UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

 

FORM 10-Q

 

 

For the Transition Period From            To            

 

Commission file number 1-12175.

 

 

 

SABRE HOLDINGS CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware		75-2662240
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
3150 Sabre Drive, Southlake, Texas		76092
(Address of principal executive offices)		(Zip Code)

 

Registrant’s telephone number, including area code (682) 605-1000

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý  No o

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes ý  No o

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class A Common Stock, $.01 par value—137,252,826 as of July 30, 2004

 

 

INDEX

SABRE HOLDINGS CORPORATION

 

PART I:	FINANCIAL INFORMATION	3
Item 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets—June 30, 2004 and December 31, 2003	3
	Consolidated Statements of Income—Three and six months ended June 30, 2004 and 2003	4
	Consolidated Condensed Statement of Stockholders’ Equity—Six months ended June 30, 2004	5
	Consolidated Statements of Cash Flows—Six months ended June 30, 2004 and 2003	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	49
PART II:	OTHER INFORMATION	50
Item 1.	Legal Proceedings	50
Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	50
Item 3.	Defaults Upon Senior Securities	50
Item 4.	Submission of Matters to a Vote of Security Holders	50
Item 5.	Other Information	51
Item 6.	Exhibits and Reports on Form 8-K	51
SIGNATURE		52

 

2

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

SABRE HOLDINGS CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited) (In thousands)

 

		June 30, 2004			December 31, 2003
Assets
Current assets
Cash		$	31,702		$	40,862
Marketable securities		988,782			881,749
Accounts receivable, net		373,680			348,988
Prepaid expenses		68,658			86,475
Deferred income taxes		18,836			10,237
Total current assets		1,481,658			1,368,311
Property and equipment
Buildings and leasehold improvements		306,195			306,294
Furniture, fixtures and equipment		35,679			36,684
Computer software and equipment		308,735			275,664
		650,609			618,642
Less accumulated depreciation and amortization		(263,692		)	(234,262		)
Total property and equipment		386,917			384,380
Investments in joint ventures		182,556			181,142
Goodwill and intangible assets, net		861,102			888,198
Other assets, net		136,630			134,122
Total assets		$	3,048,863		$	2,956,153
Liabilities and stockholders’ equity
Current liabilities
Accounts payable		$	252,894		$	202,615
Accrued compensation and related benefits		58,264			62,557
Accrued subscriber incentives		93,988			70,178
Deferred revenues		37,356			34,791
Other accrued liabilities		174,624			133,254
Total current liabilities		617,126			503,395
Deferred income taxes		7,188			4,420
Pensions and other postretirement benefits		139,070			133,404
Other liabilities		25,796			25,162
Minority interests		6,278			6,463
Capital lease obligation		157,549			160,725
Public and other notes payable		432,265			442,476
Commitments and contingencies
Stockholders’ equity
Preferred stock: $0.01 par value; 20,000 shares authorized; no shares issued		—			—
Class A common stock, $0.01 par value; 250,000 shares authorized; 145,856 and 145,652 shares issued at June 30, 2004 and December 31, 2003, respectively		1,459			1,457
Additional paid-in capital		1,286,276			1,291,841
Retained earnings		576,440			495,372
Accumulated other comprehensive loss		(16,928		)	(8,115		)
Less treasury stock at cost: 7,986 and 4,322 shares, respectively		(183,656		)	(100,447		)
Total stockholders’ equity		1,663,591			1,680,108
Total liabilities and stockholders’ equity		$	3,048,863		$	2,956,153

 

See Notes to Consolidated Financial Statements

 

3

 

SABRE HOLDINGS CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited) (In thousands, except per share amounts)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2004			2003			2004			2003
Revenues		$	550,903		$	507,189		$	1,090,656		$	1,051,022
Cost of revenues		307,777			318,303			619,292			629,908
Gross profit		243,126			188,886			471,364			421,114
Other operating expenses
Selling, general and administrative		139,455			136,400			286,084			252,247
Amortization of intangible assets		15,228			12,094			27,349			24,581
Total other operating expenses		154,683			148,494			313,433			276,828
Operating income		88,443			40,392			157,931			144,286
Other income (expense)
Interest income		3,306			3,973			6,541			8,379
Interest expense		(6,431		)	(5,300		)	(12,858		)	(10,772		)
Other, net		6,057			(29,909		)	6,485			(30,102		)
Total other income (expense)		2,932			(31,236		)	168			(32,495		)
Income before provision for income taxes		91,375			9,156			158,099			111,791
Provision for income taxes		32,438			2,340			56,125			40,096
Net earnings		$	58,937		$	6,816		$	101,974		$	71,695
Earnings per common share
Basic		$	.43		$	.05		$	.74		$	.50
Diluted		$	.42		$	.05		$	.73		$	.50
Dividends per common share		$	.075		$	.07		$	.15		$	.07

 

See Notes to Consolidated Financial Statements

 

4

 

SABRE HOLDINGS CORPORATION

CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY

SIX MONTHS ENDED JUNE 30, 2004

(Unaudited) (In thousands)

 

		Class A Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock			Total
Balance at December 31, 2003		$	1,457		$	1,291,841		$	495,372		$	(8,115	)	$	(100,447	)	$	1,680,108
Issuance of Class A common stock and treasury shares pursuant to:
Stock option plans		—			(719		)	—			—			8,767			8,048
Restricted stock plan		2			(11,342		)	—			—			10,586			(754		)
Employee stock purchase plan		—			(865		)	—			—			4,373			3,508
Tax benefit from exercise of employee stock options		—			910			—			—			—			910
Stock based compensation for employees		—			6,433			—			—			—			6,433
Dividends		—			—			(20,906		)	—			—			(20,906		)
Purchase of treasury stock		—			—			—			—			(106,935		)	(106,935		)
Other		—			18			—			—			—			18
Comprehensive income:
Net earnings		—			—			101,974			—			—			101,974
Unrealized loss on foreign currency forward and option contracts, net of deferred income taxes		—			—			—			(3,829		)	—			(3,829		)
Unrealized loss on investments, net of deferred income taxes		—			—			—			(2,368		)	—			(2,368		)
Unrealized foreign currency translation loss		—			—			—			(2,026		)	—			(2,026		)
Other		—			—			—			(590		)	—			(590		)
Total comprehensive income																	93,161
Balance at June 30, 2004		$	1,459		$	1,286,276		$	576,440		$	(16,928	)	$	(183,656	)	$	1,663,591

 

See Notes to Consolidated Financial Statements.

 

5

 

SABRE HOLDINGS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (In thousands)

 

		Six Months Ended June 30,
		2004			2003
Operating Activities
Net earnings		$	101,974		$	71,695
Adjustments to reconcile net earnings to cash provided by operating activities:
Depreciation and amortization		64,415			61,736
Stock based compensation for employees		6,433			9,259
Deferred income taxes		(5,831		)	(5,949		)
Tax benefit from exercise of stock options		910			265
Loss on impaired intangible asset		3,198			—
Gain on disposal of equipment		(903		)	—
Equity loss in joint ventures		7,621			3,849
Loss on refinancing of building		—			27,947
Other		(3,775		)	1,180
Changes in operating assets and liabilities:
Accounts receivable		(24,692		)	(63,129		)
Prepaid expenses		11,617			(3,492		)
Other assets		12,804			19,158
Accrued compensation and related benefits		(4,293		)	(16,711		)
Accounts payable and other accrued liabilities		113,901			48,313
Pensions and other postretirement benefits		5,075			(1,716		)
Other liabilities		(2,103		)	(2,465		)
Cash provided by operating activities		286,351			149,940
Investing Activities
Additions to property and equipment		(35,908		)	(39,589		)
Business combinations, net of cash acquired		—			(11,868		)
Investments in and loans to joint ventures		(32,934		)	(10,068		)
Purchases of marketable securities		(4,138,162		)	(4,460,154		)
Sales of marketable securities		4,030,234			4,414,602
Other investing activities		(5,000		)	4,196
Cash used for investing activities		(181,770		)	(102,881		)
Financing Activities
Proceeds from exercise of stock options and issuance of stock under employee stock purchase plan		10,802			706
Dividends paid		(20,906		)	(10,029		)
Purchases of treasury stock		(101,925		)	—
Payment to refinance building		—			(27,947		)
Other financing activities, net		(1,712		)	(2,030		)
Cash used for financing activities		(113,741		)	(39,300		)
Increase (decrease) in cash		(9,160		)	7,759
Cash at beginning of period		40,862			21,176
Cash at end of period		$	31,702		$	28,935

 

See Notes to Consolidated Financial Statements

 

6

 

SABRE HOLDINGS CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

1.              General Information

 

Sabre Holdings Corporation (“Sabre Holdings”) is a Delaware holding company.  Sabre Inc. is the principal operating subsidiary and sole direct subsidiary of Sabre Holdings.  Sabre Inc. or its direct or indirect subsidiaries conduct all of our businesses. In this Report on Form 10-Q, references to the “company”, “we”, “our”, “ours” and “us” refer to Sabre Holdings and its consolidated subsidiaries unless otherwise stated or the context otherwise requires.

 

We are a world leader in travel commerce, marketing travel products and providing distribution and technology solutions for the travel industry.  We operate in multiple travel distribution channels: the travel agency channel, the consumer-direct channel and the corporate or business-direct channel.  Through our Sabre®(1) global distribution system (the “Sabre system” or “Sabre GDS”) subscribers can access information about, and can book reservations for, among other things, airline trips, hotel stays, car rentals, cruises and tour packages. Our Sabre Travel Network™ business operates the Sabre GDS and markets and distributes travel-related products and services through the travel agency and corporate channels. We engage in consumer-direct and business-direct travel marketing and distribution through our TravelocityÒ business. In addition, our Sabre Airline Solutions™ business is a leading provider of technology and services, including development and consulting services, to airlines and other travel providers.

 

During the fourth quarter of 2003, we realigned our GetThereÒ business segment, which engaged in business direct travel services and had previously been operated as a separate business segment, within our other three segments.  This realignment resulted in GetThere products, services and operations being integrated into the remaining three segments.  Accordingly, GetThere is no longer reported as a separate segment.  Disaggregated information relating to the financial performance of our business segments for the three and six months ended June 30, 2004 and 2003 is presented in Note 7 to the Consolidated Financial Statements.

 

2.              Summary of Significant Accounting Policies

 

Basis of Presentation – The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, these financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position, results of operations and cash flows for the periods indicated. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Operating results for the three and six months ended June 30, 2004 are not necessarily indicative of results that may be expected for any other interim period or for the year ended December 31, 2004.  Our quarterly financial data should be read in conjunction with our consolidated financial statements for the year ended December 31, 2003 (including the notes thereto), set forth in Sabre Holdings Corporation’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2004.

 

We consolidate all of our majority-owned subsidiaries and companies that are not variable interest entities over which we exercise control through majority voting rights.  We would also consolidate all variable interest entities of which we are the primary beneficiary.  However, no entities are currently consolidated due to control through operating, financing agreements, or other arrangements (including variable interests held in variable interest entities).

 

(1)  Assured Vantage, Basic Booking Request, Direct Connect, eMergo, eVoya, GetThere, Jurni Network, Nexion, Sabre, Sabre Airline Solutions, Sabre Exclusives, Sabre Holdings, Sabre Travel Network, SabreSonic, Site 59, Site59.com, TotalTrip, Travelocity, Travelocity Business, Travelocity.ca, Travelocity.com, Turbo Sabre and World Choice Travel are trademarks of affiliates of Sabre Holdings Corporation.  All other trademarks are the property of their respective owners.   ©2004 Sabre Holdings Corporation. All rights reserved.

 

7

 

The consolidated financial statements include our accounts after elimination of all significant intercompany balances and transactions.  We account for our interests in joint ventures and investments in common stock of other companies that we do not control but over which we exert significant influence using the equity method, with our share of their results classified as revenues.  Investments in the common stock of other companies over which we do not exert significant influence are accounted for at cost.  We periodically evaluate for impairment equity and debt investments in entities accounted for at cost by reviewing updated financial information provided by the investee, including valuation information from new financing transactions by the investee and information relating to competitors of investees when available.  If we determine that a cost method investment is impaired, the carrying value of the investment is reduced to its estimated fair value.  To date, write-downs of investments carried at cost have been insignificant to our results of operations.

 

Reclassifications – Certain reclassifications have been made to the 2003 financial statements to conform to the 2004 presentation.  These reclassifications are not material, either individually or in the aggregate, to our financial statements.

 

Earnings Per Share – Basic earnings per share excludes any dilutive effect of any stock awards or options.  The number of shares used in the diluted earnings per share calculations includes the dilutive effect of any stock awards or options.

 

The following table reconciles weighted average shares used in computing basic and diluted earnings per common share (in thousands):

 

		Three Months Ended June 30,				Six Months Ended June 30,
		2004		2003		2004		2003
Denominator for basic earnings per common share—weighted-average shares		137,397		142,367		138,309		142,339
Dilutive effect of stock awards and options		2,583		741		1,497		480
Denominator for diluted earnings per common share—adjusted weighted-average shares		139,980		143,108		139,806		142,819

 

Options to purchase approximately 13,512,386 and 15,628,627 weighted-average shares of our common stock were outstanding during the three and six month periods ending June 30, 2004, but were excluded from the computation of diluted earnings per share because the effect would be anti-dilutive.  For the corresponding periods in 2003, anti-dilutive options to purchase approximately 16,428,401 and 17,644,523 weighted-average shares of our common stock were excluded from the computation of diluted earnings per share.  The decrease in the weighted-average shares for the three and six month periods ending June 30, 2004 versus 2003 is due to our share repurchase programs.

 

8

 

Stock Awards and Options – We account for stock awards and stock option grants using the intrinsic value method set forth in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related interpretations.  Generally, no compensation expense is recognized for stock option grants to employees if the exercise price is at or above the fair market value of the underlying stock on the date of grant.  Compensation expense relating to other stock awards is recognized over the period during which the employee renders service to us necessary to earn the award.

 

The following table summarizes the pro forma effect of stock-based compensation on our net earnings and net earnings per share for the three and six months ended June 30, 2004 and 2003, as if we had accounted for such compensation at fair value (in thousands, except per share data):

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2004			2003			2004			2003
Net earnings as reported		$	58,937		$	6,816		$	101,974		$	71,695
Add stock compensation expense determined under intrinsic value method, net of income taxes		1,889			2,849			3,972			5,719
Less total stock-based employee compensation expense determined under fair value based method for all awards, net of income taxes		(7,978		)	(10,062		)	(16,266		)	(21,616		)
Pro forma net earnings (loss)		$	52,848		$	(397	)	$	89,680		$	55,798
Net earnings per common share, as reported:
Basic		$	.43		$	.05		$	.74		$	.50
Diluted		$	.42		$	.05		$	.73		$	.50
Net earnings (loss) per common share, pro forma:
Basic		$	.38		$	(.00	)	$	.65		$	.39
Diluted		$	.38		$	(.00	)	$	.64		$	.39

 

3.              Significant Events

 

Contract Settlements – In the first quarter of 2003, we recognized revenue of approximately $36 million, representing settlements from two travel agency subscribers (who were affiliated with each other and were acquired by a competitor of ours) in exchange for allowing them to cancel their existing subscriber agreements.

 

Cost Reductions – In an effort to reduce our operating expenses and better align expenses with revenue targets for 2004 and future years, we reduced our workforce and recorded a charge of approximately $18 million for severance, salaries and benefits in the fourth quarter of 2003.  The remaining liability for this charge as of June 30, 2004 was approximately $3 million, of which approximately half is at the corporate level and the remainder relates to our business units.

 

In the fourth quarter of 2003, we also consolidated our operations (including integrating the products, services and operations of our GetThere business unit into our other three business units) and closed additional facilities in the United States.  These actions resulted in an approximately $17 million charge, consisting of write-offs of leasehold improvements and other facility-related assets, employee relocation expenses and lease termination costs.  The remaining liability for this charge as of June 30, 2004 was approximately $2 million, which relates entirely to corporate level charges.

 

9

 

The following table summarizes the liabilities included in the balance sheets at December 31, 2003 and June 30, 2004 and the amounts paid during the six-month period (in thousands):

 

		Severance			Facilities			Total
Remaining liability at December 31, 2003		$	7,941		$	4,264		$	12,205
Amounts paid through June 30, 2004		(5,000		)	(2,129		)	(7,129		)
Remaining liability at June 30, 2004		$	2,941		$	2,135		$	5,076

 

Amendment to AOL Agreement – On January 21, 2004, we revised the terms of and extended our agreement with America Online (“AOL”) through March 2006.  Travelocity continues to be the exclusive reservations engine for AOL’s Internet properties under the revised agreement.  Under the revised terms of the agreement, we benefit from more strategically aligned terms for placement within AOL’s brands.  Further, we are obligated for fixed payments of up to $28 million over the two-year term of the agreement.   These fixed payments, along with the unamortized portion of fixed payments previously paid under the original contract, are being expensed on a straight-line basis over the remaining term of the extended agreement.  For 2004, this expense will be approximately $23 million, of which approximately $6 million and $12 million was recognized for the three and six months ended June 30, 2004, respectively.  Additionally, in exchange for lower fixed annual payments, we agreed to a reduced share of advertising revenues generated through the AOL properties.  The agreement also contains a productivity component, whereby AOL is paid a percentage of the transaction revenue generated through the AOL network.

 

WNS Agreement – On January 30, 2004, we entered into a multi-year master services agreement with WNS North America, Inc. (“WNS”).  Under the agreement, throughout 2004 we will outsource to WNS an increasing portion of our Travelocity contact center operations, primarily front-line customer service calls and back-office fulfillment.  By the end of the first quarter of 2005, WNS should be handling Travelocity’s front-line customer service calls and emails, as well as some mid-office and back-office functions.  WNS will transition these day-to-day operations of the customer service functions to its contact centers.  Travelocity employees will continue to handle sales calls, as well as advanced customer service issues and quality control.  We do not expect severance and related costs incurred due to this agreement to be significant.

 

For 2004, we have minimum commitments to WNS of $18 million, of which approximately $5 million and $9 million was recognized during the three and six months ended June 30, 2004, respectively.  Thereafter, we are committed to minimum payments based on a calculation that considers both current and historical transaction volumes compared to thresholds established in the agreement.  For 2005 through 2010, the starting thresholds for calculating our commitment for each year ranges from approximately $17 million to $31 million, and actual commitments could be lower than these amounts, depending on call volumes.  Additionally, we committed to lend up to $10 million to WNS for transitional assistance.  As of June 30, 2004, we have loaned $5 million to WNS.  Amounts borrowed by WNS accrue interest at 5%, payable quarterly, and the principal will be due in three annual payments beginning in 2009.

 

Relocation of Certain Operations – In April 2004, we announced to affected employees that we will transition certain operations to Latin America.  The transition will occur over the remainder of 2004 and in the first half of 2005.  Severance, retention and other related costs associated with the plan are currently estimated to be in the range of $6 million to $8 million, and will primarily be recognized in the fourth quarter of 2004 and in the first half of 2005 as operations are transitioned.

 

Revolving Credit Agreement – On June 15, 2004, we replaced a $300 million revolving credit agreement that was set to expire on September 14, 2004, with a new $300 million, senior unsecured revolving credit agreement that expires June 15, 2009.  Under certain conditions, we can request an additional $100 million in credit under this new agreement.  Interest on this agreement is variable, based on either the London Interbank Offered Rate (“LIBOR”) or the prime rate, at our discretion, and is sensitive to our credit rating.  The LIBOR margin at our current credit rating is equal to 0.50%, which translates to a total borrowing rate of approximately 2.5% in the current interest rate environment.  As of June 30, 2004 there are no borrowings outstanding under this agreement.  Under this agreement, we are subject to covenants that could, among other things, restrict our ability to incur additional debt and that limit our ability to pay dividends or repurchase our stock in excess of $150 million per fiscal year (unless, after giving effect to such dividends and/or repurchases, we have more than $400 million in cash and marketable securities

 

10

 

domiciled in the United States).   A copy of the Revolving Credit Agreement is included as Exhibit 10.1 to this filing.  As of June 30, 2004 we are in compliance with all covenants under this agreement including the following financial covenants:

 

		Requirement		Level at June 30, 2004
Consolidated Leverage Ratio (Debt to EBITDA)		3 to 1 maximum		2 to 1
Consolidated Net Worth		$1.4 billion		$1.7 billion

 

4.              Pension and Other Post Retirement Benefit Plans

 

On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was signed into law.  Our measures of accumulated postretirement benefit obligation and net periodic cost presented for the three and six months ended June 30, 2004 do not reflect the effects of the Act as we have not yet concluded whether the benefits provided by the plan are actuarially equivalent to Medicare Part D under the Act.  The effects of the Act are required to be recorded for fiscal periods beginning after June 15, 2004.  Accordingly, we will record the effects of the Act on our U.S.-based plans during the third quarter of 2004.

 

The components of net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans for the three and six months ended June 30, 2004 and 2003 are presented in the tables below (in thousands).

 

		Three Months Ended June 30,						Six Months Ended June 30,
Pension Benefits		2004			2003			2004			2003
Components of net periodic benefit cost:
Service cost		$	982		$	2,635		$	2,286		$	4,173
Interest cost		3,220			10,792			8,223			15,855
Expected return on plan assets		(3,378		)	(12,427		)	(8,986		)	(17,905		)
Amortization of transition asset		(3		)	(1		)	(8		)	(6		)
Amortization of prior service cost		(8		)	13			36			28
Amortization of net loss		699			2,099			1,405			2,632
Net periodic benefit cost		1,512			3,111			2,956			4,777
Settlement gain		—			(126		)	—			—
Total net periodic benefit cost		$	1,512		$	2,985		$	2,956		$	4,777

 

		Three Months Ended June 30,						Six Months Ended June 30,
Other Benefits		2004			2003			2004			2003
Components of net periodic benefit cost:
Service cost		$	788		$	597		$	1,583		$	1,496
Interest cost		1,859			1,775			3,730			3,523
Amortization of transition asset		3			3			7			7
Amortization of prior service cost		78			68			159			148
Amortization of net loss		679			833			1,375			1,283
Net periodic benefit cost		3,407			3,276			6,854			6,457
Total net periodic benefit cost		$	3,407		$	3,276		$	6,854		$	6,457

 

11

 

We made contributions to fund our defined benefit pension plans of $5 million and $15 million during the three months ended June 30, 2004 and 2003, respectively.  We are evaluating making additional contributions during the remainder of 2004.

 

5.              Income Taxes

 

The provision for income taxes relating to continuing operations differs from amounts computed at the statutory federal income tax rate as follows (in thousands):

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2004			2003			2004			2003
Income tax provision at statutory federal income tax rate		$	31,982		$	3,205		$	55,335		$	39,127
State income taxes, net of federal benefit		420			(447		)	2,200			2,402
Other, net		36			(418		)	(1,410		)	(1,433		)
Total provision for income taxes		$	32,438		$	2,340		$	56,125		$	40,096

 

6.              Derivatives

 

Travelocity received certain vested warrants from Hotels.com in connection with an affiliation agreement entered into during 2000.  In March 2001, we extended our affiliation agreement with Hotels.com through July 31, 2005 and expanded the scope of the Hotels.com relationship. In connection with the expanded and extended agreement, we received additional vested Hotels.com warrants with a fair value of approximately $30 million on the date of receipt. We were recognizing this amount as revenue over the extended term of the agreement, which amounted to approximately $2 million and $4 million during the three and six months ended June 30, 2003, respectively.  During the three and six months ended June 30, 2003, respectively, we also recognized approximately $5 million and $7 million of revenue for performance warrants earned under this agreement.  This agreement was terminated in the third quarter of 2003 and we recognized the remaining deferred balance of approximately $8 million related to these warrants at that time.

 

We are a party to certain foreign currency forward and option contracts. We have designated these instruments as cash flow hedges. Amounts reclassified from other comprehensive income to earnings due to the settlement of forward and option contracts were $2 million and $3 million during the three months ended June 30, 2004 and 2003, respectively and $6 million for both the six months ended June 30, 2004 and 2003.  No hedging ineffectiveness was recorded in earnings relating to the forwards or options during 2004 or 2003.  The estimated fair values of the foreign currency forward and option contracts were $4 million and $10 million at June 30, 2004 and December 31, 2003, respectively.

 

We are also a party to certain interest rate swap contracts.  We have designated the swaps as fair value hedges of our public notes payable and capital lease obligation. No hedging ineffectiveness was recorded in earnings relating to our interest rate swaps during 2004 or 2003.  The estimated fair values of the interest rate swaps were a net liability of $3 million at June 30, 2004 and a net asset of $9 million at December 31, 2003.

 

7.              Business Segments

 

We are a world leader in travel commerce, marketing travel products and providing distribution and technology solutions for the travel industry.  We operate in multiple travel distribution channels: the travel agency channel, the consumer-direct channel and the corporate or business-direct channel.  Through our Sabre global distribution system (the “Sabre system” or “Sabre GDS”) subscribers can access information about, and can book reservations for, among other things, airline trips, hotel stays, car rentals, cruises and tour packages. Our Sabre Travel Network business operates the Sabre GDS and markets and distributes travel-related products and services through the travel

 

12

 

agency and corporate channels. We engage in consumer-direct and business-direct travel marketing and distribution through our Travelocity business.  In addition, our Sabre Airline Solutions business is a leading provider of technology and services, including development and consulting services, to airlines and other travel providers.

 

During the fourth quarter of 2003, we realigned our GetThere business segment, which engaged in business direct travel services and had previously been operated as a separate business segment, within our other three segments.  This realignment resulted in GetThere products, services and operations being integrated into the remaining three segments.  Accordingly, GetThere is no longer reported as a separate segment.  The segment information presented below is based on the new segment definition for all periods presented.

 

Our reportable segments are strategic business segments that offer different products and services and are managed separately because each business requires different market strategies.  The accounting policies of the segments are the same as those used in our consolidated results.  We account for significant intersegment transactions as if the transactions were to third parties, that is, at estimated current market prices.  The majority of the intersegment revenues and cost of revenues are between Travelocity and Sabre Travel Network, consisting mainly of incentives and marketing fees paid by Sabre Travel Network to Travelocity for bookings made through the Sabre GDS, data processing fees paid by Travelocity to Sabre Travel Network for bookings made through the Sabre GDS, and fees paid by Sabre Travel Network to Travelocity for corporate trips booked through Travelocity’s online booking technology.  In addition, Sabre Airline Solutions pays fees to Travelocity for airline trips booked through Travelocity’s online booking technology.

 

Personnel and related costs for the corporate headquarters, certain legal and professional fees and other corporate charges are allocated to the segments through a management fee based on the relative size of the segments and usage of corporate resources or services.  Depreciation expense on the corporate headquarters buildings and related facilities costs are allocated to the segments through a facility fee based on headcount.  Benefits expense, including pension expense, postretirement benefits, medical insurance and workers’ compensation, are allocated to the segments based on headcount.  Unallocated corporate expenses include costs associated with the corporate headquarters buildings that were not allocated to the reportable segments as well as certain other corporate charges maintained at the corporate level.

 

13

 

The segment operating results are presented on a basis that excludes certain adjusting items that are summarized below, except where noted. This presentation is consistent with the manner in which our management assesses the operating performance of our business segments.  Selected information for our three reportable segments for the three and six months ended June 30, 2004 and 2003 follows (in thousands).

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2004			2003			2004			2003
Revenues from external customers, excluding adjusting items:
Sabre Travel Network		$	393,477		$	378,289		$	797,049		$	767,750
Travelocity		97,474			72,979			180,981			136,482
Sabre Airline Solutions		60,511			56,596			120,247			114,181
Total		$	551,462		$	507,864		$	1,098,277		$	1,018,413
Intersegment revenues:
Sabre Travel Network		$	7,688		$	6,714		$	15,227		$	13,356
Travelocity		34,850			28,417			69,584			56,833
Total		$	42,538		$	35,131		$	84,811		$	70,189
Equity in net income of equity method investees:
Sabre Travel Network		$	6,222		$	2,761		$	5,947		$	4,878
Travelocity		(6,781		)	(3,436		)	(13,568		)	(8,727		)
Total		$	(559	)	$	(675	)	$	(7,621	)	$	(3,849	)
Segment revenues, excluding adjusting items:
Sabre Travel Network		$	407,388		$	387,764		$	818,223		$	785,984
Travelocity		125,542			97,960			236,997			184,588
Sabre Airline Solutions		60,511			56,596			120,247			114,181
Elimination of intersegment revenues		(42,538		)	(35,131		)	(84,811		)	(70,189		)
Total		$	550,903		$	507,189		$	1,090,656		$	1,014,564
Revenue adjusting item:
Sabre Travel Network – settlement revenue from canceled subscriber contracts		$	—		$	—		$	—		$	36,458
Consolidated revenues:
Sabre Travel Network		$	407,388		$	387,764		$	818,223		$	822,442
Travelocity		125,542			97,960			236,997			184,588
Sabre Airline Solutions		60,511			56,596			120,247			114,181
Elimination of intersegment revenues		(42,538		)	(35,131		)	(84,811		)	(70,189		)
Total		$	550,903		$	507,189		$	1,090,656		$	1,051,022

 

14

7.                                      Segment Reporting (Continued)

 

A summary of the adjusting items and reconciliation to consolidated operating income is set forth below (in thousands):

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2004			2003			2004			2003
Segment operating income (loss) excluding adjusting items:
Sabre Travel Network		$	89,308		$	60,706		$	173,794		$	145,619
Travelocity		9,643			(10,898		)	8,178			(20,451		)
Sabre Airline Solutions		5,593			4,632			4,971			10,284
Net corporate allocations		(41		)	(159		)	629			1,474
Total		$	104,503		$	54,281		$	187,572		$	136,926
Impact of adjusting items on operating income – (increase) / decrease:
Sabre Travel Network:
Settlement revenue from canceled subscriber contract		$	—		$	—		$	—		$	(36,458	)
Other intangibles amortization		7,349			3,144			11,517			6,240
Stock compensation		—			182			—			367
Restructuring expenses		—			(288		)	—			(288		)
Total Sabre Travel Network		7,349			3,038			11,517			(30,139		)
Travelocity:
Other intangibles amortization		7,390			8,461			14,852			17,362
Stock compensation		1,318			2,980			3,255			5,958
Restructuring expenses		—			(37		)	—			(37		)
Total Travelocity		8,708			11,404			18,107			23,283
Sabre Airline Solutions:
Stock compensation		—			32			—			65
Restructuring expenses		—			(231		)	—			(231		)
Total Sabre Airline Solutions		—			(199		)	—			(166		)
Corporate:
Other		3			16			17			32
Restructuring expenses		—			(370		)	—			(370		)
Total Corporate		3			(354		)	17			(338		)
Total operating income adjusting items		$	16,060		$	13,889		$	29,641		$	(7,360	)
Consolidated operating income (loss):
Sabre Travel Network		$	81,959		$	57,668		$	162,277		$	175,758
Travelocity		935			(22,302		)	(9,929		)	(43,734		)
Sabre Airline Solutions		5,593			4,831			4,971			10,450
Net Corporate Allocations		(44		)	195			612			1,812
Total		$	88,443		$	40,392		$	157,931		$	144,286

 

15

 

8.              Supplemental Guarantor/Non-Guarantor Financial Information

 

Certain obligations of Sabre Holdings Corporation (“Sabre Holdings”) have been solely guaranteed by its 100% owned operating subsidiary, Sabre Inc. There are currently no restrictions on Sabre Holdings’ ability to obtain funds from Sabre Inc. in the form of a dividend or loan other than typical dividend requirements under Delaware law.  Additionally, there are no significant restrictions on Sabre Inc.’s ability to obtain funds from its direct or indirect subsidiaries other than those that would exist under state or foreign law.  Sabre Inc. is the sole direct subsidiary of Sabre Holdings.  All other subsidiaries are direct or indirect subsidiaries of Sabre Inc.  These other subsidiaries are all included in the non-guarantor financial statements.  The following financial information presents condensed consolidating balance sheets, statements of income and statements of cash flows for Sabre Holdings, Sabre Inc. and non-guarantor subsidiaries. The information has been presented as if Sabre Holdings accounted for its ownership of Sabre Inc., and Sabre Inc. accounted for its ownership of the non-guarantor subsidiaries, using the equity method of accounting.  Certain reclassifications have been made to the 2003 financial statements to conform to the 2004 presentation.  These reclassifications are not material, either individually or in the aggregate, to our financial statements.

 

Sabre Inc. conducts the domestic operations of both the Sabre Travel Network and Sabre Airline Solutions segments.  The operations of the Travelocity segment, as well as the principal international operations of the Sabre Travel Network segment, are conducted by the non-guarantor subsidiaries.

 

Sabre Inc. and certain non-guarantor subsidiaries are parties to various intercompany agreements that affect the amount of operating expenses reported in the following condensed consolidating statements of income. Among other things, fees are paid by Sabre Inc. to a non-guarantor subsidiary relating to the use of trademarks, tradenames, etc. owned by a non-guarantor subsidiary; incentive and marketing payments are made by Sabre Inc. to non-guarantor subsidiaries relating to the use and distribution of the Sabre system; and payments are made by non-guarantor subsidiaries to Sabre Inc. for access to the Sabre system under the terms of these agreements. During the three months ended June 30, 2004 and 2003, Sabre Inc. recognized operating expenses in connection with these agreements totaling approximately $62 million and $81 million, respectively.  During the six months ended June 30, 2004 and 2003, Sabre Inc. recognized operating expenses in connection with these agreements totaling approximately $120 million and $153 million, respectively.  These amounts, and the corresponding amounts recognized by the non-guarantor subsidiaries are eliminated in consolidation.

 

16

 

UNAUDITED CONSOLIDATING CONDENSED BALANCE SHEETS

JUNE 30, 2004

(in thousands)

 

		Sabre Holdings			Sabre Inc.			Non- Guarantor Subsidiaries			Eliminating Entries			Sabre Consolidated
Assets
Current assets
Cash and marketable securities		$	—		$	998,700		$	21,784		$	—		$	1,020,484
Accounts receivable—trade, net		—			280,054			93,626			—			373,680
Intercompany accounts receivable (payable)		—			(204,593		)	204,593			—			—
Prepaid expenses and other current assets		—			32,004			36,654			—			68,658
Deferred income taxes		—			17,417			1,419			—			18,836
Total current assets		—			1,123,582			358,076			—			1,481,658
Property and equipment, net		—			343,804			43,113			—			386,917
Investments in joint ventures		—			3,459			179,097			—			182,556
Goodwill and intangible assets, net		—			9,289			851,813			—			861,102
Investments in subsidiaries		640,543			1,307,595			—			(1,948,138		)	—
Intercompany notes		1,446,722			(1,446,722		)	—			—			—
Other assets, net		7,527			64,621			64,482			—			136,630
Total assets		$	2,094,792		$	1,405,628		$	1,496,581		$	(1,948,138	)	$	3,048,863
Liabilities and stockholders’ equity
Current liabilities
Accounts payable		$	5,043		$	145,105		$	102,746		$	—		$	252,894
Accrued compensation and related benefits		—			46,752			11,512			—			58,264
Other accrued liabilities		7,462			207,277			91,229			—			305,968
Total current liabilities		12,505			399,134			205,487			—			617,126
Deferred income taxes		(235		)	48,901			(41,478		)	—			7,188
Pensions and other postretirement benefits		—			138,183			887			—			139,070
Other liabilities		1,742			21,318			2,736			—			25,796
Minority interests		—			—			6,278			—			6,278
Capital lease obligation		—			157,549			—			—			157,549
Public and other notes payable		417,189			—			15,076			—			432,265
Stockholders’ equity		1,663,591			640,543			1,307,595			(1,948,138		)	1,663,591
Total liabilities and stockholders’ equity		$	2,094,792		$	1,405,628		$	1,496,581		$	(1,948,138	)	$	3,048,863

 

17

 

UNAUDITED CONSOLIDATING CONDENSED BALANCE SHEETS

DECEMBER 31, 2003

(in thousands)

 

		Sabre Holdings			Sabre Inc.			Non- Guarantor Subsidiaries			Eliminating Entries			Sabre Consolidated
Assets
Current assets
Cash and marketable securities		$	—		$	889,638		$	32,973		$	—		$	922,611
Accounts receivable—trade, net		—			254,656			94,332			—			348,988
Intercompany accounts receivable  (payable)		—			(121,476		)	121,476			—			—
Prepaid expenses		—			42,478			43,997			—			86,475
Deferred income taxes		—			8,736			1,501			—			10,237
Total current assets		—			1,074,032			294,279			—			1,368,311
Property and equipment, net		—			345,930			38,450			—			384,380
Investments in joint ventures		—			3,994			177,148			—			181,142
Goodwill and intangible assets, net		—			10,269			877,929			—			888,198
Investments in subsidiaries		572,696			1,260,428			—			(1,833,124		)	—
Intercompany notes		1,529,296			(1,529,296		)	—			—			—
Other assets, net		17,057			79,210			37,855			—			134,122
Total assets		$	2,119,049		$	1,244,567		$	1,425,661		$	(1,833,124	)	$	2,956,153
Liabilities and stockholders’ equity
Current liabilities
Accounts payable		$	2,926		$	124,189		$	75,500		$	—		$	202,615
Accrued compensation and related benefits		—			50,554			12,003			—			62,557
Other accrued liabilities		7,474			140,814			89,935			—			238,223
Total current liabilities		10,400			315,557			177,438			—			503,395
Deferred income taxes		(24		)	41,022			(36,578		)	—			4,420
Pensions and other postretirement benefits		—			132,689			715			—			133,404
Other liabilities		1,165			21,878			2,119			—			25,162
Minority interests		—			—			6,463			—			6,463
Capital lease obligation		—			160,725			—			—			160,725
Public and other notes payable		427,400			—			15,076			—			442,476
Stockholders’ equity		1,680,108			572,696			1,260,428			(1,833,124		)	1,680,108
Total liabilities and stockholders’ equity		$	2,119,049		$	1,244,567		$	1,425,661		$	(1,833,124	)	$	2,956,153

 

18

 

UNAUDITED CONSOLIDATING CONDENSED STATEMENTS OF INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2004

(in thousands)

 

		Sabre Holdings			Sabre Inc.			Non- Guarantor Subsidiaries			Eliminating Entries			Sabre Consolidated
Revenues		$	—		$	766,518		$	574,156		$	(250,018	)	$	1,090,656
Operating expenses		2,293			659,765			520,685			(250,018		)	932,725
Operating income (loss)		(2,293		)	106,753			53,471			—			157,931
Other income (expense)
Interest income		50,047			4,883			5,335			(53,724		)	6,541
Interest expense		(8,316		)	(57,648		)	(618		)	53,724			(12,858		)
Income (loss) from subsidiaries		75,995			40,311			—			(116,306		)	—
Other, net		—			6,228			257			—			6,485
Total other income (expense)		117,726			(6,226		)	4,974			(116,306		)	168
Income before provision for income taxes		115,433			100,527			58,445			(116,306		)	158,099
Provision for income taxes		13,459			24,532			18,134			—			56,125
Net income		$	101,974		$	75,995		$	40,311		$	(116,306	)	$	101,974

 

19

 

UNAUDITED CONSOLIDATING CONDENSED STATEMENTS OF INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2003

(in thousands)

 

		Sabre Holdings			Sabre Inc.			Non- Guarantor Subsidiaries			Eliminating Entries			Sabre Consolidated
Revenues		$	—		$	786,115		$	527,927		$	(263,020	)	$	1,051,022
Operating expenses		1,750			700,361			467,645			(263,020		)	906,736
Operating income (loss)		(1,750		)	85,754			60,282			—			144,286
Other income (expense)
Interest income		37,304			5,593			9,103			(43,621		)	8,379
Interest expense		(8,654		)	(44,145		)	(1,594		)	43,621			(10,772		)
Income (loss) from subsidiaries		53,975			45,617			—			(99,592		)	—
Other, net		—			(27,133		)	(2,969		)	—			(30,102		)
Total other income (expense)		82,625			(20,068		)	4,540			(99,592		)	(32,495		)
Income before provision for income taxes		80,875			65,686			64,822			(99,592		)	111,791
Provision for income taxes		9,180			11,711			19,205			—			40,096
Net income		$	71,695		$	53,975		$	45,617		$	(99,592	)	$	71,695

 

20

 

UNAUDITED CONSOLIDATING CONDENSED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2004

(in thousands)

 

		Sabre Holdings			Sabre Inc.			Non- Guarantor Subsidiaries			Eliminating Entries			Sabre Consolidated
Revenues		$	—		$	375,303		$	305,535		$	(129,935	)	$	550,903
Operating expenses		1,027			322,995			268,373			(129,935		)	462,460
Operating income (loss)		(1,027		)	52,308			37,162			—			88,443
Other income (expense)
Interest income		24,282			2,370			2,921			(26,267		)	3,306
Interest expense		(4,166		)	(28,214		)	(318		)	26,267			(6,431		)
Income (loss) from subsidiaries		46,363			27,076			—			(73,439		)	—
Other, net		—			6,578			(521		)	—			6,057
Total other income (expense)		66,479			7,810			2,082			(73,439		)	2,932
Income before provision for income taxes		65,452			60,118			39,244			(73,439		)	91,375
Provision for income taxes		6,515			13,755			12,168			—			32,438
Net income		$	58,937		$	46,363		$	27,076		$	(73,439	)	$	58,937

 

21

 

UNAUDITED CONSOLIDATING CONDENSED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2003

(in thousands)

 

		Sabre Holdings			Sabre Inc.			Non- Guarantor Subsidiaries			Eliminating Entries			Sabre Consolidated
Revenues		$	—		$	365,948		$	277,007		$	(135,766	)	$	507,189
Operating expenses		1,104			359,565			241,894			(135,766		)	466,797
Operating income (loss)		(1,104		)	6,383			35,113			—			40,392
Other income (expense)
Interest income		18,554			2,336			4,504			(21,421		)	3,973
Interest expense		(4,272		)	(21,696		)	(753		)	21,421			(5,300		)
Income (loss) from subsidiaries		(1,865		)	25,779			—			(23,914		)	—
Other, net		—			(27,798		)	(2,111		)	—			(29,909		)
Total other income (expense)		12,417			(21,379		)	1,640			(23,914		)	(31,236		)
Income (loss) before provision for income taxes		11,313			(14,996		)	36,753			(23,914		)	9,156
Provision for income taxes		4,497			(13,131		)	10,974			—			2,340
Net income (loss)		$	6,816		$	(1,865	)	$	25,779		$	(23,914	)	$	6,816

 

22

 

UNAUDITED CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2004

(in thousands)

 

		Sabre Holdings			Sabre Inc.			Non- Guarantor Subsidiaries			Eliminating Entries			Sabre Consolidated
Operating Activities
Net earnings (loss)		$	101,974		$	75,995		$	40,311		$	(116,306	)	$	101,974
Adjustments to reconcile net earnings to cash provided by operating activities:
Depreciation and amortization		—			28,685			35,730			—			64,415
Stock based compensation for employees		—			2,969			3,464			—			6,433
Deferred income taxes		—			(802		)	(5,029		)	—			(5,831		)
Tax benefit from exercise of stock options		910			—			—			—			910
(Gain) loss on disposal of equipment		—			(923		)	20			—			(903		)
(Income) loss from subsidiaries		(75,995		)	(40,311		)	—			116,306			—
Loss on impaired intangible asset		—			—			3,198			—			3,198
Equity loss in joint ventures		—			—			7,621			—			7,621
Other		(837		)	2,407			(5,345		)	—			(3,775		)
Changes in operating assets and liabilities		(26,052		)	190,222			(51,861		)	—			112,309
Cash provided by operating activities		—			258,242			28,109			—			286,351
Investing Activities
Additions to property and equipment		—			(25,752		)	(10,156		)	—			(35,908		)
Purchases of marketable securities		—			(4,139,824		)	1,662			—			(4,138,162		)
Sales of marketable securities		—			4,030,234			—			—			4,030,234
Investments in and loans to joint ventures		—			—			(32,934		)	—			(32,934		)
Other investing activities		—			—			(5,000		)	—			(5,000		)
Cash used for investing activities		—			(135,342		)	(46,428		)	—			(181,770		)
Financing Activities
Proceeds from issuance of common stock		10,802			—			—			—			10,802
Dividends paid		(20,906		)	—			—			—			(20,906		)
Contributions from affiliates, net (1)		112,029			—			9,679			(121,708		)	—
Distributions to affiliates, net (1)		—			(121,708		)	—			121,708			—
Purchases of treasury stock		(101,925		)	—			—			—			(101,925		)
Other financing activities, net		—			(824		)	(888		)	—			(1,712		)
Cash provided by (used for) financing activities		—			(122,532		)	8,791			—			(113,741		)
Increase (decrease) in cash		—			368			(9,528		)	—			(9,160		)
Cash at beginning of period		—			10,969			29,893			—			40,862
Cash at end of period		$	—		$	11,337		$	20,365		$	—		$	31,702

 

(1)  Affiliate, for purposes of this footnote, refers to the various direct and indirect ownership relationships that exist within the Sabre Inc. and Non-Guarantor categories.

 

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UNAUDITED CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2003

(in thousands)

 

		Sabre Holdings			Sabre Inc.			Non- Guarantor Subsidiaries			Eliminating Entries			Sabre Consolidated
Operating Activities
Net earnings (loss)		$	71,695		$	53,975		$	45,617		$	(99,592	)	$	71,695
Adjustments to reconcile net earnings to cash provided by operating activities:
Depreciation and amortization		—			25,660			36,076			—			61,736
Stock based compensation for employees		—			2,608			6,651			—			9,259
Deferred income taxes		—			(5,292		)	(657		)	—			(5,949		)
Tax benefit from exercise of stock options		265			—			—			—			265
Loss on refinancing of building		—			27,947			—			—			27,947
(Income) loss from subsidiaries		(53,975		)	(45,617		)	—			99,592			—
Equity loss in joint ventures		—			—			3,849			—			3,849
Other		(837		)	2,150			(133		)	—			1,180
Changes in operating assets and liabilities		(17,148		)	(146,634		)	143,740			—			(20,042		)
Cash provided by (used for) operating activities		—			(85,203		)	235,143			—			149,940
Investing Activities
Additions to property and equipment		—			(27,718		)	(11,871		)	—			(39,589		)
Business combinations, net of cash acquired		—			(10,161		)	(1,707		)	—			(11,868		)
Purchases of marketable securities		—			(4,458,582		)	(1,572		)	—			(4,460,154		)
Sales of marketable securities		—			4,414,459			143			—			4,414,602
Investments in joint ventures		—			—			(10,068		)	—			(10,068		)
Other investing activities, net		—			—			4,196			—			4,196
Cash used for investing activities		—			(82,002		)	(20,879		)	—			(102,881		)
Financing Activities
Proceeds from issuance of common stock		706			—			—			—			706
Dividends paid		(10,029		)	—			—			—			(10,029		)
Contributions from affiliates (1)		9,323			206,783			—			(216,106		)	—
Distributions to affiliates (1)		—			(9,323		)	(206,783		)	216,106			—
Payment to refinance building		—			(27,947		)	—			—			(27,947		)
Other financing activities, net		—			—			(2,030		)	—			(2,030		)
Cash provided by (used for) financing activities		—			169,513			(208,813		)	—			(39,300		)
Increase in cash		—			2,308			5,451			—			7,759
Cash at beginning of period		—			9,219			11,957			—			21,176
Cash at end of period		$	—		$	11,527		$	17,408		$	—		$	28,935

 

(1)          Affiliate, for purposes of this footnote, refers to the various direct and indirect ownership relationships that exist within the Sabre Inc. and Non-Guarantor categories.

 

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Item 2.           Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

SABRE HOLDINGS CORPORATION

RESULTS OF OPERATIONS

 

The following discussion and analysis contains forward-looking statements about our plans and expectations of what may happen in the future.  Forward-looking statements are based on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties, and our results could differ materially from the results anticipated by our forward-looking statements as a result of many known or unknown factors, including, but not limited to, those factors discussed below in this Item under the sub-heading “Risk Factors.”

 

Overview

 

We are a world leader in travel commerce, marketing travel products and providing distribution and technology solutions for the travel industry.  We operate in multiple travel distribution channels: the travel agency channel, the consumer-direct channel and the corporate or business-direct channel.  Through our Sabre® global distribution system (the “Sabre system” or “Sabre GDS”) subscribers can access information about, and can book reservations for, among other things, airline trips, hotel stays, car rentals, cruises and tour packages. Our Sabre Travel Network™ business operates the Sabre GDS and markets and distributes travel-related products and services through the travel agency and corporate channels. We engage in consumer-direct and business-direct travel marketing and distribution through our TravelocityÒ business. In addition, our Sabre Airline Solutions™ business is a leading provider of technology and services, including development and consulting services, to airlines and other travel providers.

 

In the six months ended June 30, 2004, approximately 69.6% of our revenue was generated from Sabre Travel Network, 20.2% from Travelocity and 10.2% from Sabre Airline Solutions based on segment results that include intersegment revenues.  Compared to the year-ago period, revenue growth for the six months ended June 30, 2004 was 4.1% for Sabre Travel Network after adjusting for the subscriber settlement in the first quarter of 2003 (see Note 3 to the Consolidated Financial Statements), 28.1% for Travelocity and 5.3% for Sabre Airline Solutions.

 

Business.    We operate our business through the following business segments:

 

Sabre Travel Network: Our Sabre Travel Network segment markets and distributes travel-related products and services through the travel agency and corporate channels. Travel agencies, both online and brick and mortar, subscribe to our services. Our services provide travel agency subscribers information about and the ability to purchase travel-related products and services from airlines, hotels, car rental companies, cruise lines and others. We also provide travel agency office automation tools and enable travel agencies to provide services via the Internet.

 

Travelocity: Our Travelocity segment markets and distributes travel-related products and services directly to individuals, including leisure travelers and business travelers, through Travelocity websites and contact centers and websites and contact centers owned by its supplier and distribution partners. Travelocity customers can access offerings, pricing and information about airlines, hotels, car rental companies, cruise lines, vacation and last-minute travel packages and other travel-related services. In 2003, Travelocity launched Travelocity Business™, which combines the integrated online corporate travel technology and full-service offering products of GetThere with the expertise of Travelocity.

 

Sabre Airline Solutions: Our Sabre Airline Solutions segment is a global leader in providing airline software systems and consulting services.   Sabre Airline Solutions hosts airline reservation systems for more than 90 airlines and offers additional passenger management products such as inventory, shopping and pricing, ticketing and online booking.  Sabre Airline Solutions’ comprehensive decision support software portfolio provides integrated technology and services to airlines that help streamline and automate their operations.  Sabre Airline Solutions also provides consulting services to optimize airline and airport operations.

 

Business Trends

 

Potential effects of the following trends, events and uncertainties are discussed in Risk Factors.

 

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