<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000.
-------------------
[ ] 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)
<TABLE>
<S> <C>
Delaware 75-2662240
------------------------------------------ --------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4255 Amon Carter Blvd.
Fort Worth, Texas 76155
------------------------------------------ --------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (817) 963-6400
-------------------
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 X No .
--- ---
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 - 129,291,962 as of November 01, 2000
================================================================================
<PAGE>
INDEX
SABRE HOLDINGS CORPORATION
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - September 30, 2000 and December 31, 1999
Consolidated Statements of Income - Three and nine months ended September
30, 2000 and 1999
Condensed Consolidated Statement of Stockholders' Equity - Nine months
ended September 30, 2000
Consolidated Statements of Cash Flows - Nine months ended September 30,
2000 and 1999
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Part II: OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SABRE HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited) (In thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 9,266 $ 6,628
Short-term investments 157,526 604,498
Accounts receivable, net 505,200 295,254
Receivable from affiliates, net -- 29,093
Prepaid expenses 72,714 22,899
Deferred income taxes 25,267 18,052
----------- -----------
Total current assets 769,973 976,424
PROPERTY AND EQUIPMENT
Buildings and leasehold improvements 338,459 337,409
Furniture, fixtures and equipment 47,256 46,485
Service contract equipment 524,857 546,200
Computer equipment 505,502 482,334
----------- -----------
1,416,074 1,412,428
Less accumulated depreciation and amortization (865,782) (839,874)
----------- -----------
Total property and equipment 550,292 572,554
Investments in joint ventures 160,526 156,158
Goodwill and intangible assets, net 261,692 --
Other assets, net 293,608 246,075
----------- -----------
TOTAL ASSETS $ 2,036,091 $ 1,951,211
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 181,826 $ 121,091
Accrued compensation and related benefits 94,274 89,424
Notes payable 200,000 --
Other accrued liabilities 271,860 314,598
----------- -----------
Total current liabilities 747,960 525,113
Deferred income taxes 8,931 --
Pensions and other postretirement benefits 104,882 119,687
Notes payable 149,000 --
Other liabilities 41,793 44,366
Commitments and contingencies
Minority interest in Travelocity.com 247,266 --
STOCKHOLDERS' EQUITY
Preferred stock: $0.01 par value; 20,000 shares authorized; no shares issued -- --
Common stock:
Class A: $0.01 par value; 250,000 shares authorized; 131,465 and 23,995
shares issued, respectively 1,315 240
Class B: $0.01 par value; 107,374 shares authorized; 0 and 107,374 shares
issued and outstanding, respectively -- 1,074
Additional paid-in capital 607,314 607,285
Retained earnings 225,391 727,050
Less treasury stock at cost: 2,352 and 1,573 shares, respectively (97,761) (73,604)
----------- -----------
Total stockholders' equity 736,259 1,262,045
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,036,091 $ 1,951,211
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
SABRE HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (In thousands, except per share amounts)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
2000 1999 2000 1999
--------- -------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Travel Marketing and Distribution $ 451,059 $376,524 $ 1,341,325 $ 1,145,694
Outsourcing and Software Solutions 216,248 240,718 632,672 748,474
--------- -------- ----------- -----------
Total revenues 667,307 617,242 1,973,997 1,894,168
OPERATING EXPENSES
Cost of revenues
Travel Marketing and Distribution 289,109 255,433 837,961 758,860
Outsourcing and Software Solutions 184,716 171,098 520,129 618,208
Selling, general and administrative 103,138 70,079 296,313 188,452
Amortization of goodwill and intangible assets 22,357 -- 48,439 --
--------- -------- ----------- -----------
Total operating expenses 599,320 496,610 1,702,842 1,565,520
--------- -------- ----------- -----------
OPERATING INCOME 67,987 120,632 271,155 328,648
OTHER INCOME (EXPENSE)
Interest income 3,376 5,130 12,200 20,438
Interest expense (7,276) -- (15,813) (9,706)
Other - net 747 45 772 34,989
--------- -------- ----------- -----------
Total other income (expense) (3,153) 5,175 (2,841) 45,721
--------- -------- ----------- -----------
MINORITY INTEREST IN NET LOSS OF TRAVELOCITY.COM 8,544 -- 23,451 --
--------- -------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 73,378 125,807 291,765 374,369
Provision for income taxes 28,963 47,379 118,326 139,749
--------- -------- ----------- -----------
NET EARNINGS $ 44,415 $ 78,428 $ 173,439 $ 234,620
========= ======== =========== ===========
EARNINGS PER COMMON SHARE
Basic $ .34 $ .61 $ 1.34 $ 1.81
========= ======== =========== ===========
Diluted $ .34 $ .55 $ 1.28 $ 1.79
========= ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
SABRE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2000
(Unaudited) (In thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Additional
Common Common Paid-in Retained Treasury
Stock Stock Capital Earnings Stock Total
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 $ 240 $ 1,074 $ 607,285 $ 727,050 $(73,604) $ 1,262,045
Net earnings -- -- -- 173,439 -- 173,439
Issuance of Class A Common Stock pursuant to
stock option, restricted stock incentive
and stock purchase plans 1 -- (2,381) -- 10,315 7,935
Tax benefit from exercise of employee stock
options -- -- 1,547 -- -- 1,547
Repurchase of Class A Common Stock -- -- -- -- (34,472) (34,472)
Exchange of Class B Common Stock for Class
A Common Stock 1,074 (1,074) -- -- -- --
Dividends paid -- -- 863 (675,903) -- (675,040)
Unrealized gain on investments, net of
deferred taxes -- -- -- 805 -- 805
-------------------------------------------------------------------------------
Balance at September 30, 2000 $1,315 $ -- $ 607,314 $ 225,391 $(97,761) $ 736,259
===============================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
SABRE HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 173,439 $ 234,620
Adjustments to reconcile net earnings to cash provided by operating activities
Depreciation and amortization 214,629 187,134
Deferred income taxes 5,202 156
Gain on sale of other investments -- (34,828)
Changes in operating assets and liabilities
Accounts receivable (195,614) (8,877)
Prepaid expenses (69,230) (10,051)
Other assets (31,367) (5,581)
Accrued compensation and related benefits 2,754 (5,568)
Accounts payable and other accrued liabilities 139,440 8,313
Receivable from and payable to affiliates 29,093 (21,888)
Pensions and other postretirement benefits (14,805) 8,356
Other liabilities (26,822) 5,551
Payment to US Airways (81,469) --
Minority interest in Travelocity.com (23,451) --
--------- ---------
Cash provided by operating activities 121,799 357,337
INVESTING ACTIVITIES
Additions to property and equipment (144,193) (125,012)
Net decrease in marketable investments 423,829 126,241
Loan to affiliate -- (300,000)
Proceeds from sale of other investments -- 34,828
Business combinations, net of cash acquired (33,003) --
Net investments in joint ventures 6,979 5,052
Other investing activities, net (18,434) (31,157)
--------- ---------
Cash provided by (used for) investing activities 235,178 (290,048)
FINANCING ACTIVITIES
Proceeds from issuance of common stock pursuant to employee stock plans 7,426 12,152
Purchases of treasury stock (34,472) (58,944)
Dividends paid (675,000) --
Proceeds from issuance of notes payable 349,000 --
Other financing activities, net (1,293) (1,161)
Payment of Debenture payable to AMR -- (17,873)
--------- ---------
Cash used for financing activities (354,339) (65,826)
--------- ---------
Increase in cash 2,638 1,463
Cash at beginning of the period 6,628 8,008
--------- ---------
Cash at end of the period $ 9,266 $ 9,471
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
-------------------------------------------------------------------------------
1. GENERAL INFORMATION
Sabre Holdings Corporation is a holding company. Its sole direct subsidiary
is Sabre Inc., which is the successor to the businesses of The Sabre Group
which were previously operated as subsidiaries or divisions of American
Airlines, Inc. ("American") or AMR Corporation ("AMR"). The Sabre Group was
formed by AMR to capitalize on synergies of combining AMR's information
technology businesses under common management. On March 15, 2000, AMR
exchanged all of its 107,374,000 shares of the Company's Class B Common
Stock for an equal number of shares of the Company's Class A Common Stock
and distributed all those shares to AMR shareholders as a stock dividend.
AMR no longer has any ownership interest in the Company. Unless otherwise
indicated, references herein to the "Company" include Sabre Holdings
Corporation and its consolidated subsidiaries.
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 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
generally accepted accounting principles 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 generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results may differ from these
estimates. The Company's quarterly financial data should be read in
conjunction with the consolidated financial statements of the Company for
the year ended December 31, 1999 (including the notes thereto), set forth
in Sabre Holdings Corporation's Annual Report on Form 10-K.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1999
financial statements to conform to the 2000 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS - In June 1999, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -
DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133, which deferred
for one year the effective date of FASB Statement No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("FAS 133"). FAS 133 will
apply to all fiscal quarters of all fiscal years beginning after June 15,
2000. The Company expects to adopt FAS 133 effective January 1, 2001. FAS
133 will require the Company to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of derivatives will either
be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. FAS 133 would apply to warrants
received from Hotel Reservations Network in connection with an affiliation
agreement. The Company currently estimates that upon adoption it will
report a gain of approximately $11 to $12 million, before minority
interest, related to these warrants. The estimated gain is based upon the
Black-Scholes value of the warrants at September 30, 2000 and any actual
gains or losses realized by the Company will be dependent upon the stock
price at the time the warrants are either exercised or upon final disposal
of the stock.
3. COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions, events and circumstances
from non-owner sources. It includes all changes in equity during a period
except those resulting from investments by owners and distributions to
owners. During the three and nine months ended September 30, 2000, the
difference between net earnings and total comprehensive income was
approximately $1 million due to unrealized gains and losses on marketable
securities.
6
<PAGE>
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
--------------------------------------------------------------------------------
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per common share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic earnings per common
share - net earnings $ 44,415 $ 78,428 $ 173,439 $ 234,620
Incremental amortization of deferred
asset related to options issued to US
Airways (202) (6,489) (7,426) (205)
--------- --------- --------- ---------
Numerator for diluted earnings per
common share - adjusted net earnings
$ 44,213 $ 71,939 $ 166,013 $ 234,415
Denominator:
Denominator for basic earnings per
common share - weighted-average shares
128,889 129,379 129,191 129,608
Dilutive effect of stock awards and
options (199) 1,886 393 1,415
--------- --------- --------- ---------
Denominator for diluted earnings per
common share - adjusted weighted-average
shares 128,690 131,265 129,584 131,023
========= ========= ========= =========
Earnings per common share - basic $ .34 $ .61 $ 1.34 $ 1.81
========= ========= ========= =========
Earnings per common share - diluted $ .34 $ .55 $ 1.28 $ 1.79
========= ========= ========= =========
</TABLE>
5. SEGMENT REPORTING
The Company has three reportable segments: travel marketing and
distribution, Travelocity.com and outsourcing and software solutions. The
travel marketing and distribution segment distributes travel services to
travel agencies and corporate travel departments ("subscribers"). Through
the Company's global distribution system, subscribers can access
information about and book reservations with airlines and other providers
of travel and travel-related products and services. The Travelocity.com
segment distributes travel services to individual consumers. Through the
Travelocity.com Web site, individual consumers can compare prices, make
travel reservations and obtain destination information online. The
outsourcing and software solutions segment provides information technology
services, including software development and consulting, transaction
processing and comprehensive information technology outsourcing to the
travel and transportation industries. The Company's reportable segments are
strategic business units that offer different products and services and are
managed separately because each business requires different market
strategies. The travel marketing and distribution and Travelocity.com
segments are aggregated and presented as travel marketing and distribution
within the consolidated statements of income for the three and nine months
ended September 30, 2000 and 1999.
7
<PAGE>
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
--------------------------------------------------------------------------------
Selected information for the Company's three reportable segments for the
three and nine months ended September 30, 2000 and 1999 follows (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------ ----------------------------
2000 1999 2000 1999
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues from external customers:
Travel Marketing and Distribution $ 401,588 $ 360,329 $ 1,227,548 $ 1,106,137
Travelocity.com 43,592 11,022 98,448 25,836
Outsourcing and Software Solutions 216,220 240,718 632,672 748,474
--------- --------- ----------- -----------
Total $ 661,400 $ 612,069 $ 1,958,668 $ 1,880,447
========= ========= =========== ===========
Intersegment revenues:
Travel Marketing and Distribution $ 8,183 $ (6,551) $ 16,112 $ (15,568)
Travelocity.com 9,769 6,551 28,734 15,568
Outsourcing and Software Solutions 2,123 -- 4,619 --
--------- --------- ----------- -----------
Total $ 20,075 $ -- $ 49,465 $ --
========= ========= =========== ===========
Equity in net income of equity method investees:
Travel Marketing and Distribution $ 5,907 $ 5,173 $ 15,329 $ 13,721
========= ========= =========== ===========
Total consolidated revenues:
Travel Marketing and Distribution $ 415,678 $ 358,951 $ 1,258,989 $ 1,104,290
Travelocity.com 53,361 17,573 127,182 41,404
Outsourcing and Software Solutions 218,343 240,718 637,291 748,474
Elimination of intersegment revenues (20,075) -- (49,465) --
--------- --------- ----------- -----------
Total $ 667,307 $ 617,242 $ 1,973,997 $ 1,894,168
========= ========= =========== ===========
Operating income (loss):
Travel Marketing and Distribution $ 92,095 $ 83,975 $ 331,043 $ 291,414
Travelocity.com (33,279) (3,446) (86,538) (16,813)
Outsourcing and Software Solutions 6,924 44,123 41,543 56,496
Net corporate allocations 2,247 (4,020) (14,893) (2,449)
--------- --------- ----------- -----------
Total $ 67,987 $ 120,632 $ 271,155 $ 328,648
========= ========= =========== ===========
</TABLE>
Net corporate allocations include approximately $13 million of nonrecurring
expenses associated with the spin-off from AMR for the nine months ended
September 30, 2000.
6. STOCK OPTIONS - US AIRWAYS, INC.
In December 1999, US Airways, Inc. ("US Airways") exercised one of its two
tranches of options to acquire three million shares of the Company's Class
A Common Stock. Pursuant to the terms of the exercised options, the Company
paid approximately $81 million to US Airways on January 5, 2000 instead of
issuing shares to US Airways.
In connection with the Company's payment of the $675 million dividend on
February 18, 2000, the Company adjusted the terms of the second tranche of
stock options held by US Airways such that the aggregate intrinsic value of
US Airways' holdings was the same before and after the effect of the
payment of the dividend on the Company's stock price.
8
<PAGE>
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
--------------------------------------------------------------------------------
7. SIGNIFICANT TRANSACTIONS
On February 4, 2000, the Company entered into a $300 million, senior
unsecured, revolving credit agreement (the "Credit Facility"), which
expires on September 14, 2004. Additionally, on February 4, 2000, the
Company entered into a short-term $200 million, senior unsecured, term loan
agreement (the "Interim Loan"), which had an original maturity of August 4,
2000. On August 4, 2000, the Company executed an agreement to extend the
Interim Loan until February 4, 2001. The Company utilized a portion of its
available cash balance and short-term investments as well as proceeds from
both the Credit Facility and Interim Loan to fund the $675 million dividend
paid to shareholders on February 18, 2000 in connection with the separation
of the Company from AMR. Interest on these debt agreements is variable,
based upon the London Interbank Offered Rate ("LIBOR"), the prime rate or
the federal funds rate plus a margin, at the Company's option. The
weighted-average annual interest rate of debt outstanding under the Credit
Facility and Interim Loan at September 30, 2000 was 6.78%. As of September
30, 2000, borrowings under the Credit Facility and Interim Loan were $149
million and $200 million, respectively.
On March 7, 2000, the Company completed the merger of Travelocity.com Inc.,
a subsidiary of the Company and Preview Travel, Inc. ("Preview"), an
independent publicly-traded company engaged in consumer direct travel
distribution over the Internet. Under the terms of the merger agreement,
shareholders of Preview received one share of Travelocity.com Inc., a newly
created subsidiary of the Company, for each share of Preview held, and
Preview was merged into Travelocity.com Inc., the surviving entity. Shares
of Travelocity.com Inc. stock now trade under the symbol "TVLY" on the
NASDAQ National Market. In connection with the merger, the Company
contributed the existing assets and businesses of Travelocity.com Inc. and
approximately $100 million in cash to Travelocity.com LP, a Delaware
limited partnership (the "Partnership"). Immediately following the merger,
Travelocity.com Inc. contributed the assets and businesses obtained from
the acquisition of Preview to the Partnership. As a result of the merger,
the Company owns an economic interest of approximately 70% in the combined
businesses, composed of an approximate 61% direct interest in the
Partnership and an approximate 22% interest in Travelocity.com Inc., which
holds an approximate 39% interest in the Partnership.
The cost of the acquisition of Preview was approximately $287 million. This
amount was determined by the fair market value of Preview's outstanding
common stock on the last trading day before the merger agreement was
announced plus the value of the vested options of Preview assumed by
Travelocity.com in the merger and other direct costs associated with the
transaction as follows (in thousands):
Fair market value of Preview's common stock $ 253,395
Fair market value of vested Preview stock options 23,655
Investment advisor, legal, accounting and other
professional fees and expenses 9,342
Other costs directly related to the merger 493
----------
Total $ 286,885
==========
The cost of the acquisition was allocated to the respective assets and
liabilities acquired with the remainder recorded as goodwill. The Company
is amortizing approximately $250 million of goodwill and other intangible
assets resulting from the acquisition over a three-year period. As of
September 30, 2000, the accumulated amortization related to these assets
was approximately $47 million.
During 1999, the Company entered into an agreement with America Online,
Inc. ("AOL") that became effective upon the consummation of the merger of
Travelocity.com with Preview on March 7, 2000. The agreement provides,
among other things, that the Travelocity.com Web site will be the exclusive
reservations engine for AOL's Internet properties. Payments of up to $200
million will be made to AOL and Travelocity.com and AOL will share
advertising revenues and commissions over the five-year term of the
agreement. In connection with this agreement, Travelocity.com paid $40
million to AOL on March 7, 2000 for the first year of the agreement.
9
<PAGE>
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
--------------------------------------------------------------------------------
On March 14, 2000, the Company's Board of Directors approved a broad-based
stock option plan (the "Option Plan") effective March 15, 2000. Seven
million shares are authorized under the Option Plan for grants of options
and stock appreciation rights to employees of the Company. At September 30,
2000, approximately two million options were outstanding under this plan.
On March 15, 2000, AMR exchanged all of its 107,374,000 shares of the
Company's Class B Common Stock for an equal number of shares of the
Company's Class A Common Stock and distributed all those shares to AMR
shareholders as a stock dividend. AMR no longer has any ownership interest
in the Company.
On June 26, 2000, the Company entered into an agreement to acquire a 51%
ownership stake in Dillon Communication Systems GmbH ("DCS"), a supplier of
electronic travel distribution services in Germany. In connection with the
agreement, the Company paid approximately $20 million in cash in July 2000
and will make additional payments of approximately $1 million in each of
the next three years. The Company has estimated total goodwill and other
intangible assets related to this transaction of approximately $24 million,
which is being amortized over a five-year period.
On August 15, 2000, the Company completed the acquisition of Gradient
Solutions Limited ("Gradient"), resulting in Gradient becoming a wholly
owned subsidiary of the Company. Gradient is a Dublin, Ireland-based
technology company that provides e-commerce solutions to the global travel
marketplace. The acquisition increases the Company's leadership position in
online travel booking and distribution. The total purchase price of the
acquisition was approximately $38 million, of which approximately $13
million was paid in cash with the balance in notes payable. The cost of the
acquisition will be allocated to the respective assets and liabilities
acquired with the remainder recorded as goodwill. The Company has estimated
total goodwill and other intangible assets related to this transaction of
approximately $40 million, which is being amortized over a five-year
period.
On August 28, 2000, the Company entered into an Agreement and Plan of
Merger with GetThere Inc., a Delaware corporation ("GetThere"), to acquire
all of the outstanding shares of GetThere. GetThere operates one of the
world's largest Internet marketplaces focused on business-to-business
travel services and powers online travel sites for leading airlines.
8. SUBSEQUENT EVENTS
On October 17, 2000 the Company completed the acquisition of GetThere,
resulting in GetThere becoming a wholly owned subsidiary of the Company.
The acquisition strengthens the Company's position in both the
business-to-business corporate online travel channel and the
business-to-consumer e-commerce channel for airlines, travel suppliers and
travel agencies.
The cost of the acquisition of GetThere was approximately $757 million, or
$17.75 per share, for all of the outstanding shares of GetThere common
stock. The purchase price will be allocated to the respective assets and
liabilities acquired with the remainder recorded as goodwill. The Company
estimates that it will record goodwill and other intangible assets related
to this transaction of approximately $614 million.
On October 10, 2000, the Company entered into a $865 million bridge credit
agreement (the "Bridge Credit Agreement"). Proceeds of the Bridge Credit
Agreement were used to fund the acquisition of GetThere. In addition, $200
million of the Bridge Credit Agreement was used to repay the $200 million
outstanding under the Interim Loan entered into by the Company in February
2000. Interest on this agreement is variable, based upon the London
Interbank Offered Rate ("LIBOR"), the prime rate or the federal funds rate
plus a margin, at the Company's option. As of October 31, 2000, the
outstanding balance of borrowings under the Bridge Credit Agreement was
$710 million.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SABRE HOLDINGS CORPORATION
RESULTS OF OPERATIONS
SUMMARY. The Company generates its revenue from providing travel marketing and
distribution services and outsourcing and software solutions services. During
the nine months ended September 30, 2000, the Company generated approximately
67.9% of its revenue from travel marketing and distribution services and
approximately 32.1% of its revenue from outsourcing and software solutions
services. The Company's consolidated operating margins were 13.7% and 17.4% for
the nine months ended September 30, 2000 and 1999, respectively. Gross margins
for travel marketing and distribution and outsourcing and software solutions
were 37.5% and 17.8%, respectively, for the nine months ended September 30,
2000, and 33.8% and 17.4%, respectively, for the nine months ended September 30,
1999.
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
TRAVEL MARKETING AND DISTRIBUTION. Travel marketing and distribution revenues
for the three months ended September 30, 2000 increased approximately $74
million, 19.6%, compared to the three months ended September 30, 1999, from
$377 million to $451 million. The increase in revenues was primarily due to
growth in booking and other fees from associates from $332 million to $391
million. The growth in fees from associates was driven by an increase in
booking volumes and an overall increase in the average price per booking
charged to associates due to a price increase implemented in February 2000.
The increase in revenues was also partially driven by increased bookings made
through the Travelocity.com Web site. Other revenues increased approximately
$15 million primarily due to advertising revenues from the Travelocity.com
Web site, increased sales of miscellaneous services and products as well as
services provided to and equity income related to the Company's joint
ventures.
Cost of revenues for travel marketing and distribution increased
approximately $34 million, 13.3%, from $255 million to $289 million. This
increase was primarily attributable to increased salaries and benefits
expenses, higher subscriber incentives, and increased data processing and
other operating expenses, which were partially offset by decreased
depreciation and amortization expenses. Salaries and benefits expenses
increased in order to support the growth of the Travelocity.com business and
higher severance charges related to a reduction in force in August 2000
compared to severance charges incurred in August 1999. Subscriber incentive
expenses increased in order to maintain and expand the Company's travel
agency subscriber base and to respond to competitive pressures. Additionally,
data processing costs increased due to the growth in bookings and
transactions processed and other operating expenses increased to support the
Company's growth. Those increases were partially offset by reduced
depreciation and amortization expenses primarily attributable to certain
classes of computer equipment becoming fully depreciated in fiscal year 2000.
OUTSOURCING AND SOFTWARE SOLUTIONS. Revenues from outsourcing and software
solutions for the three months ended September 30, 2000 decreased approximately
$25 million, 10.4%, compared to the three months ended September 30, 1999, from
$241 million to $216 million. This reduction was primarily due to the conclusion
in 1999 of conversion and migration work on two information technology
outsourcing contracts, the divestiture of the Company's logistics business and
reduced application development work for Canadian Airlines.
Cost of revenues for outsourcing and software solutions increased
approximately $14 million, 8.2%, from $171 million to $185 million. This
increase was primarily attributable to increased salaries, benefits,
depreciation and amortization charges, partially offset by decreased contract
labor expenses due to a planned reduction in headcount during 1999 and a
reduction in other operating expenses. Salaries and benefits increased
primarily due to higher severance charges related to a reduction in force in
August 2000 compared to severance charges incurred in August 1999.
Depreciation and amortization increased primarily due to the impact of changes
in the Company's stock price on the amortization of the deferred asset
associated with the stock options granted to US Airways. Due to a reduction in
the market price of the Company's common stock, the value of the deferred
asset decreased during the three months ended September 30, 1999. That
reduction resulted in a credit to amortization expense during that quarter of
approximately $19 million compared to amortization expense of approximately $3
million recognized during the quarter ended September 30, 2000. Those
increases were partially offset by reduced operating expenses associated with
the conclusion of conversion and migration work on two information technology
outsourcing contracts, the divesture of the Company's logistics business and
reduced application development work for Canadian Airlines.
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SABRE HOLDINGS CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $33 million, 47.1%, from $70 million to $103
million. The increase is primarily due to the amortization of payments made by
Travelocity.com to strategic distribution partners such as America Online, Inc.,
Yahoo! Inc. and certain others. The increase was also partially due to higher
advertising and promotion costs to support the growth of Travelocity.com and
other selling and administrative expenses to support the Company's growth.
AMORTIZATION OF GOODWILL AND INTANGIBLE ASSETS. Amortization of goodwill and
intangible assets was $22 million for the three months ended September 30, 2000.
Goodwill and intangible assets of $250 million were recorded in connection with
the merger of Travelocity.com and Preview in March 2000 and are being amortized
over a three-year period. Amortization expense for the Travelocity goodwill and
intangible assets was approximately $21 million for the quarter ended September
30, 2000. In addition, the Company recognized $1 million of goodwill
amortization expense during the third quarter of 2000 associated with the
acquisition of an interest in Dillon Communication Systems and the acquisition
of Gradient Solutions Limited.
OPERATING INCOME. Operating income decreased $53 million, 43.8%, from $121
million to $68 million. Operating margins decreased from 19.5% in 1999 to 10.2%
in 2000 due to an increase in revenues of 8.1% while operating expenses
increased 20.7%.
INTEREST INCOME. Interest income decreased $2 million due to lower average
balances maintained in the Company's investment accounts.
INTEREST EXPENSE. Interest expense increased $7 million due to interest expense
on the $349 million of debt incurred in February 2000 related to the payment of
the $675 million cash dividend, partially offset by reduced interest expense
resulting from the settlement of the $318 million debenture payable to AMR in
June 1999.
MINORITY INTEREST IN NET LOSS OF TRAVELOCITY.COM. The minority interest in the
net loss of Travelocity.com represents minority owners' approximate 30% share of
the net loss of Travelocity.com.
INCOME TAXES. The provision for income taxes was $29 million and $47 million for
the three months ended September 30, 2000 and 1999, respectively. The decrease
in the provision for income taxes corresponds with the decrease in net income
before the provision for income taxes partially offset by an increase in the
effective tax rate resulting from the impact of nondeductible goodwill
amortization expense related to the merger of Travelocity.com and Preview.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
TRAVEL MARKETING AND DISTRIBUTION. Travel marketing and distribution revenues
for the nine months ended September 30, 2000 increased approximately $195
million, 17.0%, compared to the nine months ended September 30, 1999, from
$1,146 million to $1,341 million. The increase was primarily due to growth in
booking and other fees from associates from $1,022 million to $1,182 million.
The growth in fees from associates was driven by an increase in booking
volumes and an overall increase in the average price per booking charged to
associates due to a price increase implemented in February 2000. The increase
in revenues was also partially driven by increased bookings made through the
Travelocity.com Web site. Other revenues increased $35 million primarily due
to advertising revenues from the Travelocity.com Web site, services provided
to and equity income related to the Company's joint ventures and increased
sales of miscellaneous products and services.
Cost of revenues for travel marketing and distribution increased
approximately $79 million, 10.4%, from $759 million to $838 million. This
increase was primarily attributable to increases in subscriber incentives,
salaries and benefits expenses, other operating expenses and data processing
costs, which were partially offset by decreased depreciation and amortization
expenses. Subscriber incentive expenses increased in order to maintain and
expand the Company's travel agency subscriber base and to respond to
competitive pressures. Salaries and benefits expenses increased to support
the growth of the Travelocity.com business and higher severance charges
related to a reduction in force in August 2000 compared to severance charges
incurred in August 1999. Data processing costs increased due to the growth in
bookings and transactions processed and other operating expenses increased to
support the Company's growth. Those increases were partially offset by
reduced depreciation and amortization expenses primarily attributable to
certain classes of computer equipment becoming fully depreciated in fiscal
year 2000.
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SABRE HOLDINGS CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
OUTSOURCING AND SOFTWARE SOLUTIONS. Revenues from outsourcing and software
solutions for the nine months ended September 30, 2000 decreased approximately
$115 million, 15.4%, compared to the nine months ended September 30, 1999, from
$748 million to $633 million. Revenues from US Airways decreased approximately
$41 million due primarily to the conclusion of conversion and migration work
under the information technology services agreement partially offset by
increased revenues from infrastructure services. In addition, revenues from AMR
decreased approximately $15 million, primarily due to decreased development and
data processing services. The reduction in revenues was also due to reduced
applications development services for Canadian Airlines and Aerolineas
Argentinas, the divestiture of the Company's logistics business and lower
transaction processing and software development sales to other customers.
Cost of revenues for outsourcing and software solutions decreased
approximately $98 million, 15.9% from $618 million to $520 million. This
decrease was primarily attributable to decreased contract labor, depreciation
and amortization expenses and other operating expenses which were partially
offset by increased salaries and benefits expenses. Contract labor expenses
decreased due to a planned reduction in headcount during 1999. Depreciation
and amortization expense decreased primarily due to the impact of changes in
the Company's stock price on the amortization of the deferred asset
associated with the stock options granted to US Airways. Due to a reduction
in the market price of the Company's common stock, the value of the deferred
asset decreased during the nine months ended September 30, 2000. That
reduction resulted in a credit to amortization expense of approximately $3
million compared to amortization expense of approximately $6 million
recognized during the nine months ended September 30, 1999. Other operating
expenses decreased as a result of the conclusion of conversion and migration
work on two information technology outsourcing contracts, the divestiture of
the Company's logistics business and reduced application development work for
Canadian Airlines. Those decreases were partially offset by increased
salaries and benefits expenses primarily due to higher severance charges
related to a reduction in force in August 2000 compared to severance charges
incurred in August 1999. Salaries and benefits expenses increased primarily
due to higher severance charges related to a reduction in force in August
2000 compared to severance charges incurred in August 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $108 million, 57.4%, from $188 million to $296
million. Expenses for the nine months ended September 30, 2000 include $13
million of nonrecurring charges associated with the spin-off from AMR.
Additionally, approximately $78 million of the increase is due to expenses
related to the Travelocity.com business including the amortization of payments
made to strategic distribution partners, increased advertising and promotion
activities and higher salaries, benefits and other administrative expenses to
support the growth of the Travelocity.com business. The remaining increase is
due to the Company's growth initiatives.
AMORTIZATION OF GOODWILL AND INTANGIBLE ASSETS. Amortization of goodwill and
intangible assets was $48 million for the nine months ended September 30, 2000.
Goodwill and intangible assets of $250 million were recorded in connection with
the merger of Travelocity.com and Preview in March 2000 and are being amortized
over a three-year period. Amortization expense for the Travelocity goodwill and
intangible assets was approximately $47 million for the nine months ended
September 30, 2000. In addition, the Company recognized $1 million of goodwill
amortization expense associated with the acquisition of an interest in Dillon
Communication Systems and the acquisition of Gradient Solutions Limited.
OPERATING INCOME. Operating income decreased $58 million, 17.6%, from $329
million to $271 million. Operating margins decreased from 17.4% in 1999 to 13.7%
in 2000 due to an increase in revenues of 4.2% while operating expenses
increased 8.8%.
INTEREST INCOME. Interest income decreased $8 million due to lower average
balances maintained in the Company's investment accounts.
INTEREST EXPENSE. Interest expense increased $6 million as a result of the $349
million of debt incurred in February 2000 related to the payment of the $675
million cash dividend partially offset by reduced interest expense resulting
from the settlement of the $318 million debenture payable to AMR in June 1999.
OTHER INCOME (EXPENSE). Other income (expense) decreased $34 million primarily
due to a gain recognized during the nine months ended September 30, 1999 on the
liquidation of a portion of the Company's beneficial interest in Equant, N.V.
MINORITY INTEREST IN NET LOSS OF TRAVELOCITY.COM. The minority interest in the
net loss of Travelocity.com represents minority owners' approximate 30% share of
the net loss of Travelocity.com.
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SABRE HOLDINGS CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
INCOME TAXES. The provision for income taxes was $118 million and $140 million
for the nine months ended September 30, 2000 and 1999, respectively. The
decrease in the provision for income taxes corresponds with the decrease in net
income before the provision for income taxes, partially offset by an increase in
the effective tax rate resulting from the impact of nondeductible goodwill
amortization expense related to the merger of Travelocity.com and Preview.
OUTLOOK FOR THE REMAINDER OF 2000
The Company expects continued profitability and revenue growth in 2000. The
Company expects the revenue growth rate from travel marketing and
distribution to continue at its strong growth rate due to growth in travel
bookings, initiatives related to emerging distribution channels, projected
growth for the Travelocity.com business and growth due to the acquisition of
GetThere. The Company plans to grow market share and continue to invest in
products that will assist the travel agency community in meeting customer
demands. The Company expects revenues from outsourcing and software solutions
to show a slight improvement in the fourth quarter compared to the fourth
quarter of 1999.
The Company expects selling, general and administrative expenses to be higher
in 2000 than in 1999 as a result of the spin-off from AMR and to support the
growth of the Travelocity.com business. The Company also expects to continue
to invest in emerging distribution channels, product development and web
hosting services. Furthermore, the Company anticipates continued pressure on
subscriber incentive expenses and intends to manage such expenses to keep
them in line with any market share gains. As a result, operating margins for
the combined travel marketing and distribution business may come under
pressure versus 1999 levels. However, the Company expects some improvement in
operating margins in 2000 for the outsourcing and software solutions business
by controlling headcount and employee-related expenses and reducing certain
other expenses.
The Company expects interest income to decrease and interest expense to
increase due to the funding requirements for the $675 million dividend paid
to the Company's shareholders in February 2000 and the acquisition of
GetThere.
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SABRE HOLDINGS CORPORATION
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company had approximately $167 million in cash and
short-term investments and $22 million in working capital. At December 31, 1999,
cash and short-term investments and working capital were $611 million and $451
million, respectively. The Company invests cash in short-term marketable
securities, consisting primarily of certificates of deposit, bankers'
acceptances, commercial paper, corporate notes and government notes.
Approximately $326 million in cash and short-term investments was used for the
payment of a $675 million cash dividend on February 18, 2000. The Company also
borrowed $349 million to fund the dividend, of which $200 million had a
short-term maturity. The funding and subsequent payment of the $675 million cash
dividend resulted in the decrease in working capital during the nine months
ended September 30, 2000.
The Company generated $122 million of cash from operating activities during the
nine months ended September 30, 2000 compared to $357 million for the nine
months ended September 30, 1999. Historically, the Company has funded its
operations through cash generated from operations. The decrease in cash provided
by operating activities during the nine months ended September 30, 2000 was
primarily due to payment of amounts due under the agreement between
Travelocity.com and America Online, Inc. and the payment of $81 million to US
Airways upon the exercise of options in lieu of issuing shares of the Company's
common stock on January 5, 2000.
On February 4, 2000, the Company entered into a $300 million, senior unsecured,
revolving credit agreement (the "Credit Facility"), which expires on September
14, 2004. Additionally, on February 4, 2000, the Company entered into a
short-term $200 million, senior unsecured, term loan agreement (the "Interim
Loan"), which had an original maturity of August 4, 2000. On August 4, 2000, the
Company executed an agreement to extend the Interim Loan until February 4, 2001.
On February 18, 2000, the Company utilized a portion of its available cash
balance and short-term investments and proceeds from both the Credit Facility
and Interim Loan to fund the $675 million dividend paid to shareholders. As of
September 30, 2000, borrowings under the Credit Facility and Interim Loan
amounted to approximately $149 million and $200 million, respectively.
On February 7, 2000, in connection with the separation from AMR, the Company
declared a one-time cash dividend on all outstanding shares of the Company's
Class A and Class B Common Stock. The aggregate amount of the dividend was $675
million, or approximately $5.20 per share, and was paid to shareholders on
February 18, 2000. In the future, the Company intends to retain its earnings to
finance future growth and, therefore, does not anticipate paying any additional
cash dividends on its common stock. Any determination as to the future payment
of dividends will depend upon the future results of operations, capital
requirements and financial condition of the Company and its subsidiaries and
such other factors as the Board of Directors of the Company may consider,
including any contractual or statutory restrictions on the Company's ability to
pay dividends.
During 1999, the Company entered into an agreement with America Online, Inc.
("AOL") that became effective upon the consummation of the merger of
Travelocity.com with Preview on March 7, 2000. The agreement provides, among
other things, that the Travelocity.com Web site will be the exclusive
reservations engine for AOL's Internet properties. Payments of up to $200
million will be made to AOL and Travelocity.com and AOL will share advertising
revenues and commissions over the five-year term of the agreement. In connection
with this agreement, Travelocity.com paid $40 million to AOL on March 7, 2000
for the first year of the agreement.
Net capital investments for the nine months ended September 30, 2000 and 1999
were $189 million and $151 million, respectively. The increase in capital
investments is partially due to the acquisition of a 51% interest in Dillon
Communications Systems and the acquisition of Gradient Solutions Limited during
2000. The Company has estimated capital investments of approximately $200
million to $250 million for 2000.
During the nine months ended September 30, 2000, the Company purchased
approximately 1 million treasury shares at a cost of approximately $34 million.
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SABRE HOLDINGS CORPORATION
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
On March 10, 2000, the Company filed a registration statement on Form S-3 with
the Securities and Exchange Commission through which the Company intends to sell
certain securities from time to time after the effective date of the
registration statement. The Company intends to use the proceeds from the sale of
any securities for general corporate purposes, including the retirement of debt,
additions to working capital, capital expenditures and for acquisitions.
The Company expects that the principal use of funds in the foreseeable future
will be for capital expenditures, software product development, acquisitions,
new facility costs and working capital. Capital expenditures will primarily
consist of purchases of equipment for the data center, as well as computer
equipment to support (i) updating existing subscriber equipment, (ii) expansion
of the subscriber base and (iii) new product capital requirements.
The Company believes available balances of cash and short-term investments, cash
flows from operations and funds available under the various credit facilities,
combined with the ability to raise funds from the sale of securities in
connection with the registration statement on Form S-3 will be sufficient to
meet the Company's cash requirements for the foreseeable future.
ACQUISITION OF PREVIEW TRAVEL, INC.
On March 7, 2000, the Company completed the merger of Travelocity.com Inc., a
subsidiary of the Company and Preview Travel, Inc., an independent
publicly-traded company engaged in consumer direct travel distribution over the
Internet. Under the terms of the merger agreement, shareholders of Preview
received one share of Travelocity.com Inc., a newly created subsidiary of the
Company, for each share of Preview held, and Preview was merged into
Travelocity.com Inc., the surviving entity. Shares of Travelocity.com Inc. stock
now trade under the symbol "TVLY" on the NASDAQ National Market. In connection
with the merger, the Company contributed the existing assets and businesses of
Travelocity.com and approximately $100 million in cash to Travelocity.com LP, a
Delaware limited partnership (the "Partnership"). Immediately following the
merger, Travelocity.com Inc. contributed the assets and businesses obtained from
the acquisition of Preview to the Partnership. As a result of the merger, the
Company owns an economic interest of approximately 70% in the combined
businesses, composed of an approximate 61% direct interest in the Partnership
and an approximate 22% interest in Travelocity.com Inc., which holds an
approximate 39% interest in the Partnership.
The cost of the acquisition of Preview was approximately $287 million. This
amount was determined by the fair market value of Preview's outstanding common
stock on the last trading day before the merger agreement was announced plus the
value of the vested options of Preview assumed by Travelocity.com in the merger
and other direct costs associated with the transaction. The cost of the
acquisition was allocated to the respective assets and liabilities acquired with
the remainder recorded as goodwill. The Company recorded goodwill and other
intangible assets of approximately $250 million, which is being amortized over a
three-year period.
INVESTMENT IN DILLON COMMUNICATION SYSTEMS GMBH
On June 26, 2000, the Company entered into an agreement to acquire a 51%
ownership stake in Dillon Communication Systems GmbH ("DCS"), a supplier of
electronic travel distribution services in Germany. In connection with the
agreement, the Company paid approximately $20 million in cash in July 2000
and will make additional payments of approximately $1 million in each of the
next three years. The Company has estimated total goodwill and other
intangible assets related to this transaction of approximately $24 million,
which is being amortized over a five-year period.
ACQUISITION OF GRADIENT SOLUTIONS LIMITED
On August 15, 2000, the Company completed the acquisition of Gradient
Solutions Limited ("Gradient"), resulting in Gradient becoming a wholly owned
subsidiary of the Company. Gradient is a Dublin, Ireland-based technology
company that provides e-commerce solutions to the global travel marketplace.
The acquisition increases the Company's leadership position in online travel
booking and distribution. The total purchase price of the acquisition was
approximately $38 million, of which approximately $13 million was paid in
cash with the balance in notes payable. The cost of the acquisition will be
allocated to the respective assets and liabilities acquired with the
remainder recorded as goodwill. The Company has estimated total goodwill and
other intangible assets related to this transaction of approximately $40
million, which is being amortized over a five-year period.
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SABRE HOLDINGS CORPORATION
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
ACQUISITION OF GETTHERE, INC.
On August 28, 2000, the Company entered into an Agreement and Plan of Merger
with GetThere Inc., a Delaware corporation ("GetThere"), to acquire all of
the outstanding shares of GetThere. GetThere operates one of the world's
largest Internet marketplaces focused on business-to-business travel services
and powers online travel sites for leading airlines.
On October 17, 2000 the Company completed the acquisition of GetThere, resulting
in GetThere becoming a wholly owned subsidiary of the Company. The acquisition
strengthens the Company's position in both the business-to-business corporate
online travel channel and the business-to-consumer e-commerce channel for
airlines, travel suppliers and travel agencies.
The cost of the acquisition of GetThere was approximately $757 million, or
$17.75 per share, for all of the outstanding shares of GetThere common stock.
The purchase price will be allocated to the respective assets and liabilities
acquired with the remainder recorded as goodwill. The Company estimates that
it will record goodwill and other intangible assets related to this
transaction of approximately $614 million.
On October 10, 2000, the Company entered into a $865 million bridge credit
agreement (the "Bridge Credit Agreement"). Proceeds of the Bridge Credit
Agreement were used to fund the acquisition of GetThere. In addition, $200
million of the Bridge Credit Agreement was used to repay the $200 million
outstanding under the Interim Loan entered into by the Company in February 2000.
Interest on this agreement is variable, based upon the London Interbank Offered
Rate ("LIBOR"), the prime rate or the federal funds rate plus a margin, at the
Company's option. As of October 31, 2000, the outstanding balance of borrowings
under the Bridge Credit Agreement was $710 million.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133, which deferred for one year the effective
date of FASB Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities ("FAS 133"). FAS 133 will apply to all fiscal quarters of
all fiscal years beginning after June 15, 2000. The Company expects to adopt
FAS 133 effective January 1, 2001. FAS 133 will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments through earnings
or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in
fair value will be immediately recognized in earnings. FAS 133 would apply to
warrants received from Hotel Reservations Network in connection with an
affiliation agreement. The Company currently estimates that upon adoption it
will report a gain of approximately $11 to $12 million, before minority
interest, related to these warrants. The estimated gain is based upon the
Black-Scholes value of the warrants at September 30, 2000 and any actual
gains or losses realized by the Company will be dependent upon the stock
price at the time the warrants are either exercised or upon final disposal of
the stock.
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SABRE HOLDINGS CORPORATION
CAUTIONARY STATEMENT
CAUTIONARY STATEMENT
Statements in this report which are not purely historical facts, including
statements regarding the Company's anticipations, beliefs, expectations, hopes,
intentions or strategies for the future, may be forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. All forward-looking statements in this report are based upon
information available to the Company on the date of this report. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Any forward-looking statements involve risks and uncertainties that could cause
actual events or results to differ materially from the events or results
described in the forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements.
Risks associated with the Company's forward-looking statements in this
report include, but are not limited to: risks related to the Company's
relationships with American and US Airways and their affiliates, including risks
that they may terminate any of the agreements with the Company, or fail or
otherwise become unable to fulfill their principal obligations thereunder, or
determine not to renew certain of the agreements; risks associated with the
spin-off by AMR of its equity interest in the Company including potential
liability for income taxes; risks related to the $675 million dividend paid in
February 2000, including the increased debt service for indebtedness incurred to
effect that dividend; risks associated with competition, and technological
innovation by competitors, which could require the Company to reduce prices, to
change billing practices, to increase spending or marketing or product
development or otherwise to take actions that might adversely affect its
operations or earnings; risks related to the Company's technology; risks
associated with online commerce and doing business through an Internet Web site,
such as security issues, liability for site content, and uncertain protection of
intellectual property; risks relating to the Company's investment in technology,
including the ability of the Company to timely develop and achieve market
acceptance of new products; risks associated with industry consolidation,
including strategic alliances, in the computer reservations system industry;
risks related to seasonality of the travel industry and booking revenues; risks
of the Company's sensitivity to general economic conditions and events that
affect airline travel and the airlines, hotel operators and car rental companies
that participate in the Sabre system, including the increased price of fuel;
risks of a natural disaster, computer terrorism or other calamity that may cause
significant damage to the Company's data center facilities and enterprise
information systems; risks of interruption or deterioration of third party
services on which the Company relies to provide its services; risks of
deterioration or obsolescence of the Company's current systems and
infrastructures; risks associated with the Company's international operations,
such as currency fluctuations, governmental approvals, tariffs and trade
barriers, and political instability; risks of new or different legal and
regulatory requirements; and risks associated with the Company's growth
strategy, including investments in emerging markets and the ability to
successfully conclude and execute alliances.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At September 30, 2000, the Company's exposure to interest rates relates
primarily to its investment portfolio and to its variable rate debt instruments.
In February 2000, the Company entered into a long-term, $300 million, senior
unsecured, revolving credit agreement and a short-term $200 million, senior
unsecured, term loan agreement. Interest on these debt agreements is variable,
based upon LIBOR, prime rate or the federal funds rate plus a margin, at the
Company's option. The Company's earnings are affected by changes in interest
rates due to the impact that those changes have on the interest expense
associated with the loans. The weighted-average annual interest rate of debt
outstanding at September 30, 2000 was 6.78%. If short-term interest rates
average 10% higher in 2001 than during 2000, the Company's interest expenses
would increase by approximately $2 million. This amount was determined by
applying the hypothetical interest rate change to the Company's long-term and
short-term debt balances as of September 30, 2000. If the Company's mix of
interest rate-sensitive assets and liabilities changes significantly, the
Company may enter into derivative transactions to manage its net interest
exposure.
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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
PAKISTAN INTERNATIONAL AIRLINES ARBITRATION
On March 16, 2000, the Company initiated an arbitration proceeding in Paris,
France in which it is seeking to recover, from Pakistan International Airlines
("PIA"), $8.5 million for services rendered plus lost profits and termination
fees. On July 31, 2000, PIA filed counterclaims against the Company seeking
damages relating to the Company's alleged failure to perform. Because the
arbitration has just begun, the Company cannot estimate the time to complete the
arbitration or its results; however, the Company believes its claims are valid
and enforceable. Additionally, the Company believes that PIA's counterclaims are
without merit and will vigorously defend itself.
WORLDSPAN DISPUTE
On January 9, 1998, Worldspan LP ("Worldspan"), the former provider of computer
reservation system services to ABACUS International Holdings ("ABACUS"), filed a
lawsuit against the Company in the United States District Court for the Northern
District of Georgia, Atlanta Division, seeking damages and an injunction, and
alleging, among other things, that the Company interfered with Worldspan's
relationship with ABACUS, violated the U.S. antitrust laws, and misappropriated
Worldspan's confidential information. The same day, Worldspan filed a parallel
lawsuit in the same court against ABACUS. On February 26, 1998, the court denied
Worldspan's motion for a preliminary injunction against ABACUS. Thereafter, the
court stayed the ABACUS case pending arbitration between ABACUS and Worldspan.
The Arbitration Tribunal ruled in favor of Worldspan on August 7, 2000.
Discovery continues in the case between Worldspan and the Company. The Company
believes that Worldspan's claims are without merit and is vigorously defending
itself. Additionally, the Company is entitled to indemnification from ABACUS
pursuant to the terms of the agreement between the parties. No trial date has
been set.
INDIA TAX ISSUE
In 1998, the tax authority in India asserted that the Company has a taxable
presence in India. In March 1999, the Company received a $30 million USD tax
assessment (including interest) for the two years ending March 31, 1998. The
Company challenged the assessment on the grounds that it does not have a taxable
presence in India and, even if it does, the assessment is based on incorrect
data. The United States government intervened on behalf of the Company (and
other U.S. companies currently facing similar tax-related issues with the Indian
government). The Company appealed the validity and amount of the assessment
within the Indian tax authority. Although the Company did not prevail in its
appeal at this level on merits, a reassessment based on correct data was
ordered. The Company is awaiting that redetermination. The Company continues to
believe that the position of the Indian government is without merit and that it
will ultimately prevail either through the U.S. government's efforts or on its
direct appeal. The Company anticipates that it will appeal the case through
judicial systems in India if an unfavorable ruling is obtained from the tax
authority in India.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the three months ended
September 30, 2000.
The following exhibits are included herein:
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
2.1 Agreement and Plan of Merger, dated as of
August 28, 2000, by and among Registrant,
Sabre Inc., a Delaware corporation and
GetThere Inc., a Delaware corporation. (1)
3.1 Second Restated Certificate of
Incorporation of Registrant. (2)
3.2 Restated Bylaws of Registrant. (3)
10.1 Bridge Credit Agreement, dated as of
October 10, 2000, by and among Sabre Inc.,
Banc of America Securities LLC, as Co-Lead
Arranger and Joint Book Manager, Goldman
Sachs Credit Partners L.P., as Co-Lead
Arranger, Joint Book Manager and
Syndication Agent, Morgan Stanley Senior
Funding, Inc., as Documentation Agent,
Bank of America, N.A., as Administrative
Agent, and the lenders party thereto. (4)
12.1 Computation of ratio of earnings to fixed
charges for the nine months ended
September 30, 2000.
27.1 Financial Data Schedule as of September
30, 2000.
(1) Incorporated by reference to Exhibit 2 of the Registrant's Schedule 13D
filed with the Securities and Exchange Commission (the "Commission") on
September 1, 2000.
(2) Incorporated by reference to Exhibit 3.1 of the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2000,
previously filed with the Commission.
(3) Incorporated by reference to Exhibit 3.2 of the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2000,
previously filed with the Commission.
(4) Incorporated by reference to Exhibit (a)(1)(L) of Amendment No. 5 to
Registrant's Schedule TO filed with the Commission on October 10, 2000.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SABRE HOLDINGS CORPORATION
Date: November 14, 2000 BY: /s/ Jeffery M. Jackson
------------------------------------
Jeffery M. Jackson
Executive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
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