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===========================================================================DRAFT
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 [No Fee Required]
For the fiscal year ended December 31, 2000.
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[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required]
Commission file number 1-12175
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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 of (I.R.S. Employer
incorporation or organization) Identification No.)
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
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
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Class A common stock, New York Stock Exchange
par value $.01 per share
Securities registered pursuant to Section 12(g) of the Act:
NONE
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 21, 2001 was approximately $5,876,436,598, based on
the closing price per share of Class A common stock of $44.62 on such date. As
of February 21, 2001, 131,699,610 shares of the registrant's Class A common
stock and no shares of the registrant's Class B common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference certain information from
the Proxy Statement for the Annual Meeting of Stockholders to be held May 15,
2001.
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PART I
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ITEM 1. BUSINESS
Sabre Holdings Corporation is a holding company incorporated in
Delaware on June 25, 1996. Pursuant to a reorganization consummated on July 2,
1996 (the "Reorganization"), the Company became the successor to the businesses
of The Sabre Group which were formerly operated as divisions or subsidiaries of
American Airlines, Inc. ("American") or AMR Corporation ("AMR"). Unless
otherwise indicated, references herein to the "Company" include Sabre Holdings
Corporation and its consolidated subsidiaries and, for any period prior to the
Reorganization, the business of AMR and American constituting The Sabre Group.
On October 17, 1996, the Company completed an initial public offering (the
"Offering") of 23,230,000 shares of its Class A common stock, par value $.01 per
share, constituting approximately 17.8% of the economic interest of the
Company's outstanding common equity. At December 31, 1999, AMR owned all
107,374,000 shares of the Company's Class B common stock, representing
approximately 82.7% of the economic interest and 98.0% of the combined voting
power of all classes of voting stock of the Company. 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 such shares to AMR shareholders as a stock dividend. The
distribution consisted of AMR's entire ownership interest in the Company.
The Company is the world leader in the marketing and distribution of
travel through its SABRE-REGISTERED TRADEMARK-(1) computer reservations system
("the SABRE system"). In addition, the Company is a leading provider of
outsourcing and software solutions to the travel and transportation industries.
TRAVEL MARKETING AND DISTRIBUTION
The SABRE system and other global distribution systems are the
principal means of air travel distribution in the United States and a growing
means of air travel distribution internationally. Through the SABRE system,
travel agencies, corporate travel departments and individual consumers
("subscribers") can access information about and book reservations with airlines
and other providers of travel and travel-related products and services
("associates"). As of December 31, 2000, travel agencies with approximately
54,000 locations in over 100 countries on six continents subscribed to the SABRE
system. Subscribers are able to make reservations with approximately 420
airlines, 50 car rental companies and 230 hotel companies covering approximately
52,000 hotel properties worldwide.
During 2000, more airline bookings in North America were made through
the SABRE system than through any other global distribution system.
Approximately 67.4%, 60.8% and 57.4% of the Company's revenue in 2000, 1999 and
1998, respectively, was generated by the marketing and distribution of travel,
primarily through booking fees paid by associates.
THE SABRE-REGISTERED TRADEMARK- GLOBAL DISTRIBUTION SYSTEM
The SABRE system, like other global distribution systems, creates an
electronic marketplace where travel providers display information about their
products and warehouse and manage inventory. Subscribers -- principally travel
agencies but also corporate travel departments and individual consumers (via
Travelocity.com-SM- and other online agencies that subscribe to SABRE) --
access information and purchase travel products and services using the SABRE
system. In 2000, over 990 associates displayed information about their products
and services through the SABRE system, and the Company estimates that more than
$75 billion of travel-related products and services were sold through the SABRE
system.
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(1) Sabre, Direct Connect, Turbo Sabre, Sabre Business Travel Solutions,
Planet Sabre and Travelocity are registered marks, and Airmax, Airflite, Basic
Booking Request, eMergo, GetThere, Travelocity.com, Sabre Net Platform,
DirectAirline, DirectCorporate, and DirectMidMarket are trademarks and/or
service marks of an affiliate of Sabre Inc. All other names are trade names,
trademarks and/or service marks of their respective companies.
2
In addition to providing information to subscribers about airlines and
other travel-related vendors, the SABRE system reports to the travel providers
transaction data about subscriber-generated reservations, allowing vendors to
better manage inventory and revenues. The SABRE system also allows travel agency
subscribers to print airline tickets, boarding passes and itineraries.
Additionally, the SABRE system provides subscribers with travel information on
matters such as currency, medical and visa requirements, weather and
sightseeing. By accessing the SABRE system, a subscriber can, from a single
source, obtain schedules, availability and pricing information from multiple
travel providers for complex travel itineraries.
ASSOCIATE PARTICIPATION
The Company derives its travel marketing and distribution revenues
primarily from booking fees paid by associates for reservations made through the
SABRE system for their products and services. In addition to airlines,
associates include car rental companies, hotel companies, railroads, tour
operators, ferry companies and cruise lines.
Airlines and other associates can display, warehouse, manage and sell
their inventory in the SABRE system. The booking fee paid by an associate
depends upon several factors, including the associate's level of participation
in the SABRE system and the type of products or services provided by the
associate. Airlines are offered a wide range of participation levels. The
lowest level of participation for airlines, SABRE-REGISTERED TRADEMARK- BASIC
BOOKING REQUEST-SM- participation level, provides schedules and electronic
booking functionality only. Higher levels of participation for airlines, such
as SABRE-REGISTERED TRADEMARK- DIRECT CONNECT-REGISTERED TRADEMARK-
AVAILABILITY participation level, provide greater levels of communication with
the SABRE system, giving subscribers more detailed information and associates
improved inventory management. For an associate selecting one of the higher
levels of participation, the SABRE system provides subscribers with a direct
connection to the associate's internal reservation system, allowing the SABRE
system to provide real-time information and allowing the associate to optimize
revenue for each flight. Car rental companies and hotel operators are provided
with similar levels of participation from which to select. The Company also
provides associates, upon request, marketing data (in the form of anonymous,
aggregated data from which all personal information has been deleted) derived
from the SABRE system bookings for fees that vary depending on the amount and
type of information provided.
SUBSCRIBER ACCESS
Access to the SABRE system enables subscribers to electronically
locate, price, compare and purchase travel products and services provided by
associates. The Company tailors the interface and functionality of the SABRE
system to the needs of its different types of subscribers. Marketing is targeted
to travel agencies, travel suppliers, corporations and individual consumers.
TRAVEL AGENTS. The Company provides travel agents with the hardware,
software, technical support and other services needed to use the SABRE system,
in return for fees that typically vary inversely with the travel agency's
productivity, as measured by the number of bookings generated. Such fees are
payable over the term of the travel agent's agreement with the Company,
generally five years in the United States and Latin America, three years in
Canada, and one year in Europe.
Because travel agencies have differing needs, the Company has modified
the SABRE system interface to meet the specific needs of different categories of
travel agents. Travel agents can choose interfaces that range from simple,
text-based systems to feature-laden graphical systems. For example, the Company
developed TURBO SABRE-REGISTERED TRADEMARK- software, an advanced point-of-sale
interface and application development tool that enables advanced functionality
such as customized screens, automated quality control, database integration, and
eliminates complex commands, reducing keystrokes and training requirements.
PLANET SABRE-REGISTERED TRADEMARK- software includes a graphical launch
pad, which enables the user to move to any function with one or two clicks of a
mouse; a customization feature, which allows travel agencies to tailor PLANET
SABRE software to meet their own specific needs; a tutorial; online help; a
place to store notes about clients, destinations or procedures; and a suggestion
system. PLANET SABRE software transforms the SABRE system from a complex
command-oriented system to an all-graphic interface with continued access to the
SABRE system and its capabilities.
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SABRE NET PLATFORM-TM- is a low-cost, Internet browser based solution
for smaller agencies or professional travel agents working from a remote
location. The software provides Sabre quality and reliability at less than half
the cost of other connectivity solutions, while at the same time, giving agents
the flexibility to stay connected virtually anywhere.
The Company provides online bookings solutions for travel agencies and
associate customers, including Web site development, business logic middleware,
and backend processing. The end consumer accesses the agency and
associate-specific Web sites via the Internet to locate, price, compare and
purchase travel products and services. Because functionality requirements differ
among customers, a suite of products has been developed to cater to specific
online needs. Travel agent and associate product offerings range from off the
shelf applications to fully customized solutions. License, consulting, and Web
hosting fees are recovered from the subscribers and vary with the level of
customization and volume generated by the site. The Company currently provides
Web hosting services for over 700 sites including the Travelocity.com Web site,
ten major airlines, including American, US Airways, Inc. ("US Airways") and
other associates and travel agencies.
The SABRE system interfaces are available in English, Spanish,
Portuguese, French, German, Italian and Japanese. In addition, the Company
offers travel agencies back-office accounting systems and further supports
travel agencies by offering a simplified method to develop and place their own
marketing presence on the World Wide Web.
TRAVEL SUPPLIERS AND CORPORATE ONLINE. Through its October 17, 2000
acquisition of GetThere, Inc. ("GetThere"), the Company significantly extended
its leadership in Web-based solutions for corporations and suppliers.
GetThere-TM- DIRECTAIRLINE-TM- is powering Web sites for 10 major
airlines including All Nippon Airways, America West, British Airways, TWA and
United Airlines. GetThere's system provides supplier Web sites with extensive
features for travel reservations, bonus mile programs, flight status alerts and
Internet specials. In 2000, GetThere also announced its first booking site for a
top lodging company - Hyatt.
Combining the former GetThere and Sabre Business Travel
Solutions-REGISTERED TRADEMARK- organizations, GetThere provides Web-based
travel booking systems designed for corporate travelers, travel arrangers and
travel managers. It is a comprehensive offering that enables travel planning and
reservations by corporate travelers, while providing control and decision
support to travel managers. GetThere DIRECTCORPORATE-TM- provides corporations
with tools to better manage travel costs, influence use of negotiated rates and
adherence to corporate travel policies, and obtain real-time information on all
aspects of travel. Through major agency and supplier partners, GetThere
DIRECTMIDMARKET-TM- is delivering sophisticated corporate travel features to
small and mid-sized companies that make up a significant percentage of business
travel expenditures.
The Company receives fees for transactions booked through GetThere and
also recognizes revenues for certain up-front fees, such as implementation,
franchise, and license fees over the term of the related contract.
CONSUMER ONLINE. The Company owns a significant interest in
Travelocity.com Inc. ("Travelocity.com"), a leading provider of online travel
services to consumers. Through the Travelocity.com Web site and certain
co-branded sites operated in conjunction with other Internet Web sites,
individual consumers can plan their travel, obtain destination information,
compare prices and make travel reservations online. This product is available
to individual consumers free of charge.
The Travelocity.com Web site is accessible through the Internet and
computer online services. It features booking and purchase capability for
airline, car rental and hotel companies for which booking and purchase
capability is available in the SABRE system. Vacation and cruise packages are
available as well. The Travelocity.com Web site also offers access to a
database of destination information, articles from travel correspondents and
interactive maps. Travelocity.com has approximately 25 million members. During
2000, members booked approximately $2.5 billion in travel services through the
Travelocity.com Web site.
Travelocity.com has entered into co-branding agreements to provide access
to the Travelocity.com Web site on complementary Internet portals and other Web
sites. These agreements include arrangements for Travelocity.com to be the
exclusive booking service for Web sites operated by America Online, Inc.;
Yahoo!, Inc.; and Excite, Inc.
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The Company receives booking fees and commissions from travel providers
for purchases of their travel products and services pursuant to reservations
made through the Travelocity.com Web site. In addition, the Company receives
advertising revenues from the delivery of advertising impressions on the
Travelocity.com Web site.
On March 7, 2000, the Company completed the merger of Travelocity.com
Inc., a newly created 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. 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 its Travelocity.com division 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 Travelocity 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 Partnership and the Company have entered into intercompany
agreements that provide for, among other things, continued access to the SABRE
system for content and reservations services, the provision of technology and
administrative resources, and the allocation of intellectual property rights.
The Company also agreed to a non-competition agreement under which it agrees
that it will not enter into the business of offering real time travel-related
reservations, services and content directly to consumers through a
travel-related Internet site for a period of two years.
INTERNATIONAL MARKETING
The Company is actively involved in marketing the SABRE system
internationally either directly or through joint venture or distributorship
arrangements. The Company's global marketing partners principally include
foreign airlines that have strong relationships with travel agents in such
airlines' primary markets and entities that operate smaller global distribution
systems or other travel-related network services.
In February 1998, the Company signed long-term agreements with ABACUS
International Holdings Ltd. which created a Singapore-based joint venture
company to manage travel distribution in the Asia/Pacific region. The Company
owns 35% of the joint venture company, called ABACUS International Ltd., and
provides it with transaction processing and product development services on the
SABRE system.
COMPETITION
Although distribution through traditional travel agents continues to be
the primary method of travel distribution, new channels of direct online
distribution to businesses and consumers are developing rapidly. The adoption of
these tools is currently quite low, but it is growing quickly. The Company
believes that its products and services offered through GetThere and
Travelocity.com are well positioned to effectively compete in these emerging
distribution channels.
The global market to attract and retain agency subscribers is intensely
competitive. Factors affecting competitive success of global distribution
systems include depth and breadth of information, ease of use, reliability,
service and incentives to travel agents and range of products available to
travel providers, travel agents and consumers. The Company competes in travel
marketing and distribution primarily against other large and well-established
global distribution systems. The Company's principal competitors in marketing to
travel agents include Amadeus, Galileo and Worldspan. Each of these competitors
offers many products and services substantially similar to those of the Company.
5
The Company potentially faces many new competitors as new travel
distribution channels develop, including new Internet based
business-to-business ("B2B") and business-to-consumer ("B2C") channels. Of
course, these new players will have to face a number of challenges, including:
significant capital investment, development or acquisition of hardware and
software systems with global scales and reach, and ability to connect to
disparate travel suppliers' and travel agents' systems. Many of these
channels will continue to require services from a global distribution system
such as the SABRE system. The Company has and will continue to offer
transaction processing and other services to parties that compete directly
with the Travelocity.com Web site and GetThere as such parties require access
to the Company's offerings. For example, the Company provides transaction
processing services to Cheap Tickets and Lowestfare.com although such
companies compete against the Travelocity.com Web site. For the provision of
these services, the Company receives booking fees for bookings made through
these and other travel-related Web sites.
The Company markets the SABRE system to corporations through GetThere.
The market for Internet-based travel procurement and supply services is new,
highly competitive and rapidly evolving. The Company's main competitors in the
B2B channel in marketing to corporations include providers of online travel
products and services, such as Amadeus Global Travel Distribution SA; Oracle's
E-Travel and Datalex PLC; and online providers of indirect goods and services
including Ariba and Commerce One.
The Company offers its B2C channel primarily through the
Travelocity.com Web site. The main competitors of the Travelocity.com Web
site in marketing to consumers include Expedia (owned primarily by Microsoft
Corporation) and Priceline.com. Increasingly, many travel suppliers are
developing their own Web sites, some of which offer an array of products and
services, that directly target consumers. Various major airlines have
recently announced their intention to launch Internet Web sites in the United
States, Europe and Asia to provide booking services for airline travel, hotel
accommodations and other travel services offered by multiple vendors. Several
hotels have announced plans for similar multi-vendor Web sites. Certain of
these sites appear to have the intention to make certain discounted fares and
prices available exclusively on their proprietary or multi-vendor Web sites.
To that end, the multi-airline owned Web site in the U.S., named "Orbitz,"
has included "most favored distributor" and exclusivity provisions in its
airline participation contracts. Similarly, the multi-airline owned Web site
in Europe has signaled that its airline participation contracts will contain
"most favored distributor" provisions. Orbitz is currently being investigated
by the U.S. Department of Transportation (the "DOT") and the U.S. Department
of Justice (the "DOJ"). The DOT is also conducting a rulemaking proceeding in
which one of the central issues is whether Orbitz should be subject to the
same sorts of regulations as have long applied to airline owned or airline
marketed computer reservations systems used by travel agencies.
The Attorneys General of 20 U.S. states and the Commonwealth of Puerto
Rico have filed comments with both the DOT and the DOJ expressing their serious
concerns about the impact that Orbitz might have on competition. The Senate
Antitrust Subcommittee has written to the DOJ and the Federal Trade Commission
calling for an investigation of Orbitz. In those proceedings, a number of
parties -- including the Association of Retail Travel Agents, the American
Society of Travel Agents, Southwest Airlines, the Consumer Federation and the
Company -- have either sought to have conditions imposed on the manner in which
Orbitz may operate or to have it prohibited outright. The Company has sought
the imposition of conditions that will safeguard fair competition in this
sphere. The Company is unable to say when those proceedings might conclude or
what the final outcome may be.
CRS INDUSTRY REGULATION
The Company's travel marketing and distribution business is subject to
regulation in the United States, the European Union, Canada and Australia.
These regulations generally address the relationships among computer
reservation systems ("CRSs"), airline associates, and travel agency
subscribers. Generally, these regulations do not address relationships with
non-airline associates. The regulations in the European Union, however, do
include rail associates in certain circumstances. In general, these regulations
are directed at ensuring fair competition among travel providers. Among the
principles addressed in the current regulations are: unbiased CRS displays of
airline information, fair treatment of airline associates by CRSs, equal
participation by airlines in non-owned CRSs, and fair competition for
subscribers. The CRS regulations in the United States are currently under
review. In addition, the Transportation Ministry of Peru is considering the
adoption of CRS regulations. Likewise, the Department of Civil Aviation in
Brazil considered such regulations last year but, for the time being, has
decided such regulations are not necessary. The Company does not believe that
the possible revisions to the United States code, or possible adoption of codes
in Peru and Brazil will materially adversely affect its operations.
6
OTHER REGULATION
The Company may be impacted by regulations affecting issues such as:
exports of technology, telecommunications, data privacy and electronic
commerce. Some portions of the Company's business, such as its Internet-based
travel marketing and distribution, may be affected if regulations are adopted
in these areas. Any such regulations may vary among jurisdictions. The Company
believes that it is capable of addressing these regulatory issues as they arise.
OUTSOURCING AND SOFTWARE SOLUTIONS
The Company is a leading provider of information technology services
to the travel and transportation industries. The Company employs its airline
technology expertise to offer outsourcing and software solutions to clients
that face similar complex operations issues, including airport, railroad and
hospitality companies. The services offered by the Company include software
development and product sales, transactions processing and consulting, as
well as comprehensive information technology outsourcing. Approximately
32.6%, 39.2% and 42.6% of the Company's revenue in 2000, 1999 and 1998,
respectively, was generated by the provision of outsourcing and software
solutions.
The Company continues to aggressively pursue strategic information
technology relationships. Clients enter into strategic agreements with the
Company in order to benefit from its extensive airline industry expertise,
experience with complex operating and transaction environments and its
extensive suite of software products and services. In August 2000, the Company
initiated a business strategy that will allow the Company to leverage its
strengths in the software application, reservations hosting and Web hosting
areas. This business strategy includes further expansion of the Company's
suite of software applications to include Web-enabled product offerings that
will allow the Company to deliver unmatched industry knowledge and
operational expertise to a much larger customer base.
The Company offers a comprehensive set of information technology
solution services to the airline industry. These solutions include: information
technology services; software development, sales and licensing; multihost
services and consulting, which includes capabilities ranging from reengineering
to functional consulting. Recruiting and retaining capable personnel,
particularly those with expertise in operations research, information
technology and industrial engineering, is vital to the provision of solutions
by the Company.
INFORMATION TECHNOLOGY OUTSOURCING. The Company provides information
technology outsourcing to airlines for desktop, data center, network and
application development. The Company extends real-time transaction processing
services by providing access to its hardware and software to airlines for
reservations, flight operations, departure control and other related
services. Local computer terminals at a customer's location are linked to the
Company's mainframes, and the Company maintains and operates the entire
system on a secure and confidential basis. The Company also provides services
for establishing systems security, voice networks, data center connectivity,
help desk support and desktop applications. Some of the major clients for the
outsourcing business include American, US Airways and Gulf Air. The Company's
business strategy involves partnering with other information technology
providers to pursue new outsourcing opportunities.
In 1995, as a subcontractor of American, the Company began providing
information technology services to Canadian Airlines International, Ltd.
("Canadian"). The services contract was signed in conjunction with AMR
acquiring a significant ownership stake in Canadian. On January 5, 2000,
Canadian was acquired by Air Canada, and AMR no longer owns an interest in
the airline. Air Canada currently receives information technology services
from a competitor of the Company. Air Canada executed termination of the
Canadian Services Agreement with AMR effective February 2001. Since their
purchase of Canadian, Air Canada has been integrating Canadian's operations
with its own, which include the integration of information technology
services. The Company is cooperating with Air Canada in the integration and
conversion of information technology systems and services. The Company
continues to perform transition and wind-down activities related to the
Canadian Services Agreement, which are set to be concluded by end of June
2001. The Company has also entered into a services agreement directly with
Air Canada for all remaining information technology services, which currently
extends through August 2001.
In 1996, the Company executed an information technology services
agreement with American for a term of ten years for most services (five years
for others). Under this agreement, the Company provides data processing
network, distributed systems and applications development services to
American and AMR's other subsidiaries. The Company fulfills substantially all
of American's data processing requirements and manages all voice and data
communication services for American and AMR's other subsidiaries, including
data networks, voice networks and radio services. The Company also provides
American with the services required to design, install, operate and maintain
its range of local area networks, desktop, mobile computing and peripheral
devices. The Company completes nearly all of the applications development for
American.
In January 1998, the Company completed the execution of a 25-year,
multibillion dollar technology agreement with US Airways to provide
substantially all of US Airways' information technology services. The
agreement covers the management and operation of US Airways' systems and
information technology services. In 2000, United Air Lines announced its
intent to acquire US Airways. At the present time, it is uncertain what
impact this potential change in ownership may have on the services provided
to US Airways by the Company.
SOFTWARE DEVELOPMENT, SALES AND LICENSING. The Company currently
provides software solutions to more than 165 airlines. The Company develops
off the shelf products as well as customized software for some of its larger
customers. The Company's suite of software products provides many
applications for airlines and other travel providers. Some of the most
popular products support flight scheduling, flight operations, revenue
management, crew scheduling, sales automation, cargo tracking, passenger
systems and frequent flyer programs. In November 2000, the Company expanded
its existing software products and solutions by launching SABRE-REGISTERED
TRADEMARK-EMERGO-TM- Web-enabled solutions, a new application service
provider offering that is designed to simplify delivery and operations for
airlines and other travel suppliers. The EMERGO offering allows carriers
access to 17 of Sabre's best of breed technological solutions that feature
delivery through shorter implementations, 24-hour data center support, and
fewer complications than running an internal system. Over the next two years,
the Company plans to enhance more than 30 applications, which will add even
greater breadth and depth to the existing product suite. Most products
offered within EMERGO are Web-enabled and provide users with secure access
for a pre-defined, user-based fee. Previously, the Company only offered core
reservations, departure control, flight operations, and cargo products via an
ASP platform. Two products included in the EMERGO offering are:
SABRE-REGISTERED TRADEMARK- AIRFLITE-TM-, a decision-support tool that
focuses on flight schedule development processes, including market demands
and
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operational constraints, to help an airline improve profitability and reduce
costs; and SABRE-REGISTERED TRADEMARK- AIRMAX-TM-, an automated yield
management system that uses historical and current reservations data to
forecast booking activity by segment and fare class. Both products, as well as
others in the EMERGO offering, enable faster time to market and require less
in-house expertise.
MULTIHOST SERVICES. The Company currently provides multihost
internal reservations system services to over 55 airlines. Each hosted
airline has a unique and secured partition that contains that airline's data
and reservations. Airline users access their data through a global network.
The Company's line of multihost products support various fundamental airline
functions, including reservations, ticketing, pricing, departure control,
inventory and scheduling. Services included as part of the multihost offering
include 24-hour help desk, training, product consulting, and communications
and network implementation and consulting.
CONSULTING. The Company's consulting services assist businesses in the
travel and transportation industries in collecting and analyzing operational
and customer data in order to improve internal operations and product
distribution in the market place. These services enable businesses to improve
airport and other operations and optimally distribute their fares, schedules
and inventories through all available channels - with special emphasis on
distribution through computer reservations and global distribution systems.
The Company distributes its solutions and consulting services through
a sales and marketing organization that spans four continents, with primary
sales offices in Dallas, London, Paris, Hong Kong, Sydney and Auckland. The
Company also maintains agency relationships to support sales efforts in key
markets, including India, China and the Middle East. To date, the Company has
provided business solutions to nearly 750 clients located in more than 75
countries.
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COMPETITION
In outsourcing and software solutions, the Company competes both
against solutions companies and full-service providers of technology
outsourcing, some of which have considerably greater financial resources than
the Company, and against smaller companies that offer a limited range of
products. Among the Company's full-service competitors are Electronic Data
Systems, IBM Global Services, Unisys, Accenture and Lufthansa Systems. The
Company believes that its competitive position in the travel and transportation
industries is enhanced by its experience in developing systems for American and
other airlines and by its ability to offer not only software applications but
also systems development, integration and maintenance and transaction
processing services.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs approximated $59 million, $48 million
and $39 million for 2000, 1999 and 1998, respectively.
SEGMENT INFORMATION
Financial information for the Company's operating segments and
geographical revenues and assets are included in Note 14 to the Consolidated
Financial Statements.
INTELLECTUAL PROPERTY
The Company uses software, business processes and other proprietary
information to carry out its business. These assets and related patents,
copyrights, trade secrets, trademarks and intellectual property rights are
significant assets of the Company. The Company relies on a combination of
patent, copyright, trade secret and trademark laws, confidentiality procedures
and contractual provisions to protect these assets. The Company has implemented
a program to seek patent protection on key technology and business processes of
its business. The Company's software and related documentation are also
protected under trade secret and copyright laws. The laws of some foreign
jurisdictions may provide less protection than the laws of the United States
for the Company's proprietary rights. Unauthorized use of the Company's
intellectual property could have a material adverse effect on the Company, and
there can be no assurance that the Company's legal remedies would adequately
compensate it for the damages to its business caused by such use.
EMPLOYEES
As of December 31, 2000, the Company had approximately 10,000
employees. A central part of the Company's philosophy is to attract and
maintain a highly capable staff. The Company considers its current employee
relations to be good. The Company's employees based in the United States are
not represented by a labor union.
Effective upon the spin-off of the Company from AMR, the Company
ceased to be subject in the United States to the Railway Labor Act and became
subject to the Fair Labor Standards Act ("FLSA"). Among the implications of the
change in law, the Company has increased obligations to pay overtime
compensation to non-exempt employees. The Company does not expect to incur
material increased overtime costs. In addition, it is relatively easier for
unions to organize collective bargaining units under the FLSA.
9
ITEM 2. PROPERTIES
The Company's principal executive offices are located in Fort Worth,
Texas, primarily in three buildings, which are owned by the Company and one
of which is located on land leased from the Dallas/Fort Worth International
Airport Board under a lease that expires in 2019, subject to four renewal
options of five years each, exercisable at the option of the Company.
Additionally, the Company leases office facilities in Westlake, Texas under
leases expiring in 2003, subject to a three-month or a three-year option,
exercisable at the option of the Company. The Company also leases office
facilities in approximately 90 other locations worldwide.
The Company's principal data center is located in an underground
facility in Tulsa, Oklahoma (the "Data Center"). The land on which the Data
Center is located is leased from the Tulsa Airport Improvements Trust, a public
trust organized under the laws of the State of Oklahoma, pursuant to a lease
that expires in 2038. The SABRE system and the Company's data processing
services are dependent on the Company's central computer operations and
information processing facility located in the Data Center. In addition, the
Company leases a facility in Tulsa, Oklahoma, for its data tape archives under
a lease that expires in 2004, subject to one five-year renewal option. The
Company also utilizes a computer center located in one of its office buildings
in Fort Worth (the "Fort Worth Center"). At the Fort Worth Center, the Company
operates and manages a wide variety of server based and client/server
distributed systems.
During 1999, the Company entered into an agreement for the use of
land, an existing office building and the construction of a new corporate
headquarters facility in Southlake, Texas, as well as the development of new
data center facilities in Tulsa, Oklahoma. The initial term of the lease
expires in 2004, with two optional one-year renewal periods thereafter.
Many of the Company's travel agency and corporate subscribers
connect to the SABRE system through leased access circuits. These leased
access circuits, in turn, connect to the domestic and international data
networks leased by the Company, such as those leased from Societe
Internationale de Telecommunications Aeronautiques ("SITA"), which is owned
by a consortium of airlines.
The Company believes that its office facilities, Data Center and Fort
Worth Center will be adequate for its immediate needs and that the development
of the new headquarters facility in Southlake, Texas, and new data center
facilities in Tulsa, Oklahoma will accommodate expansion. The Company, however,
continuously invests to upgrade these facilities to meet changing technological
needs. The Company also believes that its network access will be adequate for
its immediate and foreseeable needs.
10
ITEM 3. LEGAL PROCEEDINGS
PAKISTAN INTERNATIONAL AIRLINES ARBITRATION
On March 16, 2000, the Company initiated an arbitration proceeding
in Paris, France in which sought 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.
On December 18, 2000, the Company and PIA reached an amicable settlement of
the dispute, under which the Company will continue providing certain services
to PIA.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended December 31, 2000.
11
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their positions and ages as of December
31, 2000 are as follows:
William J. Hannigan.................... Chairman, since March 2000 and
Director, President and Chief
Executive Officer since December
1999. President of SBC Global
Markets in 1999; President of
Business Communication Services
for Southwestern Bell/SBC
1998-1999; Chair of SBC DataComm
Strategy Task Force and Regional
President of Central & West Texas
Southwestern Bell from 1997 to
1998; Vice President of Business
and Government Markets Pacific
Bell from 1996 to 1997; Vice
President of Engineering and
Applications Support for Sprint
Corporation from 1995 to 1996. Age
41.
Jeffery M. Jackson..................... Executive Vice President, Chief
Financial Officer and Treasurer
since May 1999; Senior Vice
President, Chief Financial
Officer and Treasurer from
August 1998 to May 1999; Vice
President and Controller for
American Airlines from January
1998 to August 1998; Vice
President--Corporate Development
and Treasurer for American
Airlines from 1995 to 1998. Age 44.
David A. Schwarte...................... Executive Vice President and
General Counsel since March 2000.
Director of Kelly, Hart & Hallman
from July 1998 to March 2000;
Managing Director of International
Affairs of American Airlines from
December 1996 to July 1998;
Associate General Counsel of
American Airlines from January
1995 to December 1996. Age 50.
Eric J. Speck.......................... Executive Vice President since
May 2000; Executive Vice
President, Marketing & Sales from
May 1999 to May 2000; Senior
Vice President--Sabre Travel
Information Network from April
1997 to May 1999; Vice
President--Sabre Europe from
August 1995 to March 1997. Age 44.
All officers serve at the discretion of the Board of Directors.
12
PART II
- -----------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Class A common stock is traded on the New York Stock
Exchange (symbol TSG). The approximate number of record holders of the
Company's Class A common stock at February 21, 2001 was 11,080. At December
31, 2000 there were no shares of the Company's Class B common stock
outstanding as a result of the exchange by AMR of Class B common stock for
Class A common stock, all of which shares were distributed by AMR to AMR
shareholders on March 15, 2000.
The range of the high and low sales prices for the Company's Class A
common stock on the New York Stock Exchange by quarter for the two most
recent fiscal years was:
HIGH LOW
---- ---
Quarter Ended:
March 31, 2000 $53.50 $34.1875
June 30, 2000 38.625 25.5625
September 30, 2000 30.5625 22.3125
December 31, 2000 43.8125 26.375
Quarter Ended:
March 31, 1999 $47.75 $38.25
June 30, 1999 70.625 44.937
September 30, 1999 72.00 39.50
December 31, 1999 56.125 39.75
On February 7, 2000, 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.
13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents historical financial data of the
Company. During 2000, the Company acquired Preview; Gradient Solutions
Limited ("Gradient"); GetThere and a 51% ownership interest in Dillon
Communication Systems GmbH ("Dillon"). Such acquisitions affect the
comparability of the data presented. See Management's Discussion and Analysis
of Financial Condition and Results of Operations and Note 4 to the
Consolidated Financial Statements for further information regarding these
acquisitions and their impact on the Company's financial condition and
results of operations.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA AND OTHER DATA WHERE INDICATED)
INCOME STATEMENT DATA (1)(2):
Revenues $2,617.3 $2,434.6 $2,306.4 $1,788.4 $1,625.1
Operating expenses 2,366.9 2,062.1 1,956.0 1,475.8 1,295.2
-------- -------- -------- -------- --------
Operating income 250.4 372.5 350.4 312.6 329.9
Other income (expense), net (13.9) 155.4 21.1 11.0 (24.0)
Minority interests 30.7 --- --- --- ---
-------- -------- -------- -------- --------
Income before income taxes 267.2 527.9 371.5 323.6 305.9
Income taxes 123.1 196.0 139.6 123.7 119.3
-------- -------- -------- -------- --------
Net earnings $144.1 $331.9 $231.9 $199.9 $186.6
======== ======== ======== ======== ========
Earnings per common share, basic $1.11 $2.56 $1.78 $1.53 $1.43
======== ======== ======== ======== ========
Earnings per common share, diluted $1.11 $2.54 $1.78 $1.53 $1.43
======== ======== ======== ======== ========
BALANCE SHEET DATA
(AT END OF PERIOD) (1)(2):
Current assets $693.0 $976.4 $944.4 $877.6 $694.5
Goodwill and intangible assets, net 891.5 --- --- --- ---
Total assets 2,650.4 1,951.2 1,926.8 1,504.0 1,287.1
Current liabilities 1,266.4 525.1 400.8 311.5 289.8
Long-term notes payable 149.0 --- 317.9 317.9 317.9
Minority interests 239.5 --- --- --- ---
Stockholders' equity 791.0 1,262.0 953.7 757.3 569.6
OTHER DATA (1)(2):
Operating margin (1) 9.6% 15.3% 15.2% 17.5% 20.3%
Direct reservations booked using the
SABRE system (3) 394 370 358 360 349
Total reservations processed using
the SABRE system (4) 467 439 409 372 356
Cash flows from operating activities $310.8 $495.4 $450.8 $372.8 $415.8
Capital expenditures $190.1 $168.0 $320.0 $218.1 $184.3
- --------------------------------------------------------------------------------
(1) 2000 results of operations were impacted by the Company's merger and
acquisition activities and the related goodwill amortization expense
associated with those transactions. See Note 4 to the Consolidated
Financial Statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations for additional information regarding
mergers and acquisitions and the impact on the Company's financial
condition and results of operations.
(2) The Company has significant transactions with AMR and American. The terms
of many of the agreements with AMR and its affiliates were revised in
connection with AMR's divestiture of its entire ownership interest in the
Company in the first quarter of 2000. See Note 6 to the Consolidated
Financial Statements.
(3) CRS reservations for which the Company collects a booking fee.
(4) Includes direct reservations plus reservations processed by joint venture
partners using the SABRE system.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SUMMARY
During 2000, the Company generated approximately 67.4% of its
revenues from travel marketing and distribution services and approximately
32.6% of its revenues from outsourcing and software solutions services. Total
revenues have grown at a compound annual growth rate of 13.5% for the three
years ended December 31, 2000.
For the three years ended December 31, 2000, total operating
expenses have grown at a compound annual growth rate of 17.1%. The Company's
primary expenses consist of salaries, benefits, other employee-related costs,
depreciation and amortization, communication costs and customer incentives,
representing approximately 74.0%, 77.2% and 76.5% of total operating expenses
in 2000, 1999 and 1998, respectively. Those expenses grew at a compound
annual growth rate of 16.5% for the three years ended December 31, 2000,
primarily due to the Company's growth, including business acquisitions, the
incremental costs of the Company's Year 2000 efforts, and expenses associated
with certain long-term outsourcing agreements.
As a result of the higher growth in operating expenses compared to
revenues, primarily due to the financial impact of the Company's merger and
acquisition activities in 2000, the Company's operating margin decreased to
9.6% in 2000 from 15.2% in 1998.
SEASONALITY
The following table sets forth quarterly financial data for the Company (in
millions except per share data and percents):
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2000
- ----
Revenues $644.9 $661.8 $667.3 $643.4
Operating income (loss) 102.6 100.6 68.0 (20.7)
Operating margin 15.9% 15.2% 10.2% (3.2%)
Net earnings (loss) $65.6 $63.4 $44.4 $(29.4)
Earnings (loss) per common share, basic $.51 $.49 $.34 $(0.23)
Earnings (loss) per common share, diluted $.48 $.46 $.34 $(0.23)
Direct reservations booked using the SABRE
system 106 103 98 87
Total reservations booked using the
SABRE system 125 122 117 103
1999
- ----
Revenues $638.1 $638.8 $617.2 $540.5
Operating income 112.1 95.9 120.6 43.9
Operating margin 17.6% 15.0% 19.5% 8.1%
Net earnings $92.7 $63.5 $78.4 $97.3
Earnings per common share, basic $.71 $.49 $.61 $.75
Earnings per common share, diluted $.71 $.48 $.55 $.75
Direct reservations booked using the SABRE
system 99 97 94 80
Total reservations booked using the
SABRE system 116 115 112 96
The travel industry is seasonal in nature. Bookings, and thus fees
charged for the use of the SABRE system, decrease significantly each year in
the fourth quarter, primarily in December, due to early bookings by customers
15
for travel during the holiday season and a decline in business travel during
the holiday season. See Note 15 to the Consolidated Financial Statements for
further information on quarterly financial results.
AGREEMENTS WITH AMR AND AMERICAN
In connection with the Reorganization, the Company, AMR and American
entered into various agreements, collectively referred to as the "AMR
Agreements". These agreements include an agreement for the provision of
information technology services to American by the Company (the "Technology
Services Agreement"), an agreement for the provision of marketing support by
American for certain of the Company's products (the "Marketing Cooperation
Agreement"), an agreement for the provision of management services by
American to the Company (the "Management Services Agreement"), agreements for
the provision of travel services by American to the Company and its employees
(the "Corporate Travel Agreement" and the "Travel Privileges Agreement"). The
rates under the agreements are adjusted or renegotiated from time to time,
and current rates may represent an increase or decrease over previous rates.
The financial terms of the AMR Agreements were applied to the Company's
operations commencing January 1, 1996.
The base term of the Technology Services Agreement expires June 30,
2006. The terms of certain services to be provided by the Company to
American, however, vary. The AMR Agreements generally establish pricing and
service terms, and certain agreements, including the Technology Services
Agreement, provide for periodic price adjustments that may take into account
the market for similar services. Beginning in 1998, the formulas for annually
adjusting certain rates under the Technology Services Agreement are adjusted
every two years through negotiations of the parties which are to be guided by
benchmarking procedures set forth in the agreement.
In connection with AMR's divestiture of its entire ownership
interest in the Company in the first quarter of 2000, certain of these
agreements were revised. Revisions to the Technology Services Agreement
include extending services provided by the Company relating to AMR's real
time environment until June 30, 2008 and AMR's client server operations until
June 30, 2002. See Note 6 to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
2000 COMPARED TO 1999
TRAVEL MARKETING AND DISTRIBUTION. Travel marketing and distribution revenues
for the year ended December 31, 2000 increased approximately $284 million,
19.2%, compared to the year ended December 31, 1999, from $1,481 million to
$1,765 million. This increase was primarily due to growth in booking and
other fees from associates from $1,311 million to $1,533 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 was also
partially driven by increases in bookings made through the Travelocity.com
Web site. Other revenues increased approximately $62 million due primarily to
increased advertising revenues from the Travelocity.com Web site, the
addition of revenues from businesses acquired during 2000, services provided
to and equity income related to the Company's joint ventures and increased
revenues from the sale of miscellaneous products and services.
Cost of revenues for travel marketing and distribution increased
approximately $133 million, 13.3%, from $1,002 million to $1,135 million.
This increase was primarily attributable to increases in customer incentives,
data processing costs, salaries, benefits, other employee-related costs and
services purchased which were partially offset by reduced depreciation and
amortization expense. Subscriber incentive expenses increased in order to
maintain and expand the Company's travel agency subscriber base. Data
processing costs increased due to the growth in bookings and transactions
processed. Salaries, benefits and other employee-related costs increased to
support the growth of the Company's businesses, including Travelocity.com,
the addition of personnel associated with business combinations consummated
in 2000 and higher severance charges related to a reduction in force in 2000
compared to severance charges related to a reduction in force in 1999.
Services purchased increased due to increased temporary labor to support the
growth of Travelocity.com business. Depreciation and amortization expense
decreased due to certain classes of computer equipment becoming fully
depreciated in 2000 and decreased spending on service contract equipment for
subscribers resulting from lower unit costs of computer equipment.
16
OUTSOURCING AND SOFTWARE SOLUTIONS. Revenues from outsourcing and software
solutions for the year ended December 31, 2000 decreased approximately $100
million, 10.5%, compared to the year ended December 31, 1999, from $953
million to $853 million. Revenues from US Airways decreased approximately $38
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. Other revenues decreased
approximately $62 million primarily due to reduced applications development
services for Canadian 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 $104 million, 12.9%, from $807 million to $703 million. This
decrease was primarily attributable to decreased contract labor, salaries,
benefits, depreciation and amortization, and other operating expenses.
Contract labor expenses decreased due to a planned reduction in contract
labor headcount. Salaries and benefits decreased due to a reduction in
headcount, partially offset by higher severance charges related to a
reduction in force in 2000 compared to severance charges related to a
reduction in force in 1999. Depreciation and amortization decreased due to
the impact of changes in the Company's stock price on the amortization of the
deferred costs 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 costs decreased during the year resulting in a reduction of
amortization expense of approximately $6 million. Depreciation and
amortization expense also decreased due to reduced capital spending due in
part to leasing rather than purchasing certain computer equipment. 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $165 million, 65.0%, from $254 million to
$419 million. General and administrative expenses for the year include
approximately $19 million of nonrecurring charges associated with the
spin-off of the Company from AMR. Additionally, approximately $100 million of
the increase in selling, general and administrative expenses relates to the
Travelocity.com business and includes approximately $46 million of payments
made to strategic distribution partners, approximately $36 million in
increased advertising and promotion activities and approximately $18 million
due to higher salaries, benefits and other administrative expenses necessary
to support the growth of that business. The remaining increase in selling,
general and administrative expenses is due to the Company's growth
initiatives including strategic acquisitions consummated during 2000.
AMORTIZATION OF GOODWILL AND INTANGIBLE ASSETS. Amortization of goodwill and
intangible assets was $109 million in 2000. The Company recorded approximately
$1 billion of goodwill and intangible assets associated with the merger of
Preview and Travelocity.com and the acquisitions of GetThere, Gradient and an
interest in Dillon in 2000. The acquired goodwill and intangible assets are
being amortized over periods ranging from one to five years.
OPERATING INCOME. Operating income decreased $123 million, 33.0%, from $373
million to $250 million. Operating margins decreased from 15.3% in 1999 to
9.6% in 2000, due to an increase in operating expenses of 14.8% partially
offset by a 7.5% increase in revenues.
INTEREST INCOME. Interest income decreased by $12 million, 42.9%, from $28
million to $16 million, due primarily to lower average balances maintained in
the Company's cash and marketable securities accounts as a result of the
payment of a $675 million dividend to shareholders in February 2000 and
strategic acquisitions during 2000.
INTEREST EXPENSE. Interest expense increased $22 million, 220.0%, from $10
million to $32 million as a result of the debt assumed during 2000 in
connection with the payment of a $675 million dividend to shareholders in
February 2000 and the acquisition of GetThere in October 2000.
OTHER INCOME (EXPENSE). Other income (expense) decreased $136 million,
primarily due to a $138 million non-recurring gain recognized in 1999 on the
liquidation of Equant N.V. ("Equant") depository certificates.
MINORITY INTERESTS. Minority interests include minority owners' interests in
consolidated subsidiaries of the Company, primarily Travelocity.com.
17
INCOME TAXES. The provision for income taxes was $123 million and $196
million for 2000 and 1999, respectively. The decrease in the provision for
income taxes primarily corresponds with the change in income before the
provision for income taxes. The decrease is also due to a lower effective tax
rate resulting from the research and experimentation credit, partially offset
by a higher effective tax rate resulting from nondeductible goodwill
amortization. See Note 9 to the Consolidated Financial Statements for
additional information regarding income taxes.
NET EARNINGS. Net earnings decreased $188 million, 56.6%, from $332 million to
$144 million, primarily due to decreases in other income, operating income and
interest income and increases in interest expense in 2000 compared to 1999.
1999 COMPARED TO 1998
TRAVEL MARKETING AND DISTRIBUTION. Travel marketing and distribution revenues
for the year ended December 31, 1999 increased approximately $156 million,
11.8%, compared to the year ended December 31, 1998, from $1,325 million to
$1,481 million. This increase was primarily due to growth in booking and other
fees from associates from $1,183 million to $1,311 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 1999. The increase was also partially driven by
increases in bookings made through the Company's Travelocity.com Web site. Other
revenues increased approximately $28 million primarily due to services provided
to and equity income related to the Company's joint ventures and revenues from
sales of miscellaneous products and services.
Cost of revenues for travel marketing and distribution increased
approximately $86 million, 9.4%, from $916 million to $1,002 million. This
increase was primarily attributable to increases in subscriber incentive
expenses, data processing costs and salaries and benefits, partially offset by
reductions in expenses associated with the Marketing Cooperation Agreement with
American. Subscriber incentive expenses increased in order to maintain and
expand the Company's travel agency subscriber base. Data processing costs
increased due to the growth in bookings and transactions processed. Salaries and
benefits increased due to an increase in the average number of employees
necessary to support the Company's business growth and annual salary increases.
OUTSOURCING AND SOFTWARE SOLUTIONS. Revenues from outsourcing and software
solutions for the year ended December 31, 1999 decreased approximately $29
million, 3.0%, compared to the year ended December 31, 1998, from $982 million
to $953 million. This decrease was primarily related to services performed under
the information technology services agreement with US Airways moving into a
steady state and decreases in software development sales, offset by increased
revenues from other information technology outsourcing agreements signed during
1998.
Cost of revenues for outsourcing and software solutions decreased
approximately $40 million, 4.7%, from $847 million to $807 million. This
decrease was primarily attributable to a decrease in contract labor expenses and
other services purchased, partially offset by an increase in salaries and
benefits expenses. Contract labor expenses decreased due to a planned reduction
in contract labor headcount. Other services purchased decreased due to the
completion of conversion services for US Airways in 1999. Salaries and benefits
increased due to higher average salaries and benefits costs and severance
charges related to the reduction in force in August 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $61 million, 31.6%, from $193 million to
$254 million, primarily due to salaries, benefits and employee-related costs,
advertising and miscellaneous selling expenses. Salaries, benefits and
employee-related costs increased as a result of sales growth initiatives and
increased administrative requirements to support the Company's growth.
Advertising for the Travelocity.com Web site and miscellaneous selling
expenses also increased in order to support the Company's growth initiatives.
OPERATING INCOME. Operating income increased $23 million, 6.6%, from $350
million to $373 million. Operating margins increased from 15.2% in 1998 to 15.3%
in 1999, due to an increase in revenues of 5.6%, while operating expenses
increased 5.4%.
18
INTEREST INCOME. Interest income increased by $2 million, due primarily to
higher average balances maintained in the Company's cash and marketable
securities accounts.
INTEREST EXPENSE. Interest expense decreased $9 million as a result of the
settlement in June 1999 of the $318 million debenture payable to AMR.
OTHER INCOME (EXPENSE). Other income (expense) increased $123 million, primarily
due to a $138 million gain recognized on the liquidation in 1999 of Equant
depository certificates held by American for the economic benefit of the
Company, partially offset by the one-time gain of $14 million recognized in 1998
as a result of the favorable court judgment relating to Ticketnet Corporation,
an inactive subsidiary of the Company.
INCOME TAXES. The provision for income taxes was $196 million and $140 million
for 1999 and 1998, respectively. The increase in the provision for income taxes
corresponds with the increase in net income before the provision for income
taxes, partially offset by a lower effective tax rate due primarily to increased
foreign tax benefits. See Note 9 to the Consolidated Financial Statements for
additional information regarding income taxes.
NET EARNINGS. Net earnings increased $100 million, 43.1%, from $232 million to
$332 million, primarily due to the increases in other income and operating
income and the reduction in interest expense.
LIQUIDITY AND CAPITAL RESOURCES
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 compared to cash
and marketable securities and working capital balances at December 31, 1999
of $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. The reduction in the amount of cash and marketable
securities and working capital was primarily due to the funding of the $675
million dividend paid in February 2000 and strategic acquisitions made by the
Company in 2000. The Company plans to repay its short-term debt obligations
prior to maturity using a combination of its available cash and marketable
securities and, depending on market conditions, other refinancing
alternatives including but not limited to short-term to medium-term public or
privately-placed debt.
The Company has historically funded its operations through cash
generated from operations. The Company's cash provided by operating activities
of $311 million, $495 million and $451 million in 2000, 1999 and 1998,
respectively, were primarily attributable to net earnings before noncash
charges.
On January 5, 2000, pursuant to the terms of the stock option
agreement with US Airways, the Company settled the first tranche of options
to acquire 3 million shares of the Company's Class A common stock with a cash
payment of $81 million in lieu of issuing stock. The second tranche of
options to acquire 3,406,914 shares of the Company's Class A common stock
remained outstanding at December 31, 2000. Effective January 1, 2001, US
Airways' ability to select alternative value in place of receiving stock for
the second tranche of options expired. The Company may, at its discretion,
choose to settle the remaining stock options with alternative value in place
of issuing shares of its common stock. Such payment may result in the payment
of cash by the Company to US Airways.
Net cash used for investing activities for 2000 and 1999 were $473
million and $438 million, respectively. Investing activities in 2000 primarily
included $711 million for strategic acquisitions including GetThere, Preview,
Gradient and an interest in Dillon as well as $190 million of expenditures for
property and equipment. Investing activities in 1999 primarily included a $300
million loan to American and $167 million of expenditures for property and
equipment.
The Company obtained $163 million in cash from financing activities
in 2000 compared to cash used for financing activities in 1999 of $59
million. Cash provided by financing activities in 2000 includes $859 million
from the issuance of notes payable which was partially offset by the payment
of $675 million in dividends to shareholders in February and $34 million used
to repurchase approximately 1 million shares of the Company's Class A common
stock. See Note 11 to the Consolidated Financial Statements for a further
discussion of the 2000 dividend. 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
19
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. Cash used for financing activities in 1999 included $60
million to repurchase approximately 1 million shares of the Company's stock
and the payment of $18 million to AMR in settlement of an outstanding debt
obligation.
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. Concurrently, the Company entered into a short-term
$200 million, senior unsecured, term loan agreement (the "Interim Loan"),
with an original maturity of August 4, 2000 which was subsequently extended
to February 4, 2001. On February 18, 2000, the Company utilized a portion of
its available cash balance and marketable securities, as well as proceeds
from both the Credit Facility and Interim Loan to fund a $675 million
dividend to shareholders. In connection with the bridge credit facility
discussed below, the entire $200 million balance outstanding under the
Interim Loan was repaid and the Interim Loan agreement was terminated. At
December 31, 2000, there were no outstanding borrowings under the Interim
Loan and $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 $200
million outstanding under the Interim Loan. At December 31, 2000, the
outstanding balance of borrowings under the Bridge Credit Agreement was $710
million. See Note 7 to the Consolidated Financial Statements for further
information regarding these credit agreements.
During 1999, the Company entered into a syndicated lease financing
facility of approximately $310 million for the use of land and an existing
office building and the construction of a new corporate headquarters facility in
Southlake, Texas, as well as the development of new data center facilities in
Tulsa, Oklahoma. The financing facility will be accounted for as an operating
lease. The initial term of the lease extends through September 14, 2004, with
two optional one-year renewal periods thereafter. At the end of each renewal
period, the Company is required to either renew the lease, purchase the property
for its original cost, or arrange for the sale of the property to a third party,
with the Company guaranteeing to the lessor proceeds on such sale of
approximately 85% of the original fair value of the leased facility, or
approximately $264 million. See Note 10 to the Consolidated Financial Statements
for further information regarding future minimum lease payments.
On October 2, 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. The agreement provides, among
other things, that the Travelocity.com Web site will be the exclusive
reservations engine for AOL's Internet properties. Travelocity.com is
obligated for payments of up to $200 million and AOL and Travelocity.com will
share advertising revenues and commissions over the five year term of the
agreement. Under certain circumstances, Travelocity.com may elect to alter the
terms of this agreement such that guaranteed payments to AOL would no longer
be required. In connection with this agreement, Travelocity.com paid $40
million to AOL on March 7, 2000.
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, working capital and the repayment of debt. Capital expenditures
will primarily consist of purchases of equipment for the Data Center, as well as
computer equipment, printers, fileservers and workstations to support (i)
updating subscriber equipment primarily for travel agencies, (ii) expansion of
the subscriber base and (iii) new product capital requirements. The Company has
estimated capital expenditures of approximately $225 million to $275 million for
2001.
The Company believes that available balances of cash and marketable
securities, cash flows from operations and, depending on market conditions,
other refinancing alternatives including but not limited to short-term to
medium-term public or privately-placed debt will be sufficient to meet the
Company's cash requirements.
20
INTEREST IN EQUANT
At December 31, 2000, American held for the economic benefit of the
Company 2.3 million depository certificates representing beneficial ownership
of common stock of Equant, a telecommunications company affiliated with SITA.
The depository certificates are issued by the SITA Foundation, which holds
the underlying Equant shares. The depository certificates have an estimated
value of approximately $60 million, based upon the market value of Equant's
publicly-traded common stock at December 31, 2000.
In November 2000, an agreement was announced in which the SITA
Foundation will exchange approximately 68 million Equant shares for France
Telecom shares. The SITA Foundation will receive one France Telecom share for
every 2.2 Equant shares. The agreement is conditional upon certain regulatory
approvals from the European Union and the United States authorities. It is
also subject to certain customary termination provisions. Completion is
expected to take place in the first half of 2001. Based upon the terms of the
SITA Foundation exchange agreement with France Telecom, the depository
certificates have an estimated value of approximately $90 million at December
31, 2000. The Company's carrying value of these certificates was nominal at
December 31, 2000 as certain restrictions limit the Company's ability to
freely dispose of the certificates. Any future disposal of such depository
certificates, or shares of France Telecom received in exchange for the
depository certificates, may result in additional gains to the Company.
MERGERS AND ACQUISITIONS
During 2000, the Company completed the merger of Travelocity.com and
Preview. Additionally, the Company completed the acquisitions of Gradient and
GetThere, as well as acquired a 51% ownership interest in Dillon. For further
information regarding these transactions, see Note 4 to the Consolidated
Financial Statements.
INFLATION
The Company believes that inflation has not had a material effect on
its results of operations.
OUTLOOK FOR 2001
This outlook section contains a number of forward-looking
statements, all of which are based on current expectations. Actual results
may differ materially. 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 continued profitability and revenue growth in
2001. The Company expects consolidated year-over-year revenue growth to
exceed 15% and expects consolidated earnings growth to be in the 17% to 20%
range compared to 2000, excluding certain non-cash and one-time charges in
both years. Such items include amortization of goodwill and intangible assets
associated with strategic acquisitions, amortization expense associated with
stock options granted to US Airways, expenses associated with the spin-off
from AMR Corporation, and other various special items.
Within the Travel Marketing and Distribution business, revenue is
expected to grow due to increased travel bookings and an increase in the average
price per booking as well as expected strong revenue growth in the
Travelocity.com and GetThere businesses. The Company anticipates continued
pressure on subscriber incentive expenses and plans to offset such expenses
through cost cutting initiatives announced in 2000.
Within the Outsourcing and Software Solutions business, the Company
anticipates flat to slight year-over-year revenue growth. Revenue from existing
outsourcing customers, software solutions, and the reservations applications
business is expected to improve, offset by declining revenue on the Canadian
contract. The Company anticipates year-over-year operating margin improvement
within this business driven by cost cutting initiatives announced in 2000.
21
RECENT ACCOUNTING PRONOUNCEMENT
The Company has 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 a derivative's change in fair value will be immediately
recognized in earnings.
At December 31, 2000, the Company was a party to certain derivative
instruments, including foreign currency forwards designated as a hedge
related to anticipated foreign currency expenditures, an interest
rate/foreign currency swap contract entered into in connection with Euro
denominated debt related to the Gradient acquisition (see Note 4 to the
Consolidated Financial Statements) and warrants received from Hotel
Reservations Network in connection with an affiliation agreement. The Company
currently estimates that it will report a gain of approximately $7 million,
before minority interest, related to the adoption of FAS 133 in the first
quarter of 2001. The estimated gain is based upon the fair value of the
derivatives and any actual gains or losses realized by the Company will be
dependent upon future events.
22
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.
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-Registered Trademark- 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-SM- and Sabre-Registered Trademark- 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 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.
23
TRAVEL AGENCY CONSOLIDATION AND INCREASED COMPETITION FOR TRAVEL AGENCY
SUBSCRIBERS MAY RESULT IN INCREASED EXPENSES OR REDUCED REVENUE AND MARKET
POSITION.
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.
In order to compete, the Company may need to increase incentives, increase
spending on marketing or product development, or otherwise take actions
adverse to the Company. If the Company does not retain subscribers
representing a significant percentage of historic bookings through the
Sabre-Registered Trademark- 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 United States, 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, 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.
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.
24
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.
25
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 or to
make such business combinations and strategic investments on acceptable terms.
26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
At December 31, 2000, the Company's exposure to interest rates relates
primarily to it's investment portfolio and it's borrowings under various
credit facilities. At December 31, 1999, the Company's exposure to interest
rates related primarily to its investment portfolio.
The objectives of the Company's marketable securities are safety of principal,
liquidity maintenance, yield maximization and full investment of all available
funds. As such, the Company's investment portfolio consists primarily of high
credit quality certificates of deposit, bankers' acceptances, commercial paper,
mortgage-backed and receivables-backed securities, and corporate and government
notes. If short-term interest rates average 10% lower in 2001 than they were
during 2000, the Company's interest income from marketable securities would
decrease by approximately $0.5 million. In comparison, at December 31, 1999, the
Company estimated that if short-term interest rates averaged 10% lower in 2000
than they were during 1999, the Company's interest income from marketable
securities would have decreased by approximately $0.7 million. These amounts
were determined by applying the hypothetical interest rate change to the
Company's marketable securities balances as of December 31, 2000 and 1999.
In addition, the Company had floating rate borrowings with a principal
balance of approximately $859 million at December 31, 2000. If short-term
interest rates average 10% higher in 2001 than they were in 2000, the
Company's interest expense would increase by approximately $3 million. This
amount was determined by applying the hypothetical interest rate change to
the Company's borrowings balance at December 31, 2000. In comparison, at
December 31, 1999, the Company had no interest rate exposure due to the fact
that there was no outstanding debt at that date. 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.
FOREIGN CURRENCY RISK
The Company has various foreign operations, primarily in North America, South
America, Europe, and Asia. As a result of these business activities, the
Company is exposed to foreign currency risk. However, these exposures have
historically related to a small portion of the Company's overall operations
as a substantial majority of the Company's business is transacted in the
United States dollar. The Company was a party to certain foreign currency
derivative contracts at December 31, 2000. These contracts were not
significant to the Company's financial position or results of operations as
of or for the year ending December 31, 2000. No such transactions were
outstanding at December 31, 1999.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
-------------------
Report of Ernst & Young LLP, Independent Auditors 29
Consolidated Balance Sheets 30
Consolidated Statements of Income 31
Consolidated Statements of Cash Flows 32
Consolidated Statements of Stockholders' Equity 33
Notes to Consolidated Financial Statements 34
28
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Sabre Holdings Corporation
We have audited the accompanying consolidated balance sheets of Sabre
Holdings Corporation and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 2000. Our audits
also included the financial statement schedule listed under Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Sabre Holdings Corporation and subsidiaries at December 31, 2000 and 1999, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
Dallas, Texas
January 15, 2001
29
SABRE HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
- --------------------------------------------------------------------------------
December 31,
-----------------------------------
2000 1999
---------------- ----------------
ASSETS
CURRENT ASSETS
Cash $ 7,778 $ 6,628
Marketable securities 137,258 604,498
Accounts receivable, net 448,463 295,254
Receivable from related party, net --- 29,093
Prepaid expenses 83,580 22,899
Deferred income taxes 15,889 18,052
---------------- ----------------
Total current assets 692,968 976,424
PROPERTY AND EQUIPMENT
Buildings and leasehold improvements 340,473 337,409
Furniture, fixtures and equipment 49,627 46,485
Service contract equipment 517,886 546,200
Computer equipment 527,085 482,334
---------------- ----------------
1,435,071 1,412,428
Less accumulated depreciation and amortization (879,030) (839,874)
---------------- ----------------
Total property and equipment 556,041 572,554
Investments in joint ventures 159,317 156,158
Goodwill and intangible assets, net 891,497 ---
Other assets, net 350,531 246,075
---------------- ----------------
TOTAL ASSETS $ 2,650,354 $ 1,951,211
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 173,954 $ 121,091
Accrued compensation and related benefits 91,196 89,424
Notes payable 710,000 ---
Other accrued liabilities 291,238 314,598
---------------- ----------------
Total current liabilities 1,266,388 525,113
Deferred income taxes 47,703 ---
Pensions and other postretirement benefits 109,889 119,687
Notes payable 149,000 ---
Other liabilities 46,877 44,366
Minority interests 239,480 ---
Commitments and contingencies
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; 131,632 and 23,995
shares issued, respectively 1,321 240
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 661,098 607,285
Retained earnings 196,164 727,050
Less treasury stock at cost; 1,625 and 1,573 shares, respectively (67,566) (73,604)
---------------- ----------------
Total stockholders' equity 791,017 1,262,045
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,650,354 $ 1,951,211
================ ================
The accompanying notes are an integral part of these financial statements.
30
SABRE HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
- --------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
REVENUES
Travel Marketing and Distribution $ 1,764,610 $ 1,481,200 $ 1,324,795
Outsourcing and Software Solutions 852,765 953,419 981,592
--------------- --------------- ---------------
Total revenues 2,617,375 2,434,619 2,306,387
OPERATING EXPENSES
Cost of revenues
Travel Marketing and Distribution 1,135,445 1,001,925 915,805
Outsourcing and Software Solutions 703,313 806,635 847,212
Selling, general and administrative 418,767 253,557 192,998
Amortization of goodwill and intangible assets 109,419 --- ---
--------------- --------------- ---------------
Total operating expenses 2,366,944 2,062,117 1,956,015
--------------- --------------- ---------------
OPERATING INCOME 250,431 372,502 350,372
OTHER INCOME (EXPENSE)
Interest income 16,248 27,673 26,034
Interest expense (31,686) (9,995) (19,493)
Other, net 1,490 137,765 14,541
--------------- --------------- ---------------
Total other income (expense) (13,948) 155,443 21,082
--------------- --------------- ---------------
MINORITY INTERESTS 30,754 --- ---
--------------- --------------- ---------------
INCOME BEFORE PROVISION FOR INCOME TAXES 267,237 527,945 371,454
Provision for income taxes 123,185 196,038 139,513
--------------- --------------- ---------------
NET EARNINGS $ 144,052 $ 331,907 $ 231,941
=============== =============== ===============
EARNINGS PER COMMON SHARE
Basic $ 1.11 $ 2.56 $ 1.78
=============== =============== ===============
Diluted $ 1.11 $ 2.54 $ 1.78
=============== =============== ===============
The accompanying notes are an integral part of these financial statements.
31
SABRE HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
- ---------------------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------
2000 1999 1998
--------- --------- ---------
OPERATING ACTIVITIES
Net earnings $ 144,052 $ 331,907 $ 231,941
Adjustments to reconcile net earnings to cash
provided by operating activities
Depreciation and amortization 345,794 258,246 247,734
Deferred income taxes 22,334 (8,088) (1,021)
Gain on sale of investments --- (137,657) ---
Minority interests (30,754) --- ---
Other 19,335 1,544 1,940
Changes in operating assets and liabilities
Accounts receivable (125,038) 48,827 (103,237)
Prepaid expenses (88,861) (9,810) (9,744)
Other assets (20,582) 3,586 (437)
Accrued compensation and related benefits 7,042 (4,284) 24,014
Accounts payable and other accrued liabilities 125,355 (3,308) 53,288
Receivable from and payable to related parties 29,100 (7,491) (10,780)
Pensions and other postretirement benefits (9,798) 15,113 15,001
Payment to US Airways (81,469) --- ---
Other liabilities (25,738) 6,797 2,104
--------- --------- ---------
Cash provided by operating activities 310,772 495,382 450,803
INVESTING ACTIVITIES
Additions to property and equipment (190,126) (167,963) (320,031)
Proceeds from sale of equipment 1,517 2,002 30,276
Net decrease (increase) in marketable securities 442,930 (75,129) 43,373
Loan to American --- (300,000) ---
Proceeds from sale of investments --- 137,657 ---
Investments in joint ventures, net --- 5,965 (134,759)
Business combinations, net of cash acquired (711,383) --- ---
Other investing activities, net (15,917) (40,044) (41,691)
--------- --------- ---------
Cash used for investing activities (472,979) (437,512) (422,832)
FINANCING ACTIVITIES
Proceeds from issuance of common stock pursuant to
employee stock plans 18,198 20,645 10,997
Purchases of treasury stock (34,472) (60,454) (49,321)
Dividends paid (675,000) --- ---
Proceeds from issuance of notes payable 859,000 --- ---
Other financing activities, net (4,369) (1,568) 7,075
Payments on debenture payable to AMR --- (17,873) ---
--------- --------- ---------
Cash provided by (used for) financing activities 163,357 (59,250) (31,249)
Increase (decrease) in cash 1,150 (1,380) (3,278)
Cash at beginning of the period 6,628 8,008 11,286
--------- --------- ---------
CASH AT END OF THE PERIOD $ 7,778 $ 6,628 $ 8,008
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for income taxes $ 117,131 $ 173,907 $ 141,784
========= ========= =========
Cash payments for interest $ 27,638 $ 14,699 $ 19,818
========= ========= =========
The accompanying notes are an integral part of these financial statements.
32
SABRE HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
- --------------------------------------------------------------------------------------------------------------------
Class A Class B Additional
Common Common Paid-in Retained Treasury
Stock Stock Capital Earnings Stock Total
--------------------------------------------------------------------------------
Balance at December 31, 1997 $ 235 $ 1,074 $593,939 $ 164,004 $ (1,964) $ 757,288
Net earnings --- --- --- 231,941 --- 231,941
Repurchase of Company stock --- --- --- --- (49,321) (49,321)
Issuance of 486 shares of Class A
common stock pursuant to stock
option, restricted stock
incentive and stock purchase
plans 2 --- 2,278 --- 8,830 11,110
Tax benefit from exercise of
employee stock options --- --- 2,870 --- --- 2,870
Unrealized loss on investments --- --- --- (145) --- (145)
--------------------------------------------------------------------------------
Balance at December 31, 1998 237 1,074 599,087 395,800 (42,455) 953,743
Net earnings --- --- --- 331,907 --- 331,907
Repurchase of Company stock --- --- --- --- (60,454) (60,454)
Issuance of 289 shares of Class A
common stock pursuant to stock
option, restricted stock
incentive and stock purchase
plans 3 --- 1,276 --- 29,305 30,584
Tax benefit from exercise of
employee stock options --- --- 6,922 --- --- 6,922
Unrealized loss on investments --- --- --- (657) --- (657)
--------------------------------------------------------------------------------
Balance at December 31, 1999 240 1,074 607,285 727,050 (73,604) 1,262,045
Net earnings --- --- --- 144,052 --- 144,052
Exchange of Class B common
Stock for Class A common stock 1,074 (1,074) --- --- --- ---
Dividends paid --- --- --- (675,000) --- (675,000)
Repurchase of Company stock --- --- --- --- (34,472) (34,472)
Issuance of 720 shares of Class A
common stock pursuant to stock
option, restricted stock
incentive and stock purchase
plans 7 --- (24,583) --- 40,510 15,934
Tax benefit from exercise of
employee stock options --- --- 3,125 --- --- 3,125
Options issued in connection with
business combinations, net of
unearned deferred compensation
of $46,855 --- --- 75,271 --- --- 75,271
Other --- --- --- 62 --- 62
--------------------------------------------------------------------------------
Balance at December 31, 2000 $1,321 $ --- $661,098 $ 196,164 $(67,566) $ 791,017
================================================================================
The accompanying notes are an integral part of these financial statements.
33
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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
("the Spin-off"). 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.
The Company is the world leader in the electronic distribution of travel
through its SABRE-REGISTERED TRADEMARK- computer reservations system ("the
SABRE system"). The Company also engages in business-to-consumer and
business-to-business travel services and distribution through its
Travelocity.com and GetThere subsidiaries. In addition, the Company is a
leading provider of outsourcing and software solutions to the travel and
transportation industries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The Company consolidates all of its majority-owned
subsidiaries and companies over which the Company exercises control through
operating or financing agreements. The Company accounts for interests in
joint ventures which it does not control using the equity method. The
consolidated financial statements include the accounts of the Company after
elimination of all significant intercompany balances and transactions.
The consolidated financial statements reflect the results of operations,
financial condition and cash flows of the Company as a majority-owned
subsidiary of AMR through March 15, 2000 and may not be indicative of
actual results of operations and financial position of the Company under
other ownership. Management believes the consolidated income statements
include a reasonable allocation of administrative costs, which are
described in Note 6, incurred by AMR on behalf of the Company. Certain
reclassifications have been made to the 1999 and 1998 financial statements
to conform to the 2000 presentation.
STATEMENT OF CASH FLOWS - Marketable securities, without regard to
remaining maturity at acquisition, are not considered cash equivalents for
purposes of the statement of cash flows.
DEPRECIATION AND AMORTIZATION - The Company's depreciation and amortization
policies are as follows:
Property and Equipment:
Buildings 30 years
Service contract equipment 3 to 5 years
Computer equipment 3 to 5 years
Furniture and fixtures 5 to 15 years
Leasehold improvements Lesser of lease term or useful life
Capitalized software 3 to 7 years
Other Assets:
Internally developed software 3 to 7 years
Intangible assets 3 to 20 years
34
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Property and equipment are stated at cost less accumulated depreciation and
amortization, which is calculated on the straight-line basis. Service
contract equipment consists of hardware provided primarily to subscribers
of the SABRE system. Depreciation of property and equipment totaled
approximately $208 million, $226 million and $224 million in 2000, 1999 and
1998, respectively. Amortization of other assets approximated $138 million
in 2000, $32 million in 1999 and $24 million in 1998. Other assets are
amortized on the straight-line basis over the periods indicated.
Accumulated amortization of other assets approximated $210 million and $80
million at December 31, 2000 and 1999, respectively.
REVENUE RECOGNITION - The Company provides various travel marketing and
distribution services using the SABRE system. As compensation for services
provided, fees are collected from airline, car rental, and hotel vendors
and other providers of travel-related products and services ("associates")
for reservations booked through the SABRE system. The fee per booking
charged to associates is dependent upon the level of functionality within
the SABRE system at which the associate participates. Revenue for airline
travel reservations is recognized at the time of the booking of the
reservation, net of estimated future cancellations. At December 31, 2000
and 1999, the Company had recorded booking fee cancellation reserves of
approximately $21 million and $20 million, respectively. Revenue for car
rental, hotel bookings and other travel providers is recognized at the time
the reservation is used by the customer. The Company also enters into
service contracts with subscribers (primarily travel agencies) to provide
access to the SABRE system, hardware, software, hardware maintenance and
other support services. Fees billed on service contracts are recognized
as revenue in the month earned.
The Company, through its ownership interest in the Travelocity.com
partnership, also receives commissions from travel suppliers for air
travel, hotel rooms, car rentals, vacation packages and cruises booked
through the Travelocity.com Web site and advertising revenues from the
delivery of advertising impressions on the Travelocity.com Web site.
Commissions from air travel providers are recognized upon confirmation of
pending payment of the commission. Commissions from other travel providers
are recognized upon receipt. Advertising revenues are recognized in the
period that advertising impressions are delivered.
The Company receives fees from travel suppliers and corporate customers for
transactions booked through GetThere's Web-based travel booking systems and
recognizes the associated revenues in the month of the transaction. In
addition, GetThere also charges certain up-front fees, such as
implementation, franchise, and license fees. The revenues for those fees
are deferred and generally recognized over the term of the related
contract.
Additionally, the Company provides outsourcing and software solutions to
companies in the travel industry and other industries worldwide. Revenue
from data processing services is recognized in the period earned. Revenue
from software license fees for standard software products is recognized
when the software is delivered, fees are fixed and determinable, no
undelivered elements are essential to the functionality of delivered
software and collection is probable. Fees for software maintenance are
recognized ratably over the life of the contract. Services on long-term
software development and consulting contracts are provided under both a
time-and-materials basis and a fixed fee basis. Revenues with respect to
time-and-materials contracts are recognized as services are performed.
Revenues from services provided under fixed fee contracts are recognized
using the percentage of completion method of accounting, based on hours
completed in comparison to total hours projected at completion. Losses, if
any, on long-term contracts are recognized when the current estimate of
total contract costs indicates a loss on a contract is probable. As a
result of contractual billing terms, at December 31, 2000 and 1999 the
Company had recorded accounts receivable of approximately $25 million and
$10 million, respectively, that had not been billed to customers and
deferred revenues of approximately $35 million and $19 million,
respectively, related to advance payments from customers. Approximately $9
million of deferred revenues were noncurrent as of each balance sheet date.
ADVERTISING COSTS - Advertising costs are generally expensed as incurred.
Internet advertising expenses are recognized based on the terms of
individual agreements, but generally over the greater of the ratio of the
number of impressions delivered over the total number of contracted
impressions, or on a straight-line basis over the term of the contract.
Advertising costs expensed in 2000, 1999 and 1998, including amounts paid
to American under the terms of the Marketing Cooperation Agreement (see
Note 6), totaled approximately $91 million, $49 million and $37 million,
respectively.
35
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
INCOME TAXES - The entities comprising the Company have been included in
the consolidated federal income tax return of AMR through March 15, 2000.
The Company and AMR entered into a tax sharing agreement effective July 1,
1996 (the "Tax Sharing Agreement"), which provides for the allocation of
tax liabilities during the tax periods the Company is included in the
consolidated federal, state and local income tax returns filed by AMR. The
Tax Sharing Agreement generally requires the Company to pay to AMR the
amount of federal, state and local income taxes that the Company would have
paid had it ceased to be a member of the AMR consolidated tax group. The
Company is jointly and severally liable for the federal income tax of AMR
and the other companies included in the consolidated return for all periods
in which the Company is included in the AMR consolidated group. AMR has
agreed, however, to indemnify the Company for any liability for taxes
reported or required to be reported on a consolidated return arising from
operations of subsidiaries of AMR other than the Company.
Except for certain items specified in the Tax Sharing Agreement, AMR
generally retains any potential tax benefit carryforwards, and remains
obligated to pay all taxes attributable to periods before July 2, 1996. The
Tax Sharing Agreement also grants the Company certain limited participation
rights in any disputes with tax authorities.
As a result of the Spin-off, the Company is no longer consolidated with AMR
for tax purposes (see Note 6). Therefore, the Company will separately
report and file federal, state, and local income tax returns for the
taxable periods beginning March 16, 2000.
The results of operations of consolidated subsidiaries of the Company are
included in the Company's federal income tax return, with the exception of
Travelocity.com Inc., which files a separate federal income tax return. The
Company does include its proportionate share of the results of operations
of the Travelocity partnership in its federal income tax return (see Note
4).
The provision for deferred income taxes has been computed using the
liability method as if the Company and Travelocity.com Inc. were separate
taxpayers during all periods presented. Under the liability method,
deferred income tax assets and liabilities are determined based on
differences between financial reporting and income tax bases of assets and
liabilities and are measured using the enacted tax rates and laws. The
measurement of deferred tax assets is adjusted by a valuation allowance, if
necessary, to recognize the extent to which, based on available evidence,
the future tax benefits more likely than not will be realized.
SOFTWARE DEVELOPMENT COSTS - All costs incurred in the development of
software which is licensed to third parties that have the option to take
possession of the software are classified as research and development costs
and are expensed as incurred until technological feasibility has been
established. Once technological feasibility has been established, such
costs are capitalized until the product is ready for service. The Company
defines technological feasibility in accordance with Statement of Financial
Accounting Standards No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
TO BE SOLD, LEASED, OR OTHERWISE MARKETED. Technological feasibility is
achieved upon completion of all planning, designing, coding and testing
activities that are necessary to establish that a product can be produced
according to its design specifications.
Effective January 1, 1999, the Company adopted the provisions of Statement
of Position 98-1, ACCOUNTING FOR COMPUTER SOFTWARE DEVELOPED OR OBTAINED
FOR INTERNAL USE. SOP 98-1 requires the capitalization of certain costs
incurred during internal-use software development projects. Capitalizable
costs consist of (a) certain external direct costs of materials and
services incurred in developing or obtaining internal-use computer
software, (b) payroll and payroll-related costs for employees who are
directly associated with and who devote time to the project and (c)
interest costs incurred. Research and development costs incurred during
the preliminary project stage or incurred for data conversion activities,
and training, maintenance and general and administrative or overhead costs
are expensed as incurred. Costs that cannot be separated between
maintenance of, and relatively minor upgrades and enhancements are also
expensed as incurred.
The Company amortizes capitalized development costs using the straight-line
method over the estimated economic life of the software. At December 31,
2000 and 1999, unamortized software development costs approximated $33
million and $24 million, respectively.
36
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Research and development costs incurred in software development
approximated $59 million, $48 million and $39 million for 2000, 1999 and
1998, respectively.
CONCENTRATION OF CREDIT RISK - The Company's customers are primarily
located in the United States, Europe, Canada, Asia and Latin America, and
are concentrated in the travel industry. Approximately 23%, 24% and 25% of
revenues in 2000, 1999 and 1998, respectively, were related to American and
other subsidiaries of AMR. Approximately 12%, 13% and 16% of revenues in
2000, 1999 and 1998, respectively, were related to US Airways, Inc. ("US
Airways"). Each of the Company's segments recognizes revenues from
transactions with American and US Airways. The Company generally does not
require security or collateral from its customers as a condition of sale.
The Company maintained an allowance for losses of approximately $21 million
and $12 million at December 31, 2000 and 1999, respectively, based upon the
amount of accounts receivable expected to prove uncollectible.
USE OF ESTIMATES - The preparation of these financial statements in
conformity with generally accepted accounting principles requires that
certain amounts be recorded based on estimates and assumptions made by
management. Actual results could differ from these estimates and
assumptions.
CUSTOMER INCENTIVES - Certain service contracts with significant
subscribers contain booking fee productivity clauses and other provisions
which allow subscribers to receive cash payments, and/or various amounts of
additional equipment and other services from the Company at no cost. The
Company establishes liabilities for these commitments and recognizes the
related expense as the subscribers earn incentives based on the applicable
contractual terms. Accrued incentives at December 31, 2000 and 1999 were
approximately $80 million and $70 million, respectively. Periodically, the
Company makes cash payments to subscribers at inception or modification of
a service contract which are deferred and amortized over the expected life
of the service contract, generally three years. The service contracts are
priced so that the additional airline and other booking fees generated over
the life of the contract will exceed the cost of the incentives provided.
STOCK AWARDS AND OPTIONS - The Company accounts for stock awards and
options (including awards of AMR stock and stock options granted to
employees prior to July 2, 1996) in accordance with Accounting Principles
Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25").
No compensation expense is recognized for stock option grants if the
exercise price is at or above the fair market value of the underlying stock
on the date of grant. Compensation expense relating to other stock awards
is recognized over the period during which the employee renders service to
the Company necessary to earn the award.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK
COMPENSATION ("FIN 44"), an interpretation of APB 25. FIN 44, which was
adopted by the Company prospectively as of July 1, 2000, requires certain
changes to previous practice regarding accounting for certain stock
compensation arrangements. FIN 44 does not change APB 25's intrinsic value
method, under which compensation expense is generally not recognized for
grants of stock options to employees with an exercise price equal to the
market price of the stock at the date of grant, but it has narrowed its
application. The primary effect of the adoption of FIN 44 was the
requirement to record deferred compensation of approximately $22 million
related to unvested employee stock options issued in connection with the
acquisition of GetThere (see Note 4).
COMPREHENSIVE INCOME - Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. For the years ended
December 31, 2000, 1999 and 1998, the differences between net earnings and
total comprehensive income were not significant and consisted primarily of
unrealized gains and losses on marketable securities.
FINANCIAL INSTRUMENTS - The carrying value of the Company's financial
instruments (excluding the depository certificates discussed below),
including cash, marketable securities, accounts receivable, and short and
long-term debt instruments approximate their respective fair values at
December 31, 2000 and 1999.
37
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
At December 31, 2000, American held 2.3 million depository certificates
representing beneficial ownership of common stock of Equant N.V.
("Equant"), a telecommunications company affiliated with Societe
Internationale de Telecommunications Aeronautiques ("SITA"), for the
economic benefit of the Company. The depository certificates are issued by
the SITA Foundation, which holds the underlying Equant shares. Based upon
the market value of Equant's publicly-traded common stock, the estimated
value of the depository certificates held on behalf of the Company by
American was approximately $60 million and $258 million at December 31,
2000 and 1999, respectively.
In November 2000, an agreement was announced in which the SITA Foundation
will exchange approximately 68 million Equant shares for France Telecom
shares. The SITA Foundation will receive one France Telecom share for every
2.2 Equant shares. The agreement is conditional upon certain regulatory
approvals from the European Union and the United States authorities. It is
also subject to certain customary termination provisions. Completion is
expected to take place in the first half of 2001. Based upon the terms of
the SITA Foundation exchange agreement with France Telecom, the depository
certificates have an estimated value of approximately $90 million at
December 31, 2000.
The Company's carrying value of these certificates was nominal at December
31, 2000 and 1999 as certain restrictions limit the Company's ability to
freely dispose of the certificates. Any future disposal of such depository
certificates or shares of France Telecom received in exchange for the
depository certificates, may result in additional gains to the Company.
TREASURY STOCK - The Company accounts for the purchase of treasury stock at
cost. Upon reissuance of shares of treasury stock, the Company records any
difference between the weighted-average cost of such shares and any
proceeds received as an adjustment to additional paid-in capital.
RECENT ACCOUNTING PRONOUNCEMENT - The Company has 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 a derivative's change in fair value will be
immediately recognized in earnings.
At December 31, 2000, the Company was a party to certain derivative
instruments, including foreign currency forwards designated as a hedge
related to anticipated foreign currency expenditures, an interest
rate/foreign currency swap contract entered into in connection with Euro
denominated debt related to the Gradient acquisition (see Note 4) and
warrants received from Hotel Reservations Network in connection with an
affiliation agreement. These instruments were not significant to the
Company's financial position or results of operations as of or for the
year ending December 31, 2000. The Company currently estimates that it
will report a gain of approximately $7 million, before minority interest,
related to the adoption of FAS 133 in the first quarter of 2001. The
estimated gain is based upon the fair value of the derivatives and any
actual gains or losses realized by the Company will be dependent upon
future events.
3. MARKETABLE SECURITIES
Marketable securities consist of (in thousands):
December 31,
-------------------------
2000 1999
-------- --------
Corporate notes $ --- $380,857
Overnight investment and time deposits 99,961 149,072
Mortgages 17 23,081
Asset-backed securities --- 26,556
U.S. Government treasuries 37,280 24,932
-------- --------
Total $137,258 $604,498
======== ========
38
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The following table summarizes marketable securities by contractual
maturity (in thousands):
December 31,
-------------------------
2000 1999
-------- --------
Due in one year or less $ 99,961 $268,873
Due after one year through three years 17 297,472
Due after three years 37,280 38,153
-------- --------
Total $137,258 $604,498
======== ========
Marketable securities, all of which are classified as available-for-sale,
are stated at fair value based on market quotes. Net unrealized gains and
losses, net of deferred taxes, have not been significant and are reflected
as an adjustment to stockholders' equity.
4. MERGERS AND ACQUISITIONS
During 2000, the Company completed the following mergers and acquisitions.
Each of these transactions was accounted for using the purchase method of
accounting for business combinations.
MERGER OF TRAVELOCITY.COM AND PREVIEW TRAVEL, INC. - On March 7, 2000, the
Company completed the merger of Travelocity.com Inc. ("Travelocity.com"), a
newly created 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 common share of
Travelocity.com Inc., 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 its
Travelocity.com division 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,
which has been allocated to the respective assets and liabilities acquired
based on estimated fair values, with the remainder recorded as goodwill.
Fair values were determined by the Company's management based on
information furnished by Preview's management and independent valuations of
the net assets acquired, including intangible assets. The Company recorded
goodwill and other intangibles related to this acquisition of approximately
$252 million which are being amortized over one to three years.
ACQUIRED INTEREST IN DILLON COMMUNICATION SYSTEMS GMBH ("DILLON") - On June
26, 2000, the Company acquired a 51% ownership interest in Dillon, a
supplier of electronic travel distribution services in Germany. In
accordance with the purchase agreement, the Company paid approximately $20
million in cash and will make additional payments of approximately $1
million in each of the next three years. The cost of the acquisition of
approximately $24 million was allocated to the respective assets and
liabilities acquired based on estimated fair values, with the remainder
recorded as goodwill. The Company recorded goodwill and other intangible
assets related to this acquisition of approximately $24 million, which are
being amortized over approximately five years.
39
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
ACQUISITION OF GRADIENT SOLUTIONS LIMITED ("GRADIENT") - On August 15,
2000, the Company acquired 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 cost of the acquisition was approximately $39 million, of
which approximately $13 million was paid in cash with the balance in
Euro-denominated notes payable. This cost was allocated to the respective
assets and liabilities acquired based on estimated fair values, with the
remainder recorded as goodwill. The Company recorded goodwill and other
intangible assets of approximately $38 million related to this acquisition,
which are being amortized over approximately five years.
ACQUISITION OF GETTHERE, INC. ("GETTHERE") - On October 17, 2000, the
Company acquired GetThere, a Delaware corporation, resulting in GetThere
becoming a wholly owned subsidiary of the Company. 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
cost of the acquisition of GetThere was approximately $781 million. The
cost of the acquisition has been allocated to the respective assets and
liabilities acquired based on estimated fair values, with the remainder
recorded as goodwill. The fair values were determined by the Company's
management based on information furnished by GetThere's management and
preliminary independent valuations of the net assets acquired, including
intangible assets. The Company recorded goodwill and other intangible
assets of approximately $688 million related to this acquisition, which are
being amortized over two to four years.
The following unaudited pro forma information presents the Company's
results of operations as if the mergers and acquisitions in 2000 had
occurred as of January 1, 1999. The pro forma information has been prepared
by combining the results of operations of the Company and the acquired
businesses for the years ended December 31, 2000 and 1999. This pro forma
information does not purport to be indicative of what would have occurred
had these mergers and acquisitions occurred as of that date, or of results
of operations that may occur in the future (in thousands, except per share
data):
Year Ended December 31,
-------------------------------
2000 1999
---------- ----------
Revenues $2,645,953 $2,476,825
Net earnings (loss) (19,443) 91,350
Earnings per common share:
Basic $(0.15) $0.71
========== ==========
Diluted $(0.15) $0.69
========== ==========
5. SIGNIFICANT TRANSACTIONS
US AIRWAYS AGREEMENT - In January 1998, the Company completed the execution
of a 25-year information technology services agreement with US Airways.
Under the terms of the agreement, the Company provides substantially all of
US Airways' information technology services. In connection with the
agreement, the Company purchased substantially all of US Airways'
information technology assets for approximately $47 million, hired more
than 600 former employees of US Airways, and granted to US Airways two
tranches of stock options, each to acquire 3 million shares of the
Company's Class A common stock. On December 14, 1999, US Airways exercised
the first tranche of stock options. Pursuant to the terms of the exercised
options, the Company settled the options in cash in lieu of issuing common
stock and paid approximately $81 million to US Airways on January 5, 2000.
40
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The second tranche of options is exercisable during the ten-year period
beginning on the fifth anniversary of the asset transfer date. 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
US Airways options to provide for the same aggregate intrinsic value of the
US Airways' holdings of the Company's common stock before and after the
effect of the dividend on the Company's stock price. Additionally, the
terms of the second tranche of options provided US Airways the opportunity
to select an alternative vehicle of substantially equivalent value in place
of receiving shares of the Company's stock during the six-month period
ended December 31, 2000. No such election was made during that time. The
Company may, at its discretion, choose to settle the remaining stock
options with alternative value in place of issuing shares of its common
stock. Such payment may result in the payment of cash by the Company to
US Airways.
The Company has recorded a liability and related deferred costs equal to
the number of options outstanding, multiplied by the difference between the
exercise price of the options and the market price of the Company's Class A
common stock. The deferred costs and liability are adjusted for changes in
the market price of the Company's stock at each month-end until such time
as the options are settled or US Airways' ability to select an alternative
vehicle in place of receiving stock expires. At December 31, 2000 and 1999,
the Company had a liability relating to these options of $147 million
and $154 million, respectively, and net deferred costs of approximately
$107 million and $126 million, respectively. During 2000, 1999, and 1998,
the Company recorded amortization expense of approximately $12 million,
$18 million and $10 million, respectively, related to the options. The
deferred costs are being amortized over the eleven-year non-cancelable
portion of the agreement.
In 2000, United Airlines announced its intent to acquire US Airways.
Such acquisition may impact the level of services provided to US Airways
by the Company.
ABACUS JOINT VENTURE - In February 1998, the Company signed long-term
agreements with ABACUS International Holdings Ltd., which created a
Singapore-based joint venture company called ABACUS to manage travel
distribution in the Asia/Pacific region. The Company paid $139 million in
cash and contributed its assets related to the Company's ongoing travel
distribution activities in Asia/Pacific and other consideration. In
exchange, the Company received 35% of the shares of the joint venture
company. The Company accounts for its investment in the joint venture
using the equity method of accounting and records revenue for the
Company's share of the net income of ABACUS. The Company provides ABACUS
with transaction processing on the SABRE system. At December 31, 2000
and 1999, the Company's net investment in ABACUS totaled approximately
$144 million. The Company's initial investment in ABACUS differed from
its proportional share of the net equity in the underlying assets of
ABACUS by approximately $116 million. This amount is being amortized
over 20 years.
TICKETNET JUDGMENT - In August 1998, the Company received a favorable court
judgment related to Ticketnet Corporation, an inactive subsidiary of the
Company, and recognized approximately $14 million of other income.
EQUANT DEPOSITORY CERTIFICATES - At December 31, 1998, American owned
approximately 1.7 million depository certificates representing beneficial
ownership of common stock of Equant for the economic benefit of the
Company (see Note 2). In connection with a secondary offering of Equant
common stock, in February 1999, American liquidated 490,000 of these
certificates for the Company's benefit. The Company received proceeds of
approximately $35 million from the transaction, resulting in a gain of
approximately $35 million.
In December 1999, in connection with an additional secondary offering of
Equant common stock, approximately 1.2 million certificates were liquidated
for the Company's benefit. The Company received proceeds of approximately
$103 million from the transaction, resulting in an additional gain of
approximately $103 million.
41
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
6. CERTAIN TRANSACTIONS WITH AMR AND AMERICAN
AMR AGREEMENTS - The Company has certain agreements with AMR and its
affiliates (the "AMR Agreements"), which are discussed below.
INFORMATION TECHNOLOGY SERVICES AGREEMENT - The Company is party to the
Information Technology Services Agreement with American dated July 1, 1996
(the "Technology Services Agreement"), to provide American with certain
information technology services. The base term of the Technology Services
Agreement expires June 30, 2006. The terms of the services to be provided
by the Company to American, however, vary. For example, the Company will
provide: (i) data center services, application development and existing
application maintenance enhancement services until June 30, 2006; (ii)
services relating to existing client server operations until June 30, 2001;
(iii) distributed systems services until June 30, 2002; and (iv) data and
voice network services until June 30, 2001.
The Technology Services Agreement provides for annual price adjustments.
For certain prices, adjustments are made according to formulas, which are
reset every two years and which may take into account the market for
similar services provided by other companies. The resulting rates may
reflect an increase or decrease over the previous rates.
With limited exceptions, under the Technology Services Agreement the
Company will continue to be the exclusive provider of all information
technology services provided by the Company to American immediately prior
to the execution of the Technology Services Agreement. Any new information
technology services, including most new application development services,
requested by American can be outsourced pursuant to competitive bidding by
American or performed by American on its own behalf. With limited
exceptions, the Company has the right to bid on all new services for which
American solicits bids. Additionally, American may continue to perform
development and enhancement work that it is currently performing on its own
behalf.
After July 1, 2000, American may terminate the Technology Services
Agreement for convenience. If it does so, American will be required to pay
a termination fee equal to the sum of all amounts then due under the
Technology Services Agreement, including wind-down costs, net book value of
dedicated assets and a significant percentage of estimated lost profits.
American may also terminate the Technology Services Agreement without
penalty, in whole or in part, depending upon circumstances, for egregious
breach by the Company of its obligations or for serious failure to perform
critical or significant services. If the Company is acquired by another
company (other than AMR or American) with more than $1 billion in annual
airline transportation revenue, then American may terminate the Technology
Services Agreement without paying any termination fee. If American (i) is
acquired by an unaffiliated third party, (ii) merges with an unaffiliated
third party and the persons who were shareholders of American immediately
prior to the merger own less than 50% of the outstanding stock of American
immediately after the merger, or (iii) acquires another air carrier with
more than $1 billion in annual revenues, then American may terminate the
Technology Services Agreement without paying any termination fee; except
that if American terminates the agreement for convenience during the first
four years of the term of the Technology Services Agreement in accordance
with clause (iii) above, American would be required to pay the Company a
termination fee of $25 million plus wind-down costs. Additionally, if
American were to dispose of any portion of its businesses or any affiliate
accounting for more than 10% of the Company's fees from American, then
American shall either cause such divested business or affiliate to be
obligated to use the Company's services in accordance with the Technology
Services Agreement or pay a proportionate termination fee.
In connection with the Spin-off, the Company and American agreed to certain
amendments to the Technology Services Agreement. These amendments include
the following: (i) the Company will provide services relating to AMR's real
time environment until June 30, 2008, (ii) the Company will provide
services relating to AMR's client server operations until June 30, 2002,
(iii) American will have the right to hire up to 25 of the Company's
Operations Research personnel, (iv) the Company's obligations to pay
certain ongoing royalty payments to American are terminated in exchange for
a one time payment of $10 million, (v) the intellectual property rights of
the Company and American are modified to provide American additional rights
in certain software
42
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
applications, and (vi) American is granted access to the Company's
commercial portfolio of software on a license fee free basis.
MANAGEMENT SERVICES AGREEMENT - The Company and American were parties to a
Management Services Agreement dated July 1, 1996 (the "Management Services
Agreement"), pursuant to which American performed certain management
services for the Company that American had historically provided to the
Company. In connection with the Spin-off, the Company and American agreed
to the early termination of certain services, effective March 2000, and the
continuation of certain services with termination dates through June 30,
2001.
MARKETING COOPERATION AGREEMENT - The Company and American were parties to
the Marketing Cooperation Agreement dated July 1, 1996 (the "Marketing
Cooperation Agreement"), pursuant to which American agreed to provide
marketing support for 10 years for certain of the Company's products. Under
the terms of the Marketing Cooperation Agreement, the Company pays American
a fee for its marketing support, the amount of which may increase or
decrease, generally based on booking volumes. The total fee was
approximately $20 million, $18 million and $17 million in 2000, 1999 and
1998, respectively. Additionally, the Company had guaranteed to American
certain cost savings in the fifth year of the Marketing Cooperation
Agreement. At December 31, 1998, the Company had recorded a liability of
approximately $7 million for this guarantee. This liability was reversed
during the fourth quarter of 1999 based on projections of cost savings. In
connection with the Spin-off, the Company and American agreed to terminate
the Company's obligation to guarantee those cost savings.
NON-COMPETITION AGREEMENT - The Company, AMR and American have entered into
a Non-Competition Agreement dated July 1, 1996 (the "Non-Competition
Agreement"), pursuant to which AMR and American, on behalf of themselves
and certain of their subsidiaries, have agreed to limit their competition
with the Company's businesses. The Non-Competition Agreement expires on
December 31, 2001. American may terminate the Non-Competition Agreement,
however, if the Technology Services Agreement is terminated as a result of
an egregious breach thereof by the Company.
TRAVEL AGREEMENTS - The Company and American are parties to a Travel
Privileges Agreement dated July 1, 1996 (the "Travel Privileges
Agreement"), pursuant to which the Company is entitled to purchase personal
travel for its employees and retirees at reduced fares. The Travel
Privileges Agreement will expire on June 30, 2008. To pay for the provision
of flight privileges to certain of its future retired employees, the
Company makes a lump sum payment to American each year for each employee
retiring in that year. The payment per retiree is based on the number of
years of service with the Company and AMR over the prior ten years of
service. The cost of providing this privilege is accrued over the estimated
service lives of the employees eligible for the privilege (see Note 8).
The Company and American agreed to certain amendments to the Travel
Privileges Agreement in connection with the Spin-off. These amendments
allow American to provide certain employees with additional limited travel
privileges and require the Company to indemnify American for costs related
to the Company's continued use of the travel privileges.
The Company and American were also parties to a Corporate Travel Agreement
(the "Corporate Travel Agreement"), pursuant to which the Company received
discounts for certain flights purchased on American. In exchange, the
Company agreed to fly a certain percentage of its travel on American as
compared to all other air carriers combined.
CREDIT AGREEMENT - On July 1, 1996, the Company and American entered into a
Credit Agreement pursuant to which the Company was required to borrow from
American, and American was required to lend to the Company, amounts
required by the Company to fund its daily cash requirements. In addition,
American could, but was not required to, borrow from the Company to fund
its daily cash requirements. The maximum amount the Company could borrow at
any time from American under the Credit Agreement was $300 million. The
maximum amount that American could borrow at any time from the Company
under the Credit Agreement was $100 million. No borrowings occurred by
either the Company or American under this agreement. In connection with the
Spin-off, the Credit Agreement was terminated on April 14, 2000.
43
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
DEBENTURE PAYABLE TO AMR - In 1996, the Company issued to AMR a floating
rate, subordinated debenture due September 30, 2004 (the "Debenture"). The
principal balance was approximately $318 million at December 31, 1998.
During 1999, in connection with the Omnibus Financing Agreement discussed
below, the Company prepaid the remaining principal balance and all
outstanding accrued interest under the Debenture. The average interest rate
on the Debenture was 5.6% and 6.1% for 1999 and 1998, respectively.
OMNIBUS FINANCING AGREEMENT - On March 17, 1999, the Company and American
entered into a short-term credit agreement pursuant to which American could
borrow from the Company up to a maximum of $300 million. During the first
half of 1999, American borrowed $300 million under the short-term credit
agreement. Subsequently, in June 1999, the Company, AMR and American
entered into an Omnibus Financing Agreement pursuant to which (a) the $300
million outstanding from American under the short-term credit agreement was
applied against the $318 million remaining under the Debenture payable from
the Company to AMR and (b) the Company paid the remaining principal
balance of approximately $18 million and all outstanding accrued interest
under the Debenture.
INDEMNIFICATION AGREEMENT - In July 1996, the Company and American entered
into an intercompany agreement (the "Indemnification Agreement") pursuant
to which each party indemnified the other for certain obligations relating
to the Reorganization. Pursuant to the Indemnification Agreement, the
Company indemnified American for liabilities assumed against third party
claims asserted against American as a result of American's prior ownership
of assets or operation of businesses contributed to the Company and for
losses arising from or in connection with the Company's lease of property
from American. In exchange, American indemnified the Company for specified
liabilities retained by it against third party claims against the Company
relating to American's businesses and asserted against the Company as a
result of the ownership or possession by American prior to July 2, 1996 of
any asset contributed to the Company in July 1996 and for losses arising
from or in connection with American's lease of property from the Company.
In connection with the Spin-off, the Company and American agreed to
terminate the Indemnification Agreement as of July 1, 2003.
AGREEMENT ON SPIN-OFF TAXES - In connection with the Spin-off, the Company
and AMR entered into an indemnity agreement (the "Agreement on Spin-off
Taxes") pursuant to which the Company will be responsible for Spin-off
related taxes, in certain circumstances, if the Spin-off is deemed to be
taxable as a result of certain factual representations and assumptions
relating to the Company being inaccurate or as a result of the Company's
subsequent actions. The Internal Revenue Service ("IRS") has issued a Tax
Ruling to the effect that the Spin-off will be tax-free to the Company, AMR
and AMR shareholders under Section 355 of the Internal Revenue Code of
1986, as amended (except to the extent that cash is received in lieu of
fractional shares). Under the terms of the Agreement on Spin-off Taxes, the
Company has also agreed to comply with certain restrictions on its future
operations to assure that the Spin-off will be tax free, including
restrictions with respect to a third party's acquisition of shares of the
Company's stock and the Company's issuance of stock.
REVENUES FROM AMR - Revenues from American and other subsidiaries of AMR
were $611 million, $590 million and $574 million in 2000, 1999 and 1998,
respectively.
44
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
OPERATING EXPENSES - Prior to the Spin-off, operating expenses were charged
to the Company by American and other subsidiaries of AMR to cover certain
employee benefits, facilities rental, marketing services, management
services, legal fees and certain other administrative costs based on
employee headcount or actual usage of facilities and services. The Company
believes amounts charged to the Company for these expenses approximate the
cost of such services provided by third parties. Travel service costs for
travel by the Company's employees for personal and business travel are
charged to the Company based on rates negotiated with American. If the
Company had not been affiliated with American, the personal travel flight
privilege would most likely not have been available to employees. The rates
negotiated with American for 2000, 1999 and 1998 under the Corporate Travel
Agreement approximate corporate travel rates offered by American to similar
companies. Expenses charged to the Company by AMR and its affiliates
approximated $19 million for the two months prior to the Spin-off in March
2000. Expenses charged to the Company by AMR and its affiliates for the
years ended December 31, 1999 and 1998 are as follows (in thousands):
Year Ended December 31,
-------------------------
1999 1998
-------- --------
Employee benefits $45,471 $41,348
Facilities rental 2,814 2,706
Marketing cooperation 10,793 24,044
Management services 5,719 10,069
Other administrative costs 2,816 12,732
Travel services 45,190 45,433
-------- --------
Total expenses $112,803 $136,332
======== ========
7. DEBT
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. Concurrently, the Company entered into a
short-term $200 million, senior unsecured, term loan agreement (the
"Interim Loan"), with an original maturity of August 4, 2000 which was
subsequently extended to February 4, 2001. On February 18, 2000, the
Company utilized a portion of its available cash balance and marketable
securities, as well as proceeds from both the Credit Facility and Interim
Loan to fund a $675 million dividend to shareholders. In connection with
the bridge credit facility discussed below, the entire $200 million balance
outstanding under the Interim Loan was repaid and the Interim Loan
agreement was terminated. At December 31, 2000, there was no outstanding
borrowings under the Interim Loan and $149 million outstanding under the
Credit Facility at an average annual interest rate of 6.7%.
On October 10, 2000, the Company entered into a $865 million bridge credit
agreement (the "Bridge Credit Agreement") which expires on July 10, 2001.
Proceeds of the Bridge Credit Agreement were used to fund the acquisition
of GetThere and to repay the $200 million outstanding under the Interim
Loan. Interest on the Bridge Credit 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. At December 31, 2000,
the outstanding balance of borrowings under the Bridge Credit Agreement was
$710 million at an average interest rate of 7.1%. The Bridge Credit
Agreement contains certain covenants and events of default, including the
maintenance of certain financial ratios. The Company was in compliance with
all such covenants for 2000.
45
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
8. EMPLOYEE BENEFIT PLANS
The Company sponsors The Sabre Group Retirement Plan (the "SGRP"), a
defined contribution plan qualified under Section 401(k) of the Internal
Revenue Code of 1986. The Company makes a defined contribution and matches
a defined portion of employee contributions to the plan and has recorded
expenses related to the SGRP of approximately $21 million, $20 million and
$16 million in 2000, 1999 and 1998, respectively.
Additionally, the Company sponsors The Sabre Group Legacy Pension Plan (the
"LPP"), a tax-qualified defined benefit plan for employees meeting certain
eligibility requirements.
As a result of the Spin-off, the Company amended its retiree medical and
life insurance plan effective January 1, 2001. The Company changed the plan
to offer subsidized retiree medical coverage only to employees hired prior
to October 1, 2000. Employees hired after that date will be offered access
to the Company-sponsored plan but with no subsidy and therefore no
liability to the Company. In addition, active employees will no longer
pre-fund their share of the retiree medical benefit costs but will make
post-retirement contributions averaging 20% of the cost of retiree medical
coverage. Previously established employee pre-funding account balances will
continue to accrue interest and will be used to offset future retiree
contributions; however, new pre-funding contributions were discontinued.
The lifetime maximums for the retiree medical plan were increased due to
the consolidation of supplemental medical plan benefits into the basic
retiree medical plan.
Officers and certain employees of the Company are eligible for additional
retirement benefits, to be paid by the Company, under the Supplemental
Executive Retirement Plan (the "SERP") as an operating expense. The SERP
provides pension benefits (calculated upon the basis of final average base
salary, incentive compensation payments and performance returns) to which
officers and certain employees of the Company would be entitled, but for
the limit on the maximum annual benefit payable under the Employee
Retirement Income Security Act of 1974 ("ERISA") and the Internal Revenue
Code of 1986 ($135,000 for 2000), and the limit on the maximum amount of
compensation which may be taken into account under the Company's retirement
program ($170,000 for 2000).
Pursuant to the Travel Privileges Agreement, the Company is entitled to
purchase personal travel for certain retirees. To pay for the provision of
flight privileges to certain of its future retired employees, the Company
makes a lump sum payment to American for each employee retiring in that
year. The payment per retiree is based on the number of years of service
with the Company and AMR over the prior ten years of service. The cost of
providing this privilege is accrued over the estimated service lives of the
employees eligible for the privilege.
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets for the years ended December
31, 2000 and 1999, and a statement of funded status as of December 31, 2000
and 1999 (in thousands):
Pension Benefits Other Benefits
-------------------------- ------------------------
2000 1999 2000 1999
--------- --------- -------- --------
Change in benefit obligation:
Benefit obligation at January 1 $(201,950) $(211,445) $(61,335) $(57,333)
Service cost (10,836) (13,055) (4,369) (5,118)
Interest cost (16,974) (15,710) (4,764) (4,350)
Actuarial gains (losses) (27,828) 37,846 (5,895) 5,066
Plan amendments --- (557) (7,673) ---
Settlements --- --- 9,739 ---
Benefits paid 633 971 982 400
--------- --------- -------- --------
Benefit obligation at December 31 $(256,955) $(201,950) $(73,315) $(61,335)
========= ========= ======== ========
46
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Change in plan assets:
Fair value at January 1 $126,299 $110,607 $10,600 $8,933
Actual return on plan assets 10,122 2,025 (1,654) (159)
Company contributions 18,261 11,903 12,741 2,226
Transfers from AMR (1,384) 2,735 --- ---
Settlements --- --- (9,739) ---
Benefits paid (633) (971) (982) (400)
--------- --------- -------- --------
Fair value at December 31 $152,665 $126,299 $10,966 $10,600
========= ========= ======== ========
Funded status of the plan
(underfunded) $(104,290) $(75,651) $(62,349) $(50,735)
Unrecognized net loss (gain) 54,292 22,252 (4,246) (15,044)
Unrecognized prior service cost 702 755 5,995 (1,280)
Unrecognized transition asset 7 16 --- ---
--------- --------- -------- --------
Accrued benefit cost $(49,289) $(52,628) $(60,600) $(67,059)
========= ========= ======== ========
The assumptions used in the measurement of the Company's benefit
obligations as of December 31, 2000 and 1999 are as follows:
Pension Benefits Other Benefits
-------------------------- ------------------------
Weighted-average assumptions: 2000 1999 2000 1999
--------- --------- -------- --------
Discount rate 7.50% 8.00% 7.50% 8.00%
Expected return on plan assets 9.50% 9.50% 9.50% 9.50%
Rate of compensation increase 5.25% 5.25% --- ---
Due to the revisions to the retiree medical program, a 9% annual rate of
increase in the per capita cost of covered retiree health care benefits was
assumed for 2001. This rate was assumed to gradually decrease by .5% each
year until it reaches an ultimate rate of 5%.
The following table provides the components of net periodic benefit costs
for the three years ended December 31, 2000 (in thousands). Total costs for
other postretirement benefits are included in employee benefits in the
table in Note 6.
Pension Benefits Other Benefits
-------------------------------- -------------------------------
2000 1999 1998 2000 1999 1998
-------------------------------- -------------------------------
Service cost $10,836 $13,055 $11,257 $4,369 $5,118 $5,261
Interest cost 16,974 15,710 12,370 4,764 4,350 4,065
Expected return on plan assets (13,025) (10,294) (8,336) (1,093) (904) (684)
Amortization of transition asset 9 (151) (228) --- --- ---
Amortization of prior service cost 53 22 22 248 (150) (150)
Amortization of net loss (gain) 74 3,032 1,690 (475) (533) (241)
-------------------------------- -------------------------------
Total net periodic benefit cost $14,921 $21,374 $16,775 $7,813 $7,881 $8,251
================================ ===============================
Assumed health care cost trend rates have a significant effect on the
amounts reported for the postretirement medical benefit plans. A one
percentage point decrease in the assumed health care cost trend rates would
decrease the total service and interest cost components of total net
periodic benefit cost for 2000 and the postretirement benefit obligations
at December 31, 2000 by approximately $2 million and $10 million,
respectively. A one percentage point increase in the assumed health care
cost trend rates would increase the total service and interest cost
components of total net periodic benefit cost for 2000 and the
postretirement benefit obligations at December 31, 2000 by approximately $2
million and $12 million, respectively.
Plan assets for the LPP and for the postretirement health care and life
insurance benefits consist primarily of mutual fund shares managed by a
subsidiary of AMR invested in debt and equity securities.
47
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
9. INCOME TAXES
The provision (benefit) for income taxes is as follows (in thousands):
Year Ended December 31,
-------------------------------------------
2000 1999 1998
-------- -------- --------
Current portion:
Federal $ 88,684 $185,409 $120,628
State 1,556 11,788 7,976
Foreign 10,611 6,929 11,930
-------- -------- --------
Total current 100,851 204,126 140,534
Deferred portion:
Federal 10,298 (18,280) (7,186)
State 12,036 10,192 6,165
-------- -------- --------
Total deferred 22,334 (8,088) (1,021)
-------- -------- --------
Total provision for income taxes $123,185 $196,038 $139,513
======== ======== ========
The provision for income taxes differs from amounts computed at the
statutory federal income tax rate as follows (in thousands):
Year Ended December 31,
--------------------------------------------
2000 1999 1998
-------- -------- --------
Income tax provision at statutory federal income
tax rate $ 93,540 $184,781 $130,009
State income taxes, net of federal 6,712 14,287 9,192
benefit
Nondeductible goodwill amortization 28,278 --- ---
Research and experimentation credit (4,000) --- ---
Other, net (1,345) (3,030) 312
-------- -------- --------
Total provision for income taxes $123,185 $196,038 $139,513
======== ======== ========
48
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The components of the Company's deferred tax assets and liabilities were as
follows (in thousands):
December 31,
---------------------------
2000 1999
---------- ----------
Deferred tax assets:
Accrued expenses $ 39,630 $ 35,248
Employee benefits other than pensions 29,432 31,286
Deferred revenue 5,855 5,662
Pension obligations 10,606 18,395
Net operating loss carryforwards 82,225 416
---------- ----------
Total deferred tax assets $ 167,748 $ 91,007
Deferred tax liabilities:
Foreign operations $ (837) $ (3,269)
Depreciation and amortization (25,588) (29,313)
Amortization of computer software and intangible assets (77,214) (14,997)
Other (47,123) (23,184)
---------- ----------
Total deferred tax liabilities $(150,762) $(70,763)
---------- ----------
Valuation allowance (48,800) ---
---------- ----------
Net deferred tax asset (liability) $ (31,814) $ 20,244
========== ==========
Current deferred income tax asset $15,889 $ 18,052
Noncurrent deferred income tax asset (liability) (47,703) 2,192
---------- ----------
Net deferred tax asset (liability) $ (31,814) $ 20,244
========== ==========
The increase in the deferred tax liability for amortization of computer
software and intanbigle assets resulted from a deferred tax liability
recorded for the intangible assets, other than goodwill, recorded in
connection with the acquisition of GetThere.
As a result of the merger of Travelocity.com and Preview, Travelocity.com
acquired net operating losses ("NOL's") of approximately $105 million
previously incurred by Preview which begin expiring in 2009. Additionally,
as a result of the acquisition of GetThere, the Company acquired NOL's of
approximately $100 million previously incurred by GetThere which begin
expiring in 2011. Preview and GetThere NOL's are subject to limitation
under Section 382 of the Internal Revenue Code, but such limitation is not
expected to have a significant impact on the Company's ability to utilize
the NOL's. The company believes that, more likely than not, it will be
able to utilize the NOL's acquired from GetThere. Accordingly, no
valuation allowance has been established related to these NOL's.
The results of operations of Travelocity.com Inc. are not included in the
federal income tax return of the Company (see Note 2). Accordingly, only
Travelocity.com Inc. can utilize the NOL's acquired from Preview.
Travelocity.com Inc. has additional NOL's totaling approximately $18
million relating to its proportionate share of the losses of the
Travelocity partnership during 2000 (see Note 4). At December 31, 2000, a
valuation allowance has been recorded, to fully reserve the deferred tax
assets resulting from Travelocity.com Inc.'s NOL's, as the Company has
been unable to conclude that it is more likely than not that
Travelocity.com Inc. will be able to utilize these NOL's. To the extent
that the NOL's acquired from Preview are utilized to offset
Travelocity.com Inc.'s future taxable income, goodwill and non-current
intangible assets recorded in connection with the acquisition will be
reduced. If goodwill and non-current intangible assets have been fully
amortized or reduced to zero, income tax expense will be reduced.
To the extent that Travelocity.com Inc. is able to realize the benefit of
the NOL's, either acquired from Preview or arising subsequent to the
acquisition of Preview, the Company will recognize a benefit equal to its
ownership interest in Travelocity.com Inc. of approximately 22%.
49
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10. COMMITMENTS AND CONTINGENCIES
On July 1, 1996, the Company entered into an operating lease agreement with
AMR for certain facilities and AMR assigned its rights and obligations
under certain leases to the Company. Also on July 1, 1996, the Company
entered into an operating lease agreement with a third party for the lease
of other facilities.
In October 1998, the Company sold data center mainframe equipment to an
unrelated party for approximately $34 million. The Company then entered
into an agreement to lease back the equipment from the unrelated party. The
Company recognized a deferred gain of approximately $1 million on the
transaction. The agreement has a term of seven years; however, the Company
has the option, at its discretion, to terminate the contract as of December
31, 2001. Under the agreement, the Company may lease additional equipment
at rates specified in the agreement.
In 1999, the Company entered into a syndicated lease financing facility of
approximately $310 million for the use of land, an existing office building
and the construction of a new corporate headquarters facility in Southlake,
Texas, as well as the development of new data center facilities in Tulsa,
Oklahoma. The financing facility will be accounted for as an operating
lease. The initial term of the lease extends through September 2004, with
two optional one-year renewal periods thereafter. At the end of each
renewal period, the Company is required to either renew the lease, purchase
the property for its original cost, or arrange for the sale of the property
to a third party, with the Company guaranteeing to the lessor proceeds on
such sale of approximately 85% of the original fair value of the leased
facility, or approximately $264 million.
Additionally, in 1999, the Company entered into an agreement with AOL that
provides, among other things, that the Travelocity.com Web site will be the
exclusive reservations engine for AOL's Internet properties.
Travelocity.com is obligated for payments of up to $200 million and AOL and
Travelocity.com will share advertising revenues and commissions over the
five year term of the agreement. Under certain circumstances,
Travelocity.com may elect to alter the terms of this agreement such that
guaranteed payments to AOL would no longer be required.
At December 31, 2000, future minimum lease payments required under the
aforementioned operating lease agreements and other operating lease
agreements with terms in excess of one year for facilities, equipment and
software licenses as well as other guaranteed payments were as follows (in
thousands):
YEAR ENDING DECEMBER 31,
------------------------
2001 $95,777
2002 95,598
2003 83,899
2004 80,174
2005 18,556
Thereafter 42,752
Rental expense was approximately $63 million, $56 million and $43 million
for the years ended December 31, 2000, 1999 and 1998, respectively.
The Company is involved in certain disputes and other matters arising in
the normal course of business. Additionally, the Company is subject to
review and assessment by various taxing authorities. Although the ultimate
resolution of these matters cannot be reasonably estimated at this time,
management does not believe that they will have a material, adverse effect
on the financial condition or results of operations of the Company.
50
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
11. CAPITAL STOCK
On February 7, 2000, 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.
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 such shares to AMR
shareholders as a stock dividend. The distribution consisted of AMR's
entire ownership interest in the Company. The Company now has only
Class A common stock outstanding. The Company is authorized by its
certificate of incorporation to issue up to 250 million shares of
Class A common stock, and up to 20 million shares of Preferred Stock.
In 1997, the Company's Board of Directors authorized, subject to certain
business and market conditions, the purchase of up to 1.5 million shares of
the Company's Class A common stock. On March 16, 1999, the Company's Board
of Directors authorized the repurchase of up to an additional 1 million
shares of the Company's Class A common stock. On September 15, 1999, the
Company's Board of Directors authorized the repurchase of up to an
additional $100 million of the Company's Class A common stock during the
next two years. The Company repurchased 1,004,193; 1,029,890 and 1,428,200
shares of Class A common stock in 2000, 1999 and 1998, respectively.
51
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
12. OPTIONS AND OTHER STOCK-BASED AWARDS
Under the Company's 1996 Long-Term Incentive Plan (the "1996 Plan")
officers and other key employees of the Company may be granted restricted
stock, deferred stock, stock options, stock appreciation rights, stock
purchase rights, other stock-based awards and/or performance-related
awards. The 1996 Plan will terminate no later than October 2006. In 1999,
the Company amended the 1996 Plan (the "Amended Plan"). Under the Amended
Plan, the Company expanded the employees eligible for awards to include
non-employee directors and managers of the Company in addition to officers
and key employees. The total number of shares of Class A common stock
authorized to be issued under the Amended Plan is approximately 14 million
shares, provided that no more than 1 million shares of stock shall be
granted to any employee in a one-year period. At December 31, 2000,
approximately 3 million shares remained available for future grants of
stock-based awards under the Amended Plan.
In 2000, the Company established the Sabre Holdings Corporation Stock
Option Plan (the "2000 Plan") to attract, retain, and reward employees of
the Company, by offering stock incentives in the Company. Under the 2000
Plan, employees may be granted stock options, stock appreciation rights or
other stock-based awards. The total number of shares of Class A common
stock authorized for distribution under the 2000 Plan is 7 million shares.
At December 31, 2000 approximately 3 million shares remained available for
future grants.
The total charge for stock compensation expense included in wages, salaries
and benefits expense was $13 million, $15 million and $13 million for 2000,
1999 and 1998, respectively. No compensation expense was recognized for
stock option grants under the 1996 Plan, the Amended plan, or the 2000 Plan
since the exercise price of the Company's stock option grants was equal to
the fair market value of the underlying stock on the date of grant.
Shares of restricted stock are awarded at no cost to employees. Restricted
shares generally vest three years following the date of grant. Restricted
stock activity follows:
Year Ended December 31,
--------------------------------------------
2000 1999 1998
------- --------- ---------
Outstanding at January 1 192,410 155,590 166,940
Granted 715,957 168,000 12,390
Issued (67,148) (126,740) (10,280)
Canceled --- (4,440) (13,460)
------- --------- ---------
Outstanding at December 31 841,219 192,410 155,590
======= ========= =========
The weighted-average grant date fair values of restricted stock granted
during 2000, 1999 and 1998 were $34.70, $50.08 and $38.49, respectively.
The grant date fair values are based on the Company's stock price on the
date of grant. The Company recognizes stock compensation expense for these
grants over the related vesting period.
Company Performance Shares are also awarded at no cost to officers and key
employees of the Company based on performance metrics of the Company. The
Company Performance Shares vest over a three-year performance period and
are settled in cash. The Company's Performance Share activity was as
follows:
Year Ended December 31,
---------------------------------------------
2000 1999 1998
-------- --------- ---------
Outstanding at January 1 479,069 504,873 612,100
Granted 282,361 197,326 206,970
Awards settled in cash (194,957) (179,035) (263,040)
Canceled (100,326) (44,095) (51,157)
-------- --------- ---------
Outstanding at December 31 466,147 479,069 504,873
======== ========= =========
52
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The weighted-average grant date fair values of Company Performance Shares
granted during 2000, 1999 and 1998 were $46.43, $42.30 and $36.42,
respectively. The grant date fair values are based on the Company's stock
price on the date of grant. The Company recognizes stock compensation
expense for these grants over the related performance periods.
Stock options are granted at the market value of Class A common stock on
the date of grant, except as otherwise determined by a committee appointed
by the Board of Directors, generally vest over three to five years, and are
not exercisable more than ten years after the date of grant. Stock option
activity follows:
Year Ended December 31,
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------ -------- ---------- ------- ---------- -------
Outstanding at January 1 4,672,970 $38.20 3,395,390 $29.10 2,874,070 $25.43
Granted 13,551,898 30.89 2,469,600 46.37 1,245,600 34.94
Exercised (779,866) 27.07 (697,130) 52.17 (433,270) 21.97
Canceled (1,701,498) 37.54 (494,890) 33.49 (291,010) 28.41
---------- --------- ---------
Outstanding at December 31 15,743,504 $32.53 4,672,970 $38.20 3,395,390 $29.10
========== ========= =========
Exercisable options outstanding at
December 31 3,305,349 $21.61 826,430 $27.19 870,670 $24.82
========== ========= =========
The weighted-average grant date fair value of stock options granted during
2000, 1999 and 1998 were $13.42, $18.75 and $12.55, respectively. The grant
date fair values were estimated at the date of grant using the
Black-Scholes option pricing model.
The following table summarizes information about the stock options
outstanding at December 31, 2000:
Options Outstanding Options Exercisable
------------------------------------------------------- ------------------------------
Weighted-Average
Range of Exercise Remaining Life Weighted-Average Weighted-Average
Prices Shares (years) Exercise Price Shares Exercise Price
- ----------------------- --------- ---------------- ---------------- --------- ----------------
$ 0.16 - $25.99 5,298,291 8.49 $19.25 2,759,265 $19.25
$26.00 - $35.99 2,657,760 8.47 31.88 493,844 32.73
$36.00 - $48.99 5,321,792 9.67 38.16 52,240 40.72
$49.00 - $69.40 2,465,661 9.17 49.63 --- ---
---------- ---------
Total 15,743,504 8.99 $32.53 3,305,349 $21.61
========== =========
Stock appreciation rights ("SARS") may be granted in conjunction with all
or part of any stock option granted. All appreciation rights will terminate
upon termination or exercise of the related option and will be exercisable
only during the time that the related option is exercisable. If a SAR is
exercised, the related stock option will be deemed to have been exercised.
53
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The Company has a Directors' Stock Incentive Plan, which provides for an
annual award of options to purchase 3,000 shares of the Company's Class A
common stock to each non-employee director. The plan also provides for a
one-time award of options to purchase 10,000 shares of the Company's Class
A common stock to a new non-employee director upon his or her initial
election to the Board of Directors. The options have an exercise price
equal to the market price of the Class A common stock on the date of grant
and vest pro rata over a five-year period. Each option expires on the
earlier of (i) the date the non-employee director ceases to be a director
of the Company, if for any reason other than due to death, disability or
retirement, or (ii) three years from the date the non-employee director
ceases to be a director of the Company due to death, disability or
retirement. 350,000 shares of Class A common stock are reserved for
issuance under the Directors' Stock Incentive Plan. As of December 31,
2000, 109,026 options had been granted to directors at a weighted-average
exercise price of $25.20. None of the options granted to the directors have
been exercised. At December 31, 2000, approximately 241,000 shares were
available for future grants under the Directors' Stock Incentive Plan.
Beginning in 1999, stock options granted to non-employee directors were
granted under the Amended Plan. In 2000 and 1999, 54,543 and 24,000 options
were granted to directors at weighted-average exercise prices of $30.79 and
$62.59, respectively. These amounts are included in the previous stock
options outstanding table. None of these options have been exercised.
Certain officers and key employees of the Company have been awarded
deferred shares of the Company's Class A common stock ("Company Career
Equity Shares"). The Company Career Equity Shares are issued upon the
individual's retirement from the Company. During 2000, 1,066 of these
shares were issued and 5,057 were canceled. At December 31, 2000 and 1999,
3,609 and 7,600 shares of the Company Career Equity Shares were
outstanding, respectively.
In connection with the payment of the $675 million dividend on February 18,
2000, the Company adjusted the terms of its outstanding employee stock
option plans such that the exercise price per share of each option was
reduced, and the number of options held by each employee was increased,
such that the aggregate intrinsic value of each employee's option holdings
was the same before and after the effect of the payment of the dividend on
the Company's stock price. Because the adjustment to the option terms was
done in accordance with Emerging Issues Task Force Consensus No. 90-9,
CHANGES TO FIXED EMPLOYEE STOCK OPTION PLANS AS A RESULT OF EQUITY
RESTRUCTURING, no compensation expense was recorded by the Company. The
weighted-average exercise prices, included in the schedules above, for
stock options granted prior to the payment of the dividend have not been
adjusted for the effects of the dividend.
The Company sponsors an Employee Stock Purchase Plan (the "ESPP"). The
ESPP allows eligible employees to purchase Class A common stock at a
discount from the market price of such stock. From January 1997 through
June 2000, participating employees could purchase the stock on a monthly
basis at 85% of the market price at the beginning or the end of each
monthly offering period, whichever was lower. Participating employees
were limited to an aggregate maximum purchase price of either 1% or 2%
of the employee's annual compensation, subject to certain limitations.
The ESPP was amended July 1, 2000 to allow participating employees to
purchase stock on a semiannual basis at 85% of the lower of the market
price of the stock at the beginning or the end of a six month period. In
addition, the amended ESPP allows participating employees to purchase
stock up to an aggregate maximum purchase price of 10% of the employee's
annual compensation, subject to certain limitations. 2,000,000 shares of
Class A common stock have been reserved for issuance under the ESPP.
Approximately 57,000, 59,000 and 54,000 shares were issued under the
ESPP during 2000, 1999 and 1998, respectively, and approximately 1,800,000
shares remain available for future purchases at December 31, 2000.
For other stock-based awards, a committee established by the Board of
Directors determines the eligible persons to whom awards will be made, the
times at which the awards will be made, the number of shares to be awarded,
the price, if any, to be paid by the recipient and all other terms and
conditions of the award.
54
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
As required by Statement of Financial Accounting Standards No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, pro forma information regarding
net income and earnings per share has been determined as if the Company had
accounted for its employee stock options and stock-based awards under the
fair value method set forth in Statement No. 123. The fair value for the
stock options granted by the Company to officers and key employees of the
Company after January 1, 1995 was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rate of 5.65% to 6.51% for 2000, 4.65% to
6.22% for 1999 and 5.45% to 5.67% for 1998; a dividend yield of 0%; a
volatility factor of the expected market price of the Company's Class A
common stock of 0.40 for 2000, 0.39 for 1999 and 0.32 for 1998; and a
weighted-average expected life of the options granted of 4.5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable and requires the input of highly
subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes
in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of the pro forma disclosures, the estimated fair value of the
options and stock-based awards is amortized to expense over the vesting
period. The Company's pro forma information is as follows (in thousands,
except per share amounts):
Year Ended December 31,
-----------------------------------------------
2000 1999 1998
-------- -------- --------
Net earnings:
As reported $144,052 $331,907 $231,941
======== ======== ========
Pro forma $134,066 $326,788 $228,672
======== ======== ========
Earnings per common share, as reported:
Basic $1.11 $2.56 $1.78
======== ======== ========
Diluted $1.11 $2.54 $1.78
======== ======== ========
Earnings per common share, pro forma:
Basic $1.04 $2.52 $1.76
======== ======== ========
Diluted $1.03 $2.50 $1.75
======== ======== ========
55
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
13. EARNINGS PER SHARE
Basic earnings per share excludes any dilutive effect of options, warrants
and other stock-based awards. The number of shares used in the diluted
earnings per share calculations includes the dilutive effect of stock
options, restricted and career equity shares and the options issued to US
Airways (see Note 5). The net earnings used in the diluted earnings per
share calculations have been adjusted, as necessary, to reflect the
amortization expense that would have been recognized had options issued to
US Airways qualified as equity instruments for accounting purposes during
the period.
The following table sets forth the computation of basic and diluted
earnings per common share (in thousands, except per share amounts):
Year Ended December 31,
---------------------------------------------
2000 1999 1998
--------- -------- --------
Numerator:
Numerator for basic earnings per common share - net
earnings $144,052 $331,907 $231,941
Incremental amortization of deferred asset related
to options issued to US Airways --- --- (255)
--------- -------- --------
Numerator for diluted earnings per common share -
adjusted net earnings $144,052 $331,907 $231,686
========= ======== ========
Denominator:
Denominator for basic earnings per common share -
weighted-average shares 129,198 129,574 129,943
Dilutive effect of stock awards and options 643 1,081 578
--------- -------- --------
Denominator for diluted earnings per common share -
adjusted weighted-average shares 129,841 130,655 130,521
========= ======== ========
Earnings per common share - basic $1.11 $2.56 $1.78
========= ======== ========
Earnings per common share - diluted $1.11 $2.54 $1.78
========= ======== ========
For additional information regarding stock awards and options, see Note 12.
Options to purchase approximately 8,280,000; 3,130,000 and 2,470,000
weighted-average shares of common stock were outstanding during 2000, 1999
and 1998, respectively, but were excluded from the computation of diluted
earnings per share because the effect would be antidilutive. In addition,
one tranche of options granted to US Airways to purchase 3,000,000 shares
of common stock were excluded from the computation of diluted earnings per
share in 1999 and 1998 because the Company intended to settle those options
with a cash payment and did so on January 5, 2000 (see Note 5).
56
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
14. SEGMENT REPORTING
The Company has two primary lines of business: travel marketing and
distribution and outsourcing and software solutions. The travel marketing
and distribution business consists of three reportable segments: travel
marketing and distribution, Travelocity.com and GetThere. These three
segments are aggregated and presented as "Travel Marketing and
Distribution" within the consolidated statements of income for the three
years ended December 31, 2000. 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 consists of the Company's majority-owned interest in
Travelocity.com which 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 Company's GetThere segment provides Web-based solutions for
corporations and travel suppliers. With GetThere, travel suppliers have
access to extensive Web-based features to manage travel reservations, bonus
mile programs, flight status alerts and Internet specials. Corporate
customers have access to Web-based travel booking systems designed for
corporate travelers, travel arrangers and travel managers that enables
travel planning and reservations while providing control and decision
support to travel managers. 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 accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based upon business segment operating income, which is defined
as income before interest and non-operating income and expenses. The
Company accounts for intersegment transactions as if the transactions were
to third parties, that is, at estimated current market prices. Intersegment
transactions are recorded as expense offsets and are not included in
segment revenues.
Personnel and related costs for the corporate headquarters, certain legal
and professional fees and other corporate charges are allocated to the
segments through a management fee based primarily on usage. Depreciation
expense on the corporate headquarters buildings and related facilities
costs are allocated to the segments through a facility fee based on
headcount. The related assets are not allocated to the segments. Other
assets not allocated to the segments include cash, marketable securities
and deferred tax assets. Benefits expense, including pension expense,
postretirement benefits, medical insurance and workers' compensation, are
allocated to the segments based on headcount. Unallocated corporate
expenses include depreciation expense and other costs associated with the
corporate headquarters buildings, net of facility fees allocated to the
reportable segments and affiliated companies, expenses related to the
Spin-off and certain other corporate charges maintained at the corporate
level.
Year Ended December 31,
-------------------------------------------
2000 1999 1998
---------- ---------- ----------
Revenues from external customers:
Travel marketing and distribution $1,587,509 $1,420,693 $1,293,820
Travelocity.com 144,261 40,305 22,088
GetThere 11,991 2,165 ---
Outsourcing and software solutions 852,765 953,419 981,592
---------- ---------- ----------
Total external revenues $2,596,526 $2,416,582 $2,297,500
========== ========== ==========
Intersegment revenues:
Travel marketing and distribution $ 17,425 $ (23,882) $ (8,524)
Travelocity.com 48,409 23,882 8,524
GetThere --- --- ---
Outsourcing and software solutions 5,286 --- ---
57
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
---------- ---------- ----------
Total intersegment revenues $ 71,120 $ --- $ ---
========== ========== ==========
Equity in net income of equity method investees:
Travel marketing and distribution $ 20,849 $ 18,037 $ 8,887
========== ========== ==========
Total consolidated revenues:
Travel marketing and distribution $1,625,783 $1,414,848 $1,302,707
Travelocity.com 192,670 64,187 22,088
GetThere 11,991 2,165 ---
Outsourcing and software solutions 858,051 953,419 981,592
Elimination of intersegment revenues (71,120) --- ---
---------- ---------- ----------
Total consolidated revenues $2,617,375 $2,434,619 $2,306,387
========== ========== ==========
Intersegment expense transfers:
Travel marketing and distribution $ --- $ --- $ 10,340
Travelocity.com --- --- ---
GetThere --- --- ---
Outsourcing and software solutions 277,495 413,671 373,848
---------- ---------- ----------
Total intersegment expense transfers $ 277,495 $ 413,671 $ 384,188
========== ========== ==========
Operating income (loss):
Travel marketing and distribution $ 399,617 $ 367,354 $ 306,088
Travelocity.com (114,054) (22,578) (22,729)
GetThere (76,135) (21,565) ---
Outsourcing and software solutions 56,409 53,333 64,133
Unallocated corporate expenses (15,405) (4,042) 2,880
---------- ---------- ----------
Total consolidated operating income $ 250,432 $ 372,502 $ 350,372
========== ========== ==========
Depreciation and amortization:
Travel marketing and distribution $ 110,699 $ 123,268 $ 124,475
Travelocity.com 82,348 2,833 2,412
GetThere 38,758 5,018 5,810
Outsourcing and software solutions 96,693 103,574 94,782
Unallocated depreciation and amortization 17,296 23,553 20,255
---------- ---------- ----------
Total consolidated depreciation and amortization $ 345,794 $ 258,246 $ 247,734
========== ========== ==========
Segment assets:
Travel marketing and distribution $ 459,483 $ 546,971 $ 598,972
Travelocity.com 370,205 9,606 10,970
GetThere 684,810 2,400 6,927
Outsourcing and software solutions 543,907 434,273 501,882
Unallocated cash and investments 145,036 611,126 537,710
Unallocated corporate headquarters and other 446,913 346,835 270,356
---------- ---------- ----------
Total consolidated assets $2,650,354 $1,951,211 $1,926,817
========== ========== ==========
Capital expenditures for segment assets:
Travel marketing and distribution $ 78,567 $ 67,466 $ 96,908
Travelocity.com 11,755 522 2,346
GetThere 1,341 491 85
Outsourcing and software solutions 81,876 62,057 186,475
58
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Unallocated capital expenditures 16,587 37,427 34,217
---------- ---------- ----------
Total capital expenditures $ 190,126 $ 167,963 $ 320,031
========== ========== ==========
Amortization of goodwill and intangible assets:
Travel marketing and distribution $ 4,207 $ --- $ ---
Travelocity.com 67,996 --- ---
GetThere 37,216 --- ---
---------- ---------- ----------
Total amortization of goodwill and intangible assets $ 109,419 $ --- $ ---
========== ========== ==========
The Company's revenues and long-lived assets, including goodwill and
intangible assets, by geographic region are summarized below (in
thousands). Revenues are attributed to countries based on the location of
the customer.
Year Ended December 31,
-----------------------------------------------
2000 1999 1998
---------- ---------- ----------
Revenues:
United States $2,037,282 $1,793,818 $1,713,195
Foreign 580,093 640,801 593,192
---------- ---------- ----------
Total $2,617,375 $2,434,619 $2,306,387
========== ========== ==========
Long-lived assets:
United States $1,681,641 $ 754,201 $ 758,224
Singapore 145,606 145,586 143,496
Other foreign 130,139 75,000 80,693
---------- ---------- ----------
Total $1,957,386 $ 974,787 $ 982,413
========== ========== ==========
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly financial information
for the years ended December 31, 2000 and 1999 (in thousands except per
share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
2000
Revenues $644,906 $661,784 $667,307 $643,378
Operating income (loss) 102,600 100,568 67,987 (20,723)
Net earnings (loss) 65,616 63,408 44,415 (29,383)
Earnings (loss) per common share:
Basic $.51 $.49 $.34 $(.23)
Diluted $.48 $.46 $.34 $(.23)
1999
Revenues $638,107 $638,819 $617,242 $540,451
Operating income 112,068 95,948 120,632 43,854
Net earnings 92,729 63,463 78,428 97,287
Earnings per common share:
Basic $.71 $.49 $.61 $.75
Diluted $.71 $.48 $.55 $.75
The travel industry is seasonal in nature. Bookings, and thus booking fees
charged for the use of the SABRE system, decrease significantly each year
in the fourth quarter, primarily in December.
59
SABRE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The Company recorded expenses associated with the separation of the Company
from AMR of approximately $13 million in the first quarter of 2000.
During the first and second quarters of 2000, the Company recorded
reductions in amortization expenses of approximately $2 million and $4
million, respectively, related to options granted to US Airways due to
changes in the market price of the Company's stock (see Note 5). During the
third and fourth quarters of 2000, the Company recorded amortization
expense of approximately $3 million and $15 million, respectively, related
to the options granted to US Airways.
The Company recorded amortization expense on goodwill and intangible assets
acquired as a result of the strategic acquisitions consummated during 2000
of approximately $5 million, $21 million, $22 million and $64 million for
the four quarters of 2000, respectively (see Note 4).
During the third quarter of 2000, the Company recorded approximately $19
million in severance expenses related to the reduction in its work force.
The Company recognized a gain of approximately $35 million during the first
quarter of 1999 and approximately $103 million during the fourth quarter of
1999 related to the liquidation of Equant depository certificates held by
American for the economic benefit of the Company (see Note 5).
During 1999, the Company recorded amortization expenses of approximately $3
million in the first quarter, $22 million in the second quarter and $13
million in the fourth quarter of 1999, related to options granted to US
Airways under the information technology services agreement, due to changes
in the market price of the Company's stock (see Note 5). During the third
quarter of 1999, the Company recorded a reduction in amortization expenses
of approximately $19 million, related to the options granted to US Airways.
During the third quarter of 1999, the Company recorded approximately $8
million in severance expenses related to the reduction in its work force.
During the fourth quarter of 1999, the Company reversed a liability of
approximately $7 million related to a cost savings guarantee in the fifth
year of the Marketing Cooperation Agreement with American based on
projected cost savings.
60
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
- --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference is the information set forth under
the headings "Nominees for Election as Directors" and "Continuing Directors"
in the Company's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 15, 2001. Information concerning the executive
officers is set forth under the heading "Executive Officers of the
Registrant" in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference is the information set forth under
the heading "Executive Compensation" in the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on May 15, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference is the information set forth under
the heading "Ownership of Securities" from the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on May 15, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference is the information set forth under
the heading "Relationships with AMR Corporation and Affiliates" in the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders
to be held on May 15, 2001 and under Note 6 to the Consolidated Financial
Statements in Item 8 of this report.
PART IV
- --------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The financial statements listed in the accompanying index to
financial statements and the schedules are filed as part of
this report.
(2) The schedules listed in the accompanying index to financial
statements and schedules are filed as part of this report.
(3) Exhibits required to be filed by Item 601 of Regulation S-K.
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
2.1 Agreement and Plan of Merger, dated as of October 3,
1999, as amended January 24, 2000, by and among Sabre
Inc., Travelocity Holdings, Inc., Travelocity.com Inc.
and Preview Travel, Inc. (9)
2.2 Agreement and Plan of Merger, dated as of August 28,
2000, among Sabre Holdings Corporation, GetThere
Acquisition Corp., and GetThere, Inc. (10)
3.1 Restated Certificate of Incorporation of
Registrant. (11)
3.2 Restated Bylaws of Registrant. (11)
4.1 Registration Rights Agreement between Registrant and AMR
Corporation. (2)
4.2 Specimen Certificate representing Class A common stock. (12)
10.1 Registration Rights Agreement between Registrant and AMR
Corporation. (See Exhibit 4.1)
10.2 Intercompany Agreement, dated as of July 2, 1996, among
Registrant, The Sabre Group, Inc., TSGL Holding, Inc., TSGL-SCS, Inc.,
TSGL, Inc., Sabre International, Inc., Sabre Servicios Colombia, LTDA and
American Airlines, Inc. (1)(2)
10.3 Management Services Agreement, dated as of July 1, 1996, between
The Sabre Group, Inc. and American Airlines, Inc. (1)(2)
10.4 Credit Agreement, dated as of July 1, 1996, between Registrant,
The Sabre Group, Inc., AMR Corporation and American Airlines, Inc. (2)
61
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
10.5 $850,000,000 Subordinated Debenture, dated July 2, 1996, executed
by Registrant and payable to AMR Corporation. (2)
10.6 Information Technology Services Agreement, dated July 1, 1996,
between The Sabre Group, Inc. and American Airlines, Inc. (1)(2)
10.7 Non-competition Agreement, dated July 1, 1996, among Registrant,
The Sabre Group, Inc., AMR Corporation and American Airlines, Inc. (2)
10.8 Marketing Cooperation Agreement, dated as of July 1, 1996,
between The Sabre Group, Inc. and American Airlines, Inc. (1)(2)
10.9 Tax Sharing Agreement, dated July 1, 1996, between The Sabre
Group, Inc. and American Airlines, Inc. (2)
10.10 Travel Privileges Agreement, dated as of July 1, 1996, between The Sabre
Group, Inc. and American Airlines, Inc. (1)(2)
10.11 Corporate Travel Agreement, dated July 25, 1996, between The
Sabre Group, Inc. and American Airlines, Inc. (1)(2)
10.12 Software Marketing Agreement, dated September 10, 1996, among
Registrant, The Sabre Group, Inc. and AMR Corporation. (1)(2)
10.13 Canadian Technical Services Subcontract, dated as of July 1,
1996, between The Sabre Group, Inc. and American Airlines, Inc. (1)(2)
10.14 Form of Participating Carrier Agreement between The Sabre Group,
Inc. and American Airlines, Inc. (2)
10.15 Investment Agreement, dated September 11, 1996, between The
Sabre Group, Inc. and AMR Investment Services, Inc. (1)(2)
10.16 Assignment and Amendment Agreement, dated as of July 1, 1996,
among The Sabre Group, Inc., American Airlines, Inc. and the Dallas-Fort
Worth International Airport Board. (2)
10.17 American Airlines Special Facilities Lease Agreement, dated
October 1, 1972, between American Airlines, Inc. and the Dallas-Fort Worth
Regional Airport Board, as amended by Supplemental Agreements Nos. 1-5. (2)
10.18 Assignment Agreement, dated as of July 1, 1996, between The
Sabre Group, Inc. and American Airlines, Inc. (2)
10.19 Sublease, dated June 1, 1958, between American Airlines, Inc.
and the Trustees of the Tulsa Municipal Airport Trust, as amended by
Amendments Nos. 1-12. (2)
10.20 Assignment Agreement, dated as of July 1, 1996, between The
Sabre Group, Inc. and American Airlines, Inc. (2)
10.21 Amended and Restated Sublease Agreement, dated May, 1996,
between American Airlines, Inc. and the Tulsa Airports Improvement Trust.
(2)
10.22 Assignment Agreement, dated as of July 1, 1996, between The
Sabre Group, Inc. and American Airlines, Inc. (2)
10.23 Office Lease Agreement, dated as of January 19, 1996, between
American Airlines, Inc. and Maguire/Thomas Partners - Westlake/Southlake
Partnership. (2)
10.24 American Airlines, Inc. Supplemental Executive Retirement Plan
dated November 16, 1994. (3)
10.25 The Sabre Group Holdings, Inc. Long-Term Incentive Plan. (13)
10.26 The Sabre Group Holdings, Inc. Directors Stock Incentive Plan.
(2)
10.27 Form of Executive Termination Benefits Agreement. (2)
62
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
10.28 The Sabre Group Holdings, Inc. Employee Stock Purchase Plan. (4)
10.29 Option Issuance Agreement, dated January 1, 1998 between
Registrant and US Airways, Inc.(5)
10.30 The Sabre Group Holdings, Inc. Deferred Compensation Plan. (6)
10.31 Services Agreement, dated as of July 1, 1996, between The Sabre
Group, Inc. and AMR COMBS, Inc. (1)(14)
10.32 Services Agreement, dated as of July 1, 1996, between The Sabre
Group, Inc. and TELESERVICE RESOURCES, Inc. (1)(14)
10.33 Services Agreement, dated as of July 1, 1996, between The Sabre
Group, Inc. and AMR SERVICES CORPORATION. (1)(14)
10.34 Information Technology Services Agreement, dated as of July 1,
1998, between The Sabre Group, Inc. and TELESERVICE RESOURCES, Inc. (1)(14)
10.35 Program Lease Agreement, dated September 30, 1998, between The
Sabre Group, Inc. and Comdisco, Inc. (1)(14)
10.36 Corporate Travel Agreement, dated June 24, 1998, between The
Sabre Group, Inc. and American Airlines. (1)(14)
10.37 The Sabre Group Holdings, Inc. Amended and Restated 1996
Long-Term Incentive Plan, dated January 19, 1999. (7)
10.38 Promissory Note and Agreement, dated March 17, 1999 between
American Airlines, Inc. and The Sabre Group Holdings, Inc. (7)
10.39 Omnibus Financing Agreement, dated as of June 30, 1999, by and
among American Airlines, Inc., The Sabre Group, Inc., The Sabre Group
Holdings, Inc. and AMR Corporation. (7)
10.40 Letter Amendment, dated April 21, 1999, to the Management
Services Agreement, dated as of July 1, 1996, between The Sabre Group, Inc.
and American Airlines, Inc. (7)
10.41 Agreement and Plan of Merger dated as of October 3, 1999 by and
among Sabre Inc., Travelocity Holdings, Inc., Travelocity.com Inc. and
Preview Travel, Inc. (8)
10.42 Second Amended and Restated Information Technology Services
Agreement dated as of December 13, 1999 between Sabre Inc. and American
Airlines, Inc. (1)(15)
10.43 Amendment to Management Services Agreement dated as of March 15,
2000 between Sabre Inc. and American Airlines, Inc. (1)(15)
10.44 Services Agreement dated as of March 15, 2000 between Sabre Inc.
and American Airlines, Inc. (1)(15)
10.45 Supplemental Agreement Regarding Workers' Compensation dated as
of March 15, 2000 between Sabre Inc. and American Airlines, Inc. (1)(15)
10.46 Amendment to Travel Privileges Agreement dated as of March 15,
2000 between Sabre Inc. and American Airlines, Inc. (1)(15)
10.47 Amendment to Marketing Cooperation Agreement dated as of March
15, 2000 between Sabre Inc. and American Airlines, Inc. (1)(15)
10.48 Termination Agreement dated February 7, 2000 between Sabre Inc.
and American Airlines, Inc. relating to the Intercompany Agreement
(See Exhibit 10.2) (1)(15)
10.49 Agreement on Spin-off Taxes dated March 15, 2000 between AMR
Corporation and Sabre Holdings Corporation. (1)(15)
10.50 Sabre Holdings Corporation Officer Supplemental Executive
Retirement Plan, as Amended, effective April 24, 1999. (15)
10.51 Sabre Holdings Corporation Non-Officer Supplemental Executive
Retirement Plan, as Amended, effective April 24, 1999. (15)
12.1 Computation of ratio of earnings to fixed charges for the year
ended December 31, 2000
21.1 Subsidiaries of Registrant.
23.1 Consent of Ernst & Young LLP.
63
(1) Confidential treatment was granted as to a portion of this
document.
(2) Incorporated by reference to exhibits 3.1 through 10.32 to
the Company's Registration Statement on Form S-1
(Registration No. 333-09747).
(3) Incorporated by reference to Exhibit 10(mmm) to AMR's report
on Form 10-K for the year ended December 31, 1994.
(4) Incorporated by reference to Exhibit A to the Company's proxy
statement on Schedule 14A filed April 17, 2000.
(5) Incorporated by reference to Exhibit 10.34 to the Company's
report on Form 10-K for the year ended December 31, 1997.
(6) Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8 (Registration
No. 333-51291).
(7) Incorporated by reference to Exhibits 10.42 through 10.45 to
the Company's report on Form 10-Q for the quarterly period
ended June 30, 1999.
(8) Incorporated by reference to Exhibit 10.46 to the Company's
report on Form 10-Q for the quarterly period ended
September 30, 1999.
(9) Incorporated by reference to Annex A to the Final Prospectus
on Form 424B filed by Travelocity.com Inc. on February 8,
2000.
(10) Incorporated by reference to Exhibit 2 to the Schedule 13D
filed by the Company on September 1, 2000.
(11) 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.
(12) Incorporated by reference to Exhibit 4.1 to the Company's
report on Form 10-Q for the quarterly period ended
March 30, 2000.
(13) Incorporated by reference to Exhibit B to the Company's
proxy statement on Schedule 14A filed April 17, 2000.
(14) Incorporated by reference to Exhibits 10.36 through 10.41 to
the Company's report on Form 10-K for the year ended
December 31, 1999.
(15) Incorporated by reference to Exhibits 10.47 through 10.56 to
the Company's report on Form 10-K for the year ended
December 31, 1999.
(b) Reports on Form 8-K:
On October 25, 2000, and on December 22, 2000, the Company filed current
reports on Form 8-K relating to its acquisition of GetThere Inc.
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-K or into any other form or report filed with
the Commission into which this Form 10-K would be incorporated by reference.
On November 2, 2000, the Company filed a current report on Form 8-K announcing
it would conduct an analyst and investor conference in New York City, New York.
On November 16, 2000, the Company filed a current report on Form 8-K
announcing the publication of its investment community newsletter.
On December 15, 2000, the Company filed a current report on Form 8-K to
announce a new booking fee pricing structure effective February 1, 2001.
Also, the Company announced updated financial projections for the fourth
quarter of 2000 and fiscal year 2001.
64
SABRE HOLDINGS CORPORATION
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
COVERED BY REPORT OF INDEPENDENT AUDITORS
[ITEM 14(a)]
FINANCIAL STATEMENTS
Page
Report of Independent Auditors 29
Consolidated Balance Sheets at December 31, 2000 and 1999 30
Consolidated Statements of Income for the Years Ended 31
December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended 32
December 31, 2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the Years 33
Ended December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements 34
Schedule II - Valuation and Qualifying Accounts for the Years
Ended December 31, 2000, 1999 and 1998 66
All other schedules are omitted because the required information is included
in the financial statements or notes thereto, or because the required
information is either not present or not present in sufficient amounts.
65
CONSOLIDATED SCHEDULES FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
SABRE HOLDINGS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2000
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ----------------------------------------- ------------- ----------- ----------- ---------- -----------
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT
CLASSIFICATION YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
- ----------------------------------------- ------------- ----------- ----------- ---------- -----------
(1) (2)
YEAR ENDED DECEMBER 31, 2000
Allowance for uncollectible accounts $ 11,913 $ 16,412 $ --- $ (7,272) $ 21,053
Booking fee cancellation reserve 19,748 1,106 --- --- 20,854
Associate reserves 1,704 4,133 --- (4,237) 1,600
YEAR ENDED DECEMBER 31, 1999
Allowance for uncollectible accounts 12,403 12,913 --- (13,403) 11,913
Booking fee cancellation reserve 17,722 2,026 --- --- 19,748
Associate reserves 3,711 1,871 --- (3,878) 1,704
YEAR ENDED DECEMBER 31, 1998
Allowance for uncollectible accounts 8,905 12,199 --- (8,701) 12,403
Booking fee cancellation reserve 15,242 --- 2,480 --- 17,722
Associate reserves 4,686 3,629 --- (4,604) 3,711
- --------------------------------------------------------------------------------
(1) Amounts charged against revenue.
(2) Includes write-offs for uncollectible accounts and payments to associates.
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
/s/ William J. Hannigan
-------------------------------------------------
William J. Hannigan
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
/s/ Jeffery M. Jackson
-------------------------------------------------
Jeffery M. Jackson
Executive Vice President, Chief Financial Officer
and Treasurer
(Principal Financial and Accounting Officer)
Date: February 28, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates noted:
Directors:
/s/ David W. Dorman /s/ Pamela B. Strobel
- --------------------------- -----------------------------
David W. Dorman Pamela B. Strobel
/s/ Paul C. Ely, Jr. /s/ Mary Alice Taylor
- --------------------------- -----------------------------
Paul C. Ely, Jr. Mary Alice Taylor
/s/ Glenn W. Marschel, Jr. /s/ Richard L. Thomas
- --------------------------- -----------------------------
Glenn W. Marschel, Jr. Richard L. Thomas
/s/ Bob L. Martin
- ---------------------------
Bob L. Martin
Date: February 28, 2001
67