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TABLE OF CONTENTS
Financial Statements and Supplementary Data
TABLE OF CONTENTS 3



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K



/X/

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2005

OR

/ /

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number: 1-12175

SABRE HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
  75-2662240
(I.R.S. Employer
Identification No.)

3150 Sabre Drive, Southlake, TX
(Address of principal executive offices)

 

76092
(Zip Code)

        (Registrant's telephone number, including area code) 682 605-1000
None
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class   Name of each exchange on which registered
Class A Common Stock, $.01 par value per share   New York Stock Exchange

        Securities registered pursuant to Section 12(g) of the Act:
None

        Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes /X/     No / /

        Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes / /    No /X/ .

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

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / /

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large accelerated filer /X/ Accelerated filer / /    Non-accelerated filer / /

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes / / No /X/

        As of June 30, 2005, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was $2,576,044,248 based on the closing sale price of $19.95 as reported on the New York Stock Exchange.

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

Class   Outstanding at February 28, 2006
Common Stock, $.01 par value per share   131,847,171 shares

DOCUMENTS INCORPORATED BY REFERENCE

        Part III of this Form 10-K incorporates by reference certain information from the Proxy Statement for the Annual Meeting of Stockholders to be held May 16, 2006.




Sabre Holdings Corporation
Annual Report of Form 10-K for the Year Ended December 31, 2005
Table of Contents

PART I:    
Item 1.   Business
Item 1A.   Risk Factors
Item 1B.   Unresolved Staff Comments
Item 2.   Properties
Item 3.   Legal Proceedings
Item 4.   Submission of Matters to a Vote of Security Holders

PART II:

 

 
Item 5.   Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.   Selected Consolidated Financial Data
Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk
Item 8.   Financial Statements and Supplementary Data
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.   Controls and Procedures
Item 9B.   Other Information

PART III:

 

 
Item 10.   Directors and Executive Officers of the Registrant
Item 11.   Executive Compensation
Item 12.   Security Ownership of Certain Beneficial Owners and Management
Item 13.   Certain Relationships and Related Transactions
Item 14.   Principal Accountant Fees and Services

PART IV:

 

 
Item 15.   Exhibits

SIGNATURE

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PART I


        In this Annual Report on Form 10-K, the words "Sabre Holdings," "company," "we," "our," "ours" and "us" refer to Sabre Holdings Corporation and its consolidated subsidiaries unless otherwise stated or the context otherwise requires.

ITEM 1.    BUSINESS

Overview

        Sabre Holdings Corporation is a Delaware holding company incorporated on June 25, 1996. Sabre Inc. is the principal operating subsidiary and sole direct subsidiary of Sabre Holdings Corporation. Sabre Inc. or its direct or indirect subsidiaries conduct all of our businesses.

        We are a world leader in travel commerce. Our companies and brands offer a broad portfolio of leading travel marketing, distribution and technology solutions. We support airlines, hotels, cruise lines, car rental agencies and other travel suppliers through a distribution network that enables global marketing through tens of thousands of points of sale, sophisticated data gathering and analysis, and robust business optimization tools. We support online and conventional travel agencies, corporate travel purchasers and consumers by providing an efficient electronic marketplace that consolidates a wealth of travel information, and facilitates shopping and purchasing of travel components and packages. We participate in travel distribution and marketing to multiple audiences through different methods we refer to as "channels." These channels include travel agencies, direct to consumers, and corporate or business-direct.

        We organize our businesses into three segments:

        In 2005, approximately 59.7% of our revenue was generated from Sabre Travel Network, 30.7% from Travelocity and 9.6% from Sabre Airline Solutions, based on segment results that include intersegment revenues. Compared to the year-ago period, revenues (including intersegment revenues) for the twelve months ended December 31, 2005 increased 4.1% for Sabre Travel Network, 65.1% for Travelocity (including lastminute.com from July 20, 2005) and 7.1% for Sabre Airline Solutions.

        Sabre Travel Network:    Our Sabre Travel Network™ segment markets and distributes travel-related products and services for its travel supplier participants through the online and offline travel agency and corporate channels. Our Sabre® global distribution system (the "Sabre system" or "Sabre GDS") produces more bookings for airlines and hotels than any other distribution system. Users of the Sabre system (who we refer to as subscribers) can access information about, book reservations for, and purchase a variety of travel offerings. These offerings include, among other things, airline trips, hotel stays, car rentals, cruises and tour packages. We also enable corporate travel management through our GetThere® products. We provide travel agencies with office automation tools, consortia management services and enable them to provide services via the Internet. In addition, Sabre Travel Network provides marketing information to suppliers and reservation management and technology services to hotel properties.

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        Travelocity:    Our Travelocity® segment markets and distributes travel-related products and services directly to individuals, including leisure travelers and business travelers. Our Travelocity® and lastminute.comSM branded websites and contact centers constitute one of the largest travel agencies in the world. We also provide content and functionality to, and market and sell products and services through private-label websites for suppliers, distribution partners and travel agencies. Through our offerings, travelers 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. Our Travelocity BusinessSM online corporate travel agency provides business travelers the corporate travel technology and full-service offering of our GetThere® products along with the online expertise of Travelocity.

        Sabre Airline Solutions:    Our Sabre Airline Solutions® segment is a global leader in providing passenger management solutions, software products and related services, and consulting services to help airlines simplify operations and lower costs. We provide airline reservations, inventory and check-in hosting solutions that help airlines address the challenge of building and retaining customer loyalty while reducing costs. We supply decision-support software and technology for airlines to improve profitability, increase revenue, streamline operations and improve workflow. In addition, we offer a complete range of consulting services to the airline industry, ranging from one time to extended engagements. Clients include airlines, airports, manufacturers and governments, as well as individuals, travel agencies and members of the financial community.

The Sabre Global Distribution System

        The Sabre system and other global distribution systems are a primary means of air travel distribution in the United States and in many international regions. The Sabre system, like other global distribution systems, creates an electronic marketplace where airlines, hotels, and other travel suppliers display information about their products and services.

        The Sabre system provides subscribers a single rich source of travel information, allowing travel agents and other users to search within seconds tens of thousands of itinerary and pricing options across multiple travel suppliers. The Sabre system provides suppliers with data about subscriber-generated reservations, allowing suppliers to better manage inventory and revenues. The Sabre system enables printing airline tickets and itineraries. Additionally, the Sabre system offers extensive travel information on matters such as currency, medical and visa requirements, weather and sightseeing.

        In 2005, more than 750 travel suppliers displayed information about their products and services through the Sabre system. We estimate that nearly $80 billion of travel-related products and services were sold through the Sabre system during 2005. During 2005, more airline and hotel bookings were made through the Sabre system than through any other global distribution system.

        Travel Supplier Participation and Pricing Options.    Airlines and other travel suppliers display and sell their inventory in the Sabre system. We offer airlines a range of participation levels. The lowest level of participation for airlines, Sabre® Basic Booking RequestSM, provides schedules and electronic booking functionality only. Higher levels of participation for airlines provide enhanced levels of communication between the Sabre system and the travel supplier's inventory system, giving subscribers more reliable information and travel suppliers improved inventory management. For an airline selecting one of the higher levels of participation, the Sabre system provides subscribers with a direct connection to the travel supplier's internal reservation system. This direct connection allows the Sabre system to provide real-time information about inventory and confirmed reservations and the airline to optimize revenue for each flight. We offer car rental companies and hotel operators similar levels of participation. We also offer travel suppliers marketing data derived from the Sabre system bookings. Travel suppliers use this marketing information and other operational systems we sell to improve their revenue and profitability.

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        We have designed service and pricing offerings to airlines to ensure that subscribers will continue to have broad, dependable access to airline schedules, seat availability and fares. With the deregulation of the United States GDS industry in mid-2004 (described below under Computer Reservation System Industry Regulation), we have the flexibility to vary our pricing and other contract terms from airline to airline. We believe that airlines will see the benefits of more customizable relationships with us, including possible reductions in transaction fees. We are setting forth various pricing options for airline suppliers, including options that may include services from each of our business segments and may expand "net rate" or other merchandising opportunities. We also have "opt-in" agreements that offer participating airlines lower transaction fees for bookings created in certain regions, and make certain discounted fares on those airlines available only to those subscribers that accept lowered incentive payments.

        We have already implemented new pricing models with some suppliers. For example, under our agreements with AirTran Airways, Northwest Airlines and US Airways, our subscribers obtain broad, dependable access to all of those airlines' published content. We expect to have new agreements in place with many airlines before the expiration of their current Direct Connect Availability ("DCA") 3-Year Option agreements in 2006. As of December 31, 2005, approximately 50% of our global direct air bookings were subject to our discount pricing options. Additionally we have transitioned many carriers from our traditional Participating Carrier Agreement to a new Travel Marketing Agreement that better aligns price with value for the airline and provides better content guarantees to Sabre Travel Network.

Sabre Travel Network

        Sabre Travel Network markets the Sabre GDS to travel suppliers, travel agency subscribers (online and brick and mortar) and corporations. As of December 31, 2005, travel agencies with approximately 50,000 locations in over 113 countries on 6 continents subscribed to the Sabre system. We enabled these subscribers to make reservations with over 410 airlines, 30 car rental companies, 40 tour operators, 11 cruise lines, 6 railroads and 261 hotel companies.

        Approximately 59.7%, 67.5% and 71.3% of our revenue (including intersegment revenues) in 2005, 2004 and 2003, respectively, was generated by Sabre Travel Network, primarily through transaction fees paid by travel suppliers.

        Subscribers may access the Sabre system on their own hardware over communications circuits contracted from their telecommunications vendors, or subscribers may contract with us for the hardware, software, technical support and other services needed to use the Sabre system. Increasingly, travel agents are providing the majority of their own hardware. Fees for our services are payable over the term of the subscriber's agreement with us, generally five years in the United States and Latin America, three years in Canada, and one year in Europe. In addition, we pay incentives to many travel agencies based on their booking productivity, which is our largest cost of revenue.

        We have designed the Sabre system interface to meet the specific needs of different categories of travel agents. The Sabre system interfaces are available in English, Spanish, Portuguese, French, German, Italian and Japanese. We offer the MySabre™ web-based travel agency portal, which combines the breadth of the Internet with the power of the Sabre GDS. It provides access to the content of the Sabre GDS, as well as Web-based booking tools for cruises, restaurants, ground transportation, theatre, local events and theme parks. Turbo Sabre® software is an advanced point-of-sale interface and application development tool that enables advanced functionality like customized screens, automated quality control and database integration. In addition, Turbo Sabre eliminates complex commands, reducing keystrokes and training requirements.

        In addition to the Sabre system described above, Sabre Travel Network also provides bookings solutions to serve the specific online needs of our subscribers and travel suppliers, including website development, business logic middleware and back end processing. We also offer travel agencies back-office accounting systems and a simplified method to develop and place their own marketing presence on the Internet. Subscriber and travel supplier product offerings range from off-the-shelf applications to fully customized solutions. Subscribers pay license, consulting and web hosting fees that vary with the level of customization and volume generated by their sites.

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        Changing our Sabre Travel Network Revenue Model.    Historically, the vast majority of our travel distribution revenues have been derived from transaction fees paid by travel suppliers measured by subscriber bookings generated through the Sabre GDS. From those fees, Sabre Travel Network has paid incentives to its travel agency subscribers as a cost of revenue. We continue to seek ways to provide more flexible and cost-effective distribution options to suppliers and are increasingly entering into arrangements that depart from our traditional revenue model. As our business evolves, we have broadened our description of "transaction" to include any travel reservation that generates a fee paid directly to us, including in part the following:

See "The Sabre Global Distribution System—Travel Supplier Participation and Pricing Options" above. For example, we have arrangements under which some travel suppliers pay our travel agency customer (such as Travelocity), who in turn pays a transaction fee to Sabre Travel Network. We are also looking for more opportunities to market net rate offerings, benefiting from the merchandising insight that we gain from our integrated portfolio of travel distribution and travel marketing assets. "Net rate" offerings are explained in more detail below in "Travelocity—Net Rate Program." Some of these non-traditional transactions may have a lower rate per transaction than a traditional booking fee, and as a result the overall average revenue per transaction may be lower as these non-traditional transactions increase. See "Item 1A—Changes to our travel..."

Travelocity

        Travelocity is a leading provider of consumer direct travel services for the leisure and business traveler. In 2005 we significantly expanded our presence in Europe with the purchase of lastminute.com, a leader in European online travel marketing. Travelocity operates through the Travelocity.com® and Site59.com® ("Site 59") websites, Travelocity's international websites including lastminute.comSM, HolidayAutos.comSM and Zuji.comSM and its contact centers, travel agency partners, and its Travelocity Partner NetworkSM offering. These services allow individual leisure and business travelers to shop, compare prices and make travel reservations online with airlines, car rental agencies, hotel companies and cruise and tour providers. The Travelocity Partner Network offering expands Travelocity's distribution reach through agreements with leading online retailers, including Yahoo! Travel, America Online, American Express, Southwest Airlines, US Airways, and AARP. For example, Site 59 powers the last-minute travel sections of Travelocity, AOL Travel, Cheap Tickets, Yahoo! Travel, American Airlines Vacations, Delta Air Lines Vacations, Continental Airlines Vacations, Northwest's nwa.com, and Bestfares.com, among others. We also offer access to a database of information regarding specific destinations and other information of interest to travelers.

        Travelocity facilitates transactions between travel suppliers and consumers to book and pay for travel accommodations. For "net rate" transactions, we generate service fee revenue equal to the total amount paid by the customer, minus Travelocity's payment to the travel supplier for the travel accommodations. We also generate revenue from commissions or transaction fees from travel suppliers for the purchase of travel products and services pursuant to reservations made through our system. Other revenue sources include service fees charged to customers, advertising revenues and GDS incentives. Losses from interests in joint ventures, which are described under "International" below, are recognized as contra-revenue. We derive intersegment revenues from Sabre Travel Network, consisting mainly of incentives for Travelocity bookings made through the Sabre GDS, and fees paid by Sabre Travel Network and Sabre Airline Solutions for corporate and airline trips booked through Travelocity's online booking technology. During 2005, customers transacted approximately $8 billion in travel and related services through Travelocity.

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        For our business customers, we also operate Travelocity Business™, a comprehensive travel service available for corporations and other organizations. Travelocity Business combines the integrated corporate travel technology and full-service offering products of GetThere with the online expertise of Travelocity. Travelocity also operates multiple businesses tailored to customers outside the United States, as described under "Investments in Travelocity" and "International" below.

        Investments in Travelocity.    The growth and development of Travelocity continues to be a strategic focus for us. In 2005, we continued to invest in areas that we believe offer rapid growth opportunities, such as in the business-direct channel and online distribution in Europe and Asia. For example:

        See "Item 1A—We may be unsuccessful in pursuing and integrating business combinations..."

        Net Rate Program.    In an effort to provide additional choices to consumers, Travelocity is increasingly promoting our net rate program, commonly referred to in the industry as a "merchant model program" due to the fact that Travelocity is the merchant of record for credit card processing. Under the net rate program, we facilitate transactions between travel suppliers and travelers for the booking of and payment for travel accommodations. Under this model, we generally do not purchase and resell travel accommodations and do not have any obligations with respect to travel accommodations listed online that do not sell. Instead, we act as an intermediary by entering into agreements with travel suppliers for the right to market their products, services and other content offerings at pre-determined net rates. Net rate travel offerings can include air travel, hotel stays, car rentals and dynamically packaged combinations. We market these net rate offerings to travelers at a price that includes service fees that we retain, plus an amount sufficient to pay the travel supplier for its charge for providing the travel accommodations, along with any applicable occupancy and other local taxes on that charge. For this type of business model, we require pre-payment by the traveler at the time of booking. Net rate content is beneficial for travelers because they can often book travel at a price lower than regularly published offerings. For us, the net rate model generally delivers higher service fee revenue per transaction than comparable transactions under an agency commission booking fee model. In addition, as long as the net rate program is growing, we experience improved operating cash flows as a result of receiving pre-payments from customers while paying suppliers after the travel occurs. For net rate transactions, we recognize as revenue the service fees that we retain on these transactions.

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        Our business strategy depends on net rate bookings as a significant source of future revenue growth and increased margins. Our strategy calls for us to increase or maintain the number of hotel rooms we can market under our net rate hotel program, based upon arrangements we make directly with individual hotel properties and hotel chains. Because of Travelocity's supplier-friendly approach, which includes timely payment to suppliers and a two-way seamless connectivity to hotels' property management systems so that reservations are not lost, our hotel program has become successful even though it was started later than some competing programs. One example of the success of this approach was Travelocity's selection by InterContinental Hotels Group ("IHG") as the first online third party intermediary to be certified for IHG's more than 3,500 hotels worldwide, including InterContinental Hotels and Resorts, Crowne Plaza, Holiday Inn, Holiday Inn Express, Staybridge Suites and Candlewood Suites. Please see "Item 1A—Travelocity's revenue growth largely depends on international growth and on expanding net rate (merchant) programs."

Sabre Airline Solutions

        Sabre Airline Solutions is a global leader in providing technology that allows airlines to market and sell their inventory and serve their customers. We offer passenger management solutions, software products and related services, and consulting services. Over 200 airlines worldwide use one or more products in our broad portfolio to increase revenues and improve operations. More than 100 airlines worldwide rely on our airline reservation suite products, with eight new carriers added and four carrier renewals in 2005 and two large wins, Frontier Airlines and Aeroflot, a Russian air carrier, for our SabreSonic™ passenger reservations product suite. More than 100 clients worldwide have utilized our strategic commercial and operational consulting services.

        Airline Passenger Solutions.    We provide airline reservations, inventory and check-in hosting solutions that help airlines address the challenge of building and retaining customer loyalty while also reducing costs. With support of e-ticketing and passenger self-service options, our departure control systems equip airlines with the tools to increase sales through every distribution channel. Built on open-systems technology, our new generation SabreSonic™ Passenger Solution offers passenger-facing systems to airlines regardless of size, location, business model or current reservations system.

        Airline Products and Services.    We provide decision-support software and technology for airlines to improve profitability, increase revenue, streamline operations and improve workflow. We offer flexible product and service configurations to meet unique business needs, allowing airlines to choose a single, stand-alone system for a specific operational area or a bundled solution of multiple systems to address a variety of functional requirements and increase information sharing across a greater number of departments. Additionally, we offer the Sabre®eMergo® web-enabled and dedicated network solutions, as well as an ASP offering to airlines. Providing convenient remote access to secure data, the eMergo solutions help significantly lower or eliminate expenses associated with upfront capital outlay, staffing, data storage, ongoing maintenance and installation. Our decision-support tools are designed exclusively to meet the needs of airlines, regardless of size or business model, and assist in every key functional area of an airline, such as crew and cargo management, flight operations and revenue management.

        Consulting Services.    We offer a complete range of consulting services to the airline industry. Assignments range from a one time engagement to extended engagements. Typical engagements include achieving the necessary standards to join an alliance, preparing for privatization and optimizing current operations. Clients include airlines, airports, manufacturers and governments, as well as individuals, travel agencies and members of the financial community.

International

        Sabre Travel Network—We market the Sabre system internationally both directly and through joint venture and distributorship arrangements. As of December 31, 2005, travel agencies with approximately 50,000 locations in over 113 countries on 6 continents subscribed to the Sabre system. Our marketing partners outside the United States principally include airlines that have strong relationships with travel agents in their primary markets, and entities that operate regional computer reservation systems or other travel-related network services.

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        Sabre Travel Network has long-term agreements with ABACUS International Holdings Ltd., which created ABACUS International PTE Ltd ("Abacus"), a Singapore-based joint venture company that manages travel distribution in the Asia Pacific region. We own 35% of the joint venture and provide it with transaction processing and product development services on the Sabre system. Sabre Travel Network also provides distribution products and services to Infini and Axess, Japan's two largest GDS travel agency marketing companies. Infini is owned 40% by ABACUS and 60% by All Nippon Airways. Axess is owned 25% by Sabre and 75% by Japan Airlines. Sabre Travel Network also provides travel marketing and distribution services in Mexico through our 51% owned (48% voting rights) joint venture, Sabre Sociedad Technologica S.A. de C.V. Sabre Travel Network Middle East, a joint venture owned 60% by Sabre Travel Network and 40% by Gulf Air Company GSC ("Gulf Air"), provides technology services, bookable travel products and distribution services for travel agencies, corporations and travel suppliers in the Middle East region.

        Travelocity—We market Travelocity internationally both directly and through joint venture arrangements. In Canada, Travelocity directly markets its Travelocity.caSM site. With the acquisition of lastminute.com in July 2005, we market in Europe using lastminute.com as our leading brand. Our European operations also include other European travel websites, including Holiday Autos and Med Hotels, onlinetravel.com, Travelocity.co.uk in the United Kingdom, resfeber.seSM in Sweden, rejsefeber.dkSM in Denmark, reisefeber.noSM in Norway, Boomerang VoyagesSM in France, and Travelocity.deSM in Germany. Until December 2005, Travelocity also partnered with Otto Versand through a joint venture company that distributed Travelocity in Germany through several brands. Travelocity retained the Travelocity.de business on dissolution of that joint venture.

        We operate in the Asia Pacific region through Zuji.comSM, which is hosted by Travelocity and utilizes Travelocity technology. See "Travelocity—Investments in Travelocity" above.

        Sabre Airline Solutions—Sabre Airline Solutions markets software solutions and consulting services on four continents, with primary sales offices in the Dallas/Ft. Worth area, London, Hong Kong and Sydney. We also maintain agency relationships to support sales efforts in key areas, including countries in Asia and the Middle East. Through Stockholm, Sweden-based RM Rocade ("Rocade"), we provide software solutions, including a fully functional flight operations product suite, to international small, medium-size and low cost carriers.

Competition

        The travel marketplace is intensely competitive. Our companies and brands offer a broad portfolio of leading travel marketing, distribution and technology solutions that are well positioned in the marketplace. Sabre Travel Network competes in the travel agency channel against other large and well-established traditional global distribution systems, such as Amadeus Global Travel Distribution S.A. ("Amadeus"), Galileo International Inc. (owned by Cendant Corporation) and Worldspan, L.P. Each of these competitors offers many products and services substantially similar to those offered by Sabre Travel Network. The diverging price structures of competing global distribution systems, and our ability to offer our portfolio of solutions, may provide us with an opportunity to win additional business.

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        We routinely face new competitors and new methods of travel distribution. Suppliers and third parties seek to promote distribution systems that book directly with travel suppliers. For example, established and start-up search engine companies are attempting to enter the travel marketplace by aggregating travel search results across supplier, travel agent and other websites. Many alternative distribution systems offer lower costs to suppliers, but they are not global and offer travelers a limited subset of transactions from a limited subset of suppliers in one market segment. The systems often must rely on the scale and functionality of a GDS such as our Sabre system for a complete travel distribution solution for suppliers and travel agencies. They do not offer comprehensive functionality and do not have the infrastructure to adequately service and support travel management companies or corporations. They require the integration of a new, stand alone system into most existing agency or corporate booking tool workflows. Many of these alternative travel distribution channels are well financed but are in start-up or developing mode, and have yet to fully define their functionality and costs. These alternative travel distribution systems may have the effect of diverting customers from our online sites and our Sabre GDS, putting pressure on our revenues, pricing and operating margins. See "Item 1A—Travel suppliers are pursuing distribution options...."

        Another form of competition derives from airlines, which have worked to divert travel bookings onto channels that they control. Airlines have withheld inventory from independent travel distributors, have greatly reduced commissions paid to online and traditional travel agencies and have conditioned independent distributors' access to inventory on their acceptance of pricing offered by channels that those airlines control. Their collective efforts have resulted in travel bookings being diverted from traditional distribution channels toward supplier-controlled channels, such as individual airline websites and call centers. We believe, however, that the rate of "channel shift" from the GDS channel to supplier-controlled sites has stabilized.

        The development of competing technologies or the emergence of new industry standards may also adversely affect our competitive position. Competition could result in reduced margins on our services and products. See "Item 1A—Consolidation in the travel industry...."

        We market travel in the consumer-direct channel primarily through Travelocity. Travelocity's competitors include Priceline.com (which also operates Travelweb.com), Cendant Corporation (which owns Orbitz and ebookers.com), Expedia (which also operates Hotels.com and Hotwire.com) and Opodo (owned by nine European airlines and Amadeus). Virtually all major airlines, and many other travel suppliers, have websites that allow consumers to book directly with that supplier, and some offer an array of products and services. Certain owners of these sites may make certain discounted fares and prices available exclusively on their proprietary or multi-vendor websites. See further discussion under "Item 1A—Customers may reduce..."

        We market travel in the business-direct channel principally through Travelocity BusinessSM and our GetThere® product. The marketplace for Internet-based corporate and government travel procurement and supply services is highly competitive and rapidly evolving. Travelocity's competitors in the business-direct channel include traditional global distribution systems such as Amadeus' E-Travel and Galileo's TravelPort and more recently, online travel agents such as Orbitz.com and Expedia.com.

        In the products and services business, Sabre Airline Solutions competes with a number of boutique firms in specific product areas, as well as across our portfolio with vendors such as Lufthansa Systems. In the airline passenger solutions business, Sabre Airline Solutions competes with Amadeus, Navitaire, Worldspan, IBM and others.

Computer Reservation System Industry Regulation

        Aspects of our travel marketing and distribution businesses are subject to the Computer Reservation Systems ("CRS") regulations in the European Union, Canada and Peru. These regulations generally govern GDS services for airlines and travel agencies, but not for non-airline suppliers (except rail suppliers in limited circumstances). Among the topics addressed in some of the current regulations are:

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        All CRS regulations in the United States expired on July 31, 2004. CRS regulations in Canada were eliminated on May 7, 2004, except rules prohibiting screen preference and discrimination in providing the right for all airlines to participate in service enhancements. The deregulation of CRSs in both the U.S. and Canada will enhance our opportunities to creatively market airline services and freely negotiate with travel agencies. Regulators in the European Union ("E.U.") have indicated they may propose the total repeal of their current CRS regulations even though four large E.U.-based airlines retain substantial ownership positions in the Amadeus CRS. It is not clear whether or when any amendments in the European Union's CRS Code of Conduct will be formally proposed, or will take effect or what form they may ultimately take. The repeal of CRS rules in a jurisdiction where a locally-strong airline retains an ownership interest in a CRS presents significant competitive risks. See further discussion under "Item 1A—Regulatory developments in Europe could limit our ability to compete..."

Other Regulation

        Our businesses continue to be subject to regulations affecting issues such as: exports of technology, telecommunications, data privacy and electronic commerce. Any such regulations may vary among jurisdictions. We believe that we are capable of addressing these regulatory issues as they arise.

Seasonality

        The travel industry is seasonal in nature. Travel bookings for our Sabre Travel Network business, and the revenue we derive from those bookings, decrease significantly each year in the fourth quarter, primarily in December. Customers generally book their November and December holiday leisure travel earlier in the year, and business travel declines during the holiday season. Travelocity revenues are also impacted by the seasonality of travel bookings, but to a lesser extent since commissions from car and hotel travel providers and net rate revenue for vacation packages and hotel stays are recognized upon date of consumption. See the discussion on Seasonality in "Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information. We believe that the acquisition of lastminute.com will cause revenues and net earnings to become more significant in the second and third quarters for the Travelocity segment due largely to European travel patterns.

Research and Development Expenses

        Research and development costs represent costs incurred to investigate and gain new knowledge that could be useful in developing a new product or service and then translating those findings into a plan or design for a product or service. Our research and development costs approximated $26 million, $32 million and $48 million for 2005, 2004 and 2003, respectively.

Segment Information

        Financial information for our operating segments and geographical revenues and assets are included in Note 13 to the Consolidated Financial Statements.

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Agreements with EDS

        We have an agreement with Electronic Data Systems Corporation ("EDS") through which EDS manages a significant portion of our information technology systems. Under a 10-year agreement through June 2011, EDS provides us with information technology services, including data center management, applications hosting, applications development, data assurance and network management. Among the services provided is transaction processing for our travel marketing and distribution businesses, including operation of the Sabre system. The agreement was entered into as part of a 2001 sale to EDS of our infrastructure outsourcing business and information technology infrastructure assets and the associated real estate ("Outsourcing Business"). In connection with the sale, we also entered into agreements with EDS to jointly market information technology services and software solutions to the travel and transportation industries.

Intellectual Property

        We use software, business processes and other proprietary information to carry out our business. These assets and related patents, copyrights, trade secrets, trademarks and other intellectual property rights are significant assets of our business. We rely on a combination of patent, copyright, trade secret and trademark laws, confidentiality procedures and contractual provisions to protect these assets. We seek patent protection on key technology and business processes of our business. Our software and related documentation are also protected under trade secret and copyright laws where appropriate. We also seek statutory and common-law protection of our trademarks where appropriate. The laws of some foreign jurisdictions may provide less protection than the laws of the United States for our proprietary rights. Unauthorized use of our intellectual property could have a material adverse effect on us and there can be no assurance that our legal remedies would adequately compensate us for the damages to our business caused by such use.

Employees

        As of December 31, 2005, we had approximately 8,800 employees. This represents a substantial increase from 2004, due almost entirely to the acquisition of lastminute.com in 2005. There were approximately 2,000 lastminute.com employees as of December 31, 2005. A central part of our philosophy is to attract and maintain a highly capable staff. We consider our current employee relations to be good. Our employees based in the United States are not represented by a labor union.

Available Information

        We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith, we file reports, proxy and information statements and other information with the Securities and Exchange Commission ("SEC"). Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy and information statements and other information and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available through the Investor Relations section of our Website under the links to "—Financial Information—SEC Filings." Our Internet address is www.sabre-holdings.com. Reports are available free of charge as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. In addition, our officers and directors file with the SEC initial statements of beneficial ownership and statements of change in beneficial ownership of our securities, which are also available on our website at the same location. We are not including this or any other information on our website as a part of, nor incorporating it by reference into, this Form 10-K or any of our other SEC filings.

        In addition to our website, you may read and copy public reports we file with or furnish to the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains our reports, proxy and information statements, and other information that we file electronically with the SEC at www.sec.gov.

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ITEM 1A.    RISK FACTORS.

RISK FACTORS

        Risks associated with an investment in our securities, and with achieving the forward-looking statements contained in this report or in our news releases, websites, public filings, investor and analyst conferences or elsewhere, include, but are not limited to, the risk factors described below. Any of the risk factors described below could have a material adverse effect on our business, financial condition or results of operations. We may not succeed in addressing these challenges and risks.

Our revenues are highly dependent on the travel and transportation industries, and particularly on air travel, and a prolonged substantial decrease in travel transaction volumes could adversely affect us.

        Our revenue increases and decreases with the level of travel and transportation activity. The travel industry is seasonal and our revenue varies significantly from quarter to quarter. Our revenue is also highly subject to declines in or disruptions to travel and transportation that may be caused by factors entirely out of our control. For example, negative perceptions held by travelers about the following factors may adversely affect travel activity:

        A prolonged substantial decrease in travel transaction volumes could have an adverse impact on our financial performance, operations, liquidity, or capital resources.

Changes to our travel supplier relationships may reduce our revenues.

        Most of our revenue is derived from airlines, hotel operators, car rental companies, cruise and tour operators and other suppliers in the travel and transportation industry. We depend on a relatively small number of airlines for a significant portion of our revenues. To compete effectively in the travel distribution industry, we must offer broad, dependable access to airline content and features such as schedules, seat availability and fares, including web fares. Airlines and other suppliers may choose to reduce our access to content that we have offered in the past. In particular, since the deregulation of the CRS industry in the United States, airlines have more flexibility to limit their participation in our Sabre GDS, or to not participate. Several major airlines in the United States are experiencing liquidity problems. Some of those airlines are consolidating, others have sought bankruptcy protection, and still others may consider bankruptcy relief. The financial instability of airlines or other travel suppliers could have a material negative impact on our business. If our access to supplier-provided content or features were to be diminished relative to our competitors, our business could be materially adversely affected. Because offerings from major airlines represent a large part of our business, if the Sabre GDS were to lack the ability to facilitate bookings on one or more major airlines, our distribution channels would be relatively less attractive to travel agencies and travel purchasers, which could reduce our transaction fee revenue and materially adversely affect our business.

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Travel suppliers are pursuing distribution options that may reduce our access to content, which could reduce our revenues.

        Some travel suppliers are seeking to decrease their reliance on distribution intermediaries, including global distribution systems such as our Sabre GDS, by promoting other distribution channels. Many airlines, hotels, car rental companies and cruise operators have call centers and have established their own travel distribution websites. The airline industry has experienced a shift in segment share from full-service carriers to low-price carriers, many of which do not distribute their tickets through third-party intermediaries such as the Sabre GDS and Travelocity. Travel suppliers may create or expand commercial relationships with online and offline travel agencies that directly book travel with those suppliers, diverting bookings from our distribution channels. From time to time, travel suppliers offer advantages, such as bonus loyalty awards, lower transaction fees, or discounted prices, when their products and services are purchased from these supplier-related channels. Some of these offerings are not available to unrelated intermediaries, or those intermediaries must accept lower transaction fees in exchange for access to the offerings. Our Sabre GDS also competes with competitors who may offer less content, functionality and marketing reach at a relatively lower cost to suppliers. In addition, search engine providers are attempting to enter the online travel marketplace by aggregating travel search results across supplier, travel agent and other travel-related websites. These search engines and alternative travel distribution channels have the potential to divert customers from our distribution channels. If our access to supplier-provided content or features were to be diminished relative to our competitors, our business could be materially adversely affected. Because offerings from major airlines represent a large part of our business, if the Sabre GDS were to lack the ability to facilitate bookings on one or more major airlines, our distribution channels would be relatively less attractive to travel agencies and travel purchasers, which could reduce our transaction fee revenue and materially adversely affect our business. See "Business Trends—Supplier Efforts to Control Travel Distribution" and "Business Trends—Alternative Distribution Systems."

Customers may reduce transactions through our distribution channels, which could reduce our revenues.

        Our portfolio of travel distribution businesses includes channels that support the travel agency, business-direct and consumer-direct segments of the global travel distribution marketplace. We believe that we and our customers benefit when we broadly participate in the travel distribution industry, including our direct to traveler services. Broad participation in the industry gives us a competitive advantage, including greater scale of our technology and other synergies. In all of these distribution channels, we face significant competition.

        In some circumstances, our business segments have objectives that lead to conflicts with customers of our other business segments. For example, our Travelocity and Travelocity Business operations compete with travel-agency subscribers of Sabre Travel Network. That competition could cause current or potential travel agency subscribers to elect to use competing GDS providers, websites or other channels of travel distribution, which could reduce our transaction fee revenue and materially adversely affect our business. If our competitors introduce new pricing or offerings that we cannot meet in a timely or cost-effective manner, our customers may elect to use other travel distribution channels and our business may be materially adversely affected. In addition, travelers and other persons may use our websites and other resources to obtain schedules, availability, pricing and other travel information and then elect to purchase travel from a competitor, which would tend to increase our costs without producing revenue.

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Consolidation in the travel industry and increased competition for customers may increase costs and reduce revenue.

        Consolidation among participants in the travel industry may increase their negotiating leverage, thereby providing them with competitive advantages over us that may increase our costs and reduce our revenues. Consolidation among travel suppliers, such as major hotel and airline mergers and alliances, may increase competition from these supplier-related distribution channels or give them additional leverage to negotiate lower transaction fees payable to our travel distribution channels, including the Sabre GDS. In order for our distribution channels to obtain access to important airline content offerings, we are evaluating various pricing models for airline suppliers. It is, however, difficult to predict with certainty, in a recently deregulated environment, the impact of new pricing models on our revenues or results of operations.

        GDSs, such as our Sabre GDS, compete to attract and retain travel agencies. Some travel suppliers have reduced or eliminated commissions paid to travel agencies (including consumer-direct travel sites like Travelocity). The loss of supplier commissions causes travel agencies to become more dependent on other sources of revenues, such as traveler-paid service fees and GDS-paid incentives. The reduction or elimination of supplier-paid commissions has forced some smaller travel agencies to close or to combine with larger travel agencies. Although the Sabre GDS has a leading share of large travel agencies, competition is particularly intense among global distribution systems for larger travel agency subscribers, including online travel agencies. Consolidation of travel agencies may increase competition for these subscribers and increase the ability of those agencies to negotiate higher GDS paid incentives. In order to compete effectively, we may need to increase incentives, pre-pay incentives, increase spending on marketing or product development, or make significant investments to purchase strategic assets.

Travelocity's revenue growth largely depends on international growth and on expanding net rate (merchant) programs.

        Travelocity's revenue growth is driven by expanding global use of the Internet and driving purchases through our online travel websites. The online travel marketplace is highly competitive, with both independent online travel agencies and suppliers' proprietary websites competing for customers. Travelocity's business strategy largely depends on growing its net rate program offerings (commonly referred to in the industry as "merchant model" programs, because the online agency is the merchant of record for credit card processing). Growing the net rate programs is particularly dependent upon our ability to offer adequate hotel rooms. Many hoteliers utilize net rate programs to dispose of excess hotel rooms at discounted rates. Demand for supplier offerings may increase as a result of increased travel and competition from net rate offerings by our competitors. If demand increases for suppliers' products, services and other content offerings, suppliers may limit our right to distribute their offerings or may increase the cost of those offerings. Travelocity's business strategy also depends on expanding its dynamically packaged offerings, maintaining the breadth of its access to supplier offerings, developing its brand in a cost-effective manner in the United States, Europe, Asia and other growth regions, increasing traffic to its websites (including direct distribution as well as through current and future distribution partners), and expanding the appeal of the Travelocity Business tool to business travelers. We also plan to invest strategically in growth opportunities, such as our recent acquisition of lastminute.com in Europe and Zuji.com in the Asia Pacific region. If any of these initiatives is not successful, or requires extensive investment, Travelocity's growth may be limited and it may be unable to achieve or maintain profitability.

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We may be unsuccessful in pursuing and integrating business combinations, strategic alliances, or products and technologies, which could result in increased expenditures or cause us to fail to achieve anticipated cost savings or revenue growth.

We are currently seeking to integrate recently acquired businesses as described in this report, including our acquisition of lastminute.com. There are risks inherent in these types of transactions, such as: difficulty in assimilating or integrating the operations, technology and personnel of the combined companies; difficulties and costs associated with integrating and evaluating the internal control systems of acquired businesses; disruption of our ongoing business, including loss of management focus on existing businesses and marketplace developments; problems retaining key technical and managerial personnel; expenses associated with the amortization of identifiable intangible assets; additional or unanticipated operating losses, expenses or liabilities of acquired businesses; impairment of relationships with existing employees, customers and business partners; and fluctuations in value and losses that may arise from equity investments.

        We expect to realize strategic and other benefits as a result of our acquisition of lastminute.com. Our ability to realize these benefits or successfully integrate lastminute.com's businesses, however, is subject to certain risks and uncertainties, including:

        Our failure to manage these or other risks related to the acquisition could prevent us from realizing the expected benefits of the acquisition and also may have a material adverse effect on our results of operations and financial condition.

        In addition, we plan to continue to examine possible business combinations, investments, joint ventures or other strategic alliances with other companies in order to maintain and grow revenue and marketplace presence. We may not be able to: identify suitable candidates for additional business combinations and strategic investments; obtain financing on acceptable terms for such business combinations and strategic investments; or otherwise consummate such business combinations and strategic investments on acceptable terms. We may be unable to successfully complete potential acquisitions due to multiple factors, such as issues related to regulatory review of the proposed transactions. To consummate such transactions, we may need to raise external funds through the sale of stock and/or debt in the capital markets or through private placements, which might affect our liquidity.

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Rapid technological changes and new distribution channels or unauthorized use of intellectual property may adversely affect the value of our current or future technologies to us and our customers, which could cause us to increase expenditures to upgrade and protect our technology or develop and protect competing offerings in new distribution channels.

        New distribution channels, technology and customer behavior in our industry are evolving rapidly. Our ability to compete and our future results depend in part on our continued ability to maintain and to make timely and cost-effective enhancements, upgrades and additions to our technology in response to changes in consumer preferences and increased demand for our products and services. We must also keep pace with rapid advancements in technology, standards and practices, and protect our technology. Maintaining flexibility to respond to technological and marketplace dynamics may require substantial expenditures and lead time. We cannot assure you that we will successfully identify and develop new products or services in a timely manner, that offerings, technologies or services developed by others will not render our offerings obsolete or noncompetitive, or that the technologies in which we focus our research and development investments will achieve acceptance in the marketplace and provide a return on our investment.

        Unauthorized use of our intellectual property could have a material adverse effect on us, and our legal remedies may not adequately compensate us for the damages to our business caused by such use. Protecting our intellectual property from unauthorized use could be expensive and time-consuming. Additionally, claims that our products or services may infringe the intellectual property rights of others may require additional expenditures in resolving such claims and/or development of alternate technologies, either or which could be expensive and time-consuming.

We will encounter risks and difficulties similar to those frequently experienced in rapidly evolving industries such as the travel distribution industry.

        Some of these risks relate to our ability to:

If we are unsuccessful in addressing these risks or in executing our business strategy, our business, financial condition or results of operations may suffer.

We rely on third parties to provide critical systems and infrastructure.

        Our businesses are largely dependent on the computer data centers and network systems operated for us by Electronic Data Systems Corporation except for our lastminute.com operations which uses Colt Telecom. We also rely on other providers and on the global telecommunications infrastructure. We rely on several communications service suppliers and on the global Internet to provide network access between our computer data center and call centers and end-users of our services. The Travelocity (including the Site59® and lastminute.com websites) business is dependent upon GDSs (the Sabre GDS and others) to process travel bookings. If those providers do not enable us to provide our customers and suppliers with reliable, real-time access to our systems, our business may be materially adversely affected.

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Our success depends on maintaining the integrity of, and upgrading the quality of, our systems and infrastructure, which may suffer failures, capacity constraints and business interruptions, which could increase our operating costs and cause us to lose customers.

        In order to be successful, we must provide reliable, real-time access to our systems for our customers and suppliers while also pursuing a low-cost model. Consumers and suppliers will not tolerate a service hampered by slow delivery times, unreliable service levels, service outages due to the installation of upgrades, or insufficient capacity. As our operations grow in both size and scope, we will continually need to improve and upgrade our systems and infrastructure to offer an increasing number of customers and travel suppliers enhanced products, services, features and functionality—all while maintaining the reliability and integrity of our systems and infrastructure and while pursuing reduced costs per transaction. The expansion of our systems and infrastructure will require us to commit substantial financial, operational and technical resources before the volume of business increases, with no assurance that the volume of business will increase. System capacity limits or constraints arising from unexpected increases in our volume of business could cause interruptions, outages or delays in our services, or deterioration in their performance, or could impair our ability to process transactions. We occasionally experience system interruptions that make unavailable some or all of our global distribution system or other data processing services (including the services that Sabre Airline Solutions provides to airlines). System interruptions may prevent us from efficiently providing services to our customers or other third parties, which could result in our losing customers and revenues, or incurring liabilities. Much of the computer and communications hardware upon which we depend is located in a single facility. Our systems might be damaged or interrupted by fire, flood, power loss, telecommunications failure, break-ins, earthquakes, terrorist attacks, hostilities or war or similar events. Computer viruses, denial of service attacks, physical or electronic break-ins and similar disruptions affecting the global Internet or our systems might cause service interruptions, delays and loss of critical data, and could prevent us from providing our services. Problems affecting our systems might be expensive to remedy and could significantly diminish our reputation and brand name and prevent us from providing services. We could be harmed by outages in, or unreliability of, the data center or network systems. The occurrence of any of these events could result in a material adverse effect on our business.

Our collection, processing, storage, use and transmission of personal data may be restricted or result in liabilities.

        In our processing of travel transactions, we collect, process, store, use and transmit large amounts of personally identifiable data about travelers. Our handling of these types of data is increasingly subject to legal restrictions around the world, including the European Union. In addition, the United States government is contemplating initiatives to enhance national and aviation security. These initiatives may result in conflicting legal requirements in the United States and other jurisdictions. Companies that handle these types of data have also been subject to investigations, lawsuits and adverse publicity due to allegedly improper disclosure of personally identifiable information. Our business could be materially adversely affected if legal restrictions on the use of personally identifiable information are expanded or are interpreted in ways that conflict with our business practices.

Tax issues have the potential to have an adverse effect on our financial condition and results of operations.

        We are subject to a variety of taxes in many jurisdictions globally. We establish reserves for our potential liability for taxes, consistent with applicable accounting principles and in light of all current facts and circumstances. Regarding value-added taxes, we have established reserves regarding the collection of refunds which are subject to audit and collection risks in various regions of Europe. The reserves represent our best estimate of our contingent liability for taxes. The interpretation of tax laws and the determination of any potential liability under those laws are complex, and the amount of our liability may exceed our established reserves and could therefore have a material adverse effect on our financial results.

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        Some state and local taxing authorities impose taxes on the sale, use or occupancy of hotel room accommodations, which are called transient, occupancy, accommodation, sales or hotel room taxes. Hotel operators generally collect and remit these occupancy taxes. Consistent with that practice, when a customer books a hotel room through one of our travel services under our net rate hotel program, we collect from the customer an amount sufficient to pay the hotel its room charge and the occupancy taxes on that charge, as well as an additional amount that represents our fees. We do not collect or remit occupancy taxes on our fees. Some tax authorities claim that occupancy taxes should be collected on some or all of those fees. We believe there are strong arguments that our fees are not subject to occupancy taxes (although tax laws vary among the jurisdictions). We are attempting to resolve this issue with tax authorities in various jurisdictions, but we cannot predict the resolution in any particular jurisdiction. Any actual liability we may have for occupancy taxes, or the size of the reserve we may establish for those taxes, could be affected by a variety of factors, such as the number of jurisdictions that prevail in either assessing additional occupancy taxes or negotiating a settlement with us, the amount of fees potentially subject to tax in each jurisdiction, changes in applicable tax laws, and the timing of any or all of the foregoing.

Regulatory developments in Europe could limit our ability to compete by removing key protections needed to safeguard competition where locally strong airlines retain ownership interests in a CRS, and regulatory developments elsewhere could, among other things, inhibit our flexibility to contract with airlines or travel agencies, which could cause our customers to be diverted to our competitors and adversely affect our revenue and results of operations.

        The E.U. Commission has suggested the potential elimination of its rules governing CRS systems. It is unclear when or if the E.U. Commission will make such a formal proposal, or if it does, the final changes that might ultimately be made to those rules. Because large E.U.-based airlines retain substantial ownership interests in one CRS, we could be unfairly and adversely affected if, for example, the E.U. Commission were to eliminate current requirements for airlines that own an interest in a CRS to participate equally in other CRSs. We also could be adversely affected in Europe or elsewhere if restrictions were imposed or continued on CRS advertising and displays, or if additional limitations were placed upon our right to contract with travel agents or airlines. We could also be adversely affected if changes to any of the foregoing CRS rules or to other general laws affecting our businesses, or if decisions made under such rules or laws, were to increase our cost of doing business or otherwise impair our flexibility.

Our international operations are subject to other risks, which may impede our ability to grow internationally and adversely affect our overall results of operations.

        We continually seek to expand the reach of our various businesses into international markets as well as to successfully integrate, operate and manage our existing and future international operations. Our international operations are subject to risks, including those listed below, that may adversely affect our ability to conduct and grow business internationally and could materially adversely affect our business:

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Our ongoing cost reduction plans may not continue to be successful.

        Our strategy depends, to a substantial degree, on reducing and controlling operating expenses. In furtherance of this strategy, we have engaged in ongoing, company-wide activities intended to reduce costs. These activities include personnel reductions, reductions in personnel-related costs, programs designed to reduce the growth rate of incentive payments to travel agencies, and realigning and streamlining operations and consolidating facilities. Part of our cost reduction strategy involves leveraging our status as a global company to conduct some of our operations outside the United States, such as customer call centers and software development, either by contracting with foreign companies that work for us or by expanding our own operations outside the United States. We cannot assure you that our efforts will continue to result in the increased profitability, cost savings or other benefits that we expect.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

        We had no unresolved SEC staff comments through December 31, 2005.

ITEM 2.    PROPERTIES

        In June 2003, Sabre Inc. refinanced the syndicated lease arrangement regarding our corporate headquarters facility in Southlake, Texas, and entered into a ten-year master lease, accounted for as a capital lease. The initial term of the lease expires in 2013 with an option to purchase these facilities prior to or upon expiration of the lease (see Notes 5 and 8 to the Consolidated Financial Statements for additional information on our capital lease).

        Additionally, we lease office facilities in Westlake, Texas, under leases expiring in 2008. These facilities are utilized by each of our three business units. We also lease office facilities for our business units in approximately 150 other locations worldwide. These locations serve a variety of functions including facilities for various operating subsidiaries, branch offices in international locations and customer call centers.

        In July 2005, we acquired 31 office locations throughout Europe as a result of our acquisition of lastminute.com. These locations operate within our Travelocity segment. We currently occupy 27 of the locations; 2 are sublet, 2 are currently vacant and 2 are scheduled to be closed/vacated sometime in 2006 as a part of our lastminute.com restructuring plan (see Note 4 to the Consolidated Financial Statements).

        EDS subleases a large office facility from us in Fort Worth, Texas, under a sublease that will expire in 2019. We also sublease five small office facilities in North America to various companies.

        On December 3, 2003, we sold one of our previous office facilities in Fort Worth, Texas, for proceeds of approximately $3 million and recognized a pre-tax loss of approximately $3 million.

        We believe that our office facilities will be adequate for our immediate needs and could accommodate expansion.

ITEM 3.    LEGAL PROCEEDINGS

        The litigation matters described below involve issues or claims that may be of particular interest to the Company's stockholders, regardless of whether any of these matters may be material to the financial position or operations of the Company based upon the standard set forth in the SEC's rules.

        We previously disclosed two lawsuits (which were consolidated in federal court in Fort Worth, Texas) to which we were a party against Northwest Airlines, Inc. ("Northwest") related to Northwest's August 24, 2004 announcement and implementation on September 1, 2004 of a fare supplement for travel reservation bookings made through a GDS (including the Sabre GDS) by traditional travel agencies and some online travel sites (such as Travelocity). On January 24, 2006, we announced that this litigation had been settled. The bankruptcy court approved a settlement of this litigation by an order effective on February 25, 2006.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        No matters were submitted to a vote of our security holders during the fourth quarter of the fiscal year ended December 31, 2005.

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PART II


ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

        Our Class A Common Stock, par value $0.01 per share ("Common Stock") is traded on the New York Stock Exchange (symbol TSG). The approximate number of holders of record of our Common Stock at March 6, 2006 was 9,349.

        The range of the high and low sales prices for our Common Stock as reported by the New York Stock Exchange by quarter for the two most recent fiscal years were:

 
  High
  Low
Quarter Ended:            
  December 31, 2005   $ 24.90   $ 18.93
  September 30, 2005   $ 20.45   $ 18.26
  June 30, 2005   $ 22.24   $ 19.19
  March 31, 2005   $ 22.21   $ 19.84

Quarter Ended:

 

 

 

 

 

 
  December 31, 2004   $ 25.81   $ 20.56
  September 30, 2004   $ 27.99   $ 21.22
  June 30, 2004   $ 28.85   $ 22.70
  March 31, 2004   $ 24.96   $ 20.10

DIVIDENDS AND SHARE REPURCHASES

        On May 12, 2005, we entered into an $800 million, unsecured bridge loan agreement (the "Bridge Facility") that matures on August 12, 2006, in order to provide short-term financing in connection with the lastminute.com acquisition and to satisfy legal requirements for certainty of funding for the acquisition. The Bridge Facility contains various terms and conditions that are typical for a bridge credit facility of this type which, among other things, limits our ability to pay in excess of $150 million during the term of the Bridge Facility as dividends or as repurchases of our stock. See "Liquidity and Capital Resources" in Part II, Item 7 of this Form 10-K for additional details about the Bridge Facility.

DIVIDENDS

        During 2003, 2004 and 2005 we paid out the following cash dividends:

Declaration Date

  Payable Date
  Amount per Share
2003:          
  April 17, 2003   May 15, 2003   $ 0.070
  July 15, 2003   August 15, 2003     0.070
  October 21, 2003   November 14, 2003     0.070
2004:          
  January 20, 2004   February 17, 2004   $ 0.075
  April 20, 2004   May 14, 2004     0.075
  July 20, 2004   August 16, 2004     0.075
  October 26, 2004   November 15, 2004     0.075
2005:          
  February 1, 2005   February 28, 2005   $ 0.090
  May 3, 2005   May 26, 2005     0.090
  July 26, 2005   August 18, 2005     0.090
  November 1, 2005   November 29, 2005     0.090

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        On January 30, 2006, our Board of Directors approved a dividend of $0.10 per share payable on February 28, 2006 to stockholders of record at February 10, 2006.

        Our Board of Directors currently intends to consider declaring and paying comparable future dividends on a regular quarterly basis, subject to our ability to pay dividends and to a determination by management and our Board of Directors that dividends continue to be in the Company's best interests and those of our stockholders. For additional information on dividends see the following sections of this Form 10-K: "Liquidity and Capital Resources" in Part II, Item 7; "Consolidated Statements of Cash Flows" and "Consolidated Statements of Shareholders' Equity" in Part III, Item 8.

ISSUER PURCHASES OF EQUITY SECURITIES

        On October 25, 2004, our Board of Directors approved a share repurchase program authorizing us to repurchase up to $100 million of our Common Stock. We completed this authorization in March 2005 with the purchase of 2,042,063 shares of our Common Stock during the first three months of 2005. All purchases were made through the open market pursuant to 10b5-1 trading plans.

        On May 2, 2005, we received authorization from our Board of Directors to repurchase an additional $100 million of our Common Stock. Due to the acquisition of lastminute.com, no purchases of our Common Stock have been made under this authorization as of the date of this report. As in the past, implementation of the program is at management's discretion and will depend on the best uses for our available cash.

        On October 20, 2003 our Board of Directors issued a standing annual authorization to purchase shares of our Common Stock to satisfy our obligations to deliver shares under our Employee Stock Purchase Plan and our Long-Term Incentive Plan (the "Alternative Share Settlement Program"). We purchased 850,000 shares of our Common Stock under this authorization in December 2003 and 840,000 shares of our Common Stock under this authorization in January 2005 through the open market pursuant to 10b5-1 trading plans.

        We expect that the timing, volume and price of any future repurchases of our Common Stock will be made pursuant to trading plans that we intend as qualifying under Rule 10b5-1, unless such plans are terminated at the discretion of management.

        We made no repurchases of our Common Stock during the last quarter of 2005:

Period

  Total Number
of Shares
Purchased

  Weighted
Average
Price Paid
per Share

  Total Number of
Shares Purchased
as Part of a
Publicly Announced
Program

  Value of Shares
That May Yet be
Purchased Under
such Programs (1)

October 1, 2005—October 31, 2005     n/a     $ 100,000,000
November 1, 2005—November 30, 2005     n/a     $ 100,000,000
December 1, 2005—December 31, 2005     n/a     $ 100,000,000
   
     
     
Total 4th Quarter 2005 Repurchases     n/a        
   
     
     

(1)
Our Board of Directors did not impose a set limit on the repurchase authority under the Alternative Shares Settlement Program described above. The amount purchased is dependent on the number of shares required to satisfy our obligations to deliver shares under the Employee Stock Purchase Plan and Long-Term Incentive Plan.

        For additional information on purchases of equity securities see the following sections of this Form 10-K: "Liquidity and Capital Resources" in Part II, Item 7; "Consolidated Statements of Cash Flows" and "Consolidated Statements of Shareholders' Equity" in Part III, Item 8.

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ITEM 6.    SELECTED CONSOLIDATED FINANCIAL DATA

        The following selected financial data should be read in conjunction with "Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8: Financial Statements and Supplementary Data." We have derived the selected financial data set forth below from our audited financial statements and related notes.


Year
acquired

  Entity
  Purchase price
(in millions)

2005   SynXis Corporation   $ 41
    lastminute.com plc   $ 1,174
    Zuji Holdings Limited (1)   $
2004   RM Rocade AB and RM Rocade Assist AB   $ 15
    All State Tours, Inc.   $ 25
    Travelocity Europe—Remaining 50% of the non-German operations   $ 33
    Sabre Travel Network Middle East Joint Venture—60% ownership   $ 31
2003   Dillon Communications Systems GmbH ("Dillon")— remaining 49% interest   $ 30
    World Choice Travel, Inc.   $ 50
2002   Site59.com, Inc.   $ 44
2001   Sabre Pacific, Pty Limited   $ 46

(1)
Zuji Holdings Limited is consolidated in compliance with FIN 46R. See Note 4 to the Consolidated Financial Statements for further discussion.

On April 8, 2002, we completed a $28 per share cash tender offer for all of the approximately 16.7 million outstanding publicly held common shares of Travelocity.com that we did not own. Prior to the tender offer, we had an approximate 70% ownership stake in Travelocity.com. We consolidated Travelocity.com and accounted for the 30% outside ownership as a minority interest. After the tender offer, we effected a short-form merger on April 11, 2002, whereby Travelocity.com became our indirect 100% owned subsidiary.

23


        The following table presents selected historical financial data for each of the five years in the period ended December 31, 2005:


 
 
  Year Ended December 31,
 
 
  2005
  2004
  2003 (3)
  2002 (3)
  2001 (3)
 
 
  (in millions, except per share data and other data where indicated)

 
Income Statement Data (2) (8) (10):                                
Revenues   $ 2,521.3   $ 2,131.0   $ 2,045.2   $ 2,056.5   $ 2,145.0  
Operating expenses, excluding amortization of goodwill and intangible assets     2,212.2     1,825.4     1,822.7     1,685.6     1,876.2  
Amortization of goodwill and intangible assets (2)     48.2     46.9     56.3     53.4     277.5  
   
 
 
 
 
 
Operating income (loss)     260.9     258.7     166.2     317.5     (8.7 )
Other income (expense), net (9)     (24.6 )   (3.3 )   (38.4 )   21.4     20.2  
Minority interests     8.4     1.7     (0.4 )   0.2     22.5  
   
 
 
 
 
 
Income from continuing operations before provision for income taxes     244.7     257.1     127.4     339.1     34.0  
Provision for income taxes     72.6     66.7     44.1     125.0     81.0  
   
 
 
 
 
 
Income (loss) from continuing operations     172.2     190.4     83.3     214.1     (47.0 )
Income from discontinued operations, net (1)(4)                     75.1  
Cumulative effect of accounting change, net (5)                     3.1  
   
 
 
 
 
 
Net earnings   $ 172.2   $ 190.4   $ 83.3   $ 214.1   $ 31.2  
   
 
 
 
 
 
Earnings (loss) per common share—basic:                                
Income (loss) from continuing operations   $ 1.33   $ 1.40   $ 0.59   $ 1.53   $ (0.35 )
Income from discontinued operations, net (1)(4)                     0.57  
Cumulative effect of accounting change, net (5)                     0.02  
   
 
 
 
 
 
Net earnings   $ 1.33   $ 1.40   $ 0.59   $ 1.53   $ 0.24  
   
 
 
 
 
 
Earnings (loss) per common share—diluted:                                
Income (loss) from continuing operations   $ 1.32   $ 1.38   $ 0.58   $ 1.50   $ (0.35 )
Income from discontinued operations, net (1)(4)                     0.57  
Cumulative effect of accounting change, net (5)                     0.02  
   
 
 
 
 
 
Net earnings   $ 1.32   $ 1.38   $ 0.58   $ 1.50   $ 0.24  
   
 
 
 
 
 
Dividends per common share   $ 0.36   $ 0.30   $ 0.21   $   $  
   
 
 
 
 
 

 
 
  Year Ended December 31,
 
 
  2005
  2004
  2003 (3)
  2002 (3)(11)
  2001 (3)(11)
 
 
  (in millions, except per share data and other data where indicated)

 
Balance Sheet Data
(at end of period) (1) (8) (10):
                               
Current assets   $ 1,248.3   $ 1,273.5   $ 1,347.7   $ 1,288.0   $ 1,085.4  
Goodwill and intangible assets, net (2)   $ 2,333.1   $ 988.6   $ 891.7   $ 859.5   $ 676.2  
Total assets   $ 4,374.1   $ 3,018.0   $ 2,966.5   $ 2,771.9   $ 2,376.0  
Current liabilities   $ 1,892.5   $ 608.3   $ 503.4   $ 499.9   $ 564.5  
Minority interests   $ 38.9   $ 5.1   $ 6.5   $ 10.3   $ 219.7  
Long-term capital lease obligation   $ 158.2   $ 161.1   $ 160.7   $   $  
Public and other notes payable   $ 426.4   $ 439.3   $ 442.5   $ 450.8   $ 400.4  
Stockholders' equity   $ 1,643.1   $ 1,626.5   $ 1,680.1   $ 1,641.6   $ 1,041.8  

Other Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Total transactions through the Sabre system (in thousands) (3) (6)     342,576     330,398     314,924     343,623     374,374  
Operating margin     10.3 %   12.1 %   8.1 %   15.4 %   (0.4 )%
Ratio of earnings to fixed charges (7)     4.91     8.63     5.34     11.69      
Cash flows from operating activities   $ 225.5   $ 361.4   $ 277.9   $ 303.6   $ 401.2  
Cash flows used for investing activities   $ (833.9 ) $ (99.0 ) $ (165.2 ) $ (680.9 ) $ (28.8 )
Cash flows provided by (used for) financing activities   $ 698.1   $ (255.4 ) $ (94.4 ) $ 379.7   $ (361.4 )
Capital expenditures   $ 91.7   $ 78.0   $ 71.5   $ 62.7   $ 158.4  

 
(1)
Effective July 1, 2001, we completed the sale of our Outsourcing Business and also entered into agreements with EDS for (i) EDS to manage our IT systems for 10 years and (ii) to jointly market certain IT services and software solutions to the travel and transportation industries. The results of operations of the Outsourcing Business have been reclassified and presented as income from discontinued operations, net, for 2001.

24


(2)
The results of operations for the periods presented were impacted by our merger and acquisition activities and the amortization expense related to the goodwill and intangible assets recorded in those transactions. Amortization of goodwill and certain indefinite-lived intangible assets ceased on January 1, 2002 upon our adoption of SFAS No. 142, resulting in approximately $212 million, net of tax and minority interest, less amortization expense being recognized in 2002 compared with 2001. See Notes 2 and 4 to the Consolidated Financial Statements and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information regarding mergers and acquisitions, the change in accounting for goodwill and certain intangible assets and their impacts on our financial condition and results of operations. Amortization of intangible assets includes both cost of revenues for purchased technology and selling, general and administrative expense for other purchased intangible assets.

(3)
On September 11, 2001, the United States was the target of terrorist attacks of unprecedented scope involving the hijacking and destruction of multiple passenger aircraft operated by commercial air carriers. After those attacks, all of our business segments were adversely affected by the state of the United States economy, by the possibility of terrorist attacks, possible military action, by the financial instability of many air carriers, by delays resulting from added security measures at airports and from channel shift. Our revenues and results of operations for the years ended December 31, 2001, 2002 and 2003 were negatively affected by this continued reduction in travel and from channel shift. In 2004 and 2005, the security and channel shift concerns remain, however, travel demand did increase these years resulting in growth in our transactions. The following table shows our year-over-year percentage increase(decrease) in total transactions through the Sabre system and North America transactions by year:

 
  Year Ended December 31,
 
 
  2005
  2004
  2003
  2002
 
Total transactions through the Sabre system (6)   3.7 % 4.9 % (8.4 )% (8.2 )%
Total North America transactions through the Sabre system (6)   2.2 % 4.6 % (10.2 )% (10.9 )%
(4)
Income from discontinued operations for the year ended December 31, 2001 includes a gain of approximately $39 million, net of related income taxes of approximately $25 million, recognized upon completion of the sale of our Outsourcing Business to EDS effective July 1, 2001.

(5)
On January 1, 2001, we adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. See Note 6 to the Consolidated Financial Statements.

(6)
Transaction count includes transactions that generate a fee paid directly to Sabre related to a travel reservation, including the following: traditional booking fees paid by suppliers, non-traditional transaction fees paid by suppliers, transaction fees paid by travel agencies, and transaction fees paid by corporations related to our online booking tool.

(7)
For purposes of computing the ratio of earnings to fixed charges, earnings consist of the sum of income from continuing operations before income taxes and the cumulative effect of change in accounting method, interest expense and the portion of rent expense deemed to represent interest. Fixed charges consist of interest incurred, whether expensed or capitalized, including amortization of debt issuance costs, if applicable, and the portion of rent expense deemed to represent interest. Earnings for the year ended December 31, 2001 were inadequate to cover fixed charges by approximately $1 million.

(8)
See Note 5 to the Consolidated Financial Statements for discussion of the impact of other significant events and transactions on the periods presented.

(9)
Prior to June 30, 2001, American Airlines held for our economic benefit certain depository certificates representing beneficial ownership of common stock of Equant N.V., which was acquired by France Telecom in the first half of 2001. During 2001, our remaining ownership position in these holdings was liquidated, and we received proceeds totaling approximately $47 million. Because our carrying value of these holdings was nominal, a gain approximating the proceeds received was recorded in other income during 2001. In 2002, we recorded an $18 million gain in other income from the sale of our former corporate headquarters building. During 2003, we recorded a $28 million loss relating to the required residual value guarantee payment in connection with terminating our syndicated lease facility. The 2005 increase in expense is primarily due to interest on the $800 million Bridge Facility obtained to partially finance our acquisition of lastminute.com.

(10)
On July 20, 2005, we completed the acquisition of lastminute.com, a leading online travel agency and leisure company in Europe. lastminute.com has been included in our Consolidated Statements of Income from the date of acquisition. In order to help finance the acquisition, we obtained an $800 million Bridge Facility (See Note 7 to the Consolidated Financial Statements) which matures on August 12, 2006 and is included in our current liabilities balance. The assets acquired and liabilities assumed are included in our Consolidated Balance Sheets based on preliminary estimates of fair value by management and results of an independent valuation. We continue to review the fair value of assets acquired and liabilities assumed.

(11)
Balance sheet and cash flows data for 2001 and 2002 were reclassified to conform to 2005, 2004 and 2003 presentation.

25


ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        We begin Management's Discussion and Analysis of Financial Condition and Results of Operations with an overview of our business by segment. This is followed by a discussion of various trends that are occurring in our business and how those trends are impacting our business. We follow the discussion on trends with a description of the revenues and expenses by segment which is followed by our period over period results of operations for the described revenues and expenses. We then discuss our Consolidated Balance Sheets and Consolidated Statements of Cash Flows in the "Liquidity and Capital Resources" section. Lastly, we discuss our Critical Accounting Policies that we believe are important in understanding judgments and assumptions incorporated into our financial results.

        The following discussion and analysis contains forward-looking statements about trends, uncertainties and 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 in "Item 1A Risk Factors."

        The following discussion and analysis should be read in conjunction with "Item 6—Selected Financial Data" and "Item 8—Financial Statements and Supplementary Data" appearing elsewhere in this report.

Overview of Business

        We operate our business through the following business segments:

        Sabre Travel Network:    Sabre Travel Network 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. Sabre Travel Network primarily generates revenues from transaction fees charged to airlines and non-air travel suppliers who distribute their products and services through the Sabre system. A "transaction" is defined as any travel reservation that generates a fee paid directly to us including the following:

        Our services provide travel agency subscribers information about, and the ability to reserve for and purchase travel-related products and services from airlines, hotels, car rental companies, cruise lines and others. We also provide travel agency office automation tools, enable travel agencies to provide services via the Internet and provide reservation management, distribution and technology services to hotel properties.

        Travelocity:    Our Travelocity segment markets and distributes travel-related products and services directly to individuals, including leisure travelers and business travelers, through Travelocity owned websites and contact centers, and websites and contact centers owned by its supplier, travel agency 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. All State Tours, Inc. ("Showtickets.comSM") and lastminute.comSM offer other travel related services such as show tickets and tours. For business travelers, Travelocity BusinessSM provides the integrated online corporate travel technology and full-service offering of our GetThere product along with the online expertise of Travelocity. For corporations, Travelocity Business offers a full service corporate travel agency and GetThere provides a corporate online travel reservation system that works in conjunction with any travel agency a company chooses.

26



        Travelocity facilitates transactions between travel suppliers and consumers to book and pay for travel accommodations. For "net rate" transactions we generate service fee revenue equal to the total amount paid by the customer minus Travelocity's payment to the travel supplier for the travel accommodations. Travelocity also generates revenue from commissions or transaction fees from travel suppliers for the purchase of travel products and services pursuant to reservations made through our system. Other revenue sources include service fees charged to customers, advertising revenues and GDS incentives.

        Sabre Airline Solutions:    Sabre Airline Solutions is a global leader in providing passenger management solutions, software products and related services, and consulting services to help airlines simplify operations and lower costs. We provide airline reservations, inventory and check-in hosting solutions that help airlines address the challenge of building and retaining customer loyalty while also reducing costs. We also supply the decision-support software and technology necessary for airlines to improve profitability, increase revenue, streamline operations and improve workflow. We offer a complete range of consulting services to the airline industry, ranging from one time to extended engagements. Typical engagements include helping clients achieve the necessary standards to join an alliance, prepare for privatization and optimize current operations. Clients include airlines, airports, manufacturers and governments, as well as individuals, travel agencies and members of the financial community.

        In 2005, approximately 59.7% of our revenue was generated from Sabre Travel Network, 30.7% from Travelocity and 9.6% from Sabre Airline Solutions based on segment results that include intersegment revenues. Compared to the year-ago period, revenues (including intersegment revenue) for the twelve months ended December 31, 2005 increased 4.1% for Sabre Travel Network, 65.1% for Travelocity and 7.1% for Sabre Airline Solutions.

        For a more detailed discussion of our business, please refer to Item 1 of this Form 10-K.

Business Trends

        The following trends represent what management believes are the most significant challenges and opportunities that are currently impacting our business and industry. The discussion also includes management's best assessment of what effects these trends are having on our business. Potential effects of the following trends are discussed in "Item 1A—Risk Factors."

        Transaction Volumes.    For the year ended December 31, 2005, Sabre Travel Network experienced transaction growth of 3.7% compared to the year ended 2004 due primarily to an increase in non-traditional transactions. See "Item 1—Business—Sabre Travel Network—Changing our Sabre Travel Network Revenue Model."

        Sabre Travel Network has performed well in an industry faced with economic downturn, travel security concerns, channel shift and continued pressures on the GDS booking fee. Sabre Travel Network annual transactions and transaction revenue have remained relatively stable since 2002 with a compounded 0.1% decrease in annual transactions processed through the Sabre system. Sabre Travel Network has been able to achieve this in part due to long term content agreement with key suppliers in exchange for discounted booking fees. We believe that this has contributed in reducing the rate at which transactions leave the GDS channel for supplier-controlled channels, including individual airline websites and call centers, and other third-party controlled distribution points.

        For the three years ended December 31, 2005, Travelocity has experienced 34.8% compounded annual growth in revenues due to our continued growth in North America and expansion into the European market with the acquisitions of lastminute.com and Travelocity Europe which contributed to the growth in bookings made through our websites and contact centers, and increased yields and transaction volumes stimulated by increased net rate activity and improved packaging of offerings. Although Travelocity was negatively affected by the terrorist attacks and the negative factors noted above and by declining internet advertising revenue, the growth in the internet travel business combined with the Travelocity net rate model and packaging initiatives and market expansion into Europe offset the negative impacts.

27



        Sabre Airline Solutions has experienced 6.3% compounded annual growth in revenues for the three years ended December 31, 2005. Although Sabre Airline Solutions and its customers were negatively affected by the terrorist attacks and the negative factors noted above, we were able to grow revenues in each of the past two years. This increase in revenues is the result of increased sales of decision support products and services, consulting and web-enabled solutions that offer cost savings and more efficient operations to our customers. Additionally, this increase was driven by growth in airline reservation hosting revenues.

        Supplier Efforts to Control Travel Distribution.    Airlines have been working aggressively for several years to divert transactions away from GDS networks and towards alternative travel distribution channels, including websites that they control and online travel agencies that book directly with those airlines. See "Item 1ARisk Factors—Travel Suppliers are Pursuing Distribution Options...." The efforts of suppliers to divert transactions away from independent distributors (such as online and conventional travel agencies using our Sabre GDS) towards supplier-direct channels (such as supplier-controlled websites and call centers) are referred to as "channel shift." Over the last several years we have experienced channel shift in air transactions at an annualized rate of approximately two percentage points.

        Alternative Distribution Systems.    Travelers are being offered many systems that enable travel shopping, booking and purchasing. Established and start-up search engine companies are attempting to enter the travel marketplace by aggregating travel search results across supplier, travel agent and other websites. Many alternative distribution systems offer lower costs to suppliers, but they are not global and offer travelers a limited subset of transactions from a limited subset of suppliers in one market segment. The systems often must rely on the scale and functionality of a GDS such as our Sabre system for a complete travel distribution solution for suppliers and travel agencies. They do not offer comprehensive functionality and do not have the infrastructure to adequately service and support travel management companies or corporations. They require the integration of a new, stand-alone system into most existing agency or corporate booking tool workflows. Many of these alternative travel distribution channels, including limited travel distributors or "LTDs," are well-financed but are in start-up or developing mode, and have yet to fully define their functionality and costs. These alternative travel distribution systems may have the effect of diverting customers from our online sites and our Sabre GDS, putting pressure on our revenues, pricing and operating margins. See "Item 1A—Risk Factors—Travel Suppliers are Pursuing Distribution Options...."

        Additional Business Trends.    For a discussion of additional business trends, please refer to the following sections of Item 1—Business:


        Cost Reductions and Expense Savings.    As part of our cost leadership strategy, we are, as a standard practice, evaluating efficiency opportunities across the company to ensure that we optimally manage our operational costs. Some of these cost-saving opportunities have involved and may continue to involve globally-sourcing some of our operations (either by contracting with companies that work for us, such as through the opening of call centers we operate abroad, or by expanding our own operations abroad). See Note 5 to the Consolidated Financial Statements for the impact of various costs saving initiatives. We are also developing programs to reduce the growth rate of incentive payments to travel agencies.

28


Mergers and Acquisitions

        Our discussion of the results of operations for the years ended 2003, 2004 and 2005 will be affected by significant mergers and acquisitions that have occurred in those same years as summarized in the following table. For a more detailed discussion of our mergers and acquisitions see Note 4 to the Consolidated Financial Statements.

Year
acquired

  Entity
  Segment
2005   SynXis Corporation   Sabre Travel Network
    lastminute.com plc   Travelocity
    Zuji Holdings Limited—Primary beneficiary   Travelocity
2004   RM Rocade AB and RM Rocade Assist AB   Sabre Airline Solutions
    All State Tours, Inc.   Travelocity
    Travelocity Europe—Remaining 50% of the non-German operations   Travelocity
    Sabre Travel Network Middle East Joint Venture—60% ownership   Sabre Travel Network
2003   Dillon Communications Systems GmbH ("Dillon")—remaining 49% interest   Sabre Travel Network
    World Choice Travel, Inc.   Travelocity

Components of Revenues and Expenses

        Revenues.    Sabre Travel Network primarily generates revenues from transaction fees paid directly to us related to a travel reservation including the following: traditional booking fees paid by travel suppliers, non-traditional transaction fees paid by travel suppliers, transaction fees paid by travel agency subscribers, and transaction fees paid by corporations related to our booking tool. Sabre Travel Network earns revenue through equipment service charges paid by subscribers. In addition, Sabre Travel Network earns revenue through the sale of other products and services (including the Hotel SpotlightSM program, which offers premium marketing opportunities to hoteliers through the Sabre GDS, the Jurni Network® consortia, as well as Nexion® and SynXis® offerings to hoteliers) and the Sabre® SurroundSM program (which bundles the Hotel Spotlight services with other advertising products) to travel-suppliers, subscribers and other customers. Earnings (or losses as the case may be) derived from interests in joint ventures and other investments are also included in revenues. Sabre Travel Network earns intersegment revenues from data processing fees and transaction fees paid by Travelocity. Travelocity generates revenues from commissions or transaction fees from suppliers for the purchase of travel and lifestyle products and services pursuant to reservations made through our system. Travelocity also generates net rate revenue from providing facilitation services equal to the amount paid by the customer for travel and non-travel products and services, minus Travelocity's payment to the supplier. Additional Travelocity revenues include other fees charged to customers, advertising revenues from our websites and GDS incentives. Travelocity derives intersegment revenues from Sabre Travel Network, consisting of incentives earned for Travelocity transactions processed through the Sabre GDS, and fees paid by Sabre Travel Network for corporate trips and Sabre Airline Solutions for airline trips booked through Travelocity's online booking technology. Sabre Airline Solutions generates revenues from the sale of airline reservations hosting services; product revenues including inventory and check-in hosting solutions; decision-support software and technology; and airline consulting services.

29


        Cost of Revenues.    Sabre Travel Network cost of revenues consist primarily of incentives paid to subscribers, data processing charges resulting from the operation of the Sabre system, and salaries and other operating expenses. Sabre Travel Network also incurs intersegment expenses paid to Travelocity for incentives for Travelocity transactions processed through the Sabre GDS, as well as fees for corporate trips booked through Travelocity's online booking technology. Travelocity cost of revenues consists primarily of customer service costs, technology costs, salaries, benefits and other employee expenses, data processing fees and transaction fees paid to Sabre Travel Network, credit card fees, charges related to fraudulent bookings, service compensation and depreciation and amortization charges. In addition, Travelocity cost of revenues includes recovery of certain VAT payments which is treated as a contra-expense. Sabre Airline Solutions cost of revenues is comprised of labor cost incurred in the development and delivery of software and consulting services and depreciation and amortization. Sabre Airline Solutions also incurs intersegment expenses paid to Travelocity for airline trips booked through Travelocity's online booking technology.

        Operating Expenses.    Sabre Travel Network selling, general and administrative expenses and other operating expenses consist primarily of salaries, benefits and employee related expenses for staff who sell our services to new customers and other staff functions required to support the business as well as bad debt expense. Travelocity selling, general and administrative and other operating expenses consist primarily of advertising and promotion expenses, payments made to our travel agency and distribution partners and salaries, benefits and employee related expenses for staff functions required to support the business. Sabre Airline Solutions operating expenses consist of the costs of the sales organization and the staff functions required to support the business and bad debt expense.

30


Financial Results

        The following tables present operating results for the three years ended December 31, 2005, 2004 and 2003 (in thousands of dollars). The segment revenues and cost of revenues are shown including intersegment activity. We have included the elimination of intersegment activity below to agree to the results of operations presented in the Consolidated Financial Statements.

 
  Year Ended December 31,
 
  Sabre Travel Network
  Travelocity
  Sabre Airline Solutions
  Corporate
  Eliminations
  Total
 
  2005
  2004
  2005
  2004
  2005
  2004
  2005
  2004
  2005
  2004
  2005
  2004
Segment revenues   $ 1,615,820   $ 1,552,832   $ 829,878   $ 502,549   $ 260,812   $ 243,470   $   $   $ (185,255 ) $ (167,880 ) $ 2,521,255   $ 2,130,971

Cost of revenues

 

 

1,120,071

 

 

1,004,236

 

 

354,910

 

 

224,386

 

 

176,713

 

 

176,902

 

 

1,961

 

 

2,536

 

 

(185,255

)

 

(167,880

)

 

1,468,400

 

 

1,240,180
Amortization of purchased technology     4,835     9,325     13,593     21,077     544     1,651                     18,972     32,053
   
 
 
 
 
 
 
 
 
 
 
 
Gross profit     490,914     539,271     461,375     257,086     83,555     64,917     (1,961 )   (2,536 )           1,033,883     858,738
   
 
 
 
 
 
 
 
 
 
 
 
Selling, general & administrative     254,965     260,083     449,755     273,189     42,330     50,026     (3,295 )   1,884             743,755     585,182
Amortization of intangible assets     12,498     9,282     14,463     4,395     2,294     1,149                     29,255     14,826
   
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss)   $ 223,451   $ 269,906   $ (2,843 ) $ (20,498 ) $ 38,931   $ 13,742   $ 1,334   $ (4,420 ) $   $   $ 260,873   $ 258,730
   
 
 
 
 
 
 
 
 
 
 
 
 
  Year Ended December 31,
 
  Sabre Travel Network
  Travelocity
  Sabre Airline Solutions
  Corporate
  Eliminations
  Total

 

 

2004


 

2003


 

2004


 

2003


 

2004


 

2003


 

2004


 

2003


 

2004


 

2003


 

2004


 

2003

Segment revenues   $ 1,552,832   $ 1,560,232   $ 502,549   $ 394,508   $ 243,470   $ 232,354   $   $   $ (167,880 ) $ (141,931 ) $ 2,130,971   $ 2,045,163

Cost of revenues

 

 

1,004,236

 

 

1,031,735

 

 

224,386

 

 

203,392

 

 

176,902

 

 

177,769

 

 

2,536

 

 

(1,836

)

 

(167,880

)

 

(141,931

)

 

1,240,180

 

 

1,269,129
Amortization of purchased technology     9,325     4,950     21,077     25,947     1,651     1,587                     32,053     32,484
   
 
 
 
 
 
 
 
 
 
 
 
Gross profit     539,271     523,547     257,086     165,169     64,917     52,998     (2,536 )   1,836             858,738     743,550
   
 
 
 
 
 
 
 
 
 
 
 
Selling, general & administrative     260,083     262,029     273,189     249,893     50,026     31,454     1,884     10,127             585,182     553,503
Amortization of intangible assets     9,282     7,838     4,395     15,607     1,149     372                     14,826     23,817
   
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss)   $ 269,906   $ 253,680   $ (20,498 ) $ (100,331 ) $ 13,742   $ 21,172   $ (4,420 ) $ (8,291 ) $   $   $ 258,730   $ 166,230
   
 
 
 
 
 
 
 
 
 
 
 

Results of Operations 2003-2005

        Management's discussion and analysis of revenues, cost of revenues, selling, general and administrative expenses, amortization of intangible assets and operating income by business segment are based upon segment results including intersegment revenues and cost of revenues of approximately $185 million, $168 million and $142 million for the years ended December 31, 2005, 2004 and 2003, respectively. 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 paid to Travelocity for Travelocity transactions processed through the Sabre GDS, data processing fees and transaction fees paid by Travelocity to Sabre Travel Network (including for transactions processed 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. All intersegment revenues and corresponding cost of revenues have been eliminated in consolidation.

31


        Revenues.    The compounded annual growth rate of revenues by segment for the three years ended December 31, 2005 was a reduction of 0.3% for Sabre Travel Network, and growth of 34.8% for Travelocity and 6.3% for Sabre Airline Solutions. Each of our business segments have benefited from generally good economic conditions, stronger demand for travel products and acquisitions. However, each of our business segments have been negatively impacted by macroeconomic factors during this period including the war and continued conflict in Iraq, ongoing travel security concerns, and fear of potential terrorist attacks and infectious diseases such as SARS. These negative impacts to the general economy and the travel industry impacted each of our business segments.

        Sabre Travel Network has performed well in an industry faced with economic downturn, travel security concerns, channel shift and continued pressures on the GDS booking fee. Sabre Travel Network annual transactions and transaction revenue have remained relatively stable since 2002 with a compounded 0.1% decrease in annual transactions processed through the Sabre system. Sabre Travel Network has been able to achieve this in part due to long-term content agreements with key suppliers in exchange for discounted booking fees. We believe that this has contributed in reducing the rate at which transactions leave the GDS channel for supplier-controlled channels, including individual airline websites and call centers, and other third-party controlled distribution points.

        For the three years ended December 31, 2005, Travelocity has experienced 34.8% compounded annual growth in revenues due to our continued growth in North America and expansion into the European market with the acquisitions of lastminute.com and Travelocity Europe which contributed to the growth in bookings made through our websites and contact centers, and increased yields and transaction volumes stimulated by increased net rate activity and improved packaging of offerings. Although Travelocity was negatively affected by the terrorist attacks and the negative factors noted above and by declining internet advertising revenue, the growth in the internet travel business combined with the Travelocity net rate model and packaging initiatives and market expansion into Europe offset the negative impacts.

        Sabre Airline Solutions has experienced 6.3% compounded annual growth in revenues for the three years ended December 31, 2005. Although Sabre Airline Solutions and its customers were negatively affected by the terrorist attacks and the negative factors noted above, we were able to grow revenues in each of the past several years. This increase in revenues is the result of increased sales of decision support products and services, consulting and web-enabled solutions that offer cost savings and more efficient operations to our customers. Additionally, this increase was driven by growth in airline reservation hosting revenues.

        Expenses.    Our primary operating expenses consist of salaries, benefits, other employee-related costs, data processing costs, communication costs, advertising and subscriber incentives, representing approximately 75.6%, 78.7% and 77.8% of total operating expenses in 2005, 2004 and 2003, respectively. We have seen a decline in our expenses as a result of cost reduction initiatives across our organization. However, since 2003, we have realized a compounded increase in our operating expenses of approximately 9.1% due primarily to the acquisition of lastminute.com in July of 2005.

        Sabre Travel Network hardware and communications costs have decreased as a result of the migration to lower cost solutions and the adoption of third-party solutions by subscribers. These decreases were partially offset by increases in Sabre Travel Network technology spending due to the phased implementation and continuing expansion of new functionality that requires running legacy systems as well as the new technology, and increases in Sabre Travel Network subscriber incentives. Other increases in expenses have resulted from investments in various new businesses such as our SynXis hotel reservations system.

        Travelocity cost of revenues and selling, general and administrative expenses have increased due to growth in the business. Significant acquisitions during this period, including lastminute.com in 2005 and Travelocity Europe in 2004, have contributed to the growth in expenses. We increased our expenditures for advertising in order to drive additional travelers to Travelocity's websites, and expenses have increased as a result of increases in transaction volumes for our growing net rate offerings. Our technology infrastructure related expenses have also increased in order to support our growth and new offerings.

32



        Sabre Airline Solutions operating expenses have generally grown at a rate commensurate with the growth in revenues during the 2003 to 2005 period. These expenses have been offset by several cost reduction initiatives that have resulted in reduced headcount-related expenses as well as improvements in our receivable collection activities, particularly in 2005.

Results of Operations: 2005 Compared to 2004

 
  Year Ended December 31,
 
 
  Total revenues before eliminations
   
   
  Total consolidated revenues
 
 
  Eliminations
 
 
   
   
   
  % change
   
   
   
  % change
 
 
  2005
  2004
  change
  2005
  2004
  2005
  2004
  change
 
 
  (thousands)

  (thousands)

  (thousands)

 
Revenues   $ 2,706,510   $ 2,298,851   $ 407,659   17.7 % $ (185,255 ) $ (167,880 ) $ 2,521,255   $ 2,130,971   $ 390,284   18.3 %

Total cost of revenues

 

 

1,672,627

 

 

1,440,113

 

 

232,514

 

16.1

%

 

(185,255

)

 

(167,880

)

 

1,487,372

 

 

1,272,233

 

 

215,139

 

16.9

%

        Total revenues for the year ended December 31, 2005 after intercompany eliminations increased approximately $390 million, or 18.3%, compared to the year ended December 31, 2004, from $2,131 million to $2,521 million. Cost of revenues after intercompany eliminations for the year ended December 31, 2005 increased approximately $215 million, or 16.9%, compared to the year ended December 31, 2004, from $1,272 million to $1,487 million.

        Management's discussion and analysis of revenues, cost of revenues, selling, general and administrative expenses, amortization of intangible assets and operating income by business segment are based upon segment results including intersegment revenues and cost of revenues of approximately $185 million and $168 million for the years ended December 31, 2005 and 2004, respectively. 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 paid to Travelocity for Travelocity transactions processed through the Sabre GDS, data processing fees and transaction fees paid by Travelocity to Sabre Travel Network (including for transactions processed 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. All intersegment revenues and corresponding cost of revenues have been eliminated in consolidation.

        Total revenues (including intersegment revenues) for the year ended December 31, 2005 increased approximately $408 million, or 17.7%, as compared to the year ended December 31, 2004, from $2,299 million to $2,707 million.

        Total cost of revenues (including intersegment cost of revenues) for the year ended December 31, 2005 increased $233 million, or 16.1%, as compared to the year ended December 31, 2004, from $1,440 million to $1,673 million.

33



Sabre Travel Network

 
  Year Ended December 31,
 
 
  2005
  2004
  change
  % change
 
 
  (thousands)

 
Segment revenues   $ 1,615,820   $ 1,552,832   $ 62,988   4.1 %

Cost of revenues

 

 

1,120,071

 

 

1,004,236

 

 

115,835

 

11.5

%

Amortization of purchased technology

 

 

4,835

 

 

9,325

 

 

(4,490

)

(48.2

)%
   
 
 
 
 

Gross profit

 

 

490,914

 

 

539,271

 

 

(48,357

)

(9.0

)%

Selling, general & administrative

 

 

254,965

 

 

260,083

 

 

(5,118

)

(2.0

)%

Amortization of intangible assets

 

 

12,498

 

 

9,282

 

 

3,216

 

34.6

%
   
 
 
 
 

Operating income

 

$

223,451

 

$

269,906

 

$

(46,455

)

(17.2

)%
   
 
 
 
 

Revenues

        The increase in revenues is due to the following:


Cost of Revenues

        The increase in cost of revenues for the twelve months ended December 31, 2005, as compared to the twelve months ended December 31, 2004, includes increases in technology related spending of $26 million as a result of the expiration of contractual credits of $14 million and $12 million as a result of increased transaction volume and the continued implementation of our open system pricing and shopping engine. Subscriber support costs increased $38 million, driven almost entirely by growth in subscriber incentives as a result of the year over year growth in transaction volume and a higher average incentive rate per transaction compared to the prior year. Other cost of revenue increases include $29 million related to continued investment in new businesses and new business models such as SynXis, Jurni Network and Hotel Spotlight, $8 million for fulfillment costs for GetThere trips as a result of year over year volume growth, $4 million due to severance related primarily to our second quarter reorganization of our software development group, $3 million due to depreciation and amortization and $8 million of other expenses.

34



Selling, General and Administrative Expenses

        The decrease in selling, general and administrative expenses for the twelve months ended December 31, 2005, as compared to the twelve months ended December 31, 2004, was primarily driven by a $10 million reduction in non-income tax accruals due to events occurring that decreased our potential liabilities for taxes and associated interest. This decrease was offset by an increase in legal and other professional fees of $2 million due to an effort to settle litigation and in increase in other expenses of $3 million.

Amortization of Intangible Assets (Including Amortization of Purchased Technology)

        Amortization of intangible assets decreased due to intangibles that fully amortized in 2005 offset partially by increased amortization expense from newly acquired entities.

Operating Income

        The decline in operating income was largely the result of increased technology and incentive expenses and continued investments in new businesses and new business models that exceeded our revenue growth.

Travelocity

 
  Year Ended December 31,
 
 
  2005
  2004
  change
  % change
 
 
  (thousands)

 
Segment revenues   $ 829,878   $ 502,549   $ 327,329   65.1 %

Cost of revenues

 

 

354,910

 

 

224,386

 

 

130,524

 

58.2

%

Amortization of purchased technology

 

 

13,593

 

 

21,077

 

 

(7,484

)

(35.5

)%
   
 
 
 
 

Gross profit

 

 

461,375

 

 

257,086

 

 

204,289

 

79.5

%

Selling, general & administrative

 

 

449,755

 

 

273,189

 

 

176,566

 

64.6

%

Amortization of intangible assets

 

 

14,463

 

 

4,395

 

 

10,068

 

229.1

%
   
 
 
 
 

Operating loss

 

$

(2,843

)

$

(20,498

)

$

(17,655

)

(86.1

)%
   
 
 
 
 

        The following are important to understanding the comparability of the results of operations between 2005 and 2004 for our Travelocity segment:

35


Revenues

        Transaction revenue, including Travelocity Europe in 2005 and lastminute.com since the acquisition, increased $295 million, or 69.1%, primarily driven by a $252 million increase in non-air transaction revenue (including revenue resulting from sales of package offerings that include air travel as a component) and a $43 million increase in stand-alone air transaction revenue.

        The $252 million increase in non-air transaction revenue consisted primarily of the following:

        The $43 million increase in stand-alone air transaction revenue was primarily due to a $29 million increase resulting from the acquisitions of lastminute.com and Travelocity Europe. North American stand-alone air transaction revenue increased by $14 million driven by strong volume growth.

        Non-transaction revenue increased $32 million, or 42.5%, consisting primarily of the following:

Cost of Revenues

        The increase in cost of revenues includes $84 million from the acquisitions of lastminute.com, Travelocity Europe, Showtickets.com and the consolidation of Zuji, which we either did not own or consolidate in 2004 (lastminute.com and Zuji) or we owned for only part of 2004 (Travelocity Europe and Showtickets.com). In addition, $45 million of the increase is associated with the volume growth of our published, net rate hotel and packaged trip programs, as explained above in transaction revenue. The $45 million increase includes a $28 million increase in expenses associated with a rate increase for net rate credit card transactions and an increase in service compensation and a $17 million increase in customer service costs. The remaining $2 million increase in cost of revenues is primarily due to a software write-off associated with upgrading to a new platform at Travelocity Business.

Selling, General and Administrative Expenses

        The increase in selling, general and administrative expenses includes $143 million from lastminute.com, Travelocity Europe, Showtickets.com and Zuji and $24 million due to increased advertising and customer acquisition costs to drive additional travelers to our North American websites. Headcount-related expenses increased by $7 million driven by growth in our North American business. Other selling, general and administrative expenses increased $3 million.

Amortization of Intangible Assets (Including Amortization of Purchased Technology)

        Amortization of intangible assets increased $3 million in total due to the amortization of intangibles related to the acquisition of lastminute.com partially offset by other intangible assets becoming fully amortized in 2004.

36



Operating Loss

        Operating loss decreased due to strong revenue growth in North America, which offset the incremental losses resulting from our acquisition of lastminute.com and Travelocity Europe.

Sabre Airline Solutions

 
  Year Ended December 31,
 
 
  2005
  2004
  change
  % change
 
 
  (thousands)

 
Segment revenues   $ 260,812   $ 243,470   $ 17,342   7.1 %

Cost of revenues

 

 

176,713

 

 

176,902

 

 

(189

)

(0.1

)%

Amortization of purchased technology

 

 

544

 

 

1,651

 

 

(1,107

)

(67.1

)%
   
 
 
 
 

Gross profit

 

 

83,555

 

 

64,917

 

 

18,638

 

28.7

%

Selling, general & administrative

 

 

42,330

 

 

50,026

 

 

(7,696

)

(15.4

)%

Amortization of intangible assets

 

 

2,294

 

 

1,149

 

 

1,145

 

99.7

%
   
 
 
 
 

Operating income

 

$

38,931

 

$

13,742

 

$

25,189

 

183.3

%
   
 
 
 
 

Revenues

        The increase in revenues was driven primarily by a $16 million increase in airline reservations hosting revenue driven by higher volumes from adding new customers as well as volume growth from our existing customer base. Additionally, consulting revenues increased $7 million due to certain contractual objectives being met and an increase in customer engagements, and product revenue increased $4 million as a result of higher demand for our products. This growth was offset by a $10 million decline in our low-margin, custom-developed software business due to decreased demand.

Cost of Revenues

        The slight decrease in cost of revenues is due to a $10 million decrease in development labor expenses caused primarily by a decline in demand in our low-margin, custom-developed software business. Additionally, headcount-related expenses decreased $7 million driven by an increase in capitalized salaries and an increased utilization of global sourcing. These decreases were offset by a $4 million increase in variable compensation due to more favorable performance, a $4 million increase in data processing cost primarily due to transaction volume growth, a $3 million increase in communications expenses caused by an increase in data network rates, a $2 million increase in amortization of internally-developed software and project delivery costs due to higher capitalized balances, and a $1 million increase in services purchased due primarily to the outsourcing of training and other services. Additionally, other expenses increased $2 million.

Selling, General and Administrative Expenses

        The decrease in selling, general and administrative expenses was driven by a $10 million decrease in bad debt expense caused by the receipt of payments on accounts that had been previously reserved. This decrease was somewhat offset by increases in other expenses of $2 million.

Amortization of Intangible Assets (Including Amortization of Purchased Technology)

        Amortization of intangible assets increased due to amortization associated with the acquisition of Rocade in August 2004, partially offset by other intangible assets becoming fully amortized in 2004.

37



Operating Income

        The increase in operating income was primarily driven by higher revenues and favorable collection results.

        The following section describes our results of operations on a consolidated basis for non-operating income and expense items:

 
  Year Ended December 31,
 
 
  2005
  2004
  change
  % change
 
 
  (thousands)

 
Operating income   $ 260,873   $ 258,730   $ 2,143   0.8 %

Interest income

 

 

22,411

 

 

15,154

 

 

7,257

 

47.9

%

Interest expense

 

 

(53,075

)

 

(26,862

)

 

26,213

 

97.6

%

Gain on sale of investments

 

 

27,132

 

 


 

 

27,132

 

100.0

%

Loss on derivative instruments

 

 

(8,248

)

 


 

 

8,248

 

100.0

%

Other, net

 

 

(4,378

)

 

10,039

 

 

(14,417

)

(143.6

)%

Less: Provision for income taxes

 

 

72,563

 

 

66,642

 

 

5,921

 

8.9

%
   
 
 
 
 

Net Earnings

 

$

172,152

 

$

190,419

 

$

(18,267

)

(9.6

)%
   
 
 
 
 

Interest Income

        Interest income increased due primarily to higher interest rates on short-term investments and loans receivable, as well as interest on an $11 million loan receivable from Zuji Holdings Limited issued on January 18, 2005.

Interest Expense

        Interest expense increased $26 million, primarily from the Bridge Facility we entered into on May 12, 2005, in order to provide temporary financing in connection with the lastminute.com acquisition and to satisfy legal requirements for certainty of funding for the acquisition.

Gain on Sale of Investments

        In March 2005, we sold our interest in Karavel SA, a French tour operator and recorded a $21 million gain. Additionally, we recognized a $7 million gain on the sale of our remaining interest in Travelocity Europe that we did not acquire. These gains were offset by a $1 million loss on the conversion of a note receivable and warrants from TRX.

Loss on Derivative Instruments

        When the lastminute.com acquisition was initially announced in May 2005, we purchased currency options for $10 million, which gave us the right to purchase GBP and EUR currencies at a fixed USD rate near the closing date of the transaction. This capped our foreign exchange exposure on the acquisition. Due to the strengthening of the USD against these currencies, the USD acquisition price decreased $67 million from the time we purchased the options. The options therefore expired with no value. As a result, we recorded a $10 million loss on the premium paid for the options. When the acquisition was approved by shareholders and bondholders, the acquisition became highly certain, and we entered into forward contracts obligating us to purchase GBP 578 million and EUR 115 million, which locked in the lower USD price of the acquisition of lastminute.com. The USD weakened slightly subsequent to the purchase of these forwards resulting in a gain on the forwards of $2 million.

38



Other, net

        Other, net decreased due to a $15 million loss resulting from a litigation settlement with Northwest Airlines offset by minority interest income of $8 million, primarily due to our consolidation of Zuji in the fourth quarter of 2005 and other income of $3 million. In 2004, we had a $6 million gain from settling a contract dispute.

Income Taxes

        The provision for income taxes increased primarily due to a $6 million reduction of tax benefits associated with our foreign operations. Other changes include a reduction in income taxes of $4 million related to a decrease in pre-tax income between periods offset by additional state income tax expense of $2 million. Also included in 2005 is a reversal of previously accrued taxes of $21 million related to contingencies that no longer meet the standards for accrual under Statement of Financial Accounting Standards No. 5, Accounting for Contingencies. In particular, we released $16 million of previously accrued taxes due to the expiration of certain statutes of limitation and $5 million of previously accrued taxes due to the final resolution of certain issues related to a tax audit. In 2004, we had reversed previously accrued taxes of $23 million. Our effective tax rate for 2005 prior to the reversal was 38%. Our effective tax rate for 2004 prior to the reversal was 35%. See Note 10 to the Consolidated Financial Statements for additional information regarding income taxes.

Net Earnings

        Net earnings decreased by $18 million despite growth in our operating income of $2 million. The decrease was primarily due to $26 million more in interest expense in 2005 due to our Bridge Facility used to provide temporary financing for our acquisition of lastminute.com and our $8 million net loss on derivative instruments also related to our acquisition of lastminute.com. Gains from the sale of our Karavel investment and higher interest income only partially offset these other increases in expenses. In addition, 2004 contains a $6 million gain resulting from a contract dispute.

Results of Operations: 2004 Compared to 2003

 
  Year Ended December 31,
 
 
  Total revenues before eliminations
   
   
  Total consolidated revenues
 
 
  Eliminations
 
 
   
   
   
  % change
   
   
   
  % change
 
 
  2004
  2003
  change
  2004
  2003
  2004
  2003
  change
 
 
  (thousands)

  (thousands)

  (thousands)

 
Revenues   $ 2,298,851   $ 2,187,094   $ 111,757   5.1 % $ (167,880 ) $ (141,931 ) $ 2,130,971   $ 2,045,163   $ 85,808   4.2 %

Total cost of revenues

 

 

1,440,113

 

 

1,443,544

 

 

(3,431

)

(0.2

)%

 

(167,880

)

 

(141,931

)

 

1,272,233

 

 

1,301,613

 

 

(29,380

)

(2.3

)%

        Total revenues for the year ended December 31, 2004 increased approximately $86 million, or 4.2%, compared to the year ended December 31, 2003, from $2,045 million to $2,131 million. Cost of revenues for the year ended December 31, 2004 decreased approximately $29 million, or 2.3%, compared to the year ended December 31, 2003, from $1,302 million to $1,272 million. These reported revenues and expenses are net of intersegment revenues and expenses which were eliminated in consolidation.

        Management's discussion and analysis of revenues and cost of revenues by business segment are based upon segment results including intersegment revenues and cost of revenues of approximately $168 million and $142 million for the years ended December 31, 2004 and 2003, respectively. 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 for Travelocity bookings made through the Sabre GDS, data processing fees paid by Travelocity to Sabre Travel Network, and fees paid by Sabre Travel Network for corporate trips booked through Travelocity's online booking technology. All intersegment revenues and corresponding cost of revenues have been eliminated in consolidation.

39



        Total revenues (including intersegment revenues) for the year ended December 31, 2004 increased approximately $112 million, or 5.1%, as compared to the year ended December 31, 2003, from $2,187 million to $2,299 million.

        Total cost of revenues (including intersegment cost of revenues) for the year ended December 31, 2004 decreased $3 million, or less than 1%, as compared to the year ended December 31, 2003, from $1,444 million to $1,440 million.

Sabre Travel Network

 
  Year Ended December 31,
 
 
  2004
  2003
  change
  % change
 
 
  (thousands)

 
Segment revenues   $ 1,552,832   $ 1,560,232   $ (7,400 ) (0.5 )%

Cost of revenues

 

 

1,004,236

 

 

1,031,735

 

 

(27,499

)

(2.7

)%

Amortization of purchased technology

 

 

9,325

 

 

4,950

 

 

4,375

 

88.4

%
   
 
 
 
 

Gross profit

 

 

539,271

 

 

523,547

 

 

15,724

 

3.0

%

Selling, general & administrative

 

 

260,083

 

 

262,029

 

 

(1,946

)

(0.7

)%

Amortization of intangible assets

 

 

9,282

 

 

7,838

 

 

1,444

 

18.4

%
   
 
 
 
 

Operating income

 

$

269,906

 

$

253,680

 

$

16,226

 

6.4

%
   
 
 
 
 

Revenues

        The decrease in revenues is due to the following:

40


Cost of Revenues

        The decrease in cost of revenues for the twelve months ended December 31, 2004 as compared to the twelve months ended December 31, 2003 includes decreases in headcount-related expense of $24 million resulting from workforce reductions. Technology-related spending decreased $10 million driven almost entirely by increased transaction volume and the continued implementation of our open system pricing and shopping engine. Subscriber support costs increased $8 million, driven by growth in subscriber incentives as a result of the year over year growth in transaction volume and a higher average incentive rate compared to the prior year, offset by lower communications and maintenance and device expense. Other expenses decreased by $1 million.

Selling, General and Administrative Expenses

        The decrease in selling, general and administrative expenses was driven primarily by a $12 million decrease in services purchased, which were higher in 2003 due to our efforts as an advocate for the deregulation of the U.S. CRS industry. This decrease was offset by an increase in bad debt reserves of $8 million resulting from the increased aging of receivables due from a few large customers. Other selling, general and administrative expenses for Sabre Travel Network increased $2 million.

Amortization of Intangible Assets (Including Amortization of Purchased Technology)

        The increase in amortization was primarily due to a $3 million impairment write-down of technology related intangible assets in 2004 and a $3 million increase resulting from the acquisition of the remaining 49% of Dillon Communications Systems GmbH that we did not already own in December 2003.

Operating Income

        The increase in operating income is due to cost reduction initiatives related to investments in newer technology and in headcount related expenses that offset our reduction in revenues.

Travelocity

 
  Year Ended December 31,
 
 
  2004
  2003
  change
  % change
 
 
  (thousands)

 
Segment revenues   $ 502,549   $ 394,508   $ 108,041   27.4 %

Cost of revenues

 

 

224,386

 

 

203,392

 

 

20,994

 

10.3

%

Amortization of purchased technology

 

 

21,077

 

 

25,947

 

 

(4,870

)

(18.8

)%
   
 
 
 
 

Gross profit

 

 

257,086

 

 

165,169

 

 

91,917

 

55.7

%

Selling, general & administrative

 

 

273,189

 

 

249,893

 

 

23,296

 

9.3

%

Amortization of intangible assets

 

 

4,395

 

 

15,607

 

 

(11,212

)

(71.8

)%
   
 
 
 
 

Operating loss

 

$

(20,498

)

$

(100,331

)

$

(79,833

)

(79.6

)%
   
 
 
 
 

Revenues

        Transaction revenue increased $136 million or 46.5%, primarily driven by a $120 million increase in non-air transaction revenue (including revenue resulting from sales of package offerings that include air travel as a component) and a $16 million increase in stand-alone air transaction revenue.

41



        The $120 million increase in non-air transaction revenue consisted primarily of the following:

        The $16 million increase in stand-alone air transaction revenue was primarily due to a volume increase in stand-alone air ticket sales compared to 2003. Our volume increased due to an overall increase in online travel demand.

        Non-transaction revenue decreased $28 million, or 27.3%, consisting of the following:


Cost of Revenues

        Expenses related to our net rate model offerings increased $23 million due primarily to volume growth which is referenced above in the explanation for the 46.5% increase in transaction revenue. However, expenses related to our net rate model offerings also increased due to the fact that in 2004, we incurred credit card fees, net rate credit card chargebacks, fraud charges and other expenses that we did not incur at similar levels in 2003 due to our relationship with a third-party supplier of net rate content, which was terminated in September 2003. Data processing expenses increased by approximately $6 million due to higher booking volumes and other cost of revenue expenses increased approximately $3 million. These increases were offset by approximately $11 million of savings resulting from outsourcing our contact center operations agreement to WNS America Inc. beginning in 2004 (see Note 5 to the Consolidated Financial Statements).

42



Selling, General and Administrative Expenses

        Selling, general and administrative expenses increased primarily due to increased advertising and customer acquisition costs of $14 million to drive additional travelers to our websites. The increase also includes payments to our WCT affiliates but is offset partially by savings from the AOL agreement renegotiation. Other selling, general and administrative expense increases for Travelocity include $4 million driven by higher corporate allocations, $2 million in services purchased, $2 million in direct headcount related expenses and other increases totaling $1 million.

Amortization of Intangible Assets (Including Amortization of Purchased Technology)

        Travelocity amortization decreased by approximately $16 million due to an approximately $9 million write-off in 2003 of an intangible asset resulting from the termination of an agreement with a former hotel supplier in 2003. Also, there was an $11 million decrease due to the completion of amortization of intangible assets during 2003 and 2004, partially offset by approximately $4 million of increased amortization resulting from the acquisition of assets of WCT in the fourth quarter of 2003 and the acquisition of Showtickets.com in the third quarter of 2004. Amortization expense related to our fourth quarter 2004 acquisition of the non-German operations of Travelocity Europe was not material.

Operating Loss

        Operating loss decreased due to growth of our net rate model, Travelocity TotalTrip offering (launched in June 2003) and volume growth in our last minute deals, as well as, increased hotel bookings through WCT, which we acquired in November 2003.

Sabre Airline Solutions

 
  Year Ended December 31,
 
 
  2004
  2003
  change
  % change
 
 
  (thousands)

 
Segment revenues   $ 243,470   $ 232,354   $ 11,116   4.8 %

Cost of revenues

 

 

176,902

 

 

177,769

 

 

(867

)

(0.5

)%

Amortization of purchased technology

 

 

1,651

 

 

1,587

 

 

64

 

4.0

%
   
 
 
 
 

Gross profit

 

 

64,917

 

 

52,998

 

 

11,919

 

22.5

%

Selling, general & administrative

 

 

50,026

 

 

31,454

 

 

18,572

 

59.0

%

Amortization of intangible assets

 

 

1,149

 

 

372

 

 

777

 

208.9

%
   
 
 
 
 

Operating income

 

$

13,742

 

$

21,172

 

$

(7,430

)

(35.1

)%
   
 
 
 
 

Revenues

        The increase in revenues was driven primarily by a $20 million increase in airline reservation hosting revenue. This $20 million increase includes $11 million due to a shift towards online bookings for our customers and the sale of enhanced functionality to our existing hosted carrier base. The remaining $9 million is driven by increased transaction fees due to newly signed carriers and organic growth from our existing customers. Airline consulting services revenues increased $3 million due to a higher number of customer engagements. These increases were offset by an $8 million decrease in development labor revenues and a $4 million decrease in software products and services revenue driven by an elongated sales cycle.

43



Cost of Revenues

        The decrease in cost of revenues was driven by reduced direct headcount-related expenses of $8 million and a $7 million reduction in indirect headcount related expenses driven by a year over year change in the allocation of corporate resources (offset by a corresponding increase in Sabre Airlines Solutions selling, general and administrative expenses below). These decreases were offset by increases in travel expenses of approximately $5 million partly due to the recognition of invoiced travel as revenue beginning in 2004 as opposed to an offset to cost of revenue in prior periods. Data processing expenses increased $3 million related to internet booking engine volumes. Services purchased increased $3 million to support reservations hosting implementations and consulting engagements and development labor increased $2 million due to growth in web hosting related revenues. Other cost of revenue expenses increased $1 million.

Selling, General and Administrative Expenses

        The increase in selling, general and administrative expenses was driven by a $9 million increase in bad debt expense attributable to the economic state of the airline industry and the bankruptcy filings of several key customers. In addition, indirect headcount related expenses increased $7 million driven by a year-over-year change in the allocation of corporate resources (offset by a corresponding decrease in Sabre Airline Solutions cost of revenues above). Direct headcount related expenses and development labor increased $3 million.

Amortization of Intangible Assets (Including Amortization of Purchased Technology)

        Amortization of intangible assets for Sabre Airline Solutions increased approximately $1 million resulting from several small acquisitions during 2004.

Operating Income

        Despite revenue growth for the year, our operating income declined due primarily to collection issues with certain customers as well as increases in various other expenses such as data processing and development labor costs.

        The following section describes our results of operations on a consolidated basis for non-operating income and expense items:

 
  Year Ended December 31,
 
 
  2004
  2003
  change
  % change
 
 
  (thousands)

 
Operating income   $ 258,730   $ 166,230   $ 92,500   55.6 %

Interest income

 

 

15,154

 

 

16,477

 

 

(1,323

)

(8.0

)%

Interest expense

 

 

(26,862

)

 

(24,077

)

 

2,785

 

11.6

%

Other, net

 

 

10,039

 

 

(31,253

)

 

41,292

 

132.1

%

Less: Provision for income taxes

 

 

66,642

 

 

44,076

 

 

22,566

 

51.2

%
   
 
 
 
 

Net Earnings

 

$

190,419

 

$

83,301

 

$

107,118

 

128.6

%
   
 
 
 
 

Interest income

        Interest income decreased due primarily to lower average balances of certain short-term investments and loans receivable.

44



Interest Expense

        Interest expense increased primarily resulting from the capital lease we entered into at the end of June 2003 for our headquarters buildings.

Other, net

        Other, net changed primarily due to the $28 million loss we incurred in 2003 relating to the required residual value guarantee payment in connection with terminating our syndicated lease facility and entering into a capital lease facility for our corporate headquarters, as well as, an impairment charge on certain non-operating assets in 2003. Other net income for the year ended December 31, 2004 includes a $6 million gain from settling a contract dispute. Other changes include year over year changes in net income allocated to minority interests.

Income Taxes

        The increase in provision for income taxes resulted from the approximate $130 million increase in pre-tax income between periods offset by a reversal of previously accrued taxes in 2004 of $23 million due to a change in our federal income tax treatment of certain subscriber contract payments and the expiration of certain statutes of limitation. Our effective tax rate prior to the reversal was 35% for 2004. Our effective tax rate for 2003 was also 35%. See Note 10 to the Consolidated Financial Statements for additional information regarding income taxes.

Net Earnings

        Stronger travel demand, revenue growth in our net rate model and the successful implementation of cost reduction initiatives exceeded increases in subscriber incentives, advertising and bad debt expense, resulting in an increase to net earnings of $84 million. The remaining year over year increase relates to the $23 million reversal of previously accrued taxes discussed above.

45


SABRE HOLDINGS CORPORATION
LIQUIDITY AND CAPITAL RESOURCES

        We require cash to pay our operating expenses, make capital expenditures, invest in our products and offerings, pay dividends, complete share repurchases and service our debt and other long term liabilities. Although our primary source of funds has been from our operations, from time to time we have raised external funds through the sale of stock and debt in the capital markets and through privately negotiated borrowing transactions. In assessing our liquidity, key components include our net income adjusted for non-cash and non-operating items, and current assets and liabilities, in particular accounts receivable, accounts payable, and accrued expenses. Our current Bridge Facility, which we plan to refinance prior to its expiration, should be considered in assessing our short-term and long-term liquidity. For the long term, our debt and long-term liabilities are also considered key to assessing our liquidity.

        Our future minimum non-cancelable contractual obligations as of December 31, 2005 are as follows (in thousands of dollars):

 
  Payments Due by Year
For the Years Ending December 31,

 
Contractual Obligations

  Total
  2006
  2007-
2008

  2009-
2010

  Thereafter
 
Notes payable (1)   $ 1,401,684   $ 854,684   $ 58,800   $ 58,800   $ 429,400  
Capital lease obligations (2)     231,352     9,607     19,214     19,214     183,317  
Operating lease obligations     129,587     33,008     44,900     23,894     27,785  
IT outsourcing agreement (3)     107,540     92,104     15,436          
Yahoo! agreement (4)     26,000     26,000              
WNS agreement (5)     134,541     20,431     53,401     60,709      
Pension and other benefit obligations (Note 9)     196,214     16,190     32,613     36,206     111,205  
Other long-term obligations (6)     114,809     61,458     24,273     10,451     18,627  
Amounts receivable under non-cancelable subleases (7)     (91,466 )   (6,765 )   (13,463 )   (13,037 )   (58,201 )
   
 
 
 
 
 

Total contractual cash obligations

 

$

2,250,261

 

$

1,106,717

 

$

235,174

 

$

196,237

 

$

712,133

 
   
 
 
 
 
 

(1)
Includes all interest and principal related to $400 million of senior unsecured Notes. Also includes all interest and principal related to $800 million Bridge Facility, which matures on August 12, 2006. Excludes the effect of interest rate swaps. See Note 6 of Consolidated Financial Statements.

(2)
Consists primarily of headquarters facility lease, including interest. Excludes the effect of interest rate swap. See Note 6 of the Consolidated Financial Statements.

(3)
Represents minimum amounts due to EDS under the terms of our Outsourcing Agreement.

(4)
Fixed payment under an agreement with Yahoo! whereby we are the exclusive air, car and hotel booking engine on Yahoo! Travel through December 31, 2006.

(5)
We are committed to minimum payments to WNS, an entity to which we outsource a portion of our Travelocity contact center operations and back-office fulfillment through 2010 based upon current and historical transaction levels.

(6)
Consists primarily of minimum payments due under various marketing agreements. Also includes a note payable and related interest owed to a joint venture partner.

(7)
EDS subleases from us an office facility in Fort Worth, Texas under sublease that will expire in 2019.

46


        On February 16, 2006, we prepaid $100 million of the $800 million acquisition Bridge Facility from our available cash and marketable securities. We will be required to repay or refinance the remaining $700 million of the Bridge Facility prior to its expiration on August 12, 2006. We are evaluating choices for repaying and refinancing the Bridge Facility, including using additional cash, borrowing under our revolving credit agreement and accessing public and private markets for debt. The timing and choice of refinancing options will be subject to market conditions, but we expect to repay or refinance the Bridge Facility during the first half of 2006. Other than the Bridge Facility refinancing, our current cash flows from operations, existing balances in cash and short-term investments and funds available under our revolving credit facility are sufficient to fund our planned expenditures which include operating expenses, capital expenditures, investments in our products and offerings, interest payments on our debt and dividends. We may also consider using our funds available or possibly external sources of funds for additional acquisitions of, or investments in, complementary businesses, products, services and technologies when such opportunities become available (see Note 4 to the Consolidated Financial Statements for current year acquisitions and investment activity). These types of additional activities might affect our liquidity requirements or cause us to issue additional equity or debt securities.

        In the long term, we expect to use our existing funds and cash flows from operations to satisfy our debt and other long-term obligations. We may also use our funds, as well as external sources of funds, to retire debt as appropriate, based upon market conditions and our desired liquidity and capital structure.

        Risk factors that could possibly affect the availability of our internally generated funds include, among other things:

        See "Risk Factors" for a more complete discussion of risk factors that might affect the availability of our internally generated funds.

        As a result of the additional debt incurred on August 1, 2005 to fund the lastminute.com acquisition, Standard & Poor's changed our credit rating from BBB+ to BBB and maintained a stable outlook and Moody's Investors Service changed our credit rating from Baa2 to Baa3 and changed our outlook from stable to negative. We do not anticipate the ratings change will have a material impact on our cost of borrowing.

Cash Investments

        We invest cash in high-credit-quality marketable securities, including: fixed or variable rate obligations issued by the U.S. Treasury, government agencies and municipalities, mutual funds, asset-backed securities issued by banks, corporations, and bankruptcy-remote trusts. We use some of our securities to enter into repurchase agreements. Our investment objectives are preservation of principal, liquidity and yield. We try to invest all of our excess cash in marketable securities. Therefore, our annual investments will fluctuate depending on the levels of cash provided or used by all of our other investing, operating and financing activities. See Note 2 to the Consolidated Financial Statements for a discussion of restricted cash.

47



Capital Activities

Declaration Date

  Payable Date
  Amount per Share
2003:          
  April 17, 2003   May 15, 2003   $ 0.070
  July 15, 2003   August 15, 2003     0.070
  October 21, 2003   November 14, 2003     0.070
2004:          
  January 20, 2004   February 17, 2004   $ 0.075
  April 20, 2004   May 14, 2004     0.075
  July 20, 2004   August 16, 2004     0.075
  October 26, 2004   November 15, 2004     0.075
2005:          
  February 1, 2005   February 28, 2005   $ 0.090
  May 3, 2005   May 26, 2005     0.090
  July 26, 2005   August 18, 2005     0.090
  November 1, 2005   November 29, 2005     0.090

        On January 30, 2006, our Board of Directors approved a dividend of $0.10 per share payable on February 28, 2006 to stockholders of record at February 10, 2006. Our Board of Directors currently intends to consider declaring and paying comparable future dividends on a regular quarterly basis, subject to our ability to pay dividends and to a determination by management and our Board of Directors that dividends continue to be in our best interests and those of our stockholders.

Date Authorized

  Authorized for
Repurchase

  Repurchased
  Repurchased under
ASSP

  Available for
Repurchase

 
October 20, 2003   $100 million   $100 million   $35 million   (1)
April 19, 2004   $100 million   $100 million     (2)
October 25, 2004   $100 million   $100 million     (3)
May 2, 2005   $100 million       $100 million (4)

48


        We will generally seek to make any future share repurchases pursuant to 10b5-1 trading plans, unless such plans are terminated at the discretion of management.

Financing Arrangements

        Bridge Financing Arrangement—On May 12, 2005, we entered into an $800 million, unsecured bridge loan agreement (the "Bridge Facility") that matures on August 12, 2006, in order to provide short-term financing in connection with the lastminute.com acquisition and to satisfy legal requirements for certainty of funding for the acquisition. On July 22, 2005, we entered into an amendment to the Bridge Facility whereby all the rights and obligations of Sabre Inc. under the Bridge Facility were assumed by Sabre Holdings and Sabre Inc. was discharged from its obligations thereunder.

        Effective August 1, 2005, we borrowed $800 million under the Bridge Facility in order to fund a portion of the lastminute.com acquisition.

        The interest rate on borrowings under the Bridge Facility is variable, based at our discretion on either the London Interbank Offered Rate ("LIBOR") plus a borrowing spread or the prime rate, and is sensitive to our credit rating. The LIBOR spread at our current credit rating is 0.75%, which at December 31, 2005 equated to a borrowing rate of 5.15%.

        We may prepay all or any part of the Bridge Facility without prepayment penalties, other than any breakage costs associated with the early repayment of loans bearing interest based upon LIBOR. We would be required to repay borrowings under the Bridge Facility with net cash proceeds we receive from (i) the issuance of capital stock and indebtedness for money borrowed with a maturity in excess of one year (excluding, among other things, borrowings under our existing revolving credit agreement) and (ii) asset sales with proceeds of more than $200 million.

        The Bridge Facility contains other covenants, representations, terms and conditions that are typical for a bridge credit facility of this type which, among other things, restricts our ability to incur additional debt and limits our ability to pay in excess of $150 million during the term of the Bridge Facility as dividends or as repurchases of our stock.

        As of December 31, 2005, we were in compliance with all covenants under the Bridge Facility including the following financial covenants:

Covenant

  Requirement
  Level at
December 31,
2005

Consolidated Leverage Ratio (Debt to EBITDA)   5.0 to 1   3.23 to 1
Consolidated Net Worth   $1.3 billion   $1.7 billion

49


        On February 16, 2006, we prepaid $100 million of the $800 million acquisition Bridge Facility from our available cash and marketable securities. We will be required to repay or refinance the remaining $700 million of the Bridge Facility prior to its expiration on August 12, 2006. We are evaluating choices for repaying and refinancing the Bridge Facility, including using additional cash, borrowing under our revolving credit agreement and accessing public and private markets for debt. The timing and choice of refinancing options will be subject to market conditions, but we expect to repay or refinance the Bridge Facility during the first half of 2006.

        Revolving Credit Agreement—On July 22, 2005, in order to facilitate the consummation of the lastminute.com acquisition and to provide additional liquidity and flexibility in our capital structure, we entered into certain amendments to our current revolving credit agreement ("Credit Facility"). Under the amendments, Sabre Holdings assumed all of the rights and obligations of Sabre Inc. under the Credit Facility and Sabre Inc. was discharged from its obligations thereunder. The amendments also include, among other things: (i) amendments to certain financial and negative covenants (including amendments to provide us more flexibility under the Consolidated Leverage Ratio covenant, as shown in the table below, and amendments that place additional restrictions on the ability of our subsidiaries to incur indebtedness), (ii) amendments that prohibit us from using proceeds from the Credit Facility to repay the Bridge Facility to the extent such proceeds represent more than 50% of the then aggregate committed amount of the lenders under the Credit Facility, (iii) amendments that increase the aggregate amount committed by those lenders to $360 million, and (iv) amendments that allow us to request a future increase of the aggregate amount committed by the lenders under the Credit Facility to as much as $500 million.

        As of December 31, 2005, there are no borrowings outstanding under this agreement. As of December 31, 2005, we were in compliance with all covenants under this agreement including the following financial covenants:

Covenant

  Requirement
  Level at
December 31,
2005

Consolidated Leverage Ratio (Debt to EBITDA)   3.75 to 1 maximum   3.23 to 1
Consolidated Net Worth   $1.3 billion   $1.7 billion

        Our covenants under the amended revolving credit agreement are as follows:

As amended on July 22, 2005

  Requirement
Consolidated Leverage Ratio (Debt to EBITDA) for the quarters ended:    
July 22, 2005 through March 30, 2006   3.75 to 1 maximum
June 30, 2006 through September 30, 2006   3.50 to 1 maximum
December 31, 2006 through March 31, 2007   3.25 to 1 maximum
June 30, 2007 and thereafter   3.00 to 1 maximum

        Public Notes—In August 2001, we issued through Sabre Holdings Corporation $400 million in senior unsecured notes ("Notes"), bearing interest at 7.35% and maturing August 1, 2011, in an underwritten public offering resulting in net cash proceeds to us of approximately $397 million. The Notes include certain non-financial covenants, including restrictions on incurring certain types of debt or entering into certain sale and leaseback transactions. As of December 31, 2005, we were in compliance with all covenant requirements under the Notes. In conjunction with these Notes, we have entered into two interest rate swaps through 2011 for a total of $300 million, which pay us 7.35% and on which we pay a variable rate based on a six-month LIBOR plus 231 basis points.

        Capital Lease Obligation—In June 2003, Sabre Inc. entered into a ten-year master lease for our corporate headquarters facility in Southlake, Texas, which is accounted for as a capital lease. The interest rate on the capital lease financing is fixed at 5.37%. At the inception of the lease, we recorded an asset of approximately $168 million, along with a liability of approximately $168 million, representing the present value of the minimum lease payments due under the lease and the residual value guarantee discussed below.

50



        At any time during the lease term, we have the option to terminate the lease and purchase the properties for approximately $179 million, plus a make-whole amount, if applicable. We also have the option at any time up to one year prior to lease expiration to cause the properties to be sold. If this sell option is exercised, we have guaranteed that proceeds on a sale will be at least approximately $159 million, and we are responsible for the first dollar loss up to approximately $159 million due to a decrease in the value of the property below approximately $179 million. If the sales proceeds exceed approximately $179 million plus any sales-related expenses, we retain the excess. In conjunction with this lease, we have entered into a $100 million interest rate swap which pays us 5.37% and on which we pay a variable rate based on a six-month LIBOR plus 153 basis points. Under the lease agreement, we are subject to certain covenants. As of December 31, 2005, we were in compliance with all covenants under this agreement including the following financial covenant:

Covenant

  Requirement
  Level at
December 31,
2005

Consolidated Net Worth   $1.1 billion   $1.6 billion

Cash Flows (in thousands)

 
  Year Ended December 31,
 
 
  2005
  2004
  2003
 
Cash provided by operating activities   $ 225,506   $ 361,433   $ 277,938  
Cash used for investing activities     (833,904 )   (98,992 )   (165,203 )
Cash provided by (used for) financing activities     698,057     (255,393 )   (94,437 )
Effect of exchange rate changes on cash and cash equivalents     (4,097 )   1,761     1,388  
   
 
 
 
  Total cash increase   $ 85,562   $ 8,809   $ 19,686  
   
 
 
 

        Operating Activities—Cash flows provided by operating activities for the year ended December 31, 2005 was $226 million which resulted from net income adjusted for non-cash and non-operating items of $300 million. This was offset by unfavorable changes in our working capital of $74 million. Cash flows from operating activities decreased $136 million in the year ended December 31, 2005 compared to the same period a year ago. This decrease was primarily driven by a $17 million reduction in our net income adjusted for non-cash and non-operating items. Another factor that contributed significantly to the reduction in cash flow from operating activities was the timing of the acquisition of lastminute.com in the third quarter of 2005 which, along with the fourth quarter is historically the slowest from a cash generation perspective. lastminute.com generates most of its positive cash flows during the first part of the year, from which we were unable to benefit in 2005. Therefore, we expect that this trend will be reversed in the first half of 2006, but this trend is seasonal with the booking of travel and will fluctuate accordingly. Other factors contributing to the reduced cash flow from operating activities include collection of a $20 million receivable in 2004 related to the 2003 cancellation of two subscriber contracts and higher payouts of variable compensation due to positive 2004 financial results. Other changes are primarily due to timing differences.

        Cash provided by operating activities during year ended December 31, 2004 was $361 million, which was primarily from net earnings of $317 million adjusted for non-cash and non-operating items. In addition, cash provided by operating activities includes favorable changes in working capital of $45 million. Cash flows from operations increased $83 million in the year ended December 31, 2004 from the same period a year ago. This increase was primarily driven by an increase of $49 million in our net income adjusted for non-cash and non-operating items. In 2004 we also received $20 million related to the 2003 cancellation of two subscriber contracts. In addition, expedited collections in our merchant model due to changing service providers provided approximately $20 million in additional cash.

51



        Cash provided by operating activities for the year ended December 31, 2003 was $278 million and was primarily from net earnings of $268 million including non-cash and non-operating items as well as favorable changes in working capital items. Non-cash and non-operating adjustments to net earnings of $185 million for the year ended December 31, 2003 included depreciation and amortization of $127 million, a $9 million impairment of an intangible asset related to our agreement with a former hotel supplier, $12 million in losses from asset disposals, a $28 million charge relating to the termination of our syndicated lease facility, and stock compensation expense of $12 million, offset by deferred taxes of $4 million.

        Investing Activities—The $735 million increase in cash used for investing activities in the year ended December 31, 2005 as compared to the year-ago period primarily results from a $1,109 million increase in acquisitions (net of cash acquired) which results primarily from our acquisition of lastminute.com. Additionally, capital expenditures increased $14 million. Offsetting these cash uses for investing activities are the $318 million increase in net sales of our portfolio of marketable securities primarily used in the purchase of lastminute.com and $41 million of proceeds from the sale of our investments in Karavel and TRX.

        The $66 million decrease in cash used for investing activities in the year ended December 31, 2004 as compared to the year-ago period primarily results from an $85 million net increase in sales of marketable securities for our short-term investment portfolio. The net increase in sales of marketable securities is partially offset by $36 million in investments in unconsolidated joint ventures and $10 million in loans to business partners during the year ended December 31, 2004 compared to a net use of $12 million for similar activities in the same period a year ago. In addition, during the year ended December 31, 2004 we utilized $70 million, net of cash acquired, for acquisitions compared to $96 million in 2003.

        Financing Activities—Cash provided by financing activities was $698 million for the year ended December 31, 2005, compared to a use of cash of $255 million for the same period a year ago. This was primarily due to the $800 million in proceeds from our Bridge Facility that we used to acquire lastminute.com. Additionally, a reduction in the number of shares of our Common Stock that we repurchased under our Board authorized stock repurchasing plans resulted in a $165 million reduction in cash outflows. Offsetting this decrease in shares of Common Stock repurchased was an increase in dividends paid of $6 million due to an increase in our dividend rate from $.075 per share in 2004 to $.09 per share in 2005. Proceeds from the issuance of Common Stock decreased $6 million due to fewer employee stock option exercises resulting from a generally lower price of our Common Stock.

        The $161 million increase in cash used for financing activities in the year ended December 31, 2004 as compared to the same period a year ago was mainly due to dividends of $41 million paid in 2004 compared to $30 million for 2003 and $228 million used to repurchase our Common Stock during the year ended December 31, 2004 compared to $44 million for the same period in 2003. Proceeds from the exercise of stock options in 2004 as compared to 2003 increased $5 million due to a generally higher stock price. In 2003, $28 million was used related to the termination of our syndicated lease facility on our headquarters buildings. For the year ended December 31, 2004, cash used in financing activities of $228 million related to Common Stock repurchases differs from the comparable change in Stockholder's Equity of $229 million due to timing differences between the recognition of share repurchase transactions and their settlement for cash.

Off Balance Sheet Arrangements

        We do not have any significant relationships or agreements as of December 31, 2005 that would be considered an off balance sheet arrangement as defined by Item 303(a)(4)(ii) of Regulation S-K.

Critical Accounting Policies

        The preparation of our financial statements requires that we adopt and follow certain accounting policies. Certain amounts presented in the financial statements have been determined based upon estimates and assumptions. Although we believe that our estimates and assumptions are reasonable, actual results may differ.

52



        We have included below a discussion of the accounting policies involving material estimates and assumptions that we believe are most critical to the preparation of our financial statements, how we apply such policies and how results differing from our estimates and assumptions would affect the amounts presented in our financial statements. We have discussed the development, selection and disclosure of these accounting policies with our audit committee. Although we believe these policies to be the most critical, other accounting policies also have a significant effect on our financial statements and certain of these policies also require the use of estimates and assumptions. Note 2 to the Consolidated Financial Statements discusses each of our significant accounting policies.

        Booking Fee Cancellation Reserve:    Our Sabre Travel Network SM segment records revenue for airline travel reservations processed through the Sabre system at the time of the booking of the reservation. However, if the booking is canceled in a later month, the booking fee must be refunded to the customer (less a small cancellation fee). Therefore we record revenue net of an estimated amount reserved to account for future cancellations. This reserve is calculated based on historical cancellation rates. In estimating the amount of future cancellations that will require us to refund a booking fee, we assume that a significant percentage of cancellations are followed immediately by a new reservation, without loss of revenue. This assumption is based on historical rates of cancellations that resulted in a new reservation and has a significant impact on the amount reserved. If circumstances change, such as higher than expected cancellation rates or changes in booking behavior, our estimates of future cancellations could be increased by a material amount and our revenue decreased by a corresponding amount. At both December 31, 2005 and 2004, our booking fee cancellation reserves were $17 million. In 2005, the cancellation reserve remained the same due to immaterial changes in the rate per booking and flat booking levels for airline reservations. This reserve is sensitive to changes in booking levels and the number of bookings priced under the terms of the DCA 3-Year Pricing Option Agreements. For example, if 2005 booking volumes had been 10% lower or the weighted-average booking fee rate had been 10% lower, the reserve balance would have been reduced by approximately $2 million.

        Car and Hotel Commission Reserves:    Our Travelocity® segment receives commissions from travel suppliers for air travel, hotel rooms, car rentals, vacation packages and cruises booked through our Travelocity websites. Commissions from air travel providers are recognized at the time of booking the reservations except for lastminute.com entities that recognize revenue related to air travel at the time of departure. The revenue recognition method used by lastminute.com will be changed to conform to the remainder of our Travelocity segment when adequate historical data on cancellations is developed. Commissions from car and hotel travel providers are recognized upon the scheduled date of travel consumption. We record car and hotel commission revenue net of an estimated reserve for no-shows. If circumstances should change such that the cancellation rates are significantly higher than expected, it could have a significant impact on the amount reserved. At December 31, 2005 and 2004 our reserve for car and hotel commissions was approximately $8 million and $6 million, respectively.

        Software Revenue Recognition:    Our Sabre Airline Solutions® segment develops software that is generally sold as part of agreements which also require us to provide customization and implementation services. Such agreements are accounted for using contract accounting under the provisions of Statement of Position 97-2, Software Revenue Recognition. Revenue from license fees, when software is sold without associated customization or implementation services, is recognized when the software is delivered, fees are fixed and determinable, no undelivered elements are essential to the functionality of delivered software and collection is probable. At times, determining if all of these elements have been met requires judgment. Fees for software maintenance are recognized ratably over the life of the contract. The fees for software maintenance included in initial software license agreements is based on the vendor specific objective evidence of the fair value of the services determined using actual renewal rates for software maintenance services. The process of allocating fees based on vendor specific evidence of fair value can require judgment.

53



        Accounts Receivable:    We evaluate the collectibility of our accounts receivable based on a combination of factors. In circumstances where we are aware of a specific customer's inability to meet its financial obligations to us (e.g., bankruptcy filings, failure to pay amounts due to us or others), we record a specific reserve for bad debts against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we recognize reserves for bad debts based on past write-off history (average percentage of receivables written off historically) and the length of time the receivables are past due. Several of our airline customers are experiencing financial difficulty, some (including United Air Lines, Inc., U.S. Airways, Inc. and ATA Holdings Corporation) have sought bankruptcy protection and still others may consider bankruptcy relief. We believe that we have appropriately considered the effects of these factors, as well as any other known customer liquidity issues, on the ability of our customers to pay amounts owed to us. However, if demand for commercial air travel softens, due to prevailing economic conditions, terrorist acts, war or other incidents involving commercial air transport, or other factors, the financial condition of our customers may be adversely impacted.

        Business Combinations:    During 2005, 2004 and 2003, we completed a number of acquisitions of other companies using the purchase method of accounting. The amounts assigned to the identifiable assets and liabilities acquired in connection with these acquisitions were based on estimated fair values as of the date of the acquisition, with the remainder recorded as goodwill. The fair values were determined by our management, generally based upon information supplied by the management of the acquired entities and valuations prepared by independent appraisal experts. The valuations have been based primarily upon future cash flow projections for the acquired assets, discounted to present value using a risk-adjusted discount rate. For certain classes of intangible assets, the valuations have been based upon estimated cost of replacement. In connection with these acquisitions, we have recorded a significant amount of intangible assets, including goodwill.

        Goodwill and Long-Lived Assets:    Pursuant to Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), we evaluate goodwill and indefinite-lived intangible assets for impairment on an annual basis or if impairment indicators exist. For indefinite-lived intangible assets, the evaluation requires a comparison of the estimated fair value of the asset to the carrying value of the asset. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, as generally estimated using a discounted future net cash flow projection, the carrying value of the asset is reduced to its fair value. For goodwill, the evaluation requires a comparison of the estimated fair value of the reporting unit to which the goodwill has been assigned to the sum of the carrying value of the assets and liabilities of that unit. If the sum of the carrying value of the assets and liabilities of a reporting unit exceeds the fair value of that reporting unit, the carrying value of the reporting unit's goodwill is reduced to its implied fair value through an adjustment to the goodwill balance, resulting in an impairment charge. We evaluate five reporting units under SFAS 142, which include Sabre Travel Network, Travelocity, Sabre Airline Solutions, SynXis and Emerging Businesses. Our SynXis and Emerging Businesses reporting units are included with Sabre Travel Network for segment reporting purposes.

        The fair values used in our SFAS 142 evaluation are estimated based upon discounted future cash flow projections. These cash flow projections are based upon a number of assumptions, including risk-adjusted discount rates, future booking and transaction volume levels, future price levels, rates of growth in our consumer and corporate direct booking businesses and rates of increase in operating expenses. We believe that the assumptions we have made in projecting future cash flows for the evaluations described above are reasonable. However, if future actual results do not meet our expectations, we may be required to record an impairment charge, the amount of which could be material to our results of operations.

54



        Intangible assets subject to amortization are evaluated for impairment pursuant to Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"), which requires impairment testing whenever events or changes in circumstances indicate that the carrying amount of an amortizable intangible asset may not be recoverable. If impairment indicators exist for an amortizable intangible asset, the undiscounted future cash flows associated with the expected service potential of the asset are compared to the carrying value of the asset. If our projection of undiscounted future cash flows is in excess of the carrying value of the intangible asset, no impairment charge is recorded. If our projection of undiscounted cash flows is less than the carrying value of the intangible asset, an impairment charge is recorded to reduce the intangible asset to its fair value.

        In 2004, we recorded an impairment charge of approximately $3 million on technology-related assets. In 2003, we wrote off an intangible asset of approximately $9 million associated with a supplier agreement that was terminated early. No other significant impairments of our goodwill or intangible assets have been recorded.

        Pension and Other Postretirement Benefits:    Pension and other postretirement benefits are actuarially determined and are affected by assumptions including the discount rate, the estimated future return on plan assets, the annual rate of increase in compensation for plan employees, the increase in costs of health care benefits and other factors. The Company evaluates assumptions used on a periodic basis and makes adjustments to these liabilities as necessary. See Note 9, Employee Benefit Plans, in the Notes to Consolidated Financial Statements for additional information regarding the assumptions used and for changes in the accrued benefit.

        Income and Non-Income Taxes:    The calculation of our tax liabilities involves significant judgment and evaluation of uncertainties in the interpretation of complex tax laws. As a result, we have established reserves for taxes and associated interest that may become payable in future years as a result of audits by tax authorities. Regarding value-added taxes, we have established reserves regarding the collection of refunds which are subject to audit and collection risks in various regions of Europe. Tax reserves are reviewed regularly pursuant to Statement of Financial Accounting Standard No. 5, Accounting for Contingencies. Tax reserves are adjusted as events occur that affect our potential liability for additional taxes and associated interest, such as the expiration of statutes of limitation, conclusion of tax audits, identification of additional exposure based on current calculations, identification of new issues, or the issuance of statutory or administrative guidance or rendering of a court decision affecting a particular issue. The amount of our liability for taxes could exceed our reserves, which could have a material adverse effect on our financial results.

Seasonality

        The travel industry is seasonal in nature. Travel bookings for our Sabre Travel Network business, and the revenue we derive from those bookings, decrease significantly each year in the fourth quarter, primarily in December. Customers generally book their November and December holiday leisure travel earlier in the year, and business travel declines during the holiday season. Travel bookings for our Travelocity business decrease each year in the fourth quarter, primarily in December. Customers generally book their holiday leisure travel earlier in the year. Travelocity revenues are also impacted by the seasonality of travel bookings, but to a lesser extent since commissions from car and hotel travel providers and net rate revenue for vacation packages and hotel stays are recognized upon date of consumption. In 2005, the seasonal variations described above did continue, however, our revenues did not decline in the fourth quarter due to the acquisition of lastminute.com. We believe that the acquisition of lastminute.com will cause revenues and net earnings to become more significant in the second and third quarters for the Travelocity segment due largely to European travel patterns.

55



        The following table sets forth our quarterly financial data (unaudited), (in thousands, except per share data). Gross profit has been adjusted for all quarters in order to conform to the reclassification of amortization of purchased technology to cost of revenues from selling, general and administrative expenses.

 
  First
Quarter

  Second
Quarter

  Third
Quarter

  Fourth
Quarter

2005                        
Revenues   $ 581,888   $ 619,255   $ 699,706   $ 620,406
Gross profit     241,779     244,047     320,339     227,718
Operating income     71,194     83,106     99,571     7,002
Net earnings     57,681     43,887     58,496     12,088
Earnings per common share:                        
  Basic   $ 0.44   $ 0.34   $ 0.45   $ 0.10
   
 
 
 
  Diluted   $ 0.44   $ 0.34   $ 0.45   $ 0.09
   
 
 
 
 
  First
Quarter

  Second
Quarter

  Third
Quarter

  Fourth
Quarter

2004                        
Revenues   $ 539,753   $ 550,903   $ 544,390   $ 495,925
Gross profit     219,497     231,197     234,106     173,938
Operating income     69,488     88,443     77,167     23,632
Net earnings     43,037     58,937     67,426     21,019
Earnings per common share:                        
  Basic   $ 0.31   $ 0.43   $ 0.50   $ 0.16
   
 
 
 
  Diluted   $ 0.31   $ 0.42   $ 0.49   $ 0.16
   
 
 
 

Recent Accounting Pronouncements

        On December 16, 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payments ("SFAS 123R"), which is a revision of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). SFAS 123R supersedes APB 25 and amends Statement of Financial Accounting Standards No. 95, Statement of Cash Flows. Generally, the approach in SFAS 123R is similar to the approach described in SFAS 123. However, SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized on the income statement based on their fair values.

        We are adopting SFAS 123R on January 1, 2006 using the modified prospective method and, as a result, we will begin expensing options in 2006 with no restatement of prior periods. All options granted prior to adoption will continue to be expensed using the fair value previously determined using the Black-Scholes option-pricing model and included in our pro forma disclosures; however, options granted subsequent to our adoption of SFAS 123R will be valued using a lattice model which we believe provides us with a more reliable fair value. Stock option expenses will be recorded on a straight-line basis over the requisite service period. SFAS 123R also requires that the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow, as required under the current guidance. We cannot estimate what the impact of this will be on our financing cash flows as it will depend on the future exercise behavior of option holders. We expect the adoption of SFAS 123R will impact pre-tax income by approximately $18 million or $.09 per share in 2006 although this amount may change based on the level of future grants of options, unforeseeable changes in our assumptions used in the lattice model such as our stock volatility and actual forfeiture rates not matching our current estimates.

56



        In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and Statement of Financial Accounting Standards No. 3, Reporting Accounting Changes in Interim Financial Statements. The standard requires changing the accounting and reporting requirements of voluntary and mandatory (unless the pronouncement provides other transition requirements) changes in accounting principle by requiring retroactive application of the change in accounting principle to prior periods' financial statements, unless it is not practical to do so, rather than recording a cumulative catch up adjustment in net income in the year of the change. Reporting error corrections will be handled similar to a change in accounting principles. The standard is effective for accounting changes and error corrections made in fiscal years beginning after December 15, 2005. This new accounting standard is not anticipated to have a material impact on our financial results.

Inflation

        We believe that inflation has not had a material effect on our results of operations.

57


ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

        As of December 31, 2005, our exposure to interest rates relates primarily to our interest rate swaps and interest on our Bridge Facility which is variable, based at our discretion on either the London Interbank Offered Rate ("LIBOR") plus a borrowing spread or the prime rate, and is sensitive to changes in our credit rating. Offsetting some of this exposure is interest income received from our marketable securities portfolio. The objectives of our marketable securities are preservation of principal, liquidity and yield. As such, our investment portfolio consists primarily of fixed or variable rate obligations issued by the U.S. Treasury, government agencies and municipalities, mutual funds, asset backed securities issued by banks, corporations, and bankruptcy remote trusts. If short-term interest rates average 10% lower in 2006 than they were during 2005, our interest income from marketable securities would decrease by approximately $1 million. In comparison, at December 31, 2004, we estimated that if short-term interest rates averaged 10% lower in 2005 than they were during 2004, our interest income from marketable securities would have decreased by approximately $1 million. These amounts were determined by applying the hypothetical interest rate change to our average marketable securities invested during 2005 and 2004.

        At December 31, 2005, we had obligations under our $800 million Bridge Facility, fixed rate notes of $400 million ("Notes") and a $168 million capital lease obligation. We have entered into fixed to floating interest rate swaps related to $300 million of the outstanding Notes, effectively converting $300 million of the $400 million fixed rate Notes into floating rate obligations. We also entered into a fixed to floating interest rate swap that effectively converts $100 million of the capital lease obligation into a floating rate obligation (see Note 6 to the Consolidated Financial Statements for additional details on the swaps). If short-term interest rates average 10% higher in 2006 than they were in 2005, our interest expense would increase by approximately $3 million. This amount was determined by applying the hypothetical interest rate change to our floating rate borrowings balance, including the Bridge Facility, at December 31, 2005. If our mix of interest rate-sensitive assets and liabilities changes significantly, we may enter into additional derivative transactions to manage our net interest rate exposure.

Foreign Currency Risk

        We have various operations outside of the United States, primarily in North America, South America, Europe, Australia and Asia. As a result of these business activities, we are exposed to foreign currency risk. During times of volatile currency movements this risk can materially impact our earnings. To reduce the impact of this earnings volatility, we hedge a portion of our foreign currency exposure by entering into foreign currency forward contracts on our three largest foreign currency exposures. These forward contracts, totaling $115 million at December 31, 2004 and $135 million at December 31, 2005, represent obligations to purchase foreign currencies at a predetermined exchange rate to fund a portion of our expenses that are denominated in foreign currencies. We also enter into short-dated forward contracts to hedge a portion of our foreign currency exposure related to lastminute.com's travel supplier liability payments denominated in a foreign currency. In December 2004, we purchased foreign currency-denominated government bonds to function as a hedge of a portion of our 2005 foreign currency exposure. To protect these bond investments from foreign currency risk, we purchased put options on the currencies in which the government bonds are denominated. These options gave us the right to sell the foreign currencies at predetermined prices. There were no bonds or options outstanding as of December 31, 2005.

        The result of an immediate 10 percent appreciation of the U.S. dollar in 2006 from December 31, 2005 levels relative to our primary foreign currency exposures would result in a negative U.S. dollar impact of approximately $0.1 million in 2006, net of hedge instruments outstanding. This sensitivity analysis was prepared based upon 2006 projections of our primary foreign currency-denominated expenses and foreign currency forwards as of December 31, 2005.

58


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL
CONTROLS OVER FINANCIAL REPORTING

The Board of Directors and Stockholders
Sabre Holdings Corporation

        We have audited management's assessment, included in the accompanying Management's Assessment of the Effectiveness of Internal Controls, that Sabre Holdings Corporation maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Sabre Holdings Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.

        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        As indicated in the accompanying Management's Assessment of the Effectiveness of Internal Controls, management's assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of lastminute.com, which is included in the 2005 consolidated financial statements of the Company and constituted $1,598 million and $1,265 million of total assets and net assets, respectively, as of December 31, 2005 and $174 million and $11 million of revenues and net loss, respectively, for the year then ended. Management did not assess the effectiveness of internal control over financial reporting at lastminute.com because the Company acquired lastminute.com on July 20, 2005. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of lastminute.com.

        In our opinion, management's assessment that Sabre Holdings Corporation maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Sabre Holdings Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.

59



        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Sabre Holdings Corporation and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2005 of Sabre Holdings Corporation and subsidiaries and our report dated February 27, 2006 expressed an unqualified opinion thereon.

Dallas, Texas
February 27, 2006

60


ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 
Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets

Consolidated Statements of Income

Consolidated Statements of Cash Flows

Consolidated Statements of Stockholders' Equity

Notes to Consolidated Financial Statements

61


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Sabre Holdings Corporation

        We have audited the accompanying consolidated balance sheets of Sabre Holdings Corporation and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed under Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 Sabre Holdings Corporation and subsidiaries at December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Sabre Holdings Corporation's internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2006 expressed an unqualified opinion thereon.

Dallas, Texas
February 27, 2006
except for Note 6, as to which
the date is March 3, 2006

62


SABRE HOLDINGS CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands)


 
  December 31,
2005

  December 31,
2004

 
Assets              
Current assets              
Cash   $ 135,233   $ 49,671  
Restricted cash     57,019      
Marketable securities     376,585     787,353  
Accounts receivable, net     505,662     317,824  
Prepaid expenses     41,632     63,521  
Deferred income taxes     23,013     23,349  
Other receivables     109,144     31,797  
   
 
 
Total current assets     1,248,288     1,273,515  

Property and equipment

 

 

 

 

 

 

 
Buildings and leasehold improvements     318,880     309,635  
Furniture, fixtures and equipment     38,349     33,579  
Computer equipment     148,965     120,515  
Internally developed software     257,990     195,638  
   
 
 
      764,184     659,367  
Less accumulated depreciation and amortization     (334,616 )   (272,026 )
   
 
 
Total property and equipment     429,568     387,341  

Deferred income taxes

 

 

32,419

 

 

9,955

 
Investments in joint ventures     156,277     176,249  
Goodwill and intangible assets, net     2,333,140     988,600  
Other assets, net     174,419     182,317  
   
 
 
Total assets   $ 4,374,111   $ 3,017,977  
   
 
 
Liabilities and stockholders' equity              
Current liabilities              
Accounts payable   $ 203,663   $ 177,207  
Travel supplier liabilities and deferred revenue     301,377     72,264  
Accrued compensation and related benefits     74,628     80,448  
Accrued subscriber incentives     81,877     84,357  
Deferred revenues     32,047     24,906  
Other accrued liabilities     398,871     169,110  
Bridge facility     800,000      
   
 
 
Total current liabilities     1,892,463     608,292  

Pensions and other postretirement benefits

 

 

191,453

 

 

154,537

 
Other liabilities     23,568     23,101  
Minority interests     38,948     5,143  
Long-term capital lease obligation     158,188     161,114  
Public and other notes payable     426,379     439,309  

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

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 shares issued at December 31, 2005 and 2004     1,459     1,459  
Additional paid-in capital     1,275,836     1,289,574  
Retained earnings     769,231     644,360  
Accumulated other comprehensive loss     (77,872 )   (9,426 )
Less treasury stock at cost: 14,281 and 12,913 shares, respectively     (325,542 )   (299,486 )
   
 
 
Total stockholders' equity     1,643,112     1,626,481  
   
 
 
Total liabilities and stockholders' equity   $ 4,374,111   $ 3,017,977  
   
 
 

The accompanying notes are an integral part of these financial statements.

63


SABRE HOLDINGS CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)


 
  Year Ended December 31,
 
 
  2005
  2004
  2003
 
Revenues   $ 2,521,255   $ 2,130,971   $ 2,045,163  
 
Cost of revenues

 

 

1,468,400

 

 

1,240,180

 

 

1,269,129

 
  Amortization of purchased technology     18,972     32,053     32,484  
   
 
 
 
Total cost of revenues     1,487,372     1,272,233     1,301,613  

Gross Profit

 

 

1,033,883

 

 

858,738

 

 

743,550

 

Other operating expenses

 

 

 

 

 

 

 

 

 

 
  Selling, general and administrative     743,755     585,182     553,503  
  Amortization of other intangible assets     29,255     14,826     23,817  
   
 
 
 
Total other operating expenses     773,010     600,008     577,320  

Operating income

 

 

260,873

 

 

258,730

 

 

166,230

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 
  Interest income     22,411     15,154     16,477  
  Interest expense     (53,075 )   (26,862 )   (24,077 )
  Gain on sale of investments     27,132          
  Loss on derivative instruments     (8,248 )        
  Other, net     (4,378 )   10,039     (31,253 )
   
 
 
 
Total other expense     (16,158 )   (1,669 )   (38,853 )

Income before provision for income taxes

 

 

244,715

 

 

257,061

 

 

127,377

 
Provision for income taxes     72,563     66,642     44,076  
   
 
 
 
Net earnings   $ 172,152   $ 190,419   $ 83,301  
   
 
 
 
Earnings per common share                    
 
Basic

 

$

1.33

 

$

1.40

 

$

0.59

 
 
Diluted

 

$

1.32

 

$

1.38

 

$

0.58

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 
 
Basic

 

 

129,587

 

 

136,326

 

 

142,321

 
 
Diluted

 

 

130,336

 

 

137,931

 

 

143,407

 

The accompanying notes are an integral part of these financial statements.

64


SABRE HOLDINGS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


 
  Year Ended December 31,
 
 
  2005
  2004
  2003
 
Operating Activities                    
Net earnings   $ 172,152   $ 190,419   $ 83,301  
Adjustments to reconcile net earnings to cash provided by operating activities:                    
  Depreciation and amortization     130,643     116,712     127,173  
  Loss on impaired intangible assets         3,198     8,831  
  Loss on sale leaseback         7,302      
  Stock-based compensation for employees     11,735     11,328     11,586  
  Allowance for doubtful accounts     8,722     19,176      
  Deferred income taxes     (3,375 )   (23,608 )   (3,837 )
  Tax benefit (loss) from exercise of stock options and restricted stock     (282 )   1,173     736  
  Loss on facilities lease refinancing             27,947  
  Loss on derivative instruments     8,248          
  Joint venture equity loss/(income)     (1,832 )   5,198     127  
  Gain on sale of investments     (27,132 )        
  Other     636     (14,264 )   11,940  
  Changes in operating assets and liabilities:                    
    Accounts and other receivables     (32,735 )   (10,961 )   (43,887 )
    Prepaid expenses     16,566     (7,396 )   (2,310 )
    Other assets     (23,271 )   18,070     31,285  
    Accrued compensation and related benefits     (5,820 )   16,881     7,787  
    Accounts payable and other accrued liabilities     (39,889 )   20,997     9,494  
    Pensions and other postretirement benefits     12,483     8,009     13,270  
    Other liabilities     (1,343 )   (801 )   (5,505 )
   
 
 
 
  Cash provided by operating activities     225,506     361,433     277,938  

Investing Activities

 

 

 

 

 

 

 

 

 

 
Additions to property and equipment     (91,660 )   (77,998 )   (71,466 )
Purchases of marketable securities     (10,317,265 )   (10,208,282 )   (7,751,087 )
Sales of marketable securities     10,729,382     10,302,619     7,760,587  
Proceeds from sale of investments     40,920         5,054  
Proceeds from sale of joint venture     13,018          
Acquisitions (net of cash acquired)     (1,178,939 )   (69,744 )   (96,114 )
Other investing activities     (29,360 )   (45,587 )   (12,177 )
   
 
 
 
  Cash used for investing activities     (833,904 )   (98,992 )   (165,203 )

Financing Activities

 

 

 

 

 

 

 

 

 

 
Proceeds from bridge facility     800,000          
Proceeds from issuance of common stock     9,750     15,744     10,541  
Dividends paid     (47,281 )   (41,431 )   (30,125 )
Purchases of treasury stock     (63,212 )   (227,814 )   (44,239 )
Other financing activities     (1,200 )   (1,892 )   (30,614 )
   
 
 
 
  Cash provided by (used for) financing activities     698,057     (255,393 )   (94,437 )
 
Effect of exchange rate changes on cash and cash equivalents

 

 

(4,097

)

 

1,761

 

 

1,388

 

Increase in cash

 

 

85,562

 

 

8,809

 

 

19,686

 
Cash at beginning of period     49,671     40,862     21,176  
   
 
 
 
Cash at end of period   $ 135,233   $ 49,671   $ 40,862  
   
 
 
 

Cash payments for income taxes

 

$

50,556

 

$

95,319

 

$

34,680

 
   
 
 
 
Cash payments for interest   $ 45,330   $ 26,489   $ 30,024  
   
 
 
 

The accompanying notes are an integral part of these financial statements.

65


SABRE HOLDINGS CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands)


 
  Class A
Common
Stock

  Additional
Paid-in
Capital

  Deferred
Compensation

  Retained
Earnings

  Accumulated
Other
Comprehensive
Loss

  Treasury
Stock

  Total
 
Balance at December 31, 2002   $ 1,448   $ 1,275,417   $ (6,316 ) $ 442,130   $ (16,024 ) $ (55,077 ) $ 1,641,578  
Issuance of class A common stock pursuant to:                                            
  Stock option plans     3     7,097                     7,100  
  Restricted stock (net of forfeitures)     4     4,868     (5,127 )           255      
  Restricted stock withheld upon vesting                         (29 )   (29 )
  Employee stock purchase plan     2     3,468                     3,470  
  Tax benefit from exercise of employee stock options         736                     736  
Dividends, $0.21 per common share                 (30,125 )           (30,125 )
Purchases of treasury stock                         (45,596 )   (45,596 )
Amortization of restricted stock             2,839                 2,839  
Amortization of other stock-based compensation         8,747                     8,747  
  Comprehensive income:                                            
    Net earnings                 83,301             83,301  
    Minimum pension liability adjustment, net of deferred income taxes                     (1,223 )       (1,223 )
    Unrealized gain on foreign currency forward and option contracts, net of deferred income taxes                     1,437         1,437  
    Unrealized gain on investments, net of deferred income taxes                     710         710  
    Unrealized foreign currency translation gain                     6,985         6,985  
                                       
 
  Total comprehensive income                                         91,210  
                                       
 
  Other         112         66             178  
   
 
 
 
 
 
 
 
Balance at December 31, 2003   $ 1,457   $ 1,300,445   $ (8,604 ) $ 495,372   $ (8,115 ) $ (100,447 ) $ 1,680,108  
Issuance of class A common stock pursuant to:                                            
  Stock option plans     1     (2,251 )               11,489     9,239  
  Restricted stock (net of forfeitures)     1     3,787     (13,689 )           9,901      
  Restricted stock withheld upon vesting                         (480 )   (480 )
  Employee stock purchase plan         (1,748 )               8,733     6,985  
  Tax benefit from exercise of employee stock options         1,173                     1,173  
Dividends, $0.30 per common share                 (41,431 )           (41,431 )
Purchases of treasury stock                         (228,682 )   (228,682 )
Amortization of restricted stock             6,128                 6,128  
Amortization of other stock-based compensation         5,200                     5,200  
  Comprehensive income:                                            
    Net earnings                 190,419             190,419  
    Minimum pension liability adjustment, net of deferred income taxes                     (8,330 )       (8,330 )
    Unrealized gain on foreign currency forward and option contracts, net of deferred income taxes                     519         519  
    Unrealized loss on investments, net of deferred income taxes                     (1,422 )       (1,422 )
    Unrealized foreign currency translation gain                     7,922         7,922  
                                       
 
  Total comprehensive income                                         189,108  
                                       
 
  Other         (867 )                   (867 )
   
 
 
 
 
 
 
 
Balance at December 31, 2004   $ 1,459   $ 1,305,739   $ (16,165 ) $ 644,360   $ (9,426 ) $ (299,486 ) $ 1,626,481  
Issuance of class A common stock pursuant to:                                            
  Stock option plans         (1,572 )               10,116     8,544  
  Restricted stock (net of forfeitures)         (1,751 )   (20,916 )           22,667      
  Restricted stock withheld upon vesting                         (3,055 )   (3,055 )
  Employee stock purchase plan         (942 )               5,203     4,261  
  Tax loss from exercise of employee stock options and restricted stock         (282 )                   (282 )
Dividends, $0.36 per common share                 (47,281 )           (47,281 )
Purchases of treasury stock                         (60,987 )   (60,987 )
Amortization of restricted stock             10,298                 10,298  
Amortization of other stock-based compensation         1,437                     1,437  
  Comprehensive income:                                            
    Net earnings                 172,152             172,152  
    Minimum pension liability adjustment, net of deferred income taxes                     (24,433 )       (24,433 )
    Unrealized loss on foreign currency forward and option contracts, net of deferred income taxes                     (11,101 )       (11,101 )
    Unrealized gain on investments, net of deferred income taxes                     634         634  
    Unrealized foreign currency translation loss net of deferred income taxes                     (33,546 )       (33,546 )
                                       
 
  Total comprehensive income                                         103,706  
                                       
 
  Other             (10 )               (10 )
   
 
 
 
 
 
 
 
Balance at December 31, 2005   $ 1,459   $ 1,302,629   $ (26,793 ) $ 769,231   $ (77,872 ) $ (325,542 ) $ 1,643,112  
   
 
 
 
 
 
 
 

The accompanying notes are an integral part of these financial statements.

66


SABRE HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    General Information


1 Basic Booking Request, Boomerang Voyages, Emergo, Hotel Spotlight, GetThere, Holidayautos.com, Jurni Network, lastminute.com, MySabre, Nexion, reisefeber.no, rejsefeber.dk, resfeber.se, Sabre, Sabre Airline Solutions, Sabre Holdings, the Sabre Holdings logo, Sabre Travel Network, SabreSonic, Surround, Showtickets.com, Site59, Site59.com, SynXis, TotalTrip, TRAMS, Travelocity, Travelocity Business, Travelocity Partner Network, Travelocity.ca, Travelocity.com, Travelocity.com.uk, Travelocity.de, Turbo Sabre, World Choice Travel and Zuji.com are trademarks and/or service marks of an affiliate of Sabre Holdings Corporation. All other trademarks, service marks, or trade names are the property of their respective owners. © 2006 Sabre Holdings Corporation. All rights reserved.

2.    Summary of Significant Accounting Policies

67


Property and equipment:    
  Buildings, including buildings under capital lease   Lesser of lease term or 35 years
  Furniture and fixtures   5 to 15 years
  Leasehold improvements   Lesser of lease term or useful life
  Computer/service contract equipment   3 to 5 years
  Computer software   3 to 7 years
Other amortizable assets:    
  Capitalized software development costs   3 to 7 years
  Intangible assets   1 to 20 years

68


69


70


71


72


73


 
   
  December 31, 2005
  December 31, 2004
 
 
  Weighted-Average
Useful Lives

  Gross Carrying
Amount, at Cost

  Accumulated
Amortization

  Gross Carrying
Amount, at Cost

  Accumulated
Amortization

 
Not subject to amortization:                              
  Goodwill       $ 1,743,746   $   $ 899,404   $  
  Tradenames, trademarks and domain names         308,621         30,608      
       
 
 
 
 
          2,052,367         930,012      
Subject to amortization:                              
  Purchased technology   4 years     245,855     (153,922 )   149,826     (134,874 )
  Acquired customer relationships and database   7 years     157,444     (43,053 )   57,145     (27,270 )
  Non-compete agreements   7 years     25,736     (22,005 )   24,009     (19,581 )
  Trademarks and brandnames   14 years     43,480     (1,839 )   300     (33 )
  Acquired contracts, supplier and distributor agreements   4 years     59,784     (30,707 )   30,667     (21,601 )
       
 
 
 
 
          532,299     (251,526 )   261,947     (203,359 )
       
 
 
 
 
Total       $ 2,584,666   $ (251,526 ) $ 1,191,959   $ (203,359 )
       
 
 
 
 

74



 

 

 

 
2006   $ 67,466
2007     63,542
2008     54,846
2009     24,031
2010-2025     70,888
   
Total   $ 280,773
   
 
  Sabre Travel
Network

  Travelocity
  Sabre Airline
Solutions

  Total
 
Balance at December 31, 2003   $ 221,083   $ 517,310   $ 40,241   $ 778,634  
Goodwill acquired     31,247     71,587     10,814     113,648  
Goodwill adjustments     1,414     450         1,864  
Foreign exchange revaluation     3,563         1,695     5,258  
   
 
 
 
 
Balance at December 31, 2004     257,307     589,347     52,750     899,404  
Goodwill acquired     30,828     853,899         884,727  
Goodwill adjustments     (14,497 )   2,867     225     (11,405 )
Foreign exchange revaluation     (5,538 )   (21,250 )   (2,192 )   (28,980 )
   
 
 
 
 
Balance at December 31, 2005   $ 268,100   $ 1,424,863   $ 50,783   $ 1,743,746  
   
 
 
 
 

75


76


 
  Year Ended December 31,
 
  2005
  2004
  2003
Denominator for basic earnings per common share—weighted-average shares   129,587   136,326   142,321
Dilutive effect of stock awards and options   749   1,605   1,086
   
 
 
Denominator for diluted earnings per common share—adjusted weighted-average shares   130,336   137,931   143,407
   
 
 

77


 
  Year ended December 31,
 
 
  2005
  2004
  2003
 
Net earnings as reported   $ 172,152   $ 190,419   $ 83,301  

Add stock compensation expense determined under intrinsic value method, net of income taxes

 

 

7,361

 

 

6,995

 

 

7,531

 

Less total stock-based employee compensation expense determined under fair value based method for all awards, net of income taxes

 

 

(30,937

)

 

(31,094

)

 

(48,063

)
   
 
 
 

Pro forma net earnings

 

$

148,576

 

$

166,320

 

$

42,769

 
   
 
 
 

Net earnings per common share, as reported:

 

 

 

 

 

 

 

 

 

 
 
Basic

 

$

1.33

 

$

1.40

 

$

0.59

 
   
 
 
 
 
Diluted

 

$

1.32

 

$

1.38

 

$

0.58

 
   
 
 
 

Net earnings per common share, pro forma:

 

 

 

 

 

 

 

 

 

 
 
Basic

 

$

1.15

 

$

1.22

 

$

0.30

 
   
 
 
 
 
Diluted

 

$

1.14

 

$

1.21

 

$

0.30

 
   
 
 
 
 
  Year ended December 31,
 
 
  2005
  2004
  2003
 
Average risk-free interest rate     4.0 %   3.3 %   2.8 %
Expected life (in years)     4.5     4.5     4.5  
Dividend yield     1.7 %   1.3 %   0.1 %
Volatility     49.3 %   51.6 %   53.6 %
Fair value   $ 8.27   $ 9.81   $ 8.60  

78


 
  Minimum
Pension
Liability
Adjustment

  Unrealized Gains/
(Losses) on
Foreign
Currency
Forward
Contracts

  Unrealized
Gains/(Losses)
on Investments

  Unrealized
Foreign
Currency
Translation
Gains/
(Losses)

  Total
Accumulated
Other
Comprehensive
Loss

 
Balance at December 31, 2002   $ (21,638 ) $ 4,976   $ 616   $ 22   $ (16,024 )

2003 other comprehensive income (loss), net of deferred taxes

 

 

(1,223

)

 

1,437

 

 

710

 

 

6,985

 

 

7,909

 
   
 
 
 
 
 
Balance at December 31, 2003     (22,861 )   6,413     1,326     7,007     (8,115 )

2004 other comprehensive income (loss), net of deferred taxes

 

 

(8,330

)

 

519

 

 

(1,422

)

 

7,922

 

 

(1,311

)
   
 
 
 
 
 
Balance at December 31, 2004     (31,191 )   6,932     (96 )   14,929     (9,426 )

2005 other comprehensive income (loss), net of deferred taxes

 

 

(24,433

)

 

(11,101

)

 

634

 

 

(33,546

)

 

(68,446

)
   
 
 
 
 
 
Balance at December 31, 2005   $ (55,624 ) $ (4,169 ) $ 538   $ (18,617 ) $ (77,872 )
   
 
 
 
 
 

79


80


3.    Marketable Securities

 
  December 31,
 
  2005
  2004
Corporate notes   $ 233,351   $ 265,277
Debt securities issued by U.S. Treasury, foreign governments and other government agencies (1)     103,200     416,711
Mortgages     4,738     41,788
Other debt securities (1)     35,296     63,577
   
 
Total   $ 376,585   $ 787,353
   
 
 
  December 31,
 
  2005
  2004
Due in one year or less   $ 138,254   $ 461,674
Due after one year through three years     193,305     1,038
Due after three years     45,026     324,641
   
 
Total   $ 376,585   $ 787,353
   
 

4.    Mergers and Acquisitions

81


Assets acquired net of liabilities assumed   $ 5,503
Purchased technology (5 year useful life)     3,900
Customer relationships (8 year useful life)     10,700
Tradenames     1,800
Goodwill     19,196
   
Total   $ 41,099
   

82


Working capital   $ (176,511 )
Property and equipment     21,280  
Investments in joint ventures and other assets, net     556  
Tradenames (indefinite life)     281,789  
Tradenames (14.2 year average useful life)     45,005  
Technology (3.5 year useful life)     95,411  
Customer and contractual relationships (7 year useful life)     108,012  
Non-compete agreements (1 year useful life)     1,800  
Goodwill     798,408  
Non-current liabilities     (1,483 )
   
 
Total purchase price   $ 1,174,267  
   
 

83


84


 
  Year ended
December 31, 2005

  Year ended
December 31, 2004

Pro forma revenues   $ 2,705,612   $ 2,463,675
Pro forma net income     110,561     137,400

Pro forma net income per common share:

 

 

 

 

 

 
Basic   $ 0.85   $ 1.01
Diluted   $ 0.85   $ 1.00

85


Net liabilities assumed   $ (5,835 )
Contracts (5 year useful life)     3,970  
Tradenames     2,227  
Goodwill     54,828  
   
 
Total   $ 55,190  
   
 

86


Subscriber contracts (3 year useful life)   $ 10,679
Net assets     517
Goodwill     20,008
   
Total   $ 31,204
   

87


Current assets acquired   $ 2,846  
Liabilities assumed     (5,198 )
Other assets acquired     65  
Affiliate network (5 year useful life)     8,000  
Brand names and domain names (indefinite life)     3,600  
Purchased technology (3 year useful life)     2,100  
Other intangible assets (weighted average life of 3 years)     1,700  
Goodwill     37,353  
   
 
Total purchase price   $ 50,466  
   
 

88


5.    Significant Transactions and Events

89


 
  2001
Restructuring
Plan

  2002
Restructuring
Plan

  2003
Restructuring Plan

  2004
Restructuring
Plan

  2005
Restructuring
Plan

   
 
 
  Facilities
Related

  Severance
and
Benefits

  Severance
and
Benefits

  Facilities
Related

  Severance
and
Benefits

  Severance
and
Benefits

  Total
 
Remaining liability at December 31, 2003     974     609     7,332     3,290             12,205  
Estimated cost of 2004 workforce reduction                     4,411         4,411  
Amounts paid in 2004     (808 )   (473 )   (6,412 )   (1,929 )   (1,368 )       (10,990 )
   
 
 
 
 
 
 
 
Remaining liability at December 31, 2004     166     136     920     1,361     3,043         5,626  
Estimated cost of 2005 workforce reduction                         6,344     6,344  
Amounts paid in 2005     (166 )   (136 )   (759 )   (1,241 )   (2,736 )   (1,010 )   (6,048 )
   
 
 
 
 
 
 
 
Remaining liability at December 31, 2005   $   $   $ 161   $ 120   $ 307   $ 5,334   $ 5,922  
   
 
 
 
 
 
 
 

90


91


92


6.    Derivatives

93


94


 
  December 31,
 
  2005
  2004
Foreign currency forwards and options   $ (6,078 ) $ 11,825
Interest rate swaps     (4,805 )   8,507
   
 
  Total   $ (10,883 ) $ 20,332
   
 

7.    Debt

95


Covenant

  Requirement
  Level at
December 31, 2005

Consolidated Leverage Ratio (Debt to EBITDA)   5.0 to 1   3.23 to 1
Consolidated Net Worth   $1.3 billion   $1.7 billion
Covenant

  Requirement
  Level at
December 31, 2005

Consolidated Leverage Ratio (Debt to EBITDA)   3.75 to 1 maximum   3.23 to 1
Consolidated Net Worth   $1.3 billion   $1.7 billion
As amended on July 22, 2005

  Requirement
Consolidated Leverage Ratio (Debt to EBITDA) for the quarters ended:    
July 22, 2005 through March 30, 2006   3.75 to 1 maximum
June 30, 2006 through September 30, 2006   3.50 to 1 maximum
December 31, 2006 through March 31, 2007   3.25 to 1 maximum
June 30, 2007 and thereafter   3.00 to 1 maximum

96


8.    Commitments and Contingencies

Covenant

  Requirement
  Level at
December 31, 2005

Consolidated Net Worth   $1.1 billion   $1.6 billion

97


Year Ending December 31,

 
2006   $ 9,607  
2007     9,607  
2008     9,607  
2009     9,607  
2010     9,607  
2011 and thereafter     183,317  
   
 
Total before interest     231,352  
Amounts representing interest     (65,532 )
   
 
Total obligations under capital lease     165,820  
Less fair value of interest rate swap (Note 6)     (6,761 )
Less current portion     (871 )
   
 
Long-term capital lease obligation   $ 158,188  
   
 

98


 
  Payments Due by Year
For the Years Ending December 31,

 
Contractual Obligations

 
  Total
  2006
  2007-2008
  2009-2010
  Thereafter
 
Notes payable (1)   $ 1,401,684   $ 854,684   $ 58,800   $ 58,800   $ 429,400  
Capital lease obligations (2)     231,352     9,607     19,214     19,214     183,317  
Operating lease obligations     129,587     33,008     44,900     23,894     27,785  
IT outsourcing agreement (3)     107,540     92,104     15,436          
Yahoo! agreement (4)     26,000     26,000              
WNS agreement (5)     134,541     20,431     53,401     60,709      
Pension and other benefit obligations (Note 9)     196,214     16,190     32,613     36,206     111,205  
Other long-term obligations (6)     114,809     61,458     24,273     10,451     18,627  
Amounts receivable under non-cancelable subleases (7)     (91,466 )   (6,765 )   (13,463 )   (13,037 )   (58,201 )
   
 
 
 
 
 
Total contractual cash obligations   $ 2,250,261   $ 1,106,717   $ 235,174   $ 196,237   $ 712,133  
   
 
 
 
 
 

99


 
  Year Ended December 31,
 
 
  2005
  2004
  2003
 
Rent expense   $ 41,809   $ 34,728   $ 37,012  
Less:                    
  Sublease rent     (6,392 )   (6,199 )   (6,127 )
   
 
 
 
Total Rent expense   $ 35,417   $ 28,529   $ 30,885  
   
 
 
 

100


9.    Employee Benefit Plans

101


 
  Pension Benefits
  Other Benefits
 
 
  2005
  2004
  2005
  2004
 
Change in benefit obligation:                          
  Benefit obligation at January 1   $ (366,281 ) $ (318,785 ) $ (75,817 ) $ (121,412 )
  Service cost     (6,069 )   (5,556 )   (1,217 )   (2,924 )
  Interest cost     (21,675 )   (20,476 )   (4,459 )   (7,051 )
  Participant contributions             (942 )   (731 )
  Actuarial losses, net     (43,163 )   (27,990 )   (6,280 )   (10,827 )
  Plan amendments         (1,282 )       61,502  
  Curtailments     49,124              
  Settlements         1,020          
  Benefits paid     8,723     6,788     5,307     5,626  
   
 
 
 
 
  Benefit obligation at December 31   $ (379,341 ) $ (366,281 ) $ (83,408 ) $ (75,817 )
   
 
 
 
 
Change in plan assets:                          
  Fair value of assets at January 1   $ 285,615   $ 252,428   $   $  
  Actual return on plan assets     20,533     25,089          
  Transfers     (83 )   171          
  Settlements         (976 )        
  Employer contributions     31,769     15,691     4,368     4,896  
  Participant contributions             942     731  
  Benefits paid     (8,723 )   (6,788 )   (5,310 )   (5,627 )
   
 
 
 
 
  Fair value of assets at December 31   $ 329,111   $ 285,615   $   $  
   
 
 
 
 
Funded status:                          
  Funded status at December 31   $ (50,230 ) $ (80,666 ) $ (83,408 ) $ (75,817 )
  Unrecognized transition (asset) obligation     (144 )   (157 )   109     127  
  Unrecognized prior service cost         1,813     (53,015 )   (59,506 )
  Unrecognized net losses     90,489     93,578     42,569     39,845  
   
 
 
 
 
  Prepaid (accrued) cost recognized   $ 40,115   $ 14,568   $ (93,745 ) $ (95,351 )
   
 
 
 
 
 
  Pension Benefits
  Other Benefits
 
 
  2005
  2004
  2005
  2004
 
Prepaid benefit cost   $ 48,050   $ 23,666   $   $  
Accrued benefit liability     (97,708 )   (59,186 )   (93,745 )   (95,351 )
Accumulated other comprehensive loss     89,773     50,088          
   
 
 
 
 
Prepaid (accrued) cost recognized   $ 40,115   $ 14,568   $ (93,745 ) $ (95,351 )
   
 
 
 
 

102


 
  Pension Benefits
  Other Benefits
   
 
 
  2005
  2004
  2005
  2004
   
 
Weighted-average assumptions:                      
  Discount rate   5.75 % 6.00 % 5.75 % 6.00 %    
  Rate of compensation increase     4.50 %        
 
  Pension Benefits
  Other Benefits
 
  2005
  2004
  2003
  2005
  2004
  2003
Components of total periodic benefit cost:                                    
  Service cost   $ 6,069   $ 5,556   $ 6,153   $ 1,217   $ 2,924   $ 3,594
  Interest cost     21,675     20,476     20,251     4,459     7,051     6,990
  Expected return on plan assets     (24,490 )   (22,745 )   (21,911 )          
  Amortization of transition asset     (13 )   (19 )   (19 )   18     18     18
  Amortization of prior service cost     138     61     61     (6,491 )   299     321
  Amortization of net loss     4,751     3,458     2,130     3,558     1,770     1,801
   
 
 
 
 
 
  Net periodic benefit cost     8,130     6,787     6,665     2,761     12,062     12,724
  Settlement loss         339     503            
Curtailment (gain)/loss     (1,907 )               126    
   
 
 
 
 
 
Total periodic benefit cost   $ 6,223   $ 7,126   $ 7,168   $ 2,761   $ 12,188   $ 12,724
   
 
 
 
 
 
 
  Pension Benefits
  Other Benefits
 
 
  2005
  2004
  2003
  2005
  2004
  2003
 
Discount rate   6.00 % 6.25 % 6.75 % 6.00 % 6.25 % 6.75 %
Expected return on plan assets   8.50 % 8.75 % 9.00 %      
Rate of compensation increase   4.50 % 4.50 % 6.60 %      

103


 
   
  Asset Allocation at December 31,
 
Asset Category

  Target 2005
Allocation

 
  2005
  2004
 
Equity securities   52%-58 % 53 % 58 %
Debt securities   42%-48 % 47 % 42 %
       
 
 
Total plan assets       100 % 100 %
       
 
 
 
  Pension
  Other Benefits
2006   $ 11,022   $ 5,168
2007     7,608     5,298
2008     9,849     9,858
2009     13,386     5,236
2010     12,645     4,939
2011-2015     84,002     27,203

104


10.    Income Taxes

 
  Year Ended December 31,
 
 
  2005
  2004
  2003
 
Current portion:                    
  Federal   $ 48,642   $ 72,414   $ 29,216  
  State and Local     2,779     4,301     1,547  
  Foreign     24,517     13,535     17,150  
   
 
 
 
    Total current     75,938     90,250     47,913  
   
 
 
 

Deferred portion:

 

 

 

 

 

 

 

 

 

 
  Federal     16,988     (9,548 )   (5,119 )
  State     (20,363 )   (14,060 )   1,282  
   
 
 
 
    Total deferred     (3,375 )   (23,608 )   (3,837 )
   
 
 
 
    Total provision for income taxes   $ 72,563   $ 66,642   $ 44,076  
   
 
 
 
 
  Year Ended December 31,
 
 
  2005
  2004
  2003
 
Income tax provision at statutory federal income tax rate   $ 85,650   $ 89,971   $ 44,582  
State income taxes, net of federal benefit     4,793     2,387     1,839  
Reversal of previously accrued taxes     (21,368 )   (23,438 )    
Other, net     3,488     (2,278 )   (2,345 )
   
 
 
 
Total provision for income taxes   $ 72,563   $ 66,642   $ 44,076  
   
 
 
 

105


 
  December 31,
 
 
  2005
  2004
 
Deferred tax assets:              
  Accrued expenses   $ 63,636   $ 61,377  
  Employee benefits other than pensions     34,924     36,046  
  Deferred revenue     3,349     1,263  
  Pension obligations     28,210     15,173  
  Net operating loss carryforwards     20,676     19,726  
  Deferred costs     39,041     40,298  
   
 
 
    Total deferred tax assets     189,836     173,883  

Deferred tax liabilities:

 

 

 

 

 

 

 
  Foreign operations     (12,403 )   (6,099 )
  Depreciation and amortization     (19,337 )   (24,269 )
  Amortization of computer software and intangible assets     (84,114 )   (60,013 )
  Other     (18,550 )   (50,198 )
   
 
 
    Total deferred tax liabilities     (134,404 )   (140,579 )

Net deferred tax asset

 

$

55,432

 

$

33,304

 
   
 
 
Current deferred income tax asset   $ 23,013   $ 23,349  
Noncurrent deferred income tax asset     32,419     9,955  
   
 
 
Net deferred tax asset   $ 55,432   $ 33,304  
   
 
 

106


107


11.    Capital Stock

Declaration Date

  Payable Date
  Amount per Share
2003:          
  April 17, 2003   May 15, 2003   $ 0.070
  July 15, 2003   August 15, 2003     0.070
  October 21, 2003   November 14, 2003     0.070

2004:

 

 

 

 

 
  January 20, 2004   February 17, 2004   $ 0.075
  April 20, 2004   May 14, 2004     0.075
  July 20, 2004   August 16, 2004     0.075
  October 26, 2004   November 15, 2004     0.075

2005:

 

 

 

 

 
  February 1, 2005   February 28, 2005   $ 0.090
  May 3, 2005   May 26, 2005     0.090
  July 26, 2005   August 18, 2005     0.090
  November 1, 2005   November 29, 2005     0.090

108


Date Authorized

  Authorized for
Repurchase

  Repurchased
  Repurchased under
ASSP

  Available for
Repurchase

 
October 20, 2003   $100 million   $100 million   $35 million   (1)
April 19, 2004   $100 million   $100 million     (2)
October 25, 2004   $100 million   $100 million     (3)
May 2, 2005   $100 million       $100 million (4)

109


12.    Options and Other Stock-Based Awards

 
  Year Ended December 31,
 
 
  2005
  2004
  2003
 
Outstanding at January 1   1,250,303   731,421   342,219  
Granted   1,077,516   753,500   654,878  
Issued   (485,163 ) (135,317 ) (45,358 )
Canceled   (85,572 ) (99,301 ) (220,318 )
   
 
 
 
Outstanding at December 31   1,757,084   1,250,303   731,421  
   
 
 
 

110


 
  Year Ended December 31,
 
 
  2005
  2004
  2003
 
Outstanding at January 1       145,124  
Awards settled in cash        
Canceled       (145,124 )
   
 
 
 
Outstanding at December 31