UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 


 

FORM 10-Q

 

ý

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

 

For the Quarterly Period Ended September 30, 2005.

 

OR

 

o

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

 

For the Transition Period From               To

 

Commission file number 1-12175.

 

 

SABRE HOLDINGS CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

75-2662240

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

3150 Sabre Drive, Southlake, Texas

 

76092

(Address of principal executive offices)

 

(Zip Code)

 

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

 

Not Applicable

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

 


 

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

 

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

 

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

 

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

 

Class A Common Stock, $.01 par value—131,229,140 as of October 31, 2005

 

 



 

INDEX

 

SABRE HOLDINGS CORPORATION

 

PART I:

FINANCIAL INFORMATION

3

Item 1.

Financial Statements (Unaudited)

3

 

Consolidated Balance Sheets—December 31, 2004 and September 30, 2005

3

 

Consolidated Statements of Income—Three and nine months ended September 30, 2004 and 2005

4

 

Consolidated Condensed Statement of Stockholders’ Equity—Nine months ended September 30, 2005

5

 

Consolidated Statements of Cash Flows—Nine months ended September 30, 2004 and 2005

6

 

Notes to Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

34

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

69

Item 4.

Controls and Procedures

70

PART II:

OTHER INFORMATION

71

Item 1.

Legal Proceedings

71

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

72

Item 3.

Defaults Upon Senior Securities

72

Item 4.

Submission of Matters to a Vote of Security Holders

73

Item 5.

Other Information

73

Item 6.

Exhibits

74

SIGNATURE

 

75

 

2



 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

SABRE HOLDINGS CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

 

September 30,
2005

 

December 31,
2004

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash

 

$

104,722

 

$

49,671

 

Restricted cash

 

42,392

 

 

Marketable securities

 

447,637

 

787,353

 

Accounts receivable, net

 

634,197

 

349,621

 

Prepaid expenses

 

44,356

 

63,521

 

Deferred income taxes

 

14,870

 

23,349

 

Total current assets

 

1,288,174

 

1,273,515

 

 

 

 

 

 

 

Property and equipment

 

 

 

 

 

Buildings and leasehold improvements

 

318,861

 

309,635

 

Furniture, fixtures and equipment

 

42,433

 

33,579

 

Computer equipment

 

137,482

 

120,515

 

Internally developed software

 

244,077

 

195,638

 

 

 

742,853

 

659,367

 

Less accumulated depreciation and amortization

 

(316,833

)

(272,026

)

Total property and equipment

 

426,020

 

387,341

 

 

 

 

 

 

 

Deferred income taxes

 

4,945

 

9,955

 

Investments in joint ventures

 

159,353

 

176,249

 

Goodwill and intangible assets, net

 

2,313,433

 

988,600

 

Other assets, net

 

193,067

 

182,317

 

Total assets

 

$

4,384,992

 

$

3,017,977

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

185,043

 

$

177,207

 

Travel supplier liabilities and related deferred revenue

 

422,286

 

72,264

 

Accrued compensation and related benefits

 

59,243

 

80,448

 

Accrued subscriber incentives

 

95,940

 

84,357

 

Deferred revenues

 

27,648

 

24,906

 

Other accrued liabilities

 

336,893

 

169,110

 

Bridge facility

 

800,000

 

 

Total current liabilities

 

1,927,053

 

608,292

 

 

 

 

 

 

 

Pensions and other postretirement benefits

 

154,506

 

154,537

 

Other liabilities

 

21,099

 

23,101

 

Minority interests

 

9,027

 

5,143

 

Long-term capital lease obligation

 

159,495

 

161,114

 

Public and other notes payable

 

430,070

 

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;
145,855 shares issued at September 30, 2005 and December 31, 2004

 

1,459

 

1,459

 

Additional paid-in capital

 

1,275,576

 

1,289,574

 

Retained earnings

 

768,944

 

644,360

 

Accumulated other comprehensive loss

 

(28,711

)

(9,426

)

Less treasury stock at cost: 14,632 and 12,913 shares, respectively

 

(333,526

)

(299,486

)

Total stockholders’ equity

 

1,683,742

 

1,626,481

 

Total liabilities and stockholders’ equity

 

$

4,384,992

 

$

3,017,977

 

 

See Notes to Consolidated Financial Statements.

 

3



 

SABRE HOLDINGS CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

Revenues

 

$

699,706

 

$

544,390

 

$

1,900,849

 

$

1,635,046

 

Cost of revenues

 

372,367

 

302,015

 

1,083,673

 

921,307

 

Gross profit

 

327,339

 

242,375

 

817,176

 

713,739

 

Other operating expenses

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

211,945

 

153,209

 

532,661

 

439,293

 

Amortization of intangible assets

 

15,823

 

11,999

 

30,644

 

39,348

 

Total other operating expenses

 

227,768

 

165,208

 

563,305

 

478,641

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

99,571

 

77,167

 

253,871

 

235,098

 

Other income (expense)

 

 

 

 

 

 

 

 

 

Interest income

 

5,303

 

4,300

 

15,772

 

10,841

 

Interest expense

 

(15,801

)

(6,861

)

(31,803

)

(19,719

)

Gain/(loss) on sale of investments

 

(100

)

 

20,494

 

 

Gain/(loss) on derivative instruments

 

1,746

 

 

(8,248

)

 

Other, net

 

2,791

 

2,119

 

4,388

 

8,603

 

 

 

 

 

 

 

 

 

 

 

Total other income (expense)

 

(6,061

)

(442

)

603

 

(275

)

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

93,510

 

76,725

 

254,474

 

234,823

 

Provision for income taxes

 

35,014

 

9,299

 

94,410

 

65,424

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

58,496

 

$

67,426

 

$

160,064

 

$

169,399

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.45

 

$

0.50

 

$

1.23

 

$

1.23

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

0.45

 

$

0.49

 

$

1.23

 

$

1.22

 

 

See Notes to Consolidated Financial Statements.

 

4



 

SABRE HOLDINGS CORPORATION

CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2005

(Unaudited) (In thousands)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Class A

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Common

 

Additional Paid

 

Deferred

 

Retained

 

Comprehensive

 

Treasury

 

 

 

 

 

Stock

 

in Capital

 

Compensation

 

Earnings

 

Income (Loss)

 

Stock

 

Total

 

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

 

 

(827

)

 

 

 

2,774

 

1,947

 

Restricted stock plan (net of forfeitures)

 

 

(1,572

)

(19,572

)

 

 

21,144

 

 

Restricted stock withheld upon vesting

 

 

 

 

 

 

(1,754

)

(1,754

)

Employee stock purchase plan

 

 

(883

)

 

 

 

4,783

 

3,900

 

Tax benefit from exercise of employee stock options

 

 

171

 

 

 

 

 

171

 

Dividends, $0.27 per common share

 

 

 

 

(35,480

)

 

 

(35,480

)

Purchases of treasury stock

 

 

 

 

 

 

(60,987

)

(60,987

)

Amortization of restricted stock

 

 

 

7,512

 

 

 

 

7,512

 

Amortization of other stock-based compensation

 

 

1,202

 

 

 

 

 

1,202

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

160,064

 

 

 

160,064

 

Unrealized loss on foreign currency forward and option contracts, net of deferred income taxes

 

 

 

 

 

(9,471

)

 

(9,471

)

Unrealized gain on investments, net of deferred income taxes

 

 

 

 

 

600

 

 

600

 

Unrealized foreign currency translation loss

 

 

 

 

 

(10,553

)

 

(10,553

)

Other

 

 

 

 

 

139

 

 

139

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

140,779

 

Other

 

 

(19

)

(10

)

 

 

 

(29

)

Balance at September 30, 2005

 

$

1,459

 

$

1,303,811

 

$

(28,235

)

$

768,944

 

$

(28,711

)

$

(333,526

)

$

1,683,742

 

 

See Notes to Consolidated Financial Statements.

 

5



 

SABRE HOLDINGS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (In thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2005

 

2004

 

Operating Activities

 

 

 

 

 

Net earnings

 

$

160,064

 

$

169,399

 

Adjustments to reconcile net earnings to cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

92,120

 

94,476

 

Stock-based compensation for employees

 

8,714

 

9,182

 

Allowance for doubtful accounts

 

4,520

 

15,404

 

Deferred income taxes

 

8,077

 

(2,451

)

Loss on derivative instruments

 

8,248

 

 

Joint venture equity loss

 

1,992

 

7,066

 

Gain on sale of investments

 

(20,494

)

 

Other

 

(9,974

)

(4,733

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(50,657

)

(47,001

)

Prepaid expenses

 

12,065

 

1,520

 

Other assets

 

12,783

 

25,031

 

Accounts payable and other accrued liabilities

 

34,592

 

29,426

 

Accrued compensation and related benefits

 

(21,205

)

13,580

 

Postretirement medical and other benefits

 

108

 

7,769

 

Other liabilities

 

(2,722

)

(498

)

Cash provided by operating activities

 

238,231

 

318,170

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Additions to property and equipment

 

(62,727

)

(56,463

)

Purchases of marketable securities

 

(8,282,115

)

(7,713,992

)

Sales of marketable securities

 

8,623,107

 

7,741,718

 

Proceeds from sale of investments

 

40,920

 

 

Loans and investments to joint venture partners

 

(16,538

)

(30,561

)

Acquisitions (net of cash acquired)

 

(1,172,320

)

(37,569

)

Other investing activities

 

(17,697

)

(16,774

)

Cash used for investing activities

 

(887,370

)

(113,641

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Proceeds from bridge facility

 

800,000

 

 

Proceeds from issuance of common stock

 

4,093

 

15,364

 

Dividends paid

 

(35,480

)

(31,301

)

Purchases of treasury stock

 

(63,213

)

(165,011

)

Other financing activities

 

(1,210

)

(1,895

)

Cash provided by (used for) financing activities

 

704,190

 

(182,843

)

 

 

 

 

 

 

Increase in cash

 

55,051

 

21,686

 

Cash at beginning of period

 

49,671

 

40,862

 

Cash at end of period

 

$

104,722

 

$

62,548

 

 

See Notes to Consolidated Financial Statements.

 

6



 

SABRE HOLDINGS CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.             General Information

 

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

 

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

 

2.             Summary of Significant Accounting Policies

 

Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP in the United States for complete financial statements. In the opinion of management, these financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position, results of operations and cash flows for the periods indicated. The preparation of financial statements in accordance with GAAP in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Operating results for the three and nine months ended September 30, 2005 are not necessarily indicative of results that may be expected for any other interim period or for the year ended December 31, 2005.  Our quarterly financial data should be read in conjunction with our consolidated financial statements for the year ended December 31, 2004 (including the notes thereto), set forth in Sabre Holdings Corporation’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 11, 2005.

 

We consolidate all of our majority-owned subsidiaries and companies that are not variable interest entities over which we exercise control through majority voting rights.  We would also consolidate all variable interest entities of which we are the primary beneficiary.  However, no entities are currently consolidated due to us being the primary beneficiary through operating agreements, financing agreements, or other arrangements (including variable interests held in variable interest entities).  In the fourth quarter of 2005, we expect to loan additional funds or may possibly choose to participate in future anticipated capital calls of Zuji Holdings Limited (“Zuji”), a joint venture in which we hold a 13% equity stake through direct and indirect ownership. We account for Zuji using the equity method. Without a pro rata contribution from the other equity holders, we would be required to consolidate Zuji beginning in the fourth quarter of 2005 under the guidance of the Financial Accounting Standards Board (“FASB”) Interpretation No. 46R, Consolidation of Variable Interest Entities.  See “Management’s Discussion and Analysis – Business Trends – Investments in Travelocity.”

 


(1)           Hotel Spotlight, GetThere, Jurni Network, Nexion, Sabre, Sabre Airline Solutions, Sabre Holdings, the Sabre Holdings logo, Sabre Travel Network, SabreSonic, Surround, Showtickets.com, Site59, Site59.com, SynXis, TotalTrip, Travelocity, Travelocity Business, lastminute.com and Travelocity.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.   © 2005 Sabre Holdings Corporation. All rights reserved.

 

7



 

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

 

Reclassifications – Certain reclassifications have been made to the 2004 financial statements to conform to the 2005 presentation.  These reclassifications are not material, either individually or in the aggregate, to our financial statements.

 

Revenue Recognition – lastminute.com entities recognize revenue related to air travel at the time of departure whereas the remainder of our Travelocity segment recognizes revenue related to air travel at the time the reservation is made.  The revenue recognition method used by lastminute.com is appropriate under U.S. GAAP, but it will be changed to conform to the method used by the remainder of our Travelocity segment.  The alignment of these accounting policies will affect the timing of lastminute.com revenue recognition but it is not anticipated to materially impact our results of operations.

 

Non-income taxes – With the lastminute.com acquisition, we adopted an accounting policy regarding the recording of anticipated refund claims for certain value-added taxes (“VAT”) associated with customer transactions in certain regions of Europe.  The refund claims are accrued as a contra-expense at the time the underlying customer transaction is booked as revenue. The revenue from the customer transaction is recorded at the date of consumption by the customer.  We believe this policy appropriately recognizes this contra-expense consistently with the associated revenue.

 

Advertising – Prior to 2005, certain advertising costs were deferred within the fiscal year to future interim periods where the benefit of that advertising extended beyond the quarter in which they occurred.  Beginning in the first quarter of 2005, advertising costs are expensed in the period in which they are incurred with no deferral to subsequent interim periods.  Our current advertising strategy, particularly for Travelocity, is to generate interest in travel promotions and products where returns are more immediate, whereas in the past our strategy was developing overall brand awareness.

 

This expense timing change resulted in lower selling, general and administrative expenses for the three months ended September 30, 2005 of an estimated $7 million and higher net income of $4 million or $.03 per share.  For the nine months ended September 30, 2005, this timing change resulted in lower selling, general and administrative expenses of an estimated $1 million and higher net income of less than $1 million or $.01 per share.  The impact of this timing change will be neutral to advertising expense for the full year.

 

 We estimate that if we had used our current advertising expense method in 2004, selling, general and administrative expenses would have been an estimated $10 million lower and net income an estimated $6 million, or $.05 per share higher for the three months ended September 30, 2004 and selling, general and administrative expenses would have been $4 million higher and net income an estimated $2 million, or $.02 per share lower for the nine months ended September 30, 2004.

 

Travel Supplier Liabilities and Related Deferred Revenue – To facilitate the provision of travel accommodations to travelers, we enter into agreements with travel suppliers for the right to market their products, services and other content offerings.  Under some agreements with travel suppliers in Europe, including air travel, we collect the full price of the travel from the consumer and remit the payment to the travel supplier, after withholding our service fee.  The amount due to the travel supplier and our fee is recorded in travel supplier liabilities and related deferred revenue on the balance sheets until these amounts are paid to the supplier or recognized as revenue upon consumption of the travel.  Under other agreements with travel suppliers, content is available to us at pre-determined net rates.  Net rate travel offerings can include air travel, hotel stays, car rentals and dynamically packaged combinations of those components.  We market those offerings to travelers at a price that includes an amount sufficient to pay the travel supplier for its charge for providing the travel accommodations, along with any applicable taxes we expect will be invoiced to us by the travel supplier on that charge, as well as additional amounts representing our service fees.  For this type of business model, we require pre-payment by the traveler at the time of booking or at a pre-determined time before departure.  Travel supplier liabilities also reflects amounts payable to travel suppliers under these net rate travel offering and related deferred revenue, which reflects the amounts representing our service fees that are recognized as revenue when the travel has been consumed.

 

8



 

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

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

Denominator for basic earnings per common share - weighted-average shares

 

129,328

 

135,513

 

129,619

 

137,370

 

Dilutive effect of stock awards and options

 

764

 

2,583

 

674

 

1,861

 

 

 

 

 

 

 

 

 

 

 

Denominator for diluted earnings per common share - adjusted weighted-average shares

 

130,092

 

138,096

 

130,293

 

139,231

 

 

Options to purchase approximately 20,896,599 and 20,321,717 weighted-average shares of our Class A Common Stock, par value $0.01 per share (“Common Stock”), were outstanding during the three and nine month periods ending September 30, 2005, respectively, but were excluded from the computation of diluted earnings per share because the effect would be anti-dilutive.  For the corresponding periods in 2004, anti-dilutive options to purchase approximately 16,734,112 and 16,117,038 weighted-average shares of our Common Stock were excluded from the computation of diluted earnings per share.  The increase in anti-dilutive weighted-average shares from September 30, 2004 to September 30, 2005 is due primarily to a lower market price for shares of our Common Stock.  The decrease in weighted-average shares from September 30, 2004 to September 30, 2005 is due to our share repurchase programs.

 

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

 

We have not made, and will not make, loans (including the acceptance of promissory notes) for the exercise of our stock options or the purchase of our Common Stock.

 

On December 16, 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payments (“FAS 123R”), which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation (“FAS 123”).  FAS 123R supersedes APB 25 and amends FASB Statement No. 95, Statement of Cash Flows.  Generally, the approach in FAS 123R is similar to the approach described in FAS 123.  However, FAS 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 expect to adopt FAS 123R on January 1, 2006 using the modified prospective method and, as a result, we will begin expensing options upon adoption with no restatement of prior periods.  All options granted prior to adoption will continue to be expensed using the fair value determined by Black Scholes; however, options granted subsequent to our adoption of FAS 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-lined basis over the requisite service period.  FAS 123R also requires that the benefits of tax deductions in excess of recognized compensation cost to 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 this will depend on the future exercise behavior of option holders. We expect the of adoption of FAS 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.

 

9



 

The following table summarizes the pro forma effect of stock-based compensation on our net earnings and net earnings per share for the three and nine months ended September 30, 2005 and 2004, as if we had accounted for such compensation at fair value (in thousands, except per share data).  Pro forma footnote disclosure is no longer an alternative once FAS 123R is required to be adopted.

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Net earnings as reported

 

$

58,496

 

$

67,426

 

$

160,064

 

$

169,399

 

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

 

1,914

 

1,697

 

5,466

 

5,671

 

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

 

(7,736

)

(7,396

)

(24,027

)

(23,559

)

Pro forma net earnings

 

$

52,674

 

$

61,727

 

$

141,503

 

$

151,511

 

 

 

 

 

 

 

 

 

 

 

Net earnings per common share, as reported:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.45

 

$

0.50

 

$

1.23

 

$

1.23

 

Diluted

 

$

0.45

 

$

0.49

 

$

1.23

 

$

1.22

 

Net earnings per common share, pro forma:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.41

 

$

0.46

 

$

1.09

 

$

1.10

 

Diluted

 

$

0.40

 

$

0.45

 

$

1.09

 

$

1.09

 

 

Restricted cash - Restricted cash of $42 million primarily represents cash that is required to be held to fulfill bonding requirements in Europe which are in place to protect European travel consumers in the event a travel supplier is unable to provide the travel products purchased or we default on our obligation to pay the travel supplier.  The amounts of the required deposits are established annually based on forecasted transaction value sold and are influenced by the credit stability and ratings of the company acting as collection agent or merchant for the transaction (us in this instance) and do not represent the entire cost of the travel product purchased.  Therefore, we are contingently liable for additional amounts beyond those on deposit as restricted cash with bonding agencies.

 

10



 

Goodwill and Long-Lived Assets At September 30, 2005 and December 31, 2004, our intangible assets were comprised of the following (in thousands):

 

 

 

 

 

September 30, 2005

 

December 31, 2004

 

 

 

Weighted-

 

Gross Carrying

 

 

 

Gross Carrying

 

 

 

 

 

Average Useful

 

Amount,

 

Accumulated

 

Amount,

 

Accumulated

 

 

 

Lives

 

at Cost

 

Amortization

 

at Cost

 

Amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

Not subject to amortization:

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

 

$

1,784,806

 

$

 

$

993,481

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Tradenames, trademarks and domain names

 

 

 

314,060

 

 

30,608

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,098,866

 

 

1,024,089

 

 

Subject to amortization:

 

 

 

 

 

 

 

 

 

 

 

Purchased technology

 

4 years

 

249,944

 

(146,323

)

149,820

 

(134,874

)

 

 

 

 

 

 

 

 

 

 

 

 

Acquired customer relationships and database

 

7 years

 

161,406

 

(37,823

)

57,145

 

(27,270

)

 

 

 

 

 

 

 

 

 

 

 

 

Non-compete agreements

 

7 years

 

25,809

 

(21,400

)

24,009

 

(19,581

)

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks and brandnames

 

14 years

 

45,305

 

(886

)

300

 

(33

)

 

 

 

 

 

 

 

 

 

 

 

 

Acquired contracts, supplier and distributor agreements

 

4 years

 

60,512

 

(28,201

)

30,667

 

(21,601

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

542,976

 

(234,633

)

261,941

 

(203,359

)

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

$

2,641,842

 

$

(234,633

)

$

1,286,030

 

$

(203,359

)

 

Amortization expense relating to intangible assets subject to amortization totaled $16 million and $12 million for the three months ended September 30, 2005 and 2004, respectively and $31 million and $39 million during the nine months ended September 30, 2005 and 2004, respectively. Included in the nine months ended September 30, 2004 is an impairment charge of $3 million for technology-related assets. No other significant impairments of our goodwill or intangible assets have been recorded.

 

11



 

Estimated amortization expense relating to intangible assets subject to amortization for each of the five succeeding years is as follows (in thousands):

 

2006

 

$

69,936

 

2007

 

65,948

 

2008

 

57,224

 

2009

 

25,050

 

2010 and beyond

 

70,864

 

 

 

 

 

Total

 

$

289,022

 

 

Changes in the carrying amount of goodwill during the nine months ended September 30, 2005 and the twelve months ended December 31, 2004 are as follows (in thousands):

 

 

 

Sabre Travel
Network

 

Travelocity

 

Sabre Airline
Solutions

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2004

 

$

351,384

 

$

589,347

 

$

52,750

 

$

993,481

 

Goodwill acquired

 

30,828

 

784,363

 

 

815,191

 

Goodwill adjustments

 

(19,545

)

(2,621

)

(1,700

)

(23,866

)

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2005

 

$

362,667

 

$

1,371,089

 

$

51,050

 

$

1,784,806

 

 

Goodwill adjustments in Sabre Travel Network include the reclassification of $11 million from goodwill to intangible assets based on managements’ estimation and an independent valuation of the fair value of assets acquired with our Gulf Air joint venture.  Other goodwill adjustments primarily consist of foreign currency exchange revaluations of goodwill.

 

The goodwill balances at December 31, 2004 and September 30, 2005 include $94 million of goodwill related to our investments in joint ventures. Goodwill resulting from joint ventures is included in investments in joint ventures in the accompanying balance sheet.

 

12



 

3.             Significant Events

 

Acquisition of lastminute.com – On July 20, 2005, we completed the acquisition of lastminute.com, a leading online travel agency and leisure company in Europe. The aggregate cost of the acquisition was approximately $1.2 billion ($1,070 million net of cash acquired). The aggregate cost includes cash paid to lastminute.com plc stockholders of $1,023 million, debt retired of $138 million and direct acquisition costs of $12 million. We used approximately $367 million of available cash and marketable securities ($264 million, net of cash acquired) to fund the acquisition and incurred $800 million in additional indebtedness under the Bridge Facility as discussed in Note 7.  We plan to refinance the Bridge Facility before it expires on August 12, 2006, and are considering various sources of funds, which may or may not include a combination of debt, cash, equity or equity-like securities.

 

With the acquisition of lastminute.com our Travelocity segment greatly expanded its scale. We can now offer travel suppliers a greater number of potential buyers in a broader geographic area, particularly Europe.  We expect this increased scale to allow us to offer consumers even better travel deals and a greater range of international options.  An immediate benefit is our ability to give lastminute.com customers access to the wide range of hotels in Travelocity’s net rate hotel program. lastminute.com customers will have a greater range of U.S. and international travel options, and over time, Travelocity should gain more European travel choices.

 

lastminute.com has been included in our Consolidated Income Statement from the date of acquisition, July 20, 2005.  The assets acquired and liabilities assumed have been recorded on 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 and liabilities acquired.  The final allocation of the purchase price will be based on a complete evaluation of the assets and liabilities of lastminute.com.  Accordingly, the information presented on our Consolidated Balance Sheets and elsewhere in this report may differ materially from the final purchase price allocation. The recorded goodwill related to the acquisition of lastminute.com by our Travelocity segment will be deductible for income tax purposes and represents a value attributable to an increased competitive position in Europe and greater scale.

 

The following table summarizes the allocation of the purchase price and the amounts allocated to goodwill (in thousands):

 

Working capital

 

$

(169,049

)

Property and equipment

 

26,183

 

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

 

784,363

 

Non-current liabilities

 

(1,483

)

 

 

 

 

Total purchase price

 

$

1,172,587

 

 

Working capital includes an accrual of approximately $43 million of acquisition related cost. This accrual includes $9 million, net of deferred taxes, for the fair value of a restructuring plan which we began to develop shortly after the acquisition to eliminate duplicate costs including certain duplicate facilities and to restructure certain areas of the lastminute.com business.  We estimate that the restructuring plan will be completed by mid-2006. The accrual also includes a material contingent liability in relation to a dispute with a vendor and other items.

 

13



 

Pro forma Statement of Operations Data for lastminute.com Acquisition

 

The following unaudited pro forma information presents our results of operations from continuing operations as if the acquisition of lastminute.com, discussed above, had occurred as of January 1, 2004.  The pro forma information has been prepared by combining our results of operations and lastminute.com’s results of operations for the three and nine months ended September 30, 2004 and 2005.  Prior to the acquisition lastminute.com utilized a September 30 fiscal year end.  The lastminute.com statements of operations have been adjusted to conform to our calendar year end financial statement presentation.  For purposes of this report, unaudited pro forma adjustments, including a reconciliation between GAAP in the United Kingdom, where lastminute.com is headquartered, and GAAP in the United States, have been made to the lastminute.com historical financial statements.  The pro forma information does not purport to be indicative of the results that would have occurred if the acquisition had actually been in effect earlier than July 20, 2005 nor indicative of future performance. The lastminute.com nine months ended September 30, 2005 results include several one-time adjustments totaling $43 million which have a material effect on the results presented.  These adjustments, which are not anticipated in future periods, include costs incurred and amounts expensed related to the acquisition and a material disputed amount possibly due to a vendor.  Pro forma adjustments related to the acquisition of SynXis and the Gulf Air joint venture have not been included, as the effect of doing so would be immaterial.  Amounts below are presented in thousands, except per share data:

 

 

 

Three months ended
September 30, 2004

 

Nine months ended
September 30, 2004

 

 

 

 

 

 

 

Proforma revenues

 

$

662,704

 

$

1,892,605

 

Proforma net income

 

58,399

 

132,846

 

 

 

 

 

 

 

Proforma net income per common share:

 

 

 

 

 

Basic

 

$

0.43

 

$

0.97

 

Diluted

 

$

0.42

 

$

0.95

 

 

 

 

 

 

 

 

 

Three months ended
September 30, 2005

 

Nine months ended
September 30, 2005

 

 

 

 

 

 

 

Proforma revenues

 

$

730,434

 

$

2,085,206

 

Proforma net income

 

59,848

 

98,595

 

 

 

 

 

 

 

Proforma net income per common share:

 

 

 

 

 

Basic

 

$

0.46

 

$

0.76

 

Diluted

 

$

0.46

 

$

0.76

 

 

14



 

Gulf Air Joint Venture - On December 31, 2004, we entered into a joint venture with Gulf Air, a leading airline carrier in the Middle East, for which we will pay $31 million during 2005, $28 million of which has been paid as of September 30, 2005. The joint venture, Sabre Travel Network Middle East, is owned 60% by Sabre Travel Network and 40% by Gulf Air and will further extend our travel network products and services into the Middle East region. The joint venture will provide technology services, bookable travel products and distribution services for travel agencies, corporations and travel suppliers in the region.  In addition, Sabre Airline Solutions entered into a five-year revised contract with Gulf Air to provide the SabreSonicSM suite of products for passenger management, as well as additional operational software and consulting services. The goodwill resulting from this transaction is not deductible for tax purposes. Intangible assets subject to amortization will be amortized over their respective lives. The results of the Gulf Air joint venture are consolidated into our financial results. The following table summarizes the allocation of the purchase price and the amounts allocated to goodwill (in thousands):

 

Subscriber contracts (3 year useful life)

 

$

10,679

 

Net assets

 

517

 

Goodwill

 

20,008

 

Total

 

$

31,204

 

 

Acquisition of SynXis - On January 19, 2005, we completed the acquisition of SynXis Corporation (“SynXis”), for approximately $41 million in cash including acquisition costs, of which $37 million has been paid as of September 30, 2005. The acquisition of the SynXis® reservation management, distribution and technology services for hotels enables us to further build on our capabilities and offerings to hoteliers, to leverage new hotel content for all of our travel agents, and to extend reservation technology currently used at approximately 6,000 hotels, primarily in the United States and Europe and is a part of our Sabre Travel Network segment. The acquired goodwill is not deductible for tax purposes.  Intangible assets subject to amortization will be amortized over their respective lives.  The following table summarizes the allocation of the purchase price and the amounts allocated to goodwill (in thousands):

 

Assets acquired net of liabilities assumed

 

$

5,506

 

Purchased technology (5 year useful life)

 

3,900

 

Customer relationships (8 year useful life)

 

10,700

 

Tradenames

 

1,800

 

Goodwill

 

19,226

 

Total

 

$

41,132

 

 

15



 

Sale of Karavel Investment On March 11, 2005, we sold our interest in Karavel SA, a French tour operator. We received approximately $27 million (Euro 20 million) in cash proceeds in connection with the sale and recorded a $21 million gain in other income.

 

Conversion of TRX Note and Warrants – During the third quarter 2005, we converted a note receivable and warrants of TRX, Inc. (“TRX”), a provider of transaction processing and data integration to the travel industry, into shares of TRX common stock, a majority of which we sold.  As a result of these transactions, we recorded a loss of $1 million to other income and received cash proceeds of $15 million, including payments for accrued interest. Before these transactions, our Consolidated Balance Sheets reflected under other assets a net asset balance of $17 million related to TRX, including accrued interest.  At September 30, 2005, net assets of $2 million remained on our Consolidated Balance Sheets, reflecting the market value of TRX shares we still owned.

 

Cost Reductions We incurred approximately $4 million in severance and related cost during 2004 for a workforce reduction of which less than $1 million remains accrued for as of September 30, 2005. In June 2005, we announced a plan for a workforce reduction and accrued approximately $3 million for severance and related costs due to employees under the plan, $2 million of which remains accrued at September 30, 2005.  We expect the majority of the accruals under this plan will be paid out in the fourth quarter of 2005.

 

16



 

4.             Pension and Other Post Retirement Benefit Plans

 

The components of net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans for the three and nine months ended September 30, 2005 and 2004 are presented in the tables below (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

Pension Benefits

 

2005

 

2004

 

2005

 

2004

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

Service cost

 

$

1,510

 

$

1,618

 

$

4,529

 

$

3,904

 

Interest cost

 

5,405

 

6,096

 

16,212

 

14,319

 

Expected return on plan assets

 

(6,332

)

(6,855

)

(18,341

)

(15,840

)

Amortization of transition asset

 

(3

)

(3

)

(8

)

(11

)

Amortization of prior service cost

 

35

 

13

 

104

 

48

 

Amortization of actuarial loss

 

1,189

 

1,017

 

3,565

 

2,422

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

 

$

1,804

 

$

1,886

 

$

6,061

 

$

4,842

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

Other Benefits

 

2005

 

2004

 

2005

 

2004

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

Service cost

 

$

276

 

$

697

 

$

899

 

$

2,280

 

Interest cost

 

1,040

 

1,642

 

3,201

 

5,373

 

Amortization of transition asset

 

4

 

3

 

11

 

10

 

Amortization of prior service cost

 

(1,542

)

78

 

(4,620

)

237

 

Amortization of actuarial loss

 

661

 

666

 

2,253

 

2,040

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

 

$

439

 

$

3,086

 

$

1,744

 

$

9,940

 

 

We made a $15 million contribution to fund our defined benefit pension plan during the nine months ended September 30, 2005. During the nine months ended September 30, 2004, $5 million was contributed to fund our defined benefit pension plan and $10 million was contributed in the fourth quarter of 2004. Annual contributions to our defined benefit pension plans are based on several factors that may vary from year to year, therefore, past contributions are not always indicative of future contributions.

 

On January 21, 2005, the final regulations implementing the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 were issued.   We have considered the effects of the regulations and we do not expect them to have a significant impact on our financial condition or results of operations.

 

17



 

5.             Income Taxes

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

Income tax provision at statutory federal income tax rate

 

$

32,729

 

$

26,854

 

$

89,066

 

$

82,188

 

State income taxes, net of federal benefit

 

1,454

 

989

 

4,640

 

3,189

 

Reversal of previously accrued taxes

 

 

(17,939

)

 

(17,939

)

Other, net

 

831

 

(605

)

704

 

(2,014

)

 

 

 

 

 

 

 

 

 

 

Total provision for income taxes

 

$

35,014

 

$

9,299

 

$

94,410

 

$

65,424

 

 

During the third quarter of 2004, we reversed previously accrued taxes of $18 million related primarily to our federal income tax treatment of lump-sum payments made to subscribers at the beginning of a contract term (“upfront subscriber incentive payments”).  During the quarter, we changed our federal income tax treatment of such payments in accordance with recently issued Treasury regulations, and such change is effective for our 2003 tax year.  By changing our federal income tax treatment of these payments to comply with the new regulations effective for our 2003 tax return, the manner in which we treated such payments in years before 2003 will be respected.  Accordingly, we reversed previously accrued taxes of $18 million related to our treatment of these payments for federal income tax purposes for years before 2003.

 

6.             Derivatives

 

In order to hedge our operational exposure to foreign currency movements, we are a party to certain foreign currency forward and option contracts. We have designated these instruments as cash flow hedges. Amounts reclassified from other comprehensive income to earnings due to the settlement of forward and option contracts were approximately $1 million and $2 million during the three months ended September 30, 2005 and 2004, respectively and approximately $5 million and $9 million for the nine months ended September 30, 2005 and 2004, respectively.  No hedging ineffectiveness was recorded in earnings relating to the forwards or options during the nine months ended September 30, 2005 and 2004.  The estimated fair values of the foreign currency forward and option contracts were a liability of $3 million at September 30, 2005 and an asset of $12 million at December 31, 2004.  These foreign currency forward and option contracts were recorded in other accrued liabilities at September 30, 2005 and prepaid assets at December 31, 2004 on the Consolidated Balance Sheets.  We also have short term forward contracts in our lastmintue.com subsidiaries that hedge a portion of our foreign currency exposure related to travel supplier liability payments.  The impact of these contracts on the financial statements for the quarter ended September 30, 2005 was not significant.

 

We are also a party to certain interest rate swap contracts.  We have designated the swaps as fair value hedges of our public notes payable and capital lease obligation. No hedging ineffectiveness was recorded in earnings relating to our interest rate swaps during the nine months ended September 30, 2005 or 2004.  The estimated fair values of the interest rate swaps were a net liability of $0.4 million at September 30, 2005 and a net asset of $9 million at December 31, 2004. These interest rate swap contracts were recorded in other liabilities at September 30, 2005 and other assets at December 31, 2004 on the Consolidated Balance Sheet.

 

In order to offset our currency exposure in relation to the acquisition of lastminute.com, in May 2005, we purchased an option to acquire British Pounds Sterling (“GBP”) and Euros (“EUR”) at a fixed rate at or near the closing of the transaction for $10 million.  Due to the strengthening of the U.S. Dollar against these currencies, this transaction resulted in a loss of $10 million to the Consolidated Statement of Income, the majority of which was recorded in the second quarter of 2005.

 

On June 29, 2005, we entered into forward contracts to purchase GBP 578 million and EUR 115 million to hedge the U.S. Dollar costs of the acquisition of lastminute.com, including debt held by lastminute.com.  In the third quarter of 2005, these forward contracts matured resulting in a gain of $2 million.

 

18



 

7.             Debt

 

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 purchase of the shares of lastminute.com in connection with 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 September 30, 2005 equated to a borrowing rate of 4.61%.

 

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 to repurchase our stock.

 

As of September 30, 2005, we were in compliance with all covenants under the Bridge Facility including the following financial covenants:

 

Covenant

 

Requirement

 

Level at
September 30,
2005

 

 

 

 

 

 

 

Consolidated Leverage Ratio (Debt to EBITDA)

 

5.0 to 1

 

3.14 to 1

 

 

 

 

 

 

 

Consolidated Net Worth

 

$

1.3 billion

 

$

1.7 billion

 

 

We will refinance the Bridge Facility prior to its expiration on August 12, 2006 with long-term financing.

 

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 September 30, 2005, there are no borrowings outstanding under this agreement. As of September 30, 2005, we were in compliance with all covenants under this agreement including the following financial covenants:

 

19



 

Covenant

 

Requirement

 

Level at
September 30,
2005

 

 

 

 

 

 

 

Consolidated Leverage Ratio (Debt to EBITDA)

 

3.75 to 1 maximum

 

3.14 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):

 

 

 

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 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 September 30, 2005, we were in compliance with all covenant requirements under the Notes.  Sabre Inc., a 100% owned subsidiary of Sabre Holdings Corporation, unconditionally guarantees all debt obligations of Sabre Holdings Corporation.  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, we 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.

 

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 September 30, 2005, we were in compliance with all covenants under this agreement including the following financial covenant:

 

Covenant

 

Requirement

 

Level at
September 30,
2005

 

 

 

 

 

 

 

Consolidated Net Worth

 

$

1.0 billion

 

$

1.7 billion

 

 

20



 

8.             Commitments and Contingencies

 

Future Minimum Payments Under Contractual Obligations—The table presented below updates significant obligations obtained from our acquisition of lastminute.com and other items. At September 30, 2005, future minimum payments required under the Notes, the capital lease for our corporate headquarters facility, operating lease agreements with terms in excess of one year for facilities, equipment and software licenses and other significant contractual cash obligations were as follows (in thousands):

 

 

 

Payments Due by Year

 

 

 

For the Years Ending December 31,

 

Contractual Obligations

 

Total

 

2005
(remaining)

 

2006 -
2007

 

2008 -
2009

 

Thereafter

 

Notes payable (1)

 

$

1,408,253

 

$

9,220

 

$

881,433

 

$

58,800

 

$

458,800

 

Capital lease obligations (2)

 

236,155

 

4,803

 

19,214

 

19,214

 

192,924

 

Operating lease obligations

 

129,502

 

8,869

 

53,365

 

29,539

 

37,729

 

IT outsourcing agreement (3)

 

128,936

 

21,396

 

107,540

 

 

 

AOL agreement (4)

 

6,500

 

6,500

 

 

 

 

Yahoo! agreement (5)

 

32,755

 

6,755

 

26,000

 

 

 

WNS agreement (6)

 

135,472

 

931

 

44,796

 

58,942

 

30,803

 

Pension and other benefit obligations (Note 4)

 

156,394

 

3,001

 

25,811

 

37,167

 

90,415

 

Other long-term obligations (7)

 

90,181

 

22,118

 

42,859

 

6,477

 

18,727

 

Amounts receivable under non-cancelable subleases (8)

 

(92,943

)

(1,717

)

(13,475

)

(13,078

)

(64,673

)

 

 

 

 

 

 

 

 

 

 

 

 

Total contractual cash obligations

 

$

2,231,205

 

$

81,876

 

$

1,187,543

 

$

197,061

 

$

764,725

 

 


(1)  Includes all interest and principal related to our $400 million unsecured public notes.  Also includes all interest and principal related to our $800 million Bridge Facility, which matures on August 12, 2006, see Note 7 of the Consolidated Financial Statements.  Excludes the effect of interest rate swaps. See Note 6 of the Consolidated Financial Statements.

 

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

 

(3)  Represents minimum amounts due to Electronic Data Systems Corporation (“EDS”) under the terms of our Outsourcing Agreement.

 

(4)  Payments due under an agreement with America Online (“AOL”) that provides, among other things, that Travelocity would be the exclusive reservations engine for AOL’s Internet properties through March 2006.

 

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

 

(6)  We are committed to minimum payments to WNS North America, Inc., an entity that we outsource a portion of our contact center operations and back-office fulfillment, through 2010 based upon current and historical transactions.

 

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

 

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

 

21



 

Future financing requirements—We will be required to refinance the $800 million acquisition Bridge Facility prior to its expiration on August 12, 2006.  We expect that funds to refinance the Bridge Facility will come from several sources, including external financing, cash generated from operations, and existing cash and marketable securities from our balance sheet.  We will evaluate multiple refinancing alternatives, including public and private markets for debt, equity, and equity-like securities.  The timing and choice of refinancing options will be subject to market conditions. Otherwise, we believe available balances of cash and short-term investments, cash flows from operations and funds available under our revolving credit agreement, as amended in July 2005, will be sufficient to meet our cash requirements for the foreseeable future. We continually evaluate opportunities to sell additional equity or debt securities, obtain credit facilities from lenders, or restructure our long-term debt for strategic reasons or to further strengthen our financial position. If market conditions warrant, we may engage in additional financing transactions. In addition, to the extent we consider additional acquisitions of or investments in complementary businesses, products, services and technologies, such additional activities might affect our liquidity requirements or cause us to issue additional equity or debt securities.

 

Other contingencies—We have established a reserve for potential occupancy tax liability. The reserve represents our best estimate of our contingent liability for occupancy taxes. We are involved in certain disputes and other matters arising in the normal course of business. Additionally, we are subject to review and assessment by various taxing authorities. Although the ultimate resolution of these matters cannot be reasonably estimated at this time, we do not believe that they will have a material adverse effect on our financial condition or results of operations.

 

Other accrued liabilities on the Consolidated Balance Sheets includes our best estimate of a reserve for an ongoing dispute with a vendor of lastminute.com.  To date, the vendor has not indicated how much they believe they are owed.  The accrual did not affect our earnings as the liability existed at the date of acquisition and was established in the purchase price allocation for lastminute.com as a component of working capital.

 

We are also engaged from time to time in routine legal proceedings incidental to our businesses. We do not believe that any of these routine legal proceedings will have a material impact on the business or our financial condition.

 

22



 

9.             Business Segments

 

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

 

Our reportable segments are strategic business segments that offer different products and services and are managed separately because each business requires different market strategies.  The accounting policies of the segments are the same as those used in our consolidated results.  Due to similarities in products, services and operations, lastminute.com is included in the Travelocity segment pursuant to SFAS 131, “Disclosures about Segments of an Enterprise and Related Information.”  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 by Sabre Travel Network to Travelocity for transactions processed through the Sabre GDS, data processing fees paid by Travelocity to Sabre Travel Network for transactions processed through the Sabre GDS, transaction fees paid by Travelocity to Sabre Travel Network for transactions facilitated through the Sabre GDS in which the travel supplier pays Travelocity directly, and fees paid by Sabre Travel Network to Travelocity for corporate trips booked through the Travelocity® online booking technology.  In addition, Sabre Airline Solutions pays fees to Travelocity for airline trips booked through the Travelocity online booking technology. Personnel and related costs for the corporate headquarters, certain legal and professional fees, and other corporate charges are allocated to the segments through a management fee based on the relative size of the segments and usage of corporate resources or services.  Depreciation expense on the corporate headquarters buildings and related facilities costs are allocated to the segments through a facility fee based on headcount.  Benefits expense, including pension expense, postretirement benefits, medical insurance and workers’ compensation are allocated to the segments based on headcount.

 

23



 

Selected information for our three reportable segments for the three and nine months ended September 30, 2005 and 2004 follows (in thousands).

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

 

 

 

 

 

 

 

 

Sabre Travel Network

 

$

389,335

 

$

373,514

 

$

1,221,627

 

$

1,170,563

 

Travelocity

 

240,591

 

109,916

 

484,457

 

290,897

 

Sabre Airline Solutions

 

67,140

 

60,405

 

196,757

 

180,652

 

Total

 

$

697,066

 

$

543,835

 

$

1,902,841

 

$

1,642,112

 

 

 

 

 

 

 

 

 

 

 

Intersegment revenues:

 

 

 

 

 

 

 

 

 

Sabre Travel Network

 

$

7,555

 

$

7,845

 

$

22,450

 

$

23,073

 

Travelocity

 

38,687

 

35,569

 

120,155

 

105,152

 

Total

 

$

46,242

 

$

43,414

 

$

142,605

 

$

128,225

 

 

 

 

 

 

 

 

 

 

 

Equity in net income (loss) of equity method investees:

 

 

 

 

 

 

 

 

 

Sabre Travel Network

 

$

5,727

 

$

6,545

 

$

7,288

 

$

12,492

 

Travelocity

 

(3,087

)

(5,990

)

(9,280

)

(19,558

)

Total

 

$

2,640

 

$

555

 

$

(1,992

)

$

(7,066

)

 

 

 

 

 

 

 

 

 

 

Consolidated revenues:

 

 

 

 

 

 

 

 

 

Sabre Travel Network

 

$

402,617

 

$

387,904

 

$

1,251,365

 

$

1,206,128

 

Travelocity

 

276,191

 

139,495

 

595,332

 

376,491

 

Sabre Airline Solutions

 

67,140

 

60,405

 

196,757

 

180,652

 

Elimination of intersegment revenues

 

(46,242

)

(43,414

)

(142,605

)

(128,225

)

Total

 

$

699,706

 

$

544,390

 

$

1,900,849

 

$

1,635,046

 

 

24



 

Our Chief Operating Decision Maker allocates resources to and assesses the performance of each segment using adjusted operating income. A summary of the adjusting items and reconciliation of adjusted operating income to consolidated operating income is set forth below (in thousands).  In addition to the segment data see Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

Segment operating income (loss) excluding adjusting items:

 

 

 

 

 

 

 

 

 

Sabre Travel Network

 

$

59,467

 

$

77,629

 

$

212,291

 

$

251,423

 

Travelocity

 

42,782

 

9,655

 

37,546

 

17,833

 

Sabre Airline Solutions

 

10,877

 

2,904

 

32,447

 

7,876

 

Net corporate allocations

 

(1,056

)

(441

)

(722

)

188

 

Total

 

$

112,070

 

$

89,747

 

$

281,562

 

$

277,320

 

 

 

 

 

 

 

 

 

 

 

Impact of adjusting items on operating income – (increase) / decrease:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sabre Travel Network:

 

 

 

 

 

 

 

 

 

Intangibles amortization

 

$

3,910

 

$

3,471

 

$

13,521

 

$

14,989

 

Total Sabre Travel Network

 

$

3,910

 

$

3,471

 

$

13,521

 

$

14,989

 

 

 

 

 

 

 

 

 

 

 

Travelocity:

 

 

 

 

 

 

 

 

 

Intangibles amortization

 

$

11,104

 

$

7,556

 

$

14,721

 

$

22,408

 

Stock compensation

 

371

 

1,219

 

1,202

 

4,474

 

Total Travelocity

 

$

11,475

 

$

8,775

 

$

15,923

 

$

26,882

 

 

 

 

 

 

 

 

 

 

 

Sabre Airline Solutions:

 

 

 

 

 

 

 

 

 

Intangibles amortization

 

$

558

 

$

334

 

$

1,691

 

$

334

 

Total Sabre Airline Solutions

 

$

558

 

$

334

 

$

1,691

 

$

334

 

 

 

 

 

 

 

 

 

 

 

Corporate:

 

 

 

 

 

 

 

 

 

Other

 

(3,444

)

 

(3,444

)

17

 

Total Corporate

 

$

(3,444

)

$

 

$

(3,444

)

$

17

 

 

 

 

 

 

 

 

 

 

 

Total operating income adjusting items

 

$

12,499

 

$

12,580

 

$

27,691

 

$

42,222

 

 

 

 

 

 

 

 

 

 

 

Consolidated operating income (loss):

 

 

 

 

 

 

 

 

 

Sabre Travel Network

 

$

55,557

 

$

74,158

 

$

198,770

 

$

236,434

 

Travelocity

 

31,307

 

880

 

21,623

 

(9,049

)

Sabre Airline Solutions

 

10,319

 

2,570

 

30,756

 

7,542

 

Net corporate allocations

 

2,388

 

(441

)

2,722

 

171

 

Total

 

$

99,571

 

$

77,167

 

$

253,871

 

$

235,098

 

 

Segment operating income for Travelocity for 2005 includes the impact of changes in the timing of recognizing advertising expenses within the fiscal year.  See Note 2.

 

Corporate operating income adjusting items for the third quarter of 2005 includes a $3 million reversal of an accrual relating to disputes with former employees arising from the sale of our IT outsourcing business to EDS in 2001.  A majority of these disputes were resolved in the third quarter of 2005.

 

The acquisition of lastminute.com has materially changed Travelocity’s segment assets.  See Note 3 for additional information.

 

25



 

10.          Supplemental Guarantor/Non-Guarantor Financial Information

 

Certain obligations of Sabre Holdings have been solely guaranteed by its 100% owned operating subsidiary, Sabre Inc. There are currently no restrictions on Sabre Holdings’ ability to obtain funds from Sabre Inc. in the form of a dividend or loan other than typical dividend requirements under Delaware law.  Additionally, there are no significant restrictions on Sabre Inc.’s ability to obtain funds from its direct or indirect subsidiaries other than those that would exist under state or foreign law.  Sabre Inc. is the sole direct subsidiary of Sabre Holdings.  All other subsidiaries are direct or indirect subsidiaries of Sabre Inc.  These other subsidiaries are all included in the non-guarantor financial statements.  The following financial information presents condensed consolidating balance sheets, statements of income and statements of cash flows for Sabre Holdings, Sabre Inc. and non-guarantor subsidiaries. The information has been presented as if Sabre Holdings accounted for its ownership of Sabre Inc., and Sabre Inc. accounted for its ownership of the non-guarantor subsidiaries, using the equity method of accounting.  Certain reclassifications have been made to the 2004 financial statements to conform to the 2005 presentation.  These reclassifications are not material, either individually or in the aggregate, to our financial statements.

 

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

 

Sabre Inc. and certain non-guarantor subsidiaries are parties to various intercompany agreements that affect the amount of operating expenses reported in the following condensed consolidating statements of income. Among other things, fees are paid by Sabre Inc. to a non-guarantor subsidiary relating to the use of trademarks, tradenames, etc. owned by a non-guarantor subsidiary; incentive and marketing payments are made by Sabre Inc. to non-guarantor subsidiaries relating to the use and distribution of the Sabre system; and payments are made by non-guarantor subsidiaries to Sabre Inc. for access to the Sabre system under the terms of these agreements.  During the nine months ended September 30, 2005 and 2004, Sabre Inc. recognized operating expenses in connection with these agreements totaling approximately $252 million and $181 million, respectively.  These amounts, and the corresponding amounts recognized by the non-guarantor subsidiaries are eliminated in consolidation.

 

26



 

UNAUDITED CONSOLIDATING CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2005

(In thousands)

 

 

 

Sabre
Holdings

 

Sabre
Incorporated

 

Non-Guarantor
Subsidiaries

 

Eliminations

 

Sabre
Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and marketable securities

 

$

 

$

449,889

 

$

102,470

 

$

 

$

552,359

 

Restricted cash

 

 

 

42,392

 

 

42,392

 

Accounts receivable, net

 

 

285,986

 

348,211

 

 

634,197

 

Intercompany accounts receivable (payable)