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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 MARCH 31, 2001.
[ ] 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
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(Exact name of registrant as specified in its charter)
Delaware 75-2662240
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4255 Amon Carter Blvd.
Fort Worth, Texas 76155
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (817) 963-6400
-----------------
Not Applicable
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(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 - 132,879,306 as of April 30, 2001
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INDEX
SABRE HOLDINGS CORPORATION
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - March 31, 2001 and December 31, 2000
Consolidated Statements of Income - Three months ended March 31, 2001 and 2000
Condensed Consolidated Statement of Stockholders' Equity - Three months ended March 31, 2001
Consolidated Statements of Cash Flows - Three months ended March 31, 2001 and 2000
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Part II: OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signature
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SABRE HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited) (In thousands)
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March 31, December 31,
2001 2000
---------- ------------------
ASSETS
CURRENT ASSETS
Cash $ 12,557 $ 7,778
Marketable securities 215,343 137,258
Accounts receivable, net 538,661 448,463
Prepaid expenses 92,647 83,580
Deferred income taxes 18,434 15,889
---------- ------------------
Total current assets 877,642 692,968
PROPERTY AND EQUIPMENT
Buildings and leasehold improvements 342,781 340,473
Furniture, fixtures and equipment 51,129 49,627
Service contract equipment 507,421 517,886
Computer equipment 514,224 527,085
---------- ------------------
1,415,555 1,435,071
Less accumulated depreciation and amortization (869,856) (879,030)
---------- ------------------
Total property and equipment 545,699 556,041
Investments in joint ventures 161,977 159,317
Goodwill and intangible assets, net 871,880 891,497
Other assets, net 365,207 350,531
---------- ------------------
TOTAL ASSETS $2,822,405 $ 2,650,354
========== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 214,674 $ 173,954
Accrued compensation and related benefits 70,456 91,196
Notes payable 710,000 710,000
Other accrued liabilities 269,211 291,238
---------- ------------------
Total current liabilities 1,264,341 1,266,388
Deferred income taxes 51,731 47,703
Pensions and other postretirement benefits 115,551 109,889
Notes payable 149,000 149,000
Other liabilities 63,487 46,877
Minority interests 230,510 239,480
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock: $0.01 par value; 20,000 shares authorized; no shares issued --- ---
Class A common stock, $0.01 par value; 250,000 shares authorized; 132,244
and 131,632 shares issued at March 31, 2001 and December 31, 2000, respectively 1,322 1,321
Additional paid-in capital 736,240 660,987
Retained earnings 213,312 196,164
Accumulated other comprehensive income (2,674) 111
Less treasury stock at cost: 10 and 1,625 shares, respectively (415) (67,566)
---------- ------------------
Total stockholders' equity 947,785 791,017
---------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,822,405 $ 2,650,354
========== ==================
See Notes to Consolidated Financial Statements.
3
SABRE HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (In thousands, except per share amounts)
--------------------------------------------------------------------------------
Three Months Ended March 31,
--------------------------------------------
2001 2000
-------------------- -------------------
REVENUES $ 573,414 $ 479,142
OPERATING EXPENSES
Cost of revenues 362,858 324,152
Selling, general and administrative 101,195 73,202
Amortization of goodwill and intangible assets 64,500 5,517
-------------------- -------------------
Total operating expenses 528,553 402,871
-------------------- -------------------
OPERATING INCOME 44,861 76,271
OTHER INCOME (EXPENSE)
Interest income 3,521 6,091
Interest expense (16,193) (2,696)
Other, net (9,708) (212)
-------------------- -------------------
Total other income (expense) (22,380) 3,183
MINORITY INTERESTS 7,787 3,729
-------------------- -------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 30,268 83,183
Provision for income taxes 29,855 33,825
-------------------- -------------------
INCOME FROM CONTINUING OPERATIONS 413 49,358
INCOME FROM DISCONTINUED OPERATIONS, NET 13,632 16,258
-------------------- -------------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING METHOD 14,045 65,616
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
METHOD, NET OF MINORITY INTERESTS AND INCOME TAXES 3,103 --
-------------------- -------------------
NET EARNINGS $ 17,148 $ 65,616
==================== ===================
EARNINGS PER COMMON SHARE - BASIC
Income from continuing operations $ .00 $ .38
Income from discontinued operations .10 .13
Cumulative effect of change in accounting .03 --
method -------------------- -------------------
Net income $ .13 $ .51
==================== ===================
EARNINGS PER COMMON SHARE - DILUTED
Income from continuing operations $ .00 $ .38
Income from discontinued operations .10 .10
Cumulative effect of change in accounting .03 --
method -------------------- -------------------
Net income $ .13 $ .48
==================== ===================
See Notes to Consolidated Financial Statements.
4
SABRE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2001
(Unaudited) (In thousands)
--------------------------------------------------------------------------------
Accumulated
Class A Additional Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Income Stock Total
------------ ------------- ------------ ------------------ ------------ ------------
Balance at December 31, 2000 $ 1,321 $ 660,987 $ 196,164 $ 111 $ (67,566) $ 791,017
Issuance of Class A common stock
pursuant to stock option, restricted
stock incentive and stock purchase
plans 1 (34,612) 67,151 32,540
Tax benefit from exercise of
employee stock options 6,402 6,402
Reclassification of US Airways
options 100,447 100,447
Change in fair value of contingent
warrants to be issued to customer 3,157 3,157
Comprehensive Income:
Net earnings 17,148 17,148
Unrealized loss on foreign
currency forward contracts, net
of deferred income taxes (1,557) (1,557)
Unrealized loss on investments,
net of deferred income taxes (1,491) (1,491)
Unrealized foreign currency
translation gain 263 263
------------
Total Comprehensive Income 14,363
------------
Other (141) (141)
------------ ------------- ------------ ------------------ ------------ ------------
Balance at March 31, 2001 $ 1,322 $ 736,240 $ 213,312 $ (2,674) $ (415) $ 947,785
============ ============= ============ ================== ============ ============
See Notes to Consolidated Financial Statements.
5
SABRE HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
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Three Months Ended March 31,
----------------------------------------------------
2001 2000
--------------------- -----------------------
OPERATING ACTIVITIES
Net earnings $ 17,148 $ 65,616
Adjustments to reconcile net earnings to cash provided by
(used for) operating activities
Depreciation and amortization 138,355 61,747
Deferred income taxes 6,534 91
Minority interests (7,787) (3,729)
Cumulative effect of accounting change (3,103) --
Other 76 (760)
Changes in operating assets and liabilities
Accounts receivable (88,817) (97,098)
Prepaid expenses (9,000) (53,732)
Other assets (34,393) (16,167)
Accrued compensation and related benefits (20,740) (14,858)
Accounts payable and other accrued liabilities 55,807 103,206
Receivable from related parties -- 29,093
Pensions and other postretirement benefits 5,662 (5,807)
Payment to US Airways -- (81,469)
Other liabilities 16,107 (5,070)
--------------------- -----------------------
Cash provided by (used for) operating activities 75,849 (18,937)
INVESTING ACTIVITIES
Additions to property and equipment (51,409) (42,910)
Proceeds from sale of equipment 498 --
Acquisitions, net of cash acquired (25,000) --
Net (increase) decrease in marketable securities (19,346) 401,579
Other investing activities, net (8,353) (7,450)
--------------------- -----------------------
Cash provided by (used for) investing activities (103,610) 351,219
FINANCING ACTIVITIES
Proceeds from issuance of common stock pursuant to
employee stock plans 4,460 5,576
Proceeds from exercise of stock options 28,080 --
Purchases of treasury stock -- (8,881)
Dividends paid -- (675,000)
Proceeds from issuance of notes payable -- 349,000
--------------------- -----------------------
Cash provided by (used for) financing activities 32,540 (329,305)
--------------------- -----------------------
Increase in cash 4,779 2,977
Cash at beginning of the period 7,778 6,628
--------------------- -----------------------
Cash at end of the period $ 12,557 $ 9,605
===================== =======================
See Notes to Consolidated Financial Statements.
6
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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1. GENERAL INFORMATION
Sabre Holdings Corporation is a holding company. Its sole direct
subsidiary is Sabre Inc., which is the successor to certain businesses
that were previously operated as subsidiaries or divisions of American
Airlines, Inc. ("American") or AMR Corporation ("AMR"). AMR spun-off Sabre
on March 15, 2000 and 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.
The Company is the leading provider of technology, marketing and
distribution services for the travel industry. The Company also engages in
business-to-consumer and business-to-business travel services and
distribution through its Travelocity.com and GetThere subsidiaries and
provides software development and consulting services to airlines and
other travel providers through its Airline Solutions division.
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. These estimates are forward-looking statements. Actual results
may differ materially 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, 2000
(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
2000 financial statements to conform to the 2001 presentation.
3. DERIVATIVES
The Company adopted Statement of Financial Accounting Standards No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("FAS 133")
effective January 1, 2001. FAS 133 requires 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 the change in fair
value of a derivative designated as a hedge will be immediately recognized
in earnings. For derivative instruments not designated as hedging
instruments, the gain or loss is recognized in current earnings during the
period of change.
At January 1, 2001, the Company was a party to certain derivative
instruments, including foreign currency forwards related to anticipated
foreign currency expenditures over the next twelve months, an interest
rate/foreign currency swap contract entered into in connection with Euro
denominated debt related to the acquisition of Gradient Solutions Limited
during 2000 and warrants received from Hotel Reservations Network ("HRN
Warrants") by Travelocity.com in connection with an affiliation agreement.
7
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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The Company has designated its foreign currency forwards as a cash flow
hedge. As such, the effective portion of the gain or loss on the
forwards is reported as a component of other comprehensive income and
reclassified into earnings as a component of cost of revenues in the
same period or periods during which the hedged transaction affects
earnings. Effectiveness is measured by comparing the changes in the
present value of the anticipated foreign currency denominated expenses,
measured using forward rates, arising from the hedged forecasted
expenses with the changes in the fair value of the forward contract
using forward exchange rates. Any gain or loss on the forwards in excess
of the cumulative change in the present value of the anticipated foreign
currency denominated expenses, if any, is recognized in other income
during the period of change. Cumulative effect of adoption of FAS 133
related to foreign currency forwards was insignificant. During the three
months ended March 31, 2001, the Company recorded a loss of
approximately $2 million, net of deferred income taxes of $1 million,
relating to changes in the fair value of the foreign currency forwards.
Amounts reclassified from other comprehensive income to earnings during
the three months ended March 31, 2001 relating to the forwards were not
significant. There was no hedging ineffectiveness recorded in earnings
relating to the forwards during the three months ended March 31, 2001.
The Company also recognized a cumulative gain in earnings upon adoption
of FAS 133 of approximately $3 million, net of minority interest of
approximately $2 million and deferred income taxes of approximately $2
million, relating to the HRN Warrants. During March 2001, the Company
extended its affiliation agreement with HRN through July 31, 2005 and
expanded the scope of the HRN relationship. In connection with the
expanded and extended agreement, the Company received additional vested
HRN Warrants with a fair value of approximately $30 million on the date
of receipt. The Company will recognize this amount as revenue over the
extended term of the agreement. The Company may also vest in additional
warrants in the future based upon the achievement of certain performance
metrics. The Company recorded a loss of approximately $6 million in
other income during the three months ended March 31, 2001 relating to
changes in the fair value of the HRN Warrants as a result of the
adoption of FAS 133 mentioned above, including a $3 million loss related
to the completion of two cashless exercises of warrants to receive HRN
common stock.
The estimated fair values of the Company's derivatives as of March 31,
2001 are provided below (in thousands):
Asset
(Liability)
------------------
Foreign currency forwards $ (913)
HRN Warrants 21,400
Interest rate/foreign currency swap contract --
------------------
$ 20,487
==================
Derivative assets and liabilities are classified as current or long-term
other assets and other liabilities, respectively in the accompanying
balance sheet, depending on the date of settlement of the contract.
8
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
--------------------------------------------------------------------------------
4. DISCONTINUED OPERATIONS
On March 14, 2001, the Company entered into agreements with Electronic
Data Systems Corporation ("EDS") which provide for (i) the sale of the
Company's infrastructure outsourcing business and information technology
("IT") infrastructure assets and associated real estate to EDS (the
"Asset Purchase Agreement"), (ii) a 10-year contract with EDS to manage
the Company's IT systems (the "IT Outsourcing Agreement"), and (iii)
agreements between the Company and EDS to jointly market IT services and
software solutions to the travel and transportation industries (the
"Marketing Agreements"). The transaction is scheduled to close during the
second quarter of 2001, subject to the receipt of government approvals and
the satisfaction of closing conditions.
This pending disposition of the infrastructure outsourcing business
represents the disposal of a business segment under Accounting
Principles Board ("APB") Opinion No. 30, REPORTING THE RESULTS OF
OPERATIONS - REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A
BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS
AND TRANSACTIONS ("APB 30"). The accompanying consolidated statements
have been reclassified to present the results of discontinued operations
separately for all periods presented. These statements are forward-looking
as they assume that the EDS transaction will close as anticipated.
Summarized financial information for the discontinued operations is as
follows (in thousands):
Three months ended
March 31,
---------------------------------------
2001 2000
------------------ -------------------
Revenues $ 181,273 $ 165,764
================== ===================
Income before provision for income taxes $ 22,224 $ 26,329
Provision for income taxes 8,592 10,071
------------------ -------------------
Income from discontinued operations $ 13,632 $ 16,258
================== ===================
The Company currently anticipates recording a gain upon closing of the
transaction of approximately $20 million, net of related income taxes.
Under the Asset Purchase Agreement, the Company would sell its
infrastructure outsourcing contracts, web hosting contracts and IT
infrastructure assets to EDS for approximately $670 million in cash. Up to
approximately $31 million of this amount is contingently refundable to EDS
based, in part, upon the amount of revenues received by EDS from US
Airways under its outsourcing contract during the 30 months following the
close of the transaction. In addition, the Company may receive aggregate
additional payments from EDS for these assets ranging from $7 million to
$25 million on April 15, 2003 and 2004, depending on the amount of
revenues received by EDS under certain other airline outsourcing
contracts.
The assets transferred would include the Company's: outsourcing contracts
with American, US Airways, Gulf Air, and Dollar/Thrifty Rent-A-Car; and
data centers, network and desktop and mid range computer systems. Those
assets are used for the Company's outsourcing business and for transaction
processing in its travel marketing and distribution segment, including the
operation of the Sabre(R) global distribution system ("Sabre system").
Approximately 4,200 of the Company's employees, located mostly in the
United States, are expected to transition to employment with EDS upon
closing of the transaction. The Company intends to use approximately $570
million of the cash proceeds from the sale to reduce existing debt.
9
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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The Company will retain its core travel marketing and distribution
business, including: the line of business related to contracts with travel
suppliers and travel agency subscribers for participation in the Sabre
system; the Company's investment in the Travelocity.com(SM) consumer
on-line business and GetThere(TM) corporate on-line booking business; and
contracts with travel suppliers, travel agencies and online travel sites
for Web site development and booking engine services. The Company plans to
continue to focus its business on remaining the global leader in all
channels of travel distribution.
The Company will also retain contracts and assets that are directly
related to its core travel marketing and distribution business. Those
include its multihost business, which provides internal reservation
systems for airline customers; contracts to provide software applications
development, maintenance and licensing; the Company's intellectual
property assets, including its software applications portfolios; and the
eMergo(TM) suite of airline solutions offered by the Company as an online
application service provider.
Under the IT Outsourcing Agreement, EDS would provide, manage and operate
the Company's IT infrastructure, including data center management,
applications hosting, selected applications development, data assurance,
and network management services. The term of the outsourcing agreement is
10 years. The Outsourcing Agreement is expected to generate future cost
savings for the Company.
Under the Marketing Agreements, the Company and EDS would jointly market
IT services and software solutions to the travel and transportation
industries. As part of the marketing relationship, EDS would contribute
$20 million toward enhancing and promoting the Company's portfolio of
airline software solutions. EDS has also agreed to move its travel
bookings to the Company's Sabre system and to implement the Company's
GetThere corporate booking platform in its organization.
10
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
--------------------------------------------------------------------------------
5. EARNINGS PER SHARE
The following table reconciles weighted average shares used in computing
basic and diluted earnings per common share (in thousands):
Three months ended
March 31,
------------------------------------
2001 2000
---------------- ---------------
Denominator:
Denominator for basic earnings per common share
- weighted-average shares 130,847 129,702
Dilutive effect of stock awards and options 2,511 1,189
---------------- ---------------
Denominator for diluted earnings per common share
- adjusted weighted-average shares 133,358 130,891
================ ===============
6. SEGMENT REPORTING
The Company has four reportable segments: Travel Marketing and
Distribution, Travelocity.com, GetThere, and Airline Solutions and
Emerging Businesses. The Travel Marketing and Distribution segment
distributes travel services to travel agencies ("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. GetThere
distributes travel services on-line directly to businesses. 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. The Airline Solutions and Emerging Businesses segment
primarily provides software development and consulting solutions and other
products and services to airlines and other travel providers. 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 segment information for 2001 is presented on a basis that excludes
certain special items that are summarized below. The 2000 data has been
reclassified to conform with this presentation. This presentation is
consistent with the manner in which the Company's management assesses the
operating performance of its business segments.
11
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
--------------------------------------------------------------------------------
Selected information for the Company's four reportable segments for the
three months ended March 31, 2001 and 2000 follows (in thousands):
Three months ended
March 31,
-------------------------------------
2001 2000
----------------- -----------------
Revenues from external customers:
Travel Marketing and Distribution $ 456,283 $ 412,414
Travelocity.com 55,174 18,926
GetThere 10,981 1,465
Airline Solutions and Emerging Businesses 46,867 44,167
----------------- -----------------
Total $ 569,305 $ 476,972
================= =================
Intersegment revenues:
Travel Marketing and Distribution $ 6,321 $ 2,917
Travelocity.com 17,677 8,097
Airline Solutions and Emerging Businesses 2,075 534
----------------- -----------------
Total $ 26,073 $ 11,548
================= =================
Equity in net income of equity method investees:
Travel Marketing and Distribution $ 4,109 $ 2,170
================= =================
Total consolidated revenues:
Travel Marketing and Distribution $ 466,713 $ 417,501
Travelocity.com 72,851 27,023
GetThere 10,981 1,465
Airline Solutions and Emerging Businesses 48,942 44,701
Elimination of intersegment
revenues (26,073) (11,548)
----------------- -----------------
Total $ 573,414 $ 479,142
================= =================
Segment operating income (loss) excluding special items:
Travel Marketing and Distribution $ 131,282 $ 119,546
Travelocity.com 424 (11,713)
GetThere (16,316) (4,823)
Airline Solutions and Emerging Businesses 647 (6,612)
Net corporate allocations (863) (2,234)
----------------- -----------------
Total $ 115,174 $ 94,164
================= =================
12
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
--------------------------------------------------------------------------------
A summary of the special items and reconciliation to consolidated
operating income is set forth below (in thousands):
Three months ended
March 31,
------------------------------------
2001 2000
----------------- -----------------
Travel Marketing and Distribution:
Goodwill and other intangibles
amortization $ 3,833 $ --
Stock compensation 415 --
----------------- -----------------
Total Travel Marketing and
Distribution 4,248 --
----------------- -----------------
Travelocity.com:
Goodwill and other intangibles
amortization 21,160 5,345
Stock compensation 419 --
----------------- -----------------
Total Travelocity.com 21,579 5,345
----------------- -----------------
GetThere:
Goodwill and other intangibles
amortization 41,435 --
Stock compensation 1,665 --
Severance and integration expenses 1,386 --
----------------- -----------------
Total GetThere 44,486 --
----------------- -----------------
Corporate:
Expenses related to spin off from AMR -- 12,548
----------------- -----------------
Total Corporate -- 12,548
----------------- -----------------
Total special items $ 70,313 $ 17,893
================= =================
Consolidated operating income (loss):
Travel Marketing and Distribution $ 127,034 $ 119,546
Travelocity.com (21,155) (17,058)
GetThere (60,802) (4,823)
Airline Solutions and Emerging Businesses 647 (6,612)
Corporate allocations (863) (14,782)
----------------- -----------------
Total $ 44,861 $ 76,271
================= =================
13
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
--------------------------------------------------------------------------------
7. STOCK OPTIONS - US AIRWAYS, INC.
In December 1999, US Airways, Inc. ("US Airways") exercised one of its two
tranches of options to acquire 3 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.
After the Company's payment of the $675 million dividend to shareholders on
February 18, 2000 the Company adjusted the terms of the second tranche of
stock options held by US Airways so that the aggregate intrinsic value of
those options remained the same as before the payment of the dividend, taking
into consideration the effect of the dividend on the Company's stock price.
On December 31, 2000, the opportunity of US Airways to select an alternative
vehicle in place of receiving shares of the Company's stock upon exercise of
the second tranche of options expired. As a result, beginning January 1, 2001,
those options held by US Airways began to be carried as an equity instrument
instead of a liability instrument. The fair market value of the options on
January 1, 2001 of $100 million is included in Additional Paid in Capital on
the balance sheet.
8. SIGNIFICANT TRANSACTIONS
In March 2001, the Company purchased for approximately $46 million the
Sabre Pacific travel distribution business from TIAS, a travel distribution
alliance among three airlines in Australia and New Zealand. The acquisition
has been accounted for as a purchase. Assets acquired and liabilities assumed
have been recorded at their fair values and the excess of cost over the
estimated fair value of the net tangible assets has been recorded as goodwill.
The purchase will give travel suppliers, travel agents and travelers in the
South Pacific region greater access to Sabre's global resources and technology
potentially boosting Sabre's marketshare in that region. The following table
summarizes the allocation of the purchase price and amounts allocated to
goodwill (in thousands):
Fair value of assets purchased $ 2,733
Fair value of liabilities assumed (8,648)
Goodwill 51,565
----------------
Total purchase price $ 45,650
================
14
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 to travel agencies, corporate travel departments
and travel suppliers using the Sabre system, to consumers using the
Travelocity.com Web site and to businesses using GetThere products, from the
development and marketing of airline solutions and from products and services
offered by emerging businesses. During the three months ended March 31, 2001,
the Company generated approximately 80.3% of its revenue from Travel
Marketing and Distribution services, approximately 9.6% from Travelocity.com,
1.9% from GetThere and 8.2% from Airline Solutions and Emerging Businesses.
The Company's consolidated operating margins were 7.8% and 15.9% for the
three months ended March 31, 2001 and 2000, respectively.
EDS TRANSACTION. On March 14, 2001, the Company entered into agreements with
Electronic Data Systems Corporation ("EDS") which provide for (i) the sale of
the Company's infrastructure outsourcing business and information technology
("IT") infrastructure assets and associated real estate to EDS (the "Asset
Purchase Agreement"), (ii) a 10-year contract with EDS to manage the Company's
IT systems (the "IT Outsourcing Agreement"), and (iii) agreements between the
Company and EDS to jointly market IT services and software solutions to the
travel and transportation industries (the "Marketing Agreements"). Under the
Asset Purchase Agreement, the Company will sell its contracts and assets to
EDS for approximately $670 million in cash. The Company intends to use $570
million of this cash to reduce existing debt. See Footnote 4 of the Financial
Statements for additional information regarding this transaction.
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
REVENUES. Total revenues for the three months ended March 31, 2001
increased approximately $94 million, 19.6%, compared to the three months
ended March 31, 2000, from $479 million to $573 million. Travel Marketing and
Distribution revenue increased $45 million, 10.8%. This increase was
primarily due to a $37 million increase from booking and other fees from
associates while revenues from other products grew $8 million.
Travelocity.com increased revenues approximately $36 million, 189.5%.
Transaction revenues from associates increased $26 million due to growth in
booking volumes, and advertising and license fee revenues grew by $10
million. GetThere revenues increased $10 million, 650%, resulting from the
combination of GetThere with the Company's existing Business Travel Solutions
business in October 2000. Supplier revenue, which consists of services
provided to air suppliers, such as United and TWA, for hosting their consumer
Web sites, increased $5 million. GetThere also increased corporate and other
revenue $5 million, due to increases in trip fees and revenues from
partnerships with agencies such as American Express and other on-line
customers. Airline Solutions and Emerging Businesses increased revenues
approximately $3 million, 6.8%, due to increases in license fee revenues.
COST OF REVENUES. Cost of revenues for the three months ended March 31, 2001
increased approximately $39 million, 12.0%, compared to the three months
ended March 31, 2000, from $324 million to $363 million. Approximately $20
million of this increase was driven by higher Travel Marketing and
Distribution expenses for data processing, development labor and subscriber
incentives. The additional $19 million of the increase was primarily due to
increased salaries, benefits and employee related expenses resulting from
growth in Travelocity.com and the acquisition of GetThere.
15
SABRE HOLDINGS CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended March 31, 2001 increased
$28 million, 38.4%, compared to the three months ended March 31, 2000, from
$73 million to $101 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 $65 million for the three months ended March 31, 2001
compared to $6 million for the three months ended March 31, 2000. Goodwill and
intangible assets of approximately $1 billion were recorded in connection with
the merger in 2000 of Travelocity.com and Preview Travel; the acquisitions in
2000 of GetThere, Gradient Solutions Limited and a 51% interest in Dillon
Communications Systems and the acquisition of Sabre Pacific in March 2001. The
acquired goodwill and intangible assets are being amortized over periods
ranging from one to five years.
OPERATING INCOME. Operating income decreased $31 million, 40.8%, from $76
million to $45 million. Operating margins decreased from 15.9% in 2000 to
7.8% in 2001 as the 19.6% increase in revenues was more than offset by a
31.2% increase in operating expenses.
INTEREST INCOME. Interest income decreased $3 million due to lower average
balances maintained in the Company's investment accounts.
INTEREST EXPENSE. Interest expense increased $13 million due to interest
expense on the $859 million of debt incurred during 2000 related to the
payment of the $675 million cash dividend in February 2000 and the
acquisition of GetThere in October 2000.
17
SABRE HOLDINGS CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
OTHER, NET. Other, net, in 2001 is primarily composed of unrealized losses
on warrants to purchase shares of Hotel Reservation Network common stock held
by the Company.
MINORITY INTEREST. The minority interest includes minority owners' interests
in the results of operations of consolidated subsidiaries of the Company,
primarily Travelocity.com. The increase in losses attributable to minority
interests is due to an increase in the net loss of Travelocity.com combined
with minority interests participating in the loss of Travelocity.com for the
entire period during 2001.
INCOME TAXES. The provision for income taxes was $30 million and $34 million
for the three months ended March 31, 2001 and 2000, respectively. The
decrease in the provision for income taxes corresponds with the decrease in
net income before the provision for income taxes combined with the benefit of
an estimated research and experimentation credit partially offset by the
impact of nondeductible goodwill amortization expense of $65 million.
DISCONTINUED OPERATIONS. Revenues from discontinued operations for the three
months ended March 31, 2001 increased approximately $15 million, 9.0%,
compared to the three months ended March 31, 2000, from $166 million to $181
million. The increase in revenues was primarily due to higher applications
development revenues from American. Net earnings from discontinued operations
for the three months ended March 31, 2001 decreased approximately $2 million,
12.5%, compared to the three months ended March 31, 2000, from $16 million to
$14 million due to higher US Airways option amortization expense.
18
SABRE HOLDINGS CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
OUTLOOK FOR THE REMAINDER OF 2001
This outlook section contains a number of forward-looking statements, all of
which are based on current expectations. Actual results may differ
materially from management's expectations. Please refer to the Cautionary
Statement and Risk Factors paragraphs contained below in this Management's
Discussion and Analysis of Financial Conditions and Results of Operations.
The Company expects both revenue and profitability growth of 20% in 2001.
The Company expects revenue growth to be driven by growth in the on-line
businesses, Travelocity.com and GetThere, increased booking fee revenue from
Travel Marketing and Distribution, and increased revenue in Airline Solutions
and Emerging Businesses. The Company plans to grow market share and to
continue to invest in products that will enable the Company to maintain its
competitive position.
The Company continues to realize savings from the cost cutting initiatives
announced last year and will continue to look for opportunities to contain
costs in 2001. The Company expects pressure from expenses such as subscriber
incentives and data processing to continue and plans to manage such expenses.
Overall, the Company expects some improvement in operating margins in 2001
due to increased focus on controlling expenses, savings realized as a result
of the pending EDS transaction, and cash profitability in Travelocity.com.
The Company expects interest income to increase and interest expense to
decrease due to the proceeds that are expected from the pending sale of the
IT businesses to EDS and the resulting decrease in ongoing capital funding
required.
19
SABRE HOLDINGS CORPORATION
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2001, the Company had approximately $228 million in cash and
short-term investments and a working capital deficit of $387 million. At
December 31, 2000, the Company had $193 million in cash and marketable
securities, including $47 million of long-term marketable securities, and a
working capital deficit of $573 million. The Company invests cash in
short-term marketable securities, consisting primarily of certificates of
deposit, bankers' acceptances, commercial paper, corporate notes and
government notes.
The Company generated $76 million of cash from operating activities during the
three months ended March 31, 2001 compared to $19 million of cash used for the
three months ended March 31, 2000. The Company anticipates that cash flows
from operating activities will not be significantly affected as a result of
the EDS transaction. Historically, the Company has funded its operations
through cash generated from operations.
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. At March 31, 2001, there was $149 million outstanding
under the Credit Facility.
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 and to repay the
entire $200 million outstanding under a short-term $200 million, senior
unsecured, term loan agreement dated February 4, 2000. At March 31, 2001, the
outstanding balance of borrowings under the Bridge Credit Agreement was $710
million. It is anticipated that $570 million of the proceeds from the EDS
transaction will be used to settle a portion of this debt.
The Company has not paid any dividends on its Common Stock since a one-time
cash dividend was paid in February 2000 in connection with the separation
from AMR. In the future, the Company intends to retain its earnings to
finance future growth and, therefore, does not anticipate paying any 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.
The Company has an agreement with America Online, Inc. ("AOL") that 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. Travelocity.com paid $10 million and $40 million to AOL during the
first quarter of 2001 and 2000, respectively, in connection with the
agreement.
Capital investments for the three months ended March 31, 2001 and 2000 were
$51 million and $50 million, respectively. The Company has estimated capital
investments of approximately $160 to $180 million for 2001. This estimated
reduction from 2000 is due to anticipated decreases of IT asset acquisitions
resulting from the Company's pending contract with EDS.
On January 16, 2001 the Board of Directors authorized the purchase of up to
$25 million of Travelocity.com Common Stock at management's discretion. During
the first quarter of 2001, the Company purchased 857,500 shares of Common
Stock of Travelocity.com in the open market under Rule 10b-18 at a cost of
$17.9 million. The purchases were made to offset the potentially dilutive
effect on Sabre's equity ownership percentage of Travelocity.com from employee
stock options granted by Travelocity.com. As of March 31, 2001 Sabre and its
affiliates held a total of 2,033,970 shares of Common Stock and 33 million
shares of Class A Common Stock in Travelocity.com. Accordingly, the Company
now holds an approximate 71% economic interest in the Travelocity.com
business. The Company may, from time to time, effect future purchases for the
same reason. These and any such future purchases do not reflect any change in
Sabre's publicly disclosed plans with respect to Travelocity.com.
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, which might include the
retirement of debt, additions to working capital, new product capital and
acquisitions.
20
SABRE HOLDINGS CORPORATION
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company believes available balances of cash and short-term investments,
cash flows from operations and funds available under the various credit
facilities, and cash proceeds expected from the EDS transaction, 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.
21
SABRE HOLDINGS CORPORATION
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, and Section 27A of the Securities Act of 1933 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.
RISK FACTORS
Risks associated with an investment in the Company, and with achievement of
the Company's forward-looking statements in this report, its news releases,
Web sites, public filings, investor and analyst conferences and elsewhere,
include, but are not limited to, the risk factors described below. Any of the
risk factors described below could have a material adverse effect on the
Company's business, financial condition or results of operations. The Company
may not succeed in addressing these challenges and risks.
For a discussion of risk factors specific to the Travelocity.com business,
please refer to the filings made with the Securities and Exchange Commission
by Travelocity.com Inc. Those filings may be accessed on the Internet at
WWW.SEC.GOV.
THE COMPANY FACES COMPETITION FROM ESTABLISHED AND EMERGING TRAVEL
DISTRIBUTION CHANNELS. MANY OF THE COMPANY'S COMPETITORS IN THE TRAVEL
MARKETING AND DISTRIBUTION BUSINESS ARE WELL FUNDED AND HAVE MAJOR TRAVEL
SUPPLIERS AS SIGNIFICANT SHAREHOLDERS.
The Company's travel marketing and distribution business includes channels of
distribution that target the Travel Agency, Business-to-Business, and
Business-to-Consumer segments of the global travel distribution market. In
all of these distribution channels, the Company faces significant competitors
in the travel marketing and distribution business. In the Travel Agency
channel, the Company's Sabre(R) global distribution system competes primarily
against other large and well-established global distribution systems,
including those operated by Amadeus, Galileo and Worldspan. Airlines are
significant owners of each of those global distribution system competitors.
Sabre is the only global distribution system in which no airline is a
significant owner. In addition, the Company faces competition in the Travel
Agency channel from travel suppliers that distribute directly to travel
agencies and from non-global distribution system companies. In the
Business-to-Business channel, the Company's GetThere and Sabre Business
Travel Solutions suite of products compete not only against similar products
offered by Amadeus, Galileo and Worldspan, but also with products offered by
new competitors, including Oracle and SAP. Some of these competitors
effectively market business travel systems that are bundled with financial
and other non-travel software systems that are not offered by the Company. In
the Business-to-Consumer channel, the Company's Travelocity.com product
offering competes not only against similar products offered by Amadeus,
Galileo and Worldspan, but also with a large number of travel Web sites,
including those operated by travel suppliers and by Expedia (an affiliate of
Microsoft Corporation) and Priceline. Airlines and other travel suppliers
have significant ownership stakes in some of these competitors. In addition,
various airlines have recently established their own travel distribution Web
sites, and several have announced plans to create multi-airline travel
distribution Web sites (such as those proposed in the United States ("U.S.")
by Orbitz and in Europe by the Online Travel Portal). Although government
authorities in some jurisdictions are examining whether the content and
features made available through multi-airline Web sites by their owner
airlines must also be made available to competitor Web sites, and although
Orbitz is under investigation by the U.S. Departments of Justice and
Transportation, it is uncertain whether the various governments will act to
require carriers owning multi-carrier sites to treat competing sites in a
fair and non-discriminatory way. Furthermore, many travel suppliers offer
lower prices when their products and services are purchased directly from the
supplier, such as through its own Web site, than when they are offered by
the Company. Consolidation among travel suppliers, including airline mergers
and alliances, may increase competition from these supplier distribution
channels.
22
SABRE HOLDINGS CORPORATION
RISK FACTORS (CONTINUED)
INDUSTRY CONSOLIDATION AND INCREASED COMPETITION FOR TRAVEL AGENCY
SUBSCRIBERS MAY RESULT IN INCREASED EXPENSES, REDUCED REVENUE AND MARKET
POSITION, AND GREATER FINANCIAL LEVERAGE.
The absolute and relative size of the Company's Travel Agency subscriber base
is important to the Company's success. Travel suppliers have reduced
commissions paid to travel agencies, which has forced some smaller travel
agencies to close or to combine with larger agencies. Although the Company has
a leading share of large travel agencies, competition is particularly intense
among global distribution systems for travel agency subscribers. The potential
for the Company to add new Travel Agency subscribers exists primarily outside
of North America. Some of the Company's competitors aggressively pay economic
incentives to travel agencies to obtain business. New ownership or potential
consolidation of existing global distribution systems may result in increased
competition. For example, Galileo is actively seeking purchasers of its travel
distribution businesses. In order to compete effectively, the Company may need
to increase incentives, increase spending on marketing or product development,
or make significant investments to purchase strategic assets. If the Company
does not retain subscribers representing a significant percentage of historic
bookings through the Company's global distribution system, the Company's
booking fee revenues would decrease.
AIRLINES THAT ARE DIVESTING THEIR OWNERSHIP OF GLOBAL DISTRIBUTION SYSTEMS
MIGHT LIMIT THEIR PARTICIPATION IN THE COMPANY'S TRAVEL MARKETING AND
DISTRIBUTION SERVICES.
Rules in the U.S., Canada and the European Union govern "computer
reservation systems" such as the Company's global distribution system.
Airlines that divest their ownership of computer reservation systems (such as
American Airlines, British Airways, US Airways, and Continental Airlines) may
not be subject to the rules in these jurisdictions, which would otherwise
require them to participate in the Company's global distribution system in a
non-discriminatory manner. The Company could be adversely affected by a
decision by one or more large airlines to discontinue or to lower its level
of participation in the Company's global distribution system. Consolidation
among travel suppliers, including airline mergers, may increase competition
from these supplier distribution channels.
REGULATORY DEVELOPMENTS COULD LIMIT THE COMPANY'S ABILITY TO COMPETE.
The U.S. Department of Transportation is currently engaged in a comprehensive
review of its rules governing computer reservation systems such as the
Company's global distribution system. It is unclear at this time when the
Department of Transportation will complete its review and what changes, if
any, will be made to the U.S. rules. The Company could be unfairly and
adversely affected if the U.S. rules are retained as to traditional global
distribution systems used by travel agencies but are not applied to
Business-to-Consumer travel distribution Web sites owned by more than one
airline. The Company could also be adversely affected if changes to the U.S.
rules increased its cost of doing business, weakened the non-discriminatory
participation rules to allow one or more large airlines to discontinue or to
lower its level of participation in the Company's global distribution system,
or caused the Company to be subject to rules that do not apply to its travel
marketing and distribution competitors.
THE COMPANY MAY LOSE CERTAIN CURRENT PRINCIPAL OUTSOURCING CUSTOMERS.
A principal information technology solutions customer -- US Airways -- might
be acquired by another airline. If US Airways were to be acquired, it might
reduce the amount of services currently provided by the Company. American is
the Company's largest customer for information technology solutions services.
In March 2000, American's parent company, AMR, distributed to its
shareholders its controlling interest in the Company. Thus, American may now
have a greater incentive to negotiate lower prices and better terms in its
contracts with the Company, or to award business to competitors of the
Company.
23
SABRE HOLDINGS CORPORATION
RISK FACTORS (CONTINUED)
RAPID TECHNOLOGICAL CHANGES AND NEW DISTRIBUTION CHANNELS MAY RENDER THE
COMPANY'S TECHNOLOGY OBSOLETE OR DECREASE THE ATTRACTIVENESS OF ITS SERVICES
TO CUSTOMERS.
New distribution channels and technology in the travel marketing and
distribution business and the outsourcing and software solutions business are
rapidly emerging, such as the Internet, computer on-line services, private
networks, cellular telephones and other wireless communications devices. The
Company's ability to compete in the travel marketing and distribution
business and outsourcing and software solutions business, and the Company's
future results, depend in part on its ability to make timely and
cost-effective enhancements and additions to its technology and to introduce
new products and services that meet customer demands and rapid advancements
in technology. Maintaining flexibility to respond to technological and market
dynamics may require substantial expenditures and lead-time. There can be no
assurance that the Company will successfully identify and develop new
products or services in a timely manner, that products, technologies or
services developed by others will not render the Company's offerings obsolete
or noncompetitive, or that the technologies in which the Company focuses its
research and development investments will achieve acceptance in the
marketplace.
THE COMPANY'S SYSTEMS MAY SUFFER FAILURES, CAPACITY CONSTRAINTS AND BUSINESS
INTERRUPTIONS, WHICH COULD INCREASE THE COMPANY'S OPERATING COSTS AND CAUSE
THE COMPANY TO LOSE CUSTOMERS.
The Company's travel marketing and distribution and outsourcing and software
solutions businesses are largely dependent on the Company's computer data
centers and network systems. The Company relies on several communications
service suppliers to provide network access between the Company's computer
data center and end-users of the Company's travel marketing and distribution
and outsourcing and software solutions services. The Company occasionally
experiences system interruptions that make the Company's global distribution
system or other data processing services unavailable. Much of the Company's
computer and communications hardware is located in a single facility. Our
systems might be damaged or interrupted by fire, flood, power loss,
telecommunications failure, break-ins, earthquakes and similar events.
Computer viruses, physical or electronic break-ins and similar disruptions
might cause system interruptions, delays and loss of critical data and could
significantly diminish the Company's reputation and brand name and prevent it
from providing services. Although the Company believes it has taken adequate
steps to address these risks, the Company could be harmed by outages in or
unreliability of the data center or network systems.
THE COMPANY'S REVENUES ARE HIGHLY DEPENDENT ON THE TRAVEL AND TRANSPORTATION
INDUSTRIES, AND PARTICULARLY ON THE AIRLINES.
Most of the Company's revenue is derived from airlines, hotel operators and
car rental companies and other suppliers in the travel and transportation
industries. The Company's revenue increases and decreases with the level of
travel and transportation activity, and is therefore highly subject to
declines in or disruptions to travel and transportation. Factors that may
adversely affect travel and transportation activity include price escalation
in travel-related industries, airline or other travel-related labor action,
political instability and hostilities, bad weather, fuel price escalation,
increased occurrence of travel-related accidents, acts of terrorism, and
economic downturns and recessions. The travel industry is seasonal, and the
Company's revenue varies significantly from quarter to quarter.
THE COMPANY FACES TRADE BARRIERS OUTSIDE OF NORTH AMERICA THAT LIMIT ITS
ABILITY TO COMPETE.
Trade barriers erected by non-U.S. travel suppliers - historically often
government-owned - have on occasion prevented the Company from offering its
products and services in their markets or have denied the Company content or
features that they give to the Company's competitors. Those trade barriers
make the Company's products and services less attractive to travel agencies
in those countries than other global distribution systems that have such
capability and have restricted the ability of the Company to gain market
share outside of the U.S. Competition in those countries could require the
Company to increase incentives, reduce prices, increase spending on marketing
or product development, or otherwise to take actions adverse to the Company.
24
SABRE HOLDINGS CORPORATION
RISK FACTORS (CONTINUED)
THE COMPANY'S INTERNATIONAL OPERATIONS ARE SUBJECT TO OTHER RISKS.
The Company faces risks inherent in international operations, such as risks
of currency exchange rate fluctuations, local economic and political
conditions, restrictive governmental actions (such as trade protection
measures, including export duties and quotas and custom duties and tariffs),
changes in legal or regulatory requirements, import or export licensing
requirements, limitations on the repatriation of funds, difficulty in
obtaining distribution and support, nationalization, different accounting
practices and potentially longer payment cycles, seasonal reductions in
business activity, higher costs of doing business, consumer protection laws
and restrictions on pricing or discounts, lack of or the failure to implement
the appropriate infrastructure to support the Company's technology,
disruptions of capital and trading markets, laws and policies of the U.S.
affecting trade, foreign investment and loans, and tax and other laws. These
risks may adversely affect the Company's ability to conduct and grow business
internationally.
THE COMPANY MAY NOT SUCCESSFULLY MAKE AND INTEGRATE BUSINESS COMBINATIONS AND
STRATEGIC ALLIANCES.
The Company plans to continue to enter into business combinations,
investments, joint ventures or other strategic alliances with other companies
in order to maintain and grow revenue and market presence. Those transactions
with other companies create risks such as difficulty in assimilating the
operations, technology and personnel of the combined companies; disruption of
the Company's ongoing business, including loss of management focus on
existing businesses and other market developments; problems retaining key
technical and managerial personnel; expenses associated with amortization of
goodwill and other purchased intangible assets; additional operating losses
and expenses of acquired businesses; impairment of relationships with
existing employees, customers and business partners; and fluctuations in
value and losses that may arise from equity investments. In addition, the
Company may not be able to identify suitable candidates for business
combinations and strategic investments, obtain financing or acceptable terms
for such business combinations and strategic investments or otherwise to make
such business combinations and strategic investments on acceptable terms.
25
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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. On March 30, 2001, the parties
filed cross motions for summary judgment on certain claims and said motions
are currently pending with the court. The Company believes that Worldspan's
claims are without merit and is vigorously defending itself. Additionally,
the Company is entitled to indemnification pursuant to the terms of the
agreement with ABACUS. 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.
26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are included herein:
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
2.1 Asset Purchase Agreement by and among EDS Information Services L.L.C.,
Buyer, Electronic Data Systems Corporation, Buyer Parent, Sabre Inc., Seller, and
Sabre Holdings Corporation, Seller Parent
3.1 Restated Certificate of Incorporation of Registrant (1)
3.2 Restated Bylaws of Registrant (1)
4.1 Specimen Certificate representing Class A common stock (2)
12.1 Computation of ratio of earnings to fixed charges for three months ended
March 31, 2001
(1) Incorporated by reference to Exhibits 3.1 and 3.2 to the Company's
report on Form 10-Q for the quarterly period ended June 30, 2000.
(2) Incorporated by reference to Exhibit 4.1 to the Company's report on
Form 10-Q for the quarterly period ended March 31, 2000.
FORM 8-K
Pursuant to General Instruction B.2. of Form 8-K, the Forms 8-K listed below
contained only Item 9 disclosures, and consequently such Forms 8-K are not
incorporated into this Form 10-Q or into any other form or report filed with
the Commission into which this Form 10-Q would be incorporated by reference.
On February 28, 2001, the Company filed a current report on Form 8-K
announcing the publication of its investment community newsletter.
On March 15, 2001, the Company filed a current report on Form 8-K announcing
that it has reached agreement for a transaction in which Electronic Data
Systems Corporation ("EDS") would acquire the Company's airline
infrastructure outsourcing business, web hosting business and information
technology ("IT") systems assets, and the Company would outsource its
information technology operations to EDS. The transaction is scheduled to
close during the second quarter of 2001, subject to the receipt of government
approvals and the satisfaction of closing requirements. The report contained
a Preliminary Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
December 31, 2000 and a Preliminary Unaudited Pro Forma Condensed
Consolidated Statement of Operations for the year ended December 31, 2000.
27
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: May 15, 2001 BY: /s/ Jeffery M. Jackson
-------------------------------------
Jeffery M. Jackson
Executive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
28