Corporate Travel Agreement"). See "Relationship With AMR and Certain Transactions -- Contractual Arrangements" and Note 11 to the Consolidated Financial Statements for a description of each agreement. On a pro forma basis giving effect to the financial impact of the Technology Services Agreement as of January 1, 1995, information technology solutions represented approximately 32.6% of the Company's revenues in 1995, of which approximately 77.5% was from American, other AMR affiliates and Canadian. 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 the six months ended June 30, 1996, revenues from services provided under the Technology Services Agreement with a service term of (i) three years represented approximately 5.7% of total revenues, (ii) five years represented approximately 0.5% of total revenues and (iii) 10 years represented approximately 16.8% of total revenues. The Affiliate Agreements generally establish pricing and service terms and certain agreements, including the Technology Services Agreement, provide for periodic price adjustments that may take into account the market for similar services. Commencing in 1998, the formulas for annually adjusting certain rates under the Technology Services Agreement will be adjusted every two years 30 32 through negotiations of the parties which are to be guided by benchmarking procedures set forth in the Technology Services Agreements. The resulting rates may represent an increase or decrease over the previous rates. The financial terms of the Affiliate Agreements were applied to the Company's operations commencing January 1, 1996, and the application thereof resulted in a reduction in revenues and an increase in expenses for the six months ended June 30, 1996 as compared to the six months ended June 30, 1995. The Company has also entered into a Tax-Sharing Agreement with AMR, dated as of July 1, 1996 (the "Tax-Sharing Agreement"), which in most respects formalizes the Company's previous arrangements with AMR and which the Company does not expect to have a material impact on future operating results. The impacts of the Affiliate Agreements, as well as other impacts resulting from the Reorganization and Offerings, are presented in the Pro Forma Condensed Consolidated Balance Sheet for June 30, 1996 and the Pro Forma Condensed Consolidated Statements of Income for the six months ended June 30, 1995 and 1996 and the year ended December 31, 1995. The pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the transactions had been consummated as presented in the Pro Forma Condensed Consolidated Financial Information, nor is it necessarily indicative of future results of operations. PRO FORMA RESULTS OF OPERATIONS PRO FORMA SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO PRO FORMA SIX MONTHS ENDED JUNE 30, 1995 REVENUES. Pro forma revenues for the six months ended June 30, 1996 compared to the six months ended June 30, 1995 increased approximately $95 million, 13.0%, from $737 million to $832 million. Pro forma electronic travel distribution revenues increased approximately $74 million, 14.7%, from $501 million to $575 million. The increase was primarily attributable to growth in booking fees from associates from $460 million to $536 million. This growth was driven by an overall increase in the price per booking charged to associates and an increase in booking volumes worldwide. Pro forma revenues from information technology solutions increased approximately $22 million, 9.3%, from $235 million to $257 million, primarily due to growth in solutions services provided to AMR and non-affiliated customers. OPERATING EXPENSES. Pro forma operating expenses increased $74 million, 13.2%, from $561 million to $635 million during the six months ended June 30, 1996 as compared to the six months ended June 30, 1995. This increase was primarily attributable to an increase in salaries and benefits and subscriber incentive expenses. Salaries and benefits increased primarily due to an overall increase of 8% in the average number of employees necessary to support the Company's revenue growth and new product development. Subscriber incentive expenses increased in order to maintain and expand the Company's travel agency subscriber base. OPERATING INCOME. Pro forma operating income increased $22 million, 12.3%, from $175 million to $197 million. Operating margins remained stable due to the increase in revenues of 13.0%, while expenses increased 13.2%. OTHER EXPENSES. Pro forma other expenses decreased $8 million primarily due to a reduction in the losses from joint ventures in which the Company owns an interest accounted for under the equity method. INCOME TAXES. The pro forma provision for income taxes was $71 million and $60 million for the six months ended June 30, 1996 and 1995, respectively. The increase in the provision for income taxes corresponds with the increase in net income before the provision for income taxes. 31 33 NET EARNINGS. Pro forma net earnings increased $18 million, 19.8%, from $93 million to $111 million, primarily due to the increase in operating income. PRO FORMA 1995 The Company's 1995 revenues decreased approximately $66 million, 4.3%, from $1,530 million on an historical basis to $1,463 million on a pro forma basis. This decrease is due to the effect of the Marketing Cooperation Agreement eliminating certain marketing support payments of $21 million made by American to the Company during 1995 combined with a pro forma $45 million decrease in revenues for services provided to American to reflect the terms specified in the Technology Services Agreement. Operating expenses increased approximately $30 million, 2.6%, from $1,149 million on an historical basis to $1,179 million on a pro forma basis. This increase is primarily a result of the pro forma effects of the $20 million marketing fee to be paid to American by the Company under the terms of the Marketing Cooperation Agreement; an increase in employee travel costs of $26 million under the terms of the Travel Privileges Agreement and Corporate Travel Agreement, combined with the Company's inability to use American's existing discounts for flights on other airlines; and an increase of $5 million in general and administrative costs associated with administration of the various Affiliate Agreements and the inability of the Company to receive American's discount on shipping and handling services. The above increases are partially offset by a $12 million reduction in communication expenses from SITA under the terms of the Technology Services Agreement and a decrease in rent expense, net of increased depreciation and property tax expenses, of $9 million, resulting from the transfer of ownership of certain buildings, including the related furniture and fixtures, to the Company from American. As a result of the decreased revenues and the increased operating expenses, operating income decreased $96 million, 25.2%, from $380 million on an historical basis to $285 million on a pro forma basis. Operating margins decreased from 24.8% on an historical basis to 19.4% on a pro forma basis. Other expenses increased $24 million on a pro forma basis as a result of the recognition of interest expense on the Debenture held by AMR. Pro forma net earnings of $153 million represent a decrease of $73 million from historical net earnings of $226 million. This decrease is attributable to the decreased revenues and increased operating expenses discussed above, combined with increased interest expense from the Debenture partially offset by a $47 million decrease in income tax expense. EFFECTS OF THE REORGANIZATION, AFFILIATE AGREEMENTS WITH AMR AND AMERICAN AND THE OFFERINGS ON LIQUIDITY AND CAPITAL RESOURCES In connection with the Reorganization, the Company issued the Debenture to American. The Debenture is a floating rate subordinated debenture due September 30, 2004, with a principal amount of $850 million. American subsequently transferred the Debenture to AMR. Because the assets and liabilities of the divisions and subsidiaries of American transferred to the Company are included in the historical financial statements of the Company, this transaction resulted in the Company recognizing a deficit in stockholder's equity subsequent to the Reorganization. See Note 1 and Note 11 to the Consolidated Financial Statements. A portion of the net proceeds from the Offerings will be used to repay a portion of the Debenture. See "Use of Proceeds." The interest rate on the Debenture was 7.2% through September 30, 1996, and thereafter will be based on the sum of the six-month London Interbank Offered Rate plus a margin determined by the Company's senior unsecured long-term debt rating or, if such debt rating is not available, upon the Company's ratio of net debt to total capital. The interest rate will be determined at the beginning of each six-month period beginning October 1 and April 1 and accrued interest will be payable each 32 34 September 30 and March 31. The Company may prepay the principal balance in whole or in part at any time prior to December 31, 1996 and thereafter on any interest payment date. For cash management purposes, the Company, American and AMR entered into the Credit Agreement which established a line of credit whereby the Company is required to borrow from American, and American is required to lend to the Company, any amounts required by the Company to fund its daily cash requirements. In addition, American may, but is not required to, borrow from the Company to fund its daily cash requirements and the Company is required to lend to American if the Company has excess cash available. The maximum available amount that the Company may borrow under the Credit Agreement at any time is $300 million and, for American, $100 million, and, in the case of the Company as lender, is limited to the lender's excess cash available. If the Company's credit rating is better than "B" on the Standard & Poor's Ratings Service Scale (or an equivalent thereof) or American has excess cash to lend to the Company, the interest rate to be charged to the Company will be the sum of (a) the higher of (i) American's average rate of return on short-term investments for the month in which borrowings occurred or (ii) the actual rate of interest paid by American to borrow funds to make the loan to the Company under the Credit Agreement, plus (b) an additional spread based upon the Company's credit risk. If the Company's credit rating is "B" or below on the Standard & Poor's Ratings Service Scale (or an equivalent thereof) and American does not have excess cash to lend to the Company, the interest rate to be charged to the Company will be the lower of (a) the sum of (i) the borrowing cost incurred by American to draw on its revolving credit facility to make the advance plus (ii) an additional spread based on the Company's credit risk or (b) the sum of(i) the cost at which the Company could borrow funds from an independent party plus (ii) one half of the margin American pays to borrow under its revolving credit facility. The Company believes the interest rate charged under this agreement by American may, from time to time, be slightly above the rate at which the Company could borrow externally; however, no standby fees for the line of credit will be required to be paid by either party. The net proceeds to the Company from its sale of shares of Class A Common Stock pursuant to the Offerings will be approximately $495.0 million (after deducting underwriting commissions and estimated expenses payable by the Company) based on an assumed price to the public of $26.00 per share. The net proceeds will be used to repay a portion of the Debenture discussed above and for general corporate purposes. See "Use Of Proceeds." INFLATION The Company believes that inflation has not had a material effect on its results of operations. 33 35 BUSINESS The Company is a world leader in the electronic distribution of travel through its proprietary travel reservation and information system, SABRE, and is the largest electronic distributor of travel in the United States. In addition, the Company is a leading provider of solutions to the airline industry and fulfills substantially all of the data processing, network and distributed systems needs of American, AMR's other subsidiaries and Canadian. The Company believes that its competitive strengths give it a leadership position in its markets and a foundation from which to pursue further growth. During the last 20 years, the Company has developed core competencies that include a comprehensive knowledge of the travel industry, the capability to perform high-volume, high-reliability, real-time transactions processing and expertise in the application of operations research, information technology and industrial engineering skills to solve complex operations problems. These core competencies enable the Company to create an efficient electronic marketplace for the sale and purchase of travel and to offer a broad and deep array of technological solutions to the airline industry. In providing its products and services, the Company operates one of the largest, privately-owned, real-time transactions processing systems in the world in its underground central computer facility, which is connected to over 120,000 computer access terminals and operates 24 hours a day, seven days a week. The SABRE system maintains over 50 million air fares (updated five times per business day), processes an average of 93 million requests for information per day and has processed up to 4,969 requests for information per second (in July 1996). ELECTRONIC TRAVEL DISTRIBUTION OVERVIEW SABRE and other global distribution systems are the principal means of air travel distribution in the United States and a growing means of air travel distribution internationally. Through SABRE, travel agencies, corporate travel departments and individual consumers can access information on and book reservations with airlines and other providers of travel and travel-related products and services. As of June 30, 1996, travel agencies with more than 29,000 locations in over 70 countries on six continents subscribed to SABRE, and more than 2.5 million individuals subscribed to Travelocity and easySABRE, the Company's consumer-direct products. SABRE subscribers are able to book reservations with more than 350 airlines and to make reservations with more than 55 car rental companies and more than 190 hotel companies covering approximately 30,000 hotel properties worldwide. During 1995, more airline bookings in the United States were made through SABRE than through any other global distribution system. The Company estimates that in 1995 over 40% of all airline bookings made through travel agencies in the United States were made through SABRE. In 1995, 65.8% of the Company's revenues was generated by the electronic distribution of travel, primarily through booking fees paid by associates. SABRE SABRE, like other global distribution systems, creates an electronic market place where travel providers display information about their products and warehouse and manage inventory. Subscribers -- principally travel agencies but also business travel departments and individual consumers -- access information and purchase travel products and services. In 1995, more than 600 travel providers displayed information about their products and services through SABRE, and the Company estimates that $40 billion in travel products and services were reserved through SABRE. 34 36 The following diagram depicts the purchase and sale of travel products and services through SABRE: Sabre Travel SABRE, first developed in the 1960's, was one of the world's first electronic airline reservation systems. SABRE evolved from American's internal reservation system into a global distribution system when SABRE's content was expanded to include additional airlines and other travel providers. Computer reservation terminals were placed in travel agencies beginning in 1976, and consumer direct access to SABRE became available through computer on-line services in 1985 and on the Internet in 1996. In addition to providing information to subscribers about airlines and other travel providers and their products and services, SABRE reports transaction information from subscriber-generated sales back to the provider from which such products and services were purchased. This allows travel providers to manage inventory and yields. SABRE also allows travel agency subscribers to print airline tickets, boarding passes and itineraries. Additionally, SABRE provides subscribers with travel information on matters such as currency, health 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. A typical SABRE transaction -- consisting of an information request by a subscriber, a search in SABRE and a response to the subscriber -- averages less than two seconds in elapsed time. SABRE's "one-stop shopping" capabilities permit a consumer to locate, price, compare and purchase the travel products and services that best satisfy the traveler's requirements. ASSOCIATE PARTICIPATION The Company derives its electronic travel distribution revenues primarily from booking fees paid by associates for reservations for their products and services made through SABRE (unless the 35 37 reservations are later cancelled). In addition to airlines, associates include car rental companies, hotel companies, railroads, tour operators, ferry companies and cruise lines, which participate in SABRE through products designed for such associates, such as CARS Plus(sm), SHAARP Plus(sm), SABRErail(sm), SABRE TourGuide(R), SABRE Navigator(sm) and SABRE CruiseDirector(R), respectively. SABRE subscribers can also purchase travel insurance or book theater tickets or limousines through SABRE. In 1995, 59.1% of the Company's revenues was generated through booking fees. Depending upon the level of participation or "functionality" at which they participate in SABRE, airlines and other associates display, warehouse, manage and sell their inventory in SABRE. The booking fee per transaction paid by an associate to the Company depends upon several factors, including the associate's level of participation in SABRE and the type of products or services provided by the associate. Airlines are provided with a wide range of participation levels from which to choose. The lowest level of functionality for airlines -- Basic Booking Request(SM) -- is aimed at the low-cost "no-frills" carriers and provides schedules and electronic booking only. Higher levels of functionality for airlines, such as Direct Connect Availability(SM), provide greater levels of communication between SABRE and associates, thus enabling SABRE to provide subscribers with more detailed information and to provide associates with improved inventory management. For an associate selecting one of the higher levels of participation, SABRE provides subscribers with a direct connection to the associate's internal reservation system, allowing SABRE to provide real-time information and allowing the associate to optimize revenue for each flight. Car rental companies and hotel operators are provided with similar levels of participation from which to select. From 1991 to 1995, the number of bookings for car rental companies and hotels grew at a compound annual rate of 16.9%. The Company intends to pursue continued growth in such bookings by, among other things, emphasizing in its marketing the various levels of functionality that the Company can provide to car rental companies and hotel companies. The Company also provides associates, upon request, marketing data derived from SABRE bookings for fees that vary depending on the amount and type of information provided. Although most of the world's airlines are SABRE associates, the Company believes that the market for associate participation in SABRE has room for growth, both through the addition of non-airline associates and through upgrading by associates to higher levels of functionality in SABRE. In marketing to associates, the Company emphasizes SABRE's global distribution capabilities, the ability of associates to display information at no charge until a booking is made and SABRE's extensive subscriber network. SUBSCRIBER ACCESS The Company provides subscribers with access to SABRE which enables them to electronically locate, price, compare and purchase travel products and services provided by associates. The Company tailors the interface and functionality of SABRE to the needs of its different types of subscribers. Marketing is targeted to travel agencies, corporations and individual consumers. TRAVEL AGENTS. The Company provides travel agents with the hardware, software, technical support and other services that travel agents need to access SABRE in return for fees that vary based on the number of bookings generated by the travel agency. Such fees are payable over the term of the travel agent's agreement with the Company, which term is generally five years in the United States and Latin America, three years in Canada and one year in Europe. In 1995, approximately 4.3% of the Company's revenues was generated by fees from travel agent subscribers. Because travel agencies have differing needs, based on, among other things, volume and location, the Company has modified the SABRE interface to meet the specific needs of different categories of travel agents. Travel agents can choose SABRE interfaces that range from simple, text-based systems to feature-laden graphical interfaces. For instance, using its expertise in its 36 38 solutions services business, the Company developed Turbo SABRE, an advanced point-of-sale interface that allows for screen customization and reservations sales process structuring and eliminates SABRE-specific commands, thereby reducing keystrokes and training requirements for high-volume travel agencies who may need high levels of functionality. Turbo SABRE also provides data sources other than SABRE, such as back office hosts or LAN databases. Planet SABRE, which the Company intends to introduce in the fourth quarter of 1996, is a graphical interface consisting of a suite of Windows* applications comprised of a graphical launch pad, which allows the user to move to any function with one or two clicks of a mouse, a customizer feature, which allows travel agencies to tailor Planet SABRE to meet their own specific needs, a tutorial, online help, a place to store notes about clients, destinations or procedures and a suggestion system. Planet SABRE transforms SABRE from a complex command-oriented system to an all-graphic interface with continued access to the SABRE host system and its capabilities. SABRE interfaces are available in English, Spanish, Portuguese, French, German, Italian and Japanese, with a Chinese version currently in development. 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. The Company markets SABRE to travel agencies domestically and internationally principally using a sales force of approximately 480 employees. Presently, more than 14,500 travel agency locations in the United States use SABRE and, in 1995, more airline bookings in North America were made using SABRE than through any other global distribution system. Based upon internal estimates, the Company believes that, in 1995, more than 40% of all airline bookings made through travel agencies in the United States were made using SABRE. The 10 largest travel agencies in the United States subscribe to SABRE, although they also subscribe to another global distribution system as well. The Company estimates that, in 1995, of all bookings made by these 10 travel agencies, more than 55% were made using SABRE. The Company has had long-standing relationships with most of its travel agency subscribers. For example, approximately 97% of the travel agency locations that were SABRE subscribers at the beginning of 1995 were SABRE subscribers at the end of 1995. CORPORATIONS. The Company provides Commercial SABRE to travel agencies to supply to corporations with which they work closely. Using Commercial SABRE, a traveler inputs booking details on a personal computer, which are then transmitted to the SABRE travel agent who reviews the travel plans, makes the reservations and issues the travel documents. The Company also will provide SABRE to corporations through Business Travel Solutions. BTS, designed for corporate travel managers, is a fully-integrated suite of personal computer-based planning modules for travel planning, pre-travel decision-making and back-end travel expense reporting. BTS's various modules will provide corporations with tools to manage travel costs, to ensure compliance with corporate travel policies and to provide expense reporting, information regarding vendor relationships, ease of access for booking and quick and flexible distribution of tickets. BTS is presently being tested by Cap Gemini, Digital Equipment Corp., First Data Corp. and Cisco Systems, Inc. BTS is scheduled for release in the fourth quarter of 1996. The Company intends to market BTS initially to Fortune 1,000 companies through a distribution network and its direct sales force and currently expects to be able to install the full product suite of BTS by the end of 1996. The Company believes that substantial opportunities exist for the marketing and implementation of BTS because it provides efficiencies over other products available today and because only a small percentage of corporations currently have direct access to a global distribution system. - --------------- * Windows is a registered trademark of Microsoft Corp. 37 39 INDIVIDUAL CONSUMERS. In order to enhance its array of electronic travel distribution products and services, the Company formed its SABRE Interactive division to develop opportunities for consumer-direct travel distribution via personal computer, cable television and other media. The Company believes that, because presently only a small percentage of individual consumers in the United States and worldwide directly purchase travel and travel-related services electronically, substantial growth opportunities exist in the individual consumer market. For over 10 years, the Company has been a leader in providing consumers the ability to directly purchase travel electronically. Through the Company's Travelocity and easySABRE products, individual consumers can, for no fee (other than any normal on-line fees that may be charged by a computer on-line service), obtain access to destination information, compare prices and select travel products from their personal computers at their own pace. Travelocity is accessible through computer on-line services and the Internet. It currently offers flight schedules, reservations and purchase capabilities for all airlines available in SABRE and also offers hotel and car rental reservations and purchase capabilities. Travelocity also offers information about travel destinations and additional services, including chat groups, conferences and postings managed by noted travel writers and correspondents and the ability for consumers to purchase merchandise, such as luggage, travel guides and travel accessories. From its launch on March 12, 1996 at the Cyber Cafe in New York City until August 24, 1996, Travelocity had logged more than 2.4 million visits to its web site, and its users had viewed more than 29 million pages in the site. Currently more than 248,000 members subscribe to Travelocity. The Internet address for Travelocity is http://www.travelocity.com. Travelocity was developed and has been marketed jointly by the Company and Worldview Systems Corporation ("Worldview"), and Worldview provides the destination information and additional services described above. Worldview recently notified the Company that it intended to terminate the strategic alliance agreement related to Travelocity. The Company believes Worldview does not have the right to terminate the agreement under the circumstances, and the Company and Worldview are currently discussing areas of disagreement and possible modifications to their arrangement. It is possible that in the future some or all of the destination information and additional services provided by Worldview may not be available on Travelocity or may be provided by other vendors or that the Company will be required to provide consumer access to SABRE on the Internet through easySABRE or an alternative Internet product rather than through Travelocity. The Company believes that modification or termination of its agreement with Worldview will not be material to the Company. The Company introduced easySABRE in 1985 as one of the world's first home booking systems for travel. easySABRE is available through a number of computer on-line information systems such as Prodigy, CompuServe and AT&T Easy Link Services.* With easySABRE, consumers can, for no fee (other than any normal on-line fees that may be charged by the computer on-line service), view travel reservation information and make bookings directly in SABRE. easySABRE has a membership of more than 2.5 million, of which more than 120,000 members are active users each month. After reservations are made through either Travelocity or easySABRE, if a ticket is needed, the consumer may have a travel agent issue the ticket, have the Company's customer service center issue the ticket and deliver it to the consumer or call the travel provider directly. The Company receives booking fees from travel providers for purchases of their travel products and services pursuant to reservations made through Travelocity and easySABRE. INTERNATIONAL MARKETING. The Company believes that, because almost all United States travel agencies currently subscribe to one or more global distribution systems, the primary areas of - --------------- * Prodigy, CompuServe and AT&T Easy Link Services are the trademarks of their respective owners and are not trademarks of the Company. 38 40 growth for SABRE among travel agencies are outside the United States. As a result, the Company is actively involved in marketing SABRE internationally either directly or through joint venture or distributorship arrangements, depending upon the dynamics of the particular international market targeted. The Company is presently focusing its marketing efforts in Europe and Latin America and anticipates increasing its marketing efforts in Asia. The Company has entered into various distribution agreements and joint venture arrangements with businesses resident in foreign countries to increase its international presence. The Company's global marketing partners include principally foreign airlines that may have influence over the choice of a global distribution system by travel agents in such airlines' primary markets and entities that operate smaller global distribution systems or other travel-related network services. Included among the Company's international distribution and joint venture arrangements are arrangements covering Japan with Japan Airlines, China with the Civil Aviation Administration of China, Israel with El Al, India with Air India and Indian Airlines, Australia with Qantas Airways, Ansett Airlines and Air New Zealand, Mexico with Aeromexico and Mexicana de Aviacion and the Middle East with Gulf Air. The Company believes that continued development of marketing, licensing, joint venture and other arrangements with non-U.S. airlines and distribution systems will aid in the expansion of SABRE outside of the United States. Through its marketing efforts, the Company has placed SABRE in approximately 16,500 travel agency locations in the United States and Canada, 3,900 locations in Europe, 3,000 locations in Latin America, 2,800 locations in Asia, 1,700 locations in the South Pacific, 800 locations in the Caribbean, 650 locations in the Middle East and 8 locations in Africa. From 1991 to 1995, the Company's bookings volumes outside the United States grew at a 28.2% compound annual rate, excluding Mexico and Japan, where SABRE is marketed, and booking fees are recognized, by separate legal entities in which the Company is part owner. The map set forth below illustrates SABRE's current international market presence. NUMBER OF TRAVEL AGENCY LOCATIONS LOGO 39 41 STRATEGY The Company has developed a five-part strategy to maintain and expand its position in the global travel distribution market and to maintain its operating margins. - INCREASING PENETRATION IN INTERNATIONAL TRAVEL DISTRIBUTION MARKETS. The Company believes that the international market for travel and related products and services presents opportunities for the Company to expand its business by building on its existing base in Europe and Latin America and by pursuing opportunities in Asia. The Company will pursue international opportunities directly and through the formation of international alliances. The Company's revenues from its travel distribution business outside the United States have grown at a compound annual rate of 29.8% during the last five years, to $250 million in 1995. - EXPANDING AND CUSTOMIZING ASSOCIATE PARTICIPATION. The Company plans to continue to expand participation in SABRE by associates, such as air charters, car rental companies, hotels, railroads and tour operators, and has initiated an effort to increase the value provided to associates by tailoring available participation options to the needs of different travel providers. - ENHANCING THE VALUE OF THE TRAVEL DISTRIBUTION PRODUCT TO TRAVEL AGENTS. The Company plans to maximize the value of its products to travel agents by increasing the depth and breadth of information available through SABRE and the ease of use and reliability of its products. The Company will also continue to develop products to enhance the competitiveness of its travel agent subscribers. For example, the Company has developed two user interface products, Turbo SABRE and Planet SABRE, that provide travel agencies with greater productivity through data integration and increased ease of use, respectively. - PARTICIPATING IN EMERGING DISTRIBUTION CHANNELS. With products such as BTS, which is scheduled for release in the fourth quarter of 1996, and Travelocity, the Company intends to continue to compete in emerging distribution channels, such as corporate direct distribution, the Internet and computer on-line services. - PURSUING ALLIANCES WITH LARGE AGENCIES. The Company intends to form strategic alliances with large travel agency chains where appropriate to meet its growth objectives. - ENHANCING TECHNOLOGY AND OPERATING CAPABILITIES. The Company has budgeted capital expenditures of over $210 million for 1996, which the Company anticipates funding with operating cash flow. In addition, the Company has begun a multi-year development effort, for which the Company has budgeted over $100 million during the next five years, to improve SABRE's core operating capabilities. The goals of this development effort are to accelerate new product development, increase flexibility, power and functionality for subscribers and associates, improve data management capabilities, raise capacity levels and lower operating costs. COMPETITION The Company competes in electronic travel distribution primarily against other large and well-established global distribution systems. SABRE's principal competitors include Amadeus/System One, Galileo/Apollo and Worldspan. Amadeus/System One is owned by Air France, Continental Airlines, Iberia and Lufthansa. Galileo/Apollo is owned by United Airlines, British Airways, Swissair, KLM Royal Dutch and USAir, among others. The Canadian affiliate of Galileo/Apollo is owned by Air Canada. Worldspan is owned by Delta, Northwest and TWA and is affiliated with ABACUS, an Asian global distribution system. Each of these competitors offers many products and services similar to those of the Company. Moreover, although certain barriers exist for any new provider of electronic commerce -- barriers such as the need for significant capital investment to acquire or develop the hardware, 40 42 software and network facilities necessary to operate effectively a global distribution system -- the Company is always faced with the potential of new competitors, particularly as new channels for travel distribution develop. Competition to attract and retain travel agent subscribers, which continue to be the primary method of travel distribution, is very intense. Factors affecting competitive success of global distribution systems include depth and breadth of information, ease of use, reliability, service and incentives to travel agents and range of products available to travel providers, travel agents and consumers. Because SABRE was named the "World's Leading Computer Reservations System" for the third year in a row at the 1996 World Travel Awards, the Company believes it competes effectively as to these factors. Although distribution through travel agents continues to be the primary method of travel distribution, new channels of distribution are developing directly to businesses and consumers through computer on-line services, the Internet and private networks. The Company faces competition in these channels not only from its principal competitors but also from possible new entrants in the sale of travel products and from travel providers that distribute their products directly. For example, in July 1996, American Express Co. and Microsoft Corp. announced an on-line travel booking service for corporations, which they have scheduled for release in the first half of 1997. The Company expects that this on-line travel booking service, while only in the developmental stage, will eventually directly compete with BTS. In addition, the Internet permits consumers to have direct access to travel providers, thereby by-passing both traditional travel agents and global distribution systems such as SABRE. The Company has positioned its BTS, Travelocity and easySABRE products to compete in these emerging distribution channels. With easySABRE, the Company was one of the first companies to introduce global distribution system access through a computer on-line service. The Company believes that it continues to be a market leader in providing access through computer on-line services and that this leadership in the market, as well as its 10 years of experience marketing easySABRE, provide the Company an advantage in marketing Travelocity. In addition, the Company believes that BTS, Travelocity and easySABRE enjoy an advantage over products distributed directly by travel suppliers because the Company's display of travel products is not biased in favor of any particular provider. Also, the breadth and depth of the content of the Company's products permit one-stop shopping rather than requiring access to several different sites to compare prices and then book a single trip. INDUSTRY REGULATION More than half of the Company's electronic travel distribution business is generated by travel agencies located in the United States. Airline-Affiliated Systems have been subject to regulations promulgated by the DOT since November 1984. The current form of the U.S. Regulations was adopted in 1992. The U.S. Regulations will expire on December 31, 1997, unless they are extended. The U.S. Regulations govern the relationships of Airline-Affiliated Systems with GDS-Affiliated Airlines and travel agencies. Therefore, the U.S. Regulations would not apply to SABRE if SABRE were not offered or marketed to travel agencies by American or any other airline or airline affiliate, such as the Company. Additionally, the U.S. Regulations do not apply with respect to the use of a global distribution system by consumers and business travel departments. Accordingly, the U.S. Regulations do not currently apply to BTS, Travelocity or easySABRE. One of the principal requirements of the U.S. Regulations is that displays of airline services by Airline-Affiliated Systems must be nondiscriminatory. This means that the global distribution system may not use carrier identity in ordering the display of services or in building connecting flights. Travel agencies, however, may utilize software to override the neutral displays of an Airline-Affiliated System. 41 43 Airline-Affiliated Systems are required to charge the same fees to all air carriers for the same level of service and to update information for all air carriers with the same degree of care and timeliness and to provide, on request, information on fee arrangements. Any mechanism for the sale of airline products offered to one or more air carriers must be offered to all other air carriers on nondiscriminatory terms. The U.S. Regulations also govern relationships between Airline-Affiliated Systems and travel agents. The U.S. Regulations mandate, among other things, that contracts between travel agency subscribers and an Airline-Affiliated System be for no longer than five years. The rules also forbid an Airline-Affiliated System from impeding a travel agent's use of another system by, for example, making it a breach of contract for an agency to fail to make a designated minimum number of bookings. The rules do allow, however, systems to provide a credit against monthly fees to travel agents who achieve certain booking thresholds, with the agency being obligated to pay the system for any shortfall. The U.S. Regulations also forbid Airline-Affiliated Systems from entering into contracts with travel agents containing exclusivity clauses or that require the agency to maintain a certain percentage of computer terminals or bookings for a particular system, vis-a-vis other systems. The rules prohibit GDS-Affiliated Airlines from linking the payment of commissions to travel agents to the travel agent's use of the system with which the GDS-Affiliated Airline is affiliated. Further, an Airline-Affiliated System may not ban travel agents from using software provided by third parties in connection with the system's equipment, unless that software threatens to impair the integrity of the system. The U.S. Regulations require any GDS-Affiliated Airline doing business in the United States to participate in competing Airline-Affiliated Systems at the same level as it does in its affiliated system and to provide data on its flights to competing Airline-Affiliated Systems that is as complete, accurate and timely as the information given to its affiliated system, as long as the competing system offers terms for participation that are commercially reasonable. Although GDS-Affiliated Airlines are required by the U.S. Regulations to participate in competing Airline-Affiliated Systems at the same level of functionality, non GDS-Affiliated Airlines are not subject to the same requirement. Thus many global distribution systems include in their associate agreements parity clauses, which generally require an airline participating in a global distribution system to participate in that system at as high a level of functionality as in any competitive system. On August 14, 1996, the DOT issued a notice of proposed rulemaking (an "NPRM") proposing a prohibition on the use of parity clauses by global distribution systems but suggesting that such clauses could still be enforced as to airlines that own or market a global distribution system. The NPRM is a result of a Petition for Rulemaking filed by Alaska Airlines. See "Business -- Legal Proceedings." The Company has filed comments on the NPRM, in which the Company states that it is opposed to the prohibition on parity clauses. See "Risk Factors -- United States Regulations; Future Participation of Certain Airline Associates in SABRE." Additionally, the DOT has issued an NPRM that proposes two rules. The first proposed rule would require each global distribution system to offer a display that lists flights without giving on-line connections any preference over interline connections. The second proposed rule would require that any display offered by a global distribution system be based on criteria rationally related to consumer preferences. The Company has not yet filed comments with the DOT with regard to this NPRM. The Company also has operations in Australia, Canada and the European Union. The overall approach of the regulations for global distribution systems in each of these three jurisdictions is similar to that of the United States. In each of these jurisdictions, rules require nondiscriminatory displays of airline services and nondiscriminatory booking fees, and forbid airlines affiliated with global distribution systems from linking travel agency commissions to the use of a particular system. 42 44 Further, these rules forbid airlines affiliated with global distribution systems from discriminating against competing systems with respect to the data that they furnish. There are, however, unique aspects of each set of rules. The current Canadian and European Union rules do apply to Travelocity and easySABRE. The European rules also dictate the precise order in which flights must be displayed and permit travel agents to cancel their subscription agreements at the end of the first year of the contract. The Canadian rules forbid contracts with travel agencies of more than three years in duration and forbid certain uses of carriers' sales forces for promoting global distribution systems. The European rules are presently under review and are expected to be revised within the next year. The Company does not anticipate that any revision will materially affect its operations in Europe. The Company also has operations in the Caribbean, Latin America and Asia. In jurisdictions in those regions, there is no regulation of global distribution systems for travel products. The Company currently does business in more than 70 countries outside the U.S. The DOT, in conjunction with the U.S. Department of State, is charged with assuring fair and open access for U.S. air carriers, and U.S. global distribution systems owned by airlines, to overseas markets. In this regard, the DOT has provided assistance to the Company in entering several overseas markets. This assistance by the DOT to SABRE could cease if SABRE were not offered to travel agencies by American or another airline or an airline affiliate. The regulations in Australia, Canada and the European Union also contain, in varying degrees, remedies the Company can use to assist in the eradication of discriminatory practices that may impede the Company's access to the regulated market. INFORMATION TECHNOLOGY SOLUTIONS OVERVIEW The Company is a leading provider of solutions to the airline industry. The Company also employs its airline expertise to offer solutions to other industries that face similar complex operations issues, including the airport, railroad, logistics, hospitality and financial services industries. The solutions offered by the Company include software development and product sales, transactions processing and consulting. The Company believes that its suite of airline-related software solutions is the most comprehensive in the world. In addition, pursuant to the Technology Services Agreement, the Company provides data processing, network and distributed systems services to American and AMR's other subsidiaries, fulfilling substantially all of their information technology requirements. In 1995, 34.2% of the Company's revenues was generated by the provision of information technology solutions, and 24.2% of the Company's revenues was generated by information technology solutions services provided to American and its affiliates. SOLUTIONS The Company offers a comprehensive set of solutions to the airline industry. These solutions include: (i) consulting, which includes capabilities ranging from reengineering to functional consulting; (ii) software development, sales and licensing, which includes individual sales of specific products as well as custom development and integration; and (iii) full solutions outsourcing, which includes a full range of solutions. In providing solutions, the Company depends mainly upon its technical personnel and senior management. Recruiting and retaining capable personnel, particularly those with expertise in operations research, information technology and industrial engineering, is vital to the provision of solutions by the Company. The Company combines the expertise of its operations research, information technology and industrial engineering professionals to offer to the airline industry a wide array of consulting services, including business planning and analysis, information technology services, flight technical services and business process design services. 43 45 The Company's solutions have helped American become one of the most technologically advanced airlines in the world. The Company has provided solutions to over 120 additional airlines or airline associations. These solutions have many applications for airlines. For instance, (i) with Fare Action Evaluator(sm), airlines can seek to enhance revenue using statistical and database sources that estimate the economic implications of fare actions before they are implemented, (ii) with AIRPRICE(sm), airlines can analyze and manage fares and react to competitors' changes, (iii) with AIRFLITE(sm), airlines can determine superior flight schedules and (iv) with AIRCREWS(sm), airlines can improve crew member scheduling thus reducing staffing costs. The Company also provides real-time transactions processing services whereby the Company provides access to its hardware and software to airlines for reservations, flight operations, departure control and other related services. Local computer terminals at a customer's location are linked to the Company's mainframes, and the Company maintains and operates the entire system on a secure and confidential basis. As of June 30, 1996, under such arrangements, the Company provides to more than 60 airlines -- including Southwest Airlines, Gulf Air and Alaska Airlines -- versions of one or more of the Company's systems for reservations, flight operations, passenger handling and cargo booking and tracking. Building on its base of experience established in the development of solutions for the airline industry, the Company has extended its software solutions and consulting businesses to other industries, particularly those that face complex operations issues similar to the airline industry, including the airport, hospitality, logistics, railroad and financial services industries. For example, the Company worked closely with SNCF, the French national railroad, to design, develop and install a passenger railway reservations system, which is now accessed by more than 25,000 ticketing devices throughout Europe. The Company and SNCF are now jointly marketing this software to other passenger railroads. Other clients in industries outside of the airline industry include the United States Navy, Roadway Express, Air Products and Chemicals, Club Med, NationsBank, John Alden Insurance, Avis Rent A Car, Ryder Truck and, most recently, Hyatt Hotels. For Hyatt, all of the hotel management company's software maintenance and development functions have been outsourced to the Company, in connection with an alliance with Computer Sciences Corporation, which has undertaken to provide a broad variety of data processing services to Hyatt for an initial five-year term. The Company will also commercialize Hyatt's existing systems, including its computer reservation and property management systems, and market them to third parties in collaboration with Computer Sciences Corporation. The Company distributes its solutions and consulting services through a sales and marketing organization with offices in eight cities on four continents (Dallas, Tulsa, Vancouver, London, Paris, Kuwait, Hong Kong and Sydney). The Company also maintains agency relationships to support sales efforts in key markets, including India, China and the Middle East. To date, the Company has provided business solutions to more than 250 clients located in more than 50 countries. TECHNOLOGY SERVICES The Company, through its SABRE Computer Services division ("SCS"), provides data processing, network and distributed systems services to American and AMR's other subsidiaries. The Company fulfills substantially all of American's data processing requirements and manages all voice and data communication services for American and AMR's other subsidiaries, including data networks, voice networks and radio services. The Company also provides American with the services required to design, install, operate and maintain its range of local area networks, desktop, mobile computing and peripheral devices. This includes the design, installation, operation and maintenance of American's airport operations. In 1995, the Company introduced SABRE Wireless(SM), which provides American's airport personnel the ability to access SABRE from mobile devices. 44 46 As part of the Reorganization, the Company entered into the Technology Services Agreement with American to provide these services for a term of 10 years for most services (three and five years for others). See "Relationship with AMR and Certain Transactions -- Contractual Arrangements." Although the Company has no current plans to offer data processing or network services to other customers, the Company has the capacity to explore future opportunities. STRATEGY The Company has developed a three-part strategy to maintain its position as one of the world's leading providers of solutions to the airline industry and to expand its core competencies to become one of the leading providers of solutions to other industries. - ENHANCING LEADERSHIP IN AIR TRAVEL SOLUTIONS. The Company believes that, although it already provides its airline customers with a complete line of products, it can enhance its market leadership by improving the depth and breadth of its airline-related software product line and by expanding its airline consulting business through internal development, license agreements and acquisitions. - EMPLOYING EXPERTISE INTO OTHER INDUSTRIES. The Company has over 20 years' experience in applying its operations research, information technology and industrial engineering skills in the airline industry. The Company intends to build upon this experience and to leverage its expertise into other industries, such as oil and gas, logistics, insurance and manufacturing, with similar complex operations issues. As the Company's suite of solutions expands, the Company believes that it will also be able to provide non-airline customers with comprehensive services including software development and product sales, transactions processing and consulting. - PURSUING ADDITIONAL STRATEGIC RELATIONSHIPS. The Company intends to pursue alliances with leading information systems outsourcers to provide complete information technology outsourcing, with the Company providing the solutions outsourcing. COMPETITION The Company in information technology solutions competes both against full-service providers of technology outsourcing and solutions companies, some of which have considerably greater financial resources than the Company, and against smaller companies that offer a limited range of products. Among the Company's full-service competitors are Electronic Data Systems, IBM/ISSC, Unisys, Andersen Consulting and Lufthansa Systems. Many of these competitors have formed strategic alliances with large companies in the travel industry, and the Company's access to such potential customers is thus limited. The Company believes that its competitive position in the travel industry is enhanced by its experience in developing systems for American, by its ability to offer not only software applications but also systems development, integration and maintenance and transactions processing services, and because it can offer to customers what it believes to be the most comprehensive suite of software solutions for the airline industry. INTELLECTUAL PROPERTY In connection with the Reorganization, American transferred to the Company the software utilized in the operation of the business of The SABRE Group. This software, along with other software, proprietary information and intellectual property rights, are significant assets of the Company. The Company relies on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect these assets. The Company's software and related documentation, however, are protected principally under trade secret and copyright laws, which afford only limited protection. In addition, the laws of some foreign jurisdictions may provide less protection than the laws of the United States for the Company's proprietary rights. Unauthorized use of the Company's intellectual property could have a material adverse effect 45 47 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. Licenses for a number of software products have been granted to the Company. Certain of these licenses, individually and in the aggregate, are material to the business of the Company. FACILITIES The Company's principal executive offices are located in Fort Worth, Texas, primarily in two buildings, one of which is owned by the Company and one of which is leased from the Dallas/Fort Worth International Airport Board pursuant to a lease that expires in 2023, subject to four renewal options, exercisable by the Company, of five years duration each. The Company also leases office facilities in approximately 70 other locations worldwide. The Company's Data Center is located in an underground facility in Tulsa, Oklahoma. The land on which the Data Center is located is leased from the Tulsa Airport Improvements Trust, a public trust organized under the laws of the State of Oklahoma, pursuant to a lease that expires in 2038. SABRE and the Company's data processing services and transactions processing are dependent on the Company's central computer operations and information processing facility located in the Data Center, which contains over 120,000 square feet of space and houses fifteen mainframes having 12,639 gigabytes of storage and 3,371 MIPS of processing power. The SABRE system, which is connected to over 120,000 computer access terminals and operates non-stop throughout the year, maintains over 50 million air fares (updated five times per business day), averages 93 million requests for information per day and has processed up to 4,969 requests for information per second (in July 1996). 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 processors and computer systems as well as server based and client/server distributed systems. The Company's travel agency and corporate subscribers connect to SABRE through leased access circuits. These leased access circuits, in turn, connect to the domestic and international data networks leased by the Company from SITA, which connect to the Data Center. The Company believes that its office facilities will be adequate for its immediate needs and that additional or substitute space is available if needed to accommodate expansion. The Company also believes that its Data Center, Fort Worth Center and network access will be adequate for its immediate and foreseeable needs. The Company, however, continuously invests in research and development to upgrade these facilities to meet changing technological needs. LEGAL PROCEEDINGS In June 1996, American Trans Air, Inc. filed suit against American in the U.S. District Court for the Southern District of Indiana, Indianapolis Division seeking a refund of $400,000 in booking fees it claims were charged for illegitimate bookings. Prior to the filing by American Trans Air of its lawsuit, America West Airlines Inc. had used a similar claim of illegitimate bookings to withhold over $1.0 million in booking fees payable to American. American and SABRE Associates, Inc., an affiliate of the Company, filed suit in the District Court of Tarrant County, Texas, 153rd Judicial District, to recover the unpaid booking fees from America West. In connection with the Reorganization, the Company is the successor in interest to American in both of these cases. The claims of both American Trans Air, Inc. and America West relate to booking fees charged by the Company, and commonly charged by other providers in the electronic travel distribution industry, for "passive bookings," which are bookings initially made directly with a travel provider (rather than through a travel agent) and subsequently ticketed through SABRE or another global distribution system. If both American Trans Air and America West prevail on their claims of illegitimate booking fees, other associates may also make similar claims. The Company believes, however, that passive booking fees are properly charged pursuant to its contracts with associates. The Company intends to 46 48 vigorously defend its actions in this regard and believes that the claims of American Trans Air, Inc. and America West can be successfully defended or resolved without any material adverse effect on the Company's financial condition or results of operations. Alaska Airlines has filed a Petition for Rulemaking with the DOT seeking a rule that would bar a global distribution system from requiring airlines that are not GDS-Affiliated Airlines to participate in such system at the same level of functionality as the airline participates in other global distribution systems. The Company believes that this Petition for Rulemaking is a result of a breach of contract suit brought by American against Alaska Airlines in 1994 in the U.S. District Court for the Northern District of Texas. In its complaint, American alleged that Alaska Airlines breached its participating carrier agreement by obtaining greater functionality from other global distribution systems than it obtained from SABRE. American sought declaratory relief. In connection with the Reorganization, the Company is the successor in interest to American in this litigation. On September 19, 1996, the U.S. District Court for the Northern District of Texas dismissed the lawsuit on the grounds that, as the Company's claims were based on state law, they were preempted by federal law. The Company currently plans to appeal the dismissal. See "-- Electronic Travel Distribution -- Industry Regulation." EMPLOYEES As of June 30, 1996, the Company had approximately 7,900 full-time employees. A central part of the Company's philosophy is to attract and maintain a highly capable staff. The Company considers its current employee relations to be good. None of the Company's employees are represented by a labor union. 47 49 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of the Company, their present positions and their ages with the Company are as follows: Robert L. Crandall........ Mr. Crandall was elected Chairman of the Board of Directors of the Company in July 1996. He has been Chairman of the Board and Chief Executive Officer of AMR Corporation since 1985, President of AMR since its formation in 1982 and Chairman of the Board and Chief Executive Officer of American since 1985. Mr. Crandall was President of American from 1980 to 1995. Mr. Crandall is also a director of Halliburton Company. Age 60. Michael J. Durham......... Mr. Durham was elected a director, President and Chief Executive Officer of the Company in July 1996. Mr. Durham was also elected President and Chief Executive Officer of The SABRE Group, Inc. in July 1996. Mr. Durham was elected President of The SABRE Group in 1995. Mr. Durham was Senior Vice President and Treasurer of AMR and Senior Vice President -- Finance and Chief Financial Officer of American from 1989 to 1995. Age 45. Gerard J. Arpey........... Mr. Arpey was elected a director of the Company in July 1996. He has been Senior Vice President of AMR since 1992 and Chief Financial Officer of AMR since 1995. Mr. Arpey was Vice President of American from 1989 to 1995. Age 38. Anne H. McNamara.......... Mrs. McNamara was elected a director of the Company in August 1996. Mrs. McNamara has been Senior Vice President and General Counsel of AMR since 1988. Mrs. McNamara is a director of Louisville Gas & Electric Company and of LG&E Energy Corp. and serves on the compensation and nominating/development committees of both companies. Age 48. Bradford J. Boston........ Mr. Boston was elected Senior Vice President -- SABRE Computer Services of the Company in July 1996. Mr. Boston was also elected President -- SABRE Computer Services for The SABRE Group, Inc. in July 1996. Mr. Boston was President -- SABRE Computer Services, a division of The SABRE Group, from June 1996 to July 1996. Prior to that time, Mr. Boston was Senior Vice President for American Express Travel Related Services from 1994 to 1996, was Senior Vice President of Visa International's Visanet operations from 1993 to 1994, and was Vice President of Systems Development for United Airlines/Covia Partnership from 1991 to 1993. Age 42. Thomas M. Cook............ Mr. Cook was elected Senior Vice President -- SABRE Decision Technologies of the Company in July 1996. Mr. Cook was also elected President -- SABRE Decision Technologies for The SABRE Group, Inc. in July 1996. Mr. Cook was President -- SABRE Decision Technologies, a division of The SABRE Group, from its formation in 1994 to 1996. For American, Mr. Cook was President -- Decision Technologies from 1988 to 1994. Age 56. Terrell B. Jones.......... Mr. Jones was elected Senior Vice President -- SABRE Interactive and Chief Information Officer of the Company in July 1996. Mr. Jones was also elected President -- SABRE Interactive and Chief Informa- 48 50 tion Officer for The SABRE Group, Inc. in July 1996. Mr. Jones served as President -- SABRE Computer Services, a division of The SABRE Group, from 1993 to 1996 and as President -- SABRE Interactive, a division of The SABRE Group, from 1995 to 1996. For American, Mr. Jones served as Managing Director and Division Vice President -- SCS Systems Planning & Development from 1991 to 1993, and as Managing Director & Vice President -- STIN Product Development from 1987 to 1991. Age 48. Jeffrey G. Katz........... Mr. Katz was elected Senior Vice President -- SABRE Travel Information Network of the Company in July 1996. Mr. Katz was also elected President -- SABRE Travel Information Network for The SABRE Group, Inc. in July 1996. Mr. Katz was President -- SABRE Travel Information Network, a division of The SABRE Group, from 1993 to July 1996. For American, Mr. Katz served as Division Managing Director -- Passenger Sales from 1991 to 1993. Age 41. T. Patrick Kelly.......... Mr. Kelly was elected Senior Vice President, Chief Financial Officer and Treasurer of the Company and of The SABRE Group, Inc. in July 1996. Mr. Kelly was Senior Vice President -- SABRE Group Planning from 1995 to July 1996. For American, Mr. Kelly served as Vice President -- Financial Planning & Analysis from 1993 to 1995, Managing Director -- SABRE Development Services from 1992 to 1993, and Managing Director -- Financial Planning from 1990 to 1992. Age 39. Andrew B. Steinberg....... Mr. Steinberg has agreed to serve as Senior Vice President, General Counsel and Corporate Secretary of the Company as of the date of the consummation of the Offerings. Mr. Steinberg has served as an associate general counsel of American since 1994 and will resign from that position upon becoming Senior Vice President, General Counsel and Corporate Secretary of the Company. From 1991 to 1994, Mr. Steinberg was a senior attorney with American. Age 37. Following the consummation of the Offerings, the Company intends to elect five additional directors, two of whom are directors but not employees or officers of AMR and three of whom are neither employees or officers of the Company or AMR nor directors of AMR. INFORMATION REGARDING THE BOARD OF DIRECTORS AND COMMITTEES The Board of Directors is divided into three classes of directors, with each class elected to a three-year term every third year and holding office until their successors are elected and qualified. Mr. Crandall's present term as Chairman of the Board will expire at the Company's annual meeting of stockholders to be held in 1999. Mr. Durham's present term as a director will expire at the Company's annual meeting of stockholders to be held in 1999. Mr. Arpey's present term as a director will expire at the Company's annual meeting of stockholders to be held in 1998. Mrs. McNamara's present term as a director will expire at the Company's annual meeting of stockholders to be held in 1997. The Bylaws authorize the Board of Directors to designate three committees, an Executive Committee, an Audit Committee and a Compensation/Nominating Committee. The Board of Directors has designated an Executive Committee and will, upon the consummation of the Offerings, designate an Audit Committee and a Compensation/Nominating Committee. In addition, the Board of Directors may, from time to time, designate one or more Special Committees, which shall have such duties and may exercise such powers as are granted to it by the Board of Directors. 49 51 The Executive Committee will consist of four or more members, including the Chairman of the Board and the Chief Executive Officer. The Executive Committee has and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Company, with the exception of such powers and authority as may be specifically reserved to the Board by law or by resolution adopted by the Board of Directors. The Audit Committee, which will be composed entirely of directors who are not employees or officers of the Company or AMR or directors of AMR, will review and recommend the selection of independent auditors, the fees to be paid to such auditors, the adequacy of the audit and accounting procedures of the Company and such other matters as may be specifically delegated to the Audit Committee by the Board of Directors. In this connection, the Audit Committee shall, at its request, meet with representatives of the independent auditors and with the financial officers of the Company separately or jointly. The Compensation/Nominating Committee, which will be composed entirely of directors who are neither employees nor officers of the Company, will review and make recommendations with respect to the management remuneration policies of the Company including salary rates and fringe benefits of elected officers, other remuneration plans such as incentive compensation, deferred compensation and stock option plans, directors' compensation and benefits and such other matters as may be specifically delegated to the Compensation/Nominating Committee by the Board of Directors. In addition, the Compensation/Nominating Committee will make recommendations to the Board of Directors concerning suitable candidates for election to the Board of Directors, with respect to assignments to committees of the Board of Directors, and with respect to promotions, changes and succession among the senior management of the Company. In making recommendations for suitable candidates for election to the Board of Directors, the Compensation/Nominating Committee will consider nominees for election recommended by stockholders. COMPENSATION OF DIRECTORS Directors who are not executive officers of the Company or AMR will receive an annual retainer of $25,000 for Board of Directors and committee service and a fee of $1,000 for each meeting of the Board of Directors or any committee thereof attended. It is anticipated that, prior to the consummation of the Offerings, the Board of Directors will adopt, effective on the consummation of the Offerings, a Directors' Stock Incentive Plan (the "SIP"). The SIP will provide for an annual award of options to purchase 3,000 shares of the Company's Class A Common Stock to each director who is neither an officer nor an employee of the Company, AMR or any subsidiary thereof (a "Non-Employee Director") who is in office on the first business day after each annual meeting of stockholders occurring during the term of the SIP (an "Annual Award"). The options, which will have an exercise price equal to the fair market value of the Class A Common Stock on the date of grant, will vest pro rata over a five-year period, as long as the Non-Employee Director is in office on the first business day after each annual meeting of stockholders. Notwithstanding the vesting provisions of the previous sentence, if a Non-Employee Director ceases to be a director due to death or disability before all options are vested, the Non-Employee Director's options shall vest immediately upon death or disability. Each option will expire on the earlier of (i) the date the Non-Employee Director ceases to be a director of the Company, if for any reason other than death, disability or retirement or (ii) three years from the date the Non-Employee Director ceases to be a director of the Company due to death, disability or retirement; provided, however, that if the Non-Employee Director dies within the three-year period following disability or retirement, as applicable, the option will expire no later than 12 months after the Non-Employee Director's death. The SIP will also provide for a one-time award of options to purchase 10,000 shares of the Company's Class A Common Stock to a new Non-Employee Director upon his or her initial election 50 52 to the Board of Directors (a "New Director"). This grant will be made on the business day immediately following the annual meeting at or after which such New Director is elected to the Board (the "Election Award"). Options granted as an Election Award, which will have an exercise price equal to the fair market value of the Class A Common Stock on the date of grant, will vest in the same manner as options granted as an Annual Award. The Election Award will be in addition to the Annual Award. A maximum of 350,000 shares may be issued under the SIP, subject to appropriate adjustments in the event of certain corporate transactions, including but not limited to reorganizations, stock dividends and splits. The SIP will be administered, and may be amended, by the Board of Directors. No income will be realized by the Non-Employee Director at the time options are granted. Generally, upon exercise of an option, the Non-Employee Director will realize ordinary income in an amount equal to the difference between the price paid for the shares and the fair market value of the shares on the date of exercise. The Company will be entitled to a tax deduction in the same amount. Any appreciation (or depreciation) after the date of the exercise will be either short-term or long-term capital gain or loss, depending on the length of time that the Non-Employee Director has held the shares. EXECUTIVE COMPENSATION Prior to the Reorganization, a majority of the employees of the Company, including the five most highly compensated executive officers of the Company, who are named below, were compensated by American. Following the Reorganization, the executive officers and all other employees of the Company will be compensated solely by the Company, and the executive officers of the Company will no longer participate in any of American's compensation plans, except with regard to certain equity awards granted by AMR as described below and with regard to American's fixed benefit retirement plan, in which the employees of the Company will participate until December 31, 1996. The Company's compensation program will be administered by the Compensation/Nominating Committee. The Company's executive officers will receive annual cash compensation in the form of a base salary and will participate in a formula-based incentive compensation plan that is tied to the Company's financial performance. In addition, the Company's executive officers and other key employees will be eligible to participate in the Company's Long-Term Incentive Plan (the "LTIP"). The Company's executive officers will also participate in one or more retirement plans, the parameters of which are presently under consideration by the Company. For the fiscal year ended December 31, 1995, the five most highly compensated officers of the Company whose aggregate remuneration exceeded $100,000 were Michael J. Durham, Thomas M. Cook, Terrell B. Jones, Jeffrey G. Katz and T. Patrick Kelly (the "named executive officers"). See "-- Compensation of the Named Executive Officers in 1995." Bradford J. Boston was appointed Senior Vice President -- SABRE Computer Services on June 1, 1996. As base salary for 1996, Mr. Durham will receive $393,583, Mr. Cook will receive $259,499, Mr. Jones will receive $243,700, Mr. Katz will receive $187,243 and Mr. Kelly will receive $186,883. Mr. Boston will receive a base salary of $132,750 for the seven months commencing June 1, 1996, the date of commencement of his employment with the Company. The Company's incentive compensation plan provides that each of the named executive officers, along with other key employees, will be eligible to receive cash bonus awards only if specified financial performance goals are met by the Company. The target bonus payable to a participant under the incentive compensation plan is based upon that individual's job classification at the Company, but the actual amount of the award is based on a subjective evaluation of such individual's performance. No bonus payment may exceed 100% of the individual's base salary. 51 53 THE COMPANY'S LONG-TERM INCENTIVE PLAN It is anticipated that, prior to the consummation of the Offerings, the Board of Directors will adopt, and AMR, as the Company's sole stockholder, will approve, effective upon the consummation of the Offerings, the LTIP. LTIP awards may be made to key employees, including officers of the Company, its subsidiaries and affiliates but may not be granted to any director who is not also an employee of the Company, its subsidiaries or affiliates. The number of employees participating in the LTIP will vary from year to year. Initially 13.0 million shares of Class A Common Stock will be authorized to be issued under the LTIP. The Company presently intends, however, that as long as AMR beneficially owns at least 80% of the economic interest, and 80% of the voting power, of the Company, the Company will only issue such number of shares under the LTIP as will permit AMR to retain at least 80% of the economic interest, and 80% of the voting power, of the Company. If shares subject to an option under the LTIP cease to be subject to such option, or if shares awarded under the LTIP are forfeited, or an award otherwise terminates without a payment being made to the participant in the form of Class A Common Stock, such shares will again be available for future distribution under the LTIP. In the event of certain changes in the Company's capital structure affecting the Class A Common Stock, the LTIP Committee may make appropriate adjustments in the number of shares that may be awarded and in the number of shares covered by options and other awards then outstanding under the LTIP, and, where applicable, the exercise price of awards under the LTIP. The LTIP will be administered by a committee consisting of no fewer than two members of the Board of Directors (the "LTIP Committee"). The LTIP Committee will have the authority to grant the following types of awards under the LTIP: (1) stock options, (2) stock appreciation rights, (3) restricted stock, (4) deferred stock, (5) stock purchase rights, (6) other stock-based awards. Each of these awards may be granted alone or in conjunction with, or in tandem with, other awards under the LTIP and/or cash awards outside the LTIP. 1. STOCK OPTIONS. Incentive stock options and non-qualified stock options may be granted for such number of shares as the LTIP Committee shall determine, except that no participant may be granted stock options in any 12 month period for more than 400,000 shares. Stock options are exercisable at such times and subject to such terms and conditions as the LTIP Committee determines and over a term (not in excess of 10 years) determined by the LTIP Committee. Except as otherwise determined by the LTIP Committee, the exercise price for any option may not be less than 100% of the fair market value of the Company's Class A Common Stock as of the date of grant. Unless otherwise determined by the LTIP Committee, only options that are exercisable on a participant's date of termination, death, disability or retirement may be subsequently exercised. Upon an employee's voluntary resignation or termination for cause, such employee's stock options generally will terminate. If the employee is involuntarily terminated without cause, stock options generally will be exercisable for three months following such termination. The LTIP provides that stock options generally will be exercisable for three years following termination of employment due to death, disability or retirement; provided, however, that if the employee dies within the three-year period following disability or retirement, as applicable, the option will expire 12 months after the employee's death. In no event, however, will a stock option remain exercisable past its original term. 2. STOCK APPRECIATION RIGHTS. Stock Appreciation Rights ("SARs") may be granted in conjunction with all or part of a stock option and will be exercisable only when the underlying stock option is exercisable. Once an SAR has been exercised, the portion of the stock option underlying the SAR terminates. The LTIP Committee may grant SARs that become exercisable only in the event of a Change in Control or Potential Change in Control of the Company and may provide that such SARs 52 54 may be cashed out on the basis of the Change in Control Price, as such terms are defined in the LTIP. Upon exercise of an SAR, the LTIP Committee, at its discretion, will pay the employee in cash, Class A Common Stock or a combination thereof, an amount equal to the excess of the then fair market value of the stock over the exercise price, multiplied by the number of SARs being exercised. 3. RESTRICTED STOCK. The vesting of restricted stock may be conditioned upon such factors as the LTIP Committee may determine. The LTIP Committee determines the period during which restricted stock is subject to forfeiture. At grant, the LTIP Committee may provide for other awards, payable either in stock or cash, to ensure payment of a minimum value at the time the restrictions lapse. 4. DEFERRED STOCK. The LTIP Committee determines the periods during which the deferred stock is subject to forfeiture. The vesting of deferred stock may be conditioned upon the attainment of specific performance goals or such other factors as the LTIP Committee may determine. The LTIP Committee may provide for other awards, payable either in stock or cash, to ensure payment of a minimum value at the time the deferral limitations lapse, subject to such performance, service and/or other terms and conditions as the LTIP Committee may specify. 5. STOCK PURCHASE RIGHTS. The LTIP Committee may grant to eligible individuals rights to purchase the Company's Class A Common Stock at (a) the fair market value, (b) 50% of the fair market value, (c) book value or (d) par value, all such values being determined as of the date of grant. The LTIP Committee may condition such rights, or their exercise, on such terms and conditions as it sees fit. Rights to purchase stock will be exercisable for a period to be determined by the LTIP Committee, except that the period may not be greater than 30 days. 6. OTHER STOCK-BASED AWARDS. The LTIP Committee may also grant other types of awards that are valued, in whole or in part, by reference to or otherwise based on the Company's Class A Common Stock. Such awards will be made upon such terms and conditions as the LTIP Committee in its discretion may provide. The LTIP will also permit the LTIP Committee to pay cash amounts to any executive officer (within the meaning of Section 16(a) of the Securities Exchange Act of 1934, as amended) upon the achievement, in whole or in part, of performance goals or objectives established in writing by the LTIP Committee with respect to such performance periods as the LTIP Committee shall determine. Any such goals or objectives shall be based on one or more of the Performance Criteria, as defined in the LTIP. The maximum amount of any such cash payment to any single officer with respect to any 12 month period shall not exceed the lesser of (i) $1,000,000 or (ii) twice the officer's annual base salary as in effect on the last day of the preceding fiscal year. If there is a Change in Control or a Potential Change in Control, all awards that are not then vested will become vested and any restrictions or limitations will lapse. Stock options, SARs, limited SARs, restricted stock, deferred stock, stock purchase rights and other stock-based awards will, unless otherwise determined by the LTIP Committee in its sole discretion, be cashed out on the basis of the Change in Control Price. The following is a brief summary of the federal income tax consequences of awards made under the LTIP based upon the federal income tax laws in effect on the date hereof. This summary is not intended to be exhaustive and does not describe state or local tax consequences. Incentive Stock Options. No taxable income is realized by the participant upon the grant or exercise of an incentive stock option (an "ISO"). If a participant does not sell the stock received upon the exercise of an ISO ("ISO Shares") for at least two years from the date of grant and within one year from the date of exercise, when the shares are sold any gain (loss) realized will be long-term capital gain (loss). In such circumstances, no deduction will be allowed to the Company for federal income tax purposes. 53 55 If ISO Shares are disposed of prior to the expiration of the holding periods described above, the participant generally will realize ordinary income at that time equal to the excess, if any, of the fair market value of the shares at exercise (or, if less, the amount realized on the disposition of the shares) over the price paid for such ISO Shares. The Company will be entitled to deduct any such recognized amount. Any further gain or loss realized by the participant will be taxed as short-term or long-term capital gain or loss. Subject to certain exceptions for disability or death, if an ISO is exercised more than three months following the termination of the participant's employment, the option will generally be taxed as a non-qualified stock option. Non-Qualified Stock Options. No income is realized by the participant at the time a non-qualified stock option is granted. Generally upon exercise of a non-qualified stock option, the participant will realize ordinary income in an amount equal to the difference between the price paid for the shares and the fair market value of the shares on the date of exercise. The Company will be entitled to a tax deduction in the same amount. Any appreciation (or depreciation) after the date of the exercise will be either short-term or long-term capital gain or loss, depending on the length of time that the participant has held the shares. Stock Appreciation Rights. No income will be realized by a participant in connection with the grant of an SAR. When the SAR is exercised, the participant will generally be required to include as taxable ordinary income in the year of exercise an amount equal to the amount of cash and the fair market value of any shares received. The Company will be entitled to a deduction at the time and in the amount included in the participant's income by reason of the exercise. If the participant receives Class A Common Stock upon exercise of any SAR, the post-exercise appreciation or depreciation will be treated in the same manner discussed above under Non-Qualified Stock Options. Restricted Stock. A participant receiving restricted stock generally will recognize ordinary income in the amount of the fair market value of the restricted stock at the time the stock is no longer subject to forfeiture, less any consideration paid for the stock. The Company will be entitled to a deduction at the same time and in the same amount. The holding period to determine whether the participant has long-term or short-term gain or loss on a subsequent sale generally begins when the stock is no longer subject to forfeiture, and the participant's tax basis for such shares will generally equal the fair market value of such shares on such date. However, a participant may elect, under Section 83(b) of the Internal Revenue Code of 1986, as amended (the "Code"), within 30 days of the grant of the stock, to recognize taxable ordinary income on the date of grant equal to the excess of the fair market value of the shares of restricted stock (determined without regard to the restrictions) over the purchase price of the restricted stock. By reason of such an election, the participant's holding period will commence on the date of grant, and the participant's tax basis will be equal to the fair market value of the shares on that date (determined without regard to restrictions). Likewise, the Company generally will be entitled to a deduction at that time in the amount that is taxable as ordinary income to the participant. If shares are forfeited after making such an election, the participant will be entitled to a deduction or loss for tax purposes only in an amount equal to the purchase price, if any, of the forfeited shares. Deferred Stock. A participant receiving deferred stock generally will be subject to tax at ordinary income rates on the fair market value of the deferred stock on the date that the stock is distributed to the participant, and the capital gain or loss holding period for such stock will also commence on that date. The Company generally will be entitled to a deduction in the amount that is taxable as ordinary income to the participant. ANTICIPATED GRANTS TO THE EXECUTIVE OFFICERS FOR 1996 On the date of the consummation of the Offerings, the Company will make one-time grants to the named executive officers in connection with the Offerings and annual grants as part of their annual compensation. The grants will be comprised of (i) options to purchase Class A Common Stock, (ii) restricted stock and (iii) performance shares, which are shares of Class A Common 54 56 Stock (and a type of deferred stock) that will be issued in the first quarter of 1999 based upon the Company's attainment of pre-determined financial objectives over the period from 1996 to 1998 ("Performance Shares"). A portion of each of the one-time grants of options is an acceleration of grants that would otherwise be made, and will reduce the number of options to be granted, to the named executive officers and to Mr. Boston in 1997. The Company anticipates that upon the consummation of the Offerings: (i) approximately $1,500,000 in options to purchase shares of Class A Common Stock, calculated using a modified Black-Scholes model, and $338,500 in Performance Shares, valued based upon the Offering price of the Class A Common Stock, will be granted to Mr. Durham; (ii) approximately $662,700 in options to purchase Class A Common Stock, $175,200 in Performance Shares and $55,800 in restricted stock will be granted to Mr. Cook; (iii) approximately $475,300 in options to purchase Class A Common Stock and $175,300 in Performance Shares will be granted to Mr. Jones; (iv) approximately $450,000 in options to purchase Class A Common Stock and $169,700 in Performance Shares will be granted to Mr. Katz; (v) approximately $450,000 in options to purchase Class A Common Stock and $166,400 in Performance Shares will be granted to Mr. Kelly; and (vi) approximately $280,000 in options to purchase Class A Common Stock will be granted to Mr. Boston. CONVERSION OF AMR EQUITY COMPENSATION TO CLASS A COMMON STOCK Upon consummation of the Offerings, except as noted below, each employee will have the opportunity to have all unexercised or unvested stock awards from AMR held by such employee converted into stock awards of the Company and vest under the original time schedule applicable with respect to such awards. Each of the officers of the Company has elected to convert his AMR equity awards into awards payable in Class A Common Stock. Performance shares of AMR common stock that will be issued in the first quarter of 1998 based upon the Company's attainment of pre-determined cash flow objectives over the period from January 1, 1995 to December 31, 1997 will vest according to their original performance metric and time frame. However, upon vesting, payment to employees of the Company will be made using shares of Class A Common Stock. The number of shares of Class A Common Stock to be issued will equal the number of shares of AMR common stock to be issued multiplied by the market price of AMR common stock on the date of the pricing of the Offerings and divided by the Offering price. Stock options to purchase AMR common stock will be exchanged on the date of the consummation of the Offerings for options to purchase Class A Common Stock of equal in-the-money value. Career equity, awarded by AMR, is an award of deferred common stock that vests generally at retirement. Most of the shares of career equity held by employees of the Company will convert, on the date of consummation of the Offerings, into some combination of options to purchase Class A Common Stock and restricted shares of Class A Common Stock. Two forms of AMR stock awards will not be altered in connection with the Offerings. Performance shares of AMR common stock relating to the period from January 1, 1994 through December 31, 1996 (issuable in the first quarter of 1997) will be paid in shares of AMR common stock when and if payment is due. In addition, each share of AMR restricted stock held by each employee of the Company, other than Mr. Boston, will complete its vesting according to its original vesting schedule and will be converted to restricted shares of Class A Common Stock. Pursuant to his terms of employment, Mr. Boston's AMR restricted stock will convert into shares of restricted stock of the Company of equal value. 55 57 EMPLOYMENT AGREEMENTS The Company has entered into an agreement (the "Durham Agreement") with Mr. Durham, which provides that Mr. Durham will be employed by the Company for a term of three years from the date of the Offerings. In the event that the Company terminates Mr. Durham's employment during the term of the Durham Agreement without cause, Mr. Durham would receive a severance payment equal to the greater of (i) one year's salary and incentive compensation or (ii) the total amount of salary remaining for the term of the Durham Agreement, and all outstanding stock awards would continue vesting through the greater of one year or the remainder of the term of the Durham Agreement. Mr. Durham and the Company have also agreed that Mr. Durham will receive travel privileges from American until June 30, 2008, and thereafter as a retiree if he retires on or prior to June 30, 2008, subject to limited exceptions. The Company has assumed the obligations of American under agreements originally entered into by American with Mr. Cook and Mr. Jones (the "Officer Agreements"). Mr. Cook's agreement provides that Mr. Cook will be employed by the Company as an officer until October 31, 2000. Mr. Jones' agreement provides that Mr. Jones will be employed by the Company as an officer until April 18, 2000, subject to extension by the Company to no later than April 18, 2004. Pursuant to the Officer Agreements, the Company reserves the right to remove Mr. Cook or Mr. Jones as an officer and to retain him as an employee for consulting services during the remainder of the term of the applicable Officer Agreement. Such officer's base salary as a consultant would be the rate in effect at the time of his removal as an officer and such salary would continue for the remainder of the term of the applicable Officer Agreement. Pursuant to the Officer Agreements, each of Mr. Cook and Mr. Jones is entitled to receive specified amounts of incentive compensation under AMR's Long Term Incentive Plan, along with other specified benefits customarily provided to officers of the Company. Each of Mr. Cook and Mr. Jones has agreed that the incentive compensation to be awarded under AMR's Long Term Incentive Plan will instead be granted in awards of Class A Common Stock pursuant to the LTIP. RETIREMENT PLANS Each employee of the Company will continue to participate in American's fixed benefit retirement plan until December 31, 1996, as described below. After that time, the Company will implement The SABRE Group Retirement Plan (the "SGRP") and the Legacy Pension Plan (the "LPP"). Until December 31, 1996, each employee of the Company will participate in American's fixed benefit retirement plan (the "Fixed Benefit Retirement Plan"), which complies with the Employee Retirement Income Security Act of 1974 ("ERISA") and qualifies for federal exemption under the Internal Revenue Code of 1986 (the "Code"). Until December 31, 1996, the named executive officers of the Company are eligible for additional retirement benefits under the Supplemental Executive Retirement Plan (the "SERP"). The SERP provides pension benefits (calculated upon the basis of final average base salary, incentive compensation payments and performance returns) to which officers of the Company would be entitled but for the limit of $120,000 on the maximum annual benefit payable under ERISA and the Code and the limit on the maximum amount of compensation that may be taken into account under the Company's basic pension program ($150,000 for 1995). 56 58 The following table shows typical annual benefits payable under the Fixed Benefit Retirement Plan and the SERP, based upon retirement in 1995 at age 65, to persons in specified remuneration and credited years of service classifications. Annual retirement benefits set forth below are subject to reduction for Social Security benefits. PENSION PLAN TABLE
ANNUAL RETIREMENT BENEFITS -------------------------------------------------------- FINAL CREDITED YEARS OF SERVICE AVERAGE -------------------------------------------------------- SALARY 15 20 25 30 35 - --------- -------- -------- -------- -------- -------- $250,000............................. $ 75,000 $100,000 $125,000 $150,000 $175,000 300,000............................. 90,000 120,000 150,000 180,000 210,000 400,000............................. 120,000 160,000 200,000 240,000 280,000 500,000............................. 150,000 200,000 250,000 300,000 350,000 600,000............................. 180,000 240,000 300,000 360,000 420,000 700,000............................. 210,000 280,000 350,000 420,000 490,000 800,000............................. 240,000 320,000 400,000 480,000 560,000
As of December 31, 1995, the named executive officers had the following credited years of service: Mr. Durham: 15.5; Mr. Cook: 12.5; Mr. Katz: 14.5; Mr. Jones: 16.0; Mr. Kelly: 10.5. Commencing January 1, 1997, employees of the Company who were under the age of 40 as of December 31, 1996 will participate in the SGRP. Employees who were over the age of 40 as of December 31, 1996 will have the option of participating in the SGRP or the LPP. The SGRP is a plan qualified under Section 401(k) of the Code. Pursuant to the SGRP, the Company will contribute 2.75% of each employee's base pay to the SGRP. In addition, the Company will match 50 cents of each dollar contributed by an employee, up to 6% of the employee's base pay. The employee will vest in the Company contributions after three years of service with the Company, including service for AMR affiliates. The employee is immediately vested in his or her own contributions and in the matching contributions of the Company. The amount that any employee will be entitled to receive upon retirement will be subject to the amount of that employee's contributions, the investment selections of the employee and the returns thereon. The LPP is substantially identical to American's Fixed Benefit Retirement Plan. All benefits earned by employees of the Company under American's Fixed Benefit Retirement Plan will be transferred to the LPP effective December 31, 1996. Upon retirement, benefits under the LPP will be calculated based upon base pay for the five years closest to retirement. For employees who participate in the SGRP, benefits payable under the LPP will be based upon credited years of service as of December 31, 1996. However, employees in the SGRP will continue to earn years of service for purposes of determining vesting and early retirement benefits under the LPP. The Company anticipates that, prior to January 1, 1997, it will adopt a supplemental executive retirement plan for its officers and directors. Although the form of the supplemental executive retirement plan is under consideration, the Company anticipates that the benefits payable thereunder will be similar to those payable under American's SERP. As such, typical annual benefits payable to officers who participate in the LPP and the SERP will be similar to those indicated on page 55 for participation in American's plans. EMPLOYEE STOCK PURCHASE PLAN It is anticipated that, prior to the consummation of the Offerings, the Board of Directors will adopt, and AMR as the sole stockholder will approve, a Stock Purchase Plan (the "Stock Purchase Plan") for employees of the Company who are based in the United States and in certain foreign jurisdictions, and who otherwise meet the requirements specified in Section 423 of the Code. Through the Stock Purchase Plan, eligible employees will have the opportunity to purchase shares of Class A Common Stock semi-annually at a 15% discount from the prevailing market price on the 57 59 first or last day of the applicable six-month period, whichever is lower. Pursuant to the Stock Purchase Plan, each employee will be permitted to acquire annually Class A Common Stock with an aggregate maximum purchase price equal to 2% of that employee's base pay, subject to applicable limitations under the Code. EXECUTIVE TERMINATION BENEFITS AGREEMENTS The Company will have, effective as of the closing of the Offerings, executive termination benefits agreements (the "termination benefits agreements") with seven of its officers, including all of the named executive officers. The benefits provided by the termination benefits agreements are triggered by the termination of the individual who is a party to a termination benefits agreement (i) within three years following a change in control of the Company, if the individual's employment with the Company is terminated other than for cause or if the individual terminates his or her employment with "good reason" or (ii) within one year following a change in control of the Company, if the individual terminates his or her employment with the Company; provided, however, that if the individual's employment is terminated for cause or as a consequence of death or disability, the termination benefits agreement is not triggered. Under the terms of the termination benefits agreements, a change in control of the Company is deemed to occur (i) if a third party, other than AMR or an affiliate, acquires 20% or more of the combined voting power of the Company's then outstanding securities with respect to the election of directors of the Company, (ii) upon the occurrence of a transaction that requires stockholder approval and involves the acquisition of the Company (through the purchase of assets or by merger or otherwise) by an entity other than the Company, a subsidiary thereof, AMR or an affiliate thereof or (iii) if during any 24-month period the individuals who, at the beginning of such period, constitute the Board of Directors of the Company cease for any reason other than death to constitute at least a majority thereof and the new directors of the Company were not elected with the approval of the individuals who, at the beginning of such period, constitute the Board of Directors. A change in control would not occur in the event that AMR distributes its Class B Common Stock (or upon conversion of such Class B Common Stock, the resulting Class A Common Stock) to its stockholders or sells such Common Stock to the public in an underwritten public offering. The termination benefits agreements provide that upon such termination, the individual will receive, in a lump sum payment, the sum of (i) two times the greater of (A) the executive's annual base salary at the Termination Date or (B) the executive's effective annual base salary immediately prior to the change in control, plus (ii) two times the greater of (x) the median annual bonus awarded to the executive under the LTIP or any other bonus plan or (y) 50% of the highest median target bonus rate applicable to the executive for any period during such prior three-year period, multiplied by the annual applicable base salary determined under (i) above, and certain other miscellaneous benefits. The amount of termination benefits will be adjusted if the executive is within two years of his 65th birthday as of the date of termination. In addition, upon a change in control, the vesting and exercisability of stock awards will be accelerated (for example, deferred and restricted stock will immediately vest and all stock options will become immediately exercisable). Finally, the individual will be reimbursed for excise taxes, if any, paid pursuant to Section 280G of the Code (or its successor provision) and for federal income tax paid on such excise tax reimbursement. 58 60 COMPENSATION OF THE NAMED EXECUTIVE OFFICERS IN 1995 SUMMARY COMPENSATION TABLE The following Summary Compensation Table sets forth the compensation for the fiscal year ended December 31, 1995 paid by American to the individuals who, as of December 31, 1995, were the five most highly compensated officers of the Company whose aggregate current remuneration exceeded $100,000.
ANNUAL COMPENSATION LONG-TERM COMPENSATION --------------------- -------------------------------------- AWARDS PAYOUTS ------------------------ ---------- RESTRICTED SECURITIES STOCK UNDERLYING LTIP ALL OTHER NAME SALARY BONUS AWARDS(1) OPTIONS PAYOUTS(2) COMPENSATION(3) - -------------------- --------- --------- ---------- ---------- ---------- --------------- Durham.............. $ 360,417 $ 116,000 0 5,500 $ 60,000 $ 9,443 Cook................ 239,944 90,321 0 13,000 16,200 8,384 Katz................ 166,402 81,426 0 3,000 16,200 3,266 Jones............... 224,583 96,697 0 5,000 16,200 6,078 Kelly............... 167,142 50,000 0 3,000 13,500 2,551
- --------------- (1) The following table sets forth certain information concerning outstanding stock awards: DEFERRED AND RESTRICTED STOCK -- TOTAL SHARES AND VALUES
TOTAL NUMBER OF AGGREGATE MARKET VALUE OF DEFERRED AND RESTRICTED DEFERRED AND RESTRICTED SHARES HELD AT SHARES HELD AT NAME DECEMBER 31, 1995(A) DECEMBER 31, 1995(B) -------------------------------------- ----------------------- ------------------------- Durham................................ 51,000 $ 3,777,213 Cook.................................. 24,900 1,844,169 Katz.................................. 14,000 1,036,882 Jones................................. 21,050 1,559,026 Kelly................................. 14,800 1,096,132
- --------------- a) Consists of shares awarded under AMR's restricted stock plan that will vest in years 1996-1997, shares of deferred common stock issued under AMR's Long-Term Incentive Plan ("AMR's LTIP") that vest at retirement and shares of deferred common stock issued under AMR's LTIP that vest upon AMR's attainment of pre-determined cash flow objectives over a three year performance period. b) Based on the average market price of AMR common stock, $74.063, on the NYSE on December 29, 1995. (2) Represents performance returns, granted with respect to deferred shares, that are payable annually in cash, and are based, in part, on AMR's prior five-year average return on investment. (3) Represents the full amount of premiums paid under a split-dollar life insurance arrangement whereby AMR would recover certain premiums paid. 59 61 STOCK OPTIONS GRANTED The following table sets forth information concerning stock options granted during 1995 by AMR to the named executive officers. The hypothetical present values of stock options granted in 1995 are calculated under a modified Black-Scholes model, a mathematical formula used to value options. The actual amount, if any, realized upon the exercise of stock options will depend upon the amount by which the market price of AMR's common stock on the date of exercise exceeds the exercise price. There is no assurance that the hypothetical present value of stock options reflected in this table will actually be realized. OPTIONS/SARS GRANTED IN LAST FISCAL YEAR
INDIVIDUAL GRANTS ------------------------------------------- % OF TOTAL SECURITIES OPTIONS/SARS HYPOTHETICAL UNDERLYING GRANTED TO EXERCISE OR PRESENT VALUE OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION AT DATE NAME GRANTED FISCAL YEAR PER SHARE DATE(1) OF GRANT(2) ----------- ------------ ------------ ----------- ---------- ------------- Durham....................... 5,500 1.2% $ 74.6875 7/20/05 $ 221,595 Cook......................... 13,000 2.9 65.0625 4/24/05 456,272 Katz......................... 3,000 0.7 74.6875 7/20/05 120,870 Jones........................ 5,000 1.1 65.0625 4/24/05 175,489 Kelly........................ 3,000 0.7 74.6875 7/20/05 120,870
- --------------- (1) Options have a term of ten years, have an exercise price equal to the average market price of AMR's common stock on the date of grant and become exercisable at the rate of 20% per year over a five-year period. (2) The modified Black-Scholes model used to calculate the hypothetical values at date of grant considers a number of factors to estimate the option's present value, including the stock's historical volatility calculated using the average daily market price of AMR's common stock over a one-year period prior to the grant date, the exercise period of the option, interest rates and the stock's expected dividend yield. The assumptions used in the valuation of the options were: stock price volatility -- 25.942%, exercise period -- 10 years, interest rate -- 6.28%, and dividend yield -- 10%. 60 62 STOCK OPTION EXERCISES AND DECEMBER 31, 1995 STOCK OPTION VALUE The following table sets forth certain information concerning options to purchase AMR common stock during 1995 exercised by the named executive officers and the number and value of unexercised in-the-money options at December 31, 1995. The actual amount, if any, realized upon exercise of stock options will depend upon the amount by which the market price of AMR's common stock on the date of exercise exceeds the exercise price. There is no assurance that the values of unexercised in-the-money options (whether exercisable or unexercisable) reflected in this table will actually be realized. STOCK OPTION EXERCISES AND DECEMBER 31, 1995 STOCK OPTION VALUE
NO. OF SECURITIES SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED ACQUIRED ON VALUE OPTIONS AT IN THE MONEY OPTIONS NAME EXERCISE REALIZED DECEMBER 31, 1995 AT DECEMBER 31, 1995(1) ----------- ----------- -------- ------------------------- ------------------------- EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE Durham................ 3,000 $ 60,000 31,100/16,900 $398,158/$130,080 Cook.................. 5,600 120,988 5,600/18,400 41,052/ 182,459 Katz.................. 1,600 46,500 6,400/ 8,500 73,716/ 64,378 Jones................. 1,300 27,769 6,400/10,400 79,941/ 108,305 Kelly................. 0 0 6,100/ 8,400 92,266/ 63,303
- --------------- (1) Based on the average market price of AMR common stock, $74.063, on the NYSE on December 29, 1995. LONG TERM INCENTIVE PLAN AWARDS Set forth below are the awards granted in 1995 under AMR's LTIP.
PERFORMANCE ESTIMATED FUTURE PAYOUTS UNDER NUMBER OF PERIOD NON-STOCK PRICE-BASED PLANS PERFORMANCE UNTIL ------------------------------ NAME SHARES(1) ----------- PAYOUT THRESHOLD TARGET MAXIMUM ----------- ----------- --------- ------ ------- Durham........................ 5,600 12/31/97 0 5,600 16,800 Cook.......................... 2,200 12/31/97 0 2,200 6,600 Katz.......................... 2,000 12/31/97 0 2,000 6,000 Jones......................... 1,900 12/31/97 0 1,900 5,700 Kelly......................... 2,900 12/31/97 0 2,900 8,700
- --------------- (1) Performance shares awarded to the named executive officers in 1995 were granted pursuant to AMR's LTIP under the performance share program applicable to The SABRE Group. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Compensation information with respect to the named executive officers for 1995 reflects compensation earned prior to the Reorganization. During 1995, the Company had no Compensation/Nominating Committee. 61 63 SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDER As of the date of this Prospectus, no shares of Class A Common Stock are outstanding. After completion of the Offerings, the only shares of Class A Common Stock that will be outstanding are those that will be issued in the Offerings (including any shares issued if the Underwriters' over-allotment options are exercised) and those issued under the Company's employee and director plans. See "Management." The table below sets forth certain information with respect to the expected beneficial ownership of the Class B Common Stock of the Company before and after completion of the Offerings by each beneficial owner of more than 5% of the outstanding shares of Class B Common Stock and by the Company's directors and executive officers.
BENEFICIAL OWNERSHIP BEFORE OFFERINGS BENEFICIAL OWNERSHIP AFTER OFFERINGS --------------------------------------------- ---------------------------------------------- PERCENT OF PERCENT PERCENT PERCENT OF PERCENT PERCENT CLASS B OF OF CLASS B OF OF NUMBER OF COMMON ECONOMIC VOTING NUMBER OF COMMON ECONOMIC VOTING NAME OF BENEFICIAL OWNER SHARES STOCK INTEREST POWER SHARES STOCK INTEREST POWER - ------------------------------ ----------- ---------- -------- ------- ----------- ---------- -------- ------- AMR Corporation(1)............ 107,374,000 100% 100% 100% 107,374,000 100% 84.2%(2) 98.2%(2) 4333 Amon Carter Blvd., Fort Worth, Texas 76155 All directors and executive officers as a group (9 persons).................... -- -- -- -- -- -- (3) (3)
- --------------- (1) The Board of Directors of AMR exercises sole voting and dispositive power over the shares of Class B Common Stock held of record by AMR. (2) If the Underwriters' over-allotment options are exercised in full, AMR would beneficially own 82.2% of the economic interest and 97.9% of the voting power after the Offerings. (3) Directors participating in the SIP and the executive officers will receive equity awards payable in shares of Class A Common Stock pursuant to the Company's director and employee plans. The exact number of shares to be issued in connection therewith, and the resulting percentage ownership, cannot be calculated until the Offering price and the price of AMR common stock on the date of pricing of the Offerings are known. For information on the grants to be made, see "Management." The following table sets forth certain information with respect to the beneficial ownership, as of September 18, 1996, of AMR's equity securities by each of the Company's named executive officers and directors and by all of the Company's directors and executive officers as a group. The table includes all shares of AMR's common stock held of record or in street name, plus options granted but unexercised under AMR's director and employee stock option plans. The directors and officers of the Company individually beneficially own less than 1% of any class of equity securities of AMR.
COMMON SHARES NAME OWNED --------------------------------------------------------------------- ------------- Robert L. Crandall................................................... * Michael J. Durham.................................................... * Gerard J. Arpey...................................................... * Anne H. McNamara..................................................... * Thomas M. Cook....................................................... * Terrell B. Jones..................................................... * Jeffrey G. Katz...................................................... * T. Patrick Kelly..................................................... * All directors and executive officers as a group (9 persons).......... *
- --------------- * Each director and officer and the directors and officers of the Company collectively beneficially own less than 1% of the outstanding common stock of AMR. 62 64 RELATIONSHIP WITH AMR AND CERTAIN TRANSACTIONS FORMATION OF THE COMPANY; INDEBTEDNESS TO AMR The Company was formed on June 25, 1996 and became a subsidiary of American on July 2, 1996 in connection with the Reorganization by AMR of the businesses of its operating unit known as The SABRE Group. As part of the Reorganization, all of the businesses of The SABRE Group, including the businesses operated as divisions or subsidiaries of American or AMR, were combined in subsidiaries of the Company, and the Company and its subsidiaries were dividended by American to AMR. Since the dividend, AMR has owned all of the Company's outstanding capital stock. In connection with the Reorganization, the Company issued the $850 million Debenture to American, the amount of which exceeds the historical book value of the assets contributed by American and AMR to the Company by $120.9 million. American transferred the Debenture to AMR in exchange for a portion of a note of American held by AMR. The Debenture, which matures on September 30, 2004, bears interest, payable semiannually, at a rate based on the sum of the six-month London Interbank Offered Rate plus a margin determined by the Company's senior unsecured long-term debt rating or, if such debt rating is not available, by the Company's ratio of debt to total capital. The Company has the right to prepay the principal amount of the Debenture in whole or in part at any time prior to December 31, 1996 and thereafter on interest payment dates, and will use approximately 90% of the net proceeds of the Offerings to prepay part of the Debenture. See "Use of Proceeds." Also in connection with the Reorganization, the Company and American entered into an Intercompany Agreement (the "Indemnification Agreement") pursuant to which each party indemnified the other for certain obligations relating to the Reorganization. Pursuant to the Indemnification Agreement, the Company indemnified American for liabilities assumed in the Reorganization, against third party claims asserted against American as a result of American's prior ownership of assets or operation of businesses contributed to the Company and for losses arising from or in connection with the Company's lease of property from American. In exchange, American indemnified the Company for specified liabilities retained by it in the Reorganization, against third party claims against the Company relating to American's businesses and asserted against the Company as a result of the ownership or possession by American prior to the Reorganization of any asset contributed to the Company in the Reorganization and for losses arising from or in connection with American's lease of property from the Company. COMMON STOCK OWNERSHIP AMR currently owns all of the outstanding capital stock of the Company. Upon completion of the Offerings, AMR will own 100% of the Company's outstanding Class B Common Stock, which will represent approximately 98.2% of the combined voting power of the Company's outstanding Common Stock (approximately 97.9% if the Underwriters' over-allotment options are exercised in full). As long as AMR beneficially owns a majority of the combined voting power, it will have the ability to elect all of the members of the Board of Directors and thereby ultimately to control the management and affairs of the Company, including any determinations with respect to acquisitions, dispositions, borrowings, issuances of Common Stock or other securities of the Company or the declaration and payment of any dividends on the Common Stock. In addition, AMR will be able to determine the outcome of any matter submitted to a vote of the Company's stockholders for approval and to cause or prevent a change in control. Although, in negotiating the Affiliate Agreements between the Company and AMR, American and AMR's other subsidiaries, the parties endeavored to implement market-based agreements, as a result of AMR's control of the Company, none of the Affiliate Agreements resulted from "arm's-length" negotiations. There can be no assurance that the Company would not have received more favorable terms from an unaffiliated party. 63 65 Conflicts of interest may arise from time to time between the Company and AMR in a number of areas relating to their past and ongoing relationships, including the nature and quality of services provided by the Company to AMR and its affiliates or by AMR or its affiliates to the Company, potential competitive business activities, shared marketing functions, tax and employee benefit matters, indemnity agreements, registration rights, sales or distributions by AMR of all or any portion of its ownership interest in the Company or AMR's ability to control the management and affairs of the Company. There can be no assurance, however, that AMR and the Company will be able to resolve any potential conflict or that, if resolved, the Company would not receive more favorable resolution if it were dealing with an unaffiliated party. In addition, certain of the Affiliate Agreements contain specific procedures for resolving disputes between the Company and AMR with respect to the subject matter of those agreements. There can be no assurance that a more favorable result to the Company would not be obtained under a different procedure. AMR could decide to sell or otherwise dispose of all or a portion of its holdings of the Company's Class B Common Stock (or, upon the conversion of the Class B Common Stock into Class A Common Stock, the resulting Class A Common Stock) at some future date. Furthermore, there can be no assurance that, in any transfer by AMR of a controlling interest in the Company, any holders of Class A Common Stock will be allowed to participate in such transaction or will realize any premium with respect to their shares of Class A Common Stock. CONTRACTUAL ARRANGEMENTS TECHNOLOGY SERVICES AGREEMENT The Company is a party to the Technology Services Agreement with American to provide American with certain information technology services. The base term of the Technology Services Agreement expires June 30, 2006. The term of the services to be provided by the Company to American, however, varies. The Company will provide: (i) Data Center services, data network services, application development and existing application maintenance and enhancement services until June 30, 2006; (ii) services relating to existing client server operations until June 30, 2001; and (iii) distributed systems services, radio services and voice network services until June 30, 1999. The provision of these services is anticipated to generate approximately $380 million in revenue in 1996. In addition, AMS Holdings, Inc., a subsidiary of AMR, and Canadian have entered into an agreement pursuant to which AMR and American supply to Canadian various services, including technology services. Under the Canadian Subcontract, the Company, as subcontractor through American, will be a principal provider of technology services to Canadian. The Technology Services Agreement provides for annual price adjustments. For certain prices, adjustments are made according to formulas which, commencing in 1998, are reset every two years and which may take into account the market for similar services provided by other companies. With limited exceptions, under the Technology Services Agreement, the Company will continue to be the exclusive provider of all information technology services provided by the Company to American immediately prior to the execution of the Technology Services Agreement. Any new information technology services, including most new application development services, required by American can be outsourced pursuant to competitive bidding by American or performed by American on its own behalf. With limited exceptions, the Company has the right to bid on all new services for which American solicits bids. Additionally, American may continue to perform development and enhancement work currently performed by it for itself. All new software developed by the Company pursuant to the Technology Services Agreement will be jointly owned by the Company and American (the "Jointly Owned Software"). Except as set forth below, the Company will have the perpetual, irrevocable and exclusive right to market, display and otherwise commercially exploit the Jointly Owned Software. However, during the term of the Technology Services Agreement the Company will, for Jointly Owned Software solely funded by American and for certain enhancements to existing software, offset fees otherwise payable by 64 66 American to the Company by an amount equal to 20% of the license fees or equivalent compensation that the Company receives. In addition, after the expiration or termination of the Technology Services Agreement, the Company is required to pay American a royalty for all Jointly Owned Software that was funded solely by American. American shall have the right to use the Jointly Owned Software for itself and its commuter airline affiliates and shall be entitled to market its right to use such product in marketing its services as described in the next paragraph. American has the right to market to third parties airline services that are supported by the Company's information technology. Generally, such support by the Company will be billed to American at the rates set forth in the Technology Services Agreement plus any extraordinary costs of the Company associated with the provision of such services. However, if a significant portion of the value of the marketed services is driven by the Company's support, and the service is not related to airport operations or airline alliances, then the compensation to the Company will be negotiated by American and the Company. After July 1, 2000, American may terminate the Technology Services Agreement for convenience if American determines the agreement is no longer advantageous for any reason. If it does so, American will be required to pay a termination fee equal to the sum of all amounts then due under the Technology Services Agreement, including wind-down costs, book value of dedicated assets and a significant percentage of estimated lost profits. American may also terminate the Technology Services Agreement without penalty, in whole or in part depending upon circumstances, for egregious breach by the Company of its obligations or for serious failure to perform critical or significant services. If the Company is acquired by a company other than AMR or American with more than $1 billion in annual airline transportation revenue, then American may terminate the Technology Services Agreement without paying any termination fee. Additionally, if American were to dispose of any portion of its business or any affiliate accounting for more than 10% of the Company's fees from American, then American shall either cause such divested business or affiliate to be obligated to use the Company's services in accordance with the Technology Services Agreement or pay a proportionate termination fee. Under certain circumstances, American can also request that the Company exclude third parties from using a product and pay the Company's cost of excluding third party customers. The parties have agreed to apply the financial terms of the Technology Services Agreement as of January 1, 1996. MANAGEMENT SERVICES AGREEMENT The Company and American are parties to the Management Services Agreement, dated July 1, 1996 pursuant to which American performs various management services for the Company, including treasury, risk management and tax, and similar administrative services, that American has historically provided to the Company. The Company expects to pay American approximately $21 million for such services in 1996, subject to adjustment based on service levels and negotiated prices. Amounts charged to the Company under this agreement approximate American's cost of providing the services plus a margin. The Management Services Agreement will expire on June 30, 1999 unless terminated earlier by either party if American and the Company are no longer under common control or by American if the Technology Services Agreement is terminated. Except for certain services relating to consolidated operations or corporate policy of AMR, which the Company is required to purchase during the term of the Management Services Agreement, the Company or American may terminate any service with prior notice of either three or six months, depending on the annual price of the service. The parties have agreed to apply the financial terms of the Management Services Agreement as of January 1, 1996. 65 67 TAX SHARING AGREEMENT The Company and AMR have entered into the Tax Sharing Agreement which provides for the allocation of tax liabilities during the tax periods the Company is part of consolidated federal, state and local income tax returns filed by AMR. In addition, the Tax Sharing Agreement sets out certain benefits and obligations of the Company and AMR for tax matters relating to periods before the Reorganization and for certain benefits and obligations that would affect the Company or AMR in the future if the Company ceased to be a member of AMR's consolidated group for federal income tax purposes. The Tax Sharing Agreement generally requires the Company to pay to AMR the amount of federal, state and local income taxes that the Company would have paid had it ceased to be a member of the AMR consolidated tax group for periods after the Reorganization. The Company is jointly and severally liable for the federal income tax of AMR and the other companies included in the consolidated return for all periods in which the Company is included in the AMR consolidated group. AMR has agreed, however, to indemnify the Company for any liability for taxes reported or required to be reported on a consolidated return. Except for certain items specified in the Tax Sharing Agreement, AMR generally retains any potential tax benefit carryforwards, and remains obligated to pay all taxes, attributable to periods before the Reorganization. The Tax Sharing Agreement also grants the Company certain limited participation rights in any dispute with tax authorities. MARKETING COOPERATION AGREEMENT The Company and American are parties to the Marketing Cooperation Agreement, dated as of July 1, 1996, pursuant to which American will provide marketing support for 10 years for the Company's Professional SABRE product targeted to travel agencies and for five years for BTS, Travelocity and easySABRE. The Marketing Cooperation Agreement may be terminated by either party prior to June 30, 2006 if the other party fails to perform its obligations thereunder. Under the Marketing Cooperation Agreement, American's marketing efforts will include ongoing promotional programs to assist in the sale of those SABRE products, development with the Company of an annual sales plan, sponsorship of sales/promotional events and the targeting of potential customers. The Company will pay American for its marketing support for Professional SABRE a fee, the amount of which may increase or decrease, depending on total SABRE booking volumes generated by certain Professional SABRE subscribers in the U.S., the Caribbean and elsewhere and on SABRE's market share of travel agency bookings in those areas. That fee will range between $20 million and $30 million for 1996 and between $10 million and $30 million thereafter. As payment for American's support of the Company's promotion of BTS, Travelocity and easySABRE, the Company will pay American a marketing fee based upon booking volumes through those products. The amounts payable under the preceding sentence are expected to range from approximately $1 million in the first year of the Marketing Cooperation Agreement to approximately $12 million in the fifth year. Additionally, the Company has guaranteed to American certain cost savings in the fifth year of the Marketing Cooperation Agreement. If American does not achieve those savings, the Company will pay American any shortfall, up to a maximum of $50 million. The parties have agreed to apply the financial terms of the Marketing Cooperation Agreement as of January 1, 1996. NON-COMPETITION AGREEMENT The Company, AMR and American have entered into a Non-Competition Agreement, dated July 1, 1996 (the "Non-Competition Agreement"), pursuant to which AMR and American, on behalf of themselves and certain, but not all, of their subsidiaries, have agreed to limit their competition with the Company's businesses of (i) electronic travel distribution, (ii) development, maintenance, marketing and licensing of software for travel agency, travel, transportation and logistics management, (iii) computer system integration, (iv) development, maintenance and operation of a data 66 68 processing center providing data processing services to third parties and (v) travel industry, transportation and logistics consulting services relating primarily to computer technology and automation. Under the Non-Competition Agreement, American and AMR may develop, operate, market and provide in compliance with all applicable laws an American Airlines branded electronic travel distribution that gives a display preference to American's flights. The Non-Competition Agreement prohibits American or AMR, however, from providing such system to any travel agency that generated 25% or more of its bookings through SABRE during the preceding six calendar months. Additionally, in the event any airline competing with American engages in an activity in connection with such airline's transportation business, and if the restrictions imposed by the Non-Competition Agreement would prevent American from engaging in the same activity and place American at a disadvantage, then American may engage in such activity, subject to American and the Company consulting about means to mitigate the effect on the Company of American's engaging in such activity. American and AMR may also license to third parties any software that is owned by AMR, American or other AMR affiliates in response to a request or offer from such third parties. The Non-Competition Agreement expires on December 31, 2001. American may terminate the Non-Competition Agreement, however, as to the activities described in clauses (ii) through (v) of this paragraph upon 90 days notice to the Company if the Technology Services Agreement is terminated by American as a result of an egregious breach thereof by the Company. TRAVEL AGREEMENTS The Company and American are parties to the Travel Privileges Agreement, dated July 1, 1996, pursuant to which the Company is entitled to purchase personal travel for its employees and retirees at reduced fares. The Company estimates that its cost for such services during 1996 will be approximately $15 million. The Travel Privileges Agreement will expire on June 30, 2008. The Company and American are also parties to the Corporate Travel Agreement, dated July 1, 1996, pursuant to which the Company receives discounts for certain flights purchased on American. In exchange, the Company must use American for a certain percentage of its air travel as compared to all other air carriers combined. If the Company fails to meet the applicable percentage on an average basis over any calendar quarter, American may terminate the agreement upon 60 days' notice. The Company estimates that its costs for such services during 1996 will be approximately $32 million. The Corporate Travel Agreement will expire on June 30, 1998. The parties have agreed to apply the financial terms of the Travel Privileges Agreement and the Corporate Travel Agreement as of January 1, 1996. CREDIT AGREEMENT In order to allow AMR to manage efficiently the cash needs of its subsidiaries, the Company, AMR and American are parties to the Credit Agreement pursuant to which the Company is required to borrow from American, and American is required to lend to the Company, any amount required by the Company to fund its daily cash requirements. In addition, American may, but is not required to, borrow from the Company to fund its daily cash requirements, and the Company is required, with minor exceptions, to lend to American if the Company has excess cash available. The maximum amount that the Company may borrow at any time from American under the Credit Agreement is $300 million. The maximum amount that American may borrow at any time from the Company under the Credit Agreement is $100 million. If the Company's credit rating is better than "B" on the Standard & Poor's Ratings Service scale (or an equivalent thereof) or American has excess cash to lend to the Company, the interest rate to be charged to the Company will be the sum of (a) the higher of (i) American's average rate of return on short-term investments for the month in which borrowings occurred or (ii) the actual rate of interest paid by American to borrow funds to make a loan to the Company under the Credit Agreement, plus (b) an additional spread based upon the Company's credit risk. If the Company's credit rating is "B" or below on the Standard & Poor's Ratings Service scale (or an equivalent thereof) and American does not have excess cash to lend to the Company, the interest rate to be charged to the Company will be the lower of (a) the sum of 67 69 (i) the borrowing cost incurred by American to draw on its revolving credit facility to make the advance plus (ii) an additional spread based on the Company's credit risk or (b) the sum of (i) the cost at which the Company could borrow funds from an independent party plus (ii) one half of the margin American pays to borrow under its revolving credit facility. The Company believes that the interest rate it will be charged by American could, at times, be slightly above the rate at which the Company could borrow externally; however, no standby fees for the Credit Agreement will be required to be paid by either party. The interest rate to be charged to American will be the Company's average investment rate for the months in which borrowing occurred plus an additional spread based upon American's credit risk. On any business day that either party has excess cash available, it must use that cash to repay any outstanding loans it has under the Credit Agreement. Loans under the Credit Agreement are not intended as long-term financing. At the end of each quarter, regardless of whether it has excess cash available, American must pay all amounts owing under the Credit Agreement to the Company. The Credit Agreement will terminate on June 30, 1999, unless earlier terminated at the election of one of the parties upon the occurrence of certain events, including the termination of the Management Services Agreement or the cessation of AMR's beneficial ownership of 50% or more of the capital stock of either the Company or American. The Company has certain rights of offset against the $850 million Debenture and other debt owed by the Company to American and AMR if American fails to make quarterly and final payments when due under the Credit Agreement. OTHER AGREEMENTS In addition to the agreements set forth above, the Company and AMR are parties to a Registration Rights Agreement described under "Shares Eligible for Future Sale." Additionally, the Company and American are parties to a Participating Carrier Agreement pursuant to which American participates as an associate in SABRE. This Participating Carrier Agreement with American is in substantially the same form as each other Participating Carrier Agreement to which the Company is a party. The Company and American are also parties to a Software Marketing Agreement pursuant to which the Company may not sell or license specified applications to certain competitors of American. The Company also has, or expects to enter into, other agreements with American or other AMR affiliates, pursuant to which the Company does not expect to receive or pay material amounts. DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 250,000,000 shares of Class A Common Stock, 107,374,000 shares of Class B Common Stock and 20,000,000 shares of Preferred Stock. None of the Class A Common Stock or Preferred Stock is outstanding as of the date hereof. Of the 250,000,000 shares of Class A Common Stock authorized, 20,200,000 are being offered in the Offerings (23,230,000 shares if the Underwriters' over-allotment options are exercised in full), 107,374,000 shares will be reserved for issuance upon conversion of Class B Common Stock into Class A Common Stock and 13,000,000 shares have been reserved for issuance pursuant to certain employee benefits plans. See "Management -- Compensation of Directors" and "Management -- Executive Compensation -- The Company's Long-Term Incentive Plan." Of the 107,374,000 shares of Class B Common Stock authorized, 107,374,000 will be outstanding and held by AMR upon consummation of the Offerings. The following summary description of the capital stock of the Company is qualified by reference to the Certificate of Incorporation and Bylaws of the Company, copies of which are filed as exhibits to the Registration Statement. COMMON STOCK VOTING RIGHTS The holders of Class A Common Stock and Class B Common Stock generally have identical rights except that holders of Class A Common Stock are entitled to one vote per share while holders of Class B Common Stock are entitled to 10 votes per share on all matters to be voted on by 68 70 stockholders. Holders of shares of Class A Common Stock and Class B Common Stock are not entitled to cumulate their votes in the election of directors. Generally, all matters to be voted on by stockholders must be approved by a majority (or, in the case of election of directors, by a plurality) of the votes entitled to be cast by all shares of Class A Common Stock and Class B Common Stock present in person or represented by proxy, voting together as a single class, subject to any voting rights granted to holders of any Preferred Stock. Except as otherwise provided by law, and subject to any voting rights granted to holders of any outstanding Preferred Stock, amendments to the Company's Certificate of Incorporation generally must be approved by a majority of the combined voting power of all Class A Common Stock and Class B Common Stock voting together as a single class. However, amendments to the Company's Certificate of Incorporation that would alter or change the powers, preferences or special rights of the Class A Common Stock or the Class B Common Stock so as to affect them adversely also must be approved by a majority of the votes entitled to be cast by the holders of the shares affected by the amendment, voting as a separate class. Notwithstanding the foregoing, any amendment to the Company's Certificate of Incorporation to increase the authorized shares of any class or authorize the creation, authorization or issuance of any securities convertible into, or warrants or options to acquire, shares of any such class or classes of stock shall be approved by the affirmative vote of the holders of a majority of the Common Stock, voting together as a single class. Effective as of the first time at which AMR shall cease to be the beneficial owner of an aggregate of at least a majority of the voting power of the Voting Stock (as defined herein) of the Company then outstanding (the "Trigger Date"), amendments to certain provisions of the Certificate of Incorporation will require the approval of 80% of the combined voting power of all Class A Common Stock and Class B Common Stock, voting together as a single class. DIVIDENDS Holders of Class A Common Stock and Class B Common Stock will share in an equal amount per share in any dividend declared by the Board of Directors, subject to any preferential rights of any outstanding Preferred Stock. Dividends consisting of shares of Class A Common Stock and Class B Common Stock may be paid only as follows: (i) shares of Class A Common Stock may be paid only to holders of Class A Common Stock and shares of Class B Common Stock may be paid only to holders of Class B Common Stock and (ii) shares shall be paid proportionally with respect to each outstanding share of Class A Common Stock and Class B Common Stock. CONVERSION Each share of Class B Common Stock is convertible while held by AMR or any of its subsidiaries at such holder's option into one share of Class A Common Stock. Following the occurrence of a Tax-Free Spin-Off (as hereinafter defined), if any, shares of Class B Common Stock shall not be convertible into shares of Class A Common Stock at the option of the holder thereof. Except as provided below, any shares of Class B Common Stock transferred to a person other than AMR or any of its subsidiaries or the Class B Transferee (as defined below) shall automatically convert to shares of Class A Common Stock upon such disposition. Shares of Class B Common Stock representing more than a 50% economic interest in the Company transferred by AMR or any of its subsidiaries in a single transaction to one unrelated person (the "Class B Transferee") or any subsidiary of the Class B Transferee shall not automatically convert to shares of Class A Common Stock upon such disposition. Any shares of Class B Common Stock retained by AMR or its subsidiaries following any such transfer of shares of Class B Common Stock to the Class B Transferee shall automatically convert into shares of Class A Common Stock upon such transfer. Shares of Class B Common Stock transferred to stockholders of AMR or stockholders of the Class B Transferee in a transaction intended to be on a tax-free basis (a "Tax-Free Spin-Off") under the Code shall not convert to shares of Class A Common Stock upon the occurrence of such Tax-Free Spin-Off. 69 71 Following a Tax-Free Spin-Off, shares of Class B Common Stock shall be transferred as Class B Common Stock, subject to applicable laws; provided, however, that shares of Class B Common Stock shall automatically convert into shares of Class A Common Stock on the fifth anniversary of the Tax-Free Spin-Off, unless prior to such Tax-Free Spin-Off, AMR, or the Class B Transferee, as the case may be, delivers to the Company an opinion of counsel reasonably satisfactory to the Company to the effect that such conversion could adversely affect the ability of AMR, or the Class B Transferee, as the case may be, to obtain a favorable ruling from the Internal Revenue Service that the transfer would be a Tax-Free Spin-Off. If such an opinion is received, approval of such conversion shall be submitted to a vote of the holders of the Common Stock as soon as practicable after the fifth anniversary of the Tax-Free Spin-Off, unless AMR or the Class B Transferee, as the case may be, delivers to the Company an opinion of counsel reasonably satisfactory to the Company prior to such anniversary that such vote could adversely affect the status of the Tax-Free Spin-Off, including the ability to obtain a favorable ruling from the Internal Revenue Service; if such opinion is so delivered, such vote shall not be held. Approval of such conversion will require the affirmative vote of the holders of a majority of the shares of both Class A Common Stock and Class B Common Stock present and voting, voting together as a single class, with each share entitled to one vote for such purpose. No assurance can be given that such conversion would be consummated. The requirement to submit such conversion to a vote of the holders of the Common Stock is intended to ensure that tax-free treatment of the Tax-Free Spin-Off is preserved should the Internal Revenue Service challenge such automatic conversion as violating the 80% vote requirement currently required by the Code for a tax-free spin-off. OTHER RIGHTS On liquidation, dissolution or winding up of the Company, after payment in full of the amounts required to be paid to holders of Preferred Stock, if any, all holders of Common Stock, regardless of class, are entitled to share ratably in any assets available for distribution to holders of shares of Common Stock. No shares of either class of Common Stock are subject to redemption or have preemptive rights to purchase additional shares of Common Stock. Upon consummation of the Offerings, all the outstanding shares of Class A Common Stock and Class B Common Stock will be legally issued, fully paid and nonassessable. PREFERRED STOCK As of the date of this Prospectus, no shares of Preferred Stock are outstanding. The Board of Directors may authorize the issuance of Preferred Stock in one or more series and may determine, with respect to any such series, the designations, powers, preferences and rights of such series, and the qualifications, limitations and restrictions thereof, including (i) the designation of the series; (ii) the number of shares of the series, which number the Board of Directors may thereafter (except where otherwise provided in the designations for such series) increase or decrease (but not below the number of shares of such series then outstanding); (iii) whether dividends, if any, will be cumulative or noncumulative and the dividend rate of the series; (iv) the conditions upon which and the dates at which dividends, if any, will be payable, and the relation which such dividends, if any, shall bear to the dividends payable on any other class or classes of stock; (v) the redemption rights and price or prices, if any, for shares of the series; (vi) the terms and amounts of any sinking fund provided for the purchase or redemption of shares of the series; (vii) the amounts payable on and the preferences, if any, of shares of the series, in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company; (viii) whether the shares of the series will be convertible into shares of any other class or series, or any other security, of the Company or any other corporation, and, if so, the specification of such other class or series or such other security, the conversion price or prices or rate or rates, any adjustments thereof, the date or dates as of which such shares shall be convertible and all other terms and conditions upon which 70 72 such conversion may be made; (ix) restrictions on the issuance of shares of the same series or of any other class or series; and (x) the voting rights, if any, of the holders of shares of such series. The Company believes that the ability of the Board of Directors to issue one or more series of Preferred Stock will provide the Company with flexibility in structuring possible future financings and acquisitions and in meeting other corporate needs that might arise. The authorized shares of Preferred Stock will be available for issuance without further action by the Company's stockholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which the Company's securities may be listed or traded. The NYSE currently requires stockholder approval as a prerequisite to listing shares in several instances, including where the present or potential issuance of shares could result in an increase in the number of shares of common stock outstanding, or in the amount of voting securities outstanding, of at least 20%. Although the Board of Directors has no intention at the present time of doing so, it could issue a series of Preferred Stock that could, depending on the terms of such series, impede the completion of a merger, tender offer or other takeover attempt. The Board of Directors will make any determination to issue such shares based on its judgment as to the best interests of the Company and its stockholders. The Board of Directors, in so acting, could issue Preferred Stock having terms that could discourage a potential acquiror from making, without first negotiating with the Board of Directors, an acquisition attempt through which such acquiror may be able to change the composition of the Board of Directors, including a tender offer or other transaction that some, or a majority, of the Company's stockholders might believe to be in their best interests or in which stockholders might receive a premium for their stock over the then current market price of such stock. BUSINESS COMBINATION STATUTE As a corporation organized under the laws of the State of Delaware, the Company will be subject to Section 203 of the DGCL, which restricts certain business combinations between the Company and an "interested stockholder" (in general, a stockholder owning 15% or more of the Company's outstanding voting stock) or its affiliates or associates for a period of three years following the time that the stockholder becomes an "interested stockholder." The restrictions do not apply if (i) prior to an interested stockholder becoming such, the Board of Directors approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder, (ii) upon consummation of the transaction which resulted in any person becoming an interested stockholder, such interested stockholder owns at least 85% of the voting stock of the Company outstanding at the time the transaction commenced (excluding shares owned by certain employee stock ownership plans and persons who are both directors and officers of the Company) or (iii) at or subsequent to the time an interested stockholder becomes such, the business combination is both approved by the Board of Directors and authorized at an annual or special meeting of the Company's stockholders, not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock not owned by the interested stockholder. Because AMR became an interested stockholder at a time when the restrictions did not apply, the restrictions will not apply to any business combination with AMR. Under certain circumstances, Section 203 of the DGCL makes it more difficult for a person who would be an "interested stockholder" to effect various business combinations with a corporation for a three-year period, although the stockholders may elect to exclude a corporation from the restrictions imposed thereunder. The Certificate of Incorporation of the Company does not exclude the Company from the restrictions imposed under Section 203 of the DGCL. It is anticipated that the provisions of Section 203 of the DGCL may encourage companies interested in acquiring the Company to negotiate in advance with the Board of Directors, since the stockholder approval requirement would be avoided if a majority of the directors then in office approves, prior to the date on which a stockholder becomes an interested stockholder, either the business combination or the transaction which results in the stockholder becoming an interested stockholder. 71 73 CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS The summary set forth below describes certain provisions of the Certificate of Incorporation and Bylaws. The summary is qualified in its entirety by reference to the provisions of the Certificate of Incorporation and Bylaws, copies of which have been filed as exhibits to the Registration Statement of which this Prospectus forms a part. Certain of the provisions of the Certificate of Incorporation and Bylaws discussed below may have the effect, either alone or in combination with the provisions of Section 203 discussed above, of making more difficult or discouraging a tender offer, proxy contest or other takeover attempt that is opposed by the Board of Directors but that a stockholder might consider to be in such stockholder's best interest. Those provisions include (i) restrictions on the rights of stockholders to remove directors, (ii) prohibitions against stockholders calling a special meeting of stockholders or acting by unanimous written consent in lieu of a meeting and (iii) requirements for advance notice of actions proposed by stockholders for consideration at meetings of the stockholders. In addition, the Certificate of Incorporation contains provisions relating to the allocation of certain corporate opportunities and resolution of certain potential conflicts of interest. See "-- Corporate Opportunity and Conflict of Interest Policies." CLASSIFIED BOARD OF DIRECTORS; REMOVAL; NUMBER OF DIRECTORS; FILLING VACANCIES The Certificate of Incorporation and Bylaws of the Company provide that the Board of Directors -- except for directors who may be elected by the holders of Preferred Stock or any other series or class of stock -- will be divided into three classes of directors, with the classes to be as nearly equal in number as possible. One class is to be originally elected for a term expiring at the annual meeting of stockholders to be held in 1997, another class is to be originally elected for a term expiring at the annual meeting of stockholders to be held in 1998 and another class is to be originally elected for a term expiring at the annual meeting of stockholders to be held in 1999. Each director is to hold office until his or her successor is duly elected and qualified. Commencing with the 1997 annual meeting of stockholders, directors elected to succeed directors whose terms then expire will be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election, with each director to hold office until such person's successor is duly elected and qualified. The Bylaws provide that, subject to any rights of holders of Preferred Stock or any other series or class of stock to elect directors under specified circumstances, the number of directors will be fixed from time to time exclusively pursuant to a resolution adopted by directors constituting a majority of the total number of directors that the Company would have if there were no vacancies on the Board of Directors (the "Whole Board"), with the Whole Board consisting of not more than twelve nor less than three directors. The Bylaws also provide that, subject to any rights of holders of Preferred Stock or any other series or class of stock, and unless the Board of Directors otherwise determines, any vacancies will be filled only by the affirmative vote of a majority of the remaining directors, even if less than a quorum. Accordingly, absent an amendment to the Bylaws, the Board of Directors could prevent any stockholder from enlarging the Board of Directors and filling the new directorships with such stockholder's own nominees. The Certificate of Incorporation and Bylaws of the Company provide that, subject to the rights of holders of Preferred Stock or any other series or class of stock to elect directors under specified circumstances, effective as of the Trigger Date, directors may be removed only for cause and only upon the affirmative vote of holders of at least 80% of the voting power of all the then outstanding shares of stock entitled to vote generally in the election of directors ("Voting Stock"), voting together as a single class; provided however, that prior to the Trigger Date, directors may be removed, without cause, with the affirmative vote of the holders of at least a majority of the voting power of the then outstanding Voting Stock, voting together as a class. 72 74 The classification of directors will have the effect of making it more difficult for stockholders to change the composition of the Board of Directors. At least two annual meetings of stockholders, instead of one, will generally be required to effect a change in a majority of the Board of Directors. Such a delay may help ensure that the Company's directors, if confronted by a holder attempting to force a proxy contest, a tender or exchange offer, or an extraordinary corporate transaction, would have sufficient time to review the proposal as well as any available alternatives to the proposal and to act in what they believe to be the best interest of the stockholders. The classification provisions will apply to every election of directors, however, regardless of whether a change in the composition of the Board of Directors would be beneficial to the Company and its stockholders and whether or not a majority of the Company's stockholders believe that such a change would be desirable. The classification provisions could also have the effect of discouraging a third party from initiating a proxy contest, making a tender offer or otherwise attempting to obtain control of the Company, even though such an attempt might be beneficial to the Company and its stockholders. The classification of the Board of Directors could thus increase the likelihood that incumbent directors will retain their positions. In addition, because the classification provisions may discourage accumulations of large blocks of the Company's stock by purchasers whose objective is to take control of the Company and remove a majority of the Board of Directors, the classification of the Board of Directors could tend to reduce the likelihood of fluctuations in the market price of the Common Stock that might result from accumulations of large blocks. Accordingly, stockholders could be deprived of certain opportunities to sell their shares of Common Stock at a higher market price than might otherwise be the case. NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS The Certificate of Incorporation and Bylaws of the Company provide that, effective as of the Trigger Date, and subject to the rights of any holders of Preferred Stock or any other series or class of stock to elect additional directors under specified circumstances, stockholder action can be taken only at an annual or special meeting of stockholders and stockholder action may not be taken by written consent in lieu of a meeting. The Bylaws provide that, subject to the rights of holders of any series of Preferred Stock to elect additional directors under specified circumstances, special meetings of stockholders can be called only by the Board of Directors pursuant to a resolution adopted by a majority of the Whole Board or the Chairman of the Board; provided that, prior to the Trigger Date, special meetings can also be called at the request of the holders of a majority of the voting power of the then outstanding Voting Stock. Effective as of the Trigger Date, stockholders are not permitted to call a special meeting or to require that the Board of Directors call a special meeting of stockholders. Moreover, the business permitted to be conducted at any special meeting of stockholders is limited to the business brought before the meeting pursuant to the notice of meeting given by the Company. The provisions of the Certificate of Incorporation and Bylaws of the Company prohibiting stockholder action by written consent and permitting special meetings to be called only by the Chairman or at the request of a majority of the Whole Board may have the effect, as of the Trigger Date, of delaying consideration of a stockholder proposal until the next annual meeting. The provisions would also prevent the holders of a majority of the voting power of the Voting Stock from unilaterally using the written consent procedure to take stockholder action. Moreover, a stockholder could not force stockholder consideration of a proposal over the opposition of the Chairman or a majority of the Whole Board by calling a special meeting of stockholders prior to the time such parties believe such consideration to be appropriate. ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND STOCKHOLDER PROPOSALS The Company's Bylaws establish an advance notice procedure for stockholders to make nominations of candidates for election as directors or bring other business before an annual meeting of stockholders of the Company (the "Stockholder Notice Procedure"). 73 75 The Stockholder Notice Procedure provides that only persons who are nominated by, or at the direction of, the Board of Directors, or by a stockholder who has given timely written notice containing specified information to the Secretary of the Company prior to the meeting at which directors are to be elected, will be eligible for election as directors of the Company. The Stockholder Notice Procedure also provides that at an annual meeting only such business may be conducted as has been brought before the meeting by, or at the direction of, the Chairman or the Board of Directors or by a stockholder who has given timely written notice containing specified information to the Secretary of the Company of such stockholder's intention to bring such business before such meeting. Under the Stockholder Notice Procedure, for notice of stockholder nominations or proposals to be made at an annual meeting to be timely, such notice must be received by the Company not less than 90 days nor more than 120 days prior to the first anniversary of the previous year's annual meeting (or, in the event that the date of the annual meeting is advanced by more than 20 days or delayed by more than 70 days from such anniversary date, not earlier than the 120th day prior to such meeting and not later than the later of (x) the 90th day prior to such meeting and (y) the 10th day after public announcement of the date of such meeting is first made). Notwithstanding the foregoing, in the event that the number of directors to be elected is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Company at least 100 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice will be timely, but only with respect to nominees for any new positions created by such increase, if it is received by the Company not later than the 10th day after such public announcement is first made by the Company. Under the Stockholder Notice Procedure, for notice of a stockholder nomination to be made at a special meeting at which directors are to be elected to be timely, such notice must be received by the Company not earlier than the 120th day before such meeting and not later than the later of (x) the 90th day prior to such meeting and (y) the 10th day after public announcement of the date of such meeting is first made. If the Chairman of the Board or other officer presiding at a meeting determines at or prior to the meeting that a person was not nominated or other business was not brought before the meeting in accordance with the Stockholder Notice Procedure, such person will not be eligible for election as a director, or such business will not be conducted at such meeting, as the case may be. By requiring advance notice of nominations by stockholders, the Stockholder Notice Procedure will afford the Board of Directors an opportunity to consider the qualifications of the proposed nominees and, to the extent deemed necessary or desirable by the Board of Directors, to inform stockholders about such qualifications. By requiring advance notice of other proposed business, the Stockholder Notice Procedure will also provide a more orderly procedure for conducting annual meetings of stockholders and, to the extent deemed necessary or desirable by the Board of Directors, will provide the Board of Directors with an opportunity to inform stockholders, prior to such meetings, of any business proposed to be conducted at such meetings, together with any recommendations as to the Board of Directors' position regarding action to be taken with respect to such business, so that stockholders can better decide whether to attend such a meeting or to grant a proxy regarding the disposition of any such business. Although the Bylaws do not give the Board of Directors any power to approve or disapprove stockholder nominations for the election of directors or proposals for action, they may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals if the proper procedures are not followed, and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal, without regard to whether consideration of such nominees or proposals might be harmful or beneficial to the Company and its stockholders. The Stockholder Notice Procedure does not apply to AMR and its affiliates prior to the Trigger Date. 74 76 AMENDMENTS The Certificate of Incorporation and Bylaws require that, effective as of the Trigger Date, any amendment to the provisions of the Bylaws or to certain provisions of the Certificate of Incorporation, including those provisions discussed above, must be approved by the holders of at least 80% of the Voting Stock. This requirement, as of the Trigger Date, will prevent a stockholder with only a majority of the Common Stock from avoiding the requirements of the provisions discussed above by amending or repealing such provisions. The Certificate of Incorporation further provides that the Bylaws may be amended by the Company's Board of Directors. LIABILITY OF DIRECTORS; INDEMNIFICATION The Certificate of Incorporation provides that a director will not be personally liable for monetary damages to the Company or its stockholders for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for paying a dividend or approving a stock repurchase in violation of Section 174 of the DGCL or (iv) for any transaction from which the director derived an improper personal benefit. Any amendment or repeal of such provision shall not adversely affect any right or protection of a director existing under such provision for any act or omission occurring prior to such amendment or repeal. The Bylaws provide that the Company will indemnify any person who was or is a party to any threatened, pending or completed action, suit or proceeding because he or she is or was a director or officer of the Company, or is or was serving at the request of the Company as a director or officer of another corporation, partnership or other enterprise. The Bylaws provide that this indemnification will be from and against expenses, judgments, fines and amounts paid in settlement by the indemnitee. However, this indemnification will only be provided if the indemnitee acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Company. CORPORATE OPPORTUNITY AND CONFLICT OF INTEREST POLICIES In order to address certain potential conflicts of interest between the Company and AMR, the Certificate of Incorporation contains provisions concerning the conduct of certain affairs of the Company as they may involve AMR and its subsidiaries (other than the Company and its subsidiaries) and their respective officers and directors, and the powers, rights, duties and liabilities of the Company and its subsidiaries and their respective officers, directors and stockholders in connection therewith. In general, these provisions recognize that the Company and AMR and their respective subsidiaries may engage in the same or similar business activities and lines of business and have an interest in the same areas of corporate opportunities and that the Company and AMR and their subsidiaries will continue to have contractual and business relations with each other (including service of officers and directors of AMR as directors of the Company). See "Management -- Directors and Executive Officers." For purposes of these provisions, the terms "Company" and "AMR" include their subsidiaries and other entities in which they respectively beneficially own, directly or indirectly, 50 percent or more of the outstanding voting securities or interests (except that "AMR" does not include the Company and its subsidiaries and such other entities), and, in the case of AMR, all successors to AMR by way of merger, consolidation or sale of all or substantially all its assets. The Certificate of Incorporation provides that any person purchasing or otherwise acquiring any interest in any shares of capital stock of the Company shall be deemed to have notice of and to have consented to these provisions. CORPORATE OPPORTUNITY POLICY. The Certificate of Incorporation provides that, except as AMR may otherwise agree in writing, AMR will have the right (i) to engage in the same or similar business 75 77 activities or lines of business as the Company, (ii) to do business with any potential or actual client, customer or supplier of the Company and (iii) to employ or engage any officer or employee of the Company. Neither AMR nor any officer or director thereof will be liable to the Company or its stockholders for breach of any fiduciary duty by reason of these activities. If AMR acquires knowledge of a potential transaction or matter that may be a corporate opportunity for both AMR and the Company, AMR will have no duty to communicate that opportunity to the Company. Furthermore, AMR will not be liable to the Company or its stockholders because AMR pursues or acquires that corporate opportunity for itself, directs that corporate opportunity to another person or entity or does not present that corporate opportunity to the Company. If a director or officer of the Company who is also a director or officer of AMR acquires knowledge of a potential transaction or matter that may be a corporate opportunity for both the Company and AMR, the Certificate of Incorporation requires that the director or officer of the Company act in good faith in accordance with the following three-part policy, and a director or officer so acting is deemed to have acted reasonably and in good faith and fully to have satisfied his or her duties of loyalty and fiduciary duties to the Company and its stockholders with respect to such opportunity. First, a corporate opportunity offered to any person who is a director but not an officer of the Company and who is also an officer (whether or not a director) of AMR will belong to AMR, unless the opportunity is expressly offered to that person primarily in his or her capacity as a director of the Company, in which case the opportunity will belong to the Company. Second, a corporate opportunity offered to any person who is an officer (whether or not a director) of the Company and who is also a director but not an officer of AMR will belong to the Company, unless the opportunity is expressly offered to that person primarily in his or her capacity as a director of AMR, in which case the opportunity will belong to AMR. Third, a corporate opportunity offered to any other person who is either an officer of both the Company and AMR or a director of both the Company and AMR will belong to AMR or to the Company, as the case may be, if the opportunity is expressly offered to the person primarily in his or her capacity as an officer or director of AMR or of the Company, respectively. Otherwise, the opportunity will belong to AMR. Under the Certificate of Incorporation, any corporate opportunity that belongs to AMR or to the Company pursuant to the foregoing policy will not be pursued by the other (or directed by the other to another person or entity) unless and until AMR or the Company, as the case may be, determines not to pursue the opportunity. If the party to whom the corporate opportunity belongs does not, however, within a reasonable period of time, begin to pursue, or thereafter continue to pursue, such opportunity diligently and in good faith, the other party may pursue such opportunity (or direct it to another person or entity). A director or officer of the Company who acts in accordance with the foregoing three-part policy: (i) will be deemed fully to have satisfied his or her fiduciary duties to the Company and its stockholders with respect to such corporate opportunity; (ii) will not be liable to the Company or its stockholders for any breach of fiduciary duty by reason of the fact that AMR pursues or acquires such opportunity for itself or directs such corporate opportunity to another person or does not communicate information regarding such opportunity to the Company; (iii) will be deemed to have acted in good faith and in a manner he or she reasonably believes to be in the best interests of the Company; and (iv) will be deemed not to have breached his or her duty of loyalty to the Company or its stockholders and not to have derived an improper benefit therefrom. Under the Certificate of Incorporation, "corporate opportunities" potentially allocable to the Company consist of business opportunities which (i) the Company is financially able to undertake; (ii) are, from their nature, in the Company's line or lines of business and are of practical advantage to the Company; and (iii) are ones in which the Company has an interest or reasonable expectancy. 76 78 In addition, "corporate opportunities" do not include transactions in which the Company or AMR is permitted to participate pursuant to any agreement between the Corporation and AMR that is in effect as of the time any equity security of the Company is held of record by any person other than AMR or subsequently entered into with the approval of the Disinterested Directors. For purposes of these corporate opportunity provisions, a director of the Company who is chairman of the Board of Directors (or a committee thereof) or chief executive officer will not be deemed to be an officer of the Company by reason of holding such position, unless such person is a full-time employee of the Company. CONFLICT OF INTERESTS POLICY. The Certificate of Incorporation provides that no contract, agreement, arrangement or transaction between the Company and AMR or any customer or supplier or any entity in which a director of the Company has a financial interest (a "Related Entity"), or between the Company and one or more of the directors or officers of the Company, AMR or any Related Entity, or any amendment, modification or termination thereof, will be voidable solely because AMR or such customer or supplier, any Related Entity, or any one or more of the officers or directors of the Company, AMR or any Related Entity are parties thereto, or solely because any such directors or officers are present at or participate in the meeting of the Board of Directors or committee thereof which authorizes the contract, agreement, arrangement, transaction, amendment, modification or termination (each, a "Transaction") or solely because their votes are counted for such purpose, if a specified standard is satisfied. That standard will be satisfied, and AMR, the Related Entity and the directors and officers of the Company, AMR or the Related Entity (as applicable) will be deemed to have acted reasonably and in good faith (to the extent such standard is applicable to such person's conduct) and fully to have satisfied any duties of loyalty and fiduciary duties they may have to the Company and its stockholders with respect to such transaction if any of the following four requirements are met: (i) the material facts as to the Transaction are disclosed or known to the Board of Directors or the committee thereof that authorizes the Transaction, and the Board of Directors or such committee in good faith approves the Transaction by a majority of the Disinterested Directors on the Board of Directors or such committee, even if the Disinterested Directors are less than a quorum; (ii) the material facts as to the Transaction are disclosed or known to the holders of Voting Stock entitled to vote thereon, and the Transaction is specifically approved by vote of the holders of a majority of the then outstanding Voting Stock not owned by AMR or such Related Entity, voting together as a single class; (iii) the Transaction is effected pursuant to guidelines which are in good faith approved by a majority of the Disinterested Directors on the Board of Directors or the applicable committee thereof or by vote of the holders of a majority of the then outstanding Voting Stock not owned by AMR or such Related Entity, voting together as a single class; or (iv) the Transaction is fair to the Company as of the time it is approved by the Board of Directors, a committee thereof or the stockholders of the Company. The Certificate of Incorporation also provides that any such Transaction authorized, approved or effected, and each of such guidelines so authorized or approved, as described in (i), (ii) or (iii) above, shall be deemed to be entirely fair to the Company and its stockholders; provided that, if such authorization or approval is not obtained, or such Transaction is not so effected, no presumption shall arise that such Transaction or guideline is not fair to the Company and its stockholders. In addition, the Certificate of Incorporation provides that AMR shall not be liable to the Company or its stockholders for breach of any fiduciary duty that AMR may have by reason of the fact that AMR takes any action in connection with any transaction between AMR and the Company. 77 79 Effective as of the Trigger Date, the affirmative vote of the holders of more than 80 percent of the outstanding Voting Stock, voting together as a single class, will be required to alter, amend or repeal any of these conflict of interest or corporate opportunity provisions in a manner adverse to the interests of AMR. RIGHTS TO PURCHASE SECURITIES AND OTHER PROPERTY The Certificate of Incorporation authorizes the Board of Directors to create and issue rights entitling the holders thereof to purchase from the Company shares of capital stock or other securities or property. The times at which and terms upon which such rights are to be issued would be determined by the Board of Directors and set forth in the contracts or instruments that evidence such rights. The authority of the Board of Directors with respect to such rights includes, but is not limited to, determination of (i) the purchase price of the capital stock to be purchased upon exercise of such rights; (ii) provisions relating to the times at which and the circumstances under which such rights may be exercised or sold or otherwise transferred, either together with or separately from, any other stock or other securities of the Company; (iii) provisions which adjust the number or exercise price of such rights or amount or nature of the stock receivable upon exercise of such rights in the event of a combination, split or recapitalization of any stock of the Company, a change in ownership of the Company's stock or other securities or a reorganization, merger, consolidation, sale of assets or other occurrence relating to the Company or any stock of the Company, and provisions restricting the ability of the Company to enter into any such transaction absent an assumption by the other party or parties thereto of the obligations of the Company under such rights; (iv) provisions which deny the holder of a specified percentage of the outstanding securities of the Company the right to exercise such rights and cause such rights held by such holder to become void; (v) provisions which permit the Company to redeem or exchange such rights; and (vi) the appointment of the rights agent with respect to such rights. This provision is intended to confirm the authority of the Board of Directors to issue such share purchase rights or other rights to purchase stock or securities of the Company or any other corporation. LISTING The Class A Common Stock has been approved for listing on the New York Stock Exchange under the symbol "TSG," subject to official notice of issuance. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is First Chicago Trust Company of New York. SHARES ELIGIBLE FOR FUTURE SALE Prior to the Offerings, there has been no market for the Common Stock of the Company. Future sales of substantial amounts of Common Stock in the public market could adversely affect prevailing market prices. Upon completion of the Offerings, the Company will have 20,200,000 shares of Class A Common Stock issued and outstanding (23,230,000 if the Underwriters' over-allotment options are exercised in full) and 107,374,000 shares of Class B Common Stock issued and outstanding. All of the shares of Class A Common Stock to be sold in the Offerings will be freely tradable without restrictions or further registration under the Securities Act, except that shares purchased by an "affiliate" of the Company (as that term is defined in Rule 144) will be subject to the resale limitations of Rule 144. All of the outstanding shares of Class B Common Stock are owned by AMR and have not been registered under the Securities Act and may not be sold in the absence of an effective registration statement under the Securities Act other than in accordance with Rule 144 or 78 80 another exemption from registration ("Restricted Shares"). Restricted Shares will become eligible for resale in the public market at various dates in the future. The Restricted Shares will constitute "restricted securities" within the meaning of Rule 144 promulgated under the Securities Act and will be eligible for sale in the open market after the Offerings subject to the contractual lockup provisions and applicable requirements of Rule 144 described below. In addition, for as long as AMR is able to cause a majority of the Company's Board of Directors to be elected, it will be able to cause the Company at any time to register under the Securities Act all or a portion of the Common Stock owned by it, in which event such shares could be sold publicly upon the effectiveness of any such registration without restriction. AMR may also, at any time following the contractual lockup provisions described below, sell any or all of the Class B Common Stock in a private placement without regard to the Rule 144 restrictions described below. In general, under Rule 144 as currently in effect, if a period of at least two years has elapsed between the later of the date on which "restricted shares" (as that phrase is defined in Rule 144) were acquired from the Company and the date on which they were acquired from an "affiliate" of the Company (an "Affiliate", as that term is defined in Rule 144), then the holder of such restricted shares (including an Affiliate) is entitled to sell a number of shares within any three-month period that does not exceed the greater of (i) one percent of the then outstanding shares of the Common Stock or (ii) the average weekly reported volume of trading of the Common Stock during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain requirements pertaining to the manner of such sales, notices of such sales and the availability of current public information concerning the Company. Affiliates may sell shares not constituting restricted shares in accordance with the foregoing volume limitations and other requirements but without regard to the two-year period. Under Rule 144(k), if a period of at least three years has elapsed between the later of the date on which restricted shares were acquired from the Company and the date on which they were acquired from an Affiliate, a holder of such restricted shares who is not an Affiliate at the time of the sale and has not been an Affiliate for at least three months prior to the sale would be entitled to sell the shares immediately without regard to the volume limitations and other conditions described above. The foregoing description of Rule 144 is not intended to be a complete description thereof. Sales of significant amounts of the Common Stock, or the perception that such sales could occur, could have an adverse impact on the market price of the Class A Common Stock. The Company has agreed that during the period beginning on the date of this Prospectus and continuing to and including the date 180 days after the date of this Prospectus, it will not offer, sell, contract to sell or otherwise dispose of any shares of Class A Common Stock, any securities of the Company that are substantially similar to the shares of the Class A Common Stock or that are convertible or exchangeable into Class A Common Stock or securities that are substantially similar to the shares of the Class A Common Stock (other than pursuant to employee stock option plans existing, or on conversion or exchange of convertible or exchangeable securities outstanding, on the date of this Prospectus) without the prior written consent of Goldman, Sachs & Co., on behalf of the U.S. Underwriters, except for the shares of Class A Common Stock offered in connection with the Offerings. AMR has agreed that during the period beginning on the date of this Prospectus and continuing to and including the date 180 days after the date of this Prospectus, it will not offer, sell, contract to sell or otherwise dispose of any shares of Class A Common Stock, any securities of the Company that are substantially similar to the shares of Class A Common Stock, or that are convertible or exchangeable into Class A Common Stock or securities that are substantially similar to the shares of Class A Common Stock without the prior written consent of Goldman, Sachs & Co., on behalf of the U.S. Underwriters. See "Underwriting." 79 81 The Company and AMR are also parties to the Registration Rights Agreement pursuant to which AMR may demand registration under the Securities Act of shares of the Company's capital stock held by it at any time subject to its agreement not to sell any shares prior to the expiration of 180 days from the date of this Prospectus. The Company may postpone such a demand under certain circumstances. In addition, AMR may request the Company to include shares of the Company's capital stock held by it in any registration proposed by the Company of such capital stock under the Securities Act. 80 82 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Company has agreed to sell to each of the U.S. Underwriters named below, and each of such U.S. Underwriters, for whom Goldman, Sachs & Co., J.P. Morgan Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Salomon Brothers Inc are acting as representatives, has severally agreed to purchase from the Company, the respective number of shares of Class A Common Stock set forth opposite its name below:
NUMBER OF SHARES OF CLASS A UNDERWRITER COMMON STOCK ------------------------------------------------------------ ---------------- Goldman, Sachs & Co. ....................................... Merrill Lynch, Pierce, Fenner & Smith Incorporated................................... J.P. Morgan Securities Inc. ................................ Salomon Brothers Inc ....................................... ---------- Total............................................. 16,160,000 ==========
Under the terms and conditions of the Underwriting Agreement, the U.S. Underwriters are committed to take and pay for all of the shares offered hereby, if any are taken. The U.S. Underwriters propose to offer the shares of Class A Common Stock in part directly to the public at the initial public offering price set forth on the cover page of this Prospectus and in part to certain securities dealers at such price less a concession of $ per share. The U.S. Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain brokers and dealers. After the shares of Class A Common Stock are released for sale to the public, the offering price and other selling terms may from time to time be varied by the representatives. At the request of the Company, the Underwriters have reserved shares of the Class A Common Stock offered hereby for sale at the public offering price to the directors, officers and employees of the Company, directors of AMR and certain other persons. Such directors, officers, employees and other persons will purchase, in the aggregate, less than 10% of the Class A Common Stock offered in the Offerings. The number of shares available to the general public will be reduced to the extent persons purchase such reserved shares. Any reserved shares not so purchased will be offered by the Underwriters to the general public on the same terms as other shares offered by this Prospectus. In order to comply with local securities laws in certain jurisdictions outside the United States, sales to employees of the Company of up to an aggregate of 56,250 shares will be made directly by the Company, rather than through the Underwriters, and the total underwriting discount set forth on the cover page of this Prospectus will be reduced accordingly. The Company and AMR have entered into an underwriting agreement (the "International Underwriting Agreement") with the underwriters of the international offering (the "International Underwriters") providing for the concurrent offer and sale of 4,040,000 shares of Class A Common Stock in an international offering outside the United States. The offering price and aggregate underwriting discounts and commissions per share for the two offerings are identical. The closing of the offering made hereby is a condition to the closing of the international offering, and vice versa. The representatives acting on behalf of the International Underwriters are Goldman Sachs International, Merrill Lynch International, J.P. Morgan Securities Ltd. and Salomon Brothers International Limited. Pursuant to an Agreement between the U.S. and International Underwriting Syndicates (the "Agreement Between") relating to the two offerings, each of the U.S. Underwriters named herein has agreed that, as a part of the distribution of the shares offered hereby and subject to certain 81 83 exceptions, it will offer, sell or deliver the shares of Class A Common Stock, directly or indirectly, only in the United States of America (including the States and District of Columbia), its territories, its possessions and other areas subject to its jurisdiction (the "United States") and to U.S. persons, which term shall mean, for purposes of this paragraph: (a) any individual who is a resident of the United States or (b) any corporation, partnership or other entity organized in or under the laws of the United States or any political subdivision thereof and whose office most directly involved with the purchase is located in the United States. Each of the International Underwriters has agreed pursuant to the Agreement Between that, as a part of the distribution of the shares offered as a part of the international offering, and subject to certain exceptions, it will (i) not, directly or indirectly, offer, sell or deliver shares of Class A Common Stock (a) in the United States or to any U.S. persons or (b) to any person who it believes intends to reoffer, resell or deliver the shares in the United States or to any U.S. persons, and (ii) cause any dealer to whom it may sell such shares at any concession to agree to observe a similar restriction. Pursuant to the Agreement Between, sales may be made between the U.S. Underwriters and the International Underwriters of such number of shares of Class A Common Stock as may be mutually agreed. The price of any shares so sold shall be the initial public offering price, less an amount not greater than the selling concession. The Company has granted the U.S. Underwriters an option exercisable for 30 days after the date of this Prospectus to purchase up to an aggregate of 2,424,000 additional shares of Class A Common Stock solely to cover over-allotments, if any. If the U.S. Underwriters exercise their over-allotment option, the U.S. Underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof that the number of shares to be purchased by each of them, as shown in the foregoing table, bears to the 16,160,000 shares of Class A Common Stock offered hereby. The Company has granted the International Underwriters a similar option to purchase up to an aggregate of 606,000 additional shares of Class A Common Stock. The Company has agreed, during the period beginning from the date of this Prospectus and continuing to and including the date 180 days after the date of this Prospectus, not to offer, sell, contract to sell or otherwise dispose of any shares of Common Stock, any securities of the Company that are substantially similar to the shares of Common Stock or that are convertible or exchangeable into Common Stock or securities that are substantially similar to the shares of Common Stock (other than pursuant to employee stock option plans which exist on, or are described herein to be implemented after, the date of this Prospectus, or on conversion or exchange of convertible or exchangeable securities outstanding on the date of this Prospectus) without the prior written consent of Goldman, Sachs & Co., on behalf of the Underwriters, except for the shares of Class A Common Stock offered in connection with the Offerings. AMR has agreed, during the period beginning from the date of this Prospectus and continuing to and including the date 180 days after the date of this Prospectus, not to offer, sell, contract to sell or otherwise dispose of any shares of Common Stock, any securities of the Company that are substantially similar to the shares of Common Stock or that are convertible or exchangeable into Common Stock or securities that are substantially similar to the shares of Common Stock without the prior written consent of Goldman, Sachs & Co., on behalf of the Underwriters. The representatives of the Underwriters have informed the Company that they do not expect sales to accounts over which the Underwriters exercise discretionary authority to exceed five percent of the total number of shares of Class A Common Stock offered by them. Prior to this Offering, there has been no public market for the shares of Class A Common Stock. The initial public offering price was negotiated among the Company and the representatives of the U.S. Underwriters and the International Underwriters. Among the factors considered in determining the initial public offering price of the Class A Common Stock, in addition to prevailing market conditions, were the Company's historical performance, estimates of the business potential and earnings prospects of the Company, an assessment of the Company's management and the 82 84 consideration of the above factors in relation to market valuations of companies in related businesses. The Class A Common Stock has been approved for listing on the New York Stock Exchange under the symbol "TSG," subject to official notice of issuance. In order to meet one of the requirements for listing the Class A Common Stock on the New York Stock Exchange, the Underwriters have undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial holders. This Prospectus may be used by underwriters and dealers in connection with offers and sales of the Class A Common Stock, including shares initially sold in the International Offering, to persons located in the United States. The Underwriters perform investment banking and financial advisory and other financial services for the Company, AMR and their affiliates from time to time. Affiliates of certain of the Underwriters engage from time to time in general financing and banking transactions with the Company, AMR and their affiliates. The Company and AMR have agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act. 83 85 CERTAIN UNITED STATES TAX CONSIDERATIONS FOR NON-UNITED STATES HOLDERS The following is a discussion of certain of the anticipated United States federal income and estate tax consequences of the ownership and disposition of Class A Common Stock applicable to Non-U.S. Holders. A "Non-U.S. Holder" is any corporation, individual, partnership, estate or trust that is, as to the United States, a foreign corporation, a non-resident alien individual, a foreign partnership or a foreign estate or trust. This discussion does not deal with all aspects of United States federal income and estate taxation that may be relevant to Non-U.S. Holders in light of their particular circumstances and does not deal with state, local and non-U.S. tax consequences. Prospective non-U.S. investors should consult their own tax advisors regarding the United States and other tax consequences of owning and disposing of Class A Common Stock. DIVIDENDS Generally, any dividend paid to a Non-U.S. Holder with respect to Class A Common Stock will be subject to United States withholding tax at a rate of 30% of the amount of the dividend, or at a lesser applicable treaty rate. However, if the dividend is effectively connected with a United States trade or business of a Non-U.S. Holder, it will be subject to the regular United States federal income tax, rather than the 30% withholding tax, except as otherwise provided in an applicable treaty. Under certain circumstances, any such effectively connected dividends received by a foreign corporation may also be subject to an additional branch profits tax. Under current Treasury regulations, dividends paid to an address in a foreign country are generally presumed to be paid to a resident of such country for purposes of determining the applicability of a treaty rate. However, Treasury Regulations proposed to be effective for payments made after December 31, 1997 (the "Proposed Regulations"), which have not finally been adopted, would require a Non-U.S. Holder to file a form to obtain the benefit of any applicable tax treaty providing for a lower rate of withholding tax on dividends. Such form would contain the holder's name and address and certain other information. SALES OF CLASS A COMMON STOCK Generally, a Non-U.S. Holder will not be subject to United States federal income or withholding tax on any gain realized upon the sale of Class A Common Stock unless (i) the gain is effectively connected with a United States trade or business of the Non-U.S. Holder, or (ii) in the case of a Non-U.S. Holder who is an individual and holds the Class A Common Stock as a capital asset, such Non-U.S. Holder is present in the United States for a period or periods aggregating 183 days or more during the taxable year of the sale and certain other conditions are satisfied, or (iii) the Company is or has been a "United States real property holding corporation" for federal income tax purposes (which the Company does not believe it is or has been) and certain other conditions are satisfied, and no treaty exception is applicable. INFORMATION REPORTING AND BACKUP WITHHOLDING Generally, dividends paid to Non-U.S. Holders with respect to Class A Common Stock outside the United States that are subject to the 30% withholding tax or the reduced treaty rate of withholding tax will be exempt from any backup withholding tax. Otherwise, backup withholding of United States federal income tax at a rate of 31% may apply to dividends paid with respect to the Class A Common Stock to holders that are not "exempt recipients" and that fail to provide certain information (including the holder's taxpayer identification number) in the manner required by United States law and applicable regulations. The payment of the proceeds of the disposition of Class A Common Stock by a Non-U.S. Holder to or through a United States office of a broker will be subject to information reporting and backup withholding at a rate of 31% unless the owner certifies, in a suitable form, as to its non-U.S. tax 84 86 status or otherwise establishes an exemption. The payment of the proceeds of the disposition to or through a non-U.S. office of a broker will not be subject to backup withholding, but may be subject to information reporting if the broker is (i) a U.S. person, (ii) a foreign person that is a controlled foreign corporation for United States tax purposes, or (iii) a foreign person 50% or more of whose gross income for a specified 3-year period is effectively connected with the conduct of a trade or business within the United States. The Proposed Regulations will, if adopted, alter the foregoing rules in certain respects. Among other things, the Proposed Regulations provide certain presumptions under which a Non-U.S. Holder may be subject to backup withholding in the absence of required certifications. ESTATE TAX Class A Common Stock that is beneficially owned by an individual who is neither a citizen nor a resident of the United States at the time of death will be included in such holder's gross estate for United States federal estate tax purposes, unless an applicable treaty provides otherwise. VALIDITY OF CLASS A COMMON STOCK The validity of the shares of Class A Common Stock offered hereby will be passed upon for the Company by Debevoise & Plimpton, New York, New York, and for the Underwriters by Sullivan & Cromwell, New York, New York. EXPERTS The consolidated financial statements and financial statement schedule of the Company as of December 31, 1994 and December 31, 1995 and for each of the three years in the period ended December 31, 1995 appearing in this Prospectus and the Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Commission a registration statement on Form S-1 (the "Registration Statement") under the Securities Act with respect to the shares of Class A Common Stock offered hereby. For the purposes hereof, the term "Registration Statement" means the original registration statement and any and all amendments thereto. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and such Common Stock, reference is hereby made to such Registration Statement, including exhibits thereto, which can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Regional Offices of the Commission at Seven World Trade Center, New York, New York 10048 and 500 West Madison Street, Chicago, Illinois 60661. Copies of such material also can be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of such site is http://www.sec.gov. Statements contained in the Prospectus as to the contents of any contract or other document are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. 85 87 The Company is not currently subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a result of the offering of the Company's Class A Common Stock, the Company will become subject to the reporting requirements of the Exchange Act. The Company intends to furnish its stockholders with annual reports containing financial statements audited by independent accountants and with quarterly reports containing interim financial information for each of the first three quarters of each year. TRADEMARKS The following registered and unregistered trademarks used herein are owned by the Company or one of its subsidiaries: SABRE, Travelocity, easySABRE, Turbo SABRE, Planet SABRE, SABRE Business Travel Solutions, SABRE BTS, CARS Plus, SHAARP Plus, SABRErail, SABRE TourGuide, SABRE Navigator, SABRE CruiseDirector, Basic Booking Request, Direct Connect Availability, Fare Action Evaluator, AIRPRICE, AIRCREWS, AIRFLITE and SABRE Wireless. 86 88 INDEX TO FINANCIAL STATEMENTS
PAGE ---- Pro Forma Condensed Consolidated Financial Information.............................. F-2 Pro Forma Condensed Consolidated Balance Sheet for June 30, 1996.................. F-3 Pro Forma Condensed Consolidated Statement of Income for the year ended December 31, 1995.............................................................. F-4 Pro Forma Condensed Consolidated Statement of Income for the six months ended June 30, 1995.................................................................. F-5 Pro Forma Condensed Consolidated Statement of Income for the six months ended June 30, 1996.................................................................. F-6 Notes to Pro Forma Condensed Consolidated Financial Statements.................... F-7 Consolidated Financial Statements Report of Ernst & Young LLP, Independent Auditors................................. F-10 Consolidated Balance Sheets for December 31, 1995 and 1994 and June 30, 1996...... F-11 Consolidated Statements of Income and Stockholder's Net Investment for the years ended December 31, 1995, 1994 and 1993 and the six months ended June 30, 1996 and 1995....................................................................... F-12 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 and the six months ended June 30, 1996 and 1995....................... F-13 Notes to Consolidated Financial Statements........................................ F-14
F-1 89 PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION The accompanying pro forma condensed consolidated financial statements are based upon the historical financial statements of the Company and assume the Reorganization and the Affiliate Agreements and the Offerings were consummated at June 30, 1996, with respect to the unaudited pro forma condensed consolidated balance sheet and on January 1, 1995 with respect to the unaudited pro forma condensed consolidated statements of income. The pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the transactions had been consummated as presented in the accompanying pro forma condensed consolidated financial statements, nor is it necessarily indicative of future results of operations. The pro forma condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and related notes thereto of the Company included elsewhere herein. F-2 90 PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET JUNE 30, 1996 UNAUDITED (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS
PRO FORMA ADJUSTMENTS PRO FORMA AS PRO FORMA FOR THE ADJUSTED FOR THE PRO FORMA AS FURTHER REORGANIZATION REORGANIZATION ADJUSTMENTS ADJUSTED AND AFFILIATE AND AFFILIATE FOR THE FOR THE HISTORICAL AGREEMENTS AGREEMENTS OFFERINGS OFFERINGS ---------- -------------- ---------------- ----------- ---------- CURRENT ASSETS Cash and cash equivalents........................... $ 187,089 $ 187,089 $ 494,964(h) $ 236,585 (445,468)(i) Accounts receivable, net............................ 209,697 209,697 209,697 Prepaid expenses.................................... 12,075 12,075 12,075 Deferred income taxes............................... 40,717 40,717 40,717 ---------- ---------- ---------- --------- ---------- TOTAL CURRENT ASSETS.......................... 449,578 449,578 49,496 499,074 PROPERTY AND EQUIPMENT Buildings and leasehold improvements................ 11,243 $ 281,399(c) 292,642 292,642 Furniture, fixtures and equipment................... 4,460 16,430(c) 20,890 20,890 Service contract equipment.......................... 545,355 545,355 545,355 Computer equipment.................................. 318,928 318,928 318,928 ---------- ---------- ---------- --------- ---------- 879,986 297,829 1,177,815 0 1,177,815 Less accumulated depreciation and amortization...... (533,740) (104,621)(c) (638,361) (638,361) ---------- ---------- ---------- --------- ---------- TOTAL PROPERTY AND EQUIPMENT.................. 346,246 193,208 539,454 0 539,454 OTHER ASSETS.......................................... 59,997 59,997 59,997 ---------- ---------- ---------- --------- ---------- TOTAL ASSETS.................................. $ 855,821 $ 193,208 $1,049,029 $ 49,496 $1,098,525 ========== ========== ========== ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable.................................... $ 44,853 $ 44,853 $ 44,853 Accrued compensation and related benefits........... 41,972 41,972 41,972 Other accrued liabilities........................... 84,829 84,829 84,829 Note payable to AMR................................. 54,102 $ (54,102)(d) -- -- ---------- ---------- ---------- ---------- TOTAL CURRENT LIABILITIES..................... 225,756 (54,102) 171,654 171,654 DEFERRED INCOME TAXES................................. 24,876 34,115(c) 36,449 36,449 (19,500)(g) (3,042)(f) PENSION BENEFITS...................................... -- 50,000(g) 50,000 50,000 OTHER POSTRETIREMENT BENEFITS......................... 40,627 7,800(f) 48,427 48,427 OTHER LIABILITIES..................................... 13,375 13,375 13,375 DEBENTURE PAYABLE to AMR.............................. -- 850,000(e) 850,000 $(445,468)(i) 404,532 STOCKHOLDERS' EQUITY Preferred Stock: $0.01 par value; 20,000,000 shares authorized; no shares issued...................... -- -- -- Common Stock $0.01 par value; 1,000 shares authorized and issued and outstanding.......................... -- --(a) -- --(h) -- Class A: $0.01 par value; 250,000,000 shares authorized; 20,200,000 shares issued and outstanding..................................... -- -- 202(h) 202 Class B: $0.01 par value; 107,374,000 shares authorized; 107,374,000 shares issued and outstanding..................................... -- -- 1,074(h) 1,074 Additional paid-in-capital.......................... -- -- 493,688(h) 493,688 Formation of Company.............................. --(a) Reclassify AMR's net investment................... 551,187(b) Contribution of assets by American................ 159,093(c) Note payable capitalized.......................... 54,102(d) Issuance of Debenture to AMR...................... (764,382)(e) Retained earnings (deficit)......................... -- (120,876) (120,876) Issuance of Debenture to AMR...................... (85,618)(e) Postretirement flight benefits.................... (4,758)(f) Net pension liability............................. (30,500)(g) Stockholder's net investment...................... 551,187 (551,187)(b) -- -- ---------- ---------- ---------- --------- ---------- TOTAL STOCKHOLDERS' EQUITY.................... 551,187 (672,063) (120,876) 494,964 374,088 ---------- ---------- ---------- --------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.... $ 855,821 $ 193,208 $1,049,029 $ 49,496 $1,098,525 ========== ========== ========== ========= ==========
See notes to unaudited pro forma condensed consolidated financial statements. F-3 91 PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA PRO FORMA ADJUSTMENTS AS ADJUSTED PRO FORMA FOR THE FOR THE PRO FORMA AS FURTHER REORGANIZATION REORGANIZATION ADJUSTMENTS ADJUSTED AND AFFILIATE AND AFFILIATE FOR THE FOR THE HISTORICAL AGREEMENTS AGREEMENTS OFFERINGS OFFERINGS ---------- -------------- -------------- ----------- ---------- Revenues Electronic travel distribution............. $1,006,926 $ 986,057 $ 986,057 Marketing support payments............... $ (20,869)(j) Information technology solutions........... 522,690 477,290 477,290 Technology Services Agreement............ (45,400)(k) ---------- ---------- ---------- ---------- Total revenues....................... 1,529,616 (66,269) 1,463,347 1,463,347 Operating expenses Cost of revenues........................... 1,041,475 1,067,283 1,067,283 Technology Services Agreement............ (11,750)(k) Employee travel costs -- American........ 13,159(l) Employee travel costs -- other airlines............................... 6,480(m) Additional marketing support............. 20,000(j) Additional general expenses.............. 4,230(n) Reduction in rent expense................ (7,295)(o) Additional postretirement expense........ 984(p) Selling, general and administrative........ 107,717 111,466 111,466 Employee travel costs -- American........ 3,492(l) Employee travel costs -- other airlines............................... 1,620(m) Additional general expenses.............. 410(n) Reduction in rent expense................ (2,019)(o) Additional postretirement expense........ 246(p) ---------- ---------- ---------- ---------- Total operating expenses............. 1,149,192 29,557 1,178,749 1,178,749 ---------- ---------- ---------- ---------- Operating income............................. 380,424 (95,826) 284,598 284,598 Other income (expense), net.................. (10,349) (56,011)(q) (66,360) $32,185(s) (34,175)(t) ---------- ---------- ---------- ------- ---------- Income before provision for income taxes..... 370,075 (151,837) 218,238 32,185 250,423 Provision for income taxes................... 144,224 (59,216)(r) 85,008 12,552(r) 97,560 ---------- ---------- ---------- ------- ---------- Net earnings................................. $ 225,851 $ (92,621) $ 133,230 $19,633 $ 152,863 ========== ========= ========== ======= ========== Pro forma earnings per common share data: Earnings per common share.................. $ 1.18(u) $ 1.20(v) ========== ========== Average common and common equivalent shares outstanding.............................. 112,996(u) 127,574(v) ========== ==========
See notes to unaudited pro forma condensed consolidated financial statements. F-4 92 PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1995 UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA PRO FORMA ADJUSTMENTS AS ADJUSTED PRO FORMA FOR THE FOR THE PRO FORMA AS FURTHER REORGANIZATION REORGANIZATION ADJUSTMENTS ADJUSTED AND AFFILIATE AND AFFILIATE FOR THE FOR THE HISTORICAL AGREEMENTS AGREEMENTS OFFERINGS OFFERINGS ---------- -------------- -------------- ----------- ---------- Revenues Electronic travel distribution............... $511,739 $501,475 $501,475 Marketing support payments................. $(10,264)(j) Information technology solutions............. 255,792 235,261 235,261 Technology Services Agreement.............. (20,531)(k) -------- -------- -------- -------- Total revenues......................... 767,531 (30,795) 736,736 736,736 Operating expenses Cost of revenues............................. 499,758 511,388 511,388 Technology Services Agreement.............. (5,867)(k) Employee travel costs -- American.......... 5,297(l) Employee travel costs -- other airlines.... 3,240(m) Additional marketing support............... 10,000(j) Additional general expenses................ 2,115(n) Reduction in rent expense.................. (3,647)(o) Additional postretirement expense.......... 492(p) Selling, general and administrative.......... 48,323 49,856 49,856 Employee travel costs -- American.......... 1,404(l) Employee travel costs -- other airlines.... 810(m) Additional general expenses................ 205(n) Reduction in rent expense.................. (1,009)(o) Additional postretirement expense.......... 123(p) -------- -------- -------- -------- Total operating expenses............... 548,081 13,163 561,244 561,244 -------- -------- -------- -------- Operating income............................... 219,450 (43,958) 175,492 175,492 Other income (expense), net.................... (10,415) (27,977)(q) (38,392) $16,092(s) (22,300)(t) -------- -------- -------- ------- -------- Income before provision for income taxes....... 209,035 (71,935) 137,100 16,092 153,192 Provision for income taxes..................... 81,978 (28,055)(r) 53,923 6,276(r) 60,199 -------- -------- -------- ------- -------- Net earnings................................... $127,057 $(43,880) $ 83,177 $ 9,816 $ 92,993 ======== ======== ======== ======= ======== Pro forma earnings per common share data: Earnings per common share.................... $ .74(u) $ .73(v) ======== ======== Average common and common equivalent shares outstanding................................ 112,996(u) 127,574(v) ======== ========
See notes to unaudited pro forma condensed consolidated financial statements. F-5 93 PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1996 UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA PRO FORMA AS ADJUSTMENTS ADJUSTED FOR PRO FORMA FOR THE THE PRO FORMA AS FURTHER REORGANIZATION REORGANIZATION ADJUSTMENTS ADJUSTED AND AFFILIATE AND AFFILIATE FOR THE FOR THE HISTORICAL AGREEMENTS AGREEMENTS OFFERINGS OFFERINGS ---------- -------------- -------------- ----------- ---------- Revenues Electronic travel distribution............... $574,982 $574,982 $574,982 Information technology solutions............. 263,307 257,209 257,209 Technology Services Agreement.............. $ (6,098)(k) -------- -------- -------- -------- Total revenues............................... 838,289 (6,098) 832,191 832,191 Operating expenses Cost of revenues............................. 576,599 570,909 570,909 Technology Services Agreement.............. $ (6,098)(k) Employee travel costs -- other airlines.... 3,240(m) Additional general expenses................ 615(n) Reduction in rent expense.................. (3,939)(o) Additional postretirement expense.......... 492(p) Selling, general and administrative.......... 64,101 64,146 64,146 Employee travel costs -- other airlines.... 810(m) Additional general expenses................ 205(n) Reduction in rent expense.................. (1,093)(o) Additional postretirement expense.................................. 123(p) -------- -------- -------- -------- Total operating expenses..................... 640,700 (5,645) 635,055 635,055 -------- -------- -------- -------- Operating income............................... 197,589 (453) 197,136 197,136 Other income (expense), net.................... (2,399) (28,170)(q) (30,569) $16,092(s) (14,477)(t) -------- -------- -------- ------- -------- Income before provision for income taxes....... 195,190 (28,623) 166,567 16,092 182,659 Provision for income taxes..................... 76,140 (11,163)(r) 64,977 6,276(r) 71,253 -------- -------- -------- ------- -------- Net earnings................................... $119,050 $(17,460) $101,590 $ 9,816 $111,406 ======== ======== ======== ======= ======== Pro forma earnings per common share data: Earnings per common share.................... $ .90(u) $ .87(v) ======== ======== Average common and common equivalent shares outstanding................................ 112,996(u) 127,574(v) ======== ========
See notes to unaudited pro forma condensed consolidated financial statements. F-6 94 NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The accompanying pro forma condensed consolidated balance sheet reflects the following pro forma adjustments for the Reorganization and the Affiliate Agreements and the Offerings as if such transactions had been consummated on June 30, 1996. (a) To record the formation of the Company pursuant to which the Company issued 1,000 shares of Common Stock to American, which dividended them to AMR. Prior to the issuance of Class A Common Stock pursuant to the terms of the Offerings, AMR owned 100% of the outstanding shares of Common Stock. Common Stock held by AMR has been converted to Class B Common Stock. (b) To reclassify AMR's net investment to additional paid-in-capital in connection with the legal formation of the Company. (c) To record the contribution by American to the Company of buildings and furniture and fixtures with a historical cost to American of approximately $298 million and accumulated depreciation of approximately $104 million and the related deferred income taxes. (d) To record the capitalization of a note payable to AMR of approximately $54 million. (e) To record the issuance to American of the $850 million floating rate subordinated Debenture due September 30, 2004. The Debenture was subsequently distributed to AMR. (f) To record the estimated liability to be assumed and the related deferred income taxes for the Company's obligation to provide post-retirement flight benefits to certain employees of the Company pursuant to the Travel Privileges Agreement with American effective July 1, 1996. (g) To record the estimated net pension liability to be assumed, and the related deferred income taxes, as a result of the spin-off of the portion of the American sponsored pension plan attributable to the Company's employees from the American pension plan to a new pension plan to be sponsored by the Company. The pro forma net pension liability to be assumed is based on a preliminary estimate, prepared by the Company's actuaries, of the amounts of pension obligations and plan assets attributable to employees of the Company. The actual obligation assumed will depend upon the amounts of pension obligations and plan assets, as determined by the Company's actuaries, at the date that the spin-off occurs. Such spin-off is expected to occur effective January 1, 1997. (h) To record the issuance of 20,200,000 shares of Class A Common Stock of the Company at an assumed offering price of $26.00 per share pursuant to the Offerings, resulting in net proceeds of approximately $495 million after deducting underwriting commissions and estimated expenses of the Offerings and to record the conversion of Common Stock held by AMR to Class B Common Stock. (i) To record the use of 90% of the net proceeds of the Offerings to repay a portion of the Debenture. The accompanying pro forma condensed consolidated statements of income for the year ended December 31, 1995 and the six months ended June 30, 1995 and 1996 reflect the following pro forma adjustments assuming the Reorganization and the Affiliate Agreements and the Offerings had been consummated on January 1, 1995. (j) To record the estimated increase in marketing costs paid to American and decrease in marketing support payments from American as a result of the Marketing Cooperation Agreement with American, the financial terms of which the parties have agreed to apply as of January 1, 1996, regarding marketing support for the Company's products targeted to travel agencies, and support for the Company's promotion of Business Travel Solutions, and Travelocity and easySABRE. The increase in marketing costs is recorded at the minimum of $20 million required in the agreement. F-7 95 However, this amount may increase to $30 million in the first year and could range from $10 million to $30 million in the second year and thereafter depending on whether certain booking thresholds are reached by American. (k) To record the estimated reduction in revenues as a result of the Technology Services Agreement with American, the financial terms of which the parties have agreed to apply as of January 1, 1996 and to record the estimated reduction in revenues from American and associated reduction in communication expenses due to SITA billing American directly effective July 1, 1996, as provided for in the Technology Services Agreement. The agreement established pricing and service terms associated with the Company's information technology services provided to American. Additional periodic price adjustments are also defined in the agreement based on the market for similar services provided by other companies. (l) To record the estimated increase in travel costs as a result of the Travel Privileges Agreement and Corporate Travel Agreement with American, the financial terms of which the parties have agreed to apply as of January 1, 1996. These agreements allow the Company to purchase personal and business travel for its employees at reduced fares. The agreements provide pricing and service terms at a smaller discount than was in effect in 1995. (m) To record the estimated increase in travel costs on airlines other than American. The Company is no longer eligible to participate in discounts provided to American by other airlines effective with the Reorganization. The Company is attempting to negotiate an agreement with other airlines for discounts similar to American's. (n) To record the estimated increase in employee related costs and other general and administrative costs associated with the Affiliate Agreements with AMR and American and their administration. Amount includes an increase in shipping and handling expenses resulting from the Company's inability, effective with the Reorganization, to receive American's discount rate for these services. (o) To record the estimated decrease in rent expense paid to American due to the transfer of ownership of buildings and furniture and fixtures to the Company. This decrease is partially offset by depreciation expense and property taxes which will be incurred by the Company as a result of ownership of these facilities. (p) To record the estimated increase in post-retirement benefit costs associated with the Travel Privileges Agreement with American which provides certain retired employees of the Company flight privileges in exchange for a fixed fee per retiree. (q) To record the estimated interest expense associated with the $850 million Debenture, partially offset by a reduction in interest expense from the forgiveness of a note payable of $54 million by AMR in connection with the Reorganization, calculated based on the average interest rate the Company would have incurred during the year. (r) To record the estimated tax impact of pre-tax income statement adjustments at the Company's effective tax rate of 39%. (s) To record the estimated decrease in interest expense resulting from the partial repayment of the Debenture with the proceeds of the Offerings. (t) For each 1/8 of 1% increase in interest rates, the impact would be an annual change in interest expense of approximately $500,000. (u) The pro forma earnings per common share data is calculated using the shares of common stock outstanding after the Reorganization, assuming the conversion of shares of Common Stock held by AMR into approximately 107.4 million shares of Class B Common Stock, adjusted for the number of shares of Class A Common Stock that would have to be issued to generate sufficient funds to repay the portion of the Debenture that i) exceeds the book value of assets contributed to the Company in the Reorganization (approximately $120.9 million) and ii) will be repaid out of the proceeds from the Offering. F-8 96 (v) The pro forma earnings per common share data is calculated using the weighted average shares of common stock outstanding after the Offerings. The dilutive impact of common equivalent shares related to stock awards and options outstanding under the Company's 1996 Long-Term Incentive Plan is not significant for the periods presented. F-9 97 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholder The SABRE Group Holdings, Inc. We have audited the accompanying consolidated balance sheets of The SABRE Group Holdings, Inc. (a wholly-owned subsidiary of AMR Corporation) and subsidiaries as of December 31, 1994 and 1995, and the related consolidated statements of income and stockholder's net investment and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The SABRE Group Holdings, Inc. and subsidiaries at December 31, 1994 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Dallas, Texas January 15, 1996, except as to Note 1, for which the date is July 22, 1996 F-10 98 THE SABRE GROUP HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
ASSETS DECEMBER 31, ----------------------- JUNE 30, 1996 1994 1995 ------------- --------- --------- (UNAUDITED) CURRENT ASSETS Cash and cash equivalents......................... $ 262,956 $ 94,861 $ 187,089 Accounts receivable, less allowance for uncollectible accounts of $3,042, $4,822 and $4,307 at December 31, 1994 and 1995 and June 30, 1996, respectively......................... 114,026 138,972 209,697 Prepaid expenses.................................. 2,604 5,851 12,075 Deferred income taxes............................. 24,705 31,539 40,717 --------- --------- ----------- TOTAL CURRENT ASSETS...................... 404,291 271,223 449,578 PROPERTY AND EQUIPMENT Buildings and leasehold improvements.............. 18,107 12,250 11,243 Furniture, fixtures and equipment................. 6,044 6,049 4,460 Service contract equipment........................ 490,113 529,918 545,355 Computer equipment................................ 453,295 422,050 318,928 --------- --------- ----------- 967,559 970,267 879,986 Less accumulated depreciation and amortization.... (566,155) (589,549) (533,740) --------- --------- ----------- TOTAL PROPERTY AND EQUIPMENT........................ 401,404 380,718 346,246 OTHER ASSETS........................................ 67,810 77,465 59,997 --------- --------- ----------- TOTAL ASSETS.............................. $ 873,505 $ 729,406 $ 855,821 ========== ========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Accounts payable.................................. $ 40,365 $ 53,716 $ 44,853 Accrued compensation and related benefits......... 33,514 33,696 41,972 Other accrued liabilities......................... 60,760 77,071 84,829 Payable to AMR.................................... 302,895 -- -- Note payable to AMR............................... 65,663 54,102 54,102 --------- --------- ----------- TOTAL CURRENT LIABILITIES................. 503,197 218,585 225,756 DEFERRED INCOME TAXES............................... 36,494 30,943 24,876 OTHER POSTRETIREMENT BENEFITS....................... 33,180 37,960 40,627 OTHER LIABILITIES................................... 11,170 9,781 13,375 COMMITMENTS AND CONTINGENCIES STOCKHOLDER'S EQUITY Stockholder's net investment...................... 289,464 432,137 551,187 --------- --------- ----------- TOTAL STOCKHOLDER'S EQUITY................ 289,464 432,137 551,187 --------- --------- ----------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.................................. $ 873,505 $ 729,406 $ 855,821 ========== ========== ===========
See notes to the consolidated financial statements. F-11 99 THE SABRE GROUP HOLDINGS, INC. CONSOLIDATED STATEMENTS OF INCOME AND STOCKHOLDER'S NET INVESTMENT (IN THOUSANDS)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------ -------------------- 1993 1994 1995 1995 1996 ---------- ---------- ---------- --------- -------- (UNAUDITED) Revenues Electronic travel distribution............ $ 785,074 $ 905,908 $1,006,926 $ 511,739 $574,982 Information technology solutions.......... 473,074 500,771 522,690 255,792 263,307 ---------- ---------- ---------- --------- -------- Total revenues..................... 1,258,148 1,406,679 1,529,616 767,531 838,289 Operating expenses Cost of revenues.......................... 919,873 955,120 1,041,475 499,758 576,599 Selling, general and administrative....... 84,600 101,406 107,717 48,323 64,101 ---------- ---------- ---------- --------- -------- Total operating expenses........... 1,004,473 1,056,526 1,149,192 548,081 640,700 ---------- ---------- ---------- --------- -------- Operating income............................ 253,675 350,153 380,424 219,450 197,589 Other income (expense) Loss on partnership settlement............ (71,242) -- -- -- -- Interest income (expense), net............ (1,390) (8,913) 1,265 1,114 939 Other, net................................ (12,112) (17,180) (11,614) (11,529) (3,338) ---------- ---------- ---------- --------- -------- Income before provision for income taxes.... 168,931 324,060 370,075 209,035 195,190 Provision for income taxes.................. 68,969 126,899 144,224 81,978 76,140 ---------- ---------- ---------- --------- -------- Net earnings................................ 99,962 197,161 225,851 127,057 119,050 Stockholder's net investment at beginning of the year.................................. 244,704 157,966 289,464 289,464 432,137 Contributions from affiliates............... -- -- 310,329 310,329 -- Distributions to affiliates................. (186,700) (65,663) (393,507) (249,049) -- ---------- ---------- ---------- --------- -------- Stockholder's net investment at end of the year...................................... $ 157,966 $ 289,464 $ 432,137 $ 477,801 $551,187 ========== ========== ========== ========= ========
See notes to the consolidated financial statements. F-12 100 THE SABRE GROUP HOLDINGS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------------- -------------------- 1993 1994 1995 1995 1996 --------- --------- --------- --------- -------- (UNAUDITED) OPERATING ACTIVITIES Net earnings............................... $ 99,962 $ 197,161 $ 225,851 $ 127,057 $119,050 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization............ 170,698 174,953 171,471 88,155 87,782 Deferred income taxes.................... (12,287) 50,232 (12,385) -- (15,245) Loss on partnership settlement........... 71,242 -- -- -- -- Other.................................... 12,090 7,534 7,865 6,503 3,474 Changes in operating assets and liabilities: Accounts receivable.................... (14,112) (28,685) (24,946) (33,821) (70,725) Prepaid expenses....................... 2,599 (1,401) (3,247) (5,037) (6,222) Other assets........................... (8,445) (41,420) (6,002) (5,368) 11,617 Accrued compensation and related benefits............................. 6,395 14,618 182 (11,872) 8,276 Accounts payable and other accrued liabilities.......................... 52,668 8,449 29,662 (335) (1,105) Partnership settlement................. (45,122) (158,400) -- -- -- Postretirement benefits................ 5,654 4,790 4,780 2,810 2,666 Other liabilities...................... (8,911) (2,884) (1,389) 188 3,595 --------- --------- --------- --------- -------- Net cash provided by operating activities............................... 332,431 224,947 391,842 168,280 143,163 INVESTING ACTIVITIES Additions to property and equipment........ (176,557) (168,875) (164,580) (104,411) (82,001) Acquisition of other investments........... (5,020) (21,087) (16,318) (4,631) (513) Proceeds from sales of equipment........... 9,874 12,663 6,169 3,609 41,010 --------- --------- --------- --------- -------- Net cash used for investing activities..... (171,703) (177,299) (174,729) (105,433) (41,504) FINANCING ACTIVITIES Net cash advances from (to) affiliates..... 25,972 215,308 (236,367) (241,985) (9,431) Contributions from affiliates.............. -- -- 244,666 244,666 -- Distributions to affiliates................ (186,700) -- (393,507) (249,049) -- --------- --------- --------- --------- -------- Net cash provided by (used for) financing activities............................... (160,728) 215,308 (385,208) (246,368) (9,431) --------- --------- --------- --------- -------- Net increase (decrease) in cash equivalents.............................. -- 262,956 (168,095) (183,521) 92,228 Cash and cash equivalents at beginning of the period............................... -- -- 262,956 262,956 94,861 --------- --------- --------- --------- -------- Cash and cash equivalents at end of the period................................... $ -- $ 262,956 $ 94,861 $ 79,435 $187,089 ========= ========= ========= ========= ======== Supplemental cash flow information: Cash payments to affiliates for income taxes................................ $ 94,336 $ 138,886 $ 148,322 $ 81,978 $ 90,396 ========= ========= ========= ========= ======== Interest payments to affiliates........ $ 1,390 $ 8,913 $ -- $ -- $ -- ========= ========= ========= ========= ========
See notes to the consolidated financial statements. F-13 101 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) 1. GENERAL INFORMATION The SABRE Group Holdings, Inc. (the "Company") is a holding company. Its sole direct subsidiary is The SABRE Group, Inc., which, pursuant to the Reorganization (defined below), is the successor to the businesses of The SABRE Group which were previously operated as subsidiaries or divisions of American or AMR. The SABRE Group was formed by AMR to capitalize on synergies of combining AMR's information technology businesses under common management. On July 2, 1996, AMR reorganized the businesses of The SABRE Group (the "Reorganization"). As part of the Reorganization, the Company was formed as a subsidiary of American Airlines, Inc. ("American"), the businesses of The SABRE Group formerly operated as divisions and subsidiaries of American or AMR were combined under the Company and the Company and its subsidiaries were dividended by American to AMR. See Note 11 regarding the transactions related to the implementation of the Reorganization. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION -- The Consolidated Financial Statements have been prepared using AMR's historical basis in the assets and liabilities of the Company. The Consolidated Financial Statements reflect the results of operations, financial condition and cash flows of the Company as a component of AMR and may not be indicative of actual results of operations and financial position of the Company under other ownership. Management believes the consolidated income statements include a reasonable allocation of administrative costs, which are described in Note 3, incurred by AMR on behalf of the Company. CONSOLIDATION -- All significant accounts and transactions among the consolidated entities have been eliminated. For financial reporting purposes, the equity accounts of the previous divisions of American and subsidiaries of AMR have been accumulated into a single disclosure caption entitled Stockholder's Net Investment. INTERIM FINANCIAL DATA -- The Consolidated Financial Statements for the six months ended June 30, 1995 and 1996 have been prepared without audit. In the opinion of management, all adjustments, which include only normal recurring adjustments, necessary to present fairly the consolidated balance sheet as of June 30, 1996 and the consolidated statements of income and stockholder's net investment and cash flows for the six months ended June 30, 1995 and 1996 have been made. Interim period results are not necessarily indicative of the results to be achieved for the full year. CASH AND CASH EQUIVALENTS -- Prior to July 2, 1996, the Company's cash and cash equivalents were held for the Company by American. Cash equivalents are immediately charged or credited to the Company upon recording certain transactions, including airline booking fees and other transactions with American, and purchases of goods and services. Cash equivalents are carried at cost plus accrued interest, which approximates fair value. See Note 11 regarding the Company's cash balances subsequent to June 30, 1996. F-14 102 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) DEPRECIATION AND AMORTIZATION -- The Company's depreciation and amortization policies are as follows: Property and Equipment: Buildings....................................... 30 years Service contract equipment...................... 3 to 5 years Computer equipment.............................. 3 to 5 years Furniture and fixtures.......................... 5 to 15 years Leasehold improvements.......................... Lesser of lease term or useful life Purchased software.............................. 3 to 5 years Other Assets: Internally developed software................... 3 to 5 years
Property and equipment are stated at cost less accumulated depreciation and amortization, which is calculated on the straight-line basis. Service contract equipment consists of hardware provided primarily to subscribers of SABRE. Depreciation of property and equipment totaled approximately $169 million, $168 million and $163 million in 1993, 1994 and 1995, respectively. Other assets are amortized on the straight-line basis over the periods indicated. DEFERRED CONTRACT COSTS -- Included in other assets are costs incurred in connection with an agreement between AMS Holdings, Inc., a subsidiary of AMR ("AMS"), and Canadian Airlines International ("Canadian") to provide a variety of management, technical and administrative services. The Company incurred and deferred approximately $41 million and $9 million in costs associated with the installation and implementation of SABRE and other systems for Canadian during 1994 and 1995, respectively, under the terms of this twenty year service contract. Pursuant to the terms of the contract, the Company is allowed to recover these costs plus a margin over the first ten years of the contract. As a result, these costs are included in cost of revenues over such recovery period. Approximately $0.7 million and $5 million of these deferred costs were charged to operations in 1994 and 1995, respectively. American has agreed to reimburse the Company for any unrecovered costs incurred in connection with the implementation of such systems in the event of the termination of the provision of services to Canadian. REVENUE RECOGNITION -- The Company provides electronic travel distribution services using SABRE, one of the largest privately owned real-time computer systems in the world. As compensation for electronic travel distribution services provided, fees are collected from airline, car rental and hotel vendors ("associates") for reservations booked through SABRE. The fee per booking charged to an associate is dependent upon the level of functionality within SABRE at which the associate participates. Revenue for travel reservations is recognized at the time of the booking of the reservation, net of estimated future cancellations. At December 31, 1994 and 1995 the Company had recorded booking fee cancellation reserves of approximately $9 million and $15 million, respectively. Revenue for car rental and hotel bookings is recognized at the time the reservation is used by the customer. The Company also enters into service contracts with subscribers (primarily travel agencies) to provide access to SABRE, hardware, software, hardware maintenance and other support services. Fees billed on service contracts are recognized as revenue in the month earned. The Company provides information technology solutions to AMR and companies in the travel industry and other industries worldwide. Revenue from data processing services is recognized in the month earned. Revenue from software license fees for standard software products is recognized when the software is delivered, provided no significant future vendor obligations exist and collection is probable. The Company recognizes revenue on long-term software development and consulting contracts under the percentage of completion method of accounting. Losses, if any, on long-term contracts are recognized when the current estimate of total contract costs indicates a loss F-15 103 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) on a contract is probable. Fixed fees for software maintenance are recognized ratably over the life of the contract. INCOME TAXES -- The entities comprising the Company are included in the consolidated federal income tax return of AMR. Prior to July 1, 1996, under the terms of AMR's tax sharing policy, the Company paid AMR an amount equal to the income tax payments that it would have been obligated to pay if it had filed separate income tax returns. See Note 11 regarding the Company's tax sharing agreement subsequent to June 30, 1996. The Company computes its provision for deferred income taxes using the liability method as if it were a separate taxpayer. Under the liability method, deferred income tax assets and liabilities are determined based on differences between financial reporting and income tax bases of assets and liabilities and are measured using the enacted tax rates and laws. The measurement of deferred tax assets is adjusted by a valuation allowance, if necessary, to recognize the future tax benefits to the extent, based on available evidence, it is more likely than not they will be recognized. RESEARCH AND DEVELOPMENT COSTS -- All costs in the software development process which are classified as research and development costs, which have not been material, are expensed as incurred until technological feasibility has been established. Once technological feasibility has been established, such costs are capitalized until the product is ready for service. CONCENTRATION OF CREDIT RISK -- The Company's customers are worldwide, primarily in the United States, Europe and Canada, and are concentrated in the travel industry. Approximately 43%, 42% and 36% of revenues in 1993, 1994 and 1995, respectively, are related to American and other subsidiaries of AMR. The Company generally does not require security or collateral from its customers as a condition of sale. The Company maintains an allowance for losses based upon the expected collectibility of all accounts receivable. See Note 8. USE OF ESTIMATES -- The preparation of these financial statements in conformity with generally accepted accounting principles requires that certain amounts be recorded based on estimates and assumptions made by management. Actual results could differ from these estimates and assumptions. STOCK AWARDS AND OPTIONS -- The Company accounts for stock awards and options (including awards of AMR stock and stock options) in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." No compensation expense is recognized for stock option grants if the exercise price of the stock option grants is at or above the fair market value of the underlying stock on the date of grant. Compensation expense relating to other stock awards is recognized over the period during which the employee renders service to the Company necessary to earn the award. 3. RELATED PARTY TRANSACTIONS Certain of The SABRE Group entities from which the Company was formed distributed, in their capacity as divisions of American, $394 million in 1995 to American. Also during 1995, AMR contributed $245 million to the Company and a note payable to AMR of $66 million was capitalized in order to adequately capitalize certain of The SABRE Group entities from which the Company was formed. Proceeds from the contribution were used to reduce cash advances from AMR. In conjunction with the capital infusion discussed above, amounts payable to AMR of approximately $54 million were converted to intercompany notes payable in 1995, upon which the Company was charged interest expense at an average rate of 9.9%. The payable to AMR of approximately F-16 104 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) $303 million at December 31, 1994 represents an amount due to AMR upon demand. The carrying amount of the notes payable to AMR is equivalent to the fair market value. American allocates interest income or expense monthly to the Company based on the net balance of cash equivalents and the payable to AMR at the average rate earned by American's portfolio of short-term marketable securities. The allocation may not be representative of what the Company would earn or pay if its cash were held externally. Cash payments for interest are equivalent to net interest expense. Revenues from American and other subsidiaries of AMR were $546 million, $590 million and $548 million in 1993, 1994 and 1995, respectively, and $273 million and $261 million for the six months ended June 30, 1995 and 1996, respectively. Operating expenses are charged to the Company by American and other subsidiaries of AMR to cover certain employee benefits, facilities rental, marketing services, management services, legal fees and certain other administrative costs based on employee headcount or actual usage of facilities and services. Amounts charged to the Company for these expenses approximate the cost of such services provided by third parties. Travel service costs for travel by the Company's employees for personal and business travel are charged to the Company based on rates negotiated with American. Personal travel costs are incurred by the Company only because it is affiliated with American. If the Company were not affiliated with American, this flight privilege would most likely not be available to employees. It is estimated that travel costs, had the Company not been affiliated with American, for 1993, 1994 and 1995 would have been approximately $26 million, $32 million, and $34 million, respectively, and for the six months ended June 30, 1995 and June 30, 1996 would have been approximately $14 million in each period. Expenses charged to the Company by affiliates are as follows (in thousands):
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------- -------------------- 1993 1994 1995 1995 1996 -------- -------- -------- ------- -------- Employee benefits........ $ 64,268 $ 64,240 $ 68,743 $34,583 $ 43,492 Facilities rental........ 27,294 30,117 29,385 14,631 16,343 Marketing cooperation.... -- -- -- -- 10,802 Management services...... 10,302 16,431 16,508 7,660 9,698 Other administrative costs.................. 7,625 10,660 11,377 5,957 4,521 Travel services.......... 9,920 18,056 28,761 11,584 20,653 -------- -------- -------- -------- -------- $119,409 $139,504 $154,774 $74,415 $105,509 ======== ======== ======== ======== ========
See Note 11 regarding contractual agreements entered into with AMR and American subsequent to December 31, 1995. Substantially all employees of the Company are eligible to participate in a tax-qualified pension plan sponsored by American. The defined benefit plan provides benefits for participating employees based on years of service and average compensation for a specified period of time before retirement. Costs associated with employee participation in this plan are determined based upon employee headcount and are allocated to the Company by American. American's annual allocation of costs to the Company for such benefits was approximately $9 million, $11 million and $9 million in 1993, 1994 and 1995, respectively. The Company is jointly and severally liable with AMR and other members of AMR's consolidated group for applicable funding and termination liabilities of the plan. F-17 105 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) The historical financial statements of the Company do not reflect the portion of the net obligation of the defined benefit plan sponsored by American attributable to employees of the Company. In addition to providing pension benefits, American provides certain health care and life insurance benefits to retired employees. The amount of health care benefits is limited to lifetime maximums as outlined in the plan. Substantially all employees of the Company may become eligible for these benefits if they satisfy eligibility requirements during their working lives. Certain employee groups make contributions toward funding a portion of their retiree health care benefits during their working lives. American funds benefits as incurred and began, effective January 1993, to match employee prefunding. American's annual allocation of costs to the Company for such benefits was approximately $6 million, $9 million and $5 million in 1993, 1994 and 1995, respectively. The Company is jointly and severally liable with AMR and other members of AMR's consolidated group for funding postretirement benefit liabilities. Net other postretirement benefit costs allocated to the Company by AMR for the year ended December 31, 1995 consisted of the following (in thousands): Service cost -- benefits earned during the period................. $2,620 Interest cost on accumulated other postretirement benefit obligation...................................................... 2,420 Return on assets.................................................. (160) Net amortization and deferral..................................... (100) ------ Net other postretirement benefit cost............................. $4,780 ======
The following table summarizes the funded status of the plan, as allocated to the Company by AMR, reconciled to the accrued other postretirement benefit liabilities recognized in the Company's balance sheet at December 31, 1995 (in thousands): Fully eligible active participants............................ $ (7,210) Other active participants..................................... (34,350) -------- Accumulated other postretirement benefit obligation........... (41,560) Plan assets at fair value..................................... 3,650 -------- Accumulated other postretirement benefit obligation in excess of plan assets.............................................. (37,910) Unrecognized net loss......................................... 1,680 Unrecognized prior service benefit............................ (1,730) -------- Accrued other postretirement benefit cost..................... $(37,960) ========
Plan assets consist primarily of shares of a mutual fund managed by AMR. Future benefit costs were estimated assuming per capita cost of covered medical benefits would increase at an eight percent annual rate decreasing gradually to a four percent annual growth rate in 2000 and thereafter. A one percent increase in this annual trend rate would have increased the accumulated other postretirement benefit obligation at December 31, 1995, by approximately $5 million and 1995 other postretirement benefit cost by approximately $1 million. The weighted average discount rate used in estimating the accumulated other postretirement benefit obligation was 7.25%. The Company will provide personal flight privileges to retired employees through an agreement with American. Because flight privileges do not result in any significant incremental costs for F-18 106 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) American, the cost of providing this privilege to the Company's employees is not included in the liability for postretirement benefits at December 31, 1995. See Note 11. See Note 11 regarding the Company's benefits and the agreements for benefits provided by AMR and American subsequent to the Reorganization. 4. INCOME TAXES The provision for income taxes is as follows (in thousands):
YEAR ENDED DECEMBER 31, -------------------------------- 1993 1994 1995 -------- -------- -------- Federal, current.................................. $ 63,202 $ 52,655 $133,575 Federal, deferred................................. (11,121) 50,856 (11,792) State and local, current.......................... 16,066 20,348 21,936 State and local, deferred......................... (1,166) (624) (593) Foreign, current.................................. 1,988 3,664 1,098 -------- -------- -------- $ 68,969 $126,899 $144,224 ======== ======== ========
The provision for income taxes differs from amounts computed at the statutory federal income tax rate as follows (in thousands):
YEAR ENDED DECEMBER 31, ------------------------------- 1993 1994 1995 ------- -------- -------- Statutory income tax provision...................... $59,126 $113,420 $129,526 State income taxes, net of federal benefit.......... 7,845 12,275 13,581 Foreign tax credit.................................. -- (719) -- Valuation allowance................................. 2,831 1,559 449 Other, net.......................................... (833) 364 668 ------- -------- -------- $68,969 $126,899 $144,224 ======== ========= =========
F-19 107 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) The components of the Company's deferred tax assets and liabilities as of December 31, 1994 and 1995 were as follows (in thousands):
1994 1995 -------- -------- Deferred tax assets: Postretirement benefits other than pensions................. $ 14,092 $ 16,100 Net operating loss carryforwards............................ 10,202 9,979 Equipment obsolescence reserve.............................. 5,380 8,976 Booking fee cancellation reserve............................ 3,763 5,754 Reserve for partnership settlement.......................... 9,517 2,745 Other....................................................... 13,447 15,425 -------- -------- Total deferred tax assets........................... 56,401 58,979 Deferred tax liabilities: Depreciation and amortization............................... (29,879) (25,254) Software development costs.................................. (18,525) (21,017) Other....................................................... (8,863) (740) -------- -------- Total deferred tax liabilities...................... (57,267) (47,011) Valuation allowance........................................... (10,923) (11,372) -------- -------- Net deferred tax asset (liability)............................ $(11,789) $ 596 ======== ======== Current deferred income tax asset............................. $ 24,705 $ 31,539 Noncurrent deferred income tax liability...................... (36,494) (30,943) -------- -------- Net deferred tax asset (liability)............................ $(11,789) $ 596 ======== ========
At December 31, 1995, the Company has net operating loss carryforwards of approximately $95 million for state income tax purposes, primarily arising from the settlement of litigation regarding certain partnership agreements, as more fully described in Note 5. The litigation and resulting net operating loss carryforwards occurred in an entity that was formerly a subsidiary of AMR. If not utilized, these carryforwards will expire beginning in 1996. For financial reporting purposes, a valuation allowance of approximately $11 million has been recognized which principally relates to the state income tax net operating loss carryforwards and certain other deferred tax assets which are subject to limitations as to utilization due to the legal structure of the entity in which the losses originated. 5. PARTNERSHIP SETTLEMENT Other expense in 1993 includes a provision of approximately $71 million for losses associated with a reservation system project and resolution of related litigation. Settlement agreements entered into included $42 million in travel credits. In December 1994, the Company paid American approximately $26 million which represented the present value of the remaining travel credits. In return, American agreed to assume the liability of providing the partners all travel services as set forth by the settlement agreements. 6. COMMITMENTS AND CONTINGENCIES Certain service contracts with significant subscribers contain booking fee productivity clauses and other provisions which allow subscribers to receive various amounts of additional equipment and other services from the Company at no cost to the subscribers. The Company establishes F-20 108 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) liabilities for these commitments as the subscribers satisfy the applicable contractual terms. The service contracts are priced so that the additional airline and other booking fees generated over the life of the contract will exceed the cost of the equipment and other services. Accrued subscriber incentives at December 31, 1994 and 1995 were approximately $15 million and $17 million, respectively. The Company leases certain facilities and equipment under various operating leases with third parties. At December 31, 1995, future minimum lease payments required under these operating leases with terms in excess of one year are as follows:
YEAR ENDING DECEMBER 31, -------------------------------------------------------------- 1996.......................................................... $21,131,000 1997.......................................................... 2,527,000 1998.......................................................... 563,000 1999.......................................................... 209,000
Rental expense, excluding facilities rented from affiliates, was approximately $22 million, $27 million and $25 million for the years ended December 31, 1993, 1994 and 1995, respectively. The Company is involved in certain disputes arising in the ordinary course of business. Although the ultimate resolution of these matters cannot be reasonably estimated at this time, management does not believe that they will have a material adverse effect on the financial condition or results of operations of the Company. 7. STOCK AWARDS Under AMR's 1988 Long-Term Incentive Plan (the "AMR LTIP"), officers and key employees of the Company may be granted stock options, stock appreciation rights, restricted stock, deferred stock, stock purchase rights and/or other stock based awards in common stock, par value $1 per share, of AMR ("AMR Common Stock"). Options to purchase shares of AMR Common Stock ("AMR Options") have been granted to officers and key employees of the Company. Options granted are exercisable at the market value upon grant, generally becoming exercisable over one to five years following the date of grant, and expiring ten years from the date of grant. At December 31, 1995, there were approximately 309,000 AMR Options outstanding held by officers and key employees of the Company, of which approximately 209,000 were exercisable. The AMR Options have exercise prices ranging from $40.9375 to $78.0625 per share of AMR Common Stock, with a total exercise value of approximately $19 million. Certain officers and key employees of the Company have been awarded approximately 217,000 shares of deferred AMR Common Stock ("AMR Career Equity Shares") at no cost, to be issued upon the individual's retirement from AMR. In conjunction with AMR's 1988 Long-Term Incentive Plan, certain officers and key employees of the Company have also been awarded, at no cost, approximately 140,000 shares of deferred $1 par value AMR Common Stock ("AMR Performance Shares"). The AMR Performance Shares vest over a three-year performance period based on performance metrics of AMR and the Company, as defined in the plan. Awards of AMR Performance Shares will terminate on December 31, 1997. See Note 11 regarding stock awards and options subsequent to the Offering. F-21 109 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) 8. GEOGRAPHICAL ANALYSIS The Company is a global company, deriving revenues from worldwide operations. Data relating to the Company's operations by geographic area is set forth below (in thousands).
UNITED STATES FOREIGN TOTAL ---------- -------- ---------- 1993 Revenues................................... $1,080,190 $177,958 $1,258,148 Operating income........................... 232,870 20,805 253,675 Identifiable assets........................ 498,137 43,055 541,192 1994 Revenues................................... $1,196,291 $210,388 $1,406,679 Operating income........................... 313,636 36,517 350,153 Identifiable assets........................ 533,163 52,923 586,086 1995 Revenues................................... $1,279,471 $250,145 $1,529,616 Operating income........................... 345,262 35,162 380,424 Identifiable assets........................ 534,626 61,080 595,706
Operating income from operations consists of revenues less operating expenses, including an allocation for corporate expenses. Operating income excludes loss on partnership settlement, interest income (expense) net, and other income (expense) net. Cash equivalents and deferred tax assets are excluded from identifiable assets. 9. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following is a summary of the unaudited quarterly financial information for the years ended December 31, 1994 and 1995 (in thousands).
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- 1994 Revenues.......................... $353,567 $349,943 $361,382 $341,787 Operating income.................. 97,941 93,316 108,011 50,885 Net earnings...................... 58,422 54,018 59,179 25,542 1995 Revenues.......................... $384,466 $383,065 $393,148 $368,937 Operating income.................. 118,091 101,359 108,192 52,782 Net earnings...................... 66,927 60,130 66,855 31,939
The travel industry is seasonal in nature. Bookings, and thus booking fees charged for the use of SABRE, decrease significantly each year in the fourth quarter, primarily in December, due to customers booking earlier in the year for travel during the holiday season and a decline in business travel during the holiday season. 10. PROPOSED PUBLIC OFFERING OF COMMON STOCK (UNAUDITED) On August 7, 1996, the Company's Board of Directors authorized management of the Company to file a Registration Statement with the Securities and Exchange Commission for an initial public offering of the Company's Class A Common Stock. On October 3, 1996 the Company's Board of F-22 110 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) Directors authorized management to sell up to 23,230,000 shares of the Company's Class A Common Stock through an initial public offering. In conjunction therewith, the Company's Common Stock held by AMR was converted to Class B Common Stock. The Company contemplates using approximately 90% of the proceeds from such offering to retire a portion of the Debenture discussed in Note 11. 11. THE REORGANIZATION AND AFFILIATE AGREEMENTS (UNAUDITED) The following transactions were consummated in connection with the Reorganization: CAPITALIZATION -- The Company was incorporated as a Delaware Corporation and a direct wholly-owned subsidiary of American, which subsequently dividended capital stock of the Company to AMR. The Company has 1,000 authorized shares of Common Stock with a par value of $.01 per share, of which 1,000 shares of Common Stock were issued to American and dividended to AMR. In conjunction with the Offerings, the shares of Common Stock held by AMR were converted to shares of Class B Common Stock. Common Stock sold under the Offerings will be Class A Common Stock. The Company also has 20,000,000 authorized shares of preferred stock with a par value of $.01 per share. No preferred shares have been issued. LONG-TERM DEBT -- On July 2, 1996, in connection with the Reorganization, American transferred to the Company certain divisions and subsidiaries of American through which AMR previously conducted its information technology businesses, and in return the Company issued to American a floating rate subordinated debenture due September 30, 2004 with a principal amount of $850 million (the "Debenture") and common stock representing 100% of the equity ownership interest in the Company. American subsequently exchanged the Debenture for a portion of a note payable by American to AMR. Because the assets and liabilities of the divisions and subsidiaries of American transferred to the Company are included in the historical financial statements of the Company, this transaction resulted in a reduction of Stockholders' Equity. The interest rate on the Debenture was 7.2% through September 30, 1996 and thereafter will be based on the sum of the six-month London Interbank Offered Rate (LIBOR rate) plus a margin determined based upon the Company's senior unsecured long-term debt rating or, if such debt rating is not available, upon the Company's ratio of net debt to total capital. The interest rate will be determined at the beginning of each six-month period beginning October 1 and April 1 and accrued interest will be payable each September 30 and March 31. The Company may prepay the principal balance in whole or in part at any time prior to December 31, 1996 and thereafter at any interest payment date. CASH AND CASH EQUIVALENTS -- Effective with the Reorganization, the Company began maintaining a separate cash management system and separate cash and investment accounts from American. Transactions with American no longer result in immediate charges and credits to the Company's cash equivalents, but are settled through intercompany billings with payment due in 30 days. American manages the Company's cash management system under the Management Services Agreement discussed below. The Company invests excess cash in short-term marketable securities, consisting primarily of certificates of deposit, bankers' acceptances, commercial paper, corporate notes and government notes. NOTE PAYABLE TO AMR -- On July 1, 1996, a note payable to AMR at June 30, 1996 of approximately $54 million was capitalized. PROPERTY AND EQUIPMENT -- On July 1, 1996, American contributed buildings, furniture and fixtures in addition to those discussed above to the Company with a cost value of approximately $298 million and a net book value of $193 million. F-23 111 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) TECHNOLOGY SERVICES AGREEMENT -- The Company is a party to the Technology Services Agreement with American, dated July 1, 1996, to provide American with certain information technology services. The base term of the Technology Services Agreement expires June 30, 2006. The terms of the services to be provided by the Company to American, however, vary. The Company will provide: (i) Data Center services, data network services, application development and existing application maintenance and enhancement services until June 30, 2006; (ii) services relating to existing client server operations until June 30, 2001; and (iii) device support, distributed systems services, radio services and reservations and flight information network services until June 30, 1999. In addition, AMS and Canadian have entered into an agreement pursuant to which AMR and American supply to Canadian various services, including technology services. Under the Canadian Subcontract, the Company, as subcontractor through American, will be a principal provider of technology services to Canadian. The Technology Services Agreement provides for annual price adjustments. For certain prices, adjustments are made according to formulas which, commencing in 1998, are reset every two years and which may take into account the market for similar services provided by other companies. The resulting rates may reflect an increase or decrease over the previous rates. With limited exceptions, under the Technology Services Agreement, the Company will continue to be the exclusive provider of all information technology services provided by the Company to American immediately prior to the execution of the Technology Services Agreement. Any new information technology services, including most new application development services, requested by American can be outsourced pursuant to competitive bidding by American or performed by American on its own behalf. With limited exceptions, the Company has the right to bid on all new services for which American solicits bids. Additionally, American may continue to perform development and enhancement work that it is currently performing on its own behalf. After July 1, 2000, American may terminate the Technology Services Agreement for convenience if American determines the agreement is no longer advantageous for any reason. If it does so, American will be required to pay a termination fee equal to the sum of all amounts then due under the Technology Services Agreement, including wind-down costs, book value of dedicated assets and a significant percentage of estimated lost profits. American may also terminate the Technology Services Agreement without penalty, in whole or in part depending upon circumstances, for egregious breach by the Company of its obligations or for serious failure to perform critical or significant services. If the Company is acquired by a company other than AMR or American with more than $1 billion in annual airline transportation revenue, then American may terminate the Technology Services Agreement without paying any termination fee. Additionally, if American were to dispose of any portion of its business or any affiliate accounting for more than 10% of the Company's fees from American, then American shall either cause such divested business or affiliate to be obligated to use the Company's services in accordance with the Technology Services Agreement or pay a proportionate termination fee. The parties have agreed to apply the financial terms of the Technology Services Agreement as of January 1, 1996. Absent the agreement, revenues for the six months ended June 30, 1996 would have been $16 million greater than stated in the Consolidated Statement of Income. MANAGEMENT SERVICES AGREEMENT -- The Company and American are parties to a Management Services Agreement, dated July 1, 1996 (the "Management Services Agreement"), pursuant to which American performs various management services for the Company, including treasury, risk management and tax, and similar administrative services, that American has historically provided to the Company. The Management Services Agreement will expire on June 30, 1999 unless terminated earlier if American and the Company are no longer under common control or if the Technology F-24 112 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) Services Agreement is terminated early. Amounts charged to the Company under this agreement approximate American's cost of providing the services plus a margin. The parties have agreed to apply the financial terms of the Management Services Agreement as of January 1, 1996. The application of these terms did not materially impact expenses for the six months ended June 30, 1996. MARKETING COOPERATION AGREEMENT -- The Company and American are parties to the Marketing Cooperation Agreement, dated as of July 1, 1996, pursuant to which American will provide marketing support for 10 years for the Company's Professional SABRE products targeted to travel agencies and for five years for BTS, Travelocity and easySABRE. The Marketing Cooperation Agreement may be terminated by either party prior to June 30, 2006 only if the other party fails to perform its obligations thereunder. Under the Marketing Cooperation Agreement, American's marketing efforts will include ongoing promotional programs to assist in the sale of those SABRE products, development with the Company of an annual sales plan, sponsorship of sales/promotional events and the targeting of potential customers. For calendar year 1996, the Company will pay American for its marketing support for Professional SABRE a fee, the amount of which may increase or decrease, depending on total SABRE booking volumes generated by certain Professional SABRE subscribers in the U.S., the Caribbean and elsewhere and on SABRE's market share of travel agency bookings in those areas. That fee will range between $20 million and $30 million for 1996 and between $10 million and $30 million thereafter. As payment for American's support of the Company's promotion of BTS, Travelocity and easySABRE, the Company will pay American a marketing fee based upon booking volume. Additionally, the Company has guaranteed to American certain cost savings in the fifth year of the Marketing Cooperation Agreement. If American does not achieve those savings, the Company will pay American any shortfall, up to a maximum of $50 million. The parties have agreed to apply the financial terms of the Marketing Cooperation Agreement as of January 1, 1996. The application of these terms resulted in an increase in expenses of approximately $11 million for the six months ended June 30, 1996. Absent the cancellation of the marketing support payments from American for passenger support, revenues would have been approximately $10 million greater for the six months ended June 30, 1996. NON-COMPETITION AGREEMENT -- The Company, AMR and American have entered into a Non-Competition Agreement, dated July 1, 1996 (the "Non-Competition Agreement"), pursuant to which AMR and American, on behalf of themselves and certain of their subsidiaries, have agreed to limit their competition with the Company's businesses of (i) electronic travel distribution, (ii) development, maintenance, marketing and licensing of software for travel agency, travel, transportation and logistics management, (iii) computer system integration, (iv) development, maintenance and operation of a data processing center providing data processing services to third parties and (v) travel industry, transportation and logistics consulting services relating primarily to computer technology and automation. Under the Non-Competition Agreement, American and AMR may develop, operate, market and provide in compliance with all applicable laws an American Airlines branded electronic travel distribution system that gives a display preference to American's flights. The Non-Competition Agreement prohibits American or AMR, however, from providing such system to any travel agency that generated 25% or more of its bookings through SABRE during the preceding six calendar months. Additionally, in the event any airline competing with American engages in an activity in connection with such airline's transportation business, and if the restrictions imposed by the Non-Competition Agreement would prevent American from engaging in the same activity and place American at a disadvantage, then American may engage in such activity, subject to American and the Company consulting about means to mitigate the effect on the F-25 113 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) Company of American's engaging in such activity. American and AMR may also license to third parties any software that is owned by AMR, American or other AMR affiliates in response to a request or offer from such third parties. The Non-Competition Agreement expires on December 31, 2001. American may terminate the Non-Competition Agreement, however, as to the activities described in clauses (ii) through (v) of this paragraph upon 90 days notice to the Company if the Technology Services Agreement is terminated by American as a result of an egregious breach thereof by the Company. TRAVEL AGREEMENTS -- The Company and American are parties to a Travel Privileges Agreement, dated July 1, 1996, pursuant to which the Company is entitled to purchase personal travel for its employees and retirees at reduced fares. The Travel Privileges Agreement will expire on June 30, 2008. To pay for the provision of flight privileges to certain of its future retired employees, the Company will make a lump sum payment to American beginning in 1997 for each employee retiring in that year. The payment per retiree will be based on the number of years of service with the Company and AMR over the prior ten years of service. Service years accrue for the Company beginning on January 1, 1993. AMR will retain the obligation for the portion of benefits attributable to service years prior to January 1, 1993. The accumulated benefit obligation for postretirement travel privileges at July 1, 1996 of approximately $8 million, net of deferred taxes of approximately $3 million, will be recorded as a reduction to Stockholders' Equity. The remaining cost of providing this privilege will be accrued over the estimated service lives of the employees eligible for the privilege. The Company and American are also parties to a Corporate Travel Agreement, dated July 1, 1996 and ending June 30, 1998, pursuant to which the Company receives discounts for certain flights purchased on American. In exchange, the Company must fly a certain percentage of its travel on American as compared to all other air carriers combined. If the Company fails to meet the applicable percentage on an average basis over any calendar quarter, American may terminate the agreement upon 60 days' notice. The parties have agreed to apply the financial terms of the Travel Privileges Agreement and the Corporate Travel Agreement as of January 1, 1996. The application of the terms of these agreements resulted in an increase in expenses of approximately $8 million for the six months ended June 30, 1996. CREDIT AGREEMENT -- On July 1, 1996, the Company and American entered into a Credit Agreement pursuant to which the Company is required to borrow from American, and American is required to lend to the Company, amounts required by the Company to fund its daily cash requirements. In addition, American may, but is not required to, borrow from the Company to fund its daily cash requirements. The maximum amount that the Company may borrow at any time from American under the Credit Agreement is $300 million. The maximum amount that American may borrow at any time from the Company under the Credit Agreement is $100 million. Loans under the Credit Agreement are not intended as long-term financing. If the Company's credit rating is better than "B" on the Standard & Poor's Ratings Services scale (or an equivalent thereof) or American has excess cash to lend to the Company, the interest rate to be charged to the Company will be the sum of (a) the higher of (i) American's average rate of return on short-term investments for the month in which borrowings occurred or (ii) the actual rate of interest paid by American to borrow funds to make a loan to the Company under the Credit Agreement, plus (b) an additional spread based upon the Company's credit risk. If the Company's credit rating is "B" or below on the Standard & Poor's Ratings Service Scale (or an equivalent thereof) and American does not have excess cash to lend to the Company, the interest rate to be charged to the Company will be the lower of (a) the sum of (i) the borrowing cost incurred by American to draw on its revolving credit F-26 114 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) facility to make the advance plus (ii) an additional spread based on the Company's credit risk or (b) the sum of (i) the cost at which the Company could borrow Funds from an independent party plus (ii) one half of the margin American pays to borrow under its revolving credit facility. The Company believes that the interest rate it will be charged by American could, at times, be slightly above the rate at which the Company could borrow externally; however, no standby fees for the line of credit will be required to be paid by either party. The interest rate to be charged to American will be the Company's average portfolio rate for the months in which borrowing occurred plus an additional spread based upon American's credit risk. At the end of each quarter, American must pay all amounts owing under the Credit Agreement to the Company. COMMITMENTS -- On July 1, 1996, the Company entered into an operating lease agreement with AMR for certain facilities and AMR assigned its rights and obligations under certain leases to the Company. Also on July 1, 1996 the Company entered into an operating lease agreement with a third party for the lease of other facilities. At July 1, 1996, the future minimum lease payments required under these operating lease agreements along with various other operating lease agreements with terms in excess of one year for facilities and equipment were as follows:
AFFILIATES THIRD PARTIES ---------- ------------- Six months ending December 31, 1996............................. $ 976,000 $ 17,086,000 Year ending December 31, 1997..................................... 1,540,000 17,493,000 1998..................................... 1,370,000 14,829,000 1999..................................... 1,416,000 13,064,000 2000..................................... 1,173,000 11,489,000 2001..................................... 647,000 12,045,000 Thereafter............................... 7,368,000 63,065,000
PENSION BENEFITS -- The Company and AMR have entered into an agreement which permits the employees of the Company to continue to participate in the benefit plans and programs sponsored by AMR until the Company establishes separate plans and programs for employees. The current intent of the Company is to spin off the portion of the AMR sponsored defined benefit pension plan applicable to the Company's employees from the AMR pension plan to a new pension plan to be sponsored by the Company on January 1, 1997. At the date of the spin-off, the unrecognized net obligation attributable to the Company's employees participating in the plan, estimated to be a liability of approximately $50 million at December 31, 1995, will be charged to Stockholders' Equity, net of deferred income taxes of approximately $19 million. INCOME TAXES -- The Company and AMR have entered into a tax sharing agreement (the "Tax Sharing Agreement") which provides for the allocation of tax liabilities during the tax periods the Company is part of consolidated federal, state and local income tax returns filed by AMR. In addition, the Tax Sharing Agreement sets out certain benefits and obligations of the Company and AMR for tax matters relating to periods before the Reorganization and for certain benefits and obligations that would affect the Company or AMR in the future if the Company ceased to be a member of AMR's consolidated group for federal income tax purposes. The Tax Sharing Agreement generally requires the Company to pay to AMR the amount of federal, state and local income taxes that the Company would have paid had it ceased to be a member of the AMR consolidated tax group for periods after the Reorganization. The Company is jointly and severally liable for the federal income tax of AMR and the other companies included in the consolidated return for all periods in which the Company is included in the AMR consolidated group. AMR has agreed, however, to F-27 115 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) indemnify the Company for any liability for taxes reported or required to be reported on a consolidated return. Except for certain items specified in the Tax Sharing Agreement, AMR generally retains any potential tax benefit carryforwards, and remains obligated to pay all taxes, attributable to periods before the Reorganization. The Tax Sharing Agreement also grants the Company certain limited participation rights in any dispute with tax authorities. The Tax Sharing Agreement replaces AMR's policy discussed in Note 2. STOCK AWARDS AND OPTIONS -- Effective with the Offerings, the Company will establish the 1996 Long-Term Incentive Plan (the "LTIP"), whereby officers and other key employees of the Company may be granted stock options, stock appreciation rights, restricted stock, deferred stock, stock purchase rights and/or other stock-based awards. Initially 13,000,000 shares of Class A Common Stock are authorized to be issued under the LTIP. The LTIP will terminate no later than ten years from the date of its establishment. Options granted under the LTIP will be exercisable at a price which is not less than the market value of Class A Common Stock upon grant, except as otherwise determined by a committee appointed by the Board of Directors, and no such options will be exercisable more than 10 years after the date of grant. Stock appreciation rights may be granted in conjunction with all or part of any stock option granted under the LTIP. All appreciation rights will terminate upon termination or exercise of the related option and will be exercisable only during the time that the related option is exercisable. If an appreciation right is exercised, the related stock option will be deemed to have been exercised. For other stock-based awards, a committee established by the Board of Directors will determine the eligible persons to whom awards will be made, the times at which awards will be made, the number of shares to be awarded, the price, if any, to be paid by the recipient and all other terms and conditions of the award under the terms of the LTIP at the time of grant. In connection with the Offerings, the AMR Options (Note 7) may be exchanged for options to purchase shares of Class A Common Stock of the Company. The exercise prices of the options to purchase Class A Common Stock will be computed as the initial offering price of Class A Common Stock multiplied by the ratio of the exercise prices of the AMR Options to the previous day's closing price of AMR Common Stock at the date of the Offerings. The number of options will be increased to maintain the option holders' aggregate spread value between the exercise price of the option and the previous day's closing price of AMR common stock. These options will continue to vest in equal annual installments over five years following the original date of grant of the AMR options and expire 10 years from the original date of grant. Based on the closing price of AMR Common Stock on September 30, 1996 and assuming an initial offering price of $26.00 per share for the shares of Class A Common Stock, a maximum of approximately 741,000 options for the purchase of Class A Common Stock would be issued with a weighted average price of approximately $20 per share in exchange for the AMR Options. In connection with the Offerings, certain AMR Performance Shares (Note 7) may be converted into deferred Class A Common Stock performance shares ("Company Performance Shares") based on the initial offering price of shares of Class A Common Stock and the previous day's closing price of the AMR Common Stock on the date of the Offerings. The Company Performance Shares will continue to vest over a three-year period ending December 31, 1997 based on the Company's average change in business value and free cash flow generated. Based on the closing price of AMR common stock on September 30, 1996 and assuming an initial offering price of $26.00 per share for F-28 116 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) Class A Common Stock, a maximum of approximately 277,000 Company Performance Shares would be issued pursuant to the conversion of the outstanding AMR Performance Shares. In connection with the Offerings, the AMR Career Equity Shares (Note 7) may be exchanged for a combination of restricted shares of Class A Common Stock and options to purchase shares of Class A Common Stock. The restricted shares will vest over a three-year period. The stock options, which will have an exercise price equal to the initial offering price of the Class A Common Stock, will vest over the five years following the date of grant and will expire ten years from the date of grant. The actual number of restricted shares and stock options to be issued is dependent on, among other things, elections by the individuals as to the mix of restricted shares and stock options to be received, the previous day's closing price of AMR Common Stock at the date of the Offerings and the initial offering price of Class A Common Stock. Based on the closing price of AMR Common Stock on September 30, 1996 and assuming an initial offering price of $26.00 for Class A Common Stock, the number of shares and options issued pursuant to the exchange of the AMR Career Equity Shares will range from a minimum of 143,000 shares to a maximum of 280,000 shares and a minimum of 696,000 options to a maximum of 1,140,000 options. It is anticipated that, prior to the consummation of the Offerings, the Board of Directors will adopt a Director's Stock Incentive Plan which provides for an annual award of options to purchase 3,000 shares of the Company's Class A Common Stock to each non-employee director. The plan will provide for a one time award of options to purchase 10,000 shares of the Company's Class A Common Stock to a new Non-Employee Director upon his or her initial election to the Board of Directors. The options, which will have an exercise price equal to the Class A Common Stock on the date of grant, will vest pro rata over a five-year period. Each option will expire on the earlier of (i) the date the Non-Employee Director ceases to be a director of the Company, if for any reason other than due to death, disability or retirement or (ii) three years from the date the Non-Employee Director ceases to be a director of the Company due to death, disability or retirement. F-29 117 BACK INSIDE COVER COPY: The SABRE Group has provided information technology solutions to more than 250 clients in over 50 countries around the world. Industries served range from travel and transportation to hospitality, logistics, and financial services. SABRE offers solutions ranging from software development and product sales, to transaction processing and consulting -- solutions such as designing software for scheduling traffic through the English Channel tunnel and providing information technology solutions to American Airlines. 118 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. --------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary............................ 3 Risk Factors.................................. 10 The Company................................... 18 Use of Proceeds............................... 18 Dividend Policy............................... 19 Dilution...................................... 19 Capitalization................................ 20 Selected Historical Consolidated Financial Information................................. 21 Selected Pro Forma Condensed Consolidated Financial Information....................... 22 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 25 Business...................................... 34 Management.................................... 48 Security Ownership of Management and Principal Stockholder................................. 62 Relationship with AMR and Certain Transactions................................ 63 Description of Capital Stock.................. 68 Shares Eligible for Future Sale............... 78 Underwriting.................................. 81 Certain United States Tax Considerations for Non-United States Holders................... 84 Validity of Class A Common Stock.............. 85 Experts....................................... 85 Additional Information........................ 85 Trademarks.................................... 86 Index to Financial Statements................. F-1
THROUGH AND INCLUDING , 1996 (THE 25TH DAY AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 20,200,000 SHARES THE SABRE GROUP HOLDINGS, INC. CLASS A COMMON STOCK (PAR VALUE $.01 PER SHARE) --------------------- LOGO --------------------- GOLDMAN, SACHS & CO. MERRILL LYNCH & CO. J.P. MORGAN & CO. SALOMON BROTHERS INC REPRESENTATIVES OF THE UNDERWRITERS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 119 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. SEC registration fee............................................................. $189,656 NASD filing fee.................................................................. 30,500 NYSE listing fee................................................................. 175,600 Blue Sky fees and expenses....................................................... 26,000 Attorneys' fees and expenses..................................................... 375,000 Accountants' fees and expenses................................................... 250,000 Transfer Agent's and Registrar's fees and expenses............................... 10,000 Printing and engraving expenses.................................................. 270,000 Miscellaneous.................................................................... 23,244 -------- Total.................................................................. 1,350,000
The amounts set forth above are estimates except for the SEC registration fee, the NASD filing fee and the NYSE listing fee. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the General Corporation Law of the State of Delaware (the "DGCL") provides that a Delaware corporation may indemnify directors and officers and certain other individuals against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by any such person in connection with any threatened, pending or completed action, suit or proceeding (other than an action by or in the right of the corporation) in which such person is involved because such person is a director or officer of the corporation, if such person acted in good faith and in a manner that such person reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe that such person's conduct was unlawful. No indemnification shall be made to an officer or director or other qualified individual if such person shall have been adjudged to be liable to the corporation unless such person acted in good faith and in a manner that such person reasonably believed to be in or not opposed to the best interest of the corporation and only to the extent the Court of Chancery of the State of Delaware or the court in which such action or suit was brought, determines that despite the adjudication of liability such person is fairly and reasonably entitled to such indemnification. If such person is successful on the merits or otherwise in defense of any action, then Section 145 provides that such person shall be indemnified against expenses including attorneys' fees actually and reasonably incurred by that person in connection therewith. Section 102(b)(7) of the DGCL provides that the liability of a director may not be limited or eliminated for the breach of such director's duty of loyalty to the corporation or its stockholders, for such director's intentional acts or omissions not in good faith, for such director's concurrence in or vote for an unlawful payment of a dividend or unlawful stock purchase or redemption or for any improper personal benefit derived by the director from any transaction. The Company's Bylaws provide that the Company will indemnify any person who was or is a party (or is threatened to be made a party) to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was or has agreed to serve at the request of the Company as a director or officer of the Company, or is or was serving or has agreed to serve at the request of the Company as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity. The Company's Bylaws further II-1 120 provide that the Company may indemnify any person who was or is a party (or is threatened to be made a party) to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was or has agreed to become an employee or agent of the Company, or is or was serving or has agreed to serve at the request of the Company as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity. The indemnification referred to in the preceding paragraph will be from and against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the indemnitee or on his or her behalf in connection with such action, suit or proceeding and any appeal therefrom. However, such indemnification will only be provided if the indemnitee acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action, suit or proceeding, had no reasonable cause to believe his or her conduct was unlawful. Notwithstanding the preceding two sentences, in the case of an action or suit by or in the right of the Company to procure a judgment in its favor (a) the indemnification referred to in this paragraph will be limited to expenses (including attorneys' fees) actually and reasonably incurred by such person in the defense or settlement of such action or suit, and (b) no indemnification will be made in respect of any claim, issue or matter as to which such person will have been adjudged to be liable to the Company unless, and only to the extent that, the Delaware Court of Chancery (or the court in which such action or suit was brought) determines upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery (or such other court) deems proper. To the extent that a director, officer, employee or agent of the Company has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to above or in defense of any claim, issue or matter therein, he or she will be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him or her in connection therewith. Expenses incurred by a director or officer in defending a civil or criminal action, suit or proceeding will be paid by the Company in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay such amount if it will ultimately be determined that he or she is not entitled to be indemnified by the Company. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. The indemnification described in the preceding two paragraphs will not be deemed exclusive of any other rights to which those indemnified may be entitled under any Bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office, will continue as to a person who has ceased to be a director, officer, employee or agent and will inure to the benefit of the heirs, executors and administrators of such a person. The Company will purchase and maintain insurance on behalf of any person who is or was or has agreed to serve at the request of the Company as a director or officer of the Company, or is or was serving at the request of the Company as a director or officer of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against, and incurred by, him or her or on his or her behalf in any such capacity, or arising out of his or her status as such, whether or not the Company would have the power to indemnify him or her against such liability under the provisions of the Bylaws; provided, however, such insurance must be available on acceptable terms, which determination shall be made by a vote of a majority of the Board of Directors. II-2 121 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES In connection with its formation on June 25, 1996, and the July 1996 reorganization of The SABRE Group businesses, the Company issued 1,000 shares of Common Stock and an $850 million Debenture to American in exchange for certain operating divisions and the capital stock of subsidiaries of American. American immediately transferred the Debenture to AMR in exchange for a portion of a debenture of American held by AMR and distributed its shares of the Company's Common Stock to AMR as a tax-free dividend. Those shares were subsequently reclassified into 110,563,953 shares of Class B Common Stock. Based on the relationship between the Company and AMR Corporation and other factors, the Company believes that these issuances and distributions were exempt from registration under the Securities Act of 1933, as amended. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. Schedule II, Valuation and Qualifying Account Page S-1 All other financial statement schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ---------- ---------------------- 1.1 -- Form of U.S. Underwriting Agreement.(1) 1.2 -- Form of International Underwriting Agreement.(1) 3.1 -- Restated Certificate of Incorporation of Registrant. 3.2 -- Restated Bylaws of Registrant. 4.1 -- Registration Rights Agreement between Registrant and AMR Corporation. 4.2 -- Specimen Certificate representing Class A Common Stock.(1) 5.1 -- Opinion of Debevoise & Plimpton as to the legality of the Class A Common Stock. 10.1 -- Registration Rights Agreement between Registrant and AMR Corporation (See Exhibit 4.1). 10.2 -- Intercompany Agreement, dated as of July 2, 1996, among Registrant, The SABRE Group, Inc. TSGL Holding, Inc., TSGL-SCS, Inc., TSGL, Inc., SABRE International, Inc., SABRE Services Columbia, LTDA and American Airlines, Inc.(1) 10.3 -- Management Services Agreement, dated as of July 1, 1996, between The SABRE Group, Inc. and American Airlines, Inc.(1)(2) 10.4 -- Credit Agreement, dated as of July 1, 1996, between Registrant, The SABRE Group, Inc., AMR Corporation and American Airlines, Inc.(1) 10.5 -- $850,000,000 Subordinated Debenture, dated July 2, 1996, executed by Registrant and payable to AMR Corporation.(1) 10.6 -- Information Technology Services Agreement, dated July 1, 1996, between The SABRE Group, Inc. and American Airlines, Inc.(1)(2) 10.7 -- Non-competition Agreement, dated July 1, 1996, among Registrant, The SABRE Group, Inc., AMR Corporation and American Airlines, Inc.(1) 10.8 -- Marketing Cooperation Agreement, dated as of July 1, 1996, between The SABRE Group, Inc. and American Airlines, Inc.(1)(2) 10.9 -- Tax Sharing Agreement, dated July 1, 1996, between The SABRE Group, Inc. and American Airlines, Inc.(1) 10.10 -- Travel Privileges Agreement, dated as of July 1, 1996, between The SABRE Group, Inc. and American Airlines, Inc.(1)(2) 10.11 -- Corporate Travel Agreement, dated July 25, 1996, between The SABRE Group, Inc. and American Airlines, Inc.(1)(2) 10.12 -- Software Marketing Agreement, dated September 10, 1996, among Registrant, The SABRE Group, Inc. and AMR Corporation.(1)(2)
II-3 122
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ---------- ---------------------- 10.13 -- Canadian Technical Services Subcontract, dated as of July 1, 1996, between The SABRE Group Inc. and American Airlines, Inc.(1)(2) 10.14 -- Form of Participating Carrier Agreement between The SABRE Group, Inc. and American Airlines, Inc.(1) 10.15 -- Investment Agreement, dated September 11, 1996, between The SABRE Group, Inc. and AMR Investment Services, Inc.(1)(2) 10.16 -- Assignment and Amendment Agreement, dated as of July 1, 1996, among The SABRE Group, Inc., American Airlines, Inc. and the Dallas-Fort Worth International Airport Board.(1) 10.17 -- American Airlines Special Facilities Lease Agreement, dated October 1, 1972, between American Airlines, Inc. and the Dallas-Fort Worth Regional Airport Board, as amended by Supplemental Agreements Nos. 1-5.(1) 10.18 -- Assignment Agreement, dated as of July 1, 1996, between The SABRE Group, Inc. and American Airlines, Inc.(1) 10.19 -- Sublease, dated June 1, 1958, between American Airlines, Inc. and the Trustees of the Tulsa Municipal Airport Trust, as amended by Amendments Nos. 1-12.(1) 10.20 -- Assignment Agreement, dated as of July 1, 1996, between The SABRE Group, Inc. and American Airlines, Inc.(1) 10.21 -- Amended and Restated Sublease Agreement, dated May, 1996, between American Airlines, Inc. and the Tulsa Airports Improvement Trust.(1) 10.22 -- Assignment Agreement, dated as of July 1, 1996, between The SABRE Group, Inc. and American Airlines, Inc.(1) 10.23 -- Office Lease Agreement, dated January 19, 1996, between American Airlines, Inc. and Maguire/Thomas Partners -- Westlake/Southlake Partnership.(1) 10.24 -- American Airlines, Inc. Supplemental Executive Retirement Plan dated November 16, 1994, incorporated by reference to Exhibit 10(mmm) to AMR Corporation's report on Form 10-K for the year ended December 31, 1994, file number 1-8400. 10.25 -- Long-Term Incentive Plan. 10.26 -- Directors' Stock Incentive Plan. 10.27 -- Form of Executive Termination Benefits Agreement.(1) 10.28 -- Employment Agreement, dated August 30, 1996, between The SABRE Group, Inc. and Michael J. Durham.(1) 10.29 -- Employment Agreement, dated September 7, 1995, between American Airlines, Inc. and Thomas M. Cook.(1) 10.30 -- Employment Agreement, dated May 7, 1996, between American Airlines, Inc. and Terrell B. Jones.(1) 10.31 -- Letter Agreement, dated July 15, 1996, between Registrant and Thomas M. Cook.(1) 10.32 -- Letter Agreement, dated July 15, 1996, between Registrant and Terrell B. Jones.(1) 21.1 -- Subsidiaries of Registrant.(1) 23.1 -- Consent of Debevoise & Plimpton (included in the opinion set forth in Exhibit 5.1). 23.2 -- Consent of Ernst & Young LLP. 24.1 -- Power of Attorney.(1) 27.1 -- Financial Data Schedule.(1)
- --------------- (1) Previously filed. (2) Item for which confidential treatment is requested. II-4 123 ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned registrant hereby undertakes to provide to the Underwriters at the closing specified in the U.S. Underwriting Agreement and the International Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. II-5 124 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has duly caused this Amendment No. 4 to the Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in Fort Worth, Texas on October 9, 1996. The SABRE Group Holdings, Inc. By: /s/ MICHAEL J. DURHAM ----------------------------------- Name: Michael J. Durham Title: President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 4 has been signed by the following persons in the capacities and on the date indicated.
SIGNATURES TITLE (CAPACITY) DATE ---------- ---------------- ----------------- * Chairman of the Board of October 9, 1996 - --------------------------------------------- Directors Robert L. Crandall /s/ MICHAEL J. DURHAM President and Chief October 9, 1996 - --------------------------------------------- Executive Officer and Michael J. Durham Director (Principal Executive Officer and Director) * Senior Vice President, October 9, 1996 - --------------------------------------------- Chief Financial Officer T. Patrick Kelly and Treasurer (Principal Financial Officer and Principal Accounting Officer) * Director October 9, 1996 - --------------------------------------------- Gerard J. Arpey * Director October 9, 1996 - --------------------------------------------- Anne H. McNamara *By: /s/ MICHAEL J. DURHAM - --------------------------------------------- Michael J. Durham Attorney-in-Fact
II-6 125 THE SABRE GROUP HOLDINGS, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F - ------------------------------------- ------------ -------- -------- ---------- ----------- ADDITIONS ------------------- CHARGED TO CHARGED BALANCE AT COSTS TO BEGINNING OF AND OTHER BALANCE AT CLASSIFICATION YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR - ------------------------------------- ------------ -------- -------- ---------- ----------- (IN THOUSANDS) YEAR ENDED DECEMBER 31, 1995 Allowance for uncollectible accounts........................ $3,042 $5,909 $ -- $ (4,129) $ 4,822 Reserve for booking fee cancellations................... 9,479 4,609 1,228 (502) 14,814 YEAR ENDED DECEMBER 31, 1994 Allowance for uncollectible accounts........................ 4,819 4,306 -- (6,083) 3,042 Reserve for booking fee cancellations................... 6,213 3,535 300 (569) 9,479 YEAR ENDED DECEMBER 31, 1993 Allowance for uncollectible accounts........................ 6,097 2,732 -- (4,010) 4,819 Reserve for booking fee cancellations................... 5,875 1,044 -- (706) 6,213
S-1 126 EXHIBIT LIST
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ---------- ---------------------- 1.1 -- Form of U.S. Underwriting Agreement.(1) 1.2 -- Form of International Underwriting Agreement.(1) 3.1 -- Restated Certificate of Incorporation of Registrant. 3.2 -- Restated Bylaws of Registrant. 4.1 -- Registration Rights Agreement between Registrant and AMR Corporation. 4.2 -- Specimen Certificate representing Class A Common Stock.(1) 5.1 -- Opinion of Debevoise & Plimpton as to the legality of the Class A Common Stock. 10.1 -- Registration Rights Agreement between Registrant and AMR Corporation (See Exhibit 4.1). 10.2 -- Intercompany Agreement, dated as of July 2, 1996, among Registrant, The SABRE Group, Inc. TSGL Holding, Inc., TSGL-SCS, Inc., TSGL, Inc., SABRE International, Inc., SABRE Services Columbia, LTDA and American Airlines, Inc.(1) 10.3 -- Management Services Agreement, dated as of July 1, 1996, between The SABRE Group, Inc. and American Airlines, Inc.(1)(2) 10.4 -- Credit Agreement, dated as of July 1, 1996, between Registrant, The SABRE Group, Inc., AMR Corporation and American Airlines, Inc.(1) 10.5 -- $850,000,000 Subordinated Debenture, dated July 2, 1996, executed by Registrant and payable to AMR Corporation.(1) 10.6 -- Information Technology Services Agreement, dated July 1, 1996, between The SABRE Group, Inc. and American Airlines, Inc.(1)(2) 10.7 -- Non-competition Agreement, dated July 1, 1996, among Registrant, The SABRE Group, Inc., AMR Corporation and American Airlines, Inc.(1) 10.8 -- Marketing Cooperation Agreement, dated as of July 1, 1996, between The SABRE Group, Inc. and American Airlines, Inc.(1)(2) 10.9 -- Tax Sharing Agreement, dated July 1, 1996, between The SABRE Group, Inc. and American Airlines, Inc.(1) 10.10 -- Travel Privileges Agreement, dated as of July 1, 1996, between The SABRE Group, Inc. and American Airlines, Inc.(1)(2) 10.11 -- Corporate Travel Agreement, dated July 25, 1996, between The SABRE Group, Inc. and American Airlines, Inc.(1)(2) 10.12 -- Software Marketing Agreement, dated September 10, 1996, among Registrant, The SABRE Group, Inc. and AMR Corporation.(1)(2) 10.13 -- Canadian Technical Services Subcontract, dated as of July 1, 1996, between The SABRE Group Inc. and American Airlines, Inc.(1)(2) 10.14 -- Form of Participating Carrier Agreement between The SABRE Group, Inc. and American Airlines, Inc.(1) 10.15 -- Investment Agreement, dated September 11, 1996, between The SABRE Group, Inc. and AMR Investment Services, Inc.(1)(2) 10.16 -- Assignment and Amendment Agreement, dated as of July 1, 1996, among The SABRE Group, Inc., American Airlines, Inc. and the Dallas-Fort Worth International Airport Board.(1) 10.17 -- American Airlines Special Facilities Lease Agreement, dated October 1, 1972, between American Airlines, Inc. and the Dallas-Fort Worth Regional Airport Board, as amended by Supplemental Agreements Nos. 1-5.(1) 10.18 -- Assignment Agreement, dated as of July 1, 1996, between The SABRE Group, Inc. and American Airlines, Inc.(1) 10.19 -- Sublease, dated June 1, 1958, between American Airlines, Inc. and the Trustees of the Tulsa Municipal Airport Trust, as amended by Amendments Nos. 1-12.(1)
127
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ---------- ---------------------- 10.20 -- Assignment Agreement, dated as of July 1, 1996, between The SABRE Group, Inc. and American Airlines, Inc.(1) 10.21 -- Amended and Restated Sublease Agreement, dated May, 1996, between American Airlines, Inc. and the Tulsa Airports Improvement Trust.(1) 10.22 -- Assignment Agreement, dated as of July 1, 1996, between The SABRE Group, Inc. and American Airlines, Inc.(1) 10.23 -- Office Lease Agreement, dated January 19, 1996, between American Airlines, Inc. and Maguire/Thomas Partners -- Westlake/Southlake Partnership.(1) 10.24 -- American Airlines, Inc. Supplemental Executive Retirement Plan dated November 16, 1994, incorporated by reference to Exhibit 10(mmm) to AMR Corporation's report on Form 10-K for the year ended December 31, 1994, file number 1-8400. 10.25 -- Long-Term Incentive Plan. 10.26 -- Directors' Stock Incentive Plan. 10.27 -- Form of Executive Termination Benefits Agreement.(1) 10.28 -- Employment Agreement, dated August 30, 1996, between The SABRE Group, Inc. and Michael J. Durham.(1) 10.29 -- Employment Agreement, dated September 7, 1995, between American Airlines, Inc. and Thomas M. Cook.(1) 10.30 -- Employment Agreement, dated May 7, 1996, between American Airlines, Inc. and Terrell B. Jones.(1) 10.31 -- Letter Agreement, dated July 15, 1996, between Registrant and Thomas M. Cook.(1) 10.32 -- Letter Agreement, dated July 15, 1996, between Registrant and Terrell B. Jones.(1) 21.1 -- Subsidiaries of Registrant.(1) 23.1 -- Consent of Debevoise & Plimpton (included in the opinion set forth in Exhibit 5.1). 23.2 -- Consent of Ernst & Young LLP. 24.1 -- Power of Attorney.(1) 27.1 -- Financial Data Schedule.(1)
- --------------- (1) Previously filed. (2) Item for which confidential treatment is requested. EX-3.1 2 CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF THE SABRE GROUP HOLDINGS, INC. 1. The name of the corporation (which is hereinafter referred to as the "Corporation") is "The SABRE Group Holdings, Inc.". 2. The original Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on June 25, 1996, under the name TSG Corporation. 3. This Restated Certificate of Incorporation of the Corporation has been duly proposed by resolutions adopted and declared advisable by the Board of Directors of the Corporation, duly adopted by written consent of the sole stockholder of the Corporation in lieu of a meeting and vote and duly executed and acknowledged by the officers of the Corporation in accordance with the provisions of Sections 103, 228, 242 and 245 of the General Corporation Law of the State of Delaware and, upon filing with the Secretary of State in accordance with Section 103, shall thenceforth supersede the original Certificate of Incorporation and shall, as it may thereafter be amended or supplemented in accordance with its terms and applicable law, be the Certificate of Incorporation of the Corporation. 4. The text of the Certificate of Incorporation of the Corporation is hereby amended and restated to read in its entirety as follows: ARTICLE I The name of the corporation (which is hereinafter referred to as the "Corporation") is: The SABRE Group Holdings, Inc. ARTICLE II The address of the Corporation's registered office in the State of Delaware is The Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County of New Castle 19801. The name of the Corporation's registered agent at such address is The Corporation Trust Company. ARTICLE III The purpose of the Corporation shall be to engage in any lawful act or activity for which corporations may be organized 1 2 and incorporated under the General Corporation Law of the State of Delaware (the "GCL"). ARTICLE IV (A) Authorized Stock. The total number of shares of stock which the Corporation shall have authority to issue is Three Hundred Seventy Seven Million Three Hundred Seventy Four Thousand (377,374,000) shares, consisting of (i) Two Hundred Fifty Million (250,000,000) shares of Class A Common Stock, par value $.01 per share (hereinafter referred to as "Class A Common Stock"), and One Hundred Seven Million Three Hundred Seventy Four Thousand (107,374,000) shares of Class B Common Stock, par value $.01 per share (hereinafter referred to as "Class B Common Stock") (the Class A Common Stock and the Class B Common Stock being hereinafter collectively referred to as the "Common Stock"), and (ii) Twenty Million (20,000,000) shares of Preferred Stock, par value $.01 per share (hereinafter referred to as "Preferred Stock"). (B) Common Stock. The following is a statement of the relative powers, preferences and participating, optional or other special rights, and the qualifications, limitations and restrictions of the Class A Common Stock and the Class B Common Stock of the Corporation: (i) Except as otherwise set forth in this Article IV, the relative powers, preferences and participating, optional or other special rights, and the qualifications, limitations and restrictions of the Class A Common Stock and the Class B Common Stock shall be identical in all respects. (ii) Subject to the rights of holders of Preferred Stock, and subject to any other provisions of this Certificate of Incorporation, holders of Class A Common Stock and Class B Common Stock shall be entitled to receive such dividends and other distributions in cash, stock or property of the Corporation as may be declared thereon by the Board of Directors from time to time out of assets or funds of the Corporation legally available therefor. If any dividend or other distribution in cash or other property is paid with respect to Class A Common Stock or with respect to Class B Common Stock (other than dividends or other distributions payable in shares of Common Stock), a like dividend or other distribution in cash or other property shall also be paid with respect to shares of the other class of Common Stock, in an amount equal per share. In the case of dividends or other distributions payable in Common Stock, including without limitation distributions pursuant to stock splits or divisions of Common Stock of the Corporation, only shares of Class A Common Stock shall be paid or distributed with respect to Class A Common Stock and only shares of Class B Common Stock shall be paid or distributed with respect to Class B Common Stock. The number of shares of Class A Common Stock and Class B Common Stock so distributed 2 3 shall be equal in number on a per share basis. Neither the shares of Class A Common Stock nor the shares of Class B Common Stock may be reclassified, subdivided or combined unless such reclassification, subdivision or combination occurs simultaneously and in the same proportion for each class. (iii) (a) At each meeting of the stockholders of the Corporation, each holder of Class A Common Stock shall be entitled to one vote in person or by proxy for each share of Class A Common Stock standing in his or her name on the transfer books of the Corporation, and each holder of Class B Common Stock shall be entitled to ten votes in person or by proxy for each share of Class B Common Stock standing in his or her name on the transfer books of the Corporation, in connection with the election of directors and all other matters submitted to a vote of stockholders; provided, however, that with respect to any proposed conversion of the shares of Class B Common Stock into shares of Class A Common Stock pursuant to paragraph (B)(v)(b) below, each holder of a share of Common Stock, irrespective of class, shall have one vote in person or by proxy for each share of Common Stock standing in his or her name on the transfer books of the Corporation. Except as may be otherwise required by law or by this Article IV, the holders of Class A Common Stock and Class B Common Stock shall vote together as a single class, subject to any voting rights which may be granted to holders of Preferred Stock, on all matters submitted to a vote of stockholders of the Corporation. (b) Except as otherwise provided by law, and subject to any rights of the holders of Preferred Stock, the provisions of this Certificate of Incorporation shall not be modified, revised, altered or amended, repealed or rescinded in whole or in part, without the approval of a majority of the votes entitled to be cast by the holders of the Class A Common Stock and the Class B Common Stock, voting together as a single class; provided, however, that with respect to any proposed amendment of this Certificate of Incorporation which would alter or change the powers, preferences or special rights of the shares of Class A Common Stock or Class B Common Stock so as to affect them adversely, the approval of a majority of the votes entitled to be cast by the holders of the shares affected by the proposed amendment, voting separately as a class, shall be obtained in addition to the approval of a majority of the votes entitled to be cast by the holders of the Class A Common Stock and the Class B Common Stock 3 4 voting together as a single class as hereinbefore provided. Any increase in the authorized number of shares of any class or classes of stock of the Corporation or creation, authorization or issuance of any securities convertible into, or warrants, options or similar rights to purchase, acquire or receive, shares of any such class or classes of stock shall be deemed not to affect adversely the powers, preferences or special rights of the shares of Class A Common Stock or Class B Common Stock. (c) Each reference in this Certificate of Incorporation to a majority or other proportion of shares of Common Stock, Class A Common Stock or Class B Common Stock shall refer to such majority or other proportion of the votes to which such shares of Common Stock, Class A Common Stock or Class B Common Stock, as applicable, are entitled. (iv) In the event of any dissolution, liquidation or winding up of the affairs of the Corporation, whether voluntary or involuntary, after payment in full of the amounts required to be paid to the holders of Preferred Stock, the remaining assets and funds of the Corporation shall be distributed pro rata to the holders of Class A Common Stock and Class B Common Stock (and, for the avoidance of doubt, such distribution shall be irrespective of the difference in voting rights between such classes of stock). For purposes of this paragraph (B)(iv), the voluntary sale, conveyance, lease, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the assets of the Corporation or a consolidation or merger of the Corporation with one or more other corporations or other Persons (whether or not the Corporation is the corporation surviving such consolidation or merger) shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary. (v) (a) Prior to the date on which shares of Class B Common Stock are transferred to the holders of shares of common stock, par value $1.00 per share ("AMR Parent Common Stock"), of AMR Parent (as defined in Article VII), or to holders of stock of the Class B Transferee (as defined in paragraph (B)(v)(b) below) in a Tax-Free Spin-Off (as defined in paragraph (B)(v)(b) below), each record holder of shares of Class B Common Stock may from time to time convert any or all of such shares into an equal number of shares of Class A Common Stock by surrendering the certificates for such shares, accompanied by any required tax transfer stamps and by a written notice by such record holder to the Corporation stating that such record holder desires to 4 5 convert such shares of Class B Common Stock into the same number of shares of Class A Common Stock and requesting that the Corporation issue all of such shares of Class A Common Stock to Persons named therein, setting forth the number of shares of Class A Common Stock to be issued to each such Person and the denominations in which the certificates therefor are to be issued. To the extent permitted by law, such voluntary conversion shall be deemed to have been effected at the close of business on the date of such surrender. Following a Tax-Free Spin-Off, shares of Class B Common Stock shall no longer be convertible into shares of Class A Common Stock except as set forth in paragraph (B)(v)(b) below. (b) Prior to a Tax-Free Spin-Off, each share of Class B Common Stock shall automatically convert into one share of Class A Common Stock upon the transfer of such share if, after such transfer, such share is not Beneficially Owned (as defined in Article XI(B)) by AMR or, as set forth below in this paragraph (B)(v)(b), by the Class B Transferee or any subsidiary of the Class B Transferee. Shares of Class B Common Stock shall not convert into shares of Class A Common Stock (1) in any transfer effected in connection with a distribution of Class B Common Stock as a spin-off, split-up or split-off to holders of AMR Parent Common Stock or to holders of stock of the Class B Transferee intended to be on a tax-free basis under the Internal Revenue Code of 1986, as amended from time to time (the "Code") (a "Tax-Free Spin-Off") or (2) except as otherwise set forth below in this paragraph (B)(v)(b), in any transfer after a Tax-Free Spin-Off. For purposes of this paragraph (B)(v), a Tax-Free Spin-Off shall be deemed to have occurred at the time shares are first transferred to holders of AMR Parent Common Stock or to holders of stock of the Class B Transferee, as the case may be, following receipt of an affidavit described in clauses (6) or (7) of the first sentence of paragraph (B)(v)(d) below. Prior to a Tax-Free Spin-Off, shares of Class B Common Stock representing more than a 50 percent equity interest in the then outstanding shares of Common Stock taken as a whole transferred by AMR in a single transaction to one Person who is not an affiliate of AMR (together with its successors, the "Class B Transferee") or any subsidiary of the Class B Transferee shall not automatically convert to Class A Common Stock upon the transfer of such shares. Any shares of Class B Common Stock retained by AMR following any such transfer of shares of Class B Common Stock to the Class B Transferee shall automatically convert into shares of Class A Common Stock upon such 5 6 transfer. In the event of a Tax-Free Spin-Off, shares of Class B Common Stock shall automatically convert into shares of Class A Common Stock on the fifth anniversary of the date on which shares of Class B Common Stock are first transferred to holders of AMR Parent Common Stock or of the Class B Transferee, as the case may be, in a Tax-Free Spin-Off unless, prior to such Tax-Free Spin-Off, AMR or the Class B Transferee, as the case may be, delivers to the Corporation an opinion of counsel, reasonably satisfactory to the Corporation, to the effect that such conversion could adversely affect the ability of AMR or the Class B Transferee, as the case may be, to obtain a favorable ruling from the Internal Revenue Service (the "IRS") that the distribution would be a Tax-Free Spin-Off under the Code. If such an opinion is received, approval of such conversion shall be submitted to a vote of the holders of the Common Stock as soon as practicable after the fifth anniversary of the Tax-Free Spin-Off unless AMR or the Class B Transferee, as the case may be, delivers to the Corporation an opinion of counsel, reasonably satisfactory to the Corporation, prior to such anniversary to the effect that such vote could adversely affect the status of the Tax-Free Spin-Off (including without limitation the ability to obtain a favorable ruling from the IRS); if such opinion is so delivered, such vote shall not be held. At the meeting of stockholders called for such purpose, each holder of Common Stock shall be entitled to one vote (irrespective of the voting rights provided for such shares under paragraph (B)(iii)(a)) in person or by proxy for each share of Common Stock standing in his or her name on the transfer books of the Corporation. Approval of such conversion shall require the approval of a majority of the votes, on the per share voting basis provided in the preceding sentence, entitled to be cast by the holders of the Class A Common Stock and the Class B Common Stock present and voting, voting together as a single class, and the holders of the Class B Common Stock shall not be entitled to a separate class vote. Such conversion shall be effective on the date on which such approval is given at a meeting of stockholders called for such purpose. The Corporation will provide notice of any automatic conversion of all outstanding shares of Class B Common Stock to all holders of record of the Common Stock as soon as practicable following such conversion; provided, however, that the Corporation may satisfy such notice requirement by providing such notice prior 6 7 to such conversion. Such notice shall be provided by mailing notice of such conversion first class postage prepaid, to each holder of record of the Common Stock at such holder's address as it appears on the transfer books of the Corporation; provided, further, that no failure to give such notice nor any defect therein shall affect the validity of the automatic conversion of any shares of Class B Common Stock. Each such notice shall state, as appropriate, the following: (1) the automatic conversion date; (2) that all outstanding shares of Class B Common Stock are automatically converted; (3) the place or places where certificates for such shares are to be surrendered for conversion; and (4) that no dividends will be declared on the shares of Class B Common Stock converted after such conversion date. Immediately upon such conversion, the rights of the holders of shares of Class B Common Stock as such shall cease and such holders shall be treated for all purposes as having become the record owners of the shares of Class A Common Stock issuable upon such conversion; provided, however, that such Persons shall be entitled to receive when paid dividends, if any, declared on the Class B Common Stock as of a record date preceding the time of such conversion and unpaid as of the time of such conversion, subject to paragraph (B)(v)(f) below. (c) Prior to a Tax-Free Spin-Off, holders of shares of Class B Common Stock may (1) sell or otherwise dispose of or transfer any or all of such shares held by them, respectively, only in connection with a transfer which meets the qualifications of paragraph (B)(v)(d) below, and under no other circumstances, or (2) convert any or all of such shares into shares of Class A Common Stock as provided in paragraph (B)(v)(a) above. Prior to a Tax-Free Spin-Off, no one other than those Persons in whose names shares of Class B Common Stock become registered on the original stock ledger of the Corporation by reason of their record ownership of shares of Common Stock of the Corporation which are reclassified into shares of Class B Common Stock, or transferees or successive transferees who receive shares of Class B Common Stock in connection with a transfer which meets the 7 8 qualifications set forth in paragraph (B)(v)(d) below, shall by virtue of the acquisition of a certificate for shares of Class B Common Stock have the status of an owner or holder of shares of Class B Common Stock or be recognized as such by the Corporation or be otherwise entitled to enjoy for his or her own benefit the special rights and powers of a holder of shares of Class B Common Stock. Holders of shares of Class B Common Stock may at any and all times transfer to any Person the shares of Class A Common Stock issuable upon conversion of such shares of Class B Common Stock. (d) Prior to a Tax-Free Spin-Off, shares of Class B Common Stock shall be transferred on the books of the Corporation and a new certificate therefor issued, upon presentation at the office of the Secretary of the Corporation (or at such additional place or places as may from time to time be designated by the Secretary of the Corporation) of the certificate for such shares, in proper form for transfer and accompanied by all requisite stock transfer tax stamps, only if such certificate when so presented shall also be accompanied by any one of the following: (1) an affidavit from AMR stating that such certificate is being presented to effect a transfer by AMR of such shares to a Subsidiary of AMR; or (2) an affidavit from AMR stating that such certificate is being presented to effect a transfer by any Subsidiary of AMR of such shares to AMR or another Subsidiary of AMR; or (3) an affidavit from AMR stating that such certificate is being presented to effect a transfer by AMR or any of its Subsidiaries of such shares to the Class B Transferee or a Subsidiary of the Class B Transferee as contemplated by paragraph (B)(v)(b); or (4) an affidavit from the Class B Transferee stating that such certificate is being presented to effect a transfer by the Class B Transferee of such shares to a Subsidiary of the Class B Transferee; or (5) an affidavit from the Class B Transferee stating that such certificate is being presented to effect a transfer by any Subsidiary of the 8 9 Class B Transferee of such shares to the Class B Transferee or another Subsidiary of the Class B Transferee; or (6) an affidavit from AMR stating that such certificate is being presented to effect a transfer by AMR of such shares to the holders of AMR Parent Common Stock in connection with a Tax-Free Spin-Off; or (7) an affidavit from the Class B Transferee stating that such certificate is being presented to effect a transfer by the Class B Transferee of such shares to the stockholders of the Class B Transferee in connection with a Tax-Free Spin-Off. Each affidavit of a record holder furnished pursuant to this paragraph (B)(v)(d) shall be verified as of a date not earlier than five days prior to the date of delivery thereof, and, where such record holder is a corporation or partnership, shall be verified by an officer of the corporation or by a general partner of the partnership, as the case may be. If a record holder of shares of Class B Common Stock shall deliver a certificate for such shares, endorsed by him or her for transfer or accompanied by an instrument of transfer signed by him or her, to a Person who receives such shares in connection with a transfer which does not meet the qualifications set forth in this paragraph (B)(v)(d), then such Person or any successive transferee of such certificate may treat such endorsement or instrument as authorizing him or her on behalf of such record holder to convert such shares in the manner above provided for the purpose of the transfer to himself or herself of the shares of Class A Common Stock issuable upon such conversion, and to give on behalf of such record holder the written notice of conversion above required, and may convert such shares of Class B Common Stock accordingly. If such shares of Class B Common Stock shall improperly have been registered in the name of such a Person (or in the name of any successive transferee of such certificate) and a new certificate therefor issued, such Person or transferee shall surrender such new certificate for cancellation, accompanied by the written notice of conversion above required, in which case (1) such Person or transferee shall be deemed to have elected to treat the endorsement on (or instrument of transfer accompanying) the certificate so delivered by such former record holder as authorizing such Person 9 10 or transferee on behalf of such former record holder so to convert such shares and so to give such notice, (2) the shares of Class B Common Stock registered in the name of such former record holder shall be deemed to have been surrendered for conversion for the purpose of the transfer to such Person or transferee of the shares of Class A Common Stock issuable upon conversion, and (3) the appropriate entries shall be made on the books of the Corporation to reflect such action. In the event that the Board of Directors of the Corporation (or any committee of the Board of Directors, or any officer of the Corporation, designated for the purpose by the Board of Directors) shall determine, upon the basis of facts not disclosed in any affidavit or other document accompanying the certificate for shares of Class B Common Stock when presented for transfer, that such shares of Class B Common Stock have been registered in violation of the provisions of paragraph (B)(v), or shall determine that a Person is enjoying for his or her own benefit the special rights and powers of shares of Class B Common Stock in violation of such provisions, then the Corporation shall take such action at law or in equity as is appropriate under the circumstances. Without limiting the generality of the preceding sentence, an unforeclosed pledge made to secure a bona fide obligation shall not be deemed to violate such provisions. (e) Prior to the occurrence of a Tax-Free Spin-Off, each certificate for shares of Class B Common Stock shall bear a legend on the face thereof reading as follows: "The shares of Class B Common Stock represented by this certificate may not be transferred to any person or entity in connection with a transfer that does not meet the qualifications set forth in paragraph (B)(v)(d) of Article IV of the Certificate of Incorporation of this corporation and no person who receives such shares in connection with a transfer which does not meet the qualifications prescribed by paragraph (B)(v)(d) of said Article IV is entitled to own or to be registered as the record holder of such shares of Class B Common Stock, but the record holder of this certificate may at any time convert such shares of Class B Common Stock into the same number of shares of Class A Common Stock. 10 11 Each holder of this certificate, by accepting the same, accepts and agrees to all of the foregoing." Upon and after the transfer of shares in a Tax-Free Spin-Off, shares of Class B Common Stock shall no longer bear the legend set forth above in this paragraph (B)(v)(e). (f) Upon any conversion of shares of Class B Common Stock into shares of Class A Common Stock pursuant to the provisions of this paragraph (B)(v), any dividend, for which the record date or payment date shall be subsequent to such conversion, which may have been declared on the shares of Class B Common Stock so converted shall be deemed to have been declared, and shall be payable, with respect to the shares of Class A Common Stock into or for which such shares of Class B Common Stock shall have been so converted, and any such dividend shall be deemed to have been declared, and shall be payable, in shares of Class A Common Stock. (g) The Corporation shall not reissue or resell any shares of Class B Common Stock which shall have been converted into shares of Class A Common Stock pursuant to or as permitted by the provisions of this paragraph (B)(v), or any shares of Class B Common Stock which shall have been acquired by the Corporation in any other manner. The Corporation shall, from time to time, take such appropriate action as may be necessary to retire such shares and to reduce the authorized amount of Class B Common Stock accordingly. The Corporation shall at all times reserve and keep available, out of its authorized but unissued Common Stock, such number of shares of Class A Common Stock as would become issuable upon the conversion of all shares of Class B Common Stock then outstanding. (h) In connection with any transfer or conversion of any stock of the Corporation pursuant to or as permitted by the provisions of this paragraph (B)(v) or in connection with the making of any determination referred to in this paragraph (B)(v): (1) the Corporation shall be under no obligation to make any investigation of facts unless an officer, employee or agent of the Corporation responsible for making such transfer or determination or issuing Class A Common Stock 11 12 pursuant to such conversion has substantial reason to believe, or unless the Board of Directors (or a committee of the Board of Directors designated for the purpose) determines that there is substantial reason to believe, that any affidavit or other document is incomplete or incorrect in a material respect or that an investigation would disclose facts upon which any determination referred to in paragraph (B)(v)(f) above should be made, in either of which events the Corporation shall make or cause to be made such investigation as it may deem necessary or desirable in the circumstances and have a reasonable time to complete such investigation; and (2) neither the Corporation nor any director, officer, employee or agent of the Corporation shall be liable in any manner for any action taken or omitted in good faith. (i) The Corporation will not be required to pay any documentary, stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Class A Common Stock on the conversion of shares of Class B Common Stock pursuant to this paragraph (B)(v), and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid. (vii) All rights to vote and all voting power (including, without limitation thereto, the right to elect directors) shall be vested exclusively in the holders of Common Stock, voting together as a single class, except as otherwise expressly provided in this Certificate of Incorporation, in a Preferred Stock Designation or as otherwise expressly required by applicable law. (viii) No stockholder shall be entitled to exercise any right of cumulative voting. (ix) Immediately upon the effectiveness of this Restated Certificate of Incorporation, each share of common stock of the Corporation, par value $.01 per share, issued and outstanding immediately prior to such effectiveness shall be changed into and reclassified as 107,374 shares of Class B Common Stock. Promptly after such effectiveness, each record holder of a certificate that, immediately prior to such effectiveness, represented common stock of the Corporation, par value $.01 per share, shall be entitled to receive in exchange for such certificate, upon 12 13 surrender of such certificate to the Corporation, a certificate for the number of shares of Class B Common Stock to which such holder is entitled as a result of the changes in the common stock effected by the preceding sentence (the "Reclassification"). Until surrendered and exchanged in accordance herewith, each certificate that, immediately prior to such effectiveness, represented common stock shall represent the number of shares of Class B Common Stock to which the holder is entitled as a result of the Reclassification. (C) Preferred Stock. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized to provide by resolution or resolutions from time to time for the issuance of shares of Preferred Stock in one or more series and, by filing a certificate pursuant to the applicable law of the State of Delaware (hereinafter, along with any similar designation relating to any other class or series of stock which may hereafter be authorized, referred to as a "Preferred Stock Designation," each of which shall be part of this Certificate of Incorporation), to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations and restrictions thereof. The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following: (i) The designation of the series, which may be by distinguishing number, letter or title. (ii) The number of shares of the series, which number the Board of Directors may thereafter (except where otherwise provided in the Preferred Stock Designation) increase or decrease (but not below the number of shares thereof then outstanding). (iii) Whether dividends, if any, shall be cumulative or noncumulative and the dividend rate of the series. (iv) The conditions upon which and dates at which dividends, if any, shall be payable, and the relation which such dividends, if any, shall bear to the dividends payable on any other class or classes of stock. (v) The redemption rights and price or prices, if any, for shares of the series. (vi) The terms and amount of any sinking fund provided for the purchase or redemption of shares of the series. (vii) The amounts payable on and the preferences, if 13 14 any, of shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation. (viii) Whether the shares of the series shall be convertible into shares of any class or series, or any other security, of the Corporation or any other corporation, and, if so, the specification of such other class or series of such other security, the conversion price or prices or rate or rates, any adjustments thereof, the date or dates at which such shares shall be convertible and all other terms and conditions upon which such conversion may be made. (ix) Restrictions on the issuance (or reissuance) of shares of the same series or of any other class or series. (x) The voting rights, if any, of the holders of shares of the series. (D) Record Holders. The Corporation shall be entitled to treat the Person (as defined in Article XI) in whose name any share of its stock is registered as the owner thereof for all purposes and shall not be bound to recognize any equitable or other claim to, or interest in, such share on the part of any other Person, whether or not the Corporation shall have notice thereof, except as expressly provided by applicable law. (E) No Preemptive Rights. No stockholder of the Corporation shall have any preemptive or preferential right, nor be entitled as such as a matter of right, to subscribe for or purchase any part of any new or additional issue of stock of the Corporation of any class or series, whether now or hereafter authorized, and whether issued for money or for consideration other than money, or of any issue of securities convertible into stock of the Corporation. ARTICLE V The Board of Directors is hereby authorized to create and issue, whether or not in connection with the issuance and sale of any of its stock or other securities or property, rights entitling the holders thereof to purchase from the Corporation shares of stock or other securities or property of the Corporation or any other corporation. The times at which and the terms upon which such rights are to be issued will be determined by the Board of Directors and set forth in the contracts or instruments that evidence such rights. The authority of the Board of Directors with respect to such rights shall include, but not be limited to, determination of the following: (A) The initial purchase price per share or other unit of the stock or other securities or property to be purchased upon 14 15 exercise of such rights. (B) Provisions relating to the times at which and the circumstances under which such rights may be exercised or sold or otherwise transferred, either together with or separately from, any other stock or other securities of the Corporation. (C) Provisions which adjust the number or exercise price of such rights or amount or nature of the stock or other securities or property receivable upon exercise of such rights following the occurrence of specified events, including without limitation a combination, split or recapitalization of any stock of the Corporation, a change in ownership of the Corporation's stock or other securities or a reorganization, merger, consolidation, sale of assets or other occurrence relating to the Corporation or any stock of the Corporation, and provisions restricting the ability of the Corporation to enter into any such transaction absent an assumption by the other party or parties thereto of the obligations of the Corporation under such rights. (D) Provisions which deny the holder of a specified percentage of the outstanding stock or other securities of the Corporation the right to exercise such rights and cause the rights held by such holder to become void. (E) Provisions which permit the Corporation to redeem or exchange such rights. (F) The appointment of a rights agent with respect to such rights. ARTICLE VI (A) In furtherance of, and not in limitation of, the powers conferred by law, the Board of Directors is expressly authorized and empowered: (i) to adopt, amend or repeal the Bylaws of the Corporation; provided, however, that the Bylaws adopted by the Board of Directors under the powers hereby conferred may be amended or repealed by the Board of Directors or by the stockholders having voting power with respect thereto; provided, further, that in the case of amendments by stockholders, effective as of the first time at which AMR shall cease to be the Beneficial Owner of an aggregate of at least a majority of the voting power of the Voting Stock (as defined in paragraph (B) of this Article VI) then outstanding (the "Trigger Date"), the affirmative vote of the holders of at least 80 percent of the voting power of the then outstanding Voting Stock, voting together as a single class, shall be required to alter, amend or repeal 15 16 any provision of the Bylaws or adopt any provision of the Bylaws inconsistent with any other provision of the Bylaws; and (ii) from time to time to determine whether and to what extent, and at what times and places, and under what conditions and regulations, the accounts and books of the Corporation, or any of them, shall be open to inspection of stockholders; and, except as so determined, or as expressly provided in this Certificate of Incorporation or in any Preferred Stock Designation, no stockholder shall have any right to inspect any account, book or document of the Corporation other than such rights as may be conferred by applicable law. (B) The Corporation may in its Bylaws confer powers upon the Board of Directors in addition to the foregoing and in addition to the powers and authorities expressly conferred upon the Board of Directors by applicable law. Effective as of the Trigger Date and notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 80 percent of the voting power of the then outstanding Voting Stock, voting together as a single class, shall be required to amend or repeal, or adopt any provision inconsistent with, paragraph (A)(i) of this Article VI. For the purposes of this Certificate of Incorporation, "Voting Stock" shall mean the outstanding shares of stock of the Corporation entitled to vote generally in the election of directors. ARTICLE VII (A) For purposes of this Certificate of Incorporation, "AMR" shall mean AMR Corporation, a Delaware corporation ("AMR Parent"), all successors to AMR Parent by way of merger, consolidation or sale of all or substantially all its assets, and all corporations, partnerships, joint ventures, associations and other entities (each a "Subsidiary Entity") in which AMR Parent Beneficially Owns, directly or indirectly, 50 percent or more of the outstanding voting stock, voting power or similar voting interests ("Voting Interest"), which shall include without limitation (as of the date hereof) American Airlines, Inc., AMR Eagle, Inc., AMR Services Holding Corporation, AMR Services Corporation and AMR Investment Services, Inc., each of which are Delaware corporations, but which shall not include the Corporation or any Subsidiary Entity in which the Corporation Beneficially Owns, directly or indirectly, 50 percent or more of the outstanding Voting Interest. (B) In anticipation that: (i) the Corporation will cease to be a wholly-owned Subsidiary (as defined in Article XI hereof) of AMR Parent 16 17 but that AMR Parent will remain, for some period of time, a stockholder of the Corporation; (ii) the Corporation and AMR may engage in the same or similar activities or lines of business and may have an interest in the same or similar areas of corporate opportunities; (iii) there will be benefits to be derived by the Corporation through its continued contractual, corporate and business relations with AMR (including without limitation service of officers of AMR as directors of the Corporation); and (iv) there will be benefits in providing guidelines for directors and officers of AMR and of the Corporation with respect to the allocation of corporate opportunities and other matters; the provisions of this Article VII are set forth to regulate, define and guide the conduct of certain affairs of the Corporation as they may involve AMR and its officers and directors, and the powers, rights, duties and liabilities of the Corporation and its officers, directors and stockholders in connection therewith. (C) Except as AMR may otherwise agree in writing, AMR shall have the right to, and shall have no duty not to, (i) engage in the same or similar business activities or lines of business as the Corporation, (ii) do business with any potential or actual customer or supplier of the Corporation, or (iii) employ or otherwise engage any officer or employee of the Corporation. Neither AMR nor any officer or director thereof (except as provided in paragraph (D) of this Article VII) shall be liable to the Corporation or its stockholders for breach of any fiduciary duty by reason of any such activities (set forth in the preceding sentence) of AMR or of the participation therein of such Person. In the event that AMR acquires knowledge of a potential transaction or matter that may be a corporate opportunity for both AMR and the Corporation, AMR shall have no duty to communicate or present such corporate opportunity to the Corporation and shall not be liable to the Corporation or its stockholders for breach of any fiduciary duty as a stockholder of the Corporation by reason of the fact that AMR pursues or acquires such corporate opportunity for itself, directs such corporate opportunity to another Person, or does not present such corporate opportunity to the Corporation. (D) In the event that a director or officer of the Corporation who is also a director or officer of AMR acquires knowledge of a potential transaction or matter that may be a corporate opportunity for both the Corporation and AMR, such 17 18 director or officer of the Corporation (i) shall have fully satisfied and fulfilled the fiduciary duties of such director or officer to the Corporation and its stockholders with respect to such corporate opportunity, (ii) shall not be liable to the Corporation or its stockholders for breach of any fiduciary duty by reason of the fact that AMR pursues or acquires such corporate opportunity for itself or directs such corporate opportunity to another Person or does not communicate information regarding such corporate opportunity to the Corporation, (iii) shall be deemed to have acted in good faith and in a manner such Person reasonably believes to be in and not opposed to the best interests of the Corporation, and (iv) shall be deemed not to have breached his or her duty of loyalty to the Corporation or its stockholders and not to have derived an improper benefit therefrom, if such director or officer acts in a manner consistent with the following policy: (x) a corporate opportunity offered to any Person who is a director but not an officer of the Corporation and who is also an officer (whether or not a director) of AMR shall belong to AMR, unless such opportunity is expressly offered to such Person primarily in his or her capacity as a director of the Corporation, in which case such opportunity shall belong to the Corporation; (y) a corporate opportunity offered to any Person who is an officer (whether or not a director) of the Corporation and who is also a director but not an officer of AMR shall belong to the Corporation, unless such opportunity is expressly offered to such Person primarily in his or her capacity as a director of AMR, in which case such opportunity shall belong to AMR; and (z) a corporate opportunity offered to any other Person who is either an officer of both the Corporation and AMR or a director of both the Corporation and AMR shall belong to AMR or to the Corporation, as the case may be, if such opportunity is expressly offered to such Person primarily in his or her capacity as an officer or director of AMR or of the Corporation, respectively; otherwise, such opportunity shall belong to AMR. (E) Any corporate opportunity that belongs to AMR or to the Corporation pursuant to the foregoing policy shall not be pursued by the other, or directed by the other to another Person, unless and until AMR or the Corporation, as the case may be, determines not to pursue the opportunity. Notwithstanding the preceding sentence, if the party to whom the corporate opportunity belongs does not within a reasonable period of time begin to pursue, or thereafter continue to pursue, such opportunity diligently and in good faith, the other party may then pursue such opportunity or direct it to another Person. 18 19 (F) For purposes of this Article VII, "corporate opportunities" shall consist of business opportunities which (i) the Corporation is financially able to undertake, (ii) are, from their nature, in the line or lines of the Corporation's business and are of practical advantage to it, and (iii) are ones in which the Corporation has an interest or reasonable expectancy. In addition, "corporate opportunities" shall not include any transaction in which the Corporation or AMR is permitted to participate pursuant to (a) any agreement between the Corporation and AMR in effect as of the time any equity security of the Corporation is held of record by any Person other than AMR, as may be amended thereafter with the approval of a majority of Disinterested Directors (as defined in Article XI hereof) or (b) any subsequent agreement between the Corporation and AMR approved by a majority of Disinterested Directors, it being acknowledged that the rights of the Corporation under any such agreement shall be deemed to be contractual rights and shall not be corporate opportunities of the Corporation for any purpose; provided, however, that no presumption or implication as to corporate opportunities relating to any transaction not explicitly covered by such an agreement shall arise from the existence or absence of any such agreement. (G) Any Person purchasing or otherwise acquiring any interest in any shares of stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Article VII. (H) For purposes of this Article VII, the "Corporation" shall mean the Corporation and all corporations, partnerships, joint ventures, associations and other entities in which the Corporation Beneficially Owns, directly or indirectly, 50 percent or more of the outstanding voting stock, voting power or similar voting interests. (I) If any contract, agreement, arrangement or transaction between the Corporation and AMR involves a corporate opportunity and is approved in accordance with the procedures set forth in Article VIII hereof, AMR and its officers and directors shall also, for the purposes of this Article VII and the other provisions of this Certificate of Incorporation, be deemed to have fully satisfied and fulfilled any fiduciary duties they may have to the Corporation and its stockholders. Any such contract, agreement, arrangement or transaction involving a corporate opportunity not so approved shall not by reason thereof result in any such breach of any fiduciary duty, but shall be governed by the other provisions of this Article VII, this Certificate of Incorporation, the Bylaws, the GCL and other applicable law. (J) For purposes of this Article VII, a director of the Corporation who is Chairman of the Board of Directors of the Corporation or a committee thereof or the Chief Executive Officer 19 20 of the Corporation shall not be deemed to be an officer of the Corporation by reason of holding such position (regardless of whether such position is deemed an office of the Corporation under the Bylaws of the Corporation), unless such Person is a full-time employee of the Corporation. (K) Effective as of the Trigger Date, and notwithstanding anything in this Certificate of Incorporation to the contrary and in addition to any vote of the Board of Directors required by applicable law or this Certificate of Incorporation, the affirmative vote of the holders of more than 80 percent of the voting power of the Voting Stock then outstanding, voting together as a single class, shall be required to alter, amend or repeal in a manner adverse to the interests of AMR, or adopt any provision adverse to the interests of AMR and inconsistent with, any provision of this Article VII. Neither the alteration, amendment or repeal of this Article VII nor the adoption of any provision inconsistent with this Article VII shall eliminate or reduce the effect of this Article VII in respect of any matter occurring, or any cause of action, suit or claim that, but for this Article VII, would accrue or arise, prior to such alteration, amendment, repeal or adoption. ARTICLE VIII (A) In anticipation that: (i) the Corporation will cease to be a wholly-owned Subsidiary of AMR Parent but AMR Parent will remain, for some period of time, a stockholder of the Corporation and have continued contractual, corporate and business relations with the Corporation; (ii) the Corporation and AMR or its customers or suppliers may enter into contracts or otherwise transact business with each other and the Corporation may derive benefits therefrom; and (iii) the Corporation may from time to time enter into contractual, corporate or business relations with one or more of its directors, or one or more corporations, partnerships, associations or other organizations in which one or more of its directors have a financial interest (collectively, "Related Entities"); the provisions of this Article VIII are set forth to regulate and guide certain contractual relations and other business relations of the Corporation as they may involve AMR or its customers or suppliers, Related Entities and their respective officers and directors, and the powers, rights, duties and liabilities of the Corporation and its officers, directors and stockholders in connection therewith. 20 21 (B) The provisions of this Article VIII are in addition to, and not in limitation of, the provisions of the GCL and the other provisions of this Certificate of Incorporation. Any contract or business relation which does not comply with procedures set forth in this Article VIII shall not by reason thereof be deemed void or voidable or result in any breach of any fiduciary duty to, or duty of loyalty to, or failure to act in good faith or in the best interests of, the Corporation, or the derivation of any improper personal benefit, but shall be governed by the remaining provisions of this Certificate of Incorporation, the Bylaws, the GCL and other applicable law. (C) No contract, agreement, arrangement or transaction between the Corporation and AMR or any customer or supplier thereof or any Related Entity or between the Corporation and one or more of the directors or officers of the Corporation, AMR or any Related Entity, or any amendment, modification or termination thereof, shall be void or voidable solely for the reason that AMR or such customer or supplier, any Related Entity or any one or more of the officers or directors of the Corporation, AMR or any Related Entity are parties thereto, or solely because any such directors or officers are present at or participate in the meeting of the Board of Directors or committee thereof which authorizes such contract, agreement, arrangement, transaction, amendment, modification or termination (each, a "Transaction") or solely because his or their votes are counted for such purpose, and AMR, any Related Entity and such directors and officers (i) shall have fully satisfied and fulfilled any fiduciary duties they may have to the Corporation and its stockholders with respect thereto, (ii) shall not be liable to the Corporation or its stockholders for any breach of any fiduciary duty they may have by reason of the entering into, performance or consummation of any such Transaction, (iii) shall be deemed to have acted in good faith and in a manner such Persons reasonably believed to be in and not opposed to the best interests of the Corporation, to the extent such standard is applicable to such Persons' conduct, and (iv) shall be deemed not to have breached any duties of loyalty to the Corporation or its stockholders they may have and not to have derived an improper personal benefit therefrom, if: (w) the material facts as to the Transaction are disclosed or are known to the Board of Directors or the committee thereof that authorizes the Transaction and the Board of Directors or such committee in good faith authorizes or approves the Transaction by the affirmative vote of a majority of the Disinterested Directors on the Board of Directors or such committee (even though the Disinterested Directors be less than a quorum); (x) the material facts as to the Transaction are disclosed or are known to the holders of Voting Stock entitled to vote thereon, and the Transaction is 21 22 specifically approved in good faith by vote of the holders of a majority of the then outstanding Voting Stock not owned by AMR or such Related Entity, voting together as a single class, as the case may be; (y) such Transaction is effected pursuant to, and consistent with, terms and conditions specified in any arrangements, standards, protocols or guidelines (collectively, the "Guidelines") which are in good faith authorized or approved, after disclosure or knowledge of the material facts related thereto, by the affirmative vote of a majority of the Disinterested Directors on the Board of Directors or the applicable committee thereof (even though the Disinterested Directors be less than a quorum) or by vote of the holders of a majority of the then outstanding Voting Stock not owned by AMR or such Related Entity, voting together as a single class, as the case may be (such authorization or approval of such Guidelines constituting or being deemed to constitute authorization or approval of such Transaction); or (z) such Transaction is fair as to the Corporation as of the time it is authorized, approved or ratified by the Board of Directors, a committee thereof or the stockholders of the Corporation. In addition, each Transaction authorized, approved or effected, and such Guidelines so authorized or approved, as described in (w), (x), or (y) above, shall be deemed to be entirely fair to the Corporation and its stockholders; provided, however, that if such authorization or approval is not obtained, or such Transaction is not so effected, no presumption shall arise that such Transaction or such Guidelines are not fair to the Corporation and its stockholders. (D) Directors of the Corporation who are also directors or officers of AMR or any Related Entity may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee that authorizes or approves any such Transaction or any such Guidelines. Voting Stock owned by AMR and any Related Entities may be counted in determining the presence of a quorum at a meeting of stockholders that authorizes or approves any such Transaction or any such Guidelines. (E) AMR shall not be liable to the Corporation or its stockholders for breach of any fiduciary duty it may have by reason of the fact that AMR takes any action or exercises any rights or gives or withholds any consent in connection with any Transaction between AMR and the Corporation. No vote cast or other action taken by any Person who is an officer, director or other representative of AMR, which vote is cast or action is taken by such Person in his capacity as a director of the 22 23 Corporation, shall constitute an action of, or the exercise of a right by, or a consent of, AMR for the purpose of any such Transaction. (F) Any Person purchasing or otherwise acquiring any interest in any shares of stock of the Corporation shall be deemed to have notice of and to have consented to the provisions of this Article VIII. (G) For purposes of this Article VIII, any Transaction with any corporation, partnership, joint venture, association or other entity in which the Corporation Beneficially Owns, directly or indirectly, 50 percent or more of the outstanding voting stock, voting power or similar voting interests, or with any officer or director thereof, shall be deemed to be a Transaction with the Corporation. (H) Effective as of the Trigger Date, and notwithstanding anything in this Certificate of Incorporation to the contrary, and in addition to any vote of the Board of Directors required by applicable law or this Certificate of Incorporation, the affirmative vote of the holders of more than 80 percent of the voting power of the Voting Stock then outstanding, voting together as a single class, shall be required to alter, amend or repeal in a manner adverse to the interests of AMR, or adopt any provision adverse to the interests of AMR and inconsistent with, any provision of this Article VIII. Neither the alteration, amendment or repeal of this Article VIII nor the adoption of any provision inconsistent with this Article VIII shall eliminate or reduce the effect of this Article VIII in respect of any matter occurring, or any cause of action, suit or claim that, but for this Article VIII, would accrue or arise, prior to such alteration, amendment, repeal or adoption. ARTICLE IX Effective as of the Trigger Date, and subject to the rights of the holders of any series of Preferred Stock or any other series or class of stock as set forth in this Certificate of Incorporation to elect additional directors under specified circumstances, any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing in lieu of a meeting of such stockholders. Except as otherwise required by law, and subject to the rights of the holders of any series of Preferred Stock or any other series or class of stock as set forth in this Certificate of Incorporation to elect additional directors under specified circumstances, special meetings of the stockholders of the Corporation may be called only by the Board of Directors pursuant to a resolution adopted by a majority of the total number of Directors which the 23 24 Corporation would have if there were no vacancies or by the Chairman of the Board; provided, that, prior to the Trigger Date, special meetings of the stockholders of the Corporation shall also be called at the request of the holders of a majority of the voting power of the then outstanding Voting Stock. Except as expressly provided in the immediately preceding sentence, any power of stockholders to call a special meeting is specifically denied. Only such business as shall have been brought before the special meeting of stockholders pursuant to the Corporation's notice of meeting shall be conducted at such meeting. Effective as of the Trigger Date, and notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of at least 80 percent of the voting power of the then outstanding Voting Stock, voting together as a single class, shall be required to amend or repeal, or adopt any provision inconsistent with, this Article IX. ARTICLE X (A) Subject to the rights of the holders of any series of Preferred Stock or any other series or class of stock as set forth in this Certificate of Incorporation to elect additional directors under specified circumstances, the number of directors of the Corporation shall be fixed by the Bylaws of the Corporation and may be increased or decreased from time to time in such a manner as may be prescribed by the Bylaws. (B) Unless and except to the extent that the Bylaws of the Corporation shall so require, the election of directors of the Corporation need not be by written ballot. (C) The directors, other than those who may be elected by the holders of any series of Preferred Stock or any other series or class of stock as set forth in this Certificate of Incorporation, shall be divided into three classes, as nearly equal in number as possible. One class of directors shall be initially elected for a term expiring at the annual meeting of stockholders to be held in 1997, another class shall be initially elected for a term expiring at the annual meeting of stockholders to be held in 1998, and another class shall be initially elected for a term expiring at the annual meeting of stockholders to be held in 1999. Members of each class shall hold office until their successors are elected and qualified. At each annual meeting of the stockholders of the Corporation, commencing with the 1997 annual meeting, the successors of the class of directors whose term expires at that meeting shall be elected by a plurality vote of all votes cast at such meeting to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. (D) Subject to the rights of the holders of any series of Preferred Stock or any other series or class of stock, as set 24 25 forth in this Certificate of Incorporation, to elect additional directors under specified circumstances, any director may be removed from office, at any time, but only for cause and only by the affirmative vote of the holders of at least 80 percent of the voting power of the then outstanding Voting Stock, voting together as a single class; provided, however, that prior to the Trigger Date any director or directors may be removed from office, without cause, with the affirmative vote of the holders of at least a majority of the voting power of the then outstanding Voting Stock, voting together as a single class. (E) Notwithstanding anything contained in this Certificate of Incorporation to the contrary, and in addition to any vote of the Board of Directors required by applicable law or this Certificate of Incorporation, effective as of the Trigger Date, the affirmative vote of the holders of at least 80 percent of the voting power of the then outstanding Voting Stock, voting together as a single class, shall be required to alter, amend or repeal, or adopt any provision inconsistent with, this Article X. ARTICLE XI For purposes of this Certificate of Incorporation: (A) "Person" shall mean any individual, firm, corporation or other entity. (B) "Beneficial Owner," "Beneficially Own," "Beneficially Owned," "Beneficial Ownership," and words of similar import shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations of the Securities Exchange Act of 1934, as in effect on September 15, 1996. (C) "Disinterested Directors" shall mean the directors of the Corporation who are not officers of either AMR or the Corporation or directors of AMR. (D) "Subsidiary" shall mean any corporation of which a majority of any series or class of equity security is owned, directly or indirectly, by a different corporation. ARTICLE XII A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (A) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (B) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (C) under Section 174 of the General Corporation Law of the State of Delaware, or (D) for any 25 26 transaction from which the director derived an improper personal benefit. Notwithstanding anything contained in this Certificate of Incorporation to the contrary, any alteration, amendment or repeal of, or adoption of any provision inconsistent with, this Article XII shall not adversely affect any right or protection of a director of the Corporation existing hereunder in respect of any act or omission occurring prior to such alteration, amendment, repeal or adoption. ARTICLE XIII Except as may be expressly provided in this Certificate of Incorporation, the Corporation reserves the right at any time and from time to time to alter, amend, or repeal any provision contained in this Certificate of Incorporation, and any other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed herein or by applicable law, and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other Persons whomsoever by and pursuant to this Certificate of Incorporation (in its present form or as hereafter amended) are granted subject to the right reserved in this Article XIII. IN WITNESS WHEREOF, the Corporation has caused this Restated Certificate of Incorporation to be signed by its President and attested by its Secretary this 7th day of October, 1996. The SABRE Group Holdings, Inc. By: /s/ MICHAEL J. DURHAM ----------------------------------- President Attest: /s/ CHARLES D. MARLETT ------------------------- Corporate Secretary 26 EX-3.2 3 RESTATED BYLAWS OF REGISTRANT 1 EXHIBIT 3.2 RESTATED BYLAWS OF THE SABRE GROUP HOLDINGS, INC. INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE ARTICLE I OFFICES AND RECORDS SECTION 1.1. DELAWARE OFFICE. The registered office of the Corporation in the State of Delaware shall be located in the City of Wilmington, County of New Castle, and the name and address of its registered agent is The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware. SECTION 1.2. OTHER OFFICES. The Corporation may have such other offices, either within or without the State of Delaware, as the Board of Directors may designate or as the business of the Corporation may from time to time require. SECTION 1.3. BOOKS AND RECORDS. The books and records of the Corporation may be kept at the Corporation's headquarters in Fort Worth, Texas or at such other locations outside the State of Delaware as may from time to time be designated by the Board of Directors. ARTICLE II STOCKHOLDERS SECTION 2.1. ANNUAL MEETING. The annual meeting of the stockholders of the Corporation shall be held on the third Wednesday in May of each year, if not a legal holiday, and if a legal holiday then on the next succeeding business day, at 10:00 a.m., local time, at the principal executive offices of the Corporation, or at such other date, place and/or time as may be fixed from time to time by resolution of the Board of Directors. SECTION 2.2. SPECIAL MEETING. Except as otherwise required by applicable law, and subject to the rights of the holders of any series of preferred stock, par value $0.01 per share (the "Preferred Stock"), or any other series or class of stock, as set forth in the Certificate of Incorporation, to elect additional directors under specified circumstances, special meetings of the stockholders of the Corporation may be called only by the Board of Directors pursuant to a resolution adopted by a majority of the total number of directors which the Corporation would have if 1 2 there were no vacancies (the "Whole Board") or by the Chairman of the Board; provided, that prior to the Trigger Date (as such term is defined in the Certificate of Incorporation), special meetings of the stockholders of the Corporation shall also be called at the request of the holders of a majority of the voting power of the then outstanding Voting Stock (as defined in Section 2.5 hereof). Except as expressly provided in the immediately preceding sentence, any power of stockholders of the Corporation to call a special meeting is specifically denied. SECTION 2.3. PLACE OF MEETING. The Board of Directors may designate the place of meeting for any meeting of the stockholders. If no designation is made by the Board of Directors, the place of meeting shall be the principal office of the Corporation. SECTION 2.4. NOTICE OF MEETING. Written or printed notice, stating the place, day and hour of the meeting and the purpose or purposes for which the meeting is called, shall be prepared and delivered by the Corporation not less than ten days nor more than sixty days before the date of the meeting, either personally, or by mail, to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail with postage thereon prepaid, addressed to the stockholder at his address as it appears on the stock transfer books of the Corporation. Such further notice shall be given as may be required by law. Meetings may be held without notice if all stockholders entitled to vote are present, or if notice is waived by those not present. Any previously scheduled meeting of the stockholders may be postponed by resolution of the Board of Directors upon public notice given prior to the time previously scheduled for such meeting of stockholders. SECTION 2.5. QUORUM AND ADJOURNMENT. Except as otherwise provided by law or by the Certificate of Incorporation, the holders of at least one-third of the voting power of the outstanding shares of the Corporation entitled to vote generally in the election of directors (the "Voting Stock"), represented in person or by proxy, shall constitute a quorum at a meeting of stockholders, except that when specified business is to be voted on by a class or series voting as a class, the holders of at least one-third of the shares of such class or series shall constitute a quorum for the transaction of such business. The chairman of the meeting or a majority of the voting power of the shares of Voting Stock so represented may adjourn the meeting from time to time, whether or not there is such a quorum (or in the case of specified business to be voted on by a class or series, the chairman of the meeting or a majority of the shares of such class or series so represented may adjourn the meeting with respect to such specified business). No notice of the time 2 3 and place of adjourned meetings need be given if the time and place thereof are announced at the meeting at which the adjournment is taken, unless the adjournment is for more than thirty days or a new record date is fixed for the adjourned meeting, in which case a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. The stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. SECTION 2.6. PROXIES. At all meetings of stockholders, a stockholder may vote by proxy executed in writing by the stockholder or as otherwise permitted by law, or by his duly authorized attorney-in-fact. Such proxy must be filed with the Secretary of the Corporation or his representative at or before the time of the meeting. SECTION 2.7. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS. (A) Annual Meetings of Stockholders. (1) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (a) pursuant to the Corporation's notice of meeting delivered pursuant to Section 2.4 of these Bylaws, (b) by or at the direction of the Board of Directors or the Chairman of the Board, (c) by any stockholder of the Corporation who is entitled to vote at the meeting, who complied with the notice procedures set forth in clauses (2) and (3) of this paragraph (A) and this Bylaw and who was a stockholder of record at the time such notice is delivered to the Secretary of the Corporation or (d) prior to the Trigger Date, by AMR (as such term is defined in the Certificate of Incorporation). (2) For nominations or other business to be properly brought before an annual meeting by a stockholder, pursuant to clause (c) of paragraph (A)(1) of this Bylaw, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not less than ninety days nor more than one hundred and twenty days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than twenty days, or delayed by more than seventy days, from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the one hundred and twentieth day prior to such annual meeting and not later than the close of business on the later of the ninetieth day 3 4 prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made. For purposes of determining whether a stockholder's notice shall have been delivered in a timely manner for the annual meeting of stockholders in 1997, the "first anniversary of the preceding year's annual meeting" shall be deemed to be the third Wednesday in May, 1997. In no event shall the adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 14a-11 thereunder, including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected; (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (ii) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this Bylaw to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least one hundred days prior to the first anniversary of the preceding year's initial meeting, a stockholder's notice required by this Bylaw shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the Corporation. (B) Special Meetings of Stockholders. Only such business as shall have been brought before the special meeting of 4 5 stockholders pursuant to the Corporation's notice of meeting pursuant to Section 2.4 of these Bylaws shall be conducted at such meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (1) by or at the direction of the Board of Directors or (2) by any stockholder of the Corporation who is entitled to vote at the meeting, who complies with the notice procedures set forth in this Bylaw and who is a stockholder of record at the time such notice is delivered to the Secretary of the Corporation. Nominations by stockholders of persons for election to the Board of Directors may be made at such a special meeting of stockholders if the stockholder's notice as required by paragraph (A)(2) of this Bylaw shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the one hundred and twentieth day prior to such special meeting and not later than the close of business on the later of the ninetieth day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described above. (C) General. (1) Only persons who are nominated in accordance with the procedures set forth in this Bylaw shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Bylaw. Except as otherwise provided by law, the Restated Certificate of Incorporation or these Bylaws, the chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in this Bylaw and, if any proposed nomination or business is not in compliance with this Bylaw, to declare that such defective proposal or nomination shall be disregarded. (2) For purposes of this Bylaw, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Bylaw, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Bylaw. Nothing in this Bylaw shall be deemed to 5 6 affect any rights (i) of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act, or (ii) of the holders of any series of Preferred Stock to elect directors if so provided under an applicable Preferred Stock Designation (as defined in the Certificate of Incorporation). SECTION 2.8. VOTING PROCEDURES. Election of directors at all meetings of the stockholders at which directors are to be elected shall be by written ballot. Except as otherwise set forth in the Certificate of Incorporation with respect to the right of the holders of any series of Preferred Stock or any other series or class of stock to elect additional directors under specified circumstances, directors shall be elected by a plurality of the votes cast by the holders of Common Stock, present in person or by proxy. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, all matters other than the election of directors properly submitted to the stockholders at any meeting shall be decided by the affirmative vote of a majority of the voting power of the shares present in person or represented by proxy at the meeting and entitled to vote on the matter. The vote upon any matter other than the election of directors shall be by ballot only if so ordered by the chairman of the meeting. SECTION 2.9. INSPECTORS OF ELECTIONS; OPENING AND CLOSING THE POLLS. (A) The Board of Directors by resolution shall appoint, or shall authorize an officer of the Corporation to appoint, one or more inspectors, which inspector or inspectors may include individuals who serve the Corporation in other capacities, including, without limitation, as officers, employees, agents or representatives of the Corporation, to act at the meeting and make a written report thereof. One or more persons may be designated as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate has been appointed to act, or if all inspectors or alternates who have been appointed are unable to act, at a meeting of stockholders, the chairman of the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before discharging his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors shall have the duties prescribed by the General Corporation Law of the State of Delaware. (B) The chairman of the meeting shall fix and announce at the meeting the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting. 6 7 SECTION 2.10. NO STOCKHOLDER ACTION BY WRITTEN CONSENT. Effective as of the Trigger Date, and subject to the rights of the holders of any series of Preferred Stock or any other series or class of stock as set forth in the Certificate of Incorporation to elect additional directors under specified circumstances, any action required or permitted to be taken by the stockholders of the Corporation must be effected at an annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders. ARTICLE III BOARD OF DIRECTORS SECTION 3.1. GENERAL POWERS. The business and affairs of the Corporation shall be managed by or under the direction of its Board of Directors. In addition to the powers and authorities by these Bylaws expressly conferred upon them, the Board of Directors may exercise all such powers of the Corporation and do all such lawful acts and things as are not by law or by the Certificate of Incorporation or by these Bylaws required to be exercised or done by the stockholders. SECTION 3.2. NUMBER, TENURE AND QUALIFICATIONS. Subject to the rights of the holders of any series of Preferred Stock, or any other series or class of stock, as set forth in the Certificate of Incorporation, to elect directors under specified circumstances, the number of directors shall be fixed from time to time exclusively pursuant to a resolution adopted by a majority of the Whole Board, but shall consist of not more than twelve nor less than three directors. The directors, other than those who may be elected by the holders of any series of Preferred Stock or any other series or class of stock as set forth in the Certificate of Incorporation, shall be divided into three classes, as nearly equal in number as possible. One class of directors shall be initially elected for a term expiring at the annual meeting of stockholders to be held in 1997; another class shall be initially elected for a term expiring at the annual meeting of stockholders to be held in 1998; and another class shall be initially elected for a term expiring at the annual meeting of stockholders to be held in 1999. Members of each class shall hold office until their successors are elected and qualified. At each annual meeting of the stockholders of the Corporation, commencing with the 1997 annual meeting, the successors of the class of directors whose term expires at that meeting shall be elected by a plurality vote of all votes cast at such meeting to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. SECTION 3.3. REGULAR MEETINGS. A regular annual meeting of 7 8 the Board of Directors shall be held without other notice than this Bylaw on the same date, and at the same place, as each annual meeting of stockholders or on such other day, at such other place and at such time as the Board of Directors may determine. The Board of Directors may from time to time, by resolution, provide the time and place for the holding of additional regular meetings without other notice than such resolution. SECTION 3.4. SPECIAL MEETINGS. Special meetings of the Board of Directors shall be called at the request of the Chairman of the Board, the President or a majority of the Whole Board. The person or persons authorized to call special meetings of the Board of Directors may fix the place and time of the meetings. SECTION 3.5. NOTICE. Notice of any special meeting shall be given to each director at his or her business or residence in writing or by telegram or by telephone communication. If mailed, such notice shall be deemed adequately delivered when deposited in the United States mails so addressed, with postage thereon prepaid, at least three days before such meeting. If by telegram, such notice shall be deemed adequately delivered when the telegram is delivered to the telegraph company at least twenty-four hours before such meeting. If by facsimile transmission, such notice shall be transmitted at least twenty-four hours before such meeting. If by telephone, the notice shall be given at least twelve hours prior to the time set for the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice of such meeting, except for amendments to these Bylaws as provided under Section 8.1 of Article VIII hereof. A meeting may be held at any time without notice if all the directors are present or if those not present waive notice of the meeting in writing, either before or after such meeting. Any director present in person at a meeting of the Board of Directors shall be deemed to have waived notice of the time and place of meeting. SECTION 3.6. ACTION BY CONSENT OF BOARD OF DIRECTORS. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. SECTION 3.7. CONFERENCE TELEPHONE MEETINGS. Members of the Board of Directors, or any committee thereof, may participate in a meeting of the Board of Directors or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each 8 9 other, and such participation in a meeting shall constitute presence in person at such meeting. SECTION 3.8. QUORUM. A whole number of directors equal to at least a majority of the Whole Board shall constitute a quorum for the transaction of business, but if at any meeting of the Board of Directors there shall be less than a quorum present, a majority of the directors present may adjourn the meeting from time to time without further notice. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. The directors present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough directors to leave less than a quorum. SECTION 3.9. VACANCIES. Subject to the rights of the holders of any series of Preferred Stock or any other series or class of stock, as set forth in the Certificate of Incorporation, to elect additional directors under specified circumstances, and unless the Board of Directors otherwise determines, vacancies resulting from death, resignation, retirement, disqualification, removal from office or other cause, and newly created directorships resulting from any increase in the authorized number of directors, shall be filled only by the affirmative vote of a majority of the remaining directors, though less than a quorum of the Board of Directors, and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires and until such director's successor shall have been duly elected and qualified. No decrease in the number of authorized directors constituting the Whole Board shall shorten the term of any incumbent director. SECTION 3.10. REMOVAL. Subject to the rights of the holders of any series of Preferred Stock or any other series or class of stock, as set forth in the Certificate of Incorporation, to elect additional directors under specified circumstances, any director, or the entire Board of Directors, may be removed from office at any time, but only for cause by the affirmative vote of the holders of at least 80 percent of the voting power of the then outstanding Voting Stock, voting together as a single class; provided, however, that prior to the Trigger Date any director or directors may be removed from office, without cause, with the affirmative vote of the holders of at least a majority of the voting power of the then outstanding Voting Stock, voting together as a single class. SECTION 3.11. FEES AND EXPENSES. Directors shall receive such fees and expenses as the Board of Directors shall from time to time prescribe. 9 10 ARTICLE IV COMMITTEES SECTION 4.1. EXECUTIVE COMMITTEE. (A) The Board of Directors may, by resolution passed by a majority of the Whole Board, designate an Executive Committee, to consist of four or more members, including the Chairman of the Board and the Chief Executive Officer. The Chairman of the Board, the Chief Executive Officer, and one other member of the Executive Committee shall constitute a quorum. (B) The Executive Committee shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, with the exception of such powers and authority as may be specifically reserved to the Board of Directors by law or by resolution adopted by the Board of Directors. SECTION 4.2 AUDIT COMMITTEE. (A) The Board of Directors may, by resolution passed by a majority of the Whole Board, designate an Audit Committee, to consist of two or more members, none of the members of which shall be employees or officers of the Corporation or AMR or directors of AMR. A majority of the members of the Audit Committee shall constitute a quorum. (B) The Audit Committee shall from time to time review and make recommendations to the Board of Directors with respect to the selection of independent auditors, the fees to be paid such auditors, the adequacy of the audit and accounting procedures of the Corporation, and such other matters as may be specifically delegated to the Committee by the Board of Directors. In this connection the Audit Committee shall, at its request, meet with representatives of the independent auditors and with the financial officers of the Corporation separately or jointly. SECTION 4.3. COMPENSATION/NOMINATING COMMITTEE. (A) The Board of Directors may, by resolution passed by a majority of the Whole Board, designate a Compensation/Nominating Committee, to consist of three or more members, none of the members of which shall be employees or officers of the Corporation. A majority of the members of the Compensation/Nominating Committee shall constitute a quorum. (B) The Compensation/Nominating Committee shall from time to time review and make recommendations to the Board of Directors with respect to the management remuneration policies of the Corporation including salary rates and fringe benefits of elected officers, other remuneration plans such as incentive compensation, deferred compensation and stock option plans, directors' compensation and benefits and such other matters as 10 11 may be specifically delegated to the Committee by the Board of Directors. (C) In addition, the Compensation/Nominating Committee shall make recommendations to the Board of Directors (1) concerning suitable candidates for election to the Board, (2) with respect to assignments to Board Committees, and (3) with respect to promotions, changes and succession among the senior management of the Corporation, and shall perform such other duties as may be specifically delegated to the Committee by the Board of Directors. SECTION 4.4. COMMITTEE PROCEDURE, SEAL. (A) The Executive, Compensation/Nominating, and Audit Committees shall keep regular minutes of their meetings, which shall be reported to the Board of Directors, and shall fix their own rules of procedures. (B) The Executive, Compensation/Nominating, and Audit Committees may each authorize the seal of the Corporation to be affixed to all papers which may require it. (C) In the absence or disqualification of a member of any Committee, the members of that Committee present at any meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of such absent or disqualified member. SECTION 4.5. OTHER COMMITTEES. The Board of Directors, or any Committee thereof so authorized by the Board of Directors, may, from time to time, by resolution passed by a majority of the Whole Board or such Committee, designate one or more other Committees of the Board. Each such Committee shall have such duties and may exercise such powers as are granted to it in the resolution designating the members thereof. Each Committee shall fix its own rules of procedure. ARTICLE V OFFICERS SECTION 5.1. ELECTED OFFICERS. The elected officers of the Corporation shall be (A) a Chairman of the Board, unless the Board of Directors specifies that the Chairman of the Board shall not be an officer of the Corporation, (B) a President, (C) one or more Vice Presidents (including Executive Vice Presidents and Senior Vice Presidents), (D) a Secretary, (E) a Treasurer, and (F) such other officers as the Board of Directors from time to time may deem proper. The Chairman of the Board (whether or not an officer of the Corporation) shall be chosen from the directors. The other officers of the Corporation may or may not 11 12 be directors. All officers chosen by the Board of Directors shall each have such powers and duties as generally pertain to their respective offices, subject to the specific provisions of this Article V. Such officers shall also have such powers and duties as from time to time may be conferred by the Board of Directors or by any committee thereof. SECTION 5.2. ELECTION AND TERM OF OFFICE. The elected officers of the Corporation shall be elected annually by the Board of Directors at the regular meeting of the Board of Directors held after each annual meeting of the stockholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as convenient. Subject to Section 5.9 of these Bylaws, the officers shall hold their respective offices at the pleasure of the Board of Directors and any officer may be removed at any time, with or without cause, by a vote of the majority of the directors; each officer shall hold office until his or her successor shall have been duly elected and shall have qualified or until his death or removal or until he shall resign. SECTION 5.3. CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside at all meetings of the stockholders and of the Board of Directors. He or she shall make reports to the Board of Directors and the stockholders, and shall have such other powers and perform such other duties as are required of him or her from time to time by the Board of Directors. The Board of Directors may specify in a resolution or resolutions that the Chairman of the Board shall not be an officer of the Corporation. The offices of Chairman of the Board and President may be filled by the same individual. SECTION 5.4. PRESIDENT. Unless otherwise specified by the Board of Directors, the President shall be the Chief Executive Officer of the Corporation, shall be responsible for the general management of the affairs of the Corporation and shall perform all duties incidental to his or her office which may be required by law, and shall have such other powers and perform such other duties as are required of him or her from time to time by the Board of Directors. The President shall, in the absence of or because of the inability to act of the Chairman of the Board, perform all duties of the Chairman of the Board and preside at all meetings of stockholders and of the Board of Directors. The President may sign, alone or with the Secretary, or an Assistant Secretary, or any other proper officer of the Corporation authorized by the Board of Directors, certificates, contracts, and other instruments of the Corporation as authorized by the Board of Directors. He or she shall see that all orders and resolutions of the Board of Directors and of any committee thereof are carried into effect. 12 13 SECTION 5.5. VICE PRESIDENTS. Each Vice President (including any Executive Vice Presidents and Senior Vice Presidents) shall perform such duties as shall be assigned by the Board of Directors, the Chairman of the Board or the President. SECTION 5.6. SECRETARY. The Secretary shall give, or cause to be given, notice of all meetings of stockholders and Directors and all other notices required by law or by these Bylaws, and in case of his or her absence or refusal or neglect so to do, any such notice may be given by any person thereunto directed by the Chairman of the Board or the President, or by the Board of Directors, upon whose request the meeting is called as provided in these Bylaws. He or she shall record all the proceedings of the meetings of the Board of Directors, any committees thereof and the stockholders of the Corporation in a book to be kept for that purpose, and shall perform such other duties as may be assigned to him or her by the Board of Directors, the Chairman of the Board or the President. He or she shall have the custody of the seal of the Corporation and shall affix the same to all instruments requiring it, when authorized by the Board of Directors, the Chairman of the Board or the President, and attest to the same. Any or all of the duties of the Secretary may be delegated to one or more Assistant Secretaries. SECTION 5.7. TREASURER. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate account of receipts and disbursement in books belonging to the Corporation. The Treasurer shall deposit all moneys and other valuables in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, the Chairman of the Board, or the President, taking proper vouchers for such disbursements. The Treasurer shall render to the Chairman of the Board, the President and the Board of Directors, whenever requested, an account of all his or her transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, the Treasurer shall give the Corporation a bond for the faithful discharge of his or her duties in such amount and with such surety as the Board of Directors shall prescribe. Any or all of the duties of the Treasurer may be delegated to one or more Assistant Treasurers. SECTION 5.8. COMPENSATION. The compensation of the officers of the Corporation shall be fixed, from time to time, by the Board of Directors. SECTION 5.9. VACANCIES. In case any office becomes vacant by death, resignation, retirement, disqualification, removal from office, or any other cause, the Board of Directors may abolish the office (except that of President, Secretary and Treasurer) or 13 14 elect an officer to fill such vacancy. ARTICLE VI STOCK CERTIFICATES AND TRANSFERS SECTION 6.1. STOCK CERTIFICATES AND TRANSFERS. (A) The interest of each stockholder of the Corporation shall be evidenced by certificates for shares of stock in such form as the appropriate officers of the Corporation may from time to time prescribe; provided, however, the Board of Directors may provide by resolution that some or all of any or all classes or series of the Corporation's stock shall be uncertificated shares. The shares of the stock of the Corporation shall be transferred on the books of the Corporation by the holder thereof in person or by his attorney, upon surrender for cancellation of certificates for the same number of shares, with an assignment and power of transfer endorsed thereon or attached thereto, duly executed, with such proof of the authenticity of the signature as the Corporation or its agents may reasonably require. (B) The certificates of stock shall be signed, countersigned and registered in such manner as the Board of Directors may by resolution prescribe, which resolution may permit all or any of the signatures on such certificates to be in facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. ARTICLE VII MISCELLANEOUS PROVISIONS SECTION 7.1. FISCAL YEAR. The fiscal year of the Corporation shall begin on the first day of January and end on the thirty-first day of December of each year. SECTION 7.2. DIVIDENDS. The Board of Directors may from time to time declare, and the Corporation may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by law and its Restated Certificate of Incorporation. SECTION 7.3. SEAL. The corporate seal may bear in the center the emblem of some object, and shall have inscribed thereunder the words "Corporate Seal" and around the margin thereof the words "The SABRE Group Holdings, Inc. - - Delaware 199_". 14 15 SECTION 7.4. WAIVER OF NOTICE. Whenever any notice is required to be given to any stockholder or director of the Corporation under the provisions of the General Corporation Law of the State of Delaware, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at, nor the purpose of, any annual or special meeting of the stockholders of the Board of Directors need be specified in any waiver of notice of such meeting. SECTION 7.5. AUDITS. The accounts, books and records of the Corporation shall be audited upon the conclusion of each fiscal year by an independent certified public accountant selected by the Board of Directors, and it shall be the duty of the Board of Directors to cause such audit to be made annually. SECTION 7.6. RESIGNATIONS. Any director or any officer, whether elected or appointed, may resign at any time by serving written notice of such resignation on the Chairman of the Board, the President or the Secretary, and such resignation shall be deemed to be effective as of the close of business on the date said notice is received by the Chairman of the Board, the President, or the Secretary, or at such later date as is stated therein. No formal action shall be required of the Board of Directors or the stockholders to make any such resignation effective. SECTION 7.7. INDEMNIFICATION AND INSURANCE. (A) Generally. (1) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was or has agreed to serve at the request of the Corporation as a director or officer of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity. (2) The Corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was or has agreed to serve at the request of the Corporation as an employee or agent of the Corporation, or is or was serving or has agreed to serve at the request of the 15 16 Corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity. (3) The indemnification provided by this Subsection (A) shall be from and against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the indemnitee or on his or her behalf in connection with such action, suit or proceeding and any appeal therefrom, but shall only be provided if the indemnitee acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal action, suit or proceeding, had no reasonable cause to believe his or her conduct was unlawful. (4) Notwithstanding the foregoing provisions of this Subsection (A), in the case of an action or suit by or in the right of the Corporation to procure a judgment in its favor (a) the indemnification provided by this Subsection (A) shall be limited to expenses (including attorneys' fees) actually and reasonably incurred by such person in the defense or settlement of such action or suit, and (b) no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless, and only to the extent that, the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper. (5) The Board of Directors (by resolution passed by a majority of the Board of Directors), the Chairman of the Board, the President or the Secretary shall have the authority to determine whether a person is or was serving or has agreed to serve at the request of the Corporation (a) as a director or officer of the Corporation or another corporation, partnership, joint venture, trust or other enterprise, or (b) as an employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise. If the Board of Directors (by resolution passed by a majority of the Board of Directors), the Chairman of the Board, the President or the Secretary determines that a person is not or was not serving or has not agreed to serve at the request of the Corporation in any capacity described in clause (a) or (b) of the preceding sentence, then such person shall not (unless otherwise ordered by a court) be entitled to indemnification under this Section 7.7. (6) The termination of any action, suit or proceeding by 16 17 judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful. (B) Successful Defense. To the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Subsection (A) hereof or in defense of any claim, issue or matter therein, he or she shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him or her in connection therewith. (C) Determination That Indemnification Is Proper. Any indemnification of a person entitled to indemnity under Subsection (A)(1) hereof shall (unless otherwise ordered by a court) be made by the Corporation unless a determination is made that indemnification of such person is not proper in the circumstances because he or she has not met the applicable standard of conduct set forth in Subsection (A)(3) hereof. Any indemnification of a person entitled to indemnity under Subsection (A)(2) hereof may (unless otherwise ordered by a court) be made by the Corporation upon a determination that indemnification of such person is proper in the circumstances because he or she has met the applicable standard of conduct set forth in Subsection (A)(3) hereof. Any such determination shall be made (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even if less than a quorum, or (2) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (3) by the stockholders. (D) Advance Payment of Expenses. Expenses (including attorneys' fees) incurred by a director or officer in defending a civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the Corporation as authorized in this Section. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. The Board of Directors may authorize the Corporation's counsel to represent a director, officer, employee or agent in any action, suit or proceeding, whether or not the Corporation is a party to such action, suit or proceeding. 17 18 (E) Procedure for Indemnification of Required Indemnitees. Any indemnification of a person the Corporation is required to indemnify under Subsection (A) hereof, or advance of costs, charges and expenses of a person the Corporation is required to pay under Subsection (D) hereof, shall be made promptly, and in any event within 60 days, upon the written request of such person. If the Corporation fails to respond within 60 days, then the request for indemnification shall be deemed to be approved. The right to indemnification or advances as granted by this Section shall be enforceable by the person the Corporation is required to indemnify under Subsection (A) hereof in any court of competent jurisdiction if the Corporation denies such request, in whole or in part. Such person's costs and expenses incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the Corporation. It shall be a defense to any such action (other than an action brought to enforce a claim for the advance of costs, charges and expenses under Subsection (D) hereof where the required undertaking, if any, has been received by the Corporation) that the claimant has not met the standard of conduct set forth in Subsection (A) hereof, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, its independent legal counsel, and its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in Subsection (A) hereof, nor the fact that there has been an actual determination by the Corporation (including its Board of Directors, its independent legal counsel, and its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. (F) Survival; Preservation of Other Rights. The foregoing indemnification provisions shall be deemed to be a contract between the Corporation and each director, officer, employee and agent who serves in such capacity at any time while these provisions as well as the relevant provisions of the General Corporation Law of the State of Delaware are in effect and any repeal or modification thereof shall not affect any right or obligation then existing with respect to any state of facts then or previously existing or any action, suit, or proceeding previously or thereafter brought or threatened based in whole or in part upon any such state of facts. Such a "contract right" may not be modified retroactively without the consent of such director, officer, employee or agent. The indemnification provided by this Section 7.7 shall not be deemed exclusive of any other rights to which those 18 19 indemnified may be entitled under any Bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (G) Insurance. The Corporation shall purchase and maintain insurance on behalf of any person who is or was or has agreed to serve at the request of the Corporation as a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against, and incurred by, him or her or on his or her behalf in any such capacity, or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify him or her against such liability under the provisions of this Section 7.7; provided, however, that such insurance is available on acceptable terms, which determination shall be made by a vote of a majority of the entire Board of Directors. (H) Savings Clause. If this Section 7.7 or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each director or officer and may indemnify each employee or agent of the Corporation as to costs, charges and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of the Corporation, to the full extent permitted by any applicable portion of this Section 7.7 that shall not have been invalidated and to the full extent permitted by applicable law. ARTICLE VIII AMENDMENTS SECTION 8.1. AMENDMENTS. These Bylaws may be amended, added to, rescinded or repealed at any meeting of the Board of Directors or of the stockholders, so long as notice of the proposed change was given in the notice of the meeting and, in the case of a meeting of the Board of Directors, in a notice given no less than twenty-four hours prior to the meeting; provided, however, that, in the case of amendments by stockholders, notwithstanding any other provisions of these Bylaws or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of stock 19 20 required by law, the Certificate of Incorporation or these Bylaws, effective as of the Trigger Date, the affirmative vote of the holders of at least 80 percent of the voting power of the then outstanding Voting Stock, voting together as a single class, shall be required to alter, amend or repeal any provision of these Bylaws. 20 EX-4.1 4 REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 4.1 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT (the "Agreement"), dated as of October 8, 1996, between AMR Corporation, a Delaware corporation ("AMR"), and The SABRE Group Holdings, Inc., a Delaware corporation (the "Company"): WHEREAS, AMR is the owner of all of the Company's issued and outstanding Class B Common Stock ("Class B Common Stock") at the date hereof; and WHEREAS, the parties hereto desire to enter into this Agreement which sets forth the terms of certain registration rights applicable to the Registrable Securities (as defined below). NOW, THEREFORE, upon the premises and the mutual promises herein contained, and for good and valuable consideration, the receipt and adequacy of which is acknowledged, the parties agree as follows: 1. Definitions. As used in this Agreement the following initially capitalized terms shall have the following meanings: (a) "After-Tax Basis" means, with respect to any payment to be received or accrued by any Person, the amount of such payment supplemented by a further payment or payments (which shall be payable either simultaneously with the initial payment or, in the event that taxes resulting from the receipt or accrual of such initial payment are not payable in the year of receipt or accrual, at the time or times such taxes become payable) so that the sum of all such initial and supplemental payments, after deduction of all taxes imposed by any taxing authority (after taking into account any credits or deductions or other tax benefits arising therefrom to the extent such are currently utilized) resulting from the receipt or accrual of such payments (whether or not such taxes are payable in the year of receipt or accrual) shall be equal to the initial payment to be so received or accrued. (b) "Holder" means AMR and any "transferee" (as such term is defined in Section 10 hereof). (c) "Primary AMR Ownership Reduction" means any decrease at any time in the total voting power of all classes of stock of the Company owned by AMR or any of its majority owned subsidiaries to less than fifty percent (50%) of the total voting power of all classes of stock of the Company then outstanding. (d) "Registrable Securities" means the Class B Common Stock (as presently constituted), any stock or other securities (including the Class A Common Stock of the Company) into which or for which such Class B Common Stock may hereafter be changed, converted or 2 exchanged, and any other securities issued to holders of such Class B Common Stock (or such shares into which or for which such shares are so changed, converted or exchanged) upon any reclassification, share combination, share subdivision, share dividend, merger, consolidation or similar transaction or event; except, that any such securities shall not be Registrable Securities with respect to a proposed offer or sale thereof if a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with the plan of distribution set forth in such registration statement. (e) "Registration Expenses" means all expenses in connection with any registration of securities pursuant to this Agreement including, without limitation, the following: (i) the fees, disbursements and expenses of the Company's counsel(s) (United States and foreign) and accountants (United States and foreign) in connection with the registration of the Registrable Securities to be disposed of under the Securities Act; (ii) all expenses in connection with the preparation, printing and filing of the registration statement, any preliminary prospectus or final prospectus, any other offering document and amendments and supplements thereto and the mailing and delivering of copies thereof to any underwriters (United States and foreign) and dealers (United States and foreign); (iii) the cost of printing or producing any agreement(s), any blue sky or legal investment memoranda, any selling agreements and any other documents (in each case, United States and foreign) in connection with the offering, sale or delivery of the Registrable Securities to be disposed of; (iv) all expenses in connection with the qualification of the Registrable Securities to be disposed of for offering and sale under state securities laws, including the fees and disbursements of counsel for the underwriters or the Holders of Registrable Securities in connection with such qualification and in connection with any blue sky and legal investments surveys; (v) the filing fees incident to securing any required review by the National Association of Securities Dealers, Inc. of the terms of the sale of the Registrable Securities to be disposed of; (vi) transfer agents', depositaries' and registrars' fees and the fees of any other agent (in each case, United States and foreign) appointed in connection with such offering; (vii) all security engraving and security printing expenses; and (viii) all fees and expenses payable in connection with the listing of the Registrable Securities on each securities exchange or inter-dealer quotation system (in each case, United States and foreign) on which a class of common equity securities of the Company is then listed. (f) "Rule 144" means Rule 144 promulgated under the Securities Act, or any successor rule to similar effect. (g) "SEC" means the United States Securities and Exchange Commission. (h) "Secondary AMR Ownership Reduction" means any decrease at any time in the total voting power of all classes of stock of the Company owned by AMR or any of its majority owned subsidiaries to less than twenty percent (20%) of the total voting power of all classes of stock of the Company then outstanding. 2 3 (i) "Securities Act" means the Securities Act of 1933, as amended, or any successor statute. 2. Demand Registration. (a) Upon written notice from a Holder of Registrable Securities in the manner set forth in Section 11(g) hereof requesting that the Company effect the registration under the Securities Act of any or all of the Registrable Securities held by such Holder, which notice shall specify the intended method or methods of disposition of such Registrable Securities, the Company will use its best efforts to effect (at the earliest practicable date) the registration under the Securities Act of such Registrable Securities for disposition in accordance with the intended method or methods of disposition stated in such request (including, but not limited to, an offering on a delayed or continuous basis pursuant to Rule 415 (or any successor rule to similar effect) promulgated under the Securities Act (a "Rule 415 Offering") if the Company is then eligible to register such Registrable Securities on Form S-3 (or a successor form)), except that: (i) if, after the Primary AMR Ownership Reduction, upon receipt of a registration request pursuant to this Section 2(a), the Company is advised in writing setting forth specific reasons (with a copy to the person requesting registration pursuant to this Section 2(a)), by a nationally recognized independent investment banking firm selected by the Company that, in such firm's opinion, a registration at the time and on the terms requested would materially and adversely affect any underwritten public equity financing by the Company that had been contemplated by the Company prior to receipt of notice requesting registration pursuant to this Section 2(a) and that had been planned to be completed within 90 days of such notice (a "Transaction Blackout"), the Company shall not be required to effect a registration pursuant to this Section 2(a) until the earliest to occur of (A) the abandonment of such financing, (B) 90 days after the completion of such financing, (C) the termination of any "hold back" or "lock up" period obtained by the underwriter(s) selected by the Company from any person in connection with such financing or (D) 165 days after receipt by the Holder requesting registration of written notice of such Transaction Blackout (together with the copy of the investment banking firm opinion referred to above in this subsection (i)) (the written notice of such Transaction Blackout and a copy of the investment banking firm opinion must be given to the Holder of Registrable Securities requesting registration pursuant to this Section 2(a) within 15 days of receipt of such the registration request); (ii) if, after the Primary AMR Ownership Reduction, while a registration request is pending pursuant to this Section 2(a), the general counsel of the Company determines in good faith that (A) the filing of a registration statement would require the disclosure of material information that the Company has a bona fide business purpose for preserving as confidential or (B) the Company then is unable to comply with SEC requirements, the Company shall not be 3 4 required to effect a registration pursuant to this Section 2(a) until the earliest to occur of (1) the date upon which such material information is disclosed to the public or ceases to be material or the Company is able to so comply with SEC requirements, as the case may be, or (2) 45 days after the general counsel of the Company initially makes such good faith determination (the general counsel shall make such determination promptly and shall give written notice of such determination to the Holder of Registrable Securities requesting registration within 5 days of making such determination); (iii) AMR's transferees, collectively, shall have the right to exercise registration rights pursuant to this Section 2 an aggregate of three (3) times (it being acknowledged that AMR's registration rights pursuant to this Section 2 are independent of any rights it transfers to transferees); and (iv) subsequent to the Secondary AMR Ownership Reduction, AMR shall have the right to exercise its registration rights pursuant to this Section 2 an aggregate of three (3) times (it being acknowledged that prior to the Secondary AMR Ownership Reduction, there shall be no limit to the number of occasions on which AMR or any of its affiliates may exercise such rights). (b) Notwithstanding any other provision of this Agreement to the contrary, a registration requested by a Holder of Registrable Securities pursuant to this Section 2 shall not be deemed to have been effected (and, therefore, not exercised for purposes of subsection 2(a)), (i) if it has not become effective, (ii) if, after it has become effective, such registration is interfered with by any stop order, injunction or other order or requirement of the SEC or other governmental agency or court for any reason other than a misrepresentation or an omission by such Holder and, as a result thereof, the Registrable Securities requested to be registered cannot be completely distributed in accordance with the plan of distribution set forth in the related registration statement or (iii) if the conditions to closing specified in the purchase agreement or underwriting agreement entered into in connection with such registration are not satisfied or waived other than by reason of some act or omission by such Holder of Registrable Securities. (c) In the event that any registration pursuant to this Section 2 (other than subsection (2)(a)(iii)) shall involve, in whole or in part, an underwritten offering, AMR shall have the right to designate an underwriter reasonably satisfactory to the Company as the lead underwriter of such underwritten offering. (d) The Company shall have the right to cause the registration of additional securities for sale for the account of any person (including the Company) in any registration of Registrable Securities requested by AMR puRsuant to Section 2(a); except, that the Company shall not have the right to cause the registration of such additional securities if AMR is advised in writing setting forth specific reasons (with a copy to the Company) by a nationally recognized independent investment banking firm selected by AMR that, in such firm's opinion, registration of such additional securities would materially and adversely affect the offering and sale of the 4 5 Registrable Securities then contemplated by AMR. AMR may require that any such additional securities be included in the offering proposed by AMR on the same terms and conditions as the Registrable Securities that are included therein. (e) After the Primary AMR Ownership Reduction, in the event that, at any time after any Rule 415 Offering is declared effective, the general counsel of the Company determines in good faith that the sale of Registrable Securities in such Rule 415 Offering would require disclosure of material information that the Company has a bona fide business purpose for preserving as confidential or that the Company is unable to comply with SEC requirements, Holders selling Registrable Securities in such Rule 415 Offering shall, upon written notice of such good faith determination, suspend sales of such Registrable Securities for a period beginning on the date of receipt of such notice and expiring on the earlier of (i) the date upon which such material information is disclosed to the public or ceases to be material or the Company is able to comply with SEC requirements, as the case may be, and (ii) 45 days after the general counsel of the Company initially makes such good faith determination. 3. Piggyback Registration. If prior to the tenth anniversary of the date of this Agreement, the Company at any time proposes to register any of its Class B Common Stock or any other of its common equity securities, including Class A Common Stock, (collectively, "Other Securities") under the Securities Act (other than a registration on Form S-4 or S-8), whether or not for sale for its own account, in a manner that would permit registration of Registrable Securities for sale for cash to the public under the Securities Act, it will each such time give prompt written notice to each Holder of Registrable Securities of its intention to do so and of the rights of such Holder under this Section 3 at least 30 days prior to the anticipated filing date of the registration statement relating to such registration. Such notice shall offer each such Holder the opportunity to include in such registration statement such number of Registrable Securities as such Holder may request. Upon the written request of any such Holder made within 10 days after the receipt of the Company's notice (which request shall specify the number of Registrable Securities intended to be disposed of and the intended method of disposition thereof), the Company will use its best efforts to effect, in connection with the registration of the Other Securities, the registration under the Securities Act of all Registrable Securities which the Company has been so requested to register, to the extent required to permit the disposition (in accordance with such intended methods thereof) of the Registrable Securities so requested to be registered, except that: (a) if, after the Primary AMR Ownership Reduction, at any time after giving such written notice of its intention to register any Other Securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register the Other Securities, the Company may, at its election, give written notice of such determination to such Holders, and thereupon the Company shall be relieved of its obligation to register such Registrable Securities in connection with the registration of such Other Securities without prejudice, however, to the rights of the Holders of Registrable Securities immediately to request that such registration be effected as a registration under Section 2 hereof (in the event that the Company shall so determine not to so register the Other Securities, 5 6 each of the Company and each Holder shall be responsible for the respective Registration Expenses incurred by it in connection with such failed registration); (b) (i) if, after the Primary AMR Ownership Reduction, the registration of Other Securities referred to in the first sentence of this Section 3 is to be an underwritten primary registration on behalf of the Company, and a nationally recognized independent investment banking firm selected by the Company advises the Company in writing setting forth specific reasons that, in such firm's opinion, such offering would be materially and adversely affected by the inclusion therein of the Registrable Securities requested to be included therein, the Company shall include in such registration: (1) first, all securities the Company proposes to sell for its own account ("Company Securities"), (2) second, up to the full number of Registrable Securities held by AMR and requested to be included in such registration by AMR ("AMR Securities") in excess of the number or dollar amount of securities the Company proposes to sell that, in the good faith opinion of such underwriter(s), can be so sold without so materially and adversely affecting such offering, (3) third, up to the full number of Registrable Securities (other than AMR Securities) in excess of the number or dollar amount of Company Securities and AMR Securities that, in the good faith opinion of such underwriter(s) can be so sold without materially and adversely affecting such offering (and, if less than the full number of such Registrable Securities, allocated pro rata among the Holders of such Registrable Securities (other than AMR Securities) on the basis of the number of securities requested to be included therein by each such Holder and (4) fourth, an amount of other securities, if any, requested to be included therein in excess of the number or dollar amount of Company Securities, AMR Securities and other Registrable Securities that, in the opinion of such underwriter(s), can be so sold without materially and adversely affecting such offering (allocated among the holders of such other securities in such proportions as such holders and the Company may agree); and (ii) if, after the Primary AMR Ownership Reduction, the registration of Other Securities referred to in the first sentence of this Section 3 is to be an underwritten secondary registration on behalf of holders of the securities (other than Registrable Securities) of the Company (the "Other Holders"), and the managing underwriter(s) advise the Company in writing setting forth specific reasons that in their good faith opinion such offering would be materially and adversely affected by the inclusion therein of the Registrable Securities requested to be included therein, the Company shall include in such registration the amount of securities (including Registrable Securities) that such underwriter(s) advise allocated pro rata among the Other Holders and the Holders of Registrable Securities on the basis of the number of securities (including Registrable Securities) requested to be included therein by each Other Holder and each Holder of the Registrable Securities; (c) the Company shall not be required to effect any registration of Registrable Securities under this Section 3 incidental to the registration of any of its securities in connection with mergers, acquisitions, exchange offers, subscription offers, dividend reinvestment plans or stock option or other executive or employee benefit or compensation plans; and 6 7 (d) no registration of Registrable Securities effected under this Section 3 shall relieve the Company of its obligation to effect a registration of Registrable Securities pursuant to Section 2 hereof. (e) in the event that any registration pursuant to this Section 3 shall involve, in whole or in part, an underwritten offering, the Company may require the Registrable Securities requested to be registered pursuant to this Section 3 to be included in such underwriting on the same terms and conditions as shall be applicable to the other securities being sold through underwriters under such registration. 4. Expenses. Except as provided in Section 3(a) hereof, each of AMR and the Company agrees to pay its pro rata portion of Registration Expenses with respect to a particular offering (or proposed offering); such pro rata portion to be equal to the total amount of such Registration Expenses multiplied by a fraction, the numerator of which is the number of shares sold (or proposed to be sold if the offering is not completed) in such offering by such party and the denominator of which is the total number of shares sold (or proposed to be sold) in such offering. For purposes of determining which person is required to pay Registration Expenses, shares sold (or proposed to be sold) by the Company, by any Other Holder and on behalf of any person other than a Holder shall be deemed to have been sold (or proposed to be sold) by the Company. Notwithstanding the foregoing, each Holder and the Company shall be responsible for its own internal administrative and similar costs, which shall not constitute Registration Expenses. Underwriting discounts with respect to any offering shall also be apportioned in the manner set forth above. 5. Registration and Qualification. If and whenever the Company is required to use its best efforts to effect the registration of any Registrable Securities under the Securities Act as provided in Sections 2 or 3 hereof, the Company will as promptly as is practicable: (a) prepare, file and use its best efforts to cause to become effective a registration statement under the Securities Act relating to the Registrable Securities to be offered; (b) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities until (i) in the case of a Rule 415 Offering, the completion of such offering (subject to Section 2(e)) or (ii) in the case of an offering other than a Rule 415 Offering, the earlier of (A) such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition set forth in such registration statement and (B) the expiration of nine months after such registration statement becomes effective; except, that such nine-month period shall be extended for such number of days that equals the number of days elapsing from (x) the date the written notice contemplated by Section 5(g) hereof is given by the Company to (y) the date on which the Company delivers to the Holders of Registrable Securities the supplement or amendment contemplated by Section 5(g) hereof; 7 8 (c) furnish to the Holders of Registrable Securities and to any underwriter of such Registrable Securities such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus and any summary prospectus) (in conformity with the requirements of the Securities Act), such documents incorporated by reference in such registration statement or prospectus and such other documents, as the Holders of Registrable Securities or such underwriter may reasonably request, and a copy of any and all transmittal letters or other correspondence to, or received from, the SEC or any other governmental agency or self-regulatory body or other body having jurisdiction (including any domestic or foreign securities exchange) relating to such offering; (d) use its best efforts to register or qualify all Registrable Securities covered by such registration statement under the securities or blue sky laws of such jurisdictions (domestic or foreign) as the Holders of such Registrable Securities or any underwriter of such Registrable Securities shall reasonably request, and use its best efforts to obtain all appropriate registrations, permits and consents required in connection therewith, and do any and all other acts and things that may be reasonably necessary or advisable to enable the Holders of Registrable Securities or any such underwriters to consummate the disposition in such jurisdictions of its Registrable Securities covered by such registration statement; except, that the Company shall not for any such purpose be required to (i) qualify generally to do business as a foreign corporation in any non-United States jurisdiction, wherein it is not so qualified, (ii) subject itself to taxation in any such non-United States jurisdiction or (iii) consent to general service of process in any such non-United States jurisdiction; and, except, that, in the case of any such registration or qualification in any non-United States jurisdiction, (1) notwithstanding Section 4, the Holder of the Registrable Securities to be so registered or qualified shall pay all costs and expenses incurred by the Company in connection with such registration or qualification in such non-United States jurisdiction, (2) the Company shall have no obligation to so register or qualify Registrable Securities if in the good faith opinion of counsel for the Company such registration or qualification shall impose on the Company an on going material compliance obligation and (3) the Company shall not be obligated to keep any such registration or qualification in effect except for so long as is necessary or appropriate in order to dispose of Registrable Securities in such jurisdiction; (e) use its best efforts to list all Registrable Securities covered by such registration statement on any securities exchange or inter-dealer quotation system (in each case, domestic or foreign) as the Holders of such Registrable Securities shall reasonably request, and use its best efforts to obtain all appropriate registrations, permits and consents required in connection therewith and do any and all other acts and things that may be reasonably necessary or advisable to effect such listing; except, that, except with respect to any listing on any such securities exchange or inter-dealer quotation system on which shares of the Company's Class A Common Stock are then listed, (i) notwithstanding Section 4, the Holder of the Registrable Securities to be so listed shall pay all costs and expenses incurred by the Company in connection with such listing and (ii) the 8 9 Company shall have no obligation to use its best efforts to so list Registrable Securities if in the good faith opinion of the general counsel of the Company such listing shall impose on the Company an ongoing material compliance obligation; (f) (i) furnish to each Holder of Registrable Securities included in such registration (each, a "Selling Holder") and to any underwriter of such Registrable Securities an opinion of counsel for the Company addressed to each Selling Holder and dated the date of the closing under the underwriting agreement (if any) (or if such offering is not underwritten, dated the effective date of the registration statement) and (ii) use its best efforts to furnish to each Selling Holder a "cold comfort" letter addressed to each Selling Holder and signed by the independent public accountants who have audited the Company's financial statements included in such registration statement, in each such case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities and such other matters as the Selling Holders may reasonably request and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements; (g) as promptly as practicable notify the Selling Holders in writing (i) at any time when a prospectus relating to a registration pursuant to Section 2 or 3 hereof is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and (ii) of any request by the SEC or any other regulatory body or other body having jurisdiction for any amendment of or supplement to any registration statement or other document relating to such offering, and, in either such case (i) or (ii), at the request of the Selling Holders prepare and furnish to the Selling Holders a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading; (h) furnish unlegended certificates representing ownership of the Registrable Securities being sold in such denominations as shall be requested by the Selling Holders or the underwriters. 6. Conversion of Other Securities, etc. If AMR offers any options, rights, warrants or other securities issued by it or any other person that are offered with, convertible into or exercisable or exchangeable for any Registrable Securities, the Registrable Securities underlying such options, rights, warrants or other securities shall continue to be eligible for registration pursuant to Section 2 and Section 3 of this Agreement. 9 10 7. Underwriting; Due Diligence. (a) If requested by the underwriters for any underwritten offering of Registrable Securities pursuant to a registration requested under this Agreement (under either Section 2 or Section 3), the Company and any other person or entity for whose account securities are being sold in such offering will enter into an underwriting agreement with such underwriters for such offering, such agreement to contain such representations and warranties by the Company and such other person or entity for whose account securities are being sold in such offering and such other terms and provisions as are customarily contained in underwriting agreements with respect to secondary distributions, including, without limitation, indemnities and contribution substantially to the effect and to the extent provided in Section 8 hereof and the provision of opinions of counsel and accountants letters to the effect and to the extent provided in Section 5(f) hereof. The Selling Holders on whose behalf the Registrable Securities are to be distributed by such underwriters shall be parties to any such underwriting agreement, and the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such Selling Holders. Such underwriting agreement shall also contain such representations and warranties by the Selling Holders on whose behalf the Registrable Securities are to be distributed and such other terms and provisions as are customarily contained in underwriting agreements with respect to secondary distributions, including without limitation, indemnification and contribution provisions substantially similar to the extent provided in Section 8 hereof. (b) In connection with the preparation and filing of each registration statement registering Registrable Securities under the Securities Act, the Company will give the Holders of such Registrable Securities and the underwriters, if any, and their respective counsel and accountants, such reasonable and customary access to its books and records and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified the Company's financial statements as shall be necessary, in the opinion of such Holders and such underwriters or their respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act. 8. Indemnification and Contribution. (a) In the case of each offering of Registrable Securities made pursuant to this Agreement, the Company agrees to indemnify and hold harmless, on an After-Tax Basis, each Holder of Registrable Securities, each underwriter of Registrable Securities so offered and each person, if any, who controls any of the foregoing persons within the meaning of the Securities Act and the officers and directors of each of the foregoing, from and against any and all claims, liabilities, losses, damages, expenses (including reasonable attorneys' fees and disbursements) and judgments, joint or several, to which they or any of them may become subject, under the Securities Act or otherwise, including any amount paid in settlement of any litigation commenced or threatened, and shall promptly reimburse them, as and when incurred, for any legal or other expenses reasonably incurred by them in connection with 10 11 investigating any claims and defending any actions, insofar as such losses, claims, damages, liabilities, expenses or judgments shall arise out of, or shall be based upon, any untrue statement or alleged untrue statement of a material fact contained in the registration statement (or in any preliminary or final prospectus included therein) or in any offering memorandum or other offering document relating to the offering and sale of such Registrable Securities, or any amendment thereof or supplement thereto, or in any document incorporated by reference therein, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or shall arise out of or be based upon any violation or alleged violation by the Company of the Securities Act, any blue sky laws, securities laws or other applicable laws of any state or country in which the Registrable Securities are offered and relating to action or inaction required of the Company in connection with such offering; except, that the Company shall not be liable to a particular Holder of Registrable Securities in any such case to the extent that any such loss, claim, damage, liability, expense or judgment arises out of, or is based upon, any untrue statement or alleged untrue statement, or any omission, if such statement or omission shall have been made in reliance upon and in conformity with information relating to such Holder furnished to the Company in writing by or on behalf of such Holder specifically for use in the preparation of the registration statement (or in any preliminary or final prospectus included therein,) offering memorandum or other offering document, or any amendment thereof or supplement thereto and, except, that, in the case of an offering with respect to which a Selling Holder has designated the lead underwriter, this indemnity does not apply to any loss, liability, claim, damage, expense or judgment arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission in any preliminary prospectus if a copy of a prospectus was not sent or given by or on behalf of an underwriter to such person asserting such loss, claim, damage, liability, expense or judgment at or prior to the written confirmation of the sale of the Registrable Securities as required by the Securities Act and such untrue statement or omission had been corrected in such prospectus. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of a Holder of Registrable Securities and shall survive the transfer of such securities. The foregoing indemnity agreement is in addition to any liability that the Company may otherwise have to each Holder of Registrable Securities, its officers and directors, underwriters of the Registrable Securities or any controlling person of the foregoing. (b) In the case of each offering made pursuant to this Agreement, each Holder of Registrable Securities included in such offering, by exercising its registration rights hereunder, agrees to indemnify and hold harmless, on an After-Tax Basis, the Company, and each person, if any, who controls any of the foregoing within the meaning of the Securities Act (and if requested by the underwriters, each underwriter who participates in the offering and each person, if any, who controls any such underwriter within the meaning of the Securities Act) and the officers and directors of each of the foregoing, from and against any and all claims, liabilities, losses, damages, expenses (including reasonable attorneys fees' and expenses) and judgements, joint or several, to which they or any of them may become subject, under the Securities Act or otherwise, including any amount paid in settlement of any litigation commenced or threatened, and shall promptly reimburse them, as and when incurred, for any legal or other expenses reasonably incurred by them in connection 11 12 with investigating any claims and defending any actions, insofar as any such losses, claims, damages, liabilities, expenses or judgments shall arise out of, or shall be based upon, any untrue statement or alleged untrue statement of a material fact contained in the registration statement (or in any preliminary or final prospectus included therein) or in any offering memorandum or other offering document relating to the offering and sale of such Registrable Securities, or any amendment thereof or supplement thereto, or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that such untrue statement of a material fact is contained in, or such material fact is omitted from, information relating to such Holder furnished in writing to the Company by or on behalf of such Holder specifically for use in the preparation of such registration statement (or in any preliminary or final prospectus included therein), offering memorandum or other offering document, and except, that, in the case of an offering with respect to which the Company has designated the lead underwriter, this indemnity does not apply to any loss, liability, claim, damage, expense or judgment arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission in any preliminary prospectus if a copy of a prospectus was not sent or given by or on behalf of an underwriter to such person asserting such loss, claim, damage, liability, expense or judgment at or prior to the written confirmation of the sale of the Registrable Securities as required by the Securities Act and such untrue statement or omission had been corrected in such prospectus. The foregoing indemnity is in addition to any liability which such Holder may otherwise have to the Company, or any of its directors, officers or controlling persons. In no event shall the liability of a Holder hereunder be greater in amount than the dollar amount of the net proceeds received by it upon the sale of the Registrable Securities pursuant to such offering. (c) Procedure for Indemnification. Each party indemnified under paragraph (a) or (b) of this Section 8 shall, promptly after receipt of notice of any claim or the commencement of any action against such indemnified party in respect of which indemnity may be sought, notify the indemnifying part in writing of the claim or the commencement thereof; except, that the failure to notify the indemnifying party shall not relieve it from any liability that it may have to an indemnified party on account of the indemnity agreement contained in paragraph (a) or (b) of this Section 8, unless the indemnifying party was prejudiced by such failure and, then, only to the extent of such prejudice, and in no event shall such failure relieve the indemnifying party from any other liability that it may have to such indemnified party. If any such claim or action shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein, and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 8 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation; except, that each Holder of Registrable Securities, its officers and directors, if any, and each person, if any, who controls such Holder within the meaning of the Securities Act, shall have the right to employ separate counsel to represent them 12 13 if, in the reasonable judgement of such Holder or such other person, it is advisable for them to be represented by separate counsel, and in that event the fees and expenses of one such separate counsel shall be paid by the Company. Any indemnifying party against whom indemnity may be sought under this Section 8 shall not be liable to indemnify an indemnified party for any settlement if such indemnified party enters into such settlement without the consent of the indemnifying party (which consent will not be unreasonably withheld if requested). The indemnifying party may not agree to any settlement of any such claim or other action as the result of which any remedy or relief, other than solely for monetary damages for which the indemnifying party shall be responsible hereunder, shall be applied to or against the indemnified party, without the prior written consent of the indemnified party. In any action hereunder as to which the indemnifying party has assumed the defense thereof with counsel reasonably satisfactory to the indemnified party, the indemnified party shall continue to be entitled to participate in the defense thereof, with counsel of its own choice, but, except as set forth above, the indemnifying party shall not be obligated hereunder to reimburse the indemnified party for the costs thereof. If the indemnification provided for in this Section 8 shall for any reason be unavailable to an indemnified party in respect of any loss, claim, damage, liability, expense or judgment, or any action in respect thereof, referred to therein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage, liability, expense or judgment, or action in respect thereof, in such proportion as shall be appropriate to reflect the relative fault of the indemnifying party on the one hand and the indemnified party on the other with respect to the statements or omissions that resulted in such loss, claim, damage, liability, expense or judgment, or action in respect thereof, as well as any other relevant equitable considerations. The relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the indemnifying party on the one hand or the indemnified party on the other, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission, but not by reference to any indemnified party's stock ownership in the Company. In no event, however, shall a Holder of Registrable Securities be required to contribute in excess of the amount of the net proceeds received by such Holder in connection with the sale of Registrable Securities in the offering that is the subject of such loss, claim, damage, liability, expense or judgment. The amount paid or payable by an indemnified party as a result of the loss, claim, damage, liability, expense or judgment, or action in respect thereof, referred to above in this paragraph shall be deemed to include, for purposes of this paragraph, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 9. Rule 144. The Company shall take such measures and file such information, documents and reports as shall be required by the SEC as a condition to the availability of Rule 144 (or any successor provision). The Company further agrees to use its reasonable efforts to 13 14 cause all conditions to the availability of Form S-3 (or any successor form) under the Securities Act for the filing of registration statements under this Agreement to be met as soon as practicable after the date hereof. 10. Transfer of Registration Rights. (a) AMR may transfer all or any portion of its rights under this Agreement to any transferee of an amount of Registrable Securities owned by AMR exceeding one (1) percent of the outstanding class of such Securities at the time of transfer (each, a "transferee"). Any transfer of registration rights pursuant to this Section shall be effective upon receipt by the Company of written notice from AMR stating the name and address of any transferee and identifying the amount of Registrable Securities with respect to which the rights under this Agreement are being transferred and the nature of the rights so transferred. In connection with any such transfer, the term "AMR" as used in this Agreement (other than in this Section 10 and Section 3(b)(i)(2)) shall, where appropriate to assign the rights and obligations of AMR hereunder to such direct transferee, be deemed to refer to the transferee holder of such Registrable Securities. In no event shall the Company be required to effect more than a total of three (3) registrations for all transferees taken as a whole pursuant to Section 2 of this Agreement and each such registration shall be at the request of not more than one Holder. (b) After any such transfer, AMR shall retain its rights under this Agreement with respect to all other Registrable Securities owned by AMR. (c) Upon the request of AMR, the Company shall execute a Registration Rights Agreement with such transferee or a proposed transferee substantially similar to this Agreement, and any demand registrations granted to such transferee shall reduce the then remaining number of demand registrations to which transferees of AMR are entitled under Section 2(a) hereof. 11. Miscellaneous. (a) Injunctions. Irreparable damage would occur in the event that any of the provisions of this Agreement was not performed in accordance with its specific terms or was otherwise breached. Therefore, the parties hereto shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof in any court having jurisdiction, such remedy being in addition to any other remedy to which they may be entitled at law or in equity. (b) Severability. If any term or provision of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms and provisions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by 14 15 such term or provision. (c) Further Assurances. Subject to the specific terms of this Agreement, each of the parties hereto shall make, execute, acknowledge and deliver such other instruments and documents and take all such other actions as may be reasonably required in order to effectuate the purposes of this Agreement and to consummate the transactions contemplated hereby. (d) Waivers, Etc. No failure or delay on the part of either party hereto (or the intended third party beneficiaries referred to herein) in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. No modification or waiver of any provision of this Agreement nor consent to any departure therefrom shall in any event be effective unless the same shall be in writing, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. (e) Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the subject matter hereof. The section headings contained in this Agreement are solely for the purpose of reference and shall not in any way affect the meaning or interpretation of this Agreement. (f) Counterparts. For the convenience of the parties, this Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original but all of which together shall be one and the same instrument. (g) Notices. All notices, consents, requests, instructions, approvals and other communications provided for herein shall be validly given, made or served, if in writing and delivered personally, by facsimile or sent by registered mail, postage prepared as follows: (i) if to AMR, to AMR Corporation 4333 Amon Carter Boulevard MD 5662 Fort Worth, Texas 76155 Attention: Treasurer (ii) if to the Company, to The SABRE Group Holdings, Inc. 4255 Amon Carter Boulevard MD 4202 Fort Worth, Texas 76155 Attention: Chief Financial Officer 15 16 (iii) if to a Holder of Registrable Securities, to the name and address as the same appear in the security transfer books of the Company or such other address as any party (or other Holders of Registrable Securities) may, from time to time, designate in a written notice in a like manner. Notice given by facsimile shall be deemed delivered on the business day after it is received by the recipient. Notice given by mail as set out above shall be deemed delivered five calendar days after the date the same is mailed. (h) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICT OF LAWS OF SUCH STATE. (i) Assignment. Except as provided herein, the parties may not assign their rights under this Agreement. The Company may not delegate its obligations under this Agreement. 16 17 IN WITNESS WHEREOF, AMR and the Company have caused this Agreement to be duly executed as of the date first above written. AMR CORPORATION By: /s/ GERARD J. ARPEY ------------------------------------- Name: Gerard J. Arpey Title: Senior Vice President and Chief Financial Officer THE SABRE GROUP HOLDINGS, INC. By: /s/ T. PATRICK KELLY ------------------------------------- Name: T. Patrick Kelly Title: Senior Vice President and Chief Financial Officer 17 EX-5.1 5 OPINION OF DEBEVOISE & PLIMPTON 1 [LETTERHEAD OF DEBEVOISE & PLIMPTON] EXHIBIT 5.1 October 9, 1996 The SABRE Group Holdings, Inc. 4255 Amon Carter Boulevard Fort Worth, Texas 76155 Registration Statement on Form S-1 (Registration No. 333-09747) ---------------------------------- Ladies and Gentlemen: We have acted as counsel to The SABRE Group Holdings, Inc., a Delaware corporation (the "Company"), in connection with the preparation and filing with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "1933 Act"), of a Registration Statement on Form S-1 (Registration No. 333-09747) (the "Registration Statement"), relating to 20,200,000 shares of the Company's Class A Common Stock, par value $.01 per share (the "Class A Common Stock"), being offered by the Company, and an additional 3,030,000 shares solely to cover over-allotments (collectively, the "Shares"). In so acting, we have examined and relied upon the originals, or copies certified or otherwise identified to our satisfaction, of such records, documents, certificates and other instruments as in our judgment are necessary or 2 The SABRE Group 2 October 9, 1996 Holdings, Inc. appropriate to enable us to render the opinion expressed below. Based upon the foregoing, we are of the opinion that, upon issuance and delivery of the Shares and payment therefor in the manner described in the Registration Statement and in accordance with the terms of the underwriting agreements (the forms of which are filed as Exhibits 1.1 and 1.2 to the Registration Statement), the Shares will be duly authorized, validly issued and outstanding, and fully paid and non-assessable. Our opinion expressed above is limited to the laws of the State of New York, the corporate laws of the State of Delaware and the Federal laws of the United States of America. We hereby consent to the filing of this opinion as an Exhibit to the Registration Statement and to the use of our name under the caption "Validity of Class A Common Stock" in the Prospectus. In giving such consent, we do not thereby concede that we are within the category of persons whose consent is required under Section 7 of the 1933 Act or the Rules and Regulations of the Commission thereunder. Very truly yours, /s/ Debevoise & Plimpton EX-10.25 6 LONG TERM INCENTIVE PLAN 1 EXHIBIT 10.25 1996 LONG-TERM INCENTIVE PLAN The SABRE Group Holdings, Inc. October 1996 2 CONTENTS - -------------------------------------------------------------------------- PAGE Section 1. Purpose; Definitions 1 Section 2. Administration 3 Section 3. Stock Subject to Plan 4 Section 4. Eligibility 5 Section 5. Stock Options 5 Section 6. Stock Appreciation Rights 8 Section 7. Restricted Stock 9 Section 8. Deferred Stock 11 Section 9. Stock Purchase Rights 13 Section 10. Other Stock-Based Awards 13 Section 11. Change in Control Provisions 14 Section 12. Amendments and Termination 16 Section 13. Unfunded Status of Plan 17 Section 14. General Provisions 17 Section 15. Effective Date of Plan 18 Section 16. Term of Plan 18 Section 17. Performance Related Awards 18 3 THE SABRE GROUP 1996 LONG-TERM INCENTIVE PLAN SECTION 1. PURPOSE; DEFINITIONS The purpose of The SABRE Group Holdings, Inc.'s 1996 Long-Term Incentive Plan (the "Plan") is to enable The SABRE Group Holdings, Inc. (the "Company") to attract, retain, and reward key employees of the Company and its Subsidiaries and Affiliates, and strengthen the mutuality of interests between such key employees and the Company's shareholders, by offering such key employees performance-based stock incentives and/or other equity interests or equity-based incentives in the Company, as well as performance-based incentives payable in cash. For purposes of the Plan, the following terms shall be defined as set forth below: (A) "AFFILIATE" means any entity other than the Company and its Subsidiaries that is designated by the Board as a participating employer under the Plan, provided that the Company directly or indirectly owns at least twenty percent (20%) of the combined voting power of all classes of stock of such entity or at least twenty percent (20%) of the ownership interests in such entity. (B) "BOARD" means the Board of Directors of the Company. (C) "BOOK VALUE" means, as of any given date, on a per share basis (a) the Stockholders' Equity in the Company as of the end of the immediately preceding fiscal year as reflected in the Company's consolidated balance sheet, subject to such adjustments as the Committee shall specify at or after grant, divided by (b) the number of then outstanding shares of Stock as of such year-end date (as adjusted by the Committee for subsequent events). (D) "CODE" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. (E) "COMMITTEE" means the Committee referred to in Section 2 of the Plan. If at any time no Committee shall be in office, then the functions of the Committee specified in the Plan shall be exercised by the Board. (F) "COMPANY" means The SABRE Group Holdings, Inc., a corporation organized under the laws of the State of Delaware, or any successor corporation. (G) "DEFERRED STOCK" means an award made pursuant to Section 8 below of the right to receive Stock at the end of a specified deferral period. (H) "DISABILITY" means disability as determined under procedures established by the Committee for purposes of this Plan. (I) "EARLY RETIREMENT" means retirement, with the express consent for purposes of the Plan of the Company at or before the time of such retirement, from active employment 1 4 with the Company and any Subsidiary or Affiliate pursuant to the early retirement provisions of the applicable pension plan of such entity. (J) "FAIR MARKET VALUE" means, as of any given date, unless otherwise determined by the Committee in good faith, the mean between the highest and lowest quoted selling price, regular way, of the Stock on the New York Stock Exchange or, if no such sale of Stock occurs on the New York Stock Exchange on such date, the fair market value of the Stock as determined by the Committee in good faith. (K) "INCENTIVE STOCK OPTION" means any Stock Option intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code. (L) "NON-QUALIFIED STOCK OPTION" means any Stock Option that is not an Incentive Stock Option. (M) "NORMAL RETIREMENT" means retirement from active employment with the Company and any Subsidiary or Affiliate on or after age 65. (N) "OTHER STOCK-BASED AWARD" means an award under Section 10 below that is valued in whole or in part by reference to, or is otherwise based on, Stock. (O) "PARENT" means AMR Corporation. (P) "PLAN" means The SABRE Group Holdings, Inc.'s 1996 Long-Term Incentive Plan, as hereinafter amended from time to time. (Q) "RESTRICTED STOCK" means an award of shares of Stock that is subject to restrictions under Section 7 below. (R) "RETIREMENT" means Normal or Early Retirement. (S) "STOCK" means the Class A Common Stock, $.01 par value per share, of the Company. (T) "STOCK APPRECIATION RIGHT" means the right pursuant to an award granted under Section 6 below to surrender to the Company all (or a portion) of a Stock Option in exchange for an amount equal to the difference between (i) the Fair Market Value, as of the date such Stock Option (or such portion thereof) is surrendered, of the shares of Stock covered by such Stock Option (or such portion thereof), subject, where applicable, to the pricing provisions in Section 6(b)(ii) and (ii) the aggregate exercise price of such Stock Option (or such portion thereof). (U) "STOCK OPTION" or "OPTION" means any option to purchase shares of Stock (including Restricted Stock and Deferred Stock, if the Committee so determines) granted pursuant to Section 5 below. (V) "STOCK PURCHASE RIGHT" means the right to purchase Stock pursuant to Section 9. 2 5 (W) "SUBSIDIARY" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. In addition, the terms "Change in Control," "Potential Change in Control," and "Change in Control Price" shall have the meanings set forth, respectively, in Sections 11(b), (c) and (d) below and the term "Cause" shall have the meaning set forth in Section 5(i) below. SECTION 2. ADMINISTRATION The Plan shall be administered by a committee of not less than two members of the Board, who shall be appointed by, and serve at the pleasure of, the Board. In selecting the members of the Committee, the Board shall take into account the requirements for the members of the Committee to be treated as "Outside Directors" within the meaning of Section 162(m) of the Code and "Non-Employee Directors" for purposes of Rule 16b-3, as promulgated under Section 16 of the 1934 Act. The functions of the Committee specified in the Plan shall be exercised by the Board, if and to the extent that no Committee exists which has the authority to so administer the Plan or to the extent that the Committee is not comprised solely of Non-Employee Directors for purposes of Rule 16b-3, as promulgated under Section 16 of the 1934 Act. The Committee shall have full authority to grant, pursuant to the terms of the Plan, to officers and other key employees eligible under Section 4: (i) Stock Options; (ii) Stock Appreciation Rights; (iii) Restricted Stock; (iv) Deferred Stock; (v) Stock Purchase Rights and/or (vi) Other Stock-Based Awards. In particular the Committee shall have the authority: (i) To select the officers and other key employees of the Company and its Subsidiaries and Affiliates to whom Stock Options, Stock Appreciation Rights, Restricted Stock, Deferred Stock, Stock Purchase Rights, and/or Other Stock-Based Awards may from time to time be granted hereunder; (ii) To determine whether and to what extent Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation Rights, Restricted Stock, Deferred Stock, Stock Purchase Rights and/or Other Stock-Based Awards, or any combination thereof, are to be granted hereunder to one or more eligible employees; (iii) Subject to the provisions of Sections 3, 5 and 17, to determine the number of shares to be covered by each such award granted hereunder; (iv) To determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (including, but not limited to, the share price and any restriction or limitation, or any vesting acceleration or waiver of forfeiture restrictions regarding any Stock Option or other award and/or the shares of Stock relating thereto, based in each case on such factors as the 3 6 Committee shall determine in its sole discretion). (v) To determine whether and under what circumstances a Stock Option may be settled in cash, Restricted Stock and/or Deferred Stock under Section 5(k) or (l), as applicable, instead of Stock; (vi) To determine whether and under what circumstances an award of Restricted Stock or Deferred Stock may be settled in cash; (vii) To determine whether, to what extent and under what circumstances Option grants and/or other awards under the Plan and/or other cash awards made by the Company are to be made, and operate, on a tandem basis vis-a-vis other awards under the Plan and/or cash awards made outside of the Plan, or on an additive basis; (viii) To determine whether, to what extent and under what circumstances Stock and other amounts payable with respect to an award under this Plan shall be deferred either automatically or at the election of the participant (including providing for and determining the amount (if any) of any deemed earnings on any deferred amount during any deferral period); and (ix) To determine the terms and restrictions applicable to Stock Purchase Rights and the Stock purchased by exercising such Rights. The Committee shall have the authority to adopt, alter, and repeal such rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any award issued under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan. All decisions made by the Committee pursuant to the provisions of the Plan shall be made in the Committee's sole discretion and shall be final and binding on all persons, including the Company and Plan participants. SECTION 3. STOCK SUBJECT TO PLAN The total number of shares of Stock reserved and available for distribution under the Plan shall be 13,000,000 shares. Subject to Section 6(b)(iv) below, if any shares of Stock that have been optioned cease to be subject to a Stock Option, or if any such shares of Stock that are subject to any Restricted Stock or Deferred Stock award, Stock Purchase Right or Other Stock-Based Award granted hereunder are forfeited or any such award otherwise terminates without a payment being made to the participant in the form of Stock, such shares shall again be available for distribution in connection with future awards under the Plan. In the event of any merger, reorganization, consolidation, recapitalization, Stock dividend, Stock split or other change in corporate structure affecting the Stock, such substitution or adjustment shall be made in the aggregate number of shares reserved for 4 7 issuance under the Plan, in the number and option price of shares subject to outstanding Options granted under the Plan, in the number and purchase price of shares subject to outstanding Stock Purchase Rights under the Plan, and in the number of shares subject to other outstanding awards granted under the Plan as may be determined to be appropriate by the Committee, in its sole discretion, provided that the number of shares subject to any award shall always be a whole number. Such adjusted option price shall also be used to determine the amount payable by the Company upon the exercise of any Stock Appreciation Right associated with any Stock Option. SECTION 4. ELIGIBILITY Officers and other key employees of the Company and its Subsidiaries and Affiliates (but excluding members of the Committee and any person who serves only as a director) who are responsible for or contribute to the management, growth and/or profitability of the business of the Company and/or its Subsidiaries and Affiliates are eligible to be granted awards under the Plan. SECTION 5. STOCK OPTIONS Stock Options may be granted alone, in addition to or in tandem with other awards granted under the Plan. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. Stock Options granted under the Plan may be of two types: (i) Incentive Stock Options and (ii) Nonqualified Stock Options. The Committee shall have the authority to grant to any optionee Incentive Stock Options, Nonqualified Stock Options, or both types of Stock Options (in each case with or without Stock Appreciation Rights); provided that, in no event shall the number of shares of Stock subject to any Stock Options granted to any key employee during any twelve (12) month period exceed 400,000 shares, as such number may be adjusted pursuant to Section 3. Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable: (A) OPTION PRICE. The Option price per share of Stock purchasable under a Stock Option shall be determined by the Committee at the time of grant but shall be not less than one hundred percent (100%) of the Fair Market Value of the Stock at grant. Provided, in connection with an initial public offering of Stock, "Fair Market Value" for Stock Options granted hereunder at the time of the initial public offering shall be priced at the Stock's offering price. (B) OPTION TERM. The term of each Stock Option shall be fixed by the Committee, but no Stock Option shall be exercisable more than ten (10) years after the date the Option is granted. (C) EXERCISABILITY. Stock Options shall be exercisable at such time or times and subject 5 8 to such terms and conditions as shall be determined by the Committee at or after grant; provided, however, that, except as provided in Section 5(f), (g) and (h) and Section 11, or unless otherwise determined by the Committee at or after grant, no Stock Option shall be exercisable prior to the first anniversary date of the granting of the Option. If the Committee provides, in its sole discretion, that any Stock Option is exercisable only in installments, the Committee may waive such installment exercise provisions at any time at or after grant in whole or in part, based on such factors as the Committee shall determine, in its sole discretion. (D) METHOD OF EXERCISE. Subject to whatever installment exercise provisions apply under Section 5(c), Stock Options may be exercised in whole or in part at any time during the option period, by giving written notice of exercise to the Company specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price, either by check, note or such other instrument as the Committee may accept. As determined by the Committee, in its sole discretion, at or after grant, payment in full or in part may also be made in the form of unrestricted Stock already owned by the optionee or, in the case of the exercise of a Nonqualified Stock Option, Restricted Stock, or Deferred Stock subject to an award hereunder (based, in each case, on the Fair Market Value of the Stock on the date the Option is exercised, as determined by the Committee). If payment of the option exercise price of a Nonqualified Stock Option is made in whole or in part in the form of Restricted Stock or Deferred Stock, such Restricted Stock or Deferred Stock (and any replacement shares relating thereto) shall remain (or be) restricted or deferred, as the case may be, in accordance with the original terms of the Restricted Stock award or Deferred Stock award in question, and any additional Stock received upon the exercise shall be subject to the same forfeiture restrictions or deferral limitations, unless otherwise determined by the Committee, in its sole discretion, at or after grant. No shares of Stock shall be issued until full payment therefore has been made. An optionee shall generally have the rights to dividends or other rights of a shareholder with respect to the shares subject to the Option when the optionee has given written notice of exercise, has paid in full for such shares, and, if requested, has given the representation described in Section 14(a). (E) NON-TRANSFERABILITY OF OPTIONS. Except to the extent the Committee may authorize or permit Nonqualified Stock Options to be transferred to, or for the benefit of, members of the participant's family, no Stock Option shall be transferable by the optionee otherwise than by will or by the laws of descent and distribution, and all Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee. (F) TERMINATION BY DEATH. Subject to Section 5(j), if an optionee's employment by the Company and any Subsidiary or Affiliate terminates by reason of death, any Stock Option held by such optionee may thereafter be exercised to the extent such Option was exercisable at the time of death or on such accelerated basis as the Committee may determine at or after grant (or as may be determined in accordance with procedures established by the 6 9 Committee), by the legal representative of the estate or by the legatee of the optionee under the will of the optionee, for a period of three (3) years (or such other period as the Committee may specify at grant) from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. (G) TERMINATION BY REASON OF DISABILITY. Subject to Section 5(j), if an optionee's employment by the Company and any Subsidiary terminates by reason of Disability, any Stock Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of termination or on such accelerated basis as the Committee may determine at or after grant (or as may be determined in accordance with procedures established by the Committee) for a period of three (3) years (or such other period as the Committee may specify at grant) from the date of such termination of employment or until the expiration of the stated term of such Stock Option, whichever period is the shorter; provided, however, that, if the optionee dies within such three (3) year period (or such other period as the Committee shall specify at grant), any unexercised Stock Option held by such optionee shall thereafter be exercisable, to the extent to which it was exercisable at the time of death, for a period of twelve (12) months from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. In the event of termination of employment by reason of Disability, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Nonqualified Stock Option. (H) TERMINATION BY REASON OF RETIREMENT. Subject to Section 5(j), if an optionee's employment by the Company and any Subsidiary or Affiliate terminates by reason of Normal or Early Retirement, any Stock Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of such Retirement or on such accelerated basis as the Committee may determine at or after grant (or as may be determined in accordance with procedures established by the Committee) for a period of three (3) years (or such other period as Committee may specify at grant) from the date of such termination of employment or the expiration of the stated term of such Stock Option, whichever period is the shorter; provided, however, that if the optionee dies within such three-year period (or such other period as the Committee may specify at grant), any unexercised Stock Option held by such optionee shall thereafter be exercisable, to the extent to which it was exercisable at the time of death, for a period of twelve (12) months from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. In the event of termination of employment by reason of Retirement, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as Nonqualified Stock Option. (I) OTHER TERMINATION. Unless otherwise determined by the Committee (or pursuant to procedures established by the Committee) at or after grant, if an optionee's employment by the Company or any Subsidiary or Affiliate terminates for any reason other than death, Disability or Normal or Early Retirement, the Stock Option shall thereupon terminate. Notwithstanding the foregoing sentence, a Stock Option may be exercised, to the extent otherwise then exercisable, for the lesser of three (3) months or the balance of such Stock 7 10 Option's term, if the optionee is involuntarily terminated by the Company or any Subsidiary or Affiliate without Cause. For purposes of this Plan, "Cause" means a felony conviction of a participant or the failure of a participant to contest prosecution for a felony, or a participant's willful misconduct or dishonesty, any of which is directly and materially harmful to the business or reputation of the Company or any Subsidiary or Affiliate. (J) INCENTIVE STOCK OPTIONS. Anything in the Plan to the contrary notwithstanding, no term of this Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify the Plan under Section 422 of the Code, or, without the consent of the optionee(s) affected, to disqualify any Incentive Stock Option under such Section 422. (K) BUYOUT PROVISIONS. The Committee may at any time offer to buy out for payment in cash, Stock, Deferred Stock or Restricted Stock, an Option previously granted, based on such terms and conditions as the Committee shall establish and communicate to the optionee at the time that such offer is made. (L) SETTLEMENT PROVISIONS. If the option agreement so provides at grant or is amended after grant but prior to the exercise to so provide (with the optionee's consent), the Committee may require that all or part of the shares to be issued with respect to the spread value of an exercised Option take the form of Deferred or Restricted Stock, which shall be valued on the date of exercise on the basis of the Fair Market Value (as determined by the Committee) of such Deferred or Restricted Stock determined without regard to the deferral limitations and/or forfeiture restrictions involved. SECTION 6. STOCK APPRECIATION RIGHTS (A) GRANT AND EXERCISE. Stock Appreciation Rights may be granted in conjunction with all or part of any Stock Option granted under the Plan. In the case of a Nonqualified Stock Option, such rights may be granted either at or after the time of the grant of such Stock Option. In the case of an Incentive Stock Option, such rights may be granted only at the time of grant of such Stock Option. A Stock Appreciation Right or applicable portion thereof granted with respect to a given Stock Option shall terminate and no longer be exercisable upon the termination or exercise of the related Stock Option, subject to such provisions as the Committee may specify at grant where a Stock Appreciation Right is granted with respect to less than the full number of shares covered by a related Stock Option. A Stock Appreciation Right may be exercised by an optionee, subject to Section 6(b), in accordance with the procedures established by the Committee for such purposes. Upon such exercise, the optionee shall be entitled to receive an amount determined in the manner prescribed in Section 6(b). Stock Options relating to exercised Stock Appreciation Rights shall no longer be exercisable to the extent that the related Stock Appreciation Rights have been exercised. (B) TERMS AND CONDITIONS. Stock Appreciation Rights shall be subject to such terms and conditions, not inconsistent with the provisions of the Plan, as shall be determined from 8 11 time to time by the Committee, including the following: (i) Stock Appreciation Rights shall be exercisable only at such time or times and to the extent that the Stock Options to which they relate shall be exercisable in accordance with the provisions of Section 5 and this Section 6 of the Plan and only within a ten business day period commencing on the third business day following the release of quarterly or annual financial results (the "Window Period"). (ii) Upon the exercise of a Stock Appreciation Right, an optionee shall be entitled to receive an amount in cash and/or shares of Stock equal in value to the excess of the Fair Market Value of one share of Stock over the option price per share specified in the related Stock Option multiplied by the number of shares in respect of which the Stock Appreciation Right shall have been exercised, with the Committee having the right to determine the form of payment. When payment is to be made in shares, the number of shares to be paid shall be calculated on the basis of the Fair Market Value of the shares on the date of exercise. When payment is to be made in cash, such amount shall be calculated on the basis of the average of the Fair Market Values of a share of Stock on each business day during the Window Period in which such Stock Appreciation Right is exercised. (iii) Stock Appreciation Rights shall be transferable only when and to the extent that the underlying Stock Option would be transferable under Section 5(e) of the Plan. (iv) Upon the exercise of a Stock Appreciation Right, the Stock Option or part thereof to which such Stock Appreciation Right is related shall be deemed to have been exercised for the purpose of the limitation set forth in Section 3 of the Plan on the number of shares of Stock to be issued under the Plan, but only to the extent of the number of shares issued under the Stock Appreciation Right at the time of exercise based on the value of the Stock Appreciation Right at such time. (v) In its sole discretion, the Committee may grant "Limited" Stock Appreciation Rights under this Section 6, i.e., Stock Appreciation Rights that become exercisable only in the event of a Change in Control and/or a Potential Change in Control, subject to such terms and conditions as the Committee may specify at grant. Such Limited Stock Appreciation Rights shall be settled solely in cash. (vi) The Committee, in its sole discretion, may also provide that, in the event of a Change in Control and/or a Potential Change in Control, the amount to be paid upon the exercise of a Stock Appreciation Right or Limited Stock Appreciation Right shall be based on the Change in Control Price, subject to such terms and conditions as the Committee may specify at grant. 9 12 SECTION 7. RESTRICTED STOCK (A) ADMINISTRATION. Shares of Restricted Stock may be issued either along, in addition to, or in tandem with, other awards granted under the Plan and/or cash awards made outside of the Plan. The Committee shall determine the eligible persons to whom, and the time or times at which, grants of Restricted Stock will be made, the number of shares to be awarded, the price (if any) to be paid by the recipient of Restricted Stock (subject to Section 7(b)), the time or times within which such awards may be subject to forfeiture, and all other terms and conditions of the awards. The Committee may condition the grant of Restricted Stock upon the attainment of specified performance goals or such other factors as the Committee may determine, in its sole discretion. The provisions of Restricted Stock awards need not be the same with respect to each recipient. (B) AWARDS AND CERTIFICATES. The prospective recipient of a Restricted Stock award shall not have any rights with respect to such award, unless and until such recipient has executed an agreement evidencing the award and has delivered a fully executed copy thereof to the Company, and has otherwise complied with the applicable terms and conditions of such award. (i) The purchase price for shares of Restricted Stock shall be equal to or less than their par value and may be zero. (ii) Awards of Restricted Stock must be accepted within a period of sixty (60) days (or such shorter period as the Committee may specify at grant) after the award date, by executing an award agreement and paying whatever price (if any) is required under Section 7(b)(i). (iii) Each participant receiving a Restricted Stock award shall be issued a stock certificate in respect of such shares of Restricted Stock. Such certificate shall be registered in the name of such participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such award. (iv) The Committee shall require that the stock certificates evidencing such shares be held in custody by the Company until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock award, the participant shall have delivered a stock power, endorsed in blank, relating to the Stock covered by such award. (C) RESTRICTIONS AND CONDITIONS. The shares of Restricted Stock awarded pursuant to this Section 7 shall be subject to the following restrictions and conditions: (i) Subject to the provisions of this Plan and the award agreement, during a period set by the Committee commencing with the date of such award (the 10 13 "Restriction Period"), the participant shall not be permitted to sell, transfer, pledge or assign shares of Restricted Stock awarded under the Plan. Within these limits, the Committee, in its sole discretion, may provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions in whole or in part, based on service, performance and/or such other factors or criteria as the Committee may determine, in its sole discretion. (ii) Except as provided in this paragraph (ii) and Section 7(c)(i), the participant shall have, with respect to the shares of Restricted Stock, all of the rights of a shareholder of the Company, including the right to vote the shares, and the right to receive any cash dividends. The Committee, in its sole discretion, as determined at the time of award, may permit or require the payment of cash dividends to be deferred and, if the Committee so determines, reinvested, subject to Section 14(e), in additional Restricted Stock to the extent shares are available under Section 3, or otherwise reinvested. Pursuant to Section 3 above, Stock dividends issued with respect to Restricted Stock shall be treated as additional shares of Restricted Stock that are subject to the same restrictions and other terms and conditions that apply to the shares with respect to which such dividends are issued. (iii) Subject to the applicable provisions of the award agreement and this Section 7, upon termination of a participant's employment with the Company and any Subsidiary or Affiliate for any reason during the Restriction Period, all shares still subject to restriction will vest, or be forfeited, in accordance with the terms and conditions established by the Committee at or after grant. If and when the Restriction Period expires without a (iv) prior forfeiture of the Restricted Stock subject to such Restriction Period, certificates for an appropriate number of unrestricted shares shall be delivered to the participant promptly. (D) MINIMUM VALUE PROVISIONS. In order to better ensure that award payments actually reflect the performance of the Company and service of the participant, the Committee may provide, in its sole discretion, for a tandem performance-based or other award designed to guarantee a minimum value, payable in cash or Stock to the recipient of a restricted stock award, subject to such performance, future service, deferral and other terms and conditions as may be specified by the Committee. SECTION 8. DEFERRED STOCK (A) ADMINISTRATION. Deferred Stock may be awarded either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. The Committee shall determine the eligible persons to whom and the time or times at which Deferred Stock shall be awarded, the number of shares of Deferred Stock to be awarded to any person, the duration of the period (the "Deferral Period") during which, and the conditions under which, receipt of the Stock will be deferred, and the other terms and conditions of the award in addition to those set forth in Section 8(b). 11 14 The Committee may condition the grant of Deferred Stock upon the attainment of specified performance goals or such other factors or criteria as the Committee shall determine, in its sole discretion. The provisions of Deferred Stock awards need not be the same with respect to each recipient. (B) TERMS AND CONDITIONS. The shares of Deferred Stock awarded pursuant to this Section 8(b) shall be subject to the following terms and conditions: (i) Subject to the provision of this Plan and the award agreement referred to in Section 8(b)(vi) below, Deferred Stock awards may not be sold, assigned, transferred, pledged or otherwise encumbered during the Deferral Period. At the expiration of the Deferral Period (or the Elective Deferral Period referred to in Section 8(b)(v), where applicable), share certificates shall be delivered to the participant, or his legal representative, in a number equal to the shares covered by the Deferred Stock award. (ii) Unless otherwise determined by the Committee at grant, amounts equal to any dividends declared during the Deferral Period with respect to the number of shares covered by a Deferred Stock award will be paid to the participant currently, or deferred and deemed to be reinvested in additional Deferred Stock, or otherwise reinvested, all as determined at or after the time of the award by the Committee, in its sole discretion. (iii) Subject to the provisions of the award agreement and this Section 8, upon termination of a participant's employment with the Company and any Subsidiary or Affiliate for any reason during the Deferral Period for a given award, the Deferred Stock in question will vest, or be forfeited, in accordance with the terms and conditions established by the Committee at or after grant. (iv) Based on service, performance, and/or such other factors or criteria as the Committee may determine, the Committee may, at or after grant, accelerate the vesting of all or any part of any Deferred Stock award and/or waive the deferral limitations for all or any part of such award. (v) A participant may elect to further defer receipt of an award (or an installment of an award) for a specified period or until a specified event (the "Elective Deferral Period"), subject in each case to the Committee's approval and to such terms as are determined by the Committee, all in its sole discretion. Subject to any exceptions adopted by the Committee, such election must generally be made at least twelve (12) months prior to completion of the Deferral Period of such Deferred Stock award (or such installment). (vi) Each award shall be confirmed by, and subject to the terms of, a Deferred Stock agreement executed by the Company and the participant. 12 15 (C) MINIMUM VALUE PROVISIONS. In order to better ensure that award payments actually reflect the performance of the Company and service of the participant, the Committee may provide, in its sole discretion, for a tandem performance-based or other award designed to guarantee a minimum value, payable in cash or Stock to the recipient of a Deferred Stock award, subject to such performance, future service, deferral and other terms and conditions as may be specified by the Committee. SECTION 9. STOCK PURCHASE RIGHTS (A) AWARDS AND ADMINISTRATION. Subject to Section 3 above, the Committee may grant eligible participants Stock Purchase Rights which shall enable such participants to purchase Stock (including Deferred Stock and Restricted Stock): (i) at its Fair Market Value on the date of grant; (ii) at fifty percent (50%) of such Fair Market Value on such date; (iii) at an amount equal to Book Value on such date; or (iv) at an amount equal to the par value of such stock on such date. The Committee shall also impose such deferral, forfeiture, and/or other terms and conditions as it shall determine, in its sole discretion, on such Stock Purchase Rights or the exercise thereof. The terms of Stock Purchase Rights awards need not be the same with respect to each participant. Each Stock Purchase Right award shall be confirmed by, and be subject to the terms of, a Stock Purchase Rights agreement. (B) EXERCISABILITY. Stock Purchase Rights shall generally be exercisable for such period after grant as is determined by the Committee not to exceed thirty (30) days. SECTION 10. OTHER STOCK-BASED AWARDS (A) ADMINISTRATION. Other awards of Stock and other awards that are valued in whole or in part by reference to, or are otherwise based on, Stock ("Other Stock-Based Awards"), including, without limitation, stock purchase rights, performance shares, convertible preferred stock, convertible debentures, exchangeable securities and Stock awards or options valued by reference to Book Value or subsidiary performance, may be granted either along with, or in addition to, or in tandem with, Stock Options, Stock Appreciation Rights, Restricted Stock, Deferred Stock, or Stock Purchase Rights granted under the Plan and/or cash awards made outside of the Plan. Subject to the provisions of the Plan, the Committee shall have authority to determine the persons to whom and the time or times at which such awards shall be made, the number of shares of Common Stock to be awarded pursuant to such awards, and all other conditions 13 16 of the awards. The Committee may also provide for the grant of Stock upon the completion of a specified performance period. The provision of Other Stock-Based Awards need not be the same in respect to each recipient. (B) TERMS AND CONDITIONS. Other Stock-Based Awards made pursuant to this Section 10 shall be subject to the following terms and conditions: (i) Subject to the provisions of this Plan and the award agreement referred to in Section 10(b)(v) below, shares subject to awards made under this Section 10 may not be sold, assigned, transferred, pledged, or otherwise encumbered prior to the date on which the shares are issued, or, if later, the date on which any applicable restriction, performance, or deferral period lapses. (ii) Subject to the provision of this Plan and the award agreement and unless otherwise determined by the Committee at grant, the recipient of an award under this Section 10 shall be entitled to receive, currently, or on a deferred basis, interest or dividends or interest or dividend equivalents with respect to the number of shares covered by the award, as determined at the time of the award by the Committee, in its sole discretion, and the Committee may provide that such amounts (if any) shall be deemed to have been reinvested in additional Stock or otherwise reinvested. (iii) Any award under Section 10 and any Stock covered by any such award shall vest or be forfeited to the extent so provided in the award agreement as determined by the Committee, in its sole discretion. (iv) In the event of the participant's Retirement, Disability or death, or in cases of special circumstances, the Committee may, in its sole discretion, waive in whole or in part any or all of the remaining limitations imposed hereunder (if any) with respect to any or all of an award under this Section 10. (v) Each award under this Section 10 shall be confirmed by, and subject to the terms of, an agreement or other instrument by the Company and by the participant. (vi) Stock (including securities convertible into Stock) issued on a bonus basis under this Section 10 may be issued for no cash consideration. Stock (including securities convertible into Stock) purchased pursuant to a purchase right awarded under this Section 10 shall be priced at least fifty percent (50%) of the Fair Market Value of the Stock on the date of grant. SECTION 11. CHANGE IN CONTROL PROVISIONS (A) IMPACT OF EVENT. In the event of: (1) a "Change in Control" as defined in Section 11(b), or 14 17 (2) a "Potential Change in Control" as defined in Section 11(c), but only if and to the extent so determined by the Committee or the Board at or after grant (subject to any right of approval expressly reserved by the Committee or the Board at the time of such determination). (i) Any Stock Appreciation Rights (including, without limitation, any Limited Stock Appreciation Rights) and any Stock Options awarded under the Plan not previously exercisable and vested shall become fully exercisable and vested. (ii) The restrictions or deferral limitations applicable to any Restricted Stock, Deferred Stock, Stock Purchase Rights and Other Stock-Based Awards, in each case to the extent not already vested under the Plan, shall lapse and such shares and awards shall be deemed fully vested. (iii) The value of all outstanding Stock Options, Stock Appreciation Rights, Restricted Stock, Deferred Stock, Stock Purchase Rights and Other Stock-Based Awards, in each case to the extent vested, shall, unless determined otherwise by the Committee in its sole discretion at or after grant but prior to any Change in Control, be cashed out on the basis of the "Change in Control Price" as defined in Section 11(d) as of the date such Change in Control or such Potential Change in Control is determined to have occurred or such other date as the Committee may determine prior to the Change in Control. (B) DEFINITION OF "CHANGE IN CONTROL". For purposes of Section 11(a), a "Change in Control" means the happening of any of the following: (i) When any "person" as defined in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange Act but excluding the Company and any Subsidiary and any employee benefit plan sponsored or maintained by the Company or any Subsidiary (including any trustee of such plan acting as trustee), directly or indirectly, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, as amended from time to time) of securities of the company representing twenty percent (20%) or more of the combined voting power of the Company's then outstanding securities; (ii) When, during any period of twenty-four (24) consecutive months during the existence of the Plan, the individuals who, at the beginning of such periods, constitute the Board (the "Incumbent Directors") cease for any reason other than death to constitute at least a majority thereof, provided, however, that a director who was not a director at the beginning of such twenty-four (24) month period shall be deemed to have satisfied such twenty-four (24) month requirement (and be an Incumbent Director) if such director was elected by, or on the recommendation of or with the approval of, at least two- thirds of the directors who then qualified as Incumbent Directors either actually (because they were director at the beginning of such twenty-four (24) month period) or by prior operation of this Section 11(b)(ii); or 15 18 (iii) The occurrence of a transaction requiring stockholder approval for the acquisition of the Company by an entity other than the Company or a Subsidiary through purchase of assets, or by merger, or otherwise. (iv) Notwithstanding anything else contained herein to the contrary, in no event shall a Change of Control be deemed to occur solely by reason of (1) a distribution to the Parent's shareholders, whether as dividend or otherwise, of all or any portion of the Stock or any other voting securities of the Company held, directly or indirectly, by the Parent or (2) a sale of all or any portion of the Stock or any other voting securities of the Company held, directly or indirectly, by the Parent in an underwritten public offering. (C) DEFINITION OF POTENTIAL CHANGE IN CONTROL. For purposes of Section 11(a), a "Potential Change in Control" means the happening of any one of the following: (i) The approval by shareholders of an agreement by the Company, the consummation of which would result in a Change in Control of the Company as defined in Section 11(b); or (ii) The acquisition of beneficial ownership, directly or indirectly, by any entity, person or group (other than the Company or a Subsidiary or any Company employee benefit plan (including any trustee of such plan acting as such trustee) of securities of the Company representing five percent (5%) or more of the combined voting power of the Company's outstanding securities and the adoption by the Board of Directors of a resolution to the effect that a Potential Change in Control of the Company has occurred for purposes of this Plan. (D) CHANGE IN CONTROL PRICE. For the purposes of the Section 11, "Change in Control Price " means the highest price per share paid in any transaction reported on the New York Stock Exchange Composite Index, or paid or offered in any bona fide transaction related to a potential or actual Change in Control of the Company at any time during the sixty (60) day period immediately preceding the occurrence of the Change in Control (or, where applicable, the occurrence of the Potential Change in Control event), in each case as determined by the Committee except that, in the case of Incentive Stock Options and Stock Appreciation Rights relating to Incentive Stock Options, such price shall be based only on transactions reported for the date on which the optionee exercises such Stock Appreciation Rights (or Limited Stock Appreciation Rights) or, where applicable, the date on which a cashout occurs under Section 11(a)(iii). SECTION 12. AMENDMENTS AND TERMINATION. The Board may amend, alter, or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made which would impair the rights of an optionee or participant under a Stock Option, Stock Appreciation Right (or Limited Stock Appreciation Right), Restricted or Deferred Stock award, Stock Purchase Right, or Other Stock-Based Award theretofore granted, without the optionee's or participant's consent. 16 19 The Committee may amend the terms of any Stock Option or other award theretofore granted, prospectively or retroactively, but subject to Section 3 above, no such amendment shall impair the rights of any holder without the holder's consent. The Committee may also substitute new Stock Options for previously granted Stock Options (on a one for one or other basis), including previously granted Stock Options having higher option exercise prices. SECTION 13. UNFUNDED STATUS OF PLAN. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a participant or optionee by the Company, nothing contained herein shall give any such participant or optionee any rights that are greater than those of a general creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or payments in lieu of or with respect to awards hereunder; provided, however, that unless the Committee otherwise determines with the consent of the affected participant, the existence of such trusts or other arrangements is consistent with the "unfunded" status of the Plan. SECTION 14. GENERAL PROVISIONS (a) The Committee may require each person purchasing shares pursuant to a Stock Option or other award under the Plan to represent to and agree with the Company in writing that the optionee or participant is acquiring the shares without a view to distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. All certificates for shares of Stock or other securities delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed, and any applicable federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (b) Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required, and such arrangements may be either generally applicable or applicable only in specific cases. (c) The adoption of the Plan shall not confer upon any employee of the Company or any Subsidiary or Affiliate any right to continued employment with the Company or a Subsidiary or Affiliate, as the case may be, nor shall it interfere in any way with the right of the Company or a Subsidiary or Affiliate to terminate the employment of any of its employees at any time. (d) No later than the date as of which an amount first becomes includible in the gross income of the participant for federal income tax purposes with respect to any award under the Plan, the participant shall pay to the Company, or make arrangements satisfactory to the 17 20 Committee regarding the payment of any federal, state, or local taxes of any kind required by law to be withheld with respect to such amount. Unless otherwise determined by the Committee, withholding obligations may be settled with Stock, including Stock that is part of the award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment of arrangements and the Company and its Subsidiaries or Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the participant. (e) The actual or deemed reinvestment of dividends or dividend equivalents in additional Restricted Stock (or in Deferred Stock or other types of Plan awards) at the time of any dividend payment shall only be permissible if sufficient shares of Stock are available under Section 3 for such reinvestment (taking into account then outstanding Stock Options, Stock Purchase Rights, and other Plan awards). (f) The Plan and all awards made and actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Texas. SECTION 15. EFFECTIVE DATE OF PLAN. The Plan shall be effective as of October 9, 1996. SECTION 16. TERM OF PLAN. No Stock Option, Stock Appreciation Right, Restricted Stock award, Deferred Stock award, Stock Purchase Right, or Other Stock-Based Award shall be granted pursuant to the Plan on or after the tenth (10th) anniversary of the date of shareholder approval, but awards granted prior to such tenth (10th) anniversary may extend beyond that date. SECTION 17. PERFORMANCE RELATED AWARDS. (A) PERFORMANCE OBJECTIVES. Notwithstanding anything else contained in the Plan to the contrary, unless the Committee otherwise determines at the time of grant, any award of Restricted Stock, Deferred Stock, or Other Stock-Based Awards to an officer who is subject to the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934, as amended, other than an award which will vest solely on the basis of the passage of time, shall become vested, if at all, upon the determination by the Committee that performance objectives established by the Committee have been attained, in whole or in part (a "Performance Award"). Such performance objectives shall be determined over a measurement period or periods established by the Committee and related to at least one of the following criteria, which may be determined solely by reference to the performance of (i) the Company, (ii) a Subsidiary, (iii) an Affiliate, (iv) a division or unit of any of the foregoing or based on comparison performance of any of the foregoing relative to other companies: (A) return on equity; (B) total shareholder return; (C) revenues; (D) cash flows and earnings relative to other parameters; (E) operating income; (F) return on investment; and (G) changes in the value of the Corporation's Common Stock (the "Performance Criteria"). The maximum number of shares of Stock that may be awarded to any one participant and that may be subject to any such Performance Award in any twelve (12) month period shall not exceed 100,000 shares, as such number may be adjusted pursuant to Section 3. 18 21 (B) ANNUAL INCENTIVE COMPENSATION. The Committee may, in addition to the Performance Awards described above, pay cash amounts under the Plan to any officer of the Company or any Subsidiary who is subject to the reporting requirements of Section 16(a) of the Exchange Act upon the achievement, in whole or in part, of performance goals or objectives established in writing by the Committee with respect to such performance periods as the Committee shall determine. Any such goals or objectives shall be based on one or more of the Performance Criteria. Notwithstanding anything else contained herein to the contrary, the maximum amount of any such cash payment to any single officer with respect to any twelve (12) month period shall not exceed the lesser of (A) $1,000,000 and (B) twice the officer's annual base salary as in effect on the last day of the preceding fiscal year. (C) INTERPRETATION. Notwithstanding anything else in the Plan to the contrary, to the extent required to so qualify any Performance Award as other performance-based compensation within the meaning of Section 162(m)(4)(C) of the Code, the Committee shall not be entitled to exercise any discretion otherwise authorized under the Plan (such as the right to accelerate vesting without regard to the achievement of the relevant performance objectives) with respect to such Performance Award if the ability to exercise such discretion (as opposed to the exercise of such discretion) would cause such award to fail to qualify as other performance-based compensation. 19 EX-10.26 7 DIRECTORS STOCK INCENTIVE PLAN 1 EXHIBIT 10.26 THE SABRE GROUP HOLDINGS, INC. 1996 DIRECTORS STOCK INCENTIVE PLAN 1. PURPOSES The purposes of The SABRE Group Holdings, Inc. Directors Stock Incentive Plan, as amended, (the "Plan") are to enable The SABRE Group Holdings, Inc. (the "Company") to attract, retain and motivate the best qualified directors and to enhance a long-term mutuality of interest between the directors and stockholders of the Company by providing the directors with a direct economic interest in the Common Stock of the Company. 2. DEFINITIONS Unless the context requires otherwise, the following words as used in the Plan shall have the meanings ascribed to each below, it being understood that masculine, feminine and neuter pronouns are used interchangeably, and that each comprehends the others. (a) "Board" shall mean the Board of Directors of the Company. (b) "Change in Control" shall mean the occurrence of any of the following: (i) When any "person" as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended, (the "Exchange Act") and as used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange Act but excluding the Company and any subsidiary and any employee benefit plan sponsored or maintained by the Parent, the Company or any subsidiary (including any trustee of such plan acting as trustee), directly or indirectly, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities; or (ii) When during any period of 24 consecutive months during the existence of the Plan, the individuals who, at the beginning of such period, constitute the Board (the "Incumbent Directors") cease for any reason other than death to constitute at least a majority thereof, provided, however, that a director who was not a director at the beginning of such 24-month period shall be deemed to have satisfied such 24-month requirement (and be an Incumbent Director) if such director was elected by, or on the recommendation of, or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually (because they were directors at the beginning of such 24-month period) or by prior operation of this paragraph; or (iii) The occurrence of a transaction requiring stockholder approval for the acquisition of the Company by an entity other than the Company or a subsidiary through purchase of assets, or by merger, or otherwise. (iv) Notwithstanding anything else contained herein to the contrary, in no event shall a Change of Control be deemed to occur solely by reason of (i) a distribution to the Parent's 2 shareholders, whether as dividend or otherwise, of all or any portion of the Stock or any other voting securities of the Company held, directly or indirectly, by the Parent or (ii) a sale of all or any portion of the Stock or any other voting securities of the Company held, directly or indirectly, by the Parent in an underwritten public offering. (c) "Code" shall mean the Internal Revenue Code of 1986, as amended. (d) "Common Stock" shall mean the Class A common stock of the Company, par value $.01, any common stock into which such common stock may be changed, and any common stock resulting from any reclassification of such common stock. (e) "Disability" means disability as determined under procedures established by the Board for purposes of the Plan. (f) "Eligible Director" shall mean a director of the Company who is not an officer or employee of the Parent, Company or any of their subsidiaries. (g) "Fair Market Value" as of any given date shall mean the mean between the highest and lowest quoted selling prices, regular way, of a Share on the New York Stock Exchange on such date or, if no Shares are sold on such date, on the last preceding business day on which any such sale was reported. (h) "New Director" shall mean an Eligible Director who is first elected to the Board after the effective date of the Plan. (i) "Parent" shall mean AMR Corporation or any successor in interest thereto. (j) "Share" or "Stock" shall mean a share of Common Stock. (k) "Stock Option" shall mean an option or right to purchase shares of the Common Stock pursuant to the provisions of the Plan. 3. EFFECTIVE DATE The effective date of the Plan shall be October 9, 1996. 4. ADMINISTRATION (a) Powers of the Board. This Plan shall be administered by the Board. The Board may delegate its powers and functions hereunder to a duly appointed committee of the Board. The Board shall have full authority to interpret this Plan; to establish, amend and rescind rules for carrying out this Plan; to administer this Plan; and to make all other determinations and to take such steps in connection with this Plan as the Board, in its discretion, deems necessary or desirable for administering this Plan. (b) Delegation. The Board may designate the Corporate Secretary of the Company, other officers or employees of the Company or competent professional advisors to assist the Board in the administration of this Plan, and may grant authority to such persons to execute agreements or other documents on its behalf. 2 3 (c) Agents and Indemnification. The Board may employ such legal counsel, consultants and agents as it may deem desirable for the administration of this Plan, and may rely upon any opinion received from any such counsel or consultant or agent. No member or former member of the Board or any committee thereof or any person designated pursuant to paragraph (b) above shall be liable for any action or determination made in good faith with respect to this Plan. To the maximum extent permitted by applicable law and the Company's Certificate of Incorporation and Bylaws, each member or former member of the Board or any committee thereof or any person designated pursuant to (b) above shall be indemnified and held harmless by the Company against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim with the approval of the Company) arising from any act, or omission to act, in connection with this Plan, unless arising from such person's own fraud or bad faith. Such indemnification shall be in addition to any rights of indemnification the person may have as a director, officer or employee or under the Company's Certificate of Incorporation or Bylaws. Expenses incurred by the Board in the engagement of any such counsel, consultant or agent shall be paid by the Company. 5. SHARES; ADJUSTMENT UPON CERTAIN EVENTS (a) Shares Available. Shares delivered pursuant to the exercise of Stock Options awarded under this Plan shall be made available, at the discretion of the Board, either from authorized but unissued Shares or from issued Shares reacquired by the Company. During the term of the Plan, Stock Options may be granted as to a maximum of 350,000 Shares, except as provided in this Section. (b) No Limit on Corporate Action. The existence of this Plan and the Stock Options granted hereunder shall not affect in any way the right or power of the Board or the stockholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, any merger or consolidation of the Company, any issue of bonds, debentures, preferred or prior preference stocks ahead of or affecting Common Stock, the dissolution or liquidation of the Company or any sale or transfer of all or part of its assets or business, or any other corporate act or proceeding. (c) Recapitalization and Similar Events. The Stock Options awarded under Sections 7 and 8 relate to Shares of Common Stock as presently constituted, but if and whenever the Company shall effect a subdivision, reorganization, recapitalization or consolidation of Shares, the number and kind of Stock Options awarded under Sections 7 and 8 and the aggregate number and kind of Shares issuable under the Plan shall be proportionately adjusted by the Board. (d) No Adjustment If Value Received. Except as hereinbefore expressly provided, the issuance by the Company of shares of stock of any class of securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or other securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of Stock Options awarded to a Participant pursuant to Sections 7 and 8. 6. STOCK OPTIONS Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Board shall deem desirable: 3 4 (a) General. Stock Options granted under the Plan shall be Nonqualified Stock Options. (b) Price. The price per share of Stock purchasable under a Stock Option shall be one hundred percent (100%) of the Fair Market Value of the Stock at grant. (c) Term. Unless an Eligible Director's service on the Board is terminated by reason of death, Disability or retirement at or after age 70, the term of each Stock Option shall be equal to the period during which the Eligible Director is serving on the Board. (d) Exercisability. Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Board at or after grant; provided, however, that, except as contemplated elsewhere in the Plan or unless otherwise determined by the Board at or after grant, no Stock Option shall be exercisable prior to the first anniversary date of the granting of the Option. (e) Method of Exercise. Subject to whatever installment exercise provisions apply under Section 6(d), Stock Options may be exercised in whole or in part at any time during the option period, by giving written notice of exercise to the Company specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price, either by check, note or such other instrument as the Board may accept. As determined by the Board, in its sole discretion, at or after grant, payment in full or in part may also be made in the form of Stock already owned by the optionee. No shares of Stock shall be issued until full payment therefore has been made. An optionee shall generally have the rights to dividends or other rights of a shareholder with respect to the Shares subject to the Stock Option when the optionee has given written notice of exercise and has paid in full for such Shares. (f) Termination by Death. If an Eligible Director's service on the Board terminates by reason of death, any Stock Option held by Eligible Director may thereafter be exercised to the extent such Stock Option was exercisable at the time of death by the legal representative of the estate or by the legatee of the Eligible Director under the will of the Eligible Director for a period of three (3) years (or such other period as the Board may specify at grant) from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. (g) Termination by Reason of Disability. If an Eligible Director's service on the Board terminates by reason of Disability, any Stock Option held by such Eligible Director may thereafter be exercised by the Eligible Director to the extent it was exercisable at the time of termination for a period of three (3) years (or such other period as the Board may specify at grant) from the date of such termination of service or until the expiration of the stated term of such Stock Option, whichever period is the shorter; provided, however, that, if the Eligible Director dies within such three (3) year period (or such other period as the Board shall specify at grant), any unexercised Stock Option held by such Eligible Director shall thereafter be exercisable, to the extent to which it was exercisable at the time of death, for a period of twelve (12) months from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. (h) Termination by Reason of Retirement. If an Eligible Director's service on the Board terminates by reason of retirement at or after age 70, any Stock Option held by such Eligible Director may thereafter be exercised by the Eligible Director, to the extent it was exercisable at the time of such retirement for a period of three (3) years (or such other period as Board may specify at grant) from the date of such 4 5 retirement or the expiration of the stated term of such Stock Option, whichever period is the shorter; provided, however, that if the Eligible Director dies within such three-year period (or such other period as the Board may specify at grant), any unexercised Stock Option held by such Eligible Director shall thereafter be exercisable, to the extent to which it was exercisable at the time of death, for a period of twelve (12) months from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. (i) Other Termination. Unless otherwise determined by the Board (or pursuant to procedures established by the Board) at or after grant, if an Eligible Director's service on the Board terminates for any reason other than death, Disability or retirement at or after age 70, any Stock Options awarded to such Eligible Director shall thereupon terminate. 7. STOCK OPTIONS - ANNUAL AWARD On the first business day after each annual meeting of stockholders of the Company occurring during the term of the Plan, each Eligible Director shall receive an award of 3,000 Stock Options. 8. STOCK OPTIONS - NEW DIRECTORS AWARD On the first business day after the first annual meeting of stockholders of the Company at or after which a New Director is first elected to the Board, such New Director shall receive an award of 10,000 Stock Options, in addition to the annual award provided under Section 7. 9. FORFEITURE; CHANGE IN CONTROL (a) Forfeiture. If any Stock Options granted under Sections 7 or 8 are forfeited or are otherwise terminated prior to exercise, such Stock Options shall again be available for distribution in connection with future awards under the Plan. (b) Change in Control. Notwithstanding anything else contained in the Plan to the contrary, in the event of a Change in Control, Eligible Directors holding Stock Options granted hereunder shall have the same rights of acceleration and exercise as may be granted officers of the Company under the Company's Long Term Incentive Plan. 10. NONTRANSFERABILITY OF AWARDS No Stock Option shall be transferable by the Eligible Director otherwise than by will or under the applicable laws of descent and distribution. The Stock Option shall not be sold, assigned, negotiated, pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to execution, attachment or similar process. Upon any attempt to sell, assign, negotiate, pledge or hypothecate any Stock Option, or in the event of any levy upon any Stock Option by reason of any attachment or similar process, in either case contrary to the provisions hereof, such Stock Option shall immediately become null and void. 11. RIGHTS AS A STOCKHOLDER An Eligible Director shall have no rights as a stockholder with respect to any Shares underlying a Stock Option until the Eligible Director has given written notice of the exercise of such Stock Option and 5 6 has paid in full for such Shares. 12. DETERMINATIONS Each determination, interpretation or other action made or taken pursuant to the provisions of this Plan by the Board shall be final and binding for all purposes and upon all persons, including, without limitation, the Company, the directors, officers and other employees of the Company, the Eligible Director and their respective heirs, executors, administrators, personal representatives and other successors in interest. 13. TERMINATION, AMENDMENT AND MODIFICATION (a) Termination and Amendment. This Plan shall terminate at the close of business on October 8, 2006, unless sooner terminated by action of the stockholders of the Company, or by resolution adopted by the Board, and no Stock Options shall be granted under this Plan thereafter. The Board at any time or from time to time may further amend this Plan. (b) No Effect on Existing Rights. Except as required by law, no termination, amendment or modification of this Plan may, without the consent of an Eligible Director or the permitted transferee of Stock Options alter or impair the rights and obligations arising under any then outstanding Stock Options. 14. NON-EXCLUSIVITY Neither the adoption of this Plan by the Board nor the submission of this Plan to the stockholders of the Company for approval shall be construed as creating any limitations on the power of the Board to adopt such other compensatory arrangements as it may, in its discretion, deem desirable. 15. GENERAL PROVISIONS (a) No Right to Serve as a Director. This Plan shall not impose any obligations on the Company to retain any Eligible Director as a director nor shall it impose any obligation on the part of any Eligible Director to remain as a director of the Company. (b) No Right to Particular Assets. Nothing contained in this Plan and no action taken pursuant to this Plan shall create or be construed to create a trust of any kind or any fiduciary relationship between the Company and any Eligible Director, the executor, administrator or other personal representative or designated beneficiary of such Eligible Director, or any other persons. Any reserves that may be established by the Company in connection with this Plan shall continue to be part of the general funds of the Company, and no individual or entity other than the Company shall have any interest in such funds until paid to an Eligible Director. To the extent that any Eligible Director or his executor, administrator, or other personal representative, as the case may be, acquires a right to receive any payment from the Company pursuant to this Plan, such right shall be no greater than the right of an unsecured general creditor of the Company. (c) Notices. Each Eligible Director shall be responsible for furnishing the Board with the current and proper address for the mailing of notices and delivery of agreements. Any notices required or permitted to be given shall be deemed given if directed to the person to whom addressed at such address and mailed by regular United States mail, first-class and prepaid. If any item mailed to such address is 6 7 returned as undeliverable to the addressee, the mailing will be suspended until the Eligible Director furnishes the proper address. (d) Severability of Provisions. If any provision of this Plan shall be held invalid or unenforceable, such invalidity or non-enforceability shall not affect any other provisions hereof, and this Plan shall be construed and enforced as if such provision had not been included. (e) Incapacity. Any benefit payable to or for the benefit of an incompetent person or other person incapable of receipting therefor shall be deemed paid when paid to such person's guardian or to the party providing or reasonably appearing to provide for the care of such person, and such payment shall fully discharge the Board, the Company and other parties with respect thereto. (f) Headings and Captions. The headings and captions herein are provided for reference and convenience only, shall not be considered part of this Plan, and shall not be employed in the construction of this Plan. (g) Controlling Law. This Plan shall be construed and enforced according to the laws of the State of Delaware. 7 EX-23.2 8 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.2 We consent to the reference to our firm under the caption "Experts" and to the use of our report dated January 15, 1996, (except as to Note 1, for which the date is July 22, 1996) in the Amendment No. 4 to the Registration Statement on Form S-1 (No. 333-09747) and related Prospectus of The SABRE Group Holdings, Inc. for the registration of shares of its common stock. Our audits also included the financial statement schedule of The SABRE Group Holdings, Inc. listed in Item 16(b). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Dallas, Texas October 8, 1996 -----END PRIVACY-ENHANCED MESSAGE-----