**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

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**FORM 10-Q**

 

| **ý**                                              | ** ** | **Quarterly  Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934** |
|---------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|
|                                                    |       | ** **                                                                                         |
| **For the Quarterly Period Ended  June 30, 2004.** |
|                                                    |       |                                                                                               |
| **OR**                                                  |
|                                                    |       | ** **                                                                                         |
| o                                                       |       | **Transition Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |

 

**For the Transition Period From           To            **

 

**Commission file number 1-12175.**

 

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**SABRE HOLDINGS CORPORATION**

(Exact name of registrant as specified in itscharter)

 
| **Delaware**                                                    | ** ** | **75-2662240**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) | ** ** | (I.R.S. Employer Identification No.) |
| ** **                                                      | ** ** | ** **                           |
| **3150 Sabre Drive,  Southlake, Texas**                         | ** ** | **76092**                            |
| (Address of principal executive offices)                        | ** ** | (Zip Code)                           |

 

Registrant’s telephone number, including areacode **(682) 605-1000**

 

**Not Applicable**

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

 

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

 

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

 

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

 

Class A Common Stock, $.01 par value—137,252,826 as of July 30,2004

 

 

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**INDEX**

**SABRE HOLDINGS CORPORATION**

 
| PART I:   | FINANCIAL INFORMATION                                                                                   | 3                                            |
|-----------|---------------------------------------------------------------------------------------------------------|----------------------------------------------|
| Item 1.   | Financial Statements (Unaudited)                                                                        |         3 |
|      | Consolidated  Balance Sheets—June 30, 2004 and December 31, 2003                         |        3       |
|      | Consolidated Statements of Income—Three and  six months ended June 30, 2004 and 2003          | 4                                            |
|      | Consolidated Condensed Statement of  Stockholders’ Equity—Six months ended June 30, 2004 | 5                                            |
|      | Consolidated Statements of Cash Flows—Six months ended June 30,  2004 and 2003                | 6                                            |
|      | Notes to Consolidated Financial Statements                                                              | 7                                            |
| Item 2.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations             | 25                                           |
| Item 3.   | Quantitative and  Qualitative Disclosures About Market Risk                                             | 48                                           |
| Item 4.   | Controls and Procedures                                                                                 | 49                                           |
| PART  II: | OTHER INFORMATION                                                                                       | 50                                           |
| Item 1.   | Legal Proceedings                                                                                       | 50                                           |
| Item 2.   | Changes in Securities, Use of Proceeds and  Issuer Purchases of Equity Securities                       | 50                                           |
| Item 3.   | Defaults Upon Senior Securities                                                                         | 50                                           |
| Item 4.   | Submission of Matters to a Vote of Security  Holders                                                    | 50                                           |
| Item 5.   | Other Information                                                                                       | 51                                           |
| Item 6.   | Exhibits and Reports  on Form 8-K                                                                       | 51                                           |
| SIGNATURE | 52                                                                                                      |

 

2

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**PART I. FINANCIAL INFORMATION**

 

***Item 1******. Financial Statements***

 

**SABRE HOLDINGS CORPORATION**

**CONSOLIDATED BALANCESHEETS**

**(Unaudited) (In thousands)**

 
| ** **                                                                                                                                                           | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                                                                           |       |                    |       |                        |       |
| **Current assets**                                                                                                                                                   |       |                    |       |                        |       |
| Cash                                                                                                                                                                 |       | $                       | 31,702     |                        | $          | 40,862 |   |
| Marketable securities                                                                                                                                                |       | 988,782                 |       | 881,749                     |       |
| Accounts receivable, net                                                                                                                                             |       | 373,680                 |       | 348,988                     |       |
| Prepaid expenses                                                                                                                                                     |       | 68,658                  |       | 86,475                      |       |
| Deferred income taxes                                                                                                                                                |       | 18,836                  |       | 10,237                      |       |
| Total current assets                                                                                                                                                 |       | 1,481,658               |       | 1,368,311                   |       |
| **Property and  equipment**                                                                                                                                          |       |                    |       |                        |       |
| Buildings and leasehold improvements                                                                                                                                 |       | 306,195                 |       | 306,294                     |       |
| Furniture, fixtures and equipment                                                                                                                                    |       | 35,679                  |       | 36,684                      |       |
| Computer software and equipment                                                                                                                                      |       | 308,735                 |       | 275,664                     |       |
|                                                                                                                                                                 |       | 650,609                 |       | 618,642                     |       |
| Less accumulated depreciation and  amortization                                                                                                                      |       | (263,692                | )          | (234,262                    | )          |
| Total property and equipment                                                                                                                                         |       | 386,917                 |       | 384,380                     |       |
|                                                                                                                                                                 |       |                    |       |                        |       |
| Investments in joint ventures                                                                                                                                        |       | 182,556                 |       | 181,142                     |       |
| Goodwill and intangible assets, net                                                                                                                                  |       | 861,102                 |       | 888,198                     |       |
| Other assets, net                                                                                                                                                    |       | 136,630                 |       | 134,122                     |       |
| **Total assets**                                                                                                                                                     |       | $                       | 3,048,863  |                        | $          | 2,956,153 |   |
| ** **                                                                                                                                                           |       |                    |       |                        |       |
| **Liabilities and  stockholders’ equity**                                                                                                                       |       |                    |       |                        |       |
| **Current liabilities**                                                                                                                                              |       |                    |       |                        |       |
| Accounts payable                                                                                                                                                     |       | $                       | 252,894    |                        | $          | 202,615 |   |
| Accrued compensation and related benefits                                                                                                                            |       | 58,264                  |       | 62,557                      |       |
| Accrued subscriber incentives                                                                                                                                        |       | 93,988                  |       | 70,178                      |       |
| Deferred revenues                                                                                                                                                    |       | 37,356                  |       | 34,791                      |       |
| Other accrued liabilities                                                                                                                                            |       | 174,624                 |       | 133,254                     |       |
| Total current liabilities                                                                                                                                            |       | 617,126                 |       | 503,395                     |       |
|                                                                                                                                                                 |       |                    |       |                        |       |
| Deferred income taxes                                                                                                                                                |       | 7,188                   |       | 4,420                       |       |
| Pensions and other postretirement benefits                                                                                                                           |       | 139,070                 |       | 133,404                     |       |
| Other liabilities                                                                                                                                                    |       | 25,796                  |       | 25,162                      |       |
| Minority interests                                                                                                                                                   |       | 6,278                   |       | 6,463                       |       |
| Capital lease obligation                                                                                                                                             |       | 157,549                 |       | 160,725                     |       |
| Public and other notes payable                                                                                                                                       |       | 432,265                 |       | 442,476                     |       |
|                                                                                                                                                                 |       |                    |       |                        |       |
| Commitments and contingencies                                                                                                                                        |       |                    |       |                        |       |
|                                                                                                                                                                 |       |                    |       |                        |       |
| **Stockholders’  equity**                                                                                                                                       |       |                    |       |                        |       |
| Preferred stock: $0.01 par value; 20,000  shares authorized; no shares issued                                                                                        |       | —                  |       | —                      |       |
| Class A common stock, $0.01 par value;  250,000 shares authorized; 145,856 and 145,652 shares issued at June 30,  2004 and December 31, 2003, respectively |       | 1,459                   |       | 1,457                       |       |
| Additional paid-in capital                                                                                                                                           |       | 1,286,276               |       | 1,291,841                   |       |
| Retained earnings                                                                                                                                                    |       | 576,440                 |       | 495,372                     |       |
| Accumulated other comprehensive loss                                                                                                                                 |       | (16,928                 | )          | (8,115                      | )          |
| Less treasury stock at cost: 7,986 and  4,322 shares, respectively                                                                                                   |       | (183,656                | )          | (100,447                    | )          |
|                                                                                                                                                                 |       |                    |       |                        |       |
| Total stockholders’ equity                                                                                                                                      |       | 1,663,591               |       | 1,680,108                   |       |
| **Total liabilities  and stockholders’ equity**                                                                                                                 |       | $                       | 3,048,863  |                        | $          | 2,956,153 |   |

 

See Notes to ConsolidatedFinancial Statements

 

3

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**SABRE HOLDINGS CORPORATION**

**CONSOLIDATEDSTATEMENTS OF INCOME**

**(Unaudited) (In thousands, except per shareamounts)**

 
| ** **                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                    | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Revenues**                                  |       | $                                     | 550,903    |                                | $          | 507,189 |   | $ | 1,090,656 |   | $ | 1,051,022 |   |
| Cost of revenues                              |       | 307,777                               |       | 318,303                             |       | 619,292 |   | 629,908 |   |
| **Gross profit**                              |       | 243,126                               |       | 188,886                             |       | 471,364 |   | 421,114 |   |
| **Other operating  expenses**                 |       |                                  |       |                                |       |   |   |   |   |
| Selling, general and administrative           |       | 139,455                               |       | 136,400                             |       | 286,084 |   | 252,247 |   |
| Amortization of intangible assets             |       | 15,228                                |       | 12,094                              |       | 27,349 |   | 24,581 |   |
| Total other operating expenses                |       | 154,683                               |       | 148,494                             |       | 313,433 |   | 276,828 |   |
|                                          |       |                                  |       |                                |       |   |   |   |   |
| **Operating income**                          |       | 88,443                                |       | 40,392                              |       | 157,931 |   | 144,286 |   |
| **Other income  (expense)**                   |       |                                  |       |                                |       |   |   |   |   |
| Interest income                               |       | 3,306                                 |       | 3,973                               |       | 6,541 |   | 8,379 |   |
| Interest expense                              |       | (6,431                                | )          | (5,300                              | )          | (12,858 | ) | (10,772 | ) |
| Other, net                                    |       | 6,057                                 |       | (29,909                             | )          | 6,485 |   | (30,102 | ) |
| Total other income (expense)                  |       | 2,932                                 |       | (31,236                             | )          | 168 |   | (32,495 | ) |
| **Income before  provision for income taxes** |       | 91,375                                |       | 9,156                               |       | 158,099 |   | 111,791 |   |
| Provision for income taxes                    |       | 32,438                                |       | 2,340                               |       | 56,125 |   | 40,096 |   |
| **Net earnings**                              |       | $                                     | 58,937     |                                | $          | 6,816 |   | $ | 101,974 |   | $ | 71,695 |   |
|                                          |       |                                  |       |                                |       |   |   |   |   |
| **Earnings per common  share**                |       |                                  |       |                                |       |   |   |   |   |
| Basic                                         |       | $                                     | .43        |                                | $          | .05 |   | $ | .74 |   | $ | .50 |   |
| Diluted                                       |       | $                                     | .42        |                                | $          | .05 |   | $ | .73 |   | $ | .50 |   |
|                                          |       |                                  |       |                                |       |   |   |   |   |
| **Dividends  per common share**               |       | $                                     | .075       |                                | $          | .07 |   | $ | .15 |   | $ | .07 |   |

 

See Notes to Consolidated FinancialStatements

 

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**SABRE HOLDINGS CORPORATION**

**CONSOLIDATEDCONDENSED STATEMENT OF STOCKHOLDERS’ EQUI****TY**

**SIX MONTHS ENDED JUNE 30, 2004**

**(Unaudited) (In thousands)**

 
| ** **                                                                                      | ** ** | **Class A  Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated Other  Comprehensive Loss** | ** ** | **Treasury  Stock** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------------|------------|------------------------|------------|-------------------------------------------|------------|---------------------|------------|-----------|------------|
| Balance at December 31, 2003                                                               |       | $                          | 1,457      |                             | $          | 1,291,841              |       | $                                         | 495,372    |                | $          | (8,115    | )          | $ | (100,447 | ) | $ | 1,680,108 |   |
| Issuance of Class A common stock and  treasury shares pursuant to:                              |       |                       |       |                             |       |                   |       |                                      |       |                |       |      |       |
| Stock option plans                                                                              |       | —                     |       | (719                             | )          | —                 |       | —                                    |       | 8,767               |       | 8,048     |       |
| Restricted stock plan                                                                           |       | 2                          |       | (11,342                          | )          | —                 |       | —                                    |       | 10,586              |       | (754      | )          |
| Employee stock purchase plan                                                                    |       | —                     |       | (865                             | )          | —                 |       | —                                    |       | 4,373               |       | 3,508     |       |
| Tax benefit from exercise of employee stock  options                                            |       | —                     |       | 910                              |       | —                 |       | —                                    |       | —              |       | 910       |       |
| Stock based compensation for employees                                                          |       | —                     |       | 6,433                            |       | —                 |       | —                                    |       | —              |       | 6,433     |       |
| Dividends                                                                                       |       | —                     |       | —                           |       | (20,906                | )          | —                                    |       | —              |       | (20,906   | )          |
| Purchase of treasury stock                                                                      |       | —                     |       | —                           |       | —                 |       | —                                    |       | (106,935            | )          | (106,935  | )          |
| Other                                                                                           |       | —                     |       | 18                               |       | —                 |       | —                                    |       | —              |       | 18        |       |
| Comprehensive income:                                                                           |       |                       |       |                             |       |                   |       |                                      |       |                |       |      |       |
| Net earnings                                                                                    |       | —                     |       | —                           |       | 101,974                |       | —                                    |       | —              |       | 101,974   |       |
| Unrealized loss on foreign currency forward  and option contracts, net of deferred income taxes |       | —                     |       | —                           |       | —                 |       | (3,829                                    | )          | —              |       | (3,829    | )          |
| Unrealized loss on investments, net of  deferred income taxes                                   |       | —                     |       | —                           |       | —                 |       | (2,368                                    | )          | —              |       | (2,368    | )          |
| Unrealized foreign currency translation  loss                                                   |       | —                     |       | —                           |       | —                 |       | (2,026                                    | )          | —              |       | (2,026    | )          |
| Other                                                                                           |       | —                     |       | —                           |       | —                 |       | (590                                      | )          | —              |       | (590      | )          |
| Total comprehensive income                                                                      |       |                       |       |                             |       |                   |       |                                      |       |                |       | 93,161    |       |
| Balance at June 30, 2004                                                                   |       | $                          | 1,459      |                             | $          | 1,286,276              |       | $                                         | 576,440    |                | $          | (16,928   | )          | $ | (183,656 | ) | $ | 1,663,591 |   |

 

SeeNotes to Consolidated Financial Statements.

 

5

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**SABREHOLDINGS CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH****FLOWS**

**(Unaudited) (In thousands)**

 
| ** **                                                                                        | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                        | ** ** | **2004**                           | ** ** | **2003** | ** ** |
| **Operating  Activities**                                                                         |       |                               |       |   |   |
| Net earnings                                                                                      |       | $                                  | 101,974    |   | $ | 71,695 |   |
| Adjustments to reconcile net earnings to  cash provided by operating activities:                  |       |                               |       |   |   |
| Depreciation and amortization                                                                     |       | 64,415                             |       | 61,736 |   |
| Stock based compensation for employees                                                            |       | 6,433                              |       | 9,259 |   |
| Deferred income taxes                                                                             |       | (5,831                             | )          | (5,949 | ) |
| Tax benefit from exercise of stock options                                                        |       | 910                                |       | 265 |   |
| Loss on impaired intangible asset                                                                 |       | 3,198                              |       | — |   |
| Gain on disposal of equipment                                                                     |       | (903                               | )          | — |   |
| Equity loss in joint ventures                                                                     |       | 7,621                              |       | 3,849 |   |
| Loss on refinancing of building                                                                   |       | —                             |       | 27,947 |   |
| Other                                                                                             |       | (3,775                             | )          | 1,180 |   |
| Changes in operating assets and  liabilities:                                                     |       |                               |       |   |   |
| Accounts receivable                                                                               |       | (24,692                            | )          | (63,129 | ) |
| Prepaid expenses                                                                                  |       | 11,617                             |       | (3,492 | ) |
| Other assets                                                                                      |       | 12,804                             |       | 19,158 |   |
| Accrued compensation and related benefits                                                         |       | (4,293                             | )          | (16,711 | ) |
| Accounts payable and other accrued  liabilities                                                   |       | 113,901                            |       | 48,313 |   |
| Pensions and other postretirement benefits                                                        |       | 5,075                              |       | (1,716 | ) |
| Other liabilities                                                                                 |       | (2,103                             | )          | (2,465 | ) |
| Cash provided by operating activities                                                             |       | 286,351                            |       | 149,940 |   |
| **Investing  Activities**                                                                         |       |                               |       |   |   |
| Additions to property and equipment                                                               |       | (35,908                            | )          | (39,589 | ) |
| Business combinations, net of cash acquired                                                       |       | —                             |       | (11,868 | ) |
| Investments in and loans to joint ventures                                                        |       | (32,934                            | )          | (10,068 | ) |
| Purchases of marketable securities                                                                |       | (4,138,162                         | )          | (4,460,154 | ) |
| Sales of marketable securities                                                                    |       | 4,030,234                          |       | 4,414,602 |   |
| Other investing activities                                                                        |       | (5,000                             | )          | 4,196 |   |
| Cash used for investing activities                                                                |       | (181,770                           | )          | (102,881 | ) |
| **Financing  Activities**                                                                         |       |                               |       |   |   |
| Proceeds from exercise of stock options and  issuance of stock under employee stock purchase plan |       | 10,802                             |       | 706 |   |
| Dividends paid                                                                                    |       | (20,906                            | )          | (10,029 | ) |
| Purchases of treasury stock                                                                       |       | (101,925                           | )          | — |   |
| Payment to refinance building                                                                     |       | —                             |       | (27,947 | ) |
| Other financing activities, net                                                                   |       | (1,712                             | )          | (2,030 | ) |
|                                                                                              |       |                               |       |   |   |
| Cash used for financing activities                                                                |       | (113,741                           | )          | (39,300 | ) |
| Increase (decrease) in cash                                                                       |       | (9,160                             | )          | 7,759 |   |
| Cash at beginning of period                                                                       |       | 40,862                             |       | 21,176 |   |
| Cash at end of period                                                                             |       | $                                  | 31,702     |   | $ | 28,935 |   |

 

See Notes to Consolidated FinancialStatements

 

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**SABRE HOLDINGS CORPORATION**

 

# **NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

# ** **

**(Unaudited)**

 

**1.****              General Information**

 

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

 

We are a world leader in travel commerce, marketing travel products andproviding distribution and technology solutions for the travel industry.  We operate in multiple travel distributionchannels: the travel agency channel, the consumer-direct channel and thecorporate or business-direct channel. Through our *Sabre**®*(1) globaldistribution system (the “*Sabre*system” or “*Sabre*GDS”) subscribers can access information about, and can book reservations for,among other things, airline trips, hotel stays, car rentals, cruises and tourpackages. Our *Sabre**Travel NetworkTM* business operates the *Sabre* GDS andmarkets and distributes travel-related products and services through the travelagency and corporate channels. We engage in consumer-direct and business-directtravel marketing and distribution through our *Travelocity*Òbusiness. In addition, our *Sabre**Airline SolutionsTM* business is a leadingprovider of technology and services, including development and consultingservices, to airlines and other travel providers.

 

During the fourth quarter of 2003, we realigned our *GetThere*Ò**business segment, which engaged inbusiness direct travel services and had previously been operated as a separatebusiness segment, within our other three segments.  This realignment resulted in *GetThere***products, services and operations beingintegrated into the remaining three segments. Accordingly, GetThere is no longer reported asa separate segment.  Disaggregatedinformation relating to the financial performance of our business segments forthe three and six months ended June 30, 2004 and 2003 is presented in Note7 to the Consolidated Financial Statements.

 

**2.****              Summary ofSignificant Accounting Policies**

 

**Basis of Presentation****–**The accompanying unaudited consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States for interim financialinformation and with the instructions to Form 10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all of the informationand footnotes required by accounting principles generally accepted in theUnited States for complete financial statements. In the opinion of management,these financial statements contain all adjustments, consisting of normalrecurring accruals, necessary to present fairly the financial position, resultsof operations and cash flows for the periods indicated. The preparation offinancial statements in accordance with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. Operating results for the three and six months endedJune 30, 2004 are not necessarily indicative of results that may beexpected for any other interim period or for the year ended December 31,2004.  Our quarterly financial datashould be read in conjunction with our consolidated financial statements forthe year ended December 31, 2003 (including the notes thereto), set forthin Sabre Holdings Corporation’s Annual Report on Form 10-Kfiled with the Securities and Exchange Commission on February 27, 2004.

 

We consolidate all of our majority-owned subsidiaries and companiesthat are not variable interest entities over which we exercise control throughmajority voting rights.  We would alsoconsolidate all variable interest entities of which we are the primarybeneficiary.  However, no entities arecurrently consolidated due to control through operating, financing agreements,or other arrangements (including variable interests held in variable interestentities).

 

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(1) Assured Vantage, Basic Booking Request, Direct Connect, eMergo, eVoya, GetThere, Jurni Network, Nexion, Sabre, Sabre Airline Solutions, SabreExclusives, Sabre Holdings, SabreTravel Network, SabreSonic, Site 59, Site59.com, TotalTrip, Travelocity, Travelocity Business,Travelocity.ca, Travelocity.com, Turbo Sabre andWorld Choice Travel are trademarks of affiliates of SabreHoldings Corporation.  All othertrademarks are the property of their respective owners.   ©2004 SabreHoldings Corporation. All rights reserved.

 

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

 

**Reclassifications –**Certainreclassifications have been made to the 2003 financial statements to conform tothe 2004 presentation.  Thesereclassifications are not material, either individually or in the aggregate, toour financial statements.

 

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

 

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

 
| ** **                                                                               | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                               | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                     |       |                                  |       |                                |       |   |   |   |   |
| Denominator for basic earnings per common  share—weighted-average shares            |       | 137,397                               |       | 142,367                             |       | 138,309 |   | 142,339 |   |
| Dilutive effect of stock awards and options                                              |       | 2,583                                 |       | 741                                 |       | 1,497 |   | 480 |   |
| Denominator for diluted earnings per common  share—adjusted weighted-average shares |       | 139,980                               |       | 143,108                             |       | 139,806 |   | 142,819 |   |

 

Options to purchase approximately13,512,386 and 15,628,627 weighted-average shares of our common stock wereoutstanding during the three and six month periods ending June 30, 2004,but were excluded from the computation of diluted earnings per share becausethe effect would be anti-dilutive.  Forthe corresponding periods in 2003, anti-dilutive options to purchaseapproximately 16,428,401 and 17,644,523 weighted-average shares of our commonstock were excluded from the computation of diluted earnings per share.  The decrease in the weighted-average sharesfor the three and six month periods ending June 30, 2004 versus 2003 isdue to our share repurchase programs.

 

8

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**Stock Awards and Options –**Weaccount for stock awards and stock option grants using the intrinsic valuemethod set forth in Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees* (“APB 25”), andrelated interpretations.  Generally, nocompensation expense is recognized for stock option grants to employees if theexercise price is at or above the fair market value of the underlying stock onthe date of grant.  Compensation expenserelating to other stock awards is recognized over the period during which theemployee renders service to us necessary to earn the award.

 

The following table summarizes the pro forma effect of stock-basedcompensation on our net earnings and net earnings per share for the three andsix months ended June 30, 2004 and 2003, as if we had accounted for suchcompensation at fair value (in thousands, except per share data):

 
| ** **                                                                                                                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                          | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                                                |       |                                  |       |                                |       |   |   |   |   |
| Net earnings as reported                                                                                                            |       | $                                     | 58,937     |                                | $          | 6,816 |   | $ | 101,974 |   | $ | 71,695 |   |
| Add stock compensation expense determined under  intrinsic value method, net of income taxes                                        |       | 1,889                                 |       | 2,849                               |       | 3,972 |   | 5,719 |   |
| Less total stock-based employee  compensation expense determined under fair value based method for all awards,  net of income taxes |       | (7,978                                | )          | (10,062                             | )          | (16,266 | ) | (21,616 | ) |
| Pro forma net earnings (loss)                                                                                                       |       | $                                     | 52,848     |                                | $          | (397 | ) | $ | 89,680 |   | $ | 55,798 |   |
|                                                                                                                                |       |                                  |       |                                |       |   |   |   |   |
| Net earnings per common share, as reported:                                                                                         |       |                                  |       |                                |       |   |   |   |   |
| Basic                                                                                                                               |       | $                                     | .43        |                                | $          | .05 |   | $ | .74 |   | $ | .50 |   |
| Diluted                                                                                                                             |       | $                                     | .42        |                                | $          | .05 |   | $ | .73 |   | $ | .50 |   |
| Net earnings (loss) per common share, pro  forma:                                                                                   |       |                                  |       |                                |       |   |   |   |   |
| Basic                                                                                                                               |       | $                                     | .38        |                                | $          | (.00 | ) | $ | .65 |   | $ | .39 |   |
| Diluted                                                                                                                             |       | $                                     | .38        |                                | $          | (.00 | ) | $ | .64 |   | $ | .39 |   |

 

**3.****              Significant Events**

 

**Contract Settlements****–** In the first quarter of 2003, we recognized revenue ofapproximately $36 million, representing settlements from two travel agencysubscribers (who were affiliated with each other and were acquired by acompetitor of ours) in exchange for allowing them to cancel their existingsubscriber agreements.

 

**Cost Reductions****–**In an effort to reduce our operating expenses and betteralign expenses with revenue targets for 2004 and future years, we reduced ourworkforce and recorded a charge of approximately $18 million for severance,salaries and benefits in the fourth quarter of 2003.  The remaining liability for this charge as ofJune 30, 2004 was approximately $3 million, of which approximately half isat the corporate level and the remainder relates to our business units.

 

In the fourth quarter of 2003, we alsoconsolidated our operations (including integrating the products, services andoperations of our GetThere business unit into ourother three business units) and closed additional facilities in the UnitedStates.  These actions resulted in anapproximately $17 million charge, consisting of write-offs of leasehold improvementsand other facility-related assets, employee relocation expenses and leasetermination costs.  The remainingliability for this charge as of June 30, 2004 was approximately $2million, which relates entirely to corporate level charges.

 

9

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The following table summarizes the liabilities included in the balancesheets at December 31, 2003 and June 30, 2004 and the amounts paidduring the six-month period (in thousands):

 
| ** **                                     | ** ** | **Severance** | ** ** | **Facilities** | ** ** | **Total** | ** ** |
|------------------------------------------------|------------|---------------|------------|----------------|------------|-----------|------------|
|                                           |       |          |       |           |       |      |       |
| Remaining liability at December 31,  2003 |       | $             | 7,941      |           | $          | 4,264     |       | $ | 12,205 |   |
| Amounts paid through June 30, 2004        |       | (5,000        | )          | (2,129         | )          | (7,129    | )          |
| Remaining liability at June 30, 2004      |       | $             | 2,941      |           | $          | 2,135     |       | $ | 5,076 |   |

 

**Amendment to AOL Agreement****–**On January 21, 2004, we revised the terms of andextended our agreement with America Online (“AOL”) throughMarch 2006.  Travelocity continuesto be the exclusive reservations engine for AOL’s Internet properties under therevised agreement.  Under the revisedterms of the agreement, we benefit from more strategically aligned terms forplacement within AOL’s brands.  Further,we are obligated for fixed payments of up to $28 million over the two-year termof the agreement.   These fixed payments,along with the unamortized portion of fixed payments previously paid under theoriginal contract, are being expensed on a straight-line basis over theremaining term of the extended agreement. For 2004, this expense will be approximately $23 million, of whichapproximately $6 million and $12 million was recognized for the three and sixmonths ended June 30, 2004, respectively. Additionally, in exchange for lower fixed annual payments, we agreed toa reduced share of advertising revenues generated through the AOLproperties.  The agreement also containsa productivity component, whereby AOL is paid a percentage of the transactionrevenue generated through the AOL network.

 

**WNS Agreement****–**On January 30, 2004, we entered into a multi-yearmaster services agreement with WNS North America, Inc. (“WNS”).  Under the agreement, throughout 2004 we willoutsource to WNS an increasing portion of our Travelocity contact centeroperations, primarily front-line customer service calls and back-officefulfillment.  By the end of the firstquarter of 2005, WNS should be handling Travelocity’s front-line customerservice calls and emails, as well as some mid-office and back-officefunctions.  WNS will transition these day-to-day operations of thecustomer service functions to its contact centers.  Travelocity employees will continue to handlesales calls, as well as advanced customer service issues and qualitycontrol.  We do not expect severance andrelated costs incurred due to this agreement to be significant.

 

For 2004, we have minimum commitments to WNS of $18 million, of whichapproximately $5 million and $9 million was recognized during the three and sixmonths ended June 30, 2004, respectively. Thereafter, we are committed to minimum payments based on a calculationthat considers both current and historical transaction volumes compared tothresholds established in the agreement. For 2005 through 2010, the starting thresholds for calculating ourcommitment for each year ranges from approximately $17 million to $31 million,and actual commitments could be lower than these amounts, depending on callvolumes.  Additionally, we committed tolend up to $10 million to WNS for transitional assistance.  As of June 30, 2004, we have loaned $5million to WNS.  Amounts borrowed by WNSaccrue interest at 5%, payable quarterly, and the principal will be due inthree annual payments beginning in 2009.

 

**Relocation of Certain Operations**– In April 2004, weannounced to affected employees that we will transition certain operations toLatin America.  The transition will occurover the remainder of 2004 and in the first half of 2005.  Severance, retention and other related costsassociated with the plan are currently estimated to be in the range of $6million to $8 million, and will primarily be recognized in the fourth quarterof 2004 and in the first half of 2005 as operations are transitioned.

 

**Revolving Credit Agreement**–On June 15, 2004, we replaced a $300 million revolving credit agreementthat was set to expire on September 14, 2004, with a new $300 million,senior unsecured revolving credit agreement that expires June 15,2009.  Under certain conditions, we canrequest an additional $100 million in credit under this new agreement.  Interest on this agreement is variable, basedon either the London Interbank Offered Rate (“LIBOR”)or the prime rate, at our discretion, and is sensitive to our creditrating.  The LIBOR margin at our currentcredit rating is equal to 0.50%, which translates to a total borrowing rate ofapproximately 2.5% in the current interest rate environment.  As of June 30, 2004 there are noborrowings outstanding under this agreement. Under this agreement, we are subject to covenants that could, amongother things, restrict our ability to incur additional debt and that limit ourability to pay dividends or repurchase our stock in excess of $150 million perfiscal year (unless, after giving effect to such dividends and/or repurchases,we have more than $400 million in cash and marketable securities

 

10

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domiciled in the United States).  A copy of the Revolving Credit Agreement is included as Exhibit 10.1 tothis filing.  As of June 30, 2004 weare in compliance with all covenants under this agreement including thefollowing financial covenants:

 
| ** **                                    | ** ** | **Requirement** | ** ** | **Level at June 30, 2004** | ** ** |
|-----------------------------------------------|------------|-----------------|------------|---------------------------------|------------|
| Consolidated Leverage Ratio (Debt to  EBITDA) |       | 3 to 1 maximum  |       | 2 to 1                          |       |
| Consolidated Net Worth                        |       | $1.4 billion    |       | $1.7 billion                    |       |

 

**4.****              Pension and OtherPost Retirement Benefit Plans**

 

On December 8, 2003, the Medicare Prescription Drug, Improvementand Modernization Act of 2003 (the “Act”) was signed into law.  Our measures of accumulated postretirementbenefit obligation and net periodic cost presented for the three and six monthsended June 30, 2004 do not reflect the effects of the Act as we have notyet concluded whether the benefits provided by the plan are actuariallyequivalent to Medicare Part D under the Act. The effects of the Act are required to be recorded for fiscal periodsbeginning after June 15, 2004. Accordingly, we will record the effects of the Act on our U.S.-basedplans during the third quarter of 2004.

 

The components of net periodic benefit cost of defined benefit pensionplans and other defined benefit postretirement plans for the three and sixmonths ended June 30, 2004 and 2003 are presented in the tables below (inthousands).

 
| ** **                                   | ** ** | **Three Months  Ended  June 30,** | ** ** | **Six Months  Ended  June 30,** | ** ** |
|----------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| **Pension Benefits**                         | ** ** | **2004**                               | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Components of net periodic benefit cost:** |       |                                   |       |                                 |       |   |   |   |   |
| Service cost                                 |       | $                                      | 982        |                                 | $          | 2,635 |   | $ | 2,286 |   | $ | 4,173 |   |
| Interest cost                                |       | 3,220                                  |       | 10,792                               |       | 8,223 |   | 15,855 |   |
| Expected return on plan assets               |       | (3,378                                 | )          | (12,427                              | )          | (8,986 | ) | (17,905 | ) |
| Amortization of transition asset             |       | (3                                     | )          | (1                                   | )          | (8 | ) | (6 | ) |
| Amortization of prior service cost           |       | (8                                     | )          | 13                                   |       | 36 |   | 28 |   |
| Amortization of net loss                     |       | 699                                    |       | 2,099                                |       | 1,405 |   | 2,632 |   |
| Net periodic benefit cost                    |       | 1,512                                  |       | 3,111                                |       | 2,956 |   | 4,777 |   |
| Settlement gain                              |       | —                                 |       | (126                                 | )          | — |   | — |   |
| Total net periodic benefit cost              |       | $                                      | 1,512      |                                 | $          | 2,985 |   | $ | 2,956 |   | $ | 4,777 |   |

 
| ** **                                   | ** ** | **Three Months  Ended  June 30,** | ** ** | **Six Months  Ended  June 30,** | ** ** |
|----------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| **Other Benefits**                           | ** ** | **2004**                               | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Components of net periodic benefit cost:** |       |                                   |       |                                 |       |   |   |   |   |
| Service cost                                 |       | $                                      | 788        |                                 | $          | 597 |   | $ | 1,583 |   | $ | 1,496 |   |
| Interest cost                                |       | 1,859                                  |       | 1,775                                |       | 3,730 |   | 3,523 |   |
| Amortization of transition asset             |       | 3                                      |       | 3                                    |       | 7 |   | 7 |   |
| Amortization of prior service cost           |       | 78                                     |       | 68                                   |       | 159 |   | 148 |   |
| Amortization of net loss                     |       | 679                                    |       | 833                                  |       | 1,375 |   | 1,283 |   |
| Net periodic benefit cost                    |       | 3,407                                  |       | 3,276                                |       | 6,854 |   | 6,457 |   |
| Total net periodic benefit cost              |       | $                                      | 3,407      |                                 | $          | 3,276 |   | $ | 6,854 |   | $ | 6,457 |   |

 

11

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We made contributions to fund our defined benefit pension plans of $5million and $15 million during the three months ended June 30, 2004 and2003, respectively.  We are evaluatingmaking additional contributions during the remainder of 2004.

 

**5.****              Income Taxes**

 

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

 
| ** **                                                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                 | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                       |       |                                  |       |                                |       |   |   |   |   |
| Income tax provision at statutory federal  income tax rate |       | $                                     | 31,982     |                                | $          | 3,205 |   | $ | 55,335 |   | $ | 39,127 |   |
| State income taxes, net of federal benefit                 |       | 420                                   |       | (447                                | )          | 2,200 |   | 2,402 |   |
| Other, net                                                 |       | 36                                    |       | (418                                | )          | (1,410 | ) | (1,433 | ) |
| Total provision for income taxes                           |       | $                                     | 32,438     |                                | $          | 2,340 |   | $ | 56,125 |   | $ | 40,096 |   |

 

**6.****              Derivatives**

 

Travelocity received certain vestedwarrants from Hotels.com in connection with an affiliation agreement enteredinto during 2000.  In March 2001, weextended our affiliation agreement with Hotels.com through July 31, 2005and expanded the scope of the Hotels.com relationship. In connection with theexpanded and extended agreement, we received additional vested Hotels.comwarrants with a fair value of approximately $30 million on the date of receipt.We were recognizing this amount as revenue over the extended term of theagreement, which amounted to approximately $2 million and $4 million during thethree and six months ended June 30, 2003, respectively.  During the three and six months endedJune 30, 2003, respectively, we also recognized approximately $5 millionand $7 million of revenue for performance warrants earned under thisagreement.  This agreement was terminatedin the third quarter of 2003 and we recognized the remaining deferred balanceof approximately $8 million related to these warrants at that time.

 

We are a party to certain foreign currency forward andoption contracts. We have designated these instruments as cash flow hedges.Amounts reclassified from other comprehensive income to earnings due to thesettlement of forward and option contracts were $2 million and $3 millionduring the three months ended June 30, 2004 and 2003, respectively and $6million for both the six months ended June 30, 2004 and 2003.  No hedging ineffectiveness was recorded inearnings relating to the forwards or options during 2004 or 2003.  The estimated fair values of the foreigncurrency forward and option contracts were $4 million and $10 million atJune 30, 2004 and December 31, 2003, respectively.

 

We are also a party to certain interest rate swapcontracts.  We have designated the swapsas fair value hedges of our public notes payable and capital lease obligation.No hedging ineffectiveness was recorded in earnings relating to our interestrate swaps during 2004 or 2003.  Theestimated fair values of the interest rate swaps were a net liability of $3million at June 30, 2004 and a net asset of $9 million at December 31,2003.

 

**7.****              Business Segments**

 

We are a world leader in travel commerce, marketing travel products andproviding distribution and technology solutions for the travel industry.  We operate in multiple travel distributionchannels: the travel agency channel, the consumer-direct channel and thecorporate or business-direct channel. Through our *Sabre*global distribution system (the “*Sabre* system” or “*Sabre* GDS”) subscribers can accessinformation about, and can book reservations for, among other things, airlinetrips, hotel stays, car rentals, cruises and tour packages. Our Sabre Travel Network business operates the *Sabre* GDS andmarkets and distributes travel-related products and services through the travel

 

12

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agency and corporate channels. We engage in consumer-direct andbusiness-direct travel marketing and distribution through our Travelocitybusiness.  In addition, our Sabre Airline Solutions business is a leading provider oftechnology and services, including development and consulting services, toairlines and other travel providers.

 

During the fourth quarter of 2003, we realigned our GetTherebusiness segment, which engaged in business direct travel services and hadpreviously been operated as a separate business segment, within our other threesegments.  This realignment resulted in *GetThere*products, services and operations being integrated into the remaining threesegments.  Accordingly, GetThere is no longer reported as a separate segment.  The segment information presented below isbased on the new segment definition for all periods presented.

 

Our reportable segments are strategic business segments that offerdifferent products and services and are managed separately because eachbusiness requires different market strategies. The accounting policies of the segments are the same as those used inour consolidated results.  We account forsignificant intersegment transactions as if thetransactions were to third parties, that is, at estimated current marketprices.  The majority of the intersegment revenues and cost of revenues are betweenTravelocity and Sabre Travel Network, consistingmainly of incentives and marketing fees paid by SabreTravel Network to Travelocity for bookings made through the *Sabre* GDS, data processing feespaid by Travelocity to Sabre Travel Network forbookings made through the *Sabre*GDS, and fees paid by Sabre Travel Network toTravelocity for corporate trips booked through Travelocity’s online bookingtechnology.  In addition, Sabre Airline Solutions pays fees to Travelocity forairline trips booked through Travelocity’s online booking technology.

 

Personnel and related costs for the corporate headquarters, certainlegal and professional fees and other corporate charges are allocated to thesegments through a management fee based on the relative size of the segmentsand usage of corporate resources or services. Depreciation expense on the corporate headquarters buildings and relatedfacilities costs are allocated to the segments through a facility fee based onheadcount.  Benefits expense, includingpension expense, postretirement benefits, medical insurance and workers’compensation, are allocated to the segments based on headcount.  Unallocated corporate expenses include costsassociated with the corporate headquarters buildings that were not allocated tothe reportable segments as well as certain other corporate charges maintainedat the corporate level.

 

13

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The segment operating results are presented on a basis that excludescertain adjusting items that are summarized below, except where noted. Thispresentation is consistent with the manner in which our management assesses theoperating performance of our business segments. Selected information for our three reportable segments for the three andsix months ended June 30, 2004 and 2003 follows (in thousands).

 
| ** **                                                                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues from external customers, excluding  adjusting items:                      |       |                                  |       |                                |       |   |   |   |   |
| Sabre  Travel Network                                                              |       | $                                     | 393,477    |                                | $          | 378,289 |   | $ | 797,049 |   | $ | 767,750 |   |
| Travelocity                                                                        |       | 97,474                                |       | 72,979                              |       | 180,981 |   | 136,482 |   |
| Sabre  Airline Solutions                                                           |       | 60,511                                |       | 56,596                              |       | 120,247 |   | 114,181 |   |
| Total                                                                              |       | $                                     | 551,462    |                                | $          | 507,864 |   | $ | 1,098,277 |   | $ | 1,018,413 |   |
|                                                                               |       |                                  |       |                                |       |   |   |   |   |
| Intersegment  revenues:                                                            |       |                                  |       |                                |       |   |   |   |   |
| Sabre  Travel Network                                                              |       | $                                     | 7,688      |                                | $          | 6,714 |   | $ | 15,227 |   | $ | 13,356 |   |
| Travelocity                                                                        |       | 34,850                                |       | 28,417                              |       | 69,584 |   | 56,833 |   |
| Total                                                                              |       | $                                     | 42,538     |                                | $          | 35,131 |   | $ | 84,811 |   | $ | 70,189 |   |
|                                                                               |       |                                  |       |                                |       |   |   |   |   |
| Equity in net income of equity method investees:                                   |       |                                  |       |                                |       |   |   |   |   |
| Sabre  Travel Network                                                              |       | $                                     | 6,222      |                                | $          | 2,761 |   | $ | 5,947 |   | $ | 4,878 |   |
| Travelocity                                                                        |       | (6,781                                | )          | (3,436                              | )          | (13,568 | ) | (8,727 | ) |
| Total                                                                              |       | $                                     | (559       | )                                   | $          | (675 | ) | $ | (7,621 | ) | $ | (3,849 | ) |
|                                                                               |       |                                  |       |                                |       |   |   |   |   |
| Segment revenues, excluding adjusting  items:                                      |       |                                  |       |                                |       |   |   |   |   |
| Sabre  Travel Network                                                              |       | $                                     | 407,388    |                                | $          | 387,764 |   | $ | 818,223 |   | $ | 785,984 |   |
| Travelocity                                                                        |       | 125,542                               |       | 97,960                              |       | 236,997 |   | 184,588 |   |
| Sabre  Airline Solutions                                                           |       | 60,511                                |       | 56,596                              |       | 120,247 |   | 114,181 |   |
| Elimination of intersegment  revenues                                              |       | (42,538                               | )          | (35,131                             | )          | (84,811 | ) | (70,189 | ) |
| Total                                                                              |       | $                                     | 550,903    |                                | $          | 507,189 |   | $ | 1,090,656 |   | $ | 1,014,564 |   |
|                                                                               |       |                                  |       |                                |       |   |   |   |   |
| *Revenue adjusting  item:*                                                         |       |                                  |       |                                |       |   |   |   |   |
| Sabre  Travel Network – settlement revenue from canceled subscriber contracts |       | $                                     | —     |                                | $          | — |   | $ | — |   | $ | 36,458 |   |
|                                                                               |       |                                  |       |                                |       |   |   |   |   |
| Consolidated revenues:                                                             |       |                                  |       |                                |       |   |   |   |   |
| Sabre  Travel Network                                                              |       | $                                     | 407,388    |                                | $          | 387,764 |   | $ | 818,223 |   | $ | 822,442 |   |
| Travelocity                                                                        |       | 125,542                               |       | 97,960                              |       | 236,997 |   | 184,588 |   |
| Sabre  Airline Solutions                                                           |       | 60,511                                |       | 56,596                              |       | 120,247 |   | 114,181 |   |
| Elimination of intersegment  revenues                                              |       | (42,538                               | )          | (35,131                             | )          | (84,811 | ) | (70,189 | ) |
| Total                                                                              |       | $                                     | 550,903    |                                | $          | 507,189 |   | $ | 1,090,656 |   | $ | 1,051,022 |   |

 

14

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**7.****                                      SegmentReporting (Continued)**

 

A summary of theadjusting items and reconciliation to consolidated operating income is setforth below (in thousands):

 
| ** **                                                                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                     | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                           |       |                                  |       |                                |       |   |   |   |   |
| Segment operating income (loss) excluding adjusting  items:                    |       |                                  |       |                                |       |   |   |   |   |
|                                                                           |       |                                  |       |                                |       |   |   |   |   |
| Sabre  Travel Network                                                          |       | $                                     | 89,308     |                                | $          | 60,706 |   | $ | 173,794 |   | $ | 145,619 |   |
| Travelocity                                                                    |       | 9,643                                 |       | (10,898                             | )          | 8,178 |   | (20,451 | ) |
| Sabre  Airline Solutions                                                       |       | 5,593                                 |       | 4,632                               |       | 4,971 |   | 10,284 |   |
| Net corporate allocations                                                      |       | (41                                   | )          | (159                                | )          | 629 |   | 1,474 |   |
| Total                                                                          |       | $                                     | 104,503    |                                | $          | 54,281 |   | $ | 187,572 |   | $ | 136,926 |   |
|                                                                           |       |                                  |       |                                |       |   |   |   |   |
| *Impact of  adjusting items on operating income – (increase) / decrease:* |       |                                  |       |                                |       |   |   |   |   |
|                                                                           |       |                                  |       |                                |       |   |   |   |   |
| Sabre  Travel Network:                                                         |       |                                  |       |                                |       |   |   |   |   |
| Settlement revenue from canceled subscriber  contract                          |       | $                                     | —     |                                | $          | — |   | $ | — |   | $ | (36,458 | ) |
| Other intangibles amortization                                                 |       | 7,349                                 |       | 3,144                               |       | 11,517 |   | 6,240 |   |
| Stock compensation                                                             |       | —                                |       | 182                                 |       | — |   | 367 |   |
| Restructuring expenses                                                         |       | —                                |       | (288                                | )          | — |   | (288 | ) |
| Total Sabre  Travel Network                                                    |       | 7,349                                 |       | 3,038                               |       | 11,517 |   | (30,139 | ) |
|                                                                           |       |                                  |       |                                |       |   |   |   |   |
| Travelocity:                                                                   |       |                                  |       |                                |       |   |   |   |   |
| Other intangibles amortization                                                 |       | 7,390                                 |       | 8,461                               |       | 14,852 |   | 17,362 |   |
| Stock compensation                                                             |       | 1,318                                 |       | 2,980                               |       | 3,255 |   | 5,958 |   |
| Restructuring expenses                                                         |       | —                                |       | (37                                 | )          | — |   | (37 | ) |
| Total Travelocity                                                              |       | 8,708                                 |       | 11,404                              |       | 18,107 |   | 23,283 |   |
|                                                                           |       |                                  |       |                                |       |   |   |   |   |
| Sabre  Airline Solutions:                                                      |       |                                  |       |                                |       |   |   |   |   |
| Stock compensation                                                             |       | —                                |       | 32                                  |       | — |   | 65 |   |
| Restructuring expenses                                                         |       | —                                |       | (231                                | )          | — |   | (231 | ) |
| Total Sabre  Airline Solutions                                                 |       | —                                |       | (199                                | )          | — |   | (166 | ) |
|                                                                           |       |                                  |       |                                |       |   |   |   |   |
| Corporate:                                                                     |       |                                  |       |                                |       |   |   |   |   |
| Other                                                                          |       | 3                                     |       | 16                                  |       | 17 |   | 32 |   |
| Restructuring expenses                                                         |       | —                                |       | (370                                | )          | — |   | (370 | ) |
| Total Corporate                                                                |       | 3                                     |       | (354                                | )          | 17 |   | (338 | ) |
| Total operating income adjusting items                                         |       | $                                     | 16,060     |                                | $          | 13,889 |   | $ | 29,641 |   | $ | (7,360 | ) |
|                                                                           |       |                                  |       |                                |       |   |   |   |   |
| Consolidated operating income (loss):                                          |       |                                  |       |                                |       |   |   |   |   |
| Sabre  Travel Network                                                          |       | $                                     | 81,959     |                                | $          | 57,668 |   | $ | 162,277 |   | $ | 175,758 |   |
| Travelocity                                                                    |       | 935                                   |       | (22,302                             | )          | (9,929 | ) | (43,734 | ) |
| Sabre  Airline Solutions                                                       |       | 5,593                                 |       | 4,831                               |       | 4,971 |   | 10,450 |   |
| Net Corporate Allocations                                                      |       | (44                                   | )          | 195                                 |       | 612 |   | 1,812 |   |
| Total                                                                          |       | $                                     | 88,443     |                                | $          | 40,392 |   | $ | 157,931 |   | $ | 144,286 |   |

 

15

----

 

**8.****              SupplementalGuarantor/Non-Guarantor Financial Information**

 

Certain obligations of Sabre HoldingsCorporation (“Sabre Holdings”) have been solelyguaranteed by its 100% owned operating subsidiary, Sabre Inc.There are currently no restrictions on SabreHoldings’ ability to obtain funds from Sabre Inc. inthe form of a dividend or loan other than typical dividend requirements underDelaware law.  Additionally, there are nosignificant restrictions on Sabre Inc.’s ability toobtain funds from its direct or indirect subsidiaries other than those thatwould exist under state or foreign law.  Sabre Inc. is the sole direct subsidiary of Sabre Holdings.  Allother subsidiaries are direct or indirect subsidiaries of SabreInc.  These other subsidiaries are allincluded in the non-guarantor financial statements.  The following financial information presentscondensed consolidating balance sheets, statements of income and statements ofcash flows for Sabre Holdings, Sabre Inc.and non-guarantor subsidiaries. The information has been presented as if Sabre Holdings accounted for its ownership of Sabre Inc., and Sabre Inc.accounted for its ownership of the non-guarantor subsidiaries, using the equitymethod of accounting.  Certainreclassifications have been made to the 2003 financial statements to conform tothe 2004 presentation.  Thesereclassifications are not material, either individually or in the aggregate, toour financial statements.

 

Sabre Inc.conducts the domestic operations of both the SabreTravel Network and Sabre Airline Solutionssegments.  The operations of theTravelocity segment, as well as the principal international operations of the Sabre Travel Network segment, are conducted by thenon-guarantor subsidiaries.

 

Sabre Inc.and certain non-guarantor subsidiaries are parties to various intercompany agreements that affect the amount of operatingexpenses reported in the following condensed consolidating statements ofincome. Among other things, fees are paid by Sabre Inc.to a non-guarantor subsidiary relating to the use of trademarks, tradenames, etc. owned by a non-guarantor subsidiary;incentive and marketing payments are made by Sabre Inc.to non-guarantor subsidiaries relating to the use and distribution of the *Sabre* system; and paymentsare made by non-guarantor subsidiaries to Sabre Inc.for access to the *Sabre*system under the terms of these agreements. During the three months endedJune 30, 2004 and 2003, Sabre Inc. recognizedoperating expenses in connection with these agreements totaling approximately$62 million and $81 million, respectively. During the six months ended June 30, 2004 and 2003, Sabre Inc. recognized operating expenses in connection withthese agreements totaling approximately $120 million and $153 million,respectively.  These amounts, and thecorresponding amounts recognized by the non-guarantor subsidiaries areeliminated in consolidation.

 

16

----

 

**UNAUDITED CONSOLIDATING CONDENSED BALANCESHEETS**

**JUNE 30, 2004**

**(in thousands)**

 
| ** **                                           | ** ** | **Sabre****Holdings** | ** ** | **Sabre****Inc.** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminating  Entries** | ** ** | **Sabre****Consolidated** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|-----------------------------------|------------|--------------------------|------------|---------------------------|------------|
|                                                 |       |                  |       |              |       |                              |       |                     |       |                      |       |
| **Assets**                                           |       |                  |       |              |       |                              |       |                     |       |                      |       |
| **Current assets**                                   |       |                  |       |              |       |                              |       |                     |       |                      |       |
| Cash and marketable securities                       |       | $                     | —     |              | $          | 998,700                           |       | $                        | 21,784     |                      | $          | — |   | $ | 1,020,484 |   |
| Accounts receivable—trade, net                  |       | —                |       | 280,054           |       | 93,626                            |       | —                   |       | 373,680                   |       |
| Intercompany  accounts receivable (payable)          |       | —                |       | (204,593          | )          | 204,593                           |       | —                   |       | —                    |       |
| Prepaid expenses and other current assets            |       | —                |       | 32,004            |       | 36,654                            |       | —                   |       | 68,658                    |       |
| Deferred income taxes                                |       | —                |       | 17,417            |       | 1,419                             |       | —                   |       | 18,836                    |       |
| Total current assets                                 |       | —                |       | 1,123,582         |       | 358,076                           |       | —                   |       | 1,481,658                 |       |
| Property and equipment, net                          |       | —                |       | 343,804           |       | 43,113                            |       | —                   |       | 386,917                   |       |
| Investments in joint ventures                        |       | —                |       | 3,459             |       | 179,097                           |       | —                   |       | 182,556                   |       |
| Goodwill and intangible assets, net                  |       | —                |       | 9,289             |       | 851,813                           |       | —                   |       | 861,102                   |       |
| Investments in subsidiaries                          |       | 640,543               |       | 1,307,595         |       | —                            |       | (1,948,138               | )          | —                    |       |
| Intercompany  notes                                  |       | 1,446,722             |       | (1,446,722        | )          | —                            |       | —                   |       | —                    |       |
| Other assets, net                                    |       | 7,527                 |       | 64,621            |       | 64,482                            |       | —                   |       | 136,630                   |       |
| **Total assets**                                     |       | $                     | 2,094,792  |              | $          | 1,405,628                         |       | $                        | 1,496,581  |                      | $          | (1,948,138 | ) | $ | 3,048,863 |   |
|                                                 |       |                  |       |              |       |                              |       |                     |       |                      |       |
| **Liabilities and  stockholders’ equity**       |       |                  |       |              |       |                              |       |                     |       |                      |       |
| **Current liabilities**                              |       |                  |       |              |       |                              |       |                     |       |                      |       |
| Accounts payable                                     |       | $                     | 5,043      |              | $          | 145,105                           |       | $                        | 102,746    |                      | $          | — |   | $ | 252,894 |   |
| Accrued compensation and related benefits            |       | —                |       | 46,752            |       | 11,512                            |       | —                   |       | 58,264                    |       |
| Other accrued liabilities                            |       | 7,462                 |       | 207,277           |       | 91,229                            |       | —                   |       | 305,968                   |       |
| Total current liabilities                            |       | 12,505                |       | 399,134           |       | 205,487                           |       | —                   |       | 617,126                   |       |
| Deferred income taxes                                |       | (235                  | )          | 48,901            |       | (41,478                           | )          | —                   |       | 7,188                     |       |
| Pensions and other postretirement benefits           |       | —                |       | 138,183           |       | 887                               |       | —                   |       | 139,070                   |       |
| Other liabilities                                    |       | 1,742                 |       | 21,318            |       | 2,736                             |       | —                   |       | 25,796                    |       |
| Minority interests                                   |       | —                |       | —            |       | 6,278                             |       | —                   |       | 6,278                     |       |
| Capital lease obligation                             |       | —                |       | 157,549           |       | —                            |       | —                   |       | 157,549                   |       |
| Public and other notes payable                       |       | 417,189               |       | —            |       | 15,076                            |       | —                   |       | 432,265                   |       |
| Stockholders’ equity                            |       | 1,663,591             |       | 640,543           |       | 1,307,595                         |       | (1,948,138               | )          | 1,663,591                 |       |
| **Total liabilities  and stockholders’ equity** |       | $                     | 2,094,792  |              | $          | 1,405,628                         |       | $                        | 1,496,581  |                      | $          | (1,948,138 | ) | $ | 3,048,863 |   |

 

17

----

 

**UNAUDITED CONSOLIDATING CONDENSED BALANCESHEETS**

**DECEMBER 31, 2003**

**(in thousands)**

 
| ** **                                           | ** ** | **Sabre****Holdings** | ** ** | **Sabre****Inc.** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminating  Entries** | ** ** | **Sabre****Consolidated** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|-----------------------------------|------------|--------------------------|------------|---------------------------|------------|
|                                                 |       |                  |       |              |       |                              |       |                     |       |                      |       |
| **Assets**                                           |       |                  |       |              |       |                              |       |                     |       |                      |       |
| **Current assets**                                   |       |                  |       |              |       |                              |       |                     |       |                      |       |
| Cash and marketable securities                       |       | $                     | —     |              | $          | 889,638                           |       | $                        | 32,973     |                      | $          | — |   | $ | 922,611 |   |
| Accounts receivable—trade, net                  |       | —                |       | 254,656           |       | 94,332                            |       | —                   |       | 348,988                   |       |
| Intercompany  accounts receivable  (payable)    |       | —                |       | (121,476          | )          | 121,476                           |       | —                   |       | —                    |       |
| Prepaid expenses                                     |       | —                |       | 42,478            |       | 43,997                            |       | —                   |       | 86,475                    |       |
| Deferred income taxes                                |       | —                |       | 8,736             |       | 1,501                             |       | —                   |       | 10,237                    |       |
| Total current assets                                 |       | —                |       | 1,074,032         |       | 294,279                           |       | —                   |       | 1,368,311                 |       |
| Property and equipment, net                          |       | —                |       | 345,930           |       | 38,450                            |       | —                   |       | 384,380                   |       |
| Investments in joint ventures                        |       | —                |       | 3,994             |       | 177,148                           |       | —                   |       | 181,142                   |       |
| Goodwill and intangible assets, net                  |       | —                |       | 10,269            |       | 877,929                           |       | —                   |       | 888,198                   |       |
| Investments in subsidiaries                          |       | 572,696               |       | 1,260,428         |       | —                            |       | (1,833,124               | )          | —                    |       |
| Intercompany  notes                                  |       | 1,529,296             |       | (1,529,296        | )          | —                            |       | —                   |       | —                    |       |
| Other assets, net                                    |       | 17,057                |       | 79,210            |       | 37,855                            |       | —                   |       | 134,122                   |       |
| **Total assets**                                     |       | $                     | 2,119,049  |              | $          | 1,244,567                         |       | $                        | 1,425,661  |                      | $          | (1,833,124 | ) | $ | 2,956,153 |   |
|                                                 |       |                  |       |              |       |                              |       |                     |       |                      |       |
| **Liabilities and  stockholders’ equity**       |       |                  |       |              |       |                              |       |                     |       |                      |       |
| **Current liabilities**                              |       |                  |       |              |       |                              |       |                     |       |                      |       |
| Accounts payable                                     |       | $                     | 2,926      |              | $          | 124,189                           |       | $                        | 75,500     |                      | $          | — |   | $ | 202,615 |   |
| Accrued compensation and related benefits            |       | —                |       | 50,554            |       | 12,003                            |       | —                   |       | 62,557                    |       |
| Other accrued liabilities                            |       | 7,474                 |       | 140,814           |       | 89,935                            |       | —                   |       | 238,223                   |       |
| Total current liabilities                            |       | 10,400                |       | 315,557           |       | 177,438                           |       | —                   |       | 503,395                   |       |
| Deferred income taxes                                |       | (24                   | )          | 41,022            |       | (36,578                           | )          | —                   |       | 4,420                     |       |
| Pensions and other postretirement benefits           |       | —                |       | 132,689           |       | 715                               |       | —                   |       | 133,404                   |       |
| Other liabilities                                    |       | 1,165                 |       | 21,878            |       | 2,119                             |       | —                   |       | 25,162                    |       |
| Minority interests                                   |       | —                |       | —            |       | 6,463                             |       | —                   |       | 6,463                     |       |
| Capital lease obligation                             |       | —                |       | 160,725           |       | —                            |       | —                   |       | 160,725                   |       |
| Public and other notes payable                       |       | 427,400               |       | —            |       | 15,076                            |       | —                   |       | 442,476                   |       |
| Stockholders’ equity                            |       | 1,680,108             |       | 572,696           |       | 1,260,428                         |       | (1,833,124               | )          | 1,680,108                 |       |
| **Total liabilities  and stockholders’ equity** |       | $                     | 2,119,049  |              | $          | 1,244,567                         |       | $                        | 1,425,661  |                      | $          | (1,833,124 | ) | $ | 2,956,153 |   |

 

18

----

 

**UNAUDITED CONSOLIDATING CONDENSED STATEMENTSOF INCOME**

**FOR THE SIX MONTHS ENDED JUNE 30, 2004**

**(in thousands)**

 
| ** **                                    | ** ** | **Sabre****Holdings** | ** ** | **Sabre****Inc.** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminating Entries** | ** ** | **Sabre****Consolidated** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|-------------------|------------|-----------------------------------|------------|-------------------------|------------|---------------------------|------------|
|                                          |       |                  |       |              |       |                              |       |                    |       |                      |       |
| Revenues                                      |       | $                     | —     |              | $          | 766,518                           |       | $                       | 574,156    |                      | $          | (250,018 | ) | $ | 1,090,656 |   |
| Operating expenses                            |       | 2,293                 |       | 659,765           |       | 520,685                           |       | (250,018                | )          | 932,725                   |       |
| Operating income (loss)                       |       | (2,293                | )          | 106,753           |       | 53,471                            |       | —                  |       | 157,931                   |       |
| **Other income  (expense)**                   |       |                  |       |              |       |                              |       |                    |       |                      |       |
| Interest income                               |       | 50,047                |       | 4,883             |       | 5,335                             |       | (53,724                 | )          | 6,541                     |       |
| Interest expense                              |       | (8,316                | )          | (57,648           | )          | (618                              | )          | 53,724                  |       | (12,858                   | )          |
| Income (loss) from subsidiaries               |       | 75,995                |       | 40,311            |       | —                            |       | (116,306                | )          | —                    |       |
| Other, net                                    |       | —                |       | 6,228             |       | 257                               |       | —                  |       | 6,485                     |       |
| Total other income (expense)                  |       | 117,726               |       | (6,226            | )          | 4,974                             |       | (116,306                | )          | 168                       |       |
| **Income before  provision for income taxes** |       | 115,433               |       | 100,527           |       | 58,445                            |       | (116,306                | )          | 158,099                   |       |
| Provision for income taxes                    |       | 13,459                |       | 24,532            |       | 18,134                            |       | —                  |       | 56,125                    |       |
| **Net income**                                |       | $                     | 101,974    |              | $          | 75,995                            |       | $                       | 40,311     |                      | $          | (116,306 | ) | $ | 101,974 |   |

 

19

----

 

**UNAUDITED CONSOLIDATING CONDENSED STATEMENTSOF INCOME**

**FOR THE SIX MONTHS ENDED JUNE 30, 2003**

**(in thousands)**

 
| ** **                                    | ** ** | **Sabre****Holdings** | ** ** | **Sabre****Inc.** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminating  Entries** | ** ** | **Sabre****Consolidated** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|-------------------|------------|-----------------------------------|------------|--------------------------|------------|---------------------------|------------|
|                                          |       |                  |       |              |       |                              |       |                     |       |                      |       |
| Revenues                                      |       | $                     | —     |              | $          | 786,115                           |       | $                        | 527,927    |                      | $          | (263,020 | ) | $ | 1,051,022 |   |
| Operating expenses                            |       | 1,750                 |       | 700,361           |       | 467,645                           |       | (263,020                 | )          | 906,736                   |       |
| Operating income (loss)                       |       | (1,750                | )          | 85,754            |       | 60,282                            |       | —                   |       | 144,286                   |       |
| **Other income  (expense)**                   |       |                  |       |              |       |                              |       |                     |       |                      |       |
| Interest income                               |       | 37,304                |       | 5,593             |       | 9,103                             |       | (43,621                  | )          | 8,379                     |       |
| Interest expense                              |       | (8,654                | )          | (44,145           | )          | (1,594                            | )          | 43,621                   |       | (10,772                   | )          |
| Income (loss) from subsidiaries               |       | 53,975                |       | 45,617            |       | —                            |       | (99,592                  | )          | —                    |       |
| Other, net                                    |       | —                |       | (27,133           | )          | (2,969                            | )          | —                   |       | (30,102                   | )          |
| Total other income (expense)                  |       | 82,625                |       | (20,068           | )          | 4,540                             |       | (99,592                  | )          | (32,495                   | )          |
| **Income before  provision for income taxes** |       | 80,875                |       | 65,686            |       | 64,822                            |       | (99,592                  | )          | 111,791                   |       |
| Provision for income taxes                    |       | 9,180                 |       | 11,711            |       | 19,205                            |       | —                   |       | 40,096                    |       |
| **Net income**                                |       | $                     | 71,695     |              | $          | 53,975                            |       | $                        | 45,617     |                      | $          | (99,592 | ) | $ | 71,695 |   |

 

20

----

 

**UNAUDITED CONSOLIDATING CONDENSED STATEMENTSOF INCOME**

**FOR THE THREE MONTHS ENDED JUNE 30, 2004**

**(in thousands)**

 
| ** **                                    | ** ** | **Sabre****Holdings** | ** ** | **Sabre****Inc.** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminating  Entries** | ** ** | **Sabre****Consolidated** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|-------------------|------------|-----------------------------------|------------|--------------------------|------------|---------------------------|------------|
|                                          |       |                  |       |              |       |                              |       |                     |       |                      |       |
| Revenues                                      |       | $                     | —     |              | $          | 375,303                           |       | $                        | 305,535    |                      | $          | (129,935 | ) | $ | 550,903 |   |
| Operating expenses                            |       | 1,027                 |       | 322,995           |       | 268,373                           |       | (129,935                 | )          | 462,460                   |       |
| Operating income (loss)                       |       | (1,027                | )          | 52,308            |       | 37,162                            |       | —                   |       | 88,443                    |       |
| **Other income  (expense)**                   |       |                  |       |              |       |                              |       |                     |       |                      |       |
| Interest income                               |       | 24,282                |       | 2,370             |       | 2,921                             |       | (26,267                  | )          | 3,306                     |       |
| Interest expense                              |       | (4,166                | )          | (28,214           | )          | (318                              | )          | 26,267                   |       | (6,431                    | )          |
| Income (loss) from subsidiaries               |       | 46,363                |       | 27,076            |       | —                            |       | (73,439                  | )          | —                    |       |
| Other, net                                    |       | —                |       | 6,578             |       | (521                              | )          | —                   |       | 6,057                     |       |
| Total other income (expense)                  |       | 66,479                |       | 7,810             |       | 2,082                             |       | (73,439                  | )          | 2,932                     |       |
| **Income before  provision for income taxes** |       | 65,452                |       | 60,118            |       | 39,244                            |       | (73,439                  | )          | 91,375                    |       |
| Provision for income taxes                    |       | 6,515                 |       | 13,755            |       | 12,168                            |       | —                   |       | 32,438                    |       |
| **Net income**                                |       | $                     | 58,937     |              | $          | 46,363                            |       | $                        | 27,076     |                      | $          | (73,439 | ) | $ | 58,937 |   |

 

21

----

 

**UNAUDITED CONSOLIDATING CONDENSED STATEMENTSOF INCOME**

**FOR THE THREE MONTHS ENDED JUNE 30, 2003**

**(in thousands)**

 
| ** **                                           | ** ** | **Sabre****Holdings** | ** ** | **Sabre****Inc.** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminating  Entries** | ** ** | **Sabre****Consolidated** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|-----------------------------------|------------|--------------------------|------------|---------------------------|------------|
|                                                 |       |                  |       |              |       |                              |       |                     |       |                      |       |
| Revenues                                             |       | $                     | —     |              | $          | 365,948                           |       | $                        | 277,007    |                      | $          | (135,766 | ) | $ | 507,189 |   |
| Operating expenses                                   |       | 1,104                 |       | 359,565           |       | 241,894                           |       | (135,766                 | )          | 466,797                   |       |
| Operating income (loss)                              |       | (1,104                | )          | 6,383             |       | 35,113                            |       | —                   |       | 40,392                    |       |
| **Other income  (expense)**                          |       |                  |       |              |       |                              |       |                     |       |                      |       |
| Interest income                                      |       | 18,554                |       | 2,336             |       | 4,504                             |       | (21,421                  | )          | 3,973                     |       |
| Interest expense                                     |       | (4,272                | )          | (21,696           | )          | (753                              | )          | 21,421                   |       | (5,300                    | )          |
| Income (loss) from subsidiaries                      |       | (1,865                | )          | 25,779            |       | —                            |       | (23,914                  | )          | —                    |       |
| Other, net                                           |       | —                |       | (27,798           | )          | (2,111                            | )          | —                   |       | (29,909                   | )          |
| Total other income (expense)                         |       | 12,417                |       | (21,379           | )          | 1,640                             |       | (23,914                  | )          | (31,236                   | )          |
| **Income (loss)  before provision for income taxes** |       | 11,313                |       | (14,996           | )          | 36,753                            |       | (23,914                  | )          | 9,156                     |       |
| Provision for income taxes                           |       | 4,497                 |       | (13,131           | )          | 10,974                            |       | —                   |       | 2,340                     |       |
| **Net income (loss)**                                |       | $                     | 6,816      |              | $          | (1,865                            | )          | $                        | 25,779     |                      | $          | (23,914 | ) | $ | 6,816 |   |

 

22

----

 

**UNAUDITED CONSOLIDATING CONDENSED STATEMENTSOF CASH FLOWS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2004**

**(in thousands)**

 
| ** **                                                                       | ** ** | **Sabre****Holdings** | ** ** | **Sabre****Inc.** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminating  Entries** | ** ** | **Sabre****Consolidated** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|-----------------------------------|------------|--------------------------|------------|---------------------------|------------|
|                                                                             |       |                  |       |              |       |                              |       |                     |       |                      |       |
| **Operating  Activities**                                                        |       |                  |       |              |       |                              |       |                     |       |                      |       |
| Net earnings (loss)                                                              |       | $                     | 101,974    |              | $          | 75,995                            |       | $                        | 40,311     |                      | $          | (116,306 | ) | $ | 101,974 |   |
| Adjustments to reconcile net earnings to  cash provided by operating activities: |       |                  |       |              |       |                              |       |                     |       |                      |       |
| Depreciation and amortization                                                    |       | —                |       | 28,685            |       | 35,730                            |       | —                   |       | 64,415                    |       |
| Stock based compensation for employees                                           |       | —                |       | 2,969             |       | 3,464                             |       | —                   |       | 6,433                     |       |
| Deferred income taxes                                                            |       | —                |       | (802              | )          | (5,029                            | )          | —                   |       | (5,831                    | )          |
| Tax benefit from exercise of stock options                                       |       | 910                   |       | —            |       | —                            |       | —                   |       | 910                       |       |
| (Gain) loss on disposal of equipment                                             |       | —                |       | (923              | )          | 20                                |       | —                   |       | (903                      | )          |
| (Income) loss from subsidiaries                                                  |       | (75,995               | )          | (40,311           | )          | —                            |       | 116,306                  |       | —                    |       |
| Loss on impaired intangible asset                                                |       | —                |       | —            |       | 3,198                             |       | —                   |       | 3,198                     |       |
| Equity loss in joint ventures                                                    |       | —                |       | —            |       | 7,621                             |       | —                   |       | 7,621                     |       |
| Other                                                                            |       | (837                  | )          | 2,407             |       | (5,345                            | )          | —                   |       | (3,775                    | )          |
| Changes in operating assets and liabilities                                      |       | (26,052               | )          | 190,222           |       | (51,861                           | )          | —                   |       | 112,309                   |       |
| Cash provided by operating activities                                            |       | —                |       | 258,242           |       | 28,109                            |       | —                   |       | 286,351                   |       |
| **Investing  Activities**                                                        |       |                  |       |              |       |                              |       |                     |       |                      |       |
| Additions to property and equipment                                              |       | —                |       | (25,752           | )          | (10,156                           | )          | —                   |       | (35,908                   | )          |
| Purchases of marketable securities                                               |       | —                |       | (4,139,824        | )          | 1,662                             |       | —                   |       | (4,138,162                | )          |
| Sales of marketable securities                                                   |       | —                |       | 4,030,234         |       | —                            |       | —                   |       | 4,030,234                 |       |
| Investments in and loans to joint ventures                                       |       | —                |       | —            |       | (32,934                           | )          | —                   |       | (32,934                   | )          |
| Other investing activities                                                       |       | —                |       | —            |       | (5,000                            | )          | —                   |       | (5,000                    | )          |
| Cash used for investing activities                                               |       | —                |       | (135,342          | )          | (46,428                           | )          | —                   |       | (181,770                  | )          |
| **Financing  Activities**                                                        |       |                  |       |              |       |                              |       |                     |       |                      |       |
| Proceeds from issuance of common stock                                           |       | 10,802                |       | —            |       | —                            |       | —                   |       | 10,802                    |       |
| Dividends paid                                                                   |       | (20,906               | )          | —            |       | —                            |       | —                   |       | (20,906                   | )          |
| Contributions from affiliates, net (1)                                           |       | 112,029               |       | —            |       | 9,679                             |       | (121,708                 | )          | —                    |       |
| Distributions to affiliates, net (1)                                             |       | —                |       | (121,708          | )          | —                            |       | 121,708                  |       | —                    |       |
| Purchases of treasury stock                                                      |       | (101,925              | )          | —            |       | —                            |       | —                   |       | (101,925                  | )          |
| Other financing activities, net                                                  |       | —                |       | (824              | )          | (888                              | )          | —                   |       | (1,712                    | )          |
| Cash provided by (used for) financing  activities                                |       | —                |       | (122,532          | )          | 8,791                             |       | —                   |       | (113,741                  | )          |
| Increase (decrease) in cash                                                      |       | —                |       | 368               |       | (9,528                            | )          | —                   |       | (9,160                    | )          |
| Cash at beginning of period                                                      |       | —                |       | 10,969            |       | 29,893                            |       | —                   |       | 40,862                    |       |
| Cash at end of period                                                            |       | $                     | —     |              | $          | 11,337                            |       | $                        | 20,365     |                      | $          | — |   | $ | 31,702 |   |

 

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(1)  Affiliate, for purposes of this footnote, refers to thevarious direct and indirect ownership relationships that exist within the Sabre Inc. and Non-Guarantor categories.

 

23

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**UNAUDITED CONSOLIDATING CONDENSED STATEMENTSOF CASH FLOWS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2003**

**(in thousands)**

 
| ** **                                                                       | ** ** | **Sabre****Holdings** | ** ** | **Sabre****Inc.** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminating  Entries** | ** ** | **Sabre****Consolidated** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|-----------------------------------|------------|--------------------------|------------|---------------------------|------------|
|                                                                             |       |                  |       |              |       |                              |       |                     |       |                      |       |
| **Operating  Activities**                                                        |       |                  |       |              |       |                              |       |                     |       |                      |       |
| Net earnings (loss)                                                              |       | $                     | 71,695     |              | $          | 53,975                            |       | $                        | 45,617     |                      | $          | (99,592 | ) | $ | 71,695 |   |
| Adjustments to reconcile net earnings to  cash provided by operating activities: |       |                  |       |              |       |                              |       |                     |       |                      |       |
| Depreciation and amortization                                                    |       | —                |       | 25,660            |       | 36,076                            |       | —                   |       | 61,736                    |       |
| Stock based compensation for employees                                           |       | —                |       | 2,608             |       | 6,651                             |       | —                   |       | 9,259                     |       |
| Deferred income taxes                                                            |       | —                |       | (5,292            | )          | (657                              | )          | —                   |       | (5,949                    | )          |
| Tax benefit from exercise of stock options                                       |       | 265                   |       | —            |       | —                            |       | —                   |       | 265                       |       |
| Loss on refinancing of building                                                  |       | —                |       | 27,947            |       | —                            |       | —                   |       | 27,947                    |       |
| (Income) loss from subsidiaries                                                  |       | (53,975               | )          | (45,617           | )          | —                            |       | 99,592                   |       | —                    |       |
| Equity loss in joint ventures                                                    |       | —                |       | —            |       | 3,849                             |       | —                   |       | 3,849                     |       |
| Other                                                                            |       | (837                  | )          | 2,150             |       | (133                              | )          | —                   |       | 1,180                     |       |
| Changes in operating assets and liabilities                                      |       | (17,148               | )          | (146,634          | )          | 143,740                           |       | —                   |       | (20,042                   | )          |
| Cash provided by (used for) operating  activities                                |       | —                |       | (85,203           | )          | 235,143                           |       | —                   |       | 149,940                   |       |
| **Investing  Activities**                                                        |       |                  |       |              |       |                              |       |                     |       |                      |       |
| Additions to property and equipment                                              |       | —                |       | (27,718           | )          | (11,871                           | )          | —                   |       | (39,589                   | )          |
| Business combinations, net of cash acquired                                      |       | —                |       | (10,161           | )          | (1,707                            | )          | —                   |       | (11,868                   | )          |
| Purchases of marketable securities                                               |       | —                |       | (4,458,582        | )          | (1,572                            | )          | —                   |       | (4,460,154                | )          |
| Sales of marketable securities                                                   |       | —                |       | 4,414,459         |       | 143                               |       | —                   |       | 4,414,602                 |       |
| Investments in joint ventures                                                    |       | —                |       | —            |       | (10,068                           | )          | —                   |       | (10,068                   | )          |
| Other investing activities, net                                                  |       | —                |       | —            |       | 4,196                             |       | —                   |       | 4,196                     |       |
| Cash used for investing activities                                               |       | —                |       | (82,002           | )          | (20,879                           | )          | —                   |       | (102,881                  | )          |
| **Financing  Activities**                                                        |       |                  |       |              |       |                              |       |                     |       |                      |       |
| Proceeds from issuance of common stock                                           |       | 706                   |       | —            |       | —                            |       | —                   |       | 706                       |       |
| Dividends paid                                                                   |       | (10,029               | )          | —            |       | —                            |       | —                   |       | (10,029                   | )          |
| Contributions from affiliates (1)                                                |       | 9,323                 |       | 206,783           |       | —                            |       | (216,106                 | )          | —                    |       |
| Distributions to affiliates (1)                                                  |       | —                |       | (9,323            | )          | (206,783                          | )          | 216,106                  |       | —                    |       |
| Payment to refinance building                                                    |       | —                |       | (27,947           | )          | —                            |       | —                   |       | (27,947                   | )          |
| Other financing activities, net                                                  |       | —                |       | —            |       | (2,030                            | )          | —                   |       | (2,030                    | )          |
| Cash provided by (used for) financing  activities                                |       | —                |       | 169,513           |       | (208,813                          | )          | —                   |       | (39,300                   | )          |
| Increase in cash                                                                 |       | —                |       | 2,308             |       | 5,451                             |       | —                   |       | 7,759                     |       |
| Cash at beginning of period                                                      |       | —                |       | 9,219             |       | 11,957                            |       | —                   |       | 21,176                    |       |
| Cash at end of period                                                            |       | $                     | —     |              | $          | 11,527                            |       | $                        | 17,408     |                      | $          | — |   | $ | 28,935 |   |

 

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(1)          Affiliate,for purposes of this footnote, refers to the various direct and indirectownership relationships that exist within the SabreInc. and Non-Guarantor categories.

 

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# **Item 2**.           Management’sDiscussion and Analysis of Financial Condition and Results of Operations

# ** **

**SABRE HOLDINGS CORPORATION**

**RESULTS OF OPERATIONS**

 

The following discussion and analysiscontains forward-looking statements about our plans and expectations of whatmay happen in the future. Forward-looking statements are based on a number of assumptions andestimates that are inherently subject to significant risks and uncertainties,and our results could differ materially from the results anticipated by ourforward-looking statements as a result of many known or unknown factors,including, but not limited to, those factors discussed below in this Item underthe sub-heading “Risk Factors.”

 

**Overview**

 

We are a world leader in travel commerce, marketing travel products andproviding distribution and technology solutions for the travel industry.  We operate in multiple travel distributionchannels: the travel agency channel, the consumer-direct channel and thecorporate or business-direct channel. Through our *Sabre**®* global distribution system (the “*Sabre* system” or “*Sabre* GDS”)subscribers can access information about, and can book reservations for, amongother things, airline trips, hotel stays, car rentals, cruises and tourpackages. Our *Sabre**Travel NetworkTM* business operates the *Sabre* GDS andmarkets and distributes travel-related products and services through the travelagency and corporate channels. We engage in consumer-direct and business-directtravel marketing and distribution through our *Travelocity**Ò* business. In addition, our *Sabre**Airline SolutionsTM* business is a leadingprovider of technology and services, including development and consultingservices, to airlines and other travel providers.

 

In the six months ended June 30, 2004, approximately 69.6% of ourrevenue was generated from Sabre Travel Network,20.2% from Travelocity and 10.2% from Sabre AirlineSolutions based on segment results that include intersegmentrevenues.  Compared to the year-agoperiod, revenue growth for the six months ended June 30, 2004 was 4.1% forSabre Travel Network after adjusting for thesubscriber settlement in the first quarter of 2003 (see Note 3 to theConsolidated Financial Statements), 28.1% for Travelocity and 5.3% for Sabre Airline Solutions.

 

***Business.**** *  Weoperate our business through the following business segments:

 

**Sabre****Travel Network:** Our SabreTravel Network segment markets and distributes travel-related products andservices through the travel agency and corporate channels. Travel agencies,both online and brick and mortar, subscribe to our services. Our servicesprovide travel agency subscribers information about and the ability to purchasetravel-related products and services from airlines, hotels, car rentalcompanies, cruise lines and others. We also provide travel agency officeautomation tools and enable travel agencies to provide services via theInternet.

 

**Travelocity:**OurTravelocity segment markets and distributes travel-related products andservices directly to individuals, including leisure travelers and businesstravelers, through Travelocity websites and contact centers and websites andcontact centers owned by its supplier and distribution partners. Travelocitycustomers can access offerings, pricing and information about airlines, hotels,car rental companies, cruise lines, vacation and last-minute travel packagesand other travel-related services. In 2003, Travelocity launched *Travelocity BusinessTM*, which combines theintegrated online corporate travel technology and full-service offeringproducts of *GetThere*with the expertise of Travelocity.

 

**Sabre****Airline Solutions:**Our SabreAirline Solutions segment is a global leader in providing airline softwaresystems and consulting services.   Sabre Airline Solutions hosts airline reservation systemsfor more than 90 airlines and offers additional passenger management productssuch as inventory, shopping and pricing, ticketing and online booking.  Sabre AirlineSolutions’ comprehensive decision support software portfolio providesintegrated technology and services to airlines that help streamline andautomate their operations.  Sabre Airline Solutions also provides consulting servicesto optimize airline and airport operations.

 

**Business Trends**

 

Potential effects of the following trends, events and uncertainties arediscussed in *Risk Factors*.

 

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*Increased Travel Booking Volumes Through ourChannels. *Duringthe three and six months ended June 30, 2004, we experienced increasedtravel bookings through all of our channels. We attribute this year-over-year increase in bookings to improved demandfor travel services.  We believe that asignificant portion of this improvement results from travel demand having beendepressed in the first half of 2003 because of traveler concerns about the warin Iraq and Severe Acute Respiratory Syndrome (“SARS”).  We interpret increased bookings as anencouraging indicator, but we do not yet know if this improvement in traveldemand represents a sustainable trend. The table below details the year-over-year percentage increases in ourbooking volumes for the three and six months ended June 30, 2004,respectively.

 
| ** **                   | ** ** | **Three Months Ended  June 30, 2004** | ** ** | **Six Months Ended  June 30, 2004** | ** ** |
|------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| **Year-over-year  Increase** | ** ** | **Air  Bookings**                          | ** ** | **Total  Bookings**                      | ** ** | **Air  Bookings** | ** ** | **Total  Bookings** | ** ** |
|                         |       |                                       |       |                                     |       |   |   |   |   |
| United States                |       |  5.4%                                 |       |  6.2%                               |       |  7.5% |   |  8.0% |   |
| Global                       |       | 13.9%                                      |       | 13.8%                                    |       | 12.7% |   | 12.9% |   |

 

*Supplier Efforts to Control TravelDistribution*. Airlines have been working aggressively for several years to move travelbookings into alternative distribution channels, including websites that theycontrol and online travel agencies that book directly with those carriers. See “*Risk Factors – Some TravelSuppliers are Seeking Alternative Distribution Models....*”   Their collective efforts have contributed towhat we call “channel shift,” which is the shift of GDS bookings awayfrom independent distributors (such as online and conventional travel agenciesusing our *Sabre* GDS) towards supplier-directbooking channels (such as supplier-controlled websites and callcenters).  Over the last twelve months, we have experienced aslowing in the rate of channel shift, which we attribute partly to our NewPricing Options for Suppliers, discussed below.   During the second quarter of 2004, the rateof channel shift continued to slow. Although this slowing trend is an encouraging indicator, it isnot yet clear if it signals a long-term slowing in channel shift.

 

*New Pricing Options for Suppliers.*  In part to slow channel shift, we haveintroduced new booking fee pricing options to airlines that participate in the *Sabre* GDS.  Through the *DirectConnect**ÒAvailability* (“DCA”) 3-Year Pricing Option, for example, participatingairlines commit to the highest level of participation in the *Sabre*system for three years.  Participating airlines provide all *Sabre* GDS users with broad access toschedules, seat availability and published fares, including Web fares and otherpromotional fares but excluding certain fares such as “opaque” fares (where theairline’s identity is not disclosed until after the sale) and privatediscounts.   Participating airlines alsofurnish generally the same customer perquisites and amenities to passengersbooked through the *Sabre* GDS asthose afforded through other GDS’s and websites.  Airlines selecting this option under their *Sabre* GDS participating carrier agreementsreceive a discount from our standard DCA booking fee rates which is fixed forthe term of the agreement.  During thesecond quarter of 2004, we completed two agreements that are similar to our DCA3-Year Pricing Option agreements, but, among other differences, offer theparticipating carriers a deeper discount for bookings created in their homecountries when compared to the DCA 3-Year Pricing Option, which offersparticipating airlines smaller discounts across multiple regions.  One of these agreements, with Air Canada,provides improved booking capability only to those *Sabre* GDS users that accept lowered customer incentiverates.  As of June 30, 2004,approximately 50% of our global direct air bookings are subject to these typesof new pricing options.

 

*Competition and Consolidation*.  The marketplace for travel products isintensely competitive.  We routinely facenew competitors and new methods of travel marketing.  New travel distribution technologies such asonline search engines or supplier-direct booking tools may facilitate what werefer to as “GDS Bypass,” which is a shift of bookings away from globaldistribution systems such our *Sabre*GDS. We also face consolidation among suppliers, travel marketing anddistribution competitors, and online and conventional travel agencies, whichmay offer them financial and other advantages of scale.  See “*RiskFactors — We face competition...”*and*“Risk Factors – Consolidation....”*

 

*Investments in Travelocity. *A primary focus ofmanagement in 2003 and the first half of 2004 was on strategic investments inTravelocity, including investments that we anticipate will have a short-termdilutive effect on our financial results. For example, during the second quarter of 2003, we launched a technologyplatform (*Travelocity TotalTrip*)to support a move into higher margin products and create a brand platformduring a period of intense

 

26

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growth in our direct customer relationships.  In addition, during the first quarter of2004, we implemented a complete rebranding of Travelocity’s website design,offering consumers greater ease-of-use.

 

Another area of focus has been in investments in products and segmentsthat we believe offer rapid growth opportunities, specifically in thebusiness-direct segment and online distribution in Europe.  In 2003, in the business-direct segment,Travelocity launched *Travelocity BusinessTM*,which integrates the corporate travel technology and full-service offeringproducts of GetThere with the online expertise of Travelocity.  On July 14, 2004, *Travelocity Business* launched enhancedtechnologies in its service center that integrate and automate the corporatetravel reservation process from beginning to end.  In Europe, Travelocity plans to leverage itsU.S. product platform, beginning with its merchant model hotel business, duringthe third quarter of 2004.  In addition,during the second quarter of 2004, our Travelocity Europe joint ventureacquired Travelchannel Ltd., a leading German online travel website.  Travelocity intends to invest moreeffectively in the products, technology and marketing necessary to grow in thiskey region.

 

*Merchant Model*.  Like other independent travel distributors,we are attempting to reduce our reliance on supplier-paid commissions andbooking or transaction fees by increasingly promoting a merchant model oftravel distribution.  Under the merchantmodel, we obtain from travel suppliers access to their products, services andother content offerings at a pre-determined price.  Merchant model travel offerings can includeair travel, hotel stays, vacation packages and dynamically packaged combinations(via *Travelocity**TotalTrip*).  We sell those offerings to travelers at aprice that we control, and require pre-payment by the traveler at the time ofbooking. Merchant content is beneficial for travelers because they can oftenpurchase travel at a price lower than regularly published offerings. For us,merchant model sales generally deliver higher revenue per transaction thancomparable sales under an agency commission booking fee model.  We generally do not have any purchaseobligations for unsold offerings and we recognize as revenue the amount paid bythe traveler minus our payment to the travel supplier.

 

Our business strategy depends on merchant model sales as a significantsource of future revenue growth and increased margins.   Our merchant model hotel strategy isparticularly dependent upon our ability to obtain adequate access to hotelrooms to offer.  Our strategy calls forus to increase or maintain the number of hotel rooms we can offer under our merchantmodel hotel program, based upon arrangements we make directly with individualhotel properties and hotel chains. Demand for supplier offerings may increaseas a result of increased travel and competition from merchant model offeringsby our competitors.  If demand increasesfor suppliers’ products, services and other content offerings, suppliers maylimit our access to their offerings or may increase their price of thoseofferings.  These types of events couldexert downward pressure on the margins in our merchant model offering, althoughthe risk may be mitigated by our longer term merchant-content agreements.  See “*RiskFactors – Our business plans call for the significant growth of our merchantmodel business . . .”*

 

*Cost Reductions and Expense Savings. *In the fourth quarter of 2003, we beganimplementing plans to reduce costs in an effort to enhance our competitiveposition, reduce our operating expense and better align expenses with revenuetargets.  Through these initiatives, weexpect to generate savings of approximately $80 million in 2004.  As part of these cost leadership efforts, wereduced our workforce in the fourth quarter of 2003.  The full-year advantages of these reductionson our financial results will be realized throughout 2004.  In addition, we also revised the terms of our agreement with America Online (“AOL”)under which Travelocity is the exclusive reservations provider for AOL’sInternet properties and extended the agreement through March 2006.  Although operating earnings benefits fromthis agreement will depend upon the volume of transactions, we anticipateapproximately $10 million to $15 million in such benefits during2004.

 

Further, as part of our cost leadership strategy we are, as a standardpractice, evaluating efficiency opportunities across the Company to ensure thatwe manage our operational costs as optimally as possible.  To keep pace with our key competitors, whoare already outsourcing much of their customer fulfillment and otheroperations, some of these opportunities may involve globally-sourcing some ofour operations (either by contracting with companies that work for us or byexpanding our own operations abroad).  Anexample of this development is our multi-year master services agreement withWNS North America, Inc. (“WNS”), under which throughout 2004 we will outsourceto WNS an increasing portion of our Travelocity contact center operations,primarily front-line customer service calls and back-officefulfillment.   By the end of thefirst quarter of 2005, WNS should be handling Travelocity’s front-line customerservice calls and emails, as well as some mid-office and back-office functions.WNS will transition these day-to-day operations of the customer servicefunctions to its contact centers. Travelocity employees will continue to handle sales calls, as well asadvanced customer service issues and quality control.  Although savings from this agreement willdepend upon the volume of transactions, we anticipate approximately $10 millionin such savings during 2004.  We also expect these savings to increaseover the term of the agreement as transaction volumes increase.

 

27

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*Changing our Sabre Travel Network BusinessModel*.  Althoughthe majority of our travel distribution revenues are from booking fees paid bytravel suppliers, we recently entered into agreements that do not follow thistraditional business model, and we are evaluating the desirability of more ofthese agreements.  For example, werecently entered into an agreement in which we charge a transaction fee to thetravel agency (rather than a booking fee to the travel supplier).  In addition, in October of 2003, welaunched our *Jurni Network*Ôconsortium, a unique conventional travel agency consortium that combines apreferred sales network and consolidated purchasing power withtechnology-driven marketing tools to sell preferred offerings.  In the second quarter of 2004, we rolled outseveral new features for our Jurni Network offering, including new packagingcapabilities from *Travelocity TotalTrip*as well as a point-of-sales tool, which incorporates inventory from our *Site59.com*â last minute travel offerings.  Duringthe first quarter of 2004, we also introduced *AssuredVantageTM*, a new contract program for small- to medium-sized travelagencies that offers more agency-friendly contract terms, reducing the risk oftraditional booking volume shortfalls, and a new structured incentiveschedule that drives a slowing of the incentive growth rate.

 

With the recent deregulation of the GDS industry, (described belowunder *Computer Reservation System IndustryRegulation*) we have taken actions to both strengthen our core GDSbusiness with enhanced content and capabilities and to take advantage of theopportunities brought about by deregulation. Because we are no longer required to offer the same products, terms andconditions to all airlines, we will have greater flexibility to implement newservices and terms on a carrier-by-carrier basis.  For example, we now have the ability tointroduce display preferencing in the United States, although we have noimmediate plans to do so broadly. Nonetheless, we have already implemented preferential display featureson the desktop tool for Jurni Network.

 

*Computer Reservation System IndustryRegulation.* Aspects of our travel marketing and distribution businesses are subjectto the Computer Reservation Systems (“CRS”) regulations in the European Union,Canada and Peru.  These regulationsgenerally govern GDS services for airlines and travel agencies but not fornon-airline suppliers (except rail suppliers in limited circumstances).  Among the topics addressed in at leastcertain of the current regulations are:

 

•                  no preferencingCRS displays based upon airline identity,

•                  equal treatmentof airlines by the CRSs,

•                  equal participationby airlines that own a CRS in other systems, and

•                  limits on travelagency contract terms.

 

 All CRS regulations promulgatedby the US Department of Transportation that were applicable in the UnitedStates expired on July 31, 2004.  Webelieve that this deregulation in the United States will enhance ouropportunities to creatively market airline services and freely negotiate withtravel agencies.

 

Transport Canada issued final rules on May 7, 2004, eliminating all CRSregulations in Canada except rules prohibiting screen preference anddiscrimination in providing the right to participate in service enhancements.

 

In addition, regulators in the European Commission are reviewing theirCRS regulations for possible changes, which may include some level ofderegulation.  It is not clear whether orwhen any amendments will take effect nor what form they may take.

 

The potential effects of these trends, events and uncertainties arediscussed below under *Risk Factors*.

 

**Components of Revenues and Expenses**

 

*Revenues. *Sabre Travel Network primarily generatesrevenues from booking fees charged to airlines and non-air travel suppliersthat process their bookings through the *Sabre*system.  Sabre Travel Network also earnsrevenue through equipment service charges paid by subscribers, the sale ofother products and services (including *GetThere*offerings, merchant hotel sales in the *SabreExclusives* program and *JurniNetwork*) to travel suppliers, subscribers and other customers, aswell as earnings derived from interests in joint ventures and otherinvestments.  Sabre Travel Networkalso earns intersegment revenues from data processing fees paid by Travelocityfor bookings made through the *Sabre*GDS.

 

Travelocity primarily generates revenues fromcommissions or transaction fees from travel suppliers for the purchase oftravel products and services pursuant to reservations made through our system.Travelocity also generates merchant revenue on a net basis, defined as theamount paid by the customer for products or services, minus our payment to thetravel supplier.  Additional Travelocityrevenues include fees charged to customers and advertising revenues.  Travelocity revenues also include as acontra-revenue item, losses derived from interests in joint ventures.

 

28

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Travelocity derivesintersegment revenues from Sabre Travel Network, consisting mainly ofincentives and marketing fees for Travelocity bookings made through the *Sabre* GDS, and fees paid by Sabre Travel Networkand Sabre Airline Solutions for corporate and airline trips booked throughTravelocity’s online booking technology.

 

Sabre Airline Solutions revenues aregenerated from the sale of airline reservations hosting and other passengermanagement services, decision-support software and technology, and airlineconsulting services.

 

*Cost ofRevenues. *Sabre Travel Network cost of revenuesconsists primarily of customer incentives paid to subscribers, data processingcharges resulting from the operation of the *Sabre*system, and salaries and other operating expenses.  Sabre Travel Network also incursintersegment expenses paid to Travelocity for incentives and marketing fees forTravelocity bookings made through the *Sabre*GDS, as well as fees for corporate trips booked through Travelocity’s onlinebooking technology.

 

Travelocity cost of revenues consistprimarily of customer service costs, technology costs, salaries, benefits andother employee expenses, data processing fees paid to Sabre Travel Network,credit card fees related to our merchant model and depreciation andamortization charges.

 

Sabre Airline Solutions cost of revenues arecomprised of labor cost incurred in the development and delivery of softwareand consulting services, data processing charges for hosted applications, anddepreciation and amortization.

 

*Selling, General andAdministrative Expenses. * SabreTravel Network selling, general and administrative and other operating expensesconsist primarily of salaries, benefits and employee related expenses for stafffunctions required to support the business. Travelocity selling, general and administrative and other operatingexpenses consist primarily of advertising and customer acquisition expenses,payments made to our distribution partners and salaries, benefits and employeerelated expenses for staff functions required to support the business.  Sabre Airline Solutions selling, general andadministrative expenses consist primarily of the costs of the salesorganization and the staff functions required to support the business.

 

29

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**FinancialResults**

 

Thefollowing table presents operating results for the three and six months endedJune 30, 2004 and 2003 (in thousands of dollars).  The segment revenues and cost of revenues areshown including intersegment activity. We have included the elimination of intersegment activity below in orderto agree to the results of operations presented in the consolidated financialstatements:

 
| ** **                             | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                             | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Segment Revenues:                      |       |                                  |       |                                |       |   |   |   |   |
| Sabre Travel Network                   |       | $                                     | 407,388    |                                | $          | 387,764 |   | $ | 818,223 |   | $ | 822,442 |   |
| Travelocity                            |       | 125,542                               |       | 97,960                              |       | 236,997 |   | 184,588 |   |
| Sabre Airline Solutions                |       | 60,511                                |       | 56,596                              |       | 120,247 |   | 114,181 |   |
| Elimination of intersegment revenues   |       | (42,538                               | )          | (35,131                             | )          | (84,811 | ) | (70,189 | ) |
| Total                                  |       | $                                     | 550,903    |                                | $          | 507,189 |   | $ | 1,090,656 |   | $ | 1,051,022 |   |
|                                   |       |                                  |       |                                |       |   |   |   |   |
| Cost of Revenues:                      |       |                                  |       |                                |       |   |   |   |   |
| Sabre Travel Network                   |       | $                                     | 257,132    |                                | $          | 259,618 |   | $ | 511,762 |   | $ | 514,438 |   |
| Travelocity                            |       | 49,131                                |       | 50,851                              |       | 101,557 |   | 100,709 |   |
| Sabre Airline Solutions                |       | 44,049                                |       | 43,081                              |       | 91,291 |   | 86,816 |   |
| Elimination of intersegment expenses   |       | (42,538                               | )          | (35,131                             | )          | (84,811 | ) | (70,189 | ) |
| Other corporate expenses               |       | 3                                     |       | (116                                | )          | (507 | ) | (1,866 | ) |
| Total                                  |       | $                                     | 307,777    |                                | $          | 318,303 |   | $ | 619,292 |   | $ | 629,908 |   |
|                                   |       |                                  |       |                                |       |   |   |   |   |
| Gross Profit:                          |       |                                  |       |                                |       |   |   |   |   |
| Sabre Travel Network                   |       | $                                     | 150,256    |                                | $          | 128,146 |   | $ | 306,461 |   | $ | 308,004 |   |
| Travelocity                            |       | 76,411                                |       | 47,109                              |       | 135,440 |   | 83,879 |   |
| Sabre Airline Solutions                |       | 16,462                                |       | 13,515                              |       | 28,956 |   | 27,365 |   |
| Other corporate expenses               |       | (3                                    | )          | 116                                 |       | 507 |   | 1,866 |   |
| Total                                  |       | $                                     | 243,126    |                                | $          | 188,886 |   | $ | 471,364 |   | $ | 421,114 |   |
|                                   |       |                                  |       |                                |       |   |   |   |   |
| Selling, General & Administrative: |       |                                  |       |                                |       |   |   |   |   |
| Sabre Travel Network                   |       | $                                     | 60,948     |                                | $          | 67,334 |   | $ | 132,667 |   | $ | 126,006 |   |
| Travelocity                            |       | 68,086                                |       | 60,950                              |       | 130,517 |   | 110,251 |   |
| Sabre Airline Solutions                |       | 10,380                                |       | 8,195                               |       | 23,005 |   | 15,936 |   |
| Other corporate expenses               |       | 41                                    |       | (79                                 | )          | (105 | ) | 54 |   |
| Total                                  |       | $                                     | 139,455    |                                | $          | 136,400 |   | $ | 286,084 |   | $ | 252,247 |   |
|                                   |       |                                  |       |                                |       |   |   |   |   |
| Amortization of Intangible Assets:     |       |                                  |       |                                |       |   |   |   |   |
| Sabre Travel Network                   |       | $                                     | 7,349      |                                | $          | 3,144 |   | $ | 11,517 |   | $ | 6,240 |   |
| Travelocity                            |       | 7,390                                 |       | 8,461                               |       | 14,852 |   | 17,362 |   |
| Sabre Airline Solutions                |       | 489                                   |       | 489                                 |       | 980 |   | 979 |   |
| Total                                  |       | $                                     | 15,228     |                                | $          | 12,094 |   | $ | 27,349 |   | $ | 24,581 |   |
|                                   |       |                                  |       |                                |       |   |   |   |   |
| Operating Income (Loss)                |       |                                  |       |                                |       |   |   |   |   |
| Sabre Travel Network                   |       | $                                     | 81,959     |                                | $          | 57,668 |   | $ | 162,277 |   | $ | 175,758 |   |
| Travelocity                            |       | 935                                   |       | (22,302                             | )          | (9,929 | ) | (43,734 | ) |
| Sabre Airline Solutions                |       | 5,593                                 |       | 4,831                               |       | 4,971 |   | 10,450 |   |
| Other corporate                        |       | (44                                   | )          | 195                                 |       | 612 |   | 1,812 |   |
| Total                                  |       | $                                     | 88,443     |                                | $          | 40,392 |   | $ | 157,931 |   | $ | 144,286 |   |

 

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***Three Months EndedJune 30, 2004 and 2003***

 

Total revenues for the three months ended June 30, 2004 increasedapproximately $44 million or 8.7%, compared to the three months endedJune 30, 2003, from $507 million to $551 million.  Cost of revenues for the three months endedJune 30, 2004 decreased approximately $10 million or 3.2% compared to thethree months ended June 30, 2003, from $318 million to $308 million.

 

Management’s discussion and analysis of revenues and cost of revenuesby business segment are based upon segment results including intersegmentrevenues and cost of revenues of approximately $43 million and $35 million forthe three months ended June 30, 2004 and 2003, respectively.  We account for significant intersegmenttransactions as if the transactions were to third parties, that is, atestimated current market prices.  Themajority of the intersegment revenues and cost of revenues are betweenTravelocity and Sabre Travel Network, consisting mainly of incentives andmarketing fees paid to Travelocity for Travelocity bookings made through the *Sabre* GDS, data processing fees paid byTravelocity to Sabre Travel Network, and fees paid by Sabre Travel Network toTravelocity for corporate trips booked through Travelocity’s online bookingtechnology.  In addition, Sabre AirlineSolutions pays fees to Travelocity for airline trips booked throughTravelocity’s online booking technology. All intersegment revenues and corresponding cost of revenues have beeneliminated in consolidation.

 

***Revenues. ***Total revenues (including intersegmentrevenues) for the three months ended June 30, 2004 increased $51 millionor 9.4%, as compared to the three months ended June 30, 2003, from $542million to $593 million.

 

*Sabre Travel Network -*Revenues for the three months ended June 30, 2004 increased $19 million or4.9%, as compared to the three months ended June 30, 2003, from $388 millionto $407 million.

 

•                  Booking feesfrom suppliers increased by $13 million, or 3.9%.  This $13 million increase includes a $19million increase resulting from higher volumes associated with travel demandhaving been depressed in the second quarter of 2003 because of travelerconcerns about the war in Iraq and SARS, partially offset by a $6 milliondecrease due to a lower average rate per booking. This average rate per bookingdecrease was primarily attributable to the impact of the DCA 3-Year Pricing Option.  Total global travel bookings processedthrough the *Sabre* system, whichinclude direct connect bookings and joint venture bookings for which we or ourdistribution partners earn a booking fee, were 101.4 million for the threemonths ended June 30, 2004, an increase of 13.8% from 89.1 millionbookings in the three months ended June 30, 2003 that is primarily due tothe depression in travel demand in the second quarter of 2003 because oftraveler concerns about the war in Iraq and SARS.

 

•                  Subscriber revenuedecreased by $4 million, reflecting the trend towards the adoption ofthird-party equipment solutions by subscribers.

 

•                  Other revenueincreased by $10 million compared to 2003, driven primarily by a $3 millionincrease in equity income and a $3 million increase in transaction processingrevenue from our joint ventures.  Theremaining $4 million increase relates to other revenue increases associatedwith various products.

 

*Travelocity*-Revenues for the three months ended June 30, 2004 increased $28 million or28.6%, as compared to the three months ended June 30, 2003, from $98million to $126 million.

 

•                  Transactionrevenue increased $36 million or 49.3%, primarily driven by a $31 millionincrease in non-air transaction revenue (including revenue resulting from salesof package offerings that include air travel as a component) and a $5 millionincrease in stand-alone air transaction revenue.

 

The $31 million increase in non-airtransaction revenue consisted primarily of the following:

 

•                              Packagedtrip revenue increased approximately $15 million due to growth in last minutetravel packages (“Last Minute”) and the launch of our Travelocity *TotalTrip* offering in June 2003;

•                              Stand-alonehotel revenue increased $14 million due to the growth of our merchant modelhotel offering and due to increased hotel sales through our *World Choice Travel*Ô(“WCT”) affiliate network, which we acquired in November 2003; and

•                              Allother non-air transaction revenue increased $2 million.

 

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The $5 million increase in stand-alone air transaction revenue wasprimarily due to a volume increase in stand-alone air ticket sales compared tothe same period in 2003.  Our volumeincreased due to an overall increase in online travel demand.

 

•                  Non-transactionrevenue decreased $8 million or 30.0%, consisting of the following:

 

•                              Werecognized revenue of approximately $7 million in the second quarter of 2003related to the warrants received from Hotels.com.  Our contract with Hotels.com terminated inSeptember 2003.  See Note 6 to theConsolidated Financial Statements for additional information on these warrants.

 

•                              Jointventure equity method losses, which reduce our revenues, increased byapproximately $3 million.  The increasedequity losses result from increased spending on marketing by the joint venturesand the acquisition of Travelchannel Ltd., a leading German online travelwebsite, whose operating results increased the equity losses for our jointventure in Europe.   See Note 2 to the ConsolidatedFinancial Statements for additional information on the accounting policies forour joint ventures.

 

•                              Corporaterevenue, the fees paid by Sabre Travel Network and Sabre Airline Solutions toTravelocity for trips booked through Travelocity’s online booking technology,increased by approximately $2 million due to higher volumes.

 

*Sabre Airline Solutions -*Revenues for the three months ended June 30, 2004 increased $4 million or7.0%, as compared to the three months ended June 30, 2003, from $57 millionto $61 million due to the following:

 

•                  Airlinereservation hosting revenue increased $5 million due to an increase intransaction fees from newly signed carriers and volume growth, and otherrevenue from existing customers.

 

•                  Internet bookingengine revenue increased $2 million due to volume growth.

 

•                  Airlineconsulting revenue increased $1 million as a result of growth in consultingcontracts.

 

•                  Developmentlabor revenues from major customers decreased $1 million due to lower demand.

 

•                  Revenues fromairline software products and services decreased $3 million primarily due to alengthened customer sales cycle and decreased revenues from a large resourcemanagement contract that had significant revenues in the second quarter of2003.

 

**Cost of Revenues.**  Total cost of revenues (includingintersegment cost of revenues) for the three months ended June 30, 2004decreased approximately $3 million or 0.9%, as compared to the three monthsended June 30, 2003, from $353 million to $350 million.

 

*Sabre Travel Network -*Costof revenues for the three months ended June 30, 2004 decreased $3 millionor 1.2% as compared to the three months ended June 30, 2003, from $260million to $257 million.  These cost ofrevenues consisted of a $6 million increase in subscriber support costs offsetby a $2 million decrease in technology related spending and an approximate $7million decrease in headcount related expenses.

 

The $6million increase in subscriber support costs includes a $15 million increase incustomer incentives, offset by $9 million of reductions in hardware support andcommunications costs.  The increase incustomer incentives includes $4 million related to increased booking activityin 2004, $8 million related to increases in the average incentive per bookingdriven by competitive pressure on renewals and conversions, and $3 millionrelated to incentive payments to Travelocity due to improved volumes.  The $9 million reduction in hardware supportand communications costs was driven by migration to lower cost solutions andthe adoption of third-party solutions by subscribers.

 

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Technologyrelated spending decreased $2 million due to an $8 million reduction inoperational costs related to our phased implementation of newfunctionality.  This decrease waspartially offset by a $6 million increase related to our continuing expansionof the new system and other data processing costs.

 

*Travelocity* - Costof revenues for the three months ended June 30, 2004 decreased$2 million or 3.9%, as compared to the three months ended June 30,2003, from $51 million to $49 million. This decrease was primarily the result of savings of approximately $3million associated with our contact center operations agreement with WNS (seeNote 3 to the Consolidated Financial Statements).  Credit card fees associated with our merchantmodel business increased approximately $2 million, due to increasingvolumes.  All other expenses decreased by$1 million.

 

*Sabre Airline Solutions*- Cost of revenues for the three months ended June 30, 2004 increased$1 million or 2.3%, as compared to the three months ended June 30,2003, from $43 million to $44 million. This increase was the result of a $1 million increase in data processingcosts as a result of higher passenger boarded volume and internet bookingengine volume and an approximately $1 million increase in depreciation andamortization driven by continued investment in our product portfolio.  These increases were offset by anapproximately $1 million decrease in other cost of revenue expenses.

 

**Selling, General and Administrative Expenses*. ***Selling,general and administrative expenses for the three months ended June 30,2004 increased $3 million or 2.2%, as compared to the three months endedJune 30, 2003, from $136 million to $139 million. Sabre Travel Networkexpenses decreased by $6 million driven primarily by decreases in headcountrelated expense reductions of $2 million and services purchased of $4 million.  The decline in services purchased is largelydue to a decrease in professional fees related to our efforts as an advocatefor the deregulation of the U.S. CRS industry. Travelocity expenses increased $7 million, primarily due to increasedadvertising and customer acquisition costs to drive additional travelers to ourwebsites.  The increase also includespayments to WCT’s affiliates but is partially offset by savings from the AOLagreement renegotiation (see Note 3 to the Consolidated Financial Statements).  Sabre Airline Solutions expenses increased $2million due to a $1 million increase in bad debt expense related to specificcustomer collection risks and a $1 million increase in other expenses.

 

**Amortization of Intangible Assets*. ***Amortizationof intangible assets for the three months ended June 30, 2004 was $15million, an increase of approximately $3 million as compared to the threemonths ended June 30, 2003.  SabreTravel Network amortization increased by approximately $4 million due to a $3million impairment write-down of technology related intangible assets and a $1million increase associated with the November 2003 acquisition of theportion of Dillon Communications Systems GmbH that we did not previouslyown.  Travelocity amortization decreasedby approximately $2 million due to the completion of amortization of intangibleassets during 2003, partially offset by approximately $1 million of increasedamortization resulting from the acquisition of assets of WCT in the fourthquarter of 2003.

 

**Interest Income*.***  Interest income for the three months endedJune 30, 2004 decreased approximately $1 million or 25%, as comparedto the three months ended June 30, 2003, from approximately $4 million toapproximately $3 million due in part to lower average balances of certainshort-term investments and loans receivable.

 

**Interest Expense*. ***Interestexpense for the three months ended June 30, 2004 increased approximately$1 million or 20%, as compared to the three months ended June 30,2003, from $5 million to $6 million. This increase was primarily due to a $2 million increase resulting from the capital lease we entered into atthe end of June, 2003 for our headquarters buildings, partially offset by anapproximately $1 million decrease in other interest expenses.

 

**Other, net.*** *Other, net changed$36 million from net other expense of $30 million for the three months endedJune 30, 2003 to net other income of $6 million for the three months endedJune 30, 2004.  The change isprimarily due to the $28 million loss we incurred in 2003 relating to therequired residual value guarantee payment in connection with terminating oursyndicated lease facility and entering into a capital lease facility for ourcorporate headquarters.  Other net incomefor the three months ended June 30, 2004 also includes a $6 million gainfrom settling a contract dispute.

 

**Income Taxes*. ***The****provision for income taxes for the three months endedJune 30, 2004 increased $30 million as compared to the three monthsended June 30, 2003, from $2 million to $32 million.  This increase resulted from the approximately$82 million increase in pre-tax income between periods.  See Note 5 to the Consolidated FinancialStatements for additional information regarding income taxes.

 

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**Net Earnings. **Anincrease in travel demand, continued expansion into the higher margin merchantmodel and the implementation of cost reduction initiatives exceeded increasesin customer incentives and higher advertising costs to promote our products,resulting in a $52 million or 764.7% increase in net earnings for the threemonths ended June 30, 2004 as compared to the three months endedJune 30, 2003.

 

***Six Months EndedJune 30, 2004 and 2003***

 

Total revenues for the six months ended June 30, 2004 increased approximately$40 million or 3.8%, compared to the six months ended June 30, 2003, from$1,051 million to $1,091 million.  Costof revenues for the six months ended June 30, 2004 decreased approximately$11 million or 1.8% compared to the six months ended June 30, 2003 from$630 million to $619 million.

 

Management’s discussion and analysis of revenues and cost of revenuesby business segment are based upon segment results including intersegmentrevenues and cost of revenues of approximately $85 million and $70 million forthe six months ended June 30, 2004 and 2003, respectively.  We account for significant intersegmenttransactions as if the transactions were to third parties, that is, atestimated current market prices.  Themajority of the intersegment revenues and cost of revenues are betweenTravelocity and Sabre Travel Network, consisting mainly of incentives andmarketing fees paid to Travelocity for Travelocity bookings made through the *Sabre* GDS, data processing fees paid byTravelocity to Sabre Travel Network, and fees paid by Sabre Travel Network toTravelocity for corporate trips booked through Travelocity’s online bookingtechnology.  In addition, Sabre AirlineSolutions pays fees to Travelocity for airline trips booked throughTravelocity’s online booking technology. All intersegment revenues and corresponding cost of revenues have beeneliminated in consolidation.

 

***Revenues. ***Total revenues (including intersegmentrevenues) for the six months ended June 30, 2004 increased $54 million or4.8%, as compared to the six months ended June 30, 2003, from $1,121million to $1,175 million.

 

*Sabre Travel Network -*Revenues for the six months ended June 30, 2004 decreased $4 million or0.5%, as compared to the six months ended June 30, 2003, from $822 millionto $818 million.

 

•                  Booking feesfrom associates increased by $32 million, or 5.0%.  This $32 million increase includes a $47million increase resulting from higher volumes associated with travel demandhaving been depressed in the first half of 2003 because of traveler concernsabout the war in Iraq and SARS, partially offset by a $15 million decrease dueto a lower average rate per booking. This average rate per booking decrease wasprimarily attributable to the impact of the DCA 3-Year Pricing Option.  Total worldwide travel bookings processedthrough the *Sabre* system, whichinclude direct connect bookings and joint venture bookings for which we or ourdistribution partners earn a booking fee, were 206.4 million for the six monthsended June 30, 2004, an increase of 12.9% from 182.8 million bookings inthe six months ended June 30, 2003 that is primarily due to the depressionin travel demand in the second half of 2003 because of traveler concerns aboutthe war in Iraq and SARS.

 

•                  Subscriberrevenue decreased by $48 million, driven by $36 million of settlement revenuein 2003 derived from two canceled subscriber contracts.  Excluding the settlement, subscriber revenuewould have decreased by $12 million, reflecting the trend towards the adoptionof third-party equipment solutions by subscribers.

 

•                  Other revenueincreased by $12 million compared to 2003, driven primarily by a $1 millionincrease in equity income and a $4 million increase in transaction processingrevenue from our joint ventures.  Theremaining $7 million increase relates to other revenue increases associatedwith various products.

 

*Travelocity*-Revenues for the six months ended June 30, 2004 increased $52 million or28.1%, as compared to the six months ended June 30, 2003, from $185 millionto $237 million.

 

•                  Transactionrevenue increased $66 million or 48.7%, primarily driven by a $55 millionincrease in non-air transaction revenue (including revenue resulting from salesof package offerings that include air travel as a component) and an $11 millionincrease in stand-alone air transaction revenue.

 

The $55 million increase in non-airtransaction revenue consisted primarily of the following:

 

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•                              Packagedtrip revenue increased approximately $25 million due to growth in last minutetravel packages (“Last Minute”) and the launch of our *Travelocity TotalTrip* offering inJune 2003;

•                              Stand-alonehotel revenue increased $26 million due to the growth of our merchant modelhotel offering and due to increased hotel sales through our WCT affiliatenetwork, which we acquired in November 2003; and

•                              Allother non-air transaction revenue increased $4 million.

 

The $11 million increase in stand-alone air transaction revenue wasprimarily due to a volume increase in stand-alone air ticket sales compared tothe same period in 2003.  Our volumeincreased due to an overall increase in online travel demand.

 

•                  Non-transactionrevenue decreased $14 million or 28.7%, consisting of the following:

 

•                              Werecognized revenue of approximately $11 million in the six months endedJune 30, 2003 related to the warrants received from Hotels.com.  Our contract with Hotels.com terminated inSeptember 2003.  See Note 6 to theConsolidated Financial Statements for additional information on these warrants.

 

•                              Jointventure equity method losses, which reduce our revenues, increased byapproximately $5 million.  The increasedequity losses result from increased spending on marketing by the joint venturesand the acquisition of Travelchannel Ltd., a leading German online travelwebsite, whose operating results increased the equity losses for our jointventure in Europe.   See Note 2 to theConsolidated Financial Statements for additional information on the accountingpolicies for our joint ventures.

 

•                              Corporaterevenue, the fees paid by Sabre Travel Network and Sabre Airline Solutions toTravelocity for trips booked through Travelocity’s online booking technology,increased by approximately $4 million due to higher volumes.

 

•                              Othernon-transaction revenue decreased $2 million.

 

*Sabre Airline Solutions -*Revenues for the six months ended June 30, 2004 increased $6 million or5.3%, as compared to the six months ended June 30, 2003, from $114 millionto $120 million due to the following:

 

•                  Airlinereservation hosting revenue increased $11 million due to an increase intransaction fees from newly signed carriers and volume growth and other revenuefrom existing customers.

 

•                  Internet bookingengine revenue increased $3 million due to volume growth.

 

•                  Airlineconsulting revenue increased $2 million as a result of growth in consultingcontracts.

 

•                  Developmentlabor revenues from major customers decreased $5 million due to lower demand.

 

•                  Revenues from airline softwareproducts and services decreased $5 million primarily due to a lengthenedcustomer sales cycle and decreased revenues from a large resource managementcontract that had significant revenues in the first six months of 2003.

 

**Cost of Revenues.**  Total cost of revenues (includingintersegment cost of revenues) for the six months ended June 30, 2004increased approximately $4 million or 0.6%, as compared to the six months endedJune 30, 2003, from $700 million to $704 million.

 

*Sabre Travel Network -*Costof revenues for the six months ended June 30, 2004 decreased $2 million or0.4% as compared to the six months ended June 30, 2003, from $514 millionto $512 million.  These cost of revenuesconsisted of a $12 million increase in subscriber support costs and a $2million increase in technology related expenses offset by a $16 milliondecrease in other spending.

 

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The$12 million increase in subscriber support costs includes a $31 millionincrease in customer incentives, partially offset by $19 million of reductionsin hardware support and communications costs. The increase in customer incentives includes $10 million related toincreased booking activity in 2004, $14 million related to increases in theaverage incentive per booking driven by competitive pressure on renewals andconversions, and $7 million related to incentive payments to Travelocity due toimproved volumes.  The $19 millionreduction in hardware support and communications costs was driven by migrationto lower cost solutions and the adoption of third-party solutions bysubscribers.

 

Technologyrelated spending increased by $2 million due to a $9 million decrease inoperational costs related to our phased implementation of new functionality.This decrease was offset by an $11 million increase related to our continuingexpansion of the new system and other data processing costs.

 

Other spending decreased by $16million due to a reduction in headcount related expenses of $7 million, lowerpayments to travel suppliers of $5 million and a $4 million decrease in othercosts.

 

*Travelocity* - Costof revenues for the six months ended June 30, 2004 increased$1 million or 1.0%, as compared to the six months ended June 30,2003, from $101 million to $102 million. Credit card fees associated with our merchant model business increasedapproximately $6 million, due to increasing volumes.  This increase was offset by approximately $6million associated with the savings from our contact center operationsagreement with WNS (see Note 3 to the Consolidated Financial Statements).  All other expenses increased by $1 million.

 

*Sabre Airline Solutions*- Cost of revenues for the six months ended June 30, 2004 increased$4 million or 4.6%, as compared to the six months ended June 30,2003, from $87 million to $91 million. This increase resulted from a $2 million increase in data processingcosts due to higher passenger boarded volume and Internet booking engine volumeand from an approximately $2 million increase in depreciation and amortizationdriven by continued investment in our product portfolio.

 

**Selling, General and Administrative Expenses*. ***Selling,general and administrative expenses for the six months ended June 30, 2004increased $34 million or 13.5%, as compared to the six months endedJune 30, 2003, from $252 million to $286 million.  Sabre Travel Network expenses increased by $7million driven primarily by increased bad debt reserves of $7 million,increased other expenses of $5 million offset by decreased headcount relatedexpenses of $2 million and decreased services purchased of $3 million.  The increase in bad debt reserves is relatedto the increased aging of receivables of a few large customers.  The decline in services purchased is largelydue to a decrease in professional fees related to our efforts as an advocatefor the deregulation of the U.S. CRS industry. Travelocity expenses increased $20 million, primarily due to increasedadvertising and customer acquisition costs of $14 million to drive additionaltravelers to our websites and $6 million of increased external servicespurchased and other expenses.  Theincrease also includes payments to WCT’s affiliates but is partially offset bysavings from the AOL agreement renegotiation (see Note 3 to the ConsolidatedFinancial Statements).  Sabre AirlineSolutions expenses increased $7 million due to a $4 million increase in baddebt expense related to specific customer collection risks and a $3 millionincrease in other expenses.

 

**Amortization of Intangible Assets. **Amortization ofintangible assets for the six months ended June 30, 2004 was $27 million,an increase of approximately $3 million as compared to the six months endedJune 30, 2003.  Sabre Travel Networkamortization increased by approximately $5 million primarily due to a $3million impairment write-down of technology related intangible assets and a $1million increase associated with the November 2003 acquisition of theportion of Dillon Communications Systems GmbH that we did not previously own.  Travelocity amortization decreased byapproximately $4 million due to the completion of amortization of intangibleassets during 2003, partially offset by approximately $1 million of increasedamortization resulting from the acquisition of assets of WCT in the fourthquarter of 2003.

 

**Interest Income*.***  Interest income for the six months endedJune 30, 2004 decreased approximately $1 million or 12.5%, ascompared to the six months ended June 30, 2003, from approximately $8million to approximately $7 million. This decrease was due primarily to lower average rates of return on ourportfolio of cash and marketable securities investment accounts, as well aslower average balances of certain short-term investments and loans receivable.

 

**Interest Expense*. ***Interestexpense for the six months ended June 30, 2004 increased approximately$2 million or 18.2%, as compared to the six months ended June 30,2003, from $11 million to $13 million. This increase was primarily due to a $3 million increase resulting fromthe capital lease we entered into at the end of June, 2003 for our headquartersbuildings, partially offset by an approximately $1 million decrease in otherinterest expenses.

 

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**Other, net.*** *Other, net changed$36 million from net other expense of $30 million for the six months endedJune 2003 to net other income of $6 million for the six months endedJune 30, 2004.  The change isprimarily due to the $28 million loss we incurred relating to the requiredresidual value guarantee payment in connection with terminating our syndicatedlease facility and entering into a capital lease facility for our corporateheadquarters.  Other net income for thesix months ended June 30, 2004 also includes a $6 million gain fromsettling a contract dispute.

 

**Income Taxes*. ***The****provision for income taxes for the six months endedJune 30, 2004 increased $16 million or 40.0%, as compared to the sixmonths ended June 30, 2003, from $40 million to $56 million.  This increase resulted from the approximately$46 million increase in pre-tax income between periods.  See Note 5 to the Consolidated FinancialStatements for additional information regarding income taxes.

 

**Net Earnings.**  An increase in travel demand, continuedexpansion into the higher margin merchant model and the implementation of costreduction initiatives exceeded increases in customer incentives and higheradvertising costs to promote our products, resulting in a $30 million or 42.2%increase in net earnings for the six months ended June 30, 2004 ascompared to the six months ended June 30, 2003.

 

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**SABRE HOLDINGS CORPORATION**

**LIQUIDITY AND CAPITAL RESOURCES**

 

We require cash to pay our operating expenses, make capitalexpenditures, invest in our products and offerings, pay dividends, completeshare repurchases and service our debt and other long-term liabilities.  Although our primary source of funds has beenfrom our operations, we have occasionally raised external funds through thesale of stock and debt in the capital markets and in privately negotiatedtransactions.  In assessing ourliquidity, key components include our net income adjusted for non-cash andnon-operating items, and current assets and liabilities, in particular accountsreceivable, accounts payable, and accrued expenses.  For the longer term, our debt and long-termliabilities are also considered key to assessing our liquidity.

 

In the near-term, we anticipate that cash flows from our operations,existing balances in cash and short-term investments of $1,020 million as ofJune 30, 2004 and funds available under our revolving credit facility of$300 million (see Note 3 to the Consolidated Financial Statements) will besufficient to fund our planned expenditures which include operating expenses,capital expenditures, investments in our products and offerings, interestpayments on our debt, dividends and share repurchases.

 

In the long-term, we expect touse our existing funds and cash flows from operations to satisfy our debt andother long-term obligations.  We may alsouse our funds to retire debt as appropriate, based upon market conditions andour desired liquidity and capital structure. We may also consider using our funds available or possibly externalsources of funds for acquisitions of or investments in complementarybusinesses, products, services and technologies when such opportunities becomeavailable. These types of additional activities might affect our liquidityrequirements or cause us to issue additional equity or debt securities.

 

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

 

•                  Reduced salesdue to declining booking volumes and lower prices under the DCA 3-Year PricingOption,

•                  Diversion of bookingsaway from our channel offerings and other competitive pressures, and

•                  Changes in ourworking capital.

 

See “*Risk Factors*” for adetailed list of the risk factors that might affect the availability of ourinternally generated funds.  Nonetheless,with our strong cash and short-term investments position of $1,020 million andworking capital of $865 million as of June 30, 2004, along with ourinvestment grade credit ratings from S&P and Moody’s of BBB+ and Baa2,respectively, we have significant resources available to us and we continue toimplement cost controlling efforts to ensure our operating expenses are in linewith the impacts of the factors listed above and other risk factors.

 

***Cash Investments***

 

Weinvest cash in highly liquid instruments, including high credit quality moneymarket mutual funds, certificates of deposit, banker’s acceptances, commercialpaper, repurchase agreements, mortgage-backed and receivables-backed securitiesand corporate and government notes, including tax-exempt municipal securities.We try to invest all of our excess cash in marketable securities.  Therefore, our annual investments willfluctuate depending on the levels of cash provided or used by all of our otherinvesting, operating and financing activities.

 

***Capital Activities***

 

**Dividends.**  We began paying a quarterly dividend of $.07per share during the second quarter of 2003, and paid dividends of the sameamount during the third and fourth quarters of 2003.  On January 20, 2004 we announced anincreased dividend of $.075 per share. We paid dividends of that same amount in the first and second quartersof 2004.  On July 20, 2004 weannounced a dividend of $.075 per share, to be paid on August 16, 2004 tostockholders of record at July 30, 2004. If quarterly dividends of $.075 were to be continued throughout 2004,and assuming that the current number of outstanding shares of our Common Stockremains constant, we would expect to pay an aggregate of $10.6 million for eachquarterly dividend, or approximately $42 million on an annual basis.  Our Board of Directors currently intends toconsider declaring and paying comparable future dividends on a regularquarterly basis, subject to our ability to pay dividends and to a determinationof our Board of Directors that dividends continue to be in our best interestsand those of our stockholders.

 

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**Repurchases of Stock. **On October 20,2003 our Board of Directors approved a share repurchase program authorizing usto repurchase up to $100 million of our Common Stock.  AtDecember 31, 2003, we had remaining authorization to repurchaseapproximately $72 million of our Common Stock under this program.  Duringthe three months ended March 31, 2004, we repurchased 3,336,862 shares of ourCommon Stock for approximately $72 million, thereby completing the remainingauthorization to repurchase shares under that program.  On April 19,2004 our Board of Directors approved another share repurchase programauthorizing us to repurchase up to an additional $100 million of our CommonStock.  As of June 30, 2004, we have purchased $35 million under thisauthorization and we have remaining authorization to repurchase $65 millionunder this program.  In addition, onOctober 20, 2003 our Board of Directors authorized the purchase of sharesof our Common Stock to satisfy our obligations to deliver shares under ourEmployee Stock Purchase Plan and our Long-Term Incentive Plan.  Althoughthis authorization remains in force, we did not repurchase any shares of ourCommon Stock under this program during the six months ended June 30,2004.  We will generally seek to make future repurchases pursuant to10b5-1 trading plans, unless such plans are terminated at the discretion ofmanagement.

 

***Financing Arrangements***

 

**Revolving Credit Agreement.** On June 15, 2004, we replaced a $300million revolving credit agreement that was set to expire on September 14,2004, with a new $300 million, senior unsecured revolving credit agreement thatexpires June 15, 2009.  Under certainconditions, we can request an additional $100 million under this newagreement.  Interest on this agreement isvariable, based on either the London Interbank Offered Rate (“LIBOR”) or theprime rate, at our discretion, and is sensitive to our credit rating.  The LIBOR margin at the current credit ratingis equal to 0.50%, which translates to a total borrowing rate of approximately2.5% in the current interest rate environment. As of June 30, 2004 there are no borrowings outstanding under thisagreement.  Under this agreement, we aresubject to covenants that could, among other things, restrict our ability toincur additional debt and that limit our ability to pay dividends or repurchaseour stock in excess of $150 million per fiscal year (unless, after givingeffect to such dividends and/or repurchases, we have more than $400 million incash and marketable securities domiciled in the United States).   A copy of the Revolving Credit Agreement isincluded as Exhibit 10.1 to this filing. As of June 30, 2004 we are in compliance with all covenants underthis agreement including the following financial covenants:

 
| ** **                                    | ** ** | **Requirement** | ** ** | **Level at June 30, 2004** | ** ** |
|-----------------------------------------------|------------|-----------------|------------|---------------------------------|------------|
|                                          |       |            |       |                            |       |
| Consolidated Leverage Ratio (Debt to  EBITDA) |       | 3 to 1 maximum  |       | 2 to 1                          |       |
| Consolidated Net Worth                        |       | $1.4 billion    |       | $1.7 billion                    |       |

 

**Public Notes. **In August 2001, we issued through SabreHoldings Corporation $400 million in unsecured notes (“Notes”), bearinginterest at 7.35% and maturing August 1, 2011, in an underwritten publicoffering resulting in net cash proceeds to us of approximately $397million.  The Notes include certainnon-financial covenants including restrictions on incurring certain types ofdebt or entering into certain sale and leaseback transactions. As ofJune 30, 2004, we are in compliance with all covenant requirements underthis agreement.  Sabre Inc., a 100% ownedsubsidiary of Sabre Holdings Corporation, unconditionally guarantees all debtobligations of Sabre Holdings Corporation. In conjunction with these Notes, we have entered into two interest rateswaps through 2011 for a total of  $300million, which pay us 7.35% and on which we pay a variable rate based on asix-month LIBOR plus 231 basis points.

 

**Capital Lease Obligation. **In June 2003,we entered into a ten-year master lease for our corporate headquarters facilityin Southlake, Texas, which is accounted for as a capital lease.  The interest rate on the capital leasefinancing is fixed at 5.37%.  At theinception of the lease, we recorded an asset of approximately $168 million,along with a liability of approximately $168 million, representing the presentvalue of the minimum lease payments due under the lease and the residual valueguarantee discussed below.

 

At any time during the lease term, wehave the option to terminate the lease and purchase the properties forapproximately $179 million, plus a make-whole amount, if applicable. We alsohave the option at any time up to one year prior to lease expiration to causethe properties to be sold. If this sell option is exercised, we have guaranteedthat proceeds on a sale will be at least approximately $159 million, and we areresponsible for the first dollar loss up to approximately $159 million due to adecrease in the value of the property below approximately $179 million. If thesales proceeds exceed approximately $179 million plus any sales-relatedexpenses, we retain the excess.  Inconjunction with this lease, we have entered into a $100 million interest rateswap which pays us 5.37% and on 

 

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which we pay a variable rate based on asix-month LIBOR plus 153 basis points.  Under the lease agreement, we are subject to certain covenants.  As of June 30, 2004 we are in compliancewith all covenants under this agreement including the following financialcovenant:

 
| ** **             | ** ** | **Requirement** | ** ** | **Level at June 30, 2004** |
|------------------------|------------|-----------------|------------|---------------------------------|
| Consolidated Net Worth |       | $910 million    |       | $1.7 billion                    |

 

***Off-Balance SheetArrangements***

 

No material changes have occurred in our off-balance sheet arrangementsduring the six months ended June 30, 2004.

 

***Cash Flows (inthousands)***

 
| ** **                            | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------|------------|-------------------------------------|------------|
| ** **                            | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| Cash provided by operating activities |       | $                                   | 286,351    |   | $ | 149,940 |   |
| Cash used for investing activities    |       | (181,770                            | )          | (102,881 | ) |
| Cash used for financing activities    |       | (113,741                            | )          | (39,300 | ) |
| Total cash increase (decrease)        |       | $                                   | (9,160     | ) | $ | 7,759 |   |

 

**Operating Activities**.  Cash provided by operating activitiesincreased by $136 million in the six months ended June 30, 2004 ascompared to the year-ago period.  Cashprovided by operating activities during the six months ended June 30, 2004was $286 million, which was primarily from net earnings adjusted for non-cashand non-operating items as well as an increase in accounts payable and otheraccrued liabilities driven primarily by the growth of our merchant modelprogram. These increases were offset by uses of cash for accounts receivableand accrued compensation and benefits. Non-cash adjustments to net earnings of $72 million for the six monthsended June 30, 2004 were driven primarily by depreciation and amortizationof $64 million, equity losses in joint ventures of $8 million and stockcompensation expense of $6 million, offset by deferred tax benefits of $6million.

 

Cash provided by operating activitiesfor the six months ended June 30, 2003 was $150 million and was primarilyfrom net earnings adjusted for non-cash and non-operating items offset by usesof cash for working capital items. Non-cash and non-operating adjustments tonet earnings of $98 million for the first half of 2003 included depreciationand amortization of $62 million, a $28 million charge relating to thetermination of our syndicated lease facility, stock compensation expense of $9million and equity losses in joint ventures of $4 million, partially offset bydeferred tax benefits of $6 million.

 

**Investing Activities**.  The $79 million increase in cash used forinvesting activities in the six months ended June 30, 2004 as compared tothe year-ago period primarily results from a $62 million net increase in purchasesof marketable securities for our short-term investment portfolio.  We also invested and loaned $33 million tounconsolidated joint ventures and $5 million to business partners during thesix month ended June 30, 2004 compared to a net use of $6 million forsimilar activities in the same period a year ago.  These increases in uses of cash were offsetby $12 million used for business combinations that occurred in the year agoperiod and a $4 million decrease in capital expenditures for the six months endedJune 30, 2004 compared to the six months ended June 30, 2003.

 

**Financing Activities.**  The $74 million increase in cash used forfinancing activities in the six months ended June 30, 2004 as compared tothe same period a year ago was mainly due to dividends of $21 million paid in2004 compared to $10 million for the same period in 2003 and $102 million usedto repurchase our Common Stock during the first half of 2004 as authorized byour Board of Directors, offset by a $10 million increase of proceeds from theexercise of stock options in 2004 as compared to 2003 and $28 million that wasused in 2003 related to the termination of our syndicated lease facility.

 

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**Critical Accounting Policies**

 

The discussion and analysis of our financial condition and results ofoperations is based on our consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States. The preparation of these financial statements requires us tomake estimates and judgments that affect our reported assets and liabilities,revenues and expenses, and other financial information. Actual results maydiffer significantly from these estimates under different assumptions andconditions. In addition, our reported financial condition and results ofoperations could vary due to a change in the application of a particularaccounting standard.

 

We regard an accounting estimate underlying our financial statements asa “critical accounting estimate” if the accounting estimate requires us to makeassumptions about matters that are highly uncertain at the time of estimationand if different estimates that reasonably could have been used in the currentperiod, or changes in the estimate that are reasonably likely to occur fromperiod to period, would have had a material effect on the presentation offinancial condition, changes in financial condition, or results of operations.

 

Our significant accounting policies are described in our Annual Reporton Form 10-K for the year ended December 31, 2003. There have been nochanges to such policies or significant changes in assumptions or estimatesthat would affect such policies in the first half of 2004.  These policiesare described under the caption “*Management’sDiscussion and Analysis of Financial Condition and Results of Operations*”in our Annual Report on Form 10-K.

 

**SABRE HOLDINGS CORPORATIONCAUTIONARY STATEMENT**

 

Statements in this report which are not purely historical facts orwhich necessarily depend upon future events, including statements regarding ouranticipations, beliefs, expectations, hopes, intentions or strategies for thefuture, may be forward-looking statements within the meaning ofSection 21E of the Securities Exchange Act of 1934, as amended. Allforward-looking statements in this report are based upon information availableto us on the date of this report. We undertake no obligation to publicly updateor revise any forward-looking statements, whether as a result of new information,future events or otherwise. Any forward-looking statements involve risks anduncertainties that could cause actual events or results to differ materiallyfrom the events or results described in the forward-looking statements. Readersare cautioned not to place undue reliance on these forward-looking statements.

 

**RISK FACTORS**

 

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

 

**Our revenues are highly dependent on thetravel and transportation industries, and particularly on airlines, and aprolonged substantial decrease in travel bookings volumes could adverselyaffect us.**

 

Most of our revenue is derived from airlines, hotel operators, carrental companies, cruise operators and other suppliers in the travel andtransportation industries. Our revenue increases and decreases with the levelof travel and transportation activity and is therefore highly subject todeclines in or disruptions to travel and transportation due to factors entirelyout of our control. The travel industry is seasonal and our revenue variessignificantly from quarter to quarter. Factors that may adversely affect traveland transportation activity include:

 

•                  economicdownturns and recessions,

 

•                  global securityissues, political instability, acts of terrorism, hostilities and war,

 

•                  increasedairport security that could reduce the convenience of air travel,

 

•                  inclementweather,

 

•                  increasedoccurrence of travel-related accidents,

 

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•                  travelers’concerns about exposure to contagious diseases such as SARS,

 

•                  economic andpolitical issues in the Middle East, Asia, Latin America and elsewhere, and

 

•                  the financialcondition of travel suppliers.

 

The possibility of further terrorist attacks, hostilities and war (inthe Middle East, the Indian subcontinent or elsewhere), the resulting securitymeasures at airports, and the financial instability of many of the air carriersmay continue to adversely affect the travel industry. Airlines may reduce thenumber of their flights, making fewer offerings available to us.  We depend on a relatively small number of airlines for a significantportion of our revenues.  Severalmajor airlines are experiencing liquidity problems, some have sought bankruptcyprotection and still others may consider bankruptcy relief.  Travelers’ perceptions of passenger securityor airlines’ financial stability may have an adverse effect on demand.  A prolonged substantial decrease in travelbookings volumes could have an adverse impact on our financial performance,operations, liquidity, or capital resources and could impair our ability torecover the carrying value of certain of our assets, including capitalizedsoftware, other intangible assets and goodwill.

 

**We will also encounter risks and difficultiesfrequently experienced in rapidly evolving industries, such as the online travelindustry.  Some of these risks relate toour ability to:**

 

•                  attract andretain customers on a cost-effective basis,

 

•                  expand andenhance our service offerings,

 

•                  operate,support, expand and develop our operations, our websites, our software and communicationsand other systems,

 

•                  diversify oursources of revenue,

 

•                  manage ourrelationships with important travel suppliers and other partners,

 

•                  respond totechnological changes,

 

•                  respond tolitigation, and

 

•                  respond tocompetitive market conditions.

 

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

 

**We face competition from established andemerging travel distribution channels, risks related to deregulation of the CRSindustry and possible internal channel conflict, which could divert customersto our competitors and adversely affect our results of operations.**

 

Our business includes channels of distribution that support the travelagency, business-direct and consumer-direct segments of the global traveldistribution market.  In all of thesedistribution channels, we face significant competition.  In the travel agency channel, our *Sabre* global distribution system competesprimarily against other large and well-established global distributionsystems.  With the deregulation of theCRS industry in the United States, our CRS business will be competing in afree-market system.  Our current andpotential customers may elect to use a competing GDS offering lowerprices.  Furthermore, one or moreairlines (other than those participating in our DCA 3-Year Pricing Option) mayelect to discontinue or to lower their levels of participation in our globaldistribution system, given the expiration in the United States ofnon-discriminatory CRS participation rules. Losing access to suppliers’ inventory would make our global distributionsystem less attractive to travel agencies and travel purchasers, which couldreduce our booking fee revenue.  In orderto gain access to suppliers’ inventory, it might become necessary for us toreduce the fees charged to suppliers, which could reduce our booking feerevenue.  In addition, we face increasingcompetition in the travel agency channel, including competition from travelsuppliers that distribute directly to travel agencies.

 

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In the business-direct channel, *TravelocityBusiness* and our Sabre Travel Network’s *GetThere*âproduct compete against similar offerings from other travel agencies.  Some competitors market business travelsystems that are bundled with financial and other non-travel software systemsthat we do not offer.  As a result, ourcurrent and potential customers may choose the convenience or cost-effectivenessof our competitors’ bundled products and services, which may increase thepricing pressure on our *GetThere*product.

 

In the consumer-direct channel, our Travelocity offering competes notonly against similar offerings from affiliates of other global distributionsystems, but also with online travel search engines and a large number ofonline travel agencies, including those operated by airlines and other travelsuppliers.

 

OurSabre Airline Solutions business unit competes against several organizationsoffering internal reservation system and related technology services toairlines. This segment is highly competitive. If we cannot compete effectivelyto keep and grow this segment of business, we risk losing customers andeconomies of scale, which could have a negative impact on our operatingresults.

 

We expect existing competitors, business partners and new entrants tothe travel business to constantly revise and improve their business models inresponse to challenges from competing businesses, including ours.  If these or other travel industryparticipants introduce changes or developments that we cannot meet in a timelyor cost-effective manner, our business may be adversely affected.  In addition, consumers frequently use ourwebsites for route pricing and other travel information, and then choose topurchase travel offerings from a source other than our website, includingtravel suppliers’ own websites.   Suchuse may increase our costs without producing revenue.

 

In addition, consolidation among our competitors may give ourcompetitors increased negotiating leverage with travel suppliers andcorresponding competitive advantages over us. Consolidation among travelsuppliers, including airline mergers, may increase competition fromdistribution channels related to those suppliers and place more leverage in thehands of those suppliers to negotiate lower booking fees.  If we are unable to compete effectively,competitors could divert our customers away from our travel distributionchannels and, unless we substitute alternative revenue streams, it couldadversely affect our results of operations.

 

In certain limited circumstances, our business segments may competewith each other.  For example, both ourTravelocity.comâ and TravelocityBusinessÔ websites may compete with the travel-agencycustomers of Sabre Travel Network to distribute travel to corporate or businesscustomers.  Although we believe that ourparticipation in both the retail and distribution technology businesses is adistinct advantage for Sabre Holdings due to synergies like greater scale toour technology, customer conflicts between our offerings across businessescould create issues that have the potential to adversely effect our results ofoperations.  For example, such conflictcould cause some of our current or potential travel agency customers toconsider competing GDS providers (or online websites) or other direct orindirect channels of travel distribution.

 

**Some travel suppliers are seeking alternativedistribution models, and alternative models of travel distribution areemerging, which may have the effect of adversely affecting our results ofoperations.**

 

Some travel suppliers are seeking to decrease their reliance ondistribution intermediaries, including global distribution systems such as our *Sabre* GDS. Travel suppliers may giveadvantages to distribution intermediaries in which they have an economic stakeor may create or expand commercial relationships with online travel servicesthat work with travel suppliers to directly book travel with thosesuppliers.  Many airlines, hotels, carrental companies and cruise operators have established their own traveldistribution websites.  Several airlinesand hotels have formed joint ventures that offer multi-supplier traveldistribution websites.  From time totime, travel suppliers offer advantages, such as bonus miles, lower transactionfees, or discounted prices, when their products and services are purchased fromthese supplier-related websites.  Some ofthese offerings are not available to unrelated intermediaries, or thoseintermediaries must provide lower distribution pricing in exchange for accessto the offerings.  In addition, theairline industry has experienced a shift in market share from full-servicecarriers to low-cost carriers that focus primarily on discount fares to leisuredestinations. Some low-cost carriers do not distribute their tickets throughthe *Sabre* GDS or through otherthird-party intermediaries.  In addition,online search engines are attempting to enter the travel distribution marketsthrough travel-related keyword searches of supplier and third party travelagent websites, thereby offering an alternative method of online travelplanning with the potential for disintermediation of systems such as our *Sabre* GDS.  These search engines pose a threat to ouronline leisure travel business as they may have the effect of divertingcustomers from our global distribution system to supplier-related websites andhave the potential to put downward pressure on GDS pricing.   See *BusinessTrends - Supplier Efforts to Control Travel Distribution*and*Business Trends- New Pricing Options for Suppliers*.

 

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**Consolidation in the travel industry andincreased competition for travel agency subscribers may result in increasedexpenses, lost bookings and reduced revenue.**

 

Competition among GDSs to attract andretain travel agencies is intense.  Thenumber of bookings produced by our travel agency subscriber base is animportant factor in our success. Some travel suppliers have reduced oreliminated commissions paid to travel agencies (including consumer-directtravel sites like Travelocity).  The lossof commissions causes travel agencies to become more dependent on other sourcesof revenues, such as traveler-paid service fees and GDS-paid incentives.  The reduction or elimination of supplier-paidcommissions has forced some smaller travel agencies to close or to combine withlarger travel agencies.  Although we havea leading share of large travel agencies, competition is particularly intenseamong global distribution systems for larger travel agency subscribers.  Consolidation of travel agencies may resultin increased competition for these subscribers. In order to compete effectively, we may need to increase incentives,pre-pay incentives, increase spending on marketing or product development, ormake significant investments to purchase strategic assets.  In addition, consolidation among travel suppliers,such as major hotels and airline mergers and alliances, may increasecompetition from these supplier-related distribution channels.  If one or more of these developments occurthey could result in a material adverse effect upon our businesses, financialcondition or results of operations.  See *Business Trends – Competition and Consolidation*.

 

**Travelocity’s growth cannot be assured.**

 

The online travel space is highly competitive, with both independentonline travel agencies and suppliers’ proprietary websites competing forcustomers.  Our business strategy isdependent on expanding Travelocity’s transaction revenues, increasing itspercentage of merchant transactions, maintaining the breadth of its merchantsuppliers, developing its brand in a cost-effective manner and increasing itssite traffic (including direct distribution as well as through current andfuture distribution partners). Key components of this strategy include thegrowth of revenue from our merchant model hotel business, last-minute packagingand the *TotalTrip* dynamic packagingoffering.  We also plan to expand theappeal of *Travelocity Business* tocorporate travelers and to invest strategically in growth channels like theEuropean marketplace.  If any of theseinitiatives is not successful, Travelocity’s growth may be limited and it maybe unable to achieve or maintain profitability.

 

**Our business plans call for the significantgrowth of our merchant model business, and we may be unsuccessful in managingor expanding that business.**

 

Our business strategy is dependent upon our merchant model business,primarily our merchant model hotel business, as a significant source of revenuegrowth. Our merchant model hotel strategy is particularly dependent upon ourability to obtain adequate access to hotel rooms to offer.  Under the merchant model, we obtain fromtravel suppliers access to their products, services and other content offeringsat a pre-determined price.  Merchantmodel travel offerings can include air travel, hotel stays, vacation packagesand dynamically packaged combinations (via *Travelocity**TotalTrip*).  We sell those offerings to travelers at aprice that we control, and require pre-payment by the traveler at the time ofbooking. Our strategy calls for us to increase or maintain the number of hotelrooms we can offer under our merchant model hotel program, based uponarrangements we make directly with individual hotel properties and hotelchains.

 

We remain subject to numerous risks in the operation and growth of themerchant model.  In particular, we cannotensure that we will continue to be successful in adding and retaining hotelproperties or other suppliers in a sufficient number of domestic orinternational geographic markets.  Manyhoteliers utilize merchant model arrangements with us and with our competitorsas a channel to dispose of excess hotel rooms at discounted rates. Demand forsupplier offerings may increase as a result of increased travel and competitionfrom merchant model offerings by our competitors.  If demand increases for suppliers’ products,services and other content offerings, suppliers may limit our access to theirofferings or may increase their price of those offerings.  These types of events could exert downwardpressure on the margins we expect to achieve in our merchant hotel business. Wemay be unable to achieve our financial objectives for the merchant model hotelprogram, especially if economic conditions improve or if competitionincreases.   Similar risks could alsoimpact any future merchant model programs we might explore for other types ofsupplier offerings, such as air travel.

 

**We may be unsuccessful in pursuing andintegrating business combinations, strategic alliances, or products andtechnologies, which could result in increased expenditures or cause us to failto achieve anticipated cost savings or revenue growth.**

 

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We plan to examine possible business combinations, investments, jointventures or other strategic alliances with other companies in order to maintainand grow revenue and market presence.  Wemay be unable to successfully complete these acquisitions due to multiplefactors, such as issues related to regulatory review of the proposedtransactions.  In addition, there arerisks inherent in these types of transactions, such as: difficulty inassimilating the operations, technology and personnel of the combinedcompanies; disruption of our ongoing business, including loss of managementfocus on existing businesses and market developments; problems retaining keytechnical and managerial personnel; expenses associated with the amortizationof identifiable intangible assets; additional or unanticipated operatinglosses, expenses or liabilities of acquired businesses; impairment ofrelationships with existing employees, customers and business partners; andfluctuations in value and losses that may arise from equity investments.  In addition, we may not be able to: identifysuitable candidates for additional business combinations and strategic investments;obtain financing on acceptable terms for such business combinations andstrategic investments; or otherwise consummate such business combinations andstrategic investments on acceptable terms.

 

**We are not certain that our ongoing costreduction plans will continue to be successful.**

 

Our strategy depends, to a substantial degree, on reducing andcontrolling operating expenses. In furtherance of this strategy, we haveengaged in ongoing, company-wide activities intended to reduce costs.  These activities include significantpersonnel reductions, reductions in Travelocity fulfillment costs (in partthrough global sourcing of labor), programs designed to reduce the growth rateof incentive payments to travel agencies, and realigning and streamliningoperations and consolidating facilities. We expect, but cannot assure you that our efforts will continue toresult in the increased profitability, cost savings or other benefits that weexpect.

 

Part of our cost reduction strategy involves leveraging our status as aglobal company to conduct some of our operations outside the United States,such as customer call centers and software development, either by contractingwith foreign companies that work for us or by expanding our own operationsoutside the United States.  These foreignoperations are subject to unique risks, including: business, political andeconomic instability in foreign locations; governments might adopt policiesthat could adversely affect business and economic conditions related to ouroperations or business; adverse political or consumer reactions in the UnitedSates; disruptions to communication and transportation services supportingglobalization; actual or threatened terrorist activities; and U.S. militaryaction overseas.   Risks such as thesecould adversely affect our ability to effectively implement global sourcing.

 

**Rapid technological changes and newdistribution channels or unauthorized use of our intellectual property mayadversely affect the value of our current or future technologies to us and ourcustomers, which could cause us to increase expenditures to upgrade and protectour technology or develop and protect competing offerings in new distributionchannels.**

 

New distribution channels and technology in our industry are evolvingrapidly.  Our ability to compete and ourfuture results depend in part on our continued ability to maintain and to maketimely and cost-effective enhancements, upgrades and additions to ourtechnology in response to changes in consumer preferences and increased demandfor our products and services.  We mustalso keep pace with rapid advancements in industry technology, standards andpractices, and protect our technology. Additionally, we must maintain our ability to ensure the security andprivacy of personal information transmitted through our websites and otherdistribution channels.  Unauthorized useof our intellectual property could have a material adverse effect on us, andour legal remedies may not adequately compensate us for the damages to ourbusiness caused by such use.  Maintainingflexibility to respond to technological and market dynamics may requiresubstantial expenditures and lead-time. We cannot assure you that we will successfully identify and develop newproducts or services in a timely manner, that offerings, technologies orservices developed by others will not render our offerings obsolete ornoncompetitive, or that the technologies in which we focus our research anddevelopment investments will achieve acceptance in the marketplace and providea return on our investment.

 

**Our systems may suffer failures, capacityconstraints and business interruptions, which could increase our operatingcosts and cause us to lose customers.**

 

Our businesses are largely dependent on the computer data centers andnetwork systems operated for us by Electronic Data Systems Corporation.  We rely on several communications servicesuppliers and on the global Internet to provide network access between ourcomputer data center and end-users of our services.  Travelocity and *Site59* are dependent upon GDS’s (the *Sabre*GDS and a third-party provider,respectively) to process their travel bookings. Like any company in our industry, we occasionally experience systeminterruptions that make some or all of our global distribution system or otherdata processing services unavailable, which may prevent us from efficiently

 

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providing services to our customers or other third parties and whichcould result in a material adverse effect upon our businesses, financialcondition or results of operations (particularly if such events occur atTravelocity).  System capacity limits orconstraints arising from unexpected increases in our volume of business couldcause interruptions, outages or delays in our services, or a deterioration intheir performance, or could impair our ability to process transactions.  Much of the computer and communicationshardware upon which we depend is located in a single facility.  Our systems might be damaged or interruptedby fire, flood, power loss, telecommunications failure, break-ins, earthquakes,terrorist attacks, hostilities or war or similar events.  Computer viruses, physical or electronicbreak-ins and similar disruptions affecting the global Internet or our systemsmight cause service interruptions, delays and loss of critical data, and couldprevent us from providing our services. Problems affecting our systems might be expensive to remedy and couldsignificantly diminish our reputation and brand name and prevent us from providingservices.  We could be harmed by outagesin, or unreliability of, the data center or network systems.

 

**Our success depends on maintaining the integrity of, andupgrading the quality of, our systems and infrastructure.**

 

In order to be successful, we must provide reliable, real-time accessto our systems for our customers and suppliers. As our operations grow in bothsize and scope, we will continuously need to improve and upgrade our systemsand infrastructure to offer an increasing number of customers and travelsuppliers enhanced products, services, features and functionality – all whilemaintaining the reliability and integrity of our systems andinfrastructure.  The expansion of oursystems and infrastructure will require us to commit substantial financial,operational and technical resources before the volume of business increases,with no assurance that the volume of business will increase. Consumers andsuppliers will not tolerate a service hampered by slow delivery times,unreliable service levels, service outages due to the installation of upgrades,or insufficient capacity, any of which could have a material adverse effect onour business, financial condition or results of operations.

 

**Our processing, storage, use and disclosure of personal datacould give rise to liabilities as a result of governmental regulation,conflicting legal requirements or differing views of personal privacy rights.**

 

Inour processing of travel transactions, we receive and store a large volume ofpersonally identifiable data.  This datais increasingly subject to legislation and regulations in numerousjurisdictions around the world, including the Commission of the European Union(“E.U. Commission”) through its Data Protection Directive and variations ofthat directive in the member states of the European Union (“E.U.”).  This government action is typically intendedto protect the privacy of personal data that is collected, processed andtransmitted in or from the governing jurisdiction.  We could be adversely affected if legislationor regulations are expanded to require changes in our business practices or ifgoverning jurisdictions interpret or implement their legislation or regulationsin ways that negatively affect our business, financial condition and results ofoperations.

 

In addition,in the aftermath of the terrorist attacks of September 11, 2001 in theUnited States, government agencies have been contemplating or developinginitiatives to enhance national and aviation security, including theTransportation Security Administration’s Computer-Assisted PassengerPrescreening System, known as CAPPS II. These initiatives may result inconflicting legal requirements with respect to data handling. As privacy anddata protection has become a more sensitive issue, we may also become exposedto potential liabilities as a result of differing views on the privacy oftravel data.  Travel businesses have alsobeen subjected to investigations, lawsuits and adverse publicity due toallegedly improper disclosure of passenger information.  These and other privacy developments that aredifficult to anticipate could adversely impact our business, financialcondition and results of operations.

 

**State and local tax issues have the potentialto have an adverse effect on our financial condition and results of operations.**

 

Some state and local taxing authorities impose taxes on the sale, useor occupancy of hotel room accommodations, which are called transient,occupancy, accommodation, sales or hotel room taxes.  Hotel operators generally collect and remitthese occupancy taxes.  Consistent withthat practice, when a customer books a merchant hotel room through one of ourtravel services, we collect from the customer an amount sufficient to pay thehotel its room charge and the occupancy taxes on that charge, as well asadditional amount representing our fee.

 

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We do not collect or remit occupancy taxes on our fee.  Some tax authorities claim that occupancytaxes should be collected on some or all of that fee.  We believe there are strong arguments thatour fee is not subject to occupancy taxes (although tax laws vary among thejurisdictions).  We are attempting to resolvethis issue with tax authorities in various jurisdictions, but we cannot predictthe resolution in any particular jurisdiction.

 

We have established a reserve for potential occupancy tax liability,consistent with applicable accounting principles and in light of all currentfacts and circumstances.  The reserverepresents our best estimate of our contingent liability for occupancytaxes.  A variety of factors could affectany actual liability for occupancy taxes, such as the number of jurisdictionsthat prevail in either assessing additional occupancy taxes or negotiating a settlementwith us, the fees potentially subject to tax in each jurisdiction, changes inapplicable tax laws, and the timing of any or all of the foregoing.  We cannot assure you that the amount of ourliability on occupancy taxes will not exceed that reserve and will not have amaterial adverse effect on our financial results.

 

**Regulatory developments abroad could limitour ability to compete by restricting our flexibility to respond to competitiveconditions, which could cause our customers to be diverted to our competitorsand adversely affect our revenue and results of operations.**

 

The E.U. Commission is engaged in acomprehensive review of its rules governing CRS systems.  It is unclear when the E.U. Commission willcomplete its review and what changes, if any, will be made to its CRSrules.  We could be unfairly andadversely affected if, for example, these rules are retained as to traditionalglobal distribution systems used by travel agencies but are not applied totravel distribution websites owned by more than one airline.  We could also be adversely affected ifrestrictions are imposed or continued on CRS advertising and displays or ifadditional limitations are placed upon our right to contract with travel agentsor airlines.

 

We could also be adversely affected if changes to any of the foregoingCRS rules increase our cost of doing business or weaken the non-discriminatoryparticipation rules to allow one or more large airlines owning a competing CRSto discontinue or to lower its level of participation in our globaldistribution system.

 

**Our international operations are subject toother risks, which may impede our ability to grow internationally and adverselyaffect our overall results of operations.**

 

We continually seek to expand the reach of our variousbusinesses into international markets as well as to successfully integrate,operate and manage our existing and future international operations.  Our international operations are subject to anumber of risks, including, but not limited to, the following:

 

•                  competition fromlocal businesses, which may have a better understanding of, and ability tofocus on, local consumers and their preferences, as well as more establishedlocal brand recognition and better access to local financial and strategic resources,

 

•                  difficulty indeveloping, managing and staffing international operations as a result ofdistance, language and cultural differences,

 

•                  local economicand political conditions, including conditions resulting from the existing andpotential conflicts in the Middle East,

 

•                  restrictivegovernmental actions, such as trade protection measures, including exportduties and quotas and custom duties and tariffs,

 

•                  changes in legalor regulatory requirements,

 

•                  limitations onthe repatriation of funds,

 

•                  consumerprotection laws and restrictions on pricing or discounts,

 

•                  lack of, or thefailure to implement, the appropriate infrastructure to support our technology,

 

•                  lesserprotection in some jurisdictions for our intellectual property,

 

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•                  laws andpolicies of the U.S. affecting trade, foreign investment and loans; and

 

•                  foreign tax andother laws.

 

These risks may adversely affect our ability to conduct and growbusiness internationally, which could cause us to increase expenditures andcosts, decrease our revenue growth or both.

 

**Item 3.****           Quantitative and Qualitative Disclosuresabout Market Risk**

 

**Interest Rate Risk**

 

AtJune 30, 2004 our exposure to interest rates was related primarily to ourmarketable securities portfolio. Offsetting some of this exposure was the fixed to floating interest rateswaps on our public notes and capital lease. The objectives of our marketable securities are safety of principal,liquidity maintenance, yield maximization and full investment of all availablefunds.  As such, our investment portfolioconsists primarily of high credit quality certificates of deposit, bankers’acceptances, commercial paper, mortgage-backed and receivables-backedsecurities and corporate and government notes. If short-term interest rates had been 10% lower during the first sixmonths of 2004, our interest income from marketable securities would havedecreased by approximately $0.6 million. This amount was determined by applying the hypothetical interest ratechange to our average balance of marketable securities during the first sixmonths of 2004.

 

At June 30, 2004 we had obligations under fixed rate notes of $400million (“Notes”) and a $168 million capital lease obligation.  We entered into fixed to floating interestrate swaps related to $300 million of the outstanding Notes, effectivelyconverting $300 million of the $400 million fixed rate Notes into floating rateobligations.  In June 2003, we alsoentered into a fixed to floating interest rate swap that effectively converts$100 million of the capital lease obligation into a floating rate obligation(see Note 6 to the Consolidated Financial Statements for additional details onthe swaps).  If short-term interest rateshad been 10% higher during the first six months of 2004, our interest expensewould have increased by approximately $0.2 million. This amount was determinedby applying the hypothetical interest rate change to our floating rateborrowings balance during the first six months of 2004.

 

If our mix of interest rate-sensitive assets and liabilities changessignificantly, we may enter into additional derivative transactions to manageour net interest exposure.

 

**Foreign Currency Risk**

 

We have variousoperations outside of the United States, primarily in North America, SouthAmerica, Europe, Australia and Asia.  Asa result of these business activities, we are exposed to foreign currencyrisk.  Because a significant portion ofour business is transacted in the United States dollar, these exposures havehistorically related to a small portion of our overall operations.  Nevertheless, during times of devaluation ofthe U.S. dollar, such as in 2003 and the first half of 2004, the increase inour foreign expenses can have a negative impact on our operating results.  To reduce the impact of this earningsvolatility, we hedge a portion of our foreign currency exposure by enteringinto foreign currency forward contracts on our three largest foreign currencyexposures.  These contracts, totaling $89million at December 31, 2003 and $99 million at June 30, 2004,represent obligations to purchase foreign currencies at a predeterminedexchange rate, to fund a portion of our expenses that are denominated inforeign currencies.  Beginning inMarch 2004 we also began to hedge a portion of our foreign currencyexposure using option contracts, which give us the right to purchase foreigncurrencies at predetermined exchange rates to fund a portion of our expensesthat are denominated in foreign currencies. As of June 30, 2004 $23 million of option contracts remainoutstanding.  The result of an immediate10 percent devaluation of the U.S. dollar in 2004 from June 30, 2004levels relative to our primary foreign currency exposures would result in anincrease in the U.S. dollar-equivalent of foreign currency denominated expensesof approximately $0.5 million for the remainder of 2004, net of hedgeinstruments outstanding.  Thissensitivity analysis was prepared based upon 2004 projections of our primaryforeign currency-denominated expenses and foreign currency forward and optionscontracts as of June 30, 2004.

 

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**Item 4.****           Controls and Procedures**

 

***Limitations on theEffectiveness of Controls*.**    Ourmanagement, including our principal executive officer (“CEO”) and principalfinancial officer (“CFO”), believes that our disclosure controls and proceduresand our internal controls over financial reporting are designed to provide, andeffectively provide, reasonable assurance of achieving their objectives.  We do not expect that these controls willprevent all errors and all fraud.  Acontrol system, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the control systemare met.  Because of the limitations inall control systems, no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud, if any, within the Company havebeen detected.  Furthermore, the designof any control system is based in part upon certain assumptions about thelikelihood of future events, and there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions,regardless of how unlikely.  Because ofthese inherent limitations in a cost-effective control system, misstatementsdue to error or fraud may occur and not be detected.

 

In May, the Company filed on behalf of an officer a late report on Form4, relating to a grant of restricted stock. In order to avoid similar late filings, we revised our Section 16reporting procedures and provided supplemental training to relevantpersonnel.  In addition, our Disclosureand Controls Council evaluated the design and functioning of our disclosurecontrols and procedures related to Form 4 reporting, and provided its writtenconclusions in its quarterly report to the CEO and CFO.

 

***Evaluation of disclosure controls andprocedures*. **As of the end of the period covered by thisreport, our CEO and CFO evaluated the effectiveness of our disclosure controlsand procedures.  Based on theseevaluations, our CEO and CFO believe (i) that our disclosure controls andprocedures have been designed to ensure that information required to bedisclosed by us in this Report is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms and that suchinformation is accumulated and communicated to our management, including theCEO and CFO, as appropriate to allow timely decisions regarding requireddisclosure; and (ii) that our disclosure controls and procedures arefunctioning as designed.

 

***Changes in internal controls over financialreporting. ***Duringthe three and six months ended June 30, 2004, there was no change in ourinternal control over financial reporting (or in other factors) that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting, including any corrective actions requiredwith regard to significant deficiencies or material weaknesses.

 

***Conclusionsregarding disclosure controls.***  Based upon the required evaluation ofdisclosure controls, the CEO and CFO have concluded***,******as of June 30, 2004******,*********that, subject to thelimitations noted above, the Company’s disclosure controls are effective toensure that material information relating to the Company and its consolidatedsubsidiaries is made known to management, including the CEO and CFO.

 

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**PART II****: OTHER INFORMATION**

 

***Item 1. LegalProceedings***

 

None.

 

***Item 2. Changesin Securities, Use of Proceeds and Issuer Purchases of Equity Securities***

 

(a) –(d)  None.

 

(e)          Thefollowing table provides information about purchases by the company (and itsaffiliated purchasers) during the three months ended June 30, 2004 ofequity securities that are registered by the company pursuant toSection 12 of the Exchange Act.

 

### **ISSUER PURCHASES OF EQUITY SECURITIES**

 
| **Period**                          | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Weighted  Average  Price Paid  per Share** | ** ** | **Total Number of  Shares  Purchased as  Part of a  Publicly  Announced  Program** | ** ** | **Maximum Dollar  Value of Shares  That May Yet be  Purchased Under  the Program** | ** **  |
|-------------------------------------|------------|-----------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|-------------|
| April 04/01/04 – 04/30/04 |       | —                                  |       | N/A                                          |       | —                                                                             |       | $                                                                                  | 100,000,000 |   |
| May 05/01/04 – 05/31/04        |       | 583,300                                 |       | $                                            | 23.95      |                                                                               | 583,300    |                                                                               | $           | 86,029,530 |   |
| June 06/01/04 - 06/30/04       |       | 787,300                                 |       | $                                            | 26.72      |                                                                               | 787,300    |                                                                               | $           | 64,995,315 |   |
| Total 2nd Quarter 2004  Repurchases |       | 1,370,600                               |       | $                                            | 25.54      |                                                                               | 1,370,600  |                                                                               |        |   |

 

On April 19, 2004 our Board of Directors approved a sharerepurchase program authorizing us to repurchase up to $100 million of ourCommon Stock.  As of June 30, 2004,we have purchased approximately $35 million of our Common Stock pursuant tothis authorization.  We will generallyseek to make future repurchases pursuant to 10b5-1 trading plans, unless suchplans are supplemented or terminated at the discretion of management.

 

***Item 3. DefaultsUpon Senior Securities***

 

None.

 

***Item 4. Submissionof Matters to a Vote of Security Holders***

 

Theannual meeting of stockholders of Sabre Holdings Corporation was held onMay 4, 2004. The owners of 127,631,035 shares of Class A CommonStock, representing 91.26% of the voting power of all of the shares of SabreHoldings Corporation issued and outstanding, were represented at the annualmeeting. Each share of our Class A Common Stock was entitled to one voteat the annual meeting.

 

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Ourstockholders elected each of the following individuals as a director of SabreHoldings Corporation for a three-year term: Royce S. Caldwell (125,437,881votes in favor, 2,193,154 votes withheld), Paul C. Ely, Jr. (125,378,634 votesin favor, 2,252,401 votes withheld), and Glenn W. Marschel, Jr. (125,440,105votes in favor, 2,190,930 votes withheld). The terms of office of the followingdirectors continued after the annual meeting: Michael S. Gilliland, Bob L.Martin, Richard L. Thomas, Richard G Lindner, Pamela B. Strobel and MaryAlice Taylor.

 

Ourstockholders ratified the appointment of Ernst & Young LLP as independentauditors for the Company for the year ending December 31, 2004 with123,864,818 votes in favor, 3,747,220 votes against and 18,997 votesabstaining.

 

Our stockholders approved a proposedamendment to the Company’s Employee Stock Purchase Plan increasing the numberof available shares from 2,000,000 to 4,000,000.  The proposed amendment to the Employee StockPurchase Plan was approved with 118,160,350 votes in favor, 1,045,195 votesagainst, 46,692 abstaining, and 8,378,798 broker non-votes.  The Employee Stock Purchase Plan wassummarized in and filed as “Exhibit A” to our proxy statement for the annualmeeting, which was filed with the Securities and Exchange Commission onMarch 29, 2004.

 

***Item 5. OtherInformation***

 

None.

 

***Item 6. Exhibitsand Reports on Form 8-K***

 

(a)                                  Thefollowing exhibits are included herein:

 
| **Exhibit  Number** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                        |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                                                              |
| 3.1                 |       | Restated Certificate of Incorporation of Sabre Holdings Corporation.  (1)                                                                                                                                                                                                                                                                                         |
| 3.2                 |       | Restated Bylaws of Sabre Holdings Corporation. (2)                                                                                                                                                                                                                                                                                                                |
| 10.1                |       | Credit Agreement, dated as of June 15, 2004, by and among Sabre  Inc., Bank of America, N.A., as Administrative Agent, Citibank, N.A.,  Sumitomo Mitsui Banking Corp., New York, UFJ Bank Limited, and JP Morgan  Chase Bank, as Co-Syndication Agents, Banc of America Securities LLC, as Sole  Lead Arranger, and the other banks party thereto.  (3) |
| 12.1                |       | Computation of Ratio of Earnings to Fixed Charges (3)                                                                                                                                                                                                                                                                                                             |
| 31.1                |       | Written statement pursuant to 17 CFR 240.13a-14(a), as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated  August 6, 2004, signed by Michael S. Gilliland as Chief Executive  Officer (3)                                                                                                                                        |
| 31.2                |       | Written statement pursuant to 17 CFR 240.13a-14(a), as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated  August 6, 2004, signed by Jeffery M. Jackson as Chief Financial Officer  (3)                                                                                                                                          |
| 32.1                |       | Written  statement pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002, dated August 6, 2004, signed by Michael S. Gilliland as  Chief Executive Officer (4)                                                                                                                                 |
| 32.2                |       | Written  statement pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002, dated August 6, 2004, signed by Jeffery M. Jackson as  Chief Financial Officer (4)                                                                                                                                   |

 

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(1)                                  Incorporatedby reference to Exhibit 3.1 to our report on Form 10-Q for the quarter endedJune 30, 2000.

(2)                                  Incorporatedby reference to Exhibit 3.2 to our report on Form 10-Q for the quarter endedJune 30, 2001.

(3)                                  Filedherewith.

(4)                                  SabreHoldings Corporation is furnishing, but not filing, the written statementspursuant to Title 18 United States Code Section 1350, as added bySection 906 of the Sarbanes-Oxley Act of 2002, of Michael S. Gilliland,the Chief Executive Officer of Sabre Holdings Corporation, and Jeffery M. Jackson,the Chief Financial Officer of Sabre Holdings Corporation.

 

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(b)                                 Reports on Form 8-K:

 

Pursuant toGeneral Instruction B.2. of Form 8-K, to the extent that the Forms 8-K listedbelow contain Item 9 and/or Item 12 disclosures, those Items of such Forms 8-Kare not incorporated into this Form 10-Q or into any other form or report filedwith the Commission into which this Form 10-Q would be incorporated byreference.

 

•                  On April 20, 2004, SabreHoldings Corporation submitted a report on Item 9 of Form 8-K announcing aquarterly cash dividend.

 

•                  On April 22, 2004, SabreHoldings Corporation submitted a report on Item 9 and Item 12 of Form 8-Kreporting the financial results of the Company for the first quarter endedMarch 31, 2004 and providing an outlook for second quarter and full-year2004 financial performance.

 

•                  On May 5, 2004, Sabre HoldingsCorporation submitted a report on Item 9 of Form 8-K reporting that SabreTravel Network signed a five-year Global Distribution System (“GDS”) subscriberagreement with IAC Global, LLC, a subsidiary of Expedia, Inc. and an indirectsubsidiary of InterActiveCorp.

 

•                  On June 15, 2004, Sabre Holdings Corporation submitteda report on Item 9 of Form 8-K reporting that Sam Gilliland, President and CEOof Sabre Holdings Corporation, was scheduled to present at the Bear StearnsTechnology Conference and reporting certain financial projections of theCompany for the second quarter of 2004.

 

•                  On July 22, 2004, Sabre Holdings Corporation submitteda report on Item 9 and Item 12 of Form 8-K reporting the financial results ofthe Company for the second quarter ended June 30, 2004 and providing anoutlook for third quarter and full-year 2004 financial performance.

 

**Signature**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                     | SABRE HOLDINGS CORPORATION |
|--------------------------|----------------------------|
|                     |                       |   |
|                     |                       |   |
|                     | By:                        | /s/   JEFFERY M. JACKSON |
| Date:August 6, 2004 |                       | Jeffery M. Jackson |
|                     |                       | *Executive Vice President, Chief Financial  Officer and Treasurer* |
|                     |                       | *(Principal Financial Officer)* |

 

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