**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**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 theQuarterly Period Ended September 30, 2004.**

 

**OR**

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

 

**For theTransition Period From              To             **

 

**Commissionfile number 1-12175.**

 

 

**SABRE HOLDINGS CORPORATION**

(Exact name of registrant asspecified in its charter)

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

 

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

 

**NotApplicable**

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

 

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

 

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

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the latest practicabledate.

 

Class A Common Stock, $.01 parvalue—135,480,073 as of October 29, 2004

 

 

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**INDEX**

 

**SABREHOLDINGS CORPORATION**

 

 
| PART I:   | FINANCIAL  INFORMATION                                                                                   | 3  |
|-----------|----------------------------------------------------------------------------------------------------------|----|
| Item 1.   | Financial Statements  (Unaudited)                                                                        | 3  |
|      | Consolidated Balance Sheets-September 30, 2004 and December 31, 2003                                     | 3  |
|      | Consolidated Statements of Income—Three and  nine months ended September 30, 2004 and 2003          | 4  |
|      | Consolidated Condensed Statement of  Stockholders’ Equity—Nine months ended September 30, 2004 | 5  |
|      | Consolidated Statements of Cash Flows—Nine  months ended September 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.   | Unregistered Sales of Equity Securities and Use of Proceeds                                              | 50 |
| Item 3.   | Defaults Upon Senior Securities                                                                          | 51 |
| Item 4.   | Submission of Matters to a Vote of Security  Holders                                                     | 51 |
| Item 5.   | Other Information                                                                                        | 51 |
| Item 6.   | Exhibits                                                                                                 | 52 |
| SIGNATURE | 53                                                                                                       |

 

2

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**PART I. FINANCIAL INFORMATION**

 

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

 

# **SABRE HOLDINGS CORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

**(In thousands)**

 
| ** **                                                                                                                                                           | ** ** | **September 30,  2004** | ** **    | **December 31,  2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|---------------|------------------------|------------|
| ** **                                                                                                                                                           | ** ** | **(Unaudited)**         | ** **    | ** **             | ** ** |
| **Assets**                                                                                                                                                           | ** ** | ** **              | ** **    | ** **             | ** ** |
| **Current assets**                                                                                                                                                   |       |                    |          |                   |       |
| Cash                                                                                                                                                                 | ** ** | **$**                   | **62,548**    | ** **             | $          | 40,862 |   |
| Marketable securities                                                                                                                                                | ** ** | **853,885**             | ** **    | 881,749                |       |
| Accounts receivable, net                                                                                                                                             | ** ** | **383,351**             | ** **    | 348,988                |       |
| Prepaid expenses and other current assets                                                                                                                            | ** ** | **61,439**              | ** **    | 86,475                 |       |
| Deferred income taxes                                                                                                                                                | ** ** | **15,961**              | ** **    | 10,237                 |       |
| Total current assets                                                                                                                                                 | ** ** | **1,377,184**           | ** **    | 1,368,311              |       |
| **Property and equipment**                                                                                                                                           |       |                    | ** **    |                   |       |
| Buildings and leasehold improvements                                                                                                                                 | ** ** | **306,498**             | ** **    | 306,294                |       |
| Furniture, fixtures and equipment                                                                                                                                    | ** ** | **35,568**              | ** **    | 36,684                 |       |
| Computer software and equipment                                                                                                                                      | ** ** | **320,082**             | ** **    | 275,664                |       |
| ** **                                                                                                                                                           |       | **662,148**             |          | 618,642                | ** ** |
| Less accumulated depreciation and  amortization                                                                                                                      | ** ** | **(272,992**            | **)**         | (234,262               | )          |
| Total property and equipment                                                                                                                                         | ** ** | **389,156**             | ** **    | 384,380                |       |
|                                                                                                                                                                 |       |                    | ** **    |                   |       |
| Investments in joint ventures                                                                                                                                        | ** ** | **187,057**             | ** **    | 181,142                |       |
| Goodwill and intangible assets, net                                                                                                                                  | ** ** | **895,432**             | ** **    | 891,740                |       |
| Other assets, net                                                                                                                                                    | ** ** | **140,751**             | ** **    | 130,580                |       |
| **Total assets**                                                                                                                                                     | ** ** | **$**                   | **2,989,580** | ** **             | $          | 2,956,153 |   |
| ** **                                                                                                                                                           | ** ** | ** **              | ** **    |                   |       |
| **Liabilities and stockholders’ equity**                                                                                                                        |       |                    | ** **    |                   |       |
| **Current liabilities**                                                                                                                                              |       |                    | ** **    |                   |       |
| Accounts payable                                                                                                                                                     | ** ** | **$**                   | **202,926**   | ** **             | $          | 202,615 |   |
| Accrued compensation and related benefits                                                                                                                            | ** ** | **76,322**              | ** **    | 62,557                 |       |
| Accrued subscriber incentives                                                                                                                                        | ** ** | **89,078**              | ** **    | 70,178                 |       |
| Deferred revenues                                                                                                                                                    | ** ** | **36,242**              | ** **    | 34,791                 |       |
| Other accrued liabilities                                                                                                                                            | ** ** | **145,561**             | ** **    | 133,254                |       |
| Total current liabilities                                                                                                                                            | ** ** | **550,129**             | ** **    | 503,395                |       |
|                                                                                                                                                                 |       |                    | ** **    |                   |       |
| Deferred income taxes                                                                                                                                                | ** ** | **—**              | ** **    | 4,420                  |       |
| Pensions and other postretirement benefits                                                                                                                           | ** ** | **141,763**             | ** **    | 133,404                |       |
| Other liabilities                                                                                                                                                    | ** ** | **23,019**              | ** **    | 25,162                 |       |
| Minority interests                                                                                                                                                   | ** ** | **6,160**               | ** **    | 6,463                  |       |
| Capital lease obligation                                                                                                                                             | ** ** | **161,717**             | ** **    | 160,725                |       |
| Public and other notes payable                                                                                                                                       | ** ** | **442,238**             | ** **    | 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 September 30,  2004 and December 31, 2003, respectively | ** ** | **1,459**               | ** **    | 1,457                  |       |
| Additional paid-in capital                                                                                                                                           | ** ** | **1,287,524**           | ** **    | 1,291,841              |       |
| Retained earnings                                                                                                                                                    | ** ** | **633,470**             | ** **    | 495,372                |       |
| Accumulated other comprehensive loss                                                                                                                                 | ** ** | **(15,470**             | **)**         | (8,115                 | )          |
| Less treasury stock at cost: 10,378 and  4,322 shares, respectively                                                                                                  | ** ** | **(242,429**            | **)**         | (100,447               | )          |
|                                                                                                                                                                 | ** ** | ** **              | ** **    |                   |       |
| Total stockholders’ equity                                                                                                                                      | ** ** | **1,664,554**           | ** **    | 1,680,108              |       |
|                                                                                                                                                                 | ** ** | ** **              | ** **    |                   |       |
| **Total liabilities and stockholders’ equity**                                                                                                                  | ** ** | **$**                   | **2,989,580** | ** **             | $          | 2,956,153 |   |

 

SeeNotes to Consolidated Financial Statements

 

3

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**SABRE HOLDINGS CORPORATION**

**CONSOLIDATED STATEMENTS OF INCOME**

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

 
| ** **                                   | ** ** | **Three Months Ended  September 30,** | ** **  | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------|------------|---------------------------------------|-------------|--------------------------------------|------------|
| ** **                                   | ** ** | **2004**                              | ** **  | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Revenues**                                 | ** ** | **$**                                 | **544,390** | ** **                           | $          | 526,793 |   | **$** | **1,635,046** | ** ** | $ | 1,577,815 |   |
| Cost of revenues                             | ** ** | **302,015**                           | ** **  | 323,667                              |       | **921,307** | ** ** | 953,575 |   |
| **Gross profit**                             | ** ** | **242,375**                           | ** **  | 203,126                              |       | **713,739** | ** ** | 624,240 |   |
| **Other operating expenses**                 |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Selling, general and administrative          | ** ** | **153,209**                           | ** **  | 138,372                              |       | **439,293** | ** ** | 390,619 |   |
| Amortization of intangible assets            | ** ** | **11,999**                            | ** **  | 20,888                               |       | **39,348** | ** ** | 45,469 |   |
| Total other operating expenses               | ** ** | **165,208**                           | ** **  | 159,260                              |       | **478,641** | ** ** | 436,088 |   |
|                                         |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| **Operating income**                         | ** ** | **77,167**                            | ** **  | 43,866                               |       | **235,098** | ** ** | 188,152 |   |
| **Other income (expense)**                   |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Interest income                              | ** ** | **4,300**                             | ** **  | 4,156                                |       | **10,841** | ** ** | 12,535 |   |
| Interest expense                             | ** ** | **(6,861**                            | **)**       | (6,790                               | )          | **(19,719** | **)** | (17,562 | ) |
| Other, net                                   | ** ** | **2,119**                             | ** **  | (1,550                               | )          | **8,603** | ** ** | (31,652 | ) |
| Total other income (expense)                 | ** ** | **(442**                              | **)**       | (4,184                               | )          | **(275** | **)** | (36,679 | ) |
|                                         |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| **Income before provision for income taxes** | ** ** | **76,725**                            | ** **  | 39,682                               |       | **234,823** | ** ** | 151,473 |   |
| Provision for income taxes                   | ** ** | **9,299**                             | ** **  | 14,233                               |       | **65,424** | ** ** | 54,329 |   |
|                                         |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| **Net earnings**                             | ** ** | **$**                                 | **67,426**  | ** **                           | $          | 25,449 |   | **$** | **169,399** | ** ** | $ | 97,144 |   |
|                                         |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| **Earnings per common share**                |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Basic                                        | ** ** | **$**                                 | **.50**     | ** **                           | $          | .18 |   | **$** | **1.23** | ** ** | $ | .68 |   |
| Diluted                                      | ** ** | **$**                                 | **.49**     | ** **                           | $          | .18 |   | **$** | **1.22** | ** ** | $ | .68 |   |
|                                         | ** ** | ** **                            | ** **  |                                 |       | ** ** | ** ** |   |   |
| **Dividends per common share**               | ** ** | **$**                                 | **.075**    | ** **                           | $          | .07 |   | **$** | **.225** | ** ** | $ | .14 |   |

 

See Notes to ConsolidatedFinancial Statements

 

4

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**SABRE HOLDINGS CORPORATION**

**CONSOLIDATED CONDENSED STATEMENT OF STOC****KHOLDERS’ EQUITY**

**NINE MONTHS ENDED SEPTEMBER 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                                                                              |       | —                     |       | (1,080                           | )          | —                 |       | —                                    |        | 10,227              |       | 9,147       |       |
| Restricted stock plan                                                                           |       | 2                          |       | (10,843                          | )          | —                 |       | —                                    |        | 10,073              |       | (768        | )          |
| Employee stock purchase plan                                                                    |       | —                     |       | (1,748                           | )          | —                 |       | —                                    |        | 8,733               |       | 6,985       |       |
| Tax benefit from exercise of employee stock  options                                            |       | —                     |       | 1,051                            |       | —                 |       | —                                    |        | —              |       | 1,051       |       |
| Stock based compensation for employees                                                          |       | —                     |       | 9,182                            |       | —                 |       | —                                    |        | —              |       | 9,182       |       |
| Dividends                                                                                       |       | —                     |       | —                           |       | (31,301                | )          | —                                    |        | —              |       | (31,301     | )          |
| Purchase of treasury stock                                                                      |       | —                     |       | —                           |       | —                 |       | —                                    |        | (171,015            | )          | (171,015    | )          |
| Other                                                                                           |       | —                     |       | (879                             | )          | —                 |       | —                                    |        | —              |       | (879        | )          |
| Comprehensive income:                                                                           |       |                       |       |                             |       |                   |       |                                      |        |                |       |        |       |
| Net earnings                                                                                    |       | —                     |       | —                           |       | 169,399                |       | —                                    |        | —              |       | 169,399     |       |
| Unrealized loss on foreign currency forward  and option contracts, net of deferred income taxes |       | —                     |       | —                           |       | —                 |       | (4,599                                    | )           | —              |       | (4,599      | )          |
| Unrealized loss on investments, net of  deferred income taxes                                   |       | —                     |       | —                           |       | —                 |       | (1,238                                    | )           | —              |       | (1,238      | )          |
| Unrealized foreign currency translation  loss                                                   |       | —                     |       | —                           |       | —                 |       | (928                                      | )           | —              |       | (928        | )          |
| Other                                                                                           |       | —                     |       | —                           |       | —                 |       | (590                                      | )           | —              |       | (590        | )          |
|                                                                                            |       |                       |       |                             |       |                   |       |                                      |        |                |       |        |       |
| Total comprehensive income                                                                      |       |                       |       |                             |       |                   |       |                                      |        |                |       | 162,044     |       |
|                                                                                            |       |                       |       |                             |       |                   |       |                                      |        |                |       |        |       |
| **Balance at September 30, 2004**                                                               | ** ** | **$**                      | **1,459**  | ** **                       | **$**      | **1,287,524**          | ** ** | **$**                                     | **633,470** | ** **          | **$**      | **(15,470** | **)**      | **$** | **(242,429** | **)** | **$** | **1,664,554** | ** ** |

 

See Notes to Consolidated FinancialStatements.

 

5

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**SABRE HOLDINGS CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited) (In thousands)**

 
| ** **                                                                                        | ** ** | **Nine Months Ended September 30,** | ** **  |
|---------------------------------------------------------------------------------------------------|------------|-------------------------------------|-------------|
| ** **                                                                                        | ** ** | **2004**                            | ** **  | **2003** | ** ** |
| **Operating Activities**                                                                          |       |                                | ** **  |   |   |
| Net earnings                                                                                      | ** ** | **$**                               | **169,399** | ** ** | $ | 97,144 |   |
| Adjustments to reconcile net earnings to  cash provided by operating activities:                  |       |                                | ** **  |   |   |
| Depreciation and amortization                                                                     | ** ** | **91,278**                          | ** **  | 96,353 |   |
| Loss on impaired intangible assets                                                                | ** ** | **3,198**                           | ** **  | 8,831 |   |
| Stock based compensation for employees                                                            | ** ** | **9,182**                           | ** **  | 13,892 |   |
| Allowance for doubtful accounts                                                                   | ** ** | **15,404**                          | ** **  | (123 | ) |
| Deferred income taxes                                                                             | ** ** | **(2,451**                          | **)**       | (4,688 | ) |
| Tax benefit from exercise of stock options                                                        | ** ** | **1,051**                           | ** **  | 586 |   |
| Equity loss in joint ventures                                                                     | ** ** | **7,066**                           | ** **  | 1,839 |   |
| Loss on refinancing of building                                                                   | ** ** | **—**                          | ** **  | 27,947 |   |
| Other                                                                                             | ** ** | **(7,736**                          | **)**       | 2,808 |   |
| Changes in operating assets and  liabilities:                                                     |       |                                | ** **  |   |   |
| Accounts receivable                                                                               | ** ** | **(47,001**                         | **)**       | (70,858 | ) |
| Prepaid expenses                                                                                  | ** ** | **10,266**                          | ** **  | (21,230 | ) |
| Other assets                                                                                      | ** ** | **18,237**                          | ** **  | 33,311 |   |
| Accrued compensation and related benefits                                                         | ** ** | **13,580**                          | ** **  | 1,911 |   |
| Accounts payable and other accrued  liabilities                                                   | ** ** | **29,426**                          | ** **  | 35,009 |   |
| Pensions and other postretirement benefits                                                        | ** ** | **7,769**                           | ** **  | 1,507 |   |
| Other liabilities                                                                                 | ** ** | **(498**                            | **)**       | (7,900 | ) |
| Cash provided by operating activities                                                             | ** ** | **318,170**                         | ** **  | 216,339 |   |
| **Investing Activities**                                                                          |       |                                | ** **  |   |   |
| Additions to property and equipment                                                               | ** ** | **(56,463**                         | **)**       | (54,159 | ) |
| Business combinations, net of cash acquired                                                       | ** ** | **(46,843**                         | **)**       | (11,934 | ) |
| Investments in joint ventures                                                                     | ** ** | **(29,642**                         | **)**       | (11,060 | ) |
| Purchases of marketable securities                                                                | ** ** | **(7,713,992**                      | **)**       | (6,528,942 | ) |
| Sales of marketable securities                                                                    | ** ** | **7,741,718**                       | ** **  | 6,434,837 |   |
| Proceeds from sales of warrants                                                                   | ** ** | **—**                          | ** **  | 5,054 |   |
| Other investing activities                                                                        | ** ** | **(8,419**                          | **)**       | **—** | ** ** |
| Cash used for investing activities                                                                | ** ** | **(113,641**                        | **)**       | (166,204 | ) |
| **Financing Activities**                                                                          |       |                                | ** **  |   |   |
| Proceeds from exercise of stock options and  issuance of stock under employee stock purchase plan | ** ** | **15,364**                          | ** **  | 5,859 |   |
| Dividends paid                                                                                    | ** ** | **(31,301**                         | **)**       | (20,078 | ) |
| Purchases of treasury stock                                                                       | ** ** | **(165,011**                        | **)**       | **—** | ** ** |
| Payment to refinance building                                                                     | ** ** | **—**                          | ** **  | (27,947 | ) |
| Other financing activities, net                                                                   | ** ** | **(1,895**                          | **)**       | (2,661 | ) |
| Cash used for financing activities                                                                | ** ** | **(182,843**                        | **)**       | (44,827 | ) |
| Increase decrease in cash                                                                         | ** ** | **21,686**                          | ** **  | 5,308 |   |
| Cash at beginning of period                                                                       | ** ** | **40,862**                          | ** **  | 21,176 |   |
|                                                                                              |       |                                | ** **  |   |   |
| Cash at end of period                                                                             | ** ** | **$**                               | **62,548**  | ** ** | $ | 26,484 |   |

 

See Notes to ConsolidatedFinancial Statements

 

6

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**SABREHOLDINGS CORPORATION**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**(Unaudited)**

 

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

 

Sabre HoldingsCorporation (“Sabre Holdings”) is a Delaware holding company.  Sabre Inc. is the principal operatingsubsidiary and sole direct subsidiary of Sabre Holdings.  Sabre Inc. or its direct or indirectsubsidiaries conduct all of our businesses. In this Report on Form 10-Q,references to the “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)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* GDSand markets and distributes travel-related products and services through thetravel agency and corporate channels. We engage in consumer-direct andbusiness-direct travel marketing and distribution through our *Travelocity*Òbusiness. In addition, our *Sabre AirlineSolutionsTM* business is a leading provider of technology andservices, including development and consulting services, to airlines and othertravel 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 operationsbeing integrated into the remaining three segments.  Accordingly, GetThere is no longer reportedas a separate segment.  Disaggregatedinformation relating to the financial performance of our business segments forthe three and nine months ended September 30, 2004 and 2003 is presented inNote 7 to the Consolidated Financial Statements.

 

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

 

**Basis of Presentation****–**The accompanying unaudited consolidated financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States for interim financial information and with the instructionsto Form 10-Q and Article 10 of Regulation S-X. Accordingly, theydo not include all of the information and footnotes required by accountingprinciples generally accepted in the United States for complete financialstatements. In the opinion of management, these financial statements containall adjustments, consisting of normal recurring accruals, necessary to presentfairly the financial position, results of operations and cash flows for theperiods indicated. The preparation of financial statements in accordance withaccounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the amounts reportedin the financial statements and accompanying notes. Operating results for thethree and nine months ended September 30, 2004 are not necessarily indicativeof results that may be expected for any other interim period or for the yearended December 31, 2004.  Ourquarterly financial data should be read in conjunction with our consolidatedfinancial statements for the year ended December 31, 2003 (including thenotes thereto), set forth in Sabre Holdings Corporation’s Annual Report onForm 10-K filed with the Securities and Exchange Commission on February27, 2004.

 

We consolidate all of our majority-ownedsubsidiaries and companies that are not variable interest entities over whichwe exercise control through majority voting rights.  We would also consolidate all variableinterest entities of which we are the primary beneficiary.  However, no entities are currentlyconsolidated due to control through operating, financing agreements, or otherarrangements (including variable interests held in variable interest entities).

 

Theconsolidated financial statements include our accounts after elimination of allsignificant intercompany balances and transactions.  We account for our interests in jointventures and investments in common stock of other companies that we do

 

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(1)   Agent 59, Assured Vantage, Direct Connect,Hotel Spotlight, GetThere, Jurni Network, Sabre, Sabre Airline Solutions, SabreConnected, Sabre Exclusives, Sabre Holdings, the Sabre Holdings logo, SabreTravel Network, SabreSonic, Site 59, Site59.com, TotalTrip, Travelocity,Travelocity Business, Travelocity.com, and World Choice Travel are trademarksof affiliates of Sabre Holdings Corporation. All other trademarks are the property of their respective owners.   ©2004 Sabre Holdings Corporation. All rightsreserved.

 

7

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not controlbut over which we exert significant influence using the equity method, with ourshare of their results classified as revenues. Investments in the common stock of other companies over which we do notexert significant influence are accounted for at cost.  We periodically evaluate for impairmentequity and debt investments by reviewing updated financial information providedby the investee, including valuation information from new financingtransactions by the investee and information relating to competitors ofinvestees when available.  If wedetermine that an investment is impaired, the carrying value of the investmentis reduced to its estimated fair value. To date, write-downs of investments have been insignificant to ourresults 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.

 

**Revenue Recognition** – Under our Travelocity merchanthotel and TotalTrip lines of business, we record merchant revenues on a netbasis, defined as the amount paid by the customer for products or services,minus our payment to the travel supplier. On the date a customer makes and prepays a reservation, we accrue forcosts of merchant revenues as a supplier liability based on the amount weexpect to be billed by our suppliers.  Insome cases, a portion of Travelocity’s pre-paid merchant hotel and travelpackage sales goes unused by the traveler. In those circumstances, and some others, Travelocity may not be billedthe full amount of the accrued supplier liability.  Before the third quarter of2004, we carried the entire unused portion of those pre-paid sales as anaccrued supplier liability.  In the thirdquarter of 2004, we implemented technology improvements that allow us to betterestimate the potential liability to suppliers for those pre-paid sales and weadopted a process to reduce the accrued supplier liability for amounts agedmore than six months.  For the thirdquarter of 2004, that process resulted in an approximately $8 million decreasein the accrued supplier liability and an approximately $8 million increase totransaction revenue and operating income. Based on recent trends in the amounts billed to us by suppliers ascompared to the amounts we accrued, we estimate approximately $5 million of the$8 million adjustment is attributable to travel in the period prior to December2003 which would be recognized six months following the travel date under ournew process.  Our process includesconsideration of key factors, including, but not limited to the age ofthe supplier liability and historical billing and paymentinformation.  We intend to consistentlyapply this process on a going forward basis.

 

**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  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                               | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                     |       |                                  |       |                                 |       |   |   |   |   |
| Denominator for basic earnings per common share—weighted-average  shares            |       | **135,513**                           |       | 142,672                              | ** ** | **137,370** |   | 142,451 |   |
| Dilutive effect of stock awards and options                                              | ** ** | **2,583**                             |       | 2,485                                | ** ** | **1,861** |   | 1,156 |   |
|                                                                                     |       |                                  |       |                                 |       |   |   |   |   |
| Denominator for diluted earnings per common  share—adjusted weighted-average shares |       | **138,096**                           |       | 145,157                              | ** ** | **139,231** |   | 143,607 |   |

 

Options to purchaseapproximately 16,734,112 and 16,117,038 weighted-average shares of our commonstock were outstanding during the three and nine month periods ending September30, 2004, but were excluded from the computation of diluted earnings per sharebecause the effect would be anti-dilutive. For the corresponding periods in 2003, anti-dilutive options to purchaseapproximately 16,346,710 and 17,261,417 weighted-average shares of our commonstock were excluded from the computation of diluted earnings per share.  The overall decrease in the weighted-averageshares for the three and nine month periods ending September 30, 2004 versus2003 is due to our share repurchase programs.

 

**Stock Awards and Options –**InMarch 2004, the Financial Accounting Standards Board (“FASB”) issued anexposure draft entitled “Share Based Payment”, which would amend FinancialAccounting Standards 123 and 95. We are monitoring the FASB’s progress on thisguidance and its potential impact on our financial statements.  When the guidance becomes effective, weintend to adopt the statement in accordance with FASB requirements. As aresult, current estimates of option values using the Black-Scholes method (asused in the table below) may not be indicative of results from valuationmethodologies required by the final rules.  Currently, we account for stock awards andstock option grants using the intrinsic value method set forth in AccountingPrinciples Board Opinion No. 25, *Accounting for StockIssued to Employees* (“APB 25”), and related interpretations.  Generally, no compensation expense isrecognized for stock option grants to employees if the exercise price is at orabove the fair market value of the underlying stock on the date of grant.  Compensation expense relating to other stockawards is recognized over the period during which the employee renders serviceto us necessary to earn the award.

 

8

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The followingtable summarizes the pro forma effect of stock-based compensation on our netearnings and net earnings per share for the three and nine months endedSeptember 30, 2004 and 2003, as if we had accounted for such compensation atfair value (in thousands, except per share data):

 
| ** **                                                                                                                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                          | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                                                |       |                                  |       |                                 |       |   |   |   |   |
| Net earnings as reported                                                                                                            | ** ** | **$**                                 | **67,426** |                                 | $          | 25,449 | ** ** | **$** | **169,399** |   | $ | 97,144 |   |
| Add stock compensation expense determined  under intrinsic value method, net of income taxes                                        | ** ** | **1,697**                             |       | 2,862                                | ** ** | **5,671** |   | 8,582 |   |
| Less total stock-based employee  compensation expense determined under fair value based method for all awards,  net of income taxes | ** ** | **7,396**                             |       | 10,324                               | ** ** | **23,559** |   | 32,822 |   |
| Pro forma net earnings                                                                                                              | ** ** | **$**                                 | **61,727** |                                 | $          | 17,987 | ** ** | **$** | **151,511** |   | $ | 72,904 |   |
| ** **                                                                                                                          | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings per common share, as reported:                                                                                         | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                                                                                               | ** ** | **$**                                 | **.50**    |                                 | $          | .18 | ** ** | **$** | **1.23** |   | $ | .68 |   |
| Diluted                                                                                                                             | ** ** | **$**                                 | **.49**    |                                 | $          | .18 | ** ** | **$** | **1.22** |   | $ | .68 |   |
| Net earnings per common share, pro forma:                                                                                           | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                                                                                               | ** ** | **$**                                 | **.46**    |                                 | $          | .13 | ** ** | **$** | **1.10** |   | $ | .51 |   |
| Diluted                                                                                                                             | ** ** | **$**                                 | **.45**    |                                 | $          | .12 | ** ** | **$** | **1.09** |   | $ | .51 |   |

 

**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 ofSeptember 30, 2004 was approximately $1 million.  We have also incurred approximately $3million during 2004 for a workforce reduction of which approximately $1 millionremains outstanding as of September 30, 2004.

 

In the fourthquarter of 2003, we also consolidated our operations (including realigning theproducts, services, and operations of our GetThere business unit into our otherthree business units) and closed additional facilities in the UnitedStates.  These actions resulted in anapproximately $17 million charge, consisting of write-offs of leaseholdimprovements and other facility-related assets, employee relocation expensesand lease termination costs.  Theremaining liability for this charge as of September 30, 2004 was approximately$2 million, which relates entirely to corporate level charges.

 

The following table summarizes the liabilities included in the balancesheets at December 31, 2003 and September 30, 2004 and the amounts paid duringthe nine-month period (in thousands):

 
| ** **                                 | ** ** | **Severance** | ** ** | **Facilities** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|---------------|------------|----------------|------------|-----------|------------|
|                                       |       |          |       |           |       |      |       |
| Remaining liability at December 31, 2003   |       | $             | 7,941      |           | $          | 4,264     |       | $ | 12,205 |   |
| Estimated cost of 2004 workforce reduction |       | 2,777         |       | —         |       | 2,777     |       |
| Amounts paid through September 30, 2004    |       | (8,479        | )          | (2,478         | )          | (10,957   | )          |
| Remaining liability at September 30, 2004  |       | $             | 2,239      |           | $          | 1,786     |       | $ | 4,025 |   |

 

9

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**Amendment to AOL Agreement****–**On January 21, 2004, we revised the terms of and extendedour agreement with America Online (“AOL”) through March 2006.  Travelocity continues to be the exclusivereservations engine for AOL’s Internet properties under the revised agreement.  Under the revised terms of the agreement, webenefit from more strategically aligned terms for placement within AOL’sbrands.  Further, we are obligated forfixed payments of up to $28 million over the two-year term of theagreement.   These fixed payments, alongwith 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 $17 million was recognized for the three and ninemonths ended September 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-year masterservices agreement with WNS North America, Inc. (“WNS”).  Under the agreement, throughout 2004 we areoutsourcing to WNS an increasing portion of our Travelocity contact centeroperations, primarily front-line customer service calls and back-office fulfillment.  By the end of the first quarter of 2005, WNSshould be handling Travelocity’s front-line customer service calls and emails,as well as some mid-office and back-office functions.  WNS istransitioning these day-to-day operations of the customer service functions toits contact centers.  Travelocityemployees will continue to handle sales calls, as well as advanced customerservice issues and quality control.  Wedo not expect severance and related costs incurred due to this agreement to besignificant.

 

For 2004, we have minimum commitments to WNS of $18 million, of whichapproximately $4 million and $13 million was recognized during the three andnine months ended September 30, 2004, respectively.  Thereafter, we are committed to minimumpayments based on a calculation that considers both current and historicaltransaction volumes compared to thresholds established in the agreement.  For 2005 through 2010, the startingthresholds for calculating our commitment for each year ranges from approximately$17 million to $31 million, and actual commitments could be lower than theseamounts, depending on call volumes. Additionally, we committed to lend up to $10 million to WNS fortransitional assistance.  As of September30, 2004, we had loaned approximately $8 million to WNS. On October 4, 2004 weloaned to WNS the remaining balance of approximately $2 million under the $10million loan agreement.  Amounts borrowedby WNS accrue interest at 5%, payable quarterly, and the principal will be duein three annual payments beginning in 2009.

 

**Relocationof Certain Operations –** In April 2004, we announced toaffected employees that we will transition certain of our operations to acompany-operated subsidiary in Latin America. The transition will occur over the remainder of 2004 through the firsthalf of 2006.  Severance, retention andother related costs associated with the plan are currently estimated to be inthe range of $5 million to $7 million, and will primarily be recognized in 2005and 2006 as operations are transitioned.

 

**Acquisition of RM Rocade -**OnAugust 16, 2004, we completed the acquisition of Stockholm, Sweden-based RMRocade AB and RM Assist AB (“RM Rocade”) for approximately $15 million incash.  The acquisition of RM Rocadeexpands the ability of our Sabre Airline Solutions business segment to providesoftware solutions, including a fully functional flight operations productsuite at a compelling price and value point to international small, medium-sizeand low cost carriers.  The results of operationsof RM Rocade have been included in our consolidated statements of income andthe results of operations of our Sabre Airline Solutions segment from the dateof acquisition.  Assets acquired andliabilities assumed have been recorded at their estimated fair values and the$11 million excess of cost over the estimated fair value of the net assets hasbeen recorded as goodwill.  The acquiredgoodwill is not deductible for tax purposes. The fair values were determined by management based on a valuation ofthe net assets acquired, including intangible assets of $3 million.  Intangible assets subject to amortization arebeing amortized over a weighted average of 3 years and relate primarily totechnology and customer relationships.

 

**Acquisition of All State Tours, Inc.**-On August 30, 2004 we completed the acquisition of All State Tours, Inc. (“AllstateTicketing”), a leading distributor of show tickets and tours in Las Vegas, forapproximately $25 million in cash.  Theacquisition of Allstate Ticketing enhances the ability of our Travelocitybusiness segment to sell show tickets, attraction passes and other travelextras for this popular destination.  Theresults of operations of Allstate Ticketing have been included in ourconsolidated statements of income and the results of operations of ourTravelocity segment from the date of acquisition.  Assets acquired and liabilities assumed havebeen recorded at their estimated fair values and the $15 million excess of costover the estimated fair value of the net assets has been recorded asgoodwill.  The acquired goodwill isdeductible for tax purposes.  The fairvalues were determined by management based on a valuation of the net assetsacquired including an independent valuation of the intangible assets acquiredof $10 million.  Intangible assets subjectto amortization are being amortized over a weighted average of 5 years andrelate primarily to customer relationships and technology.

 

**Legal Proceedings** -We are party to two lawsuits against Northwest related to Northwest’s August24, 2004 announcement and implementation on September 1, 2004 of a faresupplement for travel reservation bookings made through a GDS (including the *Sabre* GDS) by traditional travel agenciesand some online travel sites (such as Travelocity).  We notified Northwest that it was in breachof the parties’ agreements, the DCA 3-Year Option Agreement, an amendment totheir Participating Carrier Distribution and Services Agreement (“PCA”).  We also took commercial steps, which webelieved were reasonable under the DCA 3-Year Option Agreement and PCA, inorder to enforce both agreements.

 

The Company sued Northwest on August 24, 2004 in Sabre Inc. v.Northwest Airlines, Inc., Civil Action 4-04-CV-612-Y in the Fort Worth Divisionof the United States District Court for the Northern District of Texas.  We allege that Northwest breached the PCA, asamended by the DCA 3-Year Option Agreement. Among other things, the DCA 3-Year Option Agreement requires thatNorthwest provide us with fares and other content for the *Sabre*GDS that Northwest makes availablethrough other channels of ticket distribution. We believe that Northwest breached the DCA 3-Year Option Agreement byimposing a fare supplement on tickets booked on the *Sabre* GDS and other competing GDSs but not on other channelsof ticket distribution.  We seek monetarydamages, attorneys fees, and to compel Northwest to adhere to the terms oftheir agreements.  On September 14, 2004,Northwest moved the Fort Worth court to dismiss the suit or transfer it tofederal court in Minneapolis, Minnesota. Briefing on the motion has been completed.

 

On August 25, 2004 Northwest sued Sabre Holdings Corporation, SabreInc. and Sabre Travel International Ltd. in a separate action styled Northwest Airlines Corporationv. Sabre Inc. et al., Cause No. 04-CV-03889 in the same Minneapolis federalcourt to which Northwest later sought to transfer the Fort Worth action. ThisMinneapolis action relates to the same factual events described above.  In its complaint filed on August 25, 2004,Northwest asserted that we breached our PCA with Northwest by our commercialactions in response to Northwest’s August 24, 2004 breach of the PCA.  On September 27, 2004, Northwest filed anamended complaint in the same cause number adding allegations that we hadviolated Section 2 of the Sherman Act, claiming that we had monopoly power andalso asserting claims against us for alleged interference with prospectivecontractual relations, deceptive trade practices, fraud, false advertisingunder the federal Lanham Act, and for a declaratory judgment that Sabre, andnot Northwest, is in breach of the PCA. Northwest alleges that it has suffered unspecified damages. Northwestseeks treble damages under the antitrust laws, attorneys fees, to have thecourt declare that we breached the parties’ agreement and violated federal andstate statutes, and to enjoin us from certain conduct.  On September 1, 2004, we moved to dismiss,stay, or transfer Northwest’s Minneapolis action to the federal court in FortWorth.  That motion is scheduled to beheard by the Court in Minneapolis on November 10, 2004.

 

10

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

 

On December 8, 2003, the Medicare Prescription Drug, Improvement andModernization Act of 2003 (the “Act”) was signed into law.  The Act introduces a prescription drugbenefit under Medicare Part D as well as a federal subsidy to sponsors ofretiree healthcare benefit plans that provide a benefit that is at leastactuarially equivalent to Medicare Part D. We reflected the impact of the subsidy effective July 1, 2004 as anunrecognized gain, which reduced our accumulated postretirement benefitobligation by approximately $8 million. The subsidy resulted in a reduction in our periodic postretirementbenefit cost by approximately $0.4 million for the three and nine months endedSeptember 30, 2004.

 

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

 
| **Pension Benefits**                         | ** ** | **Three Months  Ended  September 30,** | ** ** | **Nine Months  Ended  September 30,** | ** ** |
|----------------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| ** **                                   | ** ** | **2004**                               | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Components of net periodic benefit cost:** | ** ** | ** **                             | ** ** | ** **                            |       | ** ** | ** ** | ** ** | ** ** |
| Service cost                                 | ** ** | **$**                                  | **1,618**  | ** **                            | $          | 755 |   | **$** | **3,904** | ** ** | $ | 4,928 |   |
| Interest cost                                | ** ** | **6,096**                              | ** ** | 2,280                                 |       | **14,319** | ** ** | 18,135 |   |
| Expected return  on plan assets              | ** ** | **(6,855**                             | **)**      | (2,288                                | )          | **(15,840** | **)** | (20,193 | ) |
| Amortization of  transition asset            | ** ** | **(3**                                 | **)**      | (21                                   | )          | **(11** | **)** | (26 | ) |
| Amortization of  prior service cost          | ** ** | **13**                                 | ** ** | 19                                    |       | **48** | ** ** | 47 |   |
| Amortization of  net loss                    | ** ** | **1,017**                              | ** ** | 442                                   |       | **2,422** | ** ** | 3,073 |   |
|                                         | ** ** | ** **                             | ** ** |                                  |       | ** ** | ** ** |   |   |
| Total net  periodic benefit cost             | ** ** | **$**                                  | **1,886**  | ** **                            | $          | 1,187 |   | **$** | **4,842** | ** ** | $ | 5,964 |   |

 
| **Other Benefits**                           | ** ** | **Three Months  Ended  September 30,** | ** ** | **Nine Months  Ended  September 30,** | ** ** |
|----------------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| ** **                                   | ** ** | **2004**                               | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Components of net periodic benefit cost:** | ** ** | ** **                             | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                 | ** ** | **$**                                  | **697**    |                                  | $          | 720 | ** ** | **$** | **2,280** |   | $ | 2,216 |   |
| Interest cost                                | ** ** | **1,642**                              |       | 1,696                                 | ** ** | **5,373** |   | 5,219 |   |
| Amortization of transition  asset            | ** ** | **3**                                  |       | 4                                     | ** ** | **10** |   | 11 |   |
| Amortization of  prior service cost          | ** ** | **78**                                 |       | 73                                    | ** ** | **237** |   | 221 |   |
| Amortization of  net loss                    | ** ** | **666**                                |       | 630                                   | ** ** | **2,040** |   | 1,914 |   |
|                                         | ** ** | ** **                             |       |                                  | ** ** | ** ** |   |   |   |
| Total net  periodic benefit cost             | ** ** | **$**                                  | **3,086**  |                                  | $          | 3,123 | ** ** | **$** | **9,940** |   | $ | 9,581 |   |

 

We madecontributions to fund our defined benefit pension plans of $5 million and $15million during the nine months ended September 30, 2004 and 2003,respectively.  We are evaluating makingadditional contributions during the remainder of 2004.

 

11

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

 

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

 
| ** **                                                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                 | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                       |       |                                  |       |                                 |       |   |   |   |   |
| Income tax provision at statutory federal  income tax rate | ** ** | **$**                                 | **26,854** | ** **                           | $          | 13,889 | ** ** | **$** | **82,188** | ** ** | $ | 53,016 |   |
| State income taxes, net of federal benefit                 | ** ** | **989**                               | ** ** | 291                                  | ** ** | **3,189** | ** ** | 2,692 |   |
| Reversal of previously accrued taxes                       | ** ** | **(17,939**                           | **)**      | **—**                           | ** ** | **(17,939** | **)** | **—** | ** ** |
| Other, net                                                 | ** ** | **(605**                              | **)**      | 53                                   | ** ** | **(2,014** | **)** | (1,379 | ) |
|                                                       |       |                                  | ** ** |                                 |       |   | ** ** |   |   |
| Total provision for income taxes                           | ** ** | **$**                                 | **9,299**  | ** **                           | $          | 14,233 | ** ** | **$** | **65,424** | ** ** | $ | 54,329 |   |

 

During the third quarter of 2004, we reversed previously accrued taxesof $18 million related primarily to our federal income tax treatment oflump-sum payments made to subscribers at the beginning of a contract term (“upfrontsubscriber incentive payments”).  Duringthe quarter, we changed our federal income tax treatment of such payments inaccordance with recently issued Treasury regulations, and such change iseffective for our 2003 tax year.  Bychanging our federal income tax treatment of these payments to comply with thenew regulations effective for our 2003 tax return, the manner in which wetreated such payments in years before 2003 will be respected.  Accordingly, we reversed previously accruedtaxes of $18 million related to our treatment of these payments for federal incometax purposes for years before 2003.

 

**6.****              Derivatives**

 

Travelocityreceived certain vested warrants from a former hotel supplier in connectionwith an affiliation agreement entered into during 2000.  In March 2001, we extended our affiliationagreement with that supplier through July 31, 2005 and expanded the scope ofthe supplier relationship. In connection with the expanded and extendedagreement, we received additional vested warrants with a fair value ofapproximately $30 million on the date of receipt. We were recognizing thisamount as revenue over the extended term of the agreement, which amounted toapproximately $2 million and $6 million during the three and nine months endedSeptember 30, 2003, respectively.  Duringthe three and nine months ended September 30, 2003, respectively, we alsorecognized approximately $3 million and $10 million of revenue for performancewarrants earned under this agreement. This agreement was terminated in the third quarter of 2003 and werecognized the remaining deferred balance of approximately $8 million relatedto these warrants at that time.

 

We are a party to certain foreign currencyforward and option contracts. We have designated these instruments as cash flowhedges. Amounts reclassified from other comprehensive income to earnings due tothe settlement of forward and option contracts were $3 million and $2 millionduring the three months ended September 30, 2004 and 2003, respectively and $9million and $9 million during the nine months ended September 30, 2004 and2003, respectively.  No hedging ineffectivenesswas recorded in earnings relating to the forwards or options during 2004 or2003.  The estimated fair values of theforeign currency forward and option contracts were $3 million and $10 millionat September 30, 2004 and December 31, 2003, respectively.

 

We are also a party to certain interest rateswap contracts.  We have designated theswaps as fair value hedges of our public notes payable and capital leaseobligation. No hedging ineffectiveness was recorded in earnings relating to ourinterest rate swaps during 2004 or 2003. The estimated fair values of the interest rate swaps were a net asset of$11 million and $9 million at September 30, 2004 and December 31, 2003,respectively.

 

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**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* globaldistribution 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 Network business operates the *Sabre* GDS and markets and distributestravel-related products and services through the travel agency and corporatechannels. We engage in consumer-direct and business-direct travel marketing anddistribution through our Travelocity business. In addition, our Sabre Airline Solutions business is a leading providerof technology and services, including development and consulting services, toairlines and other travel providers.

 

During the fourth quarter of 2003, we realigned our GetThere businesssegment, which engaged in business direct travel services and had previouslybeen operated as a separate business segment, within our other three segments.  This realignment resulted in *GetThere* products, services and operationsbeing integrated into the remaining three segments.  Accordingly, GetThere is no longer reportedas a separate segment.  The segmentinformation presented below is based on the new segment definition for allperiods 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 the transactions were to thirdparties, that is, at estimated current market prices.  The majority of the intersegment revenues andcost of revenues are between Travelocity and Sabre Travel Network, consistingmainly of incentives and marketing fees paid by Sabre Travel Network toTravelocity for bookings made through the *Sabre*GDS, data processing fees paid by Travelocity to Sabre Travel Network forbookings made through the *Sabre*GDS, and fees paid by Sabre Travel Network to Travelocity for corporate tripsbooked through Travelocity’s online booking technology.  In addition, Sabre Airline Solutions paysfees to Travelocity for airline trips booked through Travelocity’s onlinebooking 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 presentedon a basis that excludes certain adjusting items that are summarized below,except where noted. This presentation is consistent with the manner in whichour management assesses the operating performance of our businesssegments.  Selected information for ourthree reportable segments for the three and nine months ended September 30,2004 and 2003 follows (in thousands).

 
| ** **                                                                         | ** ** | **Three Months Ended  September 30,** | ** **  | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------|-------------|--------------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                              | ** **  | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues from external customers, excluding  adjusting items:                      |       | ** **                            | ** **  |                                 |       | ** ** | ** ** |   |   |
| Sabre Travel Network                                                               | ** ** | **$**                                 | **373,514** | ** **                           | $          | 380,961 | ** ** | **$** | **1,170,563** | ** ** | $ | 1,148,711 |   |
| Travelocity                                                                        | ** ** | **109,916**                           | ** **  | 76,902                               |       | **290,897** | ** ** | 213,384 |   |
| Sabre Airline Solutions                                                            | ** ** | **60,405**                            | ** **  | 59,084                               |       | **180,652** | ** ** | 173,265 |   |
|                                                                               |       | ** **                            | ** **  |                                 |       | ** ** | ** ** |   |   |
| Total                                                                              | ** ** | **$**                                 | **543,835** | ** **                           | $          | 516,947 |   | **$** | **1,642,112** | ** ** | $ | 1,535,360 |   |
|                                                                               |       | ** **                            | ** **  |                                 |       | ** ** | ** ** |   |   |
| Intersegment revenues:                                                             |       | ** **                            | ** **  |                                 |       | ** ** | ** ** |   |   |
| Sabre Travel Network                                                               | ** ** | **$**                                 | **7,845**   | ** **                           | $          | 7,118 |   | **$** | **23,073** | ** ** | $ | 20,474 |   |
| Travelocity                                                                        | ** ** | **35,569**                            | ** **  | 30,505                               |       | **105,152** | ** ** | 87,339 |   |
|                                                                               |       | ** **                            | ** **  |                                 |       | ** ** | ** ** |   |   |
| Total                                                                              | ** ** | **$**                                 | **43,414**  | ** **                           | $          | 37,623 |   | **$** | **128,225** | ** ** | $ | 107,813 |   |
|                                                                               |       | ** **                            | ** **  |                                 |       | ** ** | ** ** |   |   |
| Equity in net income of equity method  investees:                                  |       | ** **                            | ** **  |                                 |       | ** ** | ** ** |   |   |
| Sabre Travel Network                                                               | ** ** | **$**                                 | **6,545**   | ** **                           | $          | 4,446 |   | **$** | **12,492** | ** ** | $ | 9,324 |   |
| Travelocity                                                                        | ** ** | **(5,990**                            | **)**       | (2,436                               | )          | **(19,558** | **)** | (11,163 | ) |
|                                                                               |       | ** **                            | ** **  |                                 |       | ** ** | ** ** |   |   |
| Total                                                                              | ** ** | **$**                                 | **555**     | ** **                           | $          | 2,010 |   | **$** | **(7,066** | **)** | $ | (1,839 | ) |
|                                                                               |       | ** **                            | ** **  |                                 |       | ** ** | ** ** |   |   |
| Segment revenues, excluding adjusting  items:                                      |       | ** **                            | ** **  |                                 |       | ** ** | ** ** |   |   |
| Sabre Travel Network                                                               | ** ** | **$**                                 | **387,904** | ** **                           | $          | 392,525 |   | **$** | **1,206,128** | ** ** | $ | 1,178,509 |   |
| Travelocity                                                                        | ** ** | **139,495**                           | ** **  | 104,971                              |       | **376,491** | ** ** | 289,560 |   |
| Sabre Airline Solutions                                                            | ** ** | **60,405**                            | ** **  | 59,084                               |       | **180,652** | ** ** | 173,265 |   |
| Elimination of intersegment revenues                                               | ** ** | **(43,414**                           | **)**       | (37,623                              | )          | **(128,225** | **)** | (107,813 | ) |
|                                                                               |       | ** **                            | ** **  |                                 |       | ** ** | ** ** |   |   |
| Total                                                                              | ** ** | **$**                                 | **544,390** | ** **                           | $          | 518,957 |   | **$** | **1,635,046** | ** ** | $ | 1,533,521 |   |
|                                                                               |       | ** **                            | ** **  |                                 |       | ** ** | ** ** |   |   |
| *Revenue adjusting item:*                                                          |       | ** **                            | ** **  |                                 |       | ** ** | ** ** |   |   |
| Sabre Travel Network – settlement revenue  from canceled subscriber contracts | ** ** | **—**                            | ** **  | **—**                           |       | **—** | ** ** | $ | 36,458 |   |
| Travelocity – recognition of deferred  warrant revenue                        | ** ** | **$**                                 | **—**  | ** **                           | $          | 7,836 |   | **$** | **—** | ** ** | $ | 7,836 |   |
| Total Revenue Adjusting Items                                                      | ** ** | **$**                                 | **—**  | ** **                           | $          | 7,836 |   | **$** | **—** | ** ** | $ | 44,294 |   |
|                                                                               |       | ** **                            | ** **  |                                 |       | ** ** | ** ** |   |   |
| Consolidated revenues:                                                             |       | ** **                            | ** **  |                                 |       | ** ** | ** ** |   |   |
| Sabre Travel Network                                                               | ** ** | **$**                                 | **387,904** | ** **                           | $          | 392,525 |   | **$** | **1,206,128** | ** ** | $ | 1,214,967 |   |
| Travelocity                                                                        | ** ** | **139,495**                           | ** **  | 112,807                              |       | **376,491** | ** ** | 297,396 |   |
| Sabre Airline Solutions                                                            | ** ** | **60,405**                            | ** **  | 59,084                               |       | **180,652** | ** ** | 173,265 |   |
| Elimination of intersegment revenues                                               | ** ** | **(43,414**                           | **)**       | (37,623                              | )          | **(128,225** | **)** | (107,813 | ) |
| Total                                                                              | ** ** | **$**                                 | **544,390** | ** **                           | $          | 526,793 |   | **$** | **1,635,046** | ** ** | $ | 1,577,815 |   |

 

14

----

 

A summary of the adjusting items andreconciliation to consolidated operating income is set forth below (inthousands):

 
| ** **                                                                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                     | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                           |       |                                  |       |                                 |       |   |   |   |   |
| Segment operating income (loss) excluding  adjusting items:                    |       |                                  |       |                                 |       |   |   |   |   |
| Sabre Travel Network                                                           | ** ** | **$**                                 | **77,629** | ** **                           | $          | 65,476 |   | **$** | **251,423** | ** ** | $ | 211,096 |   |
| Travelocity                                                                    | ** ** | **9,655**                             | ** ** | (9,855                               | )          | **17,833** | ** ** | (30,306 | ) |
| Sabre Airline Solutions                                                        | ** ** | **2,904**                             | ** ** | 3,755                                |       | **7,876** | ** ** | 14,038 |   |
| Net corporate allocations                                                      | ** ** | **(441**                              | **)**      | (161                                 | )          | **188** | ** ** | 1,314 |   |
| Total                                                                          | ** ** | **$**                                 | **89,747** | ** **                           | $          | 59,215 |   | **$** | **277,320** | ** ** | $ | 196,142 |   |
|                                                                           |       |                                  | ** ** |                                 |       |   | ** ** |   |   |
| *Impact of adjusting items on operating  income – (increase) / decrease:* |       |                                  | ** ** |                                 |       |   | ** ** |   |   |
|                                                                           |       |                                  | ** ** |                                 |       |   | ** ** |   |   |
| Sabre Travel Network:                                                          |       |                                  | ** ** |                                 |       |   | ** ** |   |   |
| Settlement revenue from canceled subscriber  contract                          | ** ** | **$**                                 | **—** | ** **                           | $          | — |   | **$** | **—** | ** ** | $ | (36,458 | ) |
| Intangibles amortization                                                       | ** ** | **3,471**                             | ** ** | 3,106                                |       | **14,989** | ** ** | 9,346 |   |
| Stock compensation                                                             | ** ** | **—**                            | ** ** | 182                                  |       | **—** | ** ** | 551 |   |
| Restructuring expenses                                                         | ** ** | **—**                            | ** ** | **—**                           |       | **—** | ** ** | (288 | ) |
| Total Sabre Travel Network                                                     | ** ** | **3,471**                             | ** ** | 3,288                                |       | **14,989** | ** ** | (26,849 | ) |
|                                                                           |       |                                  | ** ** |                                 |       |   | ** ** |   |   |
| Travelocity:                                                                   |       |                                  | ** ** |                                 |       |   | ** ** |   |   |
| Intangibles amortization                                                       | ** ** | **7,556**                             | ** ** | 17,293                               |       | **22,408** | ** ** | 34,655 |   |
| Hotel supplier deferred revenues                                               | ** ** | **—**                            | ** ** | (7,836                               | )          | **—** | ** ** | (7,836 | ) |
| Stock compensation                                                             | ** ** | **1,219**                             | ** ** | 3,006                                |       | **4,474** | ** ** | 8,964 |   |
| Restructuring expenses                                                         | ** ** | **—**                            | ** ** | **—**                           |       | **—** | ** ** | (37 | ) |
| Total Travelocity                                                              | ** ** | **8,775**                             | ** ** | 12,463                               |       | **26,882** | ** ** | 35,746 |   |
|                                                                           |       |                                  | ** ** |                                 |       |   | ** ** |   |   |
| Sabre Airline Solutions:                                                       |       |                                  | ** ** |                                 |       |   | ** ** |   |   |
| Intangibles amortization                                                       | ** ** | **334**                               | ** ** | —                               |       | **334** | ** ** | **—** | ** ** |
| Stock compensation                                                             | ** ** | **—**                            | ** ** | 32                                   |       | **—** | ** ** | 97 |   |
| Restructuring expenses                                                         | ** ** | **—**                            | ** ** | —                               |       | **—** | ** ** | (231 | ) |
| Total Sabre Airline Solutions                                                  | ** ** | **334**                               | ** ** | 32                                   |       | **334** | ** ** | (134 | ) |
|                                                                           |       |                                  | ** ** |                                 |       |   | ** ** |   |   |
| Corporate:                                                                     |       |                                  | ** ** |                                 |       |   | ** ** |   |   |
| Other                                                                          | ** ** | **—**                            | ** ** | **—**                           |       | **—** | ** ** | **—** | ** ** |
| Stock compensation                                                             | ** ** | **—**                            | ** ** | (434                                 | )          | **17** | ** ** | (403 | ) |
| Restructuring expenses                                                         | ** ** | **—**                            | ** ** | **—**                           |       | **—** | ** ** | (370 | ) |
| Total Corporate                                                                | ** ** | **—**                            | ** ** | (434                                 | )          | **17** | ** ** | (773 | ) |
| Total operating income adjusting items                                         | ** ** | **$**                                 | **12,580** | ** **                           | $          | 15,349 |   | **$** | **42,222** | ** ** | $ | 7,990 |   |
|                                                                           | ** ** | ** **                            | ** ** |                                 |       | ** ** | ** ** |   |   |
| Consolidated operating income (loss):                                          |       |                                  | ** ** |                                 |       |   | ** ** |   |   |
| Sabre Travel Network                                                           | ** ** | **$**                                 | **74,158** | ** **                           | $          | 62,188 |   | **$** | **236,434** | ** ** | $ | 237,945 |   |
| Travelocity                                                                    | ** ** | **880**                               | ** ** | (22,318                              | )          | **(9,049** | **)** | (66,052 | ) |
| Sabre Airline Solutions                                                        | ** ** | **2,570**                             | ** ** | 3,723                                |       | **7,542** | ** ** | 14,172 |   |
| Net Corporate Allocations                                                      | ** ** | **(441**                              | **)**      | 273                                  |       | **171** | ** ** | 2,087 |   |
| Total                                                                          | ** ** | **$**                                 | **77,167** | ** **                           | $          | 43,866 |   | **$** | **235,098** | ** ** | $ | 188,152 |   |

 

15

----

 

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

 

Certain obligations of Sabre HoldingsCorporation (“Sabre Holdings”) have been solely guaranteed by its 100% ownedoperating subsidiary, Sabre Inc. There are currently no restrictions onSabre Holdings’ ability to obtain funds from Sabre Inc. in the form of adividend or loan other than typical dividend requirements under Delawarelaw.  Additionally, there are nosignificant restrictions on Sabre Inc.’s ability to obtain funds from itsdirect or indirect subsidiaries other than those that would exist under stateor foreign law.  Sabre Inc. is the soledirect subsidiary of Sabre Holdings.  Allother subsidiaries are direct or indirect subsidiaries of Sabre Inc.  These other subsidiaries are all included inthe non-guarantor financial statements. The following financial information presents condensed consolidatingbalance sheets, statements of income and statements of cash flows for SabreHoldings, Sabre Inc. and non-guarantor subsidiaries. The information hasbeen presented as if Sabre Holdings accounted for its ownership ofSabre Inc., and Sabre Inc. accounted for its ownership of thenon-guarantor subsidiaries, using the equity method of accounting.  Certain reclassifications have been made tothe 2003 financial statements to conform to the 2004 presentation.  These reclassifications are not material,either individually or in the aggregate, to our financial statements.

 

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

 

Sabre Inc. and certain non-guarantor subsidiaries are parties tovarious intercompany agreements that affect the amount of operating expensesreported in the following condensed consolidating statements of income. Amongother things, fees are paid by Sabre Inc. to a non-guarantor subsidiaryrelating to the use of trademarks, tradenames, etc. owned by a non-guarantorsubsidiary; incentive and marketing payments are made by Sabre Inc. tonon-guarantor subsidiaries relating to the use and distribution of the *Sabre* system; and payments are made by non-guarantorsubsidiaries to Sabre Inc. for access to the *Sabre*system under the terms of these agreements. During the three months endedSeptember 30, 2004 and 2003, Sabre Inc. recognized operating expenses inconnection with these agreements totaling approximately $62 million and $77million, respectively.  During the ninemonths ended September 30, 2004 and 2003, Sabre Inc. recognized operating expensesin connection with these agreements totaling approximately $181 million and$230 million, respectively.  Theseamounts, and the corresponding amounts recognized by the non-guarantorsubsidiaries are eliminated in consolidation.

 

16

----

 

**UNAUDITED CONSOLIDATING CONDENSED BALANCESHEETS**

**SEPTEMBER30, 2004**

**(inthousands)**

 
| ** **                                          | ** ** | **Sabre  Holdings** | ** ** | **Sabre Inc.** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminating  Entries** | ** ** | **Sabre  Consolidated** | ** ** |
|-----------------------------------------------------|------------|---------------------|------------|----------------|------------|-----------------------------------|------------|--------------------------|------------|-------------------------|------------|
|                                                |       |                |       |           |       |                              |       |                     |       |                    |       |
| **Assets**                                          |       |                |       |           |       |                              |       |                     |       |                    |       |
| **Current assets**                                  |       |                |       |           |       |                              |       |                     |       |                    |       |
| Cash and marketable securities                      |       | $                   | —     |           | $          | 866,969                           |       | $                        | 49,464     |                    | $          | — |   | $ | 916,433 |   |
| Accounts receivable—trade, net                 |       | —              |       | 281,106        |       | 102,245                           |       | —                   |       | 383,351                 |       |
| Intercompany accounts receivable (payable)          |       | —              |       | (157,145       | )          | 157,145                           |       | —                   |       | —                  |       |
| Prepaid expenses and other current assets           |       | —              |       | 26,111         |       | 35,328                            |       | —                   |       | 61,439                  |       |
| Deferred income taxes                               |       | —              |       | 14,618         |       | 1,343                             |       | —                   |       | 15,961                  |       |
| Total current assets                                |       | —              |       | 1,031,659      |       | 345,525                           |       | —                   |       | 1,377,184               |       |
| Property and equipment, net                         |       | —              |       | 344,630        |       | 44,526                            |       | —                   |       | 389,156                 |       |
| Investments in joint ventures                       |       | —              |       | 3,709          |       | 183,348                           |       | —                   |       | 187,057                 |       |
| Goodwill and intangible assets, net                 |       | —              |       | 12,170         |       | 883,262                           |       | —                   |       | 895,432                 |       |
| Investments in subsidiaries                         |       | 679,001             |       | 1,326,270      |       | —                            |       | (2,005,271               | )          | —                  |       |
| Intercompany notes                                  |       | 1,406,662           |       | (1,406,662     | )          | —                            |       | —                   |       | —                  |       |
| Other assets, net                                   |       | 17,842              |       | 76,572         |       | 46,337                            |       | —                   |       | 140,751                 |       |
|                                                |       |                |       |           |       |                              |       |                     |       |                    |       |
| **Total assets**                                    |       | $                   | 2,103,505  |           | $          | 1,388,348                         |       | $                        | 1,502,998  |                    | $          | (2,005,271 | ) | $ | 2,989,580 |   |
|                                                |       |                |       |           |       |                              |       |                     |       |                    |       |
| **Liabilities and stockholders’ equity**       |       |                |       |           |       |                              |       |                     |       |                    |       |
| **Current liabilities**                             |       |                |       |           |       |                              |       |                     |       |                    |       |
| Accounts payable                                    |       | $                   | 7,007      |           | $          | 121,245                           |       | $                        | 74,674     |                    | $          | — |   | $ | 202,926 |   |
| Accrued compensation and related benefits           |       | —              |       | 61,467         |       | 14,855                            |       | —                   |       | 76,322                  |       |
| Other accrued liabilities                           |       | 3,317               |       | 161,851        |       | 105,713                           |       | —                   |       | 270,881                 |       |
| Total current liabilities                           |       | 10,324              |       | 344,563        |       | 195,242                           |       | —                   |       | 550,129                 |       |
| Deferred income taxes                               |       | (235                | )          | 45,611         |       | (45,376                           | )          | —                   |       | —                  |       |
| Pensions and other postretirement benefits          |       | —              |       | 140,992        |       | 771                               |       | —                   |       | 141,763                 |       |
| Other liabilities                                   |       | 1,700               |       | 16,464         |       | 4,855                             |       | —                   |       | 23,019                  |       |
| Minority interests                                  |       | —              |       | —         |       | 6,160                             |       | —                   |       | 6,160                   |       |
| Capital lease obligation                            |       | —              |       | 161,717        |       | —                            |       | —                   |       | 161,717                 |       |
| Public and other notes payable                      |       | 427,162             |       | —         |       | 15,076                            |       | —                   |       | 442,238                 |       |
| Stockholders’ equity                           |       | 1,664,554           |       | 679,001        |       | 1,326,270                         |       | (2,005,271               | )          | 1,664,554               |       |
|                                                |       |                |       |           |       |                              |       |                     |       |                    |       |
| **Total liabilities and stockholders’ equity** |       | $                   | 2,103,505  |           | $          | 1,388,348                         |       | $                        | 1,502,998  |                    | $          | (2,005,271 | ) | $ | 2,989,580 |   |
|                                                     |            |                     |            |                |            |                                   |            |                          |            |                         |            |  |  |  |  |  |  |  |  |

 

17

----

 

**UNAUDITED CONSOLIDATING CONDENSED BALANCESHEETS**

**DECEMBER31, 2003**

**(inthousands)**

 
| ** **                                          | ** ** | **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                 |       | —              |       | 13,811         |       | 877,929                           |       | —                   |       | 891,740                 |       |
| Investments in subsidiaries                         |       | 572,696             |       | 1,260,428      |       | —                            |       | (1,833,124               | )          | —                  |       |
| Intercompany notes                                  |       | 1,529,296           |       | (1,529,296     | )          | —                            |       | —                   |       | —                  |       |
| Other assets, net                                   |       | 17,057              |       | 75,668         |       | 37,855                            |       | —                   |       | 130,580                 |       |
| **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 THENINE MONTHS ENDED SEPTEMBER 30, 2004**

**(inthousands)**

 
| ** **                                         | ** ** | **Sabre  Holdings** | ** ** | **Sabre Inc.** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminating Entries** | ** ** | **Sabre  Consolidated** | ** ** |
|----------------------------------------------------|------------|---------------------|------------|----------------|------------|-----------------------------------|------------|-------------------------|------------|-------------------------|------------|
|                                               |       |                |       |           |       |                              |       |                    |       |                    |       |
| Revenues                                           |       | $                   | —     |           | $          | 1,143,611                         |       | $                       | 863,216    |                    | $          | (371,781 | ) | $ | 1,635,046 |   |
| Operating expenses                                 |       | 2,842               |       | 980,423        |       | 788,464                           |       | (371,781                | )          | 1,399,948               |       |
| Operating income (loss)                            |       | (2,842              | )          | 163,188        |       | 74,752                            |       | —                  |       | 235,098                 |       |
| **Other income (expense)**                         |       |                |       |           |       |                              |       |                    |       |                    |       |
| Interest income                                    |       | 78,238              |       | 8,475          |       | 6,423                             |       | (82,295                 | )          | 10,841                  |       |
| Interest expense                                   |       | (12,864             | )          | (88,138        | )          | (1,012                            | )          | 82,295                  |       | (19,719                 | )          |
| Income (loss) from subsidiaries                    |       | 128,426             |       | 54,830         |       | —                            |       | (183,256                | )          | —                  |       |
| Other, net                                         |       | —              |       | 8,328          |       | 275                               |       | —                  |       | 8,603                   |       |
| Total other income (expense)                       |       | 193,800             |       | (16,505        | )          | 5,686                             |       | (183,256                | )          | (275                    | )          |
|                                               |       |                |       |           |       |                              |       |                    |       |                    |       |
| **Income loss before provision for income  taxes** |       | 190,958             |       | 146,683        |       | 80,438                            |       | (183,256                | )          | 234,823                 |       |
| Provision for income taxes                         |       | 21,559              |       | 18,257         |       | 25,608                            |       | —                  |       | 65,424                  |       |
| **Net income loss**                                |       | $                   | 169,399    |           | $          | 128,426                           |       | $                       | 54,830     |                    | $          | (183,256 | ) | $ | 169,399 |   |

 

19

----

 

**UNAUDITEDCONSOLIDATING CONDENSED STATEMENTS OF INCOME**

**FOR THENINE MONTHS ENDED SEPTEMBER 30, 2003**

**(inthousands)**

 
| ** **                                         | ** ** | **Sabre  Holdings** | ** ** | **Sabre Inc.** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminating  Entries** | ** ** | **Sabre  Consolidated** | ** ** |
|----------------------------------------------------|------------|---------------------|------------|----------------|------------|-----------------------------------|------------|--------------------------|------------|-------------------------|------------|
|                                               |       |                |       |           |       |                              |       |                     |       |                    |       |
| Revenues                                           |       | $                   | —     |           | $          | 1,147,049                         |       | $                        | 826,049    |                    | $          | (395,283 | ) | $ | 1,577,815 |   |
| Operating expenses                                 |       | 2,218               |       | 1,057,672      |       | 725,056                           |       | (395,283                 | )          | 1,389,663               |       |
| Operating income (loss)                            |       | (2,218              | )          | 89,377         |       | 100,993                           |       | —                   |       | 188,152                 |       |
| **Other income (expense)**                         |       |                |       |           |       |                              |       |                     |       |                    |       |
| Interest income                                    |       | 60,302              |       | 8,607          |       | 12,948                            |       | (69,322                  | )          | 12,535                  |       |
| Interest expense                                   |       | (12,855             | )          | (71,772        | )          | (2,257                            | )          | 69,322                   |       | (17,562                 | )          |
| Income (loss) from subsidiaries                    |       | 67,350              |       | 75,251         |       | —                            |       | (142,601                 | )          | —                  |       |
| Other, net                                         |       | —              |       | (27,061        | )          | (4,591                            | )          | —                   |       | (31,652                 | )          |
| Total other income (expense)                       |       | 114,797             |       | (14,975        | )          | 6,100                             |       | (142,601                 | )          | (36,679                 | )          |
|                                               |       |                |       |           |       |                              |       |                     |       |                    |       |
| **Income loss before provision for income  taxes** |       | 112,579             |       | 74,402         |       | 107,093                           |       | (142,601                 | )          | 151,473                 |       |
| Provision for income taxes                         |       | 15,435              |       | 7,052          |       | 31,842                            |       | —                   |       | 54,329                  |       |
| **Net income loss**                                |       | $                   | 97,144     |           | $          | 67,350                            |       | $                        | 75,251     |                    | $          | (142,601 | ) | $ | 97,144 |   |

 

20

----

 

**UNAUDITED CONSOLIDATING CONDENSED STATEMENTSOF INCOME**

**FOR THETHREE MONTHS ENDED SEPTEMBER 30, 2004**

**(inthousands)**

 
| ** **                                         | ** ** | **Sabre  Holdings** | ** ** | **Sabre Inc.** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminating  Entries** | ** ** | **Sabre  Consolidated** | ** ** |
|----------------------------------------------------|------------|---------------------|------------|----------------|------------|-----------------------------------|------------|--------------------------|------------|-------------------------|------------|
|                                               |       |                |       |           |       |                              |       |                     |       |                    |       |
| Revenues                                           |       | $                   | —     |           | $          | 377,093                           |       | $                        | 289,060    |                    | $          | (121,763 | ) | $ | 544,390 |   |
| Operating expenses                                 |       | 549                 |       | 320,658        |       | 267,779                           |       | (121,763                 | )          | 467,223                 |       |
| Operating income (loss)                            |       | (549                | )          | 56,435         |       | 21,281                            |       | —                   |       | 77,167                  |       |
| **Other income (expense)**                         |       |                |       |           |       |                              |       |                     |       |                    |       |
| Interest income                                    |       | 28,191              |       | 3,592          |       | 1,088                             |       | (28,571                  | )          | 4,300                   |       |
| Interest expense                                   |       | (4,547              | )          | (30,490        | )          | (395                              | )          | 28,571                   |       | (6,861                  | )          |
| Income (loss) from subsidiaries                    |       | 52,431              |       | 14,519         |       | —                            |       | (66,950                  | )          | —                  |       |
| Other, net                                         |       | —              |       | 2,100          |       | 19                                |       | —                   |       | 2,119                   |       |
| Total other income (expense)                       |       | 76,075              |       | (10,279        | )          | 712                               |       | (66,950                  | )          | (442                    | )          |
|                                               |       |                |       |           |       |                              |       |                     |       |                    |       |
| **Income loss before provision for income  taxes** |       | 75,526              |       | 46,156         |       | 21,993                            |       | (66,950                  | )          | 76,725                  |       |
| Provision for income taxes                         |       | 8,100               |       | (6,275         | )          | 7,474                             |       | —                   |       | 9,299                   |       |
| **Net income loss**                                |       | $                   | 67,426     |           | $          | 52,431                            |       | $                        | 14,519     |                    | $          | (66,950 | ) | $ | 67,426 |   |

 

21

----

 

**UNAUDITED CONSOLIDATING CONDENSED STATEMENTSOF INCOME**

**FOR THETHREE MONTHS ENDED SEPTEMBER 30, 2003**

**(inthousands)**

 
| ** **                                           | ** ** | **Sabre  Holdings** | ** ** | **Sabre Inc.** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminating  Entries** | ** ** | **Sabre  Consolidated** | ** ** |
|------------------------------------------------------|------------|---------------------|------------|----------------|------------|-----------------------------------|------------|--------------------------|------------|-------------------------|------------|
|                                                 |       |                |       |           |       |                              |       |                     |       |                    |       |
| Revenues                                             |       | $                   | —     |           | $          | 360,934                           |       | $                        | 309,801    |                    | $          | (143,942 | ) | $ | 526,793 |   |
| Operating expenses                                   |       | 468                 |       | 357,311        |       | 269,090                           |       | (143,942                 | )          | 482,927                 |       |
| Operating income (loss)                              |       | (468                | )          | 3,623          |       | 40,711                            |       | —                   |       | 43,866                  |       |
| **Other income (expense)**                           |       |                |       |           |       |                              |       |                     |       |                    |       |
| Interest income                                      |       | 22,998              |       | 3,014          |       | 3,845                             |       | (25,701                  | )          | 4,156                   |       |
| Interest expense                                     |       | (4,201              | )          | (27,627        | )          | (663                              | )          | 25,701                   |       | (6,790                  | )          |
| Income (loss) from subsidiaries                      |       | 13,375              |       | 29,634         |       | —                            |       | (43,009                  | )          | —                  |       |
| Other, net                                           |       | —              |       | 72             |       | (1,622                            | )          | —                   |       | (1,550                  | )          |
| Total other income (expense)                         |       | 32,172              |       | 5,093          |       | 1,560                             |       | (43,009                  | )          | (4,184                  | )          |
|                                                 |       |                |       |           |       |                              |       |                     |       |                    |       |
| **Income (loss) before provision for income  taxes** |       | 31,704              |       | 8,716          |       | 42,271                            |       | (43,009                  | )          | 39,682                  |       |
| Provision for income taxes                           |       | 6,255               |       | (4,659         | )          | 12,637                            |       | —                   |       | 14,233                  |       |
| **Net income (loss)**                                |       | $                   | 25,449     |           | $          | 13,375                            |       | $                        | 29,634     |                    | $          | (43,009 | ) | $ | 25,449 |   |

 

22

----

 

**UNAUDITED CONSOLIDATING CONDENSED STATEMENTSOF CASH FLOWS**

**FOR THENINE MONTHS ENDED SEPTEMBER 30, 2004**

**(inthousands)**

 
| ** **                                                                       | ** ** | **Sabre**    | ** ** | ** **     | ** ** | **Non-  Guarantor** | ** ** | **Eliminating** | ** ** | **Sabre**        | ** ** |
|----------------------------------------------------------------------------------|------------|--------------|------------|----------------|------------|---------------------|------------|-----------------|------------|------------------|------------|
| ** **                                                                       | ** ** | **Holdings** | ** ** | **Sabre Inc.** | ** ** | **Subsidiaries**    | ** ** | **Entries**     | ** ** | **Consolidated** | ** ** |
|                                                                             |       |         |       |           |       |                |       |            |       |             |       |
| **Operating Activities**                                                         |       |         |       |           |       |                |       |            |       |             |       |
| Net earnings (loss)                                                              |       | $            | 169,399    |           | $          | 128,426             |       | $               | 54,830     |             | $          | (183,256 | ) | $ | 169,399 |   |
| Adjustments to reconcile net earnings to cash  provided by operating activities: |       |         |       |           |       |                |       |            |       |             |       |
| Depreciation and amortization                                                    |       | —       |       | 42,242         |       | 52,234              |       | —          |       | 94,476           |       |
| Stock based compensation for employees                                           |       | —       |       | 4,400          |       | 4,782               |       | —          |       | 9,182            |       |
| Allowance for doubtful accounts                                                  |       | —       |       | 12,831         |       | 2,573               |       | —          |       | 15,404           |       |
| Deferred income taxes                                                            |       | —       |       | (2,451         | )          | —              |       | —          |       | (2,451           | )          |
| Tax benefit from exercise of stock options                                       |       | 1,051        |       | —         |       | —              |       | —          |       | 1,051            |       |
| (Income) loss from subsidiaries                                                  |       | (128,426     | )          | (54,830        | )          | —              |       | 183,256         |       | —           |       |
| Equity loss in joint ventures                                                    |       | —       |       | —         |       | 7,066               |       | —          |       | 7,066            |       |
| Other                                                                            |       | (1,255       | )          | 4,053          |       | (10,534             | )          | —          |       | (7,736           | )          |
| Changes in operating assets and liabilities                                      |       | (40,769      | )          | 94,687         |       | (22,139             | )          | —          |       | 31,779           |       |
| Cash provided by operating activities                                            |       | —       |       | 229,358        |       | 88,812              |       | —          |       | 318,170          |       |
| **Investing  Activities**                                                        |       |         |       |           |       |                |       |            |       |             |       |
| Additions to property and equipment                                              |       | —       |       | (41,009        | )          | (15,454             | )          | —          |       | (56,463          | )          |
| Business combinations, net of cash acquired                                      |       | —       |       | —         |       | (46,843             | )          | —          |       | (46,843          | )          |
| Investments in joint ventures                                                    |       | —       |       | —         |       | (29,642             | )          | —          |       | (29,642          | )          |
| Purchases of marketable securities                                               |       | —       |       | (7,715,654     | )          | 1,662               |       | —          |       | (7,713,992       | )          |
| Sales of marketable securities                                                   |       | —       |       | 7,741,718      |       | —              |       | —          |       | 7,741,718        |       |
| Investments in subsidiaries, net                                                 |       | —       |       | —         |       | —              |       | —          |       | —           |       |
| Other investing activities                                                       |       | —       |       | —         |       | (8,419              | )          | —          |       | (8,419           | )          |
| Cash used for investing activities                                               |       | —       |       | (14,945        | )          | (98,696             | )          | —          |       | (113,641         | )          |
| **Financing Activities**                                                         |       |         |       |           |       |                |       |            |       |             |       |
| Proceeds from issuance of common stock                                           |       | 15,364       |       | —         |       | —              |       | —          |       | 15,364           |       |
| Dividends paid                                                                   |       | (31,301      | )          | —         |       | —              |       | —          |       | (31,301          | )          |
| Contributions from affiliates, net (1)                                           |       | 180,948      |       | —         |       | 29,093              |       | (210,041        | )          | —           |       |
| Distributions to affiliates, net (1)                                             |       | —       |       | (210,041       | )          | —              |       | 210,041         |       | —           |       |
| Purchases of treasury stock                                                      |       | (165,011     | )          | —         |       | —              |       | —          |       | (165,011         | )          |
| Other financing activities, net                                                  |       | —       |       | (838           | )          | (1,057              | )          | —          |       | (1,895           | )          |
| Cash provided by (used for) financing  activities                                |       | —       |       | (210,879       | )          | 28,036              |       | —          |       | (182,843         | )          |
| Increase (decrease) in cash                                                      |       | —       |       | 3,534          |       | 18,152              |       | —          |       | 21,686           |       |
| Cash at beginning of period                                                      |       | —       |       | 9,565          |       | 31,297              |       | —          |       | 40,862           |       |
| Cash at end of period                                                            |       | $            | —     |           | $          | 13,099              |       | $               | 49,449     |             | $          | — |   | $ | 62,548 |   |

 

----

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

 

23

----

 

**UNAUDITED CONSOLIDATING CONDENSED STATEMENTSOF CASH FLOWS**

**FOR THENINE MONTHS ENDED SEPTEMBER 30, 2003**

**(inthousands)**

 

 
| ** **                                                                       | ** ** | **Sabre**    | ** ** | ** **     | ** ** | **Non-  Guarantor** | ** ** | **Eliminating** | ** ** | **Sabre**        | ** ** |
|----------------------------------------------------------------------------------|------------|--------------|------------|----------------|------------|---------------------|------------|-----------------|------------|------------------|------------|
| ** **                                                                       | ** ** | **Holdings** | ** ** | **Sabre Inc.** | ** ** | **Subsidiaries**    | ** ** | **Entries**     | ** ** | **Consolidated** | ** ** |
|                                                                             |       |         |       |           |       |                |       |            |       |             |       |
| **Operating Activities**                                                         |       |         |       |           |       |                |       |            |       |             |       |
| Net earnings (loss)                                                              |       | $            | 97,144     |           | $          | 67,350              |       | $               | 75,251     |             | $          | (142,601 | ) | $ | 97,144 |   |
| Adjustments to reconcile net earnings to cash  provided by operating activities: |       |         |       |           |       |                |       |            |       |             |       |
| Depreciation and amortization                                                    |       | —       |       | 41,189         |       | 63,995              |       | —          |       | 105,184          |       |
| Stock based compensation for employees                                           |       | —       |       | 2,608          |       | 11,284              |       | —          |       | 13,892           |       |
| Allowance for doubtful accounts                                                  |       | —       |       | (2,301         | )          | 2,178               |       | —          |       | (123             | )          |
| Deferred income taxes                                                            |       | —       |       | (4,688         | )          | —              |       | —          |       | (4,688           | )          |
| Tax benefit from exercise of stock options                                       |       | 586          |       | —         |       | —              |       | —          |       | 586              |       |
| Loss on refinancing of building                                                  |       | —       |       | 27,947         |       | —              |       | —          |       | 27,947           |       |
| (Income) loss from subsidiaries                                                  |       | (67,350      | )          | (75,251        | )          | —              |       | 142,601         |       | —           |       |
| Equity loss in joint ventures                                                    |       | —       |       | —         |       | 1,839               |       | —          |       | 1,839            |       |
| Other                                                                            |       | (1,256       | )          | 1,700          |       | 2,364               |       | —          |       | 2,808            |       |
| Changes in operating assets and liabilities                                      |       | (29,124      | )          | (362,466       | )          | 363,340             |       | —          |       | (28,250          | )          |
| Cash provided by (used for) operating  activities                                |       | —       |       | (303,912       | )          | 520,251             |       | —          |       | 216,339          |       |
| **Investing Activities**                                                         |       |         |       |           |       |                |       |            |       |             |       |
| Additions to property and equipment                                              |       | —       |       | (39,056        | )          | (15,103             | )          | —          |       | (54,159          | )          |
| Business combinations, net of cash acquired                                      |       | —       |       | (11,934        | )          | —              |       | —          |       | (11,934          | )          |
| Investments in joint ventures                                                    |       | —       |       | —         |       | (11,060             | )          | —          |       | (11,060          | )          |
| Purchases of marketable securities                                               |       | —       |       | (6,529,049     | )          | 107                 |       | —          |       | (6,528,942       | )          |
| Sales of marketable securities                                                   |       | —       |       | 6,436,855      |       | (2,018              | )          | —          |       | 6,434,837        |       |
| Investments in subsidiaries, net                                                 |       | —       |       | —         |       | —              |       | —          |       | —           |       |
| Other investing activities, net                                                  |       | —       |       | —         |       | 5,054               |       | —          |       | 5,054            |       |
| Cash used for investing activities                                               |       | —       |       | (143,184       | )          | (23,020             | )          | —          |       | (166,204         | )          |
| **Financing Activities**                                                         |       |         |       |           |       |                |       |            |       |             |       |
| Proceeds from issuance of common stock                                           |       | 5,859        |       | —         |       | —              |       | —          |       | 5,859            |       |
| Dividends paid                                                                   |       | (20,078      | )          | —         |       | —              |       | —          |       | (20,078          | )          |
| Contributions from affiliates (1)                                                |       | 14,100       |       | 488,829        |       | —              |       | (502,929        | )          | —           |       |
| Distributions to affiliates (1)                                                  |       | —       |       | (14,100        | )          | (488,829            | )          | 502,929         |       | —           |       |
| Payment to refinance building                                                    |       | —       |       | (27,947        | )          | —              |       | —          |       | (27,947          | )          |
| Other financing activities, net                                                  |       | 119          |       | —         |       | (2,780              | )          | —          |       | (2,661           | )          |
| Cash provided by (used for) financing  activities                                |       | —       |       | 446,782        |       | (491,609            | )          | —          |       | (44,827          | )          |
| Increase in cash                                                                 |       | —       |       | (314           | )          | 5,622               |       | —          |       | 5,308            |       |
| Cash at beginning of period                                                      |       | —       |       | 9,219          |       | 11,957              |       | —          |       | 21,176           |       |
| Cash at end of period                                                            |       | $            | —     |           | $          | 8,905               |       | $               | 17,579     |             | $          | — |   | $ | 26,484 |   |

 

----

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

 

24

----

**9.****             ****Subsequent Events**

 

On October 4, 2004, wecompleted the acquisition of certain entities in the United Kingdom,Scandinavia and France, which were previously owned jointly by the TravelocityEurope joint venture.  We purchased the50% of these entities that we did not indirectly already own from the OttoGroup’s Otto Freizeit and Touristik GmbH for approximately $33 million (26.6million Euros) in cash.  The remaining50% of these entities that we did already own indirectly through theTravelocity Europe joint venture was distributed to us by the joint venture sothat we now directly own 100% of these entities.  The entities acquired includeTravelocity.co.uk in the United Kingdom, Resfeber.se and Box Office in Sweden,Rejsefeber.dk and Arte Udland in Denmark, Reisefeber.no and Ticket Service inNorway and Usit Connections SAS, Boomerang SAS and Travelocity SAS inFrance.  Travelocity and The Otto Groupwill continue their joint (50/50) ownership of the German operations ofTravelocity Europe, which include Travelchannel.de, Travelocity.de, TravelOverland and Flug.de. Our decision to take full ownership of Travelocity Europeoutside of Germany will enable us to invest more heavily and efficiently in theproducts, technology and marketing necessary to grow in this key region.

 

# **Item 2**. Management’s Discussion and Analysis of FinancialCondition and Results of Operations

 

**SABREHOLDINGS CORPORATION**

**RESULTSOF OPERATIONS**

 

Thefollowing discussion and analysis contains forward-looking statements about ourplans and expectations of what may happen in the future.  Forward-looking statements are based on anumber of assumptions and estimates that are inherently subject to significantrisks and uncertainties, and our results could differ materially from theresults anticipated by our forward-looking statements as a result of many knownor unknown factors, including, but not limited to, those factors discussedbelow in this Item under the sub-heading “Risk Factors.”

 

**Overview**

** **

We are a world leader intravel commerce, marketing travel products and providing distribution andtechnology solutions for the travel industry. We operate in multiple travel distribution channels: the travel agencychannel, the consumer-direct channel and the corporate or business-directchannel.  Through our *Sabre*â 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 NetworkTM* business operatesthe *Sabre* GDS and markets anddistributes travel-related products and services through the travel agency andcorporate channels. We engage in consumer-direct and business-direct travelmarketing and distribution through our *Travelocity*Òbusiness. In addition, our *Sabre AirlineSolutionsTM* business is a leading provider of technology andservices, including development and consulting services, to airlines and othertravel providers.

 

In the nine months endedSeptember 30, 2004, approximately 68.4% of our revenue was generated from SabreTravel Network, 21.4% from Travelocity and 10.2% from Sabre Airline Solutionsbased on segment results that include intersegment revenues.  Compared to the year-ago period, revenues(including intersegment revenue) for the nine months ended September 30, 2004decreased 0.7% for Sabre Travel Network, while revenues increased 26.6% forTravelocity and 4.3% for Sabre Airline Solutions.

 

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

 

**SabreTravel Network:**Our Sabre Travel Network segment markets and distributes travel-relatedproducts and services through the travel agency and corporate channels. Travelagencies, both online and brick and mortar, subscribe to our services. Ourservices provide travel agency subscribers information about and the ability topurchase travel-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:**Our Travelocitysegment markets and distributes travel-related products and services directlyto individuals, including leisure travelers and business travelers, throughTravelocity websites and contact centers and websites and contact centers ownedby its supplier and distribution partners. Travelocity customers can accessofferings, pricing and information about airlines, hotels, car rentalcompanies, cruise lines, vacation and last-minute travel packages and othertravel-related services. In 2003, Travelocity launched *Travelocity BusinessTM*, which combines theintegrated online corporate travel technology and full-service offeringproducts of *GetThere*â withthe expertise of Travelocity.

 

25

----

 

**SabreAirline Solutions:**OurSabre Airline Solutions segment is a global leader in providing airlinesoftware systems and consulting services.  Sabre Airline Solutions hosts airline reservation systems for more than90 airlines and offers additional passenger management products such asinventory, shopping and pricing, ticketing and online booking.  Sabre Airline Solutions’ comprehensivedecision support software portfolio provides integrated technology and servicesto airlines that help streamline and automate their operations.  Sabre Airline Solutions also providesconsulting services to optimize airline and airport operations.

 

**Business Trends**

** **

Potential effects of thefollowing trends, events and uncertainties are discussed in *Risk Factors*.

 

*IncreasedTravel Booking Volumes Through our Channels. *During thenine months ended September 30, 2004, we experienced increased travel bookingsthrough all of our channels.  Weattribute this year-over-year increase in bookings to improved demand fortravel services as compared to the same period in 2003.  We believe that a significant portion of thisimprovement results from travel demand having been depressed in thecorresponding period for 2003 because of traveler concerns about the war inIraq and Severe Acute Respiratory Syndrome (“SARS”).  During the three months ended September 30,2004 booking volumes through our Sabre Travel Network business segment haveremained comparable with the first half of the year when adjusted for normalseasonality variations.  However,year-over-year growth rates are lower than the first two quarters of 2004 asthe war in Iraq and SARS had less of an impact on bookings during the secondhalf of 2003 compared to the first half of 2003. The table below details theyear-over-year percentage increases in Sabre Travel Network booking volumes forthe three and nine months ended September 30, 2004, respectively.

 
| ** **                  | ** ** | **Three Months Ended  September 30, 2004** | ** ** | **Nine Months Ended  September 30, 2004** | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **Year-over-year Increase** | ** ** | **Air  Bookings**                          | ** ** | **Total  Bookings**                       | ** ** | **Air  Bookings** | ** ** | **Total  Bookings** | ** ** |
| ** **                  | ** ** | ** **                                 | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| United States               |       | 0.4                                        | %          | 1.3                                       | %          | 5.2 | % | 5.8 | % |
| Global                      |       | (0.4                                       | )%         | 0.6                                       | %          | 8.2 | % | 8.6 | % |

 

**Factors Influencing the Travel Industry, ParticularlyAirlines**.  Our revenues are highly dependent on thetravel and transportation industries, and particularly on airlines.  Most of our revenue is derived from airlines,hotel operators, car rental companies, cruise operators, and other suppliers inthe travel and transportation industries. Our revenue increases and decreases with the level of travel andtransportation transactions processed by our systems.  Consequently, our revenues are highly subjectto declines in or disruptions to travel and transportation due to factorsentirely out of our control, such as recent inclement weather in theSoutheastern United States.  In addition,we depend on a relatively small number of major airlines for a significantportion of our revenues.  Several ofthese airlines are experiencing financial difficulty, some (including UnitedAir Lines, Inc., U.S. Airways, Inc. and ATA Holdings Corporation) have soughtbankruptcy protection and still others may consider bankruptcy relief.  See “*RiskFactors*–*Our Revenues Are HighlyDependent....”*

 

*Supplier Efforts to Control TravelDistribution*.  Airlines have been working aggressively forseveral years to divert travel bookings away from GDS networks and towardsalternative travel distribution channels, including websites that they controland online travel agencies that book directly with those airlines.  See “*RiskFactors – Some Travel Suppliers are Seeking Alternative Distribution Models....*”  The efforts of suppliers to divert bookingsaway from independent distributors (such as online and conventional travelagencies using our *Sabre* GDS)towards supplier-direct booking channels (such as supplier-controlled websitesand call centers) is referred to as “channel shift.”  Over the last fifteen months, we haveexperienced a slowing in the rate of channel shift, which we attribute partlyto our current Pricing Options for suppliers, discussed below, and partly dueto a rebound in corporate travel.  Theslowing of channel shift is an encouraging indicator, but it is not yet clearif it represents a long-term trend of reduced channel shift.

 

During the third quarter, Northwest Airlines, Inc. (“Northwest”)attempted to influence channel shift by implementing a fare supplement fortravel reservation bookings made through a GDS by traditional travel agenciesand online travel sites (including Travelocity).  In response to Northwest’s announcement,Sabre Travel Network filed a lawsuit against Northwest for noncompliance withits Participating Carrier Distribution and Services Agreement with us.  Sabre Travel Network also implemented aseries of actions under its Fare Parity Policy, in order to cause Northwest tohonor its contract to provide fare parity for users of the *Sabre* GDS. Northwest countersued us the following day.  On September 2, 2004, Northwest discontinuedthe fare supplement, and Sabre Travel Network discontinued application of itsFare Parity Policy to Northwest.  *See*Part II – Item 1: “Legal Proceedings.”

 

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**Competition and Consolidation.** The marketplace for travel distribution is intensely competitive.  We routinely face new competitors and newmethods of travel distribution. Suppliers and third parties seek to create distribution systems thatbook directly with travel suppliers at a reduced cost.  Some of these alternative travel distributionchannels are developing and have yet to fully define their functionality andcosts.  These new travel distributiontechnologies may contribute to “channel shift.” (**See***Supplier Efforts to Control TravelDistribution*, above.).  Inaddition, online vertical search engines are attempting to enter the traveldistribution business through travel-related keyword searches of supplier andthird party travel agent websites.  Thesesearch engines and alternative travel distribution channels pose a threat toour businesses as they may have the effect of diverting customers from ouronline sites and our *Sabre* GDS,putting pressure on our revenues, pricing and operating margins.  We also face consolidation among suppliers,travel marketing and distribution competitors, and online and conventionaltravel agencies, which may offer them negotiating leverage and other advantagesof scale.  See “*Risk Factors*-*We face competition...”*and*“Risk Factors – Consolidation...”*

 

**Pricing Options for Suppliers***.* In part to slow channel shift, but primarily to ensure that ourcustomers had access to the most comprehensive airline fares, in 2002 and 2003we introduced alternative booking fee pricing options to airlines that participatein the *Sabre* GDS.  Through the *DirectConnect**Ò**Availability* (“DCA”) 3-Year Pricing Option, for example,participating airlines committed to the highest level of participation in the *Sabre*system for three years.  Participating airlines provide all **Sabre**GDSusers with broad access to schedules, seat availability and published fares,including Web fares and other promotional fares but excluding certain faressuch as “opaque” fares (where the airline’s identity is not disclosed untilafter the sale) and private discounts.  Participating airlines also furnish generally the same customerperquisites and amenities to passengers booked through the **Sabre**GDS as those afforded through other GDS’s and websites.  Airlines selecting this option under their **Sabre**GDS participating carrier agreements receive a discount from our standard DCAbooking fee rates which is fixed for the term of the agreement.  Our DCA 3-Year Pricing Option agreements werea first step in preparation for being a leader in a deregulated industry bygiving us access to virtually all of a carrier’s content, eliminating “fareconfusion” in the marketplace.  *See**“Computer ReservationSystem Industry Regulation”* below.

 

With the recent deregulation of the GDS industry,(described below under **Computer Reservation System Industry Regulation**),we have new flexibility to price our services based upon a variety offactors.  We have already implemented newpricing models for some suppliers.  Forexample, during the second quarter of 2004, we completed two “opt-in”agreements with international carriers that are generally similar to our DCA3-Year Pricing Option agreements.  Forbookings created in the participating carriers’ home countries, those opt-inagreements offer a deeper discount than under the DCA 3-Year Pricing Option,which offers participating airlines smaller discounts across multipleregions.  These agreements provideimproved booking capability only to those *Sabre*GDS users that accept lowered customer incentive rates.  As of September 30, 2004, approximately 50%of our global direct air bookings are subject to our current discount pricingoptions (DCA 3-Year Pricing Option and “Opt-In” agreements).

 

We are evaluating various other options for pricingour services to suppliers.  Pricingoptions might be offered to airlines according to their operational needs, suchas pricing that varies with the volume of an airline’s bookings through the *Sabre* GDS or pricing that differs betweenlong-haul or short-haul trips.  We areconsidering offering airlines a choice of multiple pricing schedules.  Our goal with any new models will be to matchour pricing programs with the value that we provide to suppliers whilemaintaining a neutral impact to the average unit revenue in the Sabre TravelNetwork business.  Our goal is to havethese new models, and new agreements with many airlines, in place before theexpiration of our DCA 3-Year Pricing Option agreements in 2005 and 2006.  *See*“*Risk Factors – Some Travel Suppliers are SeekingAlternative Distribution Models....*”

 

**Changing our Sabre Travel Network Business Model.** With the recent deregulation of the GDS industry, (described below under**ComputerReservation System Industry Regulation**) we have taken actionsto both strengthen our core **Sabre** GDS business with enhanced contentand capabilities and to take advantage of the opportunities brought about byderegulation.  Because we are no longerrequired to offer the same products, terms and conditions to all airlines, wewill have greater flexibility to implement new services and terms on acarrier-by-carrier basis.  For example,we now have the ability to introduce airline display preferencing in the UnitedStates, although we have no immediate plans to do so broadly.  Nonetheless, we have already implementedpreferential display features on the desktop tool for Jurni Network (describedbelow), for example.

 

Although the majority of our travel distributionrevenues are still derived from booking fees paid by travel suppliers, werecently entered into agreements that do not follow this traditional businessmodel, and we are evaluating the desirability of more of these agreements.  For example, we recently entered into anagreement in which we charge a transaction fee to the travel agency (ratherthan a booking fee to the travel supplier). In addition, in October of 2003, we launched our *Jurni Network*Ôconsortium, a unique travel agency consortium that combines a preferred salesnetwork and consolidated purchasing power with technology-driven marketingtools to sell preferred offerings.  Inthe second quarter of 2004, we rolled out several new features for our *Jurni Network* offering, including newpackaging capabilities from Travelocity*TotalTrip*ä, as well as a point-of-sales tool, *Agent*59â,which incorporates inventory from our *Site59.com*â last minutetravel offerings into the *Sabre* GDS.  During thefirst quarter of 2004, we also introduced *AssuredVantageTM*, a new contract program for

 

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small- to medium-sized travel agencies that offersmore agency-friendly contract terms, reducing the risk of traditional bookingvolume shortfalls, and a new structured incentive schedule that drives aslowing of the incentive growth rate.  Wealso introduced the *Hotel SpotlightTM*program during the third quarter of 2004. *Hotel Spotlight* offerspremium marketing opportunities to hoteliers that provide full content throughthe *Sabre* GDS.

 

**Investments in Travelocity.** The development of Travelocity continues to be a strategic focus for us.For example, during the second quarter of 2003, we launched a new technologyplatform (Travelocity*TotalTrip*)to enable sales of higher margin travel products.  In addition, during the first quarter of2004, we implemented a complete rebranding and redesign of Travelocity’swebsite, offering consumers greater ease-of-use.

 

We may also invest indeveloping products and segments that we believe offer rapid growthopportunities, such as in the business-direct segment and online distributionin Europe.  In 2003, in thebusiness-direct segment, Travelocity launched *TravelocityBusinessTM*, which integrates the corporate travel technology andfull-service offering products of GetThere with the online expertise ofTravelocity.  In the third quarter of2004, *Travelocity Business*launched enhanced technologies in its service center that integrate andautomate the corporate travel reservation process from beginning to end.  In Europe, Travelocity introduced itsmerchant model hotel platform on Travelocity.co.uk during the third quarter of2004 and will continue to expand the program into its other European operationsin the near future.  On October 4, 2004,Travelocity acquired sole control of Travelocity Europe by purchasing the 50%interest in the joint venture’s non-German operations owned by the Otto Group’sOtto Freizeit und Touristik GmbH (“Otto”). Although we anticipate that this acquisition will be dilutive over theshort term, by gaining full control over the non-German operations ofTravelocity Europe, we believe we can accelerate its growth by introducingTravelocity’s industry-leading capabilities, including dynamic packaging, ouradvanced merchant hotel program and revolutionary site designs.  Travelocity and Otto plan to continue theirjoint (50/50) ownership of the German operations of Travelocity Europe.

 

**Merchant Model.**  In an effortto provide additional choices to consumers, we are increasingly promoting amerchant model of travel distribution. 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, and dynamicallypackaged 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 deliverhigher revenue per transaction than comparable sales under an agency commissionbooking fee model.  We generally do nothave any purchase obligations for unsold offerings and we recognize as revenuethe amount paid by the traveler minus our payment to the travel supplier.

 

Our business strategy depends on merchant model salesas a significant source of future revenue growth and increased margins.  Our strategy calls for us to increase ormaintain the number of hotel rooms we can offer under our merchant model hotelprogram, based upon arrangements we make directly with individual hotelproperties and hotel chains.  See “*Risk Factors – Our business plans call for thesignificant growth of our merchant model business . . .”*Because ofTravelocity’s supplier friendly approach, which includes a two-way seamlessconnectivity to hotels property management system so that reservations aren’tlost, its hotel program has become successful even though it was started laterthan others. One example of the success of this approach was Travelocity’sannouncement in the third quarter of 2004, that it was notified byInterContinental Hotels Group (IHG) that it was the first to be certified as anonline third party intermediary for IHG’s more than 3,500 hotels worldwide,including InterContinental Hotels and Resorts, Crowne Plaza, Holiday Inn,Holiday Inn Express, Staybridge Suites and Candlewood Suites.

 

*Cost Reductions and ExpenseSavings. *In the fourth quarter of2003, we began implementing plans to enhance our competitive position byreducing our operating expenses and better aligning expenses with revenuetargets.  Through these initiatives, weexpect to generate significant savings in 2004. The full-year advantages of these reductions on our financial resultswill be realized throughout 2004, including the workforce reduction completedin the fourth quarter of 2003.  We also revised the terms of our agreementwith America Online (“AOL”) under which Travelocity is the exclusivereservations provider for AOL’s Internet properties and extended the agreementthrough March 2006.  Althoughoperating earnings benefits from this agreement will depend upon the volume oftransactions, we anticipate approximately $10 million to $12 millionin such benefits during 2004.

 

Further, as part of our cost leadership strategy weare, as a standard practice, evaluating efficiency opportunities across theCompany to ensure that we manage our operational costs as optimally aspossible.  To keep pace with our keycompetitors, who are already outsourcing much of their customer fulfillment andother operations, some of these opportunities may involve globally-sourcingsome of our operations (either by contracting with companies that work for usor by expanding our own operations abroad). An example of this development is our multi-year master servicesagreement with WNS North America, Inc. (“WNS”), under which throughout 2004 weare outsourcing to WNS an increasing portion of our Travelocity contact centeroperations, primarily front-line customer service calls and back-officefulfillment.   By the end of thefirst quarter of 2005, WNS should be handling nearly all of Travelocity’sfront-line customer service calls and emails, as well as some mid-

 

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office and back-office functions. WNS is transitioningthese day-to-day operations of the customer service functions to its contactcenters.  Travelocity employees willcontinue to handle sales calls, as well as advanced customer service issues andquality control.  Although savings fromthis agreement will depend upon the volume of transactions, we anticipateapproximately $10 million in such savings during 2004.  We also expect these savings to increase overthe term of the agreement as transaction volumes increase.

 

**Computer Reservation System Industry Regulation.** Aspects of our travel marketing and distribution businesses are subjectto the Computer Reservation Systems (“CRS”) regulations in the European Union, Canada and Peru.  These regulations generally govern GDSservices for airlines and travel agencies, but not for non-airline suppliers(except rail suppliers in limited circumstances).  Among the topics addressed in some of thecurrent regulations are:

 

•                  no preferencing CRS displays based upon airline identity,

 

•                  equal treatment of airlines by the CRSs,

 

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

 

•                  limits on travel agency contract terms.

 

All CRS regulations promulgated by the US Departmentof Transportation that were applicable in the United States expired on July 31,2004.  We believe that this deregulationin the United States will enhance our opportunities to creatively marketairline services and freely negotiate with travel agencies.

 

Transport Canada issued final rules on May 7, 2004,eliminating all CRS regulations in Canada except rules prohibiting screenpreference and discrimination in providing the right to participate in serviceenhancements.  In addition, regulators inthe European Commission are reviewing their CRS regulations for possible changes,which may include some level of deregulation. It is not clear whether or when any amendments in the European Unionwill take effect nor what form they may take.

 

The potential effects ofthese trends, events and uncertainties are discussed below under **Risk Factors**.

 

**Componentsof Revenues and Expenses**

** **

*Revenues. *Sabre TravelNetwork primarily generates revenues from booking fees charged to airlines andnon-air travel suppliers that process their bookings through the *Sabre* system.  Sabre Travel Network has also begun togenerate revenue from transaction fees charged to certain subscribers that usethe *Sabre* system.  Sabre Travel Network also earns revenuethrough equipment service charges paid by subscribers, the sale of otherproducts and services (including *GetThere*offerings, merchant hotel sales in the *SabreExclusives*ä program and *JurniNetwork*) to travel suppliers, subscribers and other customers, aswell as earnings derived from interests in joint ventures and otherinvestments.  Sabre Travel Network also earns intersegment revenuesfrom data processing fees paid by Travelocity for bookings made through the *Sabre* GDS.

 

Travelocitygenerates merchant revenue on a net basis, defined as the amount paid by thecustomer for products or services, minus our payment to the travelsupplier.  Travelocity also generatesrevenues from commissions or transaction fees from travel suppliers for thepurchase of travel products and services pursuant to reservations made throughour system. Additional Travelocity revenues include fees charged to customersand advertising revenues.  Travelocityrevenues also include as a contra-revenue item, losses derived from interestsin joint ventures. Travelocityderives intersegment revenues from Sabre Travel Network, consisting mainly ofincentives for Travelocity bookings made through the *Sabre* GDS, and fees paid by Sabre Travel Network and SabreAirline Solutions for corporate and airline trips booked through Travelocity’sonline booking technology.

 

SabreAirline Solutions revenues are generated from the sale of airline reservationshosting and other passenger management services, decision-support software andtechnology, and airline consulting services.

 

*Cost of Revenues. *Sabre Travel Network cost of revenues consists primarily of customerincentives paid to subscribers, data processing charges resulting from theoperation of the *Sabre* system,and salaries and other operating expenses. Sabre TravelNetwork also incurs intersegment expenses paid to Travelocity for incentivesand marketing fees for Travelocity bookings made through the *Sabre* GDS, as well as fees for corporatetrips booked through Travelocity’s online booking technology.

 

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Travelocitycost of revenues consists primarily of customer service costs, technologycosts, salaries, benefits and other employee expenses, data processing feespaid to Sabre Travel Network, credit card fees related to our merchant modeland depreciation and amortization charges.

 

SabreAirline Solutions cost of revenues is comprised of labor cost incurred in thedevelopment and delivery of software and consulting services, data processingcharges for hosted applications (including intersegment charges fromTravelocity), and depreciation and amortization.

 

*Selling, General and Administrative Expenses. * Sabre Travel Network selling, general andadministrative and other operating expenses consist primarily of salaries,benefits and employee related expenses for staff functions required to supportthe business.  Travelocity selling,general and administrative and other operating expenses consist primarily ofadvertising and customer acquisition expenses, payments made to ourdistribution partners and salaries, benefits and employee related expenses forstaff 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.

 

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**Financial Results**

** **

The following table presents operating results forthe three and nine months ended September 30, 2004 and 2003 (in thousands ofdollars).  The segment revenues and costof revenues are shown including intersegment activity.  We have included the elimination ofintersegment activity below in order to agree to the results of operationspresented in the consolidated financial statements:

 
| ** **                              | ** ** | **Three Months Ended  September 30,** | ** **  | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------|------------|---------------------------------------|-------------|--------------------------------------|------------|
| ** **                              | ** ** | **2004**                              | ** **  | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Segment  Revenues:                      |       |                                  |        |                                 |       |   |   |   |   |
| Sabre Travel  Network                   | ** ** | **$**                                 | **387,904** | ** **                           | $          | 392,525 |   | **$** | **1,206,128** | ** ** | $ | 1,214,967 |   |
| Travelocity                             | ** ** | **139,495**                           | ** **  | 112,807                              |       | **376,491** | ** ** | 297,396 |   |
| Sabre Airline  Solutions                | ** ** | **60,405**                            | ** **  | 59,084                               |       | **180,652** | ** ** | 173,265 |   |
| Subtotal Segment  Revenues              | ** ** | **587,804**                           | ** **  | 564,416                              |       | **1,763,271** | ** ** | 1,685,628 |   |
| Elimination of  intersegment revenues   | ** ** | **(43,414**                           | **)**       | (37,623                              | )          | **(128,225** | **)** | (107,813 | ) |
| Total                                   | ** ** | **$**                                 | **544,390** | ** **                           | $          | 526,793 |   | **$** | **1,635,046** | ** ** | $ | 1,577,815 |   |
|                                    |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Cost of  Revenues:                      |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Sabre Travel  Network                   | ** ** | **$**                                 | **247,815** | ** **                           | $          | 262,807 |   | **$** | **759,576** | ** ** | $ | 777,245 |   |
| Travelocity                             | ** ** | **54,442**                            | ** **  | 51,132                               |       | **156,000** | ** ** | 151,842 |   |
| Sabre Airline  Solutions                | ** ** | **42,837**                            | ** **  | 47,335                               |       | **134,128** | ** ** | 134,150 |   |
| Other corporate  expenses               | ** ** | **335**                               | ** **  | 16                                   |       | **(172** | **)** | (1,849 | ) |
| Subtotal Cost of  Revenues              | ** ** | **345,429**                           | ** **  | 361,290                              |       | **1,049,532** | ** ** | 1,061,388 |   |
| Elimination of  intersegment expenses   | ** ** | **(43,414**                           | **)**       | (37,623                              | )          | **(128,225** | **)** | (107,813 | ) |
| Total                                   | ** ** | **$**                                 | **302,015** | ** **                           | $          | 323,667 |   | **$** | **921,307** | ** ** | $ | 953,575 |   |
|                                    |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Gross Profit:                           |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Sabre Travel  Network                   | ** ** | **$**                                 | **140,089** | ** **                           | $          | 129,718 |   | **$** | **446,552** | ** ** | $ | 437,722 |   |
| Travelocity                             | ** ** | **85,053**                            | ** **  | 61,675                               |       | **220,491** | ** ** | 145,554 |   |
| Sabre Airline  Solutions                | ** ** | **17,568**                            | ** **  | 11,749                               |       | **46,524** | ** ** | 39,115 |   |
| Other corporate  expenses               | ** ** | **(335**                              | **)**       | (16                                  | )          | **172** | ** ** | 1,849 |   |
| Total                                   | ** ** | **$**                                 | **242,375** | ** **                           | $          | 203,126 |   | **$** | **713,739** | ** ** | $ | 624,240 |   |
|                                    | ** ** | ** **                            | ** **  |                                 |       | ** ** | ** ** |   |   |
| Selling, General  & Administrative: |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Sabre Travel  Network                   | ** ** | **$**                                 | **62,460**  | ** **                           | $          | 64,424 |   | **$** | **195,129** | ** ** | $ | 190,431 |   |
| Travelocity                             | ** ** | **76,469**                            | ** **  | 66,701                               |       | **206,984** | ** ** | 176,952 |   |
| Sabre Airline  Solutions                | ** ** | **14,174**                            | ** **  | 7,536                                |       | **37,179** | ** ** | 23,474 |   |
| Other corporate  expenses               | ** ** | **106**                               | ** **  | (289                                 | )          | **1** | ** ** | (238 | ) |
| Total                                   | ** ** | **$**                                 | **153,209** | ** **                           | $          | 138,372 |   | **$** | **439,293** | ** ** | $ | 390,619 |   |
|                                    |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Amortization of  Intangible Assets:     |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Sabre Travel  Network                   | ** ** | **$**                                 | **3,471**   | ** **                           | $          | 3,106 |   | **$** | **14,989** | ** ** | $ | 9,346 |   |
| Travelocity                             | ** ** | **7,704**                             | ** **  | 17,292                               |       | **22,556** | ** ** | 34,654 |   |
| Sabre Airline  Solutions                | ** ** | **824**                               | ** **  | 490                                  |       | **1,803** | ** ** | 1,469 |   |
| Total                                   | ** ** | **$**                                 | **11,999**  | ** **                           | $          | 20,888 |   | **$** | **39,348** | ** ** | $ | 45,469 |   |
|                                    |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Operating Income  (Loss)                |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Sabre Travel  Network                   | ** ** | **$**                                 | **74,158**  | ** **                           | $          | 62,188 |   | **$** | **236,434** | ** ** | $ | 237,945 |   |
| Travelocity                             | ** ** | **880**                               | ** **  | (22,318                              | )          | **(9,049** | **)** | (66,052 | ) |
| Sabre Airline  Solutions                | ** ** | **2,570**                             | ** **  | 3,723                                |       | **7,542** | ** ** | 14,172 |   |
| Other corporate                         | ** ** | **(441**                              | **)**       | 273                                  |       | **171** | ** ** | 2,087 |   |
| Total                                   | ** ** | **$**                                 | **77,167**  | ** **                           | $          | 43,866 |   | **$** | **235,098** | ** ** | $ | 188,152 |   |

 

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***Three Months Ended September 30, 2004 and 2003***

*** ***

Total revenues for thethree months ended September 30, 2004 increased approximately $17 million or3.2%, compared to the three months ended September 30, 2003, from $527 millionto $544 million.  Cost of revenues forthe three months ended September 30, 2004 decreased approximately $22 millionor 6.8% compared to the three months ended September 30, 2003, from $324million to $302 million.

 

Management’s discussionand analysis of revenues and cost of revenues by business segment are basedupon segment results including intersegment revenues and cost of revenues ofapproximately $43 million and $38 million for the three months ended September30, 2004 and 2003, respectively.  Weaccount for significant intersegment transactions as if the transactions wereto third parties, that is, at estimated current market prices.  The majority of the intersegment revenues andcost of revenues are between Travelocity and Sabre Travel Network, consistingmainly of incentives and marketing fees paid to Travelocity for Travelocitybookings made through the *Sabre*GDS, data processing fees paid by Travelocity to Sabre Travel Network, and feespaid by Sabre Travel Network to Travelocity for corporate trips booked throughTravelocity’s online booking technology. In addition, Sabre Airline Solutions pays fees to Travelocity forairline trips booked through Travelocity’s online booking technology.  All intersegment revenues and correspondingcost of revenues have been eliminated in consolidation.

 

***Revenues. ***Total revenues (including intersegment revenues) forthe three months ended September 30, 2004 increased approximately $24 millionor 4.3%, as compared to the three months ended September 30, 2003, from $564million to $588 million.

 

*SabreTravel Network -*Revenues for the three months ended September 30, 2004 decreased $5 million or1.3%, as compared to the three months ended September 30, 2003, from $393million to $388 million.

 

•                  Booking fees from suppliers andtransaction fees from certain subscribers decreased by $11 million, or3.3%.  This $11 million decrease includesa $1 million increase resulting from slightly higher booking volumes and a $2million decrease driven by a lower effective average rate per booking.  In addition, booking fee revenue decreased$10 million compared to the year ago period due to the recognition of one-timeitems in 2003.  These one-time items in2003 include: (i) payments received in 2003 of approximately $6 million fromcertain customers for revenues that were being deferred until cash was receiveddue to significant collection concerns and (ii) the reversal in 2003 of $4million in accrued supplier payments (which were originally recorded ascontra-revenue)  that we did not make dueto a renegotiated contract.  Total globaltravel bookings processed through the *Sabre*system, which include direct connect bookings and joint venture bookings forwhich we or our distribution partners earn a booking fee, were 97.4 million forthe three months ended September 30, 2004, an increase of 0.6% from 96.9million bookings in the three months ended September 30, 2003.

 

•                  Non-transaction fee subscriber revenuedecreased by $2 million, reflecting the trend towards the adoption ofthird-party equipment solutions by subscribers.

 

•                  Other revenue increased by $8 millioncompared to 2003, driven primarily by a $2 million increase in equity incomefrom joint ventures and a $2 million increase in corporate booking tool revenuedriven by higher corporate booking volumes. The remaining $4 million increase relates to other revenue increasesassociated with various products.

 

*Travelocity*- Revenues forthe three months ended September 30, 2004 increased $26 million or 23.0%, ascompared to the three months ended September 30, 2003, from $113 million to$139 million.

 

•                    Transaction revenue increased $41 million or 50.8%,primarily driven by a $38 million increase in non-air transaction revenue(including revenue resulting from sales of package offerings that include airtravel as a component) and a $3 million increase in stand-alone air transactionrevenue.

 

The$38 million increase in non-air transaction revenue consisted primarily of thefollowing:

 

•                              Stand-alone hotel revenue increased $16million due to the growth of our merchant model hotel offering and due toincreased hotel sales through our *WorldChoice Travel*Ô (“WCT”) affiliate network, which weacquired in November 2003;

•                              Packaged trip revenue increasedapproximately $13 million due to the growth of our Travelocity *TotalTrip* offering (launched in June2003);

 

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•                              Net transaction revenue increased $8million due to an adjustment to reduce our supplier liability for amountsdetermined to be over-accrued.  Based onrecent trends, we estimate that approximately $5 million of the $8 millionrelates to travel prior to December 31, 2003 which would be recognized sixmonths following the travel date under our new process (see Note 2 to theConsolidated Financial Statements for additional information on thisadjustment); and

•                              All other non-air transaction revenueincreased $1 million.

 

The $3 millionincrease in stand-alone air transaction revenue was primarily due to a volumeincrease in stand-alone air ticket sales compared to the same period in2003.  Our volume increased due to anoverall increase in online travel demand.

 

•                  Non-transaction revenue decreased $14million or 43.5%, consisting primarily of the following:

 

•                              We recognized revenue of approximately $13million in the third quarter of 2003 related to the warrants received from aformer hotel supplier.  Our contract withthe supplier terminated in September 2003. See Note 6 to the Consolidated Financial Statements for additionalinformation on these warrants.

 

•                              Joint venture equity method losses, whichreduce our revenues, increased by approximately $3 million.  The increased equity losses result fromincreased spending on marketing by the joint ventures, the expansion of ourEuropean joint venture into France and the acquisition of Travelchannel Ltd., aleading German online travel website, whose operating results increased theequity losses for our joint venture in Europe. See Note 2 to the Consolidated Financial Statements for additionalinformation on the accounting policies for our joint ventures.

 

•                              Corporate revenue, the fees paid by SabreTravel Network and Sabre Airline Solutions to Travelocity for trips bookedthrough Travelocity’s online booking technology, increased by approximately $2million due to higher booking volumes.

 

*SabreAirline Solutions -*Revenues for the three months ended September 30, 2004 increased $1 million or1.7%, as compared to the three months ended September 30, 2003, from $59million to $60 million due to a $2 million increase in transaction fees fromnewly signed carriers and volume growth, and other revenue from existingcustomers.  In addition, Internet bookingengine revenue increased approximately $1 million due to volume growth.  These increases were offset by a decrease ofapproximately $1 million in airline consulting revenue and a decrease ofapproximately $1 million in development labor revenues from major customers dueto lower demand.

 

**Cost ofRevenues.**  Total cost of revenues (includingintersegment cost of revenues) for the three months ended September 30, 2004decreased approximately $16 million or 4.4%, as compared to the three monthsended September 30, 2003, from $361 million to $345 million.

 

*SabreTravel Network -*Costof revenues for the three months ended September 30, 2004 decreased $15 millionor 5.7% as compared to the three months ended September 30, 2003, from $263million to $248 million.  These cost ofrevenues consisted of a $5 million decrease in subscriber support costs, a $2million decrease in technology related spending and an approximate $8 milliondecrease in other expenses.

 

The $5 million decrease in subscriber support costsincludes a $1 million increase in customer incentives driven by an increase inincentives paid to Travelocity of $4 million resulting from higher bookingvolumes, offset by reductions in incentives to other subscribers of $3million.  The increase in incentiveexpense is offset by reductions in hardware support and communications costs of$6 million driven by migration to lower cost solutions and the adoption ofthird-party solutions by subscribers.

 

Technology related spending decreased $2 million dueto a $5 million reduction in operational costs related to our phasedimplementation of new functionality. This decrease was partially offset by a $3 million increase related toour continuing expansion of the new system and other data processing costs.

 

Other expenses decreased approximately $8 milliondriven by reductions in headcount related expenses of $6 million and decreasesin other expenses of $2 million.

 

33

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*Travelocity* - Cost of revenues for the three monthsended September 30, 2004 increased $3 million or 5.9%, as compared to the threemonths ended September 30, 2003, from $51 million to $54 million.  This increase was primarily the result of a$7 million increase in expenses associated with the volume growth of ourmerchant model business, as explained above in transaction revenue.  In addition, for 2004, this expense alsoincludes credit card fees, merchant credit card chargebacks and fraud charges,and other expenses that we did not incur in the three months ended September30, 2003 due to our merchant hotel content supplier relationship that wasterminated in September 2003.  Theincrease was offset by savings of $2 million related to our contact centeroperations agreement with WNS (see Note 3 to the Consolidated FinancialStatements) and a $2 million decrease in other expenses.

 

*SabreAirline Solutions*- Cost of revenues for the three months ended September 30, 2004 decreasedapproximately $4 million or 8.5%, as compared to the three months endedSeptember 30, 2003, from $47 million to $43 million.  This decrease was due to reduced headcountrelated expenses of $2 million and reduced depreciation and amortizationexpense of approximately $2 million.

 

**Selling,General and Administrative Expenses*. ***Selling, general and administrative expenses for thethree months ended September 30, 2004 increased $15 million or 10.9%, ascompared to the three months ended September 30, 2003, from $138 million to$153 million. Sabre Travel Network expenses decreased by $2 million driven by a$1 million increase in bad debt expense offset by a $3 million decrease inservices purchased.  Services purchasedin 2003 were higher due to our efforts towards the deregulation of the CRSindustry.  Travelocity expenses increasedapproximately $10 million, primarily due to increased advertising and customeracquisition costs to drive additional travelers to our websites.  The increase also includes payments to ourWCT affiliates but is partially offset by savings from the AOL agreementrenegotiation (see Note 3 to the Consolidated Financial Statements).  Sabre Airline Solutions expenses increasedapproximately $7 million due to a $4 million increase in bad debt expenserelated to specific customer collection risks and an approximately $3 millionincrease in other selling, general and administrative expenses.

 

**Amortizationof Intangible Assets*. ***Amortization of intangible assets for the three monthsended September 30, 2004 was $12 million, a decrease of approximately $9million as compared to the three months ended September 30, 2003.  The decrease was primarily due to anapproximately $9 million write-off of an intangible asset resulting from thetermination of an agreement with a former hotel supplier in the third quarterof 2003.  Travelocity amortizationdecreased by approximately $2 million due to the completion of amortization ofintangible assets during 2003, partially offset by approximately $1 million ofincreased amortization resulting from the acquisition of assets of WCT in thefourth quarter of 2003.  The remainingincreases of $1 million results primarily from Sabre Travel Network’sacquisition of the remaining 49% of Dillon Communications Systems GmbH inDecember 2003.

 

**InterestIncome*.***  Interestincome remained unchanged at approximately $4 million for the three monthsended September 30, 2004 and 2003, respectively.  Average balances of our short-terminvestments were slightly lower, offset by slightly improved rates of return onthose balances.

 

**InterestExpense*. ***Interest expense remained unchanged atapproximately $7 million for the three months ended September 30, 2004 and 2003,respectively, reflecting interest expense on the capital lease we entered intoat the end of June 2003 for our headquarters buildings.

 

**Other,net.*** *Other, net changed approximately $4 million from netother expense of approximately $2 million for the three months ended September30, 2003 to net other income of approximately $2 million for the three monthsended September 30, 2004.  This change isprimarily due to year over year changes in minority interests as well as 2003impairment charges on certain non-operating assets.

 

**IncomeTaxes*. ***The****provision forincome taxes for the three months ended September 30, 2004 decreased$5 million as compared to the three months ended September 30, 2003, from$14 million to $9 million.  This decreaseis due to an $18 million reversal of previously accrued taxes, offset by thetax effect of an approximately $37 million increase in pre-tax income betweenperiods.   See Note 5 to the ConsolidatedFinancial Statements for additional information regarding income taxes.

 

**NetEarnings. **Net earningsincreased $42 million or 168% during the three months ended September 30, 2004as compared to the three months ended September 30, 2003.  An increase in online travel demand, yearover year growth in our merchant model business and the implementation of costreduction initiatives exceeded increases in customer incentives, higheradvertising costs to promote our products and bad debt expense, resulting in a$24 million increase in net earnings for the three months ended September 30,2004 as compared to the three months ended September 30, 2003.  The remaining increase relates to the $18million reversal of previously accrued taxes discussed above.

 

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***Nine Months Ended September 30, 2004 and 2003***

*** ***

Total revenues for thenine months ended September 30, 2004 increased approximately $57 million or3.6%, compared to the nine months ended September 30, 2003, from $1,578 millionto $1,635 million.  Cost of revenues forthe nine months ended September 30, 2004 decreased approximately $33 million or3.5% compared to the nine months ended September 30, 2003 from $954 million to$921 million.

 

Management’s discussionand analysis of revenues and cost of revenues by business segment are basedupon segment results including intersegment revenues and cost of revenues ofapproximately $128 million and $108 million for the nine months ended September30, 2004 and 2003, respectively.  Weaccount for significant intersegment transactions as if the transactions wereto third parties, that is, at estimated current market prices.  The majority of the intersegment revenues andcost of revenues are between Travelocity and Sabre Travel Network, consistingmainly of incentives and marketing fees paid to Travelocity for Travelocitybookings made through the *Sabre*GDS, data processing fees paid by Travelocity to Sabre Travel Network, and feespaid by Sabre Travel Network to Travelocity for corporate trips booked throughTravelocity’s online booking technology. In addition, Sabre Airline Solutions pays fees to Travelocity forairline trips booked through Travelocity’s online booking technology.  All intersegment revenues and correspondingcost of revenues have been eliminated in consolidation.

 

***Revenues. ***Total revenues (including intersegment revenues) forthe nine months ended September 30, 2004 increased approximately $77 million or4.6%, as compared to the nine months ended September 30, 2003, from $1,686million to $1,763 million.

 

*SabreTravel Network -*Revenues for the nine months ended September 30, 2004 decreased $9 million or0.7%, as compared to the nine months ended September 30, 2003, from $1,215million to $1,206 million.

 

•                  Booking fees from suppliers andtransaction fees from certain subscribers increased by $22 million, or2.2%.  This $22 million increase includesa $47 million increase resulting from higher booking volumes associated withtravel demand having been depressed in the corresponding period for 2003 becauseof traveler concerns about the war in Iraq and SARS and a $15 million decreasedue to a lower effective average rate per booking.  For the nine month period, this average rateper booking decrease was primarily attributable to the impact of the DCA 3-YearPricing Option.  In addition, booking feerevenue decreased $10 million compared to the year ago period due to therecognition of one-time items in 2003. These one-time items in 2003 include: (i) payments received in 2003 ofapproximately $6 million from certain customers for revenues that were beingdeferred until cash was received due to significant collection concerns and(ii) the reversal in 2003 of $4 million in accrued supplier payments that wedid not make due to a renegotiated contract. Total global travel bookings processed through the *Sabre* system, which include direct connectbookings and joint venture bookings for which we or our distribution partnersearn a booking fee, were 303.9 million for the nine months ended September 30,2004, an increase of 8.6% from 279.7 million bookings in the nine months endedSeptember 30, 2003.  The increase isprimarily due to depressed travel demand in the corresponding period for 2003because of traveler concerns about the war in Iraq and SARS.

 

•                  Non-transaction fee subscriber revenuedecreased by $50 million, driven by $36 million of settlement revenue in 2003derived from two canceled subscriber contracts. Excluding the settlement, subscriber revenue would have decreased by $14million, reflecting the trend towards the adoption of third-party equipmentsolutions by subscribers.

 

•                  Other revenues increased by $19 millioncompared to 2003, driven primarily by a $7 million increase in equity incomeand transaction processing revenue from our joint ventures and a $5 millionincrease in corporate booking tool revenue resulting from higher corporatebooking volumes.  The remaining $7million relates to other revenue increases associated with various products.

 

*Travelocity*- Revenues forthe nine months ended September 30, 2004 increased $79 million or 26.6%, ascompared to the nine months ended September 30, 2003, from $297 million to $376million.

 

•                  Transaction revenue increased $106million or 49.0%, primarily driven by a $92 million increase in non-airtransaction revenue (including revenue resulting from sales of packageofferings that include air travel as a component) and a $14 million increase instand-alone air transaction revenue.

 

The$92 million increase in non-air transaction revenue consisted primarily of thefollowing:

 

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•                              Stand-alone hotel revenue increased $43million due to the growth of our merchant model hotel offering and due toincreased hotel sales through our WCT affiliate network, which we acquired in November2003;

•                              Packaged trip revenue increasedapproximately $38 million due to growth in our Travelocity *TotalTrip* offering which was launched inSeptember 2003;

•                              Net transaction revenue increased $8million due to an adjustment to reduce our supplier liability for amounts determinedto be over-accrued.  Based on recenttrends, we estimate that approximately $5 million of the $8 million relates totravel prior to December 31, 2003 which would be recognized six monthsfollowing the travel date under our new process (see Note 2 to the ConsolidatedFinancial Statements for additional information on this adjustment); and

•                              All other non-air transaction revenueincreased $3 million.

 

The $14 millionincrease in stand-alone air transaction revenue was primarily due to a volumeincrease in stand-alone air ticket sales compared to the same period in2003.  Our volume increased due to anoverall increase in online travel demand.

 

•                  Non-transaction revenue decreased $27million or 33.3%, consisting of the following:

 

•                              We recognized revenue of approximately$24 million in the nine months ended September 30, 2003 related to the warrantsreceived from a former hotel supplier. Our contract with the supplier terminated in September 2003.  See Note 6 to the Consolidated FinancialStatements for additional information on these warrants.

 

•                              Joint venture equity method losses, whichreduce our revenues, increased by approximately $8 million.  The increased equity losses result fromincreased spending on marketing by the joint ventures, the expansion of ourEuropean joint venture into France and the acquisition of Travelchannel Ltd., aleading German online travel website, whose operating results increased theequity losses for our joint venture in Europe. See Note 2 to the Consolidated Financial Statements for additionalinformation on the accounting policies for our joint ventures.

 

•                              Corporate revenue, the fees paid by SabreTravel Network and Sabre Airline Solutions to Travelocity for trips bookedthrough Travelocity’s online booking technology, increased by approximately $5million due to higher volumes.

 

*Sabre Airline Solutions -* Revenues for the nine months endedSeptember 30, 2004 increased approximately $8 million or 4.6%, as compared tothe nine months ended September 30, 2003, from $173 million to $181 million dueto a $13 million increase in transaction fees from newly signed carriers andvolume growth, and other revenue from existing customers.  In addition, Internet booking engine revenueincreased approximately $4 million due to volume growth.  Other revenues, including invoiced travel andairline consulting revenues, increased by approximately $3 million.  These increases were offset by a decrease ofapproximately $6 million in development labor revenues from major customers dueto lower demand and a decrease of approximately $6 million due to lower salesof airline software products and services.

 

**Cost ofRevenues.**  Total cost of revenues (includingintersegment cost of revenues) for the nine months ended September 30, 2004decreased approximately $11 million or 1%, as compared to the nine months endedSeptember 30, 2003, from $1,061 million to $1,050 million.

 

*SabreTravel Network -*Costof revenues for the nine months ended September 30, 2004 decreased $17 millionor 2.2% as compared to the nine months ended September 30, 2003, from $777million to $760 million.  These cost ofrevenues consisted of a $9 million increase in subscriber support costs offsetby a $26 million decrease in other spending.

 

The $9 million increase in subscriber support costsincludes a $34 million increase in customer incentives, partially offset by $25million of reductions in hardware support and communications costs.  The increase in customer incentives includes$9 million related to increased booking activity in 2004, $12 million relatedto increases in the average incentive per booking driven by competitivepressure on renewals and conversions, and $13 million related to incentivepayments to Travelocity due to improved booking volumes.  The $25 million reduction in hardware supportand communications costs was driven by migration to lower cost solutions andthe adoption of third-party solutions by subscribers.

 

Other spending decreased by $26 million due to areduction in headcount related expenses of $14 million, lower payments totravel suppliers of $7 million, reduced facility costs of $2 million and a $3million decrease in other costs.

 

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*Travelocity* - Cost of revenues for the nine monthsended September 30, 2004 increased $4 million or 2.6%, as compared to the ninemonths ended September 30, 2003, from $152 million to $156 million.  This increase was primarily the result of an$18 million increase in expenses associated with the volume growth of ourmerchant model business, as explained above in transaction revenue. Inaddition, for 2004, this expense also includes credit card fees, merchantcredit card chargebacks and fraud charges, and other expenses that we did notincur in the nine months ended September 30, 2003 due to our merchant hotelcontent supplier relationship that was terminated in September 2003.  The increase was offset by approximately $8million associated with the savings from our contact center operationsagreement with WNS (see Note 3 to the Consolidated Financial Statements).  Other costs of revenue decreasedapproximately $6 million due to reduced headcount related costs andamortization expense partially offset by increased data processing costs drivenby higher booking volumes.

 

*SabreAirline Solutions*- Cost of revenues for the nine months ended September 30, 2004 remainedunchanged at approximately $134 million for the nine months ended September 30,2004 and 2003, respectively.  Travelexpense increased approximately $4 million partly due to the recognition ofinvoiced travel as revenue beginning in 2004 as opposed to an offset to cost ofrevenue in prior periods.  Dataprocessing costs increased approximately $2 million as a result of increasedpassenger boarded volumes and increased Internet booking engine volumes.  These increases were offset by a $2 milliondecrease in direct headcount related expenses and a $4 million decrease inindirect headcount related expenses driven by a year over year change in theallocation of corporate resources (offset by a corresponding increase in SabreAirline Solutions selling, general and administrative expenses below).

 

**Selling,General and Administrative Expenses*. ***Selling, general and administrative expenses for thenine months ended September 30, 2004 increased $48 million or 12.3%, ascompared to the nine months ended September 30, 2003, from $391 million to $439million.  Sabre Travel Networkexpenses increased by $5 million driven primarily by an increase in bad debtreserves of $8 million.  The increase inbad debt reserves is related to the increased aging of receivables of a fewlarge customers. The increase also includes a $2 million increase in headcountrelated expenses, $1 million increase in facility costs, and a $5 millionincrease in various other expenses. These increases were offset by a decreasein services purchased of $12 million. The decline in services purchased is largely due to a decrease inprofessional fees related to our efforts as an advocate for the deregulation ofthe U.S. CRS industry.  Travelocity expenses increased $30million, primarily due to increased advertising and customer acquisition costsof $25 million to drive additional travelers to our websites and a $5 millionincrease in other expenses.  The increasealso includes payments to our WCT affiliates but is partially offset by savingsfrom the AOL agreement renegotiation (see Note 3 to the Consolidated FinancialStatements).  Sabre Airline Solutionsexpenses increased approximately $14 million due to an $8 million increase inbad debt expense related to specific customer collection risks and a $6 millionincrease in headcount related expenses, of which $5 million was driven by ayear over year change in the allocation of general and administrative corporateexpenses (offset by a corresponding decrease in Sabre Airline Solutions cost ofrevenues above).

 

**Amortizationof Intangible Assets*. ***Amortization of intangible assets for the nine monthsended September 30, 2004 was $39 million, a decrease of approximately $6million as compared to the nine months ended September 30, 2003.  Sabre Travel Network amortization increasedapproximately $6 million primarily due a $3 million impairment write-down oftechnology related intangible assets in 2004 and a $2 million increaseresulting from the acquisition of the remaining 49% of Dillon CommunicationsSystems GmbH in December 2003. Travelocity amortization decreased by approximately $12 million due toan approximately $9 million write-off of an intangible asset resulting from thetermination of an agreement with a former hotel supplier in the third quarterof 2003.  Also, there was a $5 milliondecrease due to the completion of amortization of intangible assets during2003, partially offset by approximately $2 million of increased amortizationresulting from the acquisition of assets of WCT in the fourth quarter of 2003.

 

**InterestIncome*.***  Interestincome decreased approximately $2 million for the nine months ended September30, 2004 from $13 million to $11 million due primarily to lower averagebalances of certain short-term investments and loans receivable.

 

**InterestExpense*. ***Interest expense increased $2 million forthe nine months ended September 30, 2004 from $18 million to $20 millionresulting from the capital lease we entered into at the end of June 2003 forour headquarters buildings.

 

**Other,net.*** *Other, net changed approximately $41 million from netother expense of approximately $32 million for the nine months ended September30, 2003 to net other income of approximately $9 million for the nine monthsended September 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 nine months ended September 30, 2004 also includes a $6 million gainfrom settling a contract dispute.  Otherchanges include year over year changes in minority interests as well as 2003impairment charges on certain non-operating assets.

 

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**IncomeTaxes*. ***The****provision forincome taxes for the nine months ended September 30, 2004 increased$11 million as compared to the nine months ended September 30, 2003, from$54 million to $65 million.  Thisincrease resulted from the approximately $84 million increase in pre-tax incomebetween periods offset by a reversal of previously accrued taxes of  $18 million. See Note 5 to the Consolidated Financial Statements for additionalinformation regarding income taxes.

 

**NetEarnings. **Net earningsincreased $72 million or 74.2% during the nine months ended September 30, 2004as compared to the nine months ended September 30, 2003.  An increase in online travel demand, yearover year growth in our merchant model business and the implementation of costreduction initiatives exceeded increases in customer incentives, higheradvertising costs to promote our products and bad debt expense, resulting in a$54 million increase in net earnings for the nine months ended September 30,2004 as compared to the nine months ended September 30, 2003.  The remaining increase relates to the $18million reversal of previously accrued taxes discussed above.

 

**SABREHOLDINGS CORPORATION**

**LIQUIDITYAND CAPITAL RESOURCES**

** **

We require cash to payour operating expenses, make capital expenditures, invest in our products andofferings, pay dividends, complete share repurchases and service our debt andother long-term liabilities.  Althoughour primary source of funds has been from our operations, we have occasionallyraised external funds through the sale of stock and debt in the capital marketsand in privately negotiated transactions. In assessing our liquidity, key components include our net incomeadjusted for non-cash and non-operating items, and current assets andliabilities, in particular accounts receivable, accounts payable, and accruedexpenses.  For the longer term, our debtand long-term liabilities are also considered key to assessing our liquidity.

 

In the near-term, weanticipate that cash flows from our operations, existing balances in cash andshort-term investments of $916 million as of September 30, 2004 and fundsavailable under our revolving credit facility of $300 million 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 to use our existing fundsand cash flows from operations to satisfy our debt and other long-termobligations.  We may also use our fundsto retire debt as appropriate, based upon market conditions and our desiredliquidity and capital structure.  We mayalso consider using our funds available or possibly external sources of fundsfor acquisitions of or investments in complementary businesses, products,services and technologies when such opportunities become available. These typesof additional activities might affect our liquidity requirements or cause us toissue additional equity or debt securities.

 

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

 

•                  Reduced sales due to declining bookingvolumes and lower prices under the DCA 3-Year Pricing Option,

•                  Diversion of bookings away from ourchannel offerings and other competitive pressures, and

•                  Changes in our working capital.

 

See “*Risk Factors*” for a more completediscussion of risk factors that might affect the availability of our internallygenerated funds.  Nonetheless, with ourstrong cash and short-term investments position of $916 million and workingcapital of $827 million as of September 30, 2004, along with our investmentgrade credit ratings from S&P and Moody’s of BBB+ and Baa2, respectively,we have significant resources available to us and we continue to implement costcontrolling efforts to ensure our operating expenses are in line with theimpacts of the factors listed above and other risk factors.

 

***Cash Investments***

*** ***

We invest cash in highly liquid instruments, includinghigh credit quality money market mutual funds, certificates of deposit, banker’sacceptances, commercial paper, repurchase agreements, mortgage-backed andreceivables-backed securities and corporate and government notes, includingtax-exempt municipal securities. We try to invest all of our excess cash inmarketable securities.  Therefore, ourannual investments will fluctuate depending on the levels of cash provided orused by all of our other investing, operating and financing activities.

 

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***Capital Activities***

*** ***

**Dividends.** We began paying a quarterly dividend of $.07 per share during the secondquarter of 2003, and paid dividends of the same amount during the third andfourth quarters of 2003.  On January 20,2004 we announced an increased dividend of $.075 per share.  We paid dividends of that same amount in thefirst, second and third quarters of 2004. On October 26, 2004, we announced a dividend of $.075 per share to bepaid on November 15, 2004 to stockholders of record on November 5, 2004.  Based on a quarterly dividend of $.075 pershare, and assuming that the current number of outstanding shares of our CommonStock remains constant for the remainder of 2004, we expect to pay an aggregateof approximately $42 million for the fiscal year 2004.  Our Board of Directors currently intends to considerdeclaring and paying comparable future dividends on a regular quarterly basis,subject to our ability to pay dividends and to a determination by managementand our Board of Directors that dividends continue to be in our best interestsand those of our stockholders.

 

**Repurchasesof Stock. **On October 20, 2003 our Board ofDirectors approved a share repurchase program authorizing us to repurchase upto $100 million of our Common Stock.  At December 31, 2003, we hadremaining authorization to repurchase approximately $72 million of our CommonStock under this program.  During the three months ended March 31, 2004,we repurchased 3,336,862 shares of our Common Stock for approximately $72million, thereby completing the remaining authorization to repurchase sharesunder that program.  On April 19, 2004 our Board of Directors approvedanother share repurchase program authorizing us to repurchase up to anadditional $100 million of our Common Stock.  As of September 30, 2004, wehad purchased $99 million under this authorization and we have since utilizedour remaining authorization to repurchase $1 million under this program.  On October 25, 2004, our Board of Directorsapproved another share repurchase program authorizing us to repurchase up to anadditional $100 million of our Common Stock.

 

In addition, on October20, 2003 our Board of Directors authorized the purchase of shares of our CommonStock to satisfy our obligations to deliver shares under our Employee StockPurchase Plan and our Long-Term Incentive Plan.  Although this authorizationremains in force, we did not repurchase any shares of our Common Stock underthis program during the nine months ended September 30, 2004.

 

We will generally seek tomake future share repurchases pursuant to 10b5-1 trading plans, unless suchplans are terminated at the discretion of management.

 

***Financing Arrangements***

*** ***

**RevolvingCredit Agreement.** On June 15, 2004, we replaced a $300 millionrevolving credit agreement that was set to expire on September 14, 2004, with anew $300 million, senior unsecured revolving credit agreement that expires June15, 2009.  Under certain conditions, wecan request an additional $100 million under this new agreement.  Interest on this agreement is variable, basedon either the London Interbank Offered Rate (“LIBOR”) or the prime rate, at ourdiscretion, 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 September 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).   As of September 30, 2004 we are in compliancewith all covenants under this agreement including the following financialcovenants:

 
| ** **                                    | ** ** | **Requirement** | ** ** | **Level at  September 30, 2004** | ** ** |
|-----------------------------------------------|------------|-----------------|------------|----------------------------------|------------|
|                                          |       |            |       |                             |       |
| Consolidated  Leverage Ratio (Debt to EBITDA) |       | 3 to 1 maximum  |       | 2 to 1                           |       |
| Consolidated Net  Worth                       |       | $1.3 billion    |       | $1.7 billion                     |       |

 

**PublicNotes. **In August 2001, we issued through Sabre HoldingsCorporation $400 million in unsecured notes (“Notes”), bearing interest at7.35% and maturing August 1, 2011, in an underwritten public offering resultingin net cash proceeds to us of approximately $397 million.  The Notes include certain non-financialcovenants including restrictions on incurring certain types of debt or enteringinto certain sale and leaseback transactions. As of September 30, 2004, we arein compliance with all covenant requirements under this agreement.  Sabre Inc., a 100% owned subsidiary of SabreHoldings Corporation, unconditionally guarantees all debt obligations of SabreHoldings Corporation.  In conjunctionwith these Notes, we have entered into two interest rate swaps through 2011 fora total of  $300 million, which pay us7.35% and on which we pay a variable rate based on a six-month LIBOR plus 231basis points.

 

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**CapitalLease Obligation. **In June 2003, we entered into a ten-yearmaster lease for our corporate headquarters facility in Southlake, Texas, whichis accounted for as a capital lease.  Theinterest rate on the capital lease financing is fixed at 5.37%.  At the inception of the lease, we recorded anasset of approximately $168 million, along with a liability of approximately$168 million, representing the present value of the minimum lease payments dueunder the lease and the residual value guarantee discussed below.

 

At any time during the lease term, we have the optionto terminate the lease and purchase the properties for approximately $179million, plus a make-whole amount, if applicable. We also have the option atany time up to one year prior to lease expiration to cause the properties to besold. If this sell option is exercised, we have guaranteed that proceeds on asale will be at least approximately $159 million, and we are responsible forthe first dollar loss up to approximately $159 million due to a decrease in thevalue of the property below approximately $179 million. If the sales proceedsexceed approximately $179 million plus any sales-related expenses, we retainthe excess.  In conjunction with thislease, we have entered into a $100 million interest rate swap which pays us5.37% and on which we pay a variable rate based on a six-month LIBOR plus 153basis points.   Under the leaseagreement, we are subject to certain covenants. As of September 30, 2004 we are in compliance with all covenants underthis agreement including the following financial covenant:

 
| ** **              | ** ** | **Requirement** | ** ** | **Level at September  30, 2004** | ** ** |
|-------------------------|------------|-----------------|------------|----------------------------------|------------|
| Consolidated Net  Worth |       | $913 million    |       | $1.7 billion                     |       |

 

***Off-Balance Sheet Arrangements and Contractual Obligations***

 

No material changes haveoccurred in our off-balance sheet arrangements or contractual obligationsduring the nine months ended September 30, 2004.

 

***Cash Flows (in thousands)***

 
| ** **                             | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------|------------|--------------------------------------|------------|
| ** **                             | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| Cash provided by  operating activities |       | $                                    | 318,170    |   | $ | 216,339 |   |
| Cash used for  investing activities    |       | (113,641                             | )          | (166,204 | ) |
| Cash used for  financing activities    |       | (182,843                             | )          | (44,827 | ) |
| Total cash  increase                   |       | $                                    | 21,686     |   | $ | 5,308 |   |

 

**Operating Activities**.  Cash provided by operating activitiesincreased by $102 million in the nine months ended September 30, 2004 ascompared to the year-ago period.  Thisyear over year increase was primarily due to improved earnings and favorablechanges in working capital.  Net earningsfor the nine months ended September 30, 2004, when adjusted for the $18 millionreversal of accrued taxes, improved $54 million. The favorable changes inworking capital include an estimated $53 million related to our merchant modelbusiness, $33 million related to lower prepaid expenses due to therenegotiation of our contract with AOL and $8 million in other favorableworking capital changes.  The estimated $53million related to our merchant model business is driven primarily by year overyear growth as well as the expedited collection of credit card receivablesresulting from a change in service providers. These favorable impacts were offset by larger payments in federal incometaxes in 2004 of $46 million due to higher taxable income and timing ofpayments.

 

Cash provided by operating activities during the nine months endedSeptember 30, 2004 was $318 million, which was primarily from net earnings of$169 million adjusted for non-cash and non-operating items.  In addition, cash provided by operatingactivities includes favorable changes in working capital.  Non-cash adjustments to net earnings of $117million were driven primarily by depreciation and amortization of $94 million,bad debt expense of $15 million, equity losses in unconsolidated joint venturesof $7 million and stock compensation expense of $9 million, offset by other changesof approximately $8 million. The favorable changes in working capital includean increase in merchant supplier liabilities of approximately $29 million, areduction in accounts receivable in 2004 due to the collection of $20 millionrelated to the 2003 cancellations of two subscriber contracts, the receipt ofapproximately $16 million in 2004 of dividends from our Sabre Travel Networkunconsolidated joint ventures and lower prepaid expenses, net of amortizationof $10 million related to the renegotiation of our contract with AOL.  These favorable impacts were offset by anincrease in accounts receivable of approximately $54 million.

 

Cash provided by operating activities for the ninemonths ended September 30, 2003 was $216 million and was primarily from netearnings adjusted for non-cash and non-operating items offset by uses of cashfor working capital items. Non-cash and non-operating adjustments to netearnings of $147 million for the nine months ended September 30, 2003 includeddepreciation and amortization of $105 million, a $28 million charge relating tothe termination of our syndicated lease

 

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facility, stock compensation expense of $14 millionand equity losses in joint ventures of $2 million, partially offset by deferredtax benefits of $5 million.

** **

**InvestingActivities**.  The $53 million decrease in cash used forinvesting activities in the nine months ended September 30, 2004 as compared tothe year-ago period primarily results from a $122 million net increase in salesof marketable securities for our short-term investment portfolio.  The net increase in sales of marketablesecurities is partially offset by $30 million in investments in unconsolidatedjoint ventures and $8 million in loans to business partners during the ninemonths ended September 30, 2004 compared to a net use of $11 million forsimilar activities in the same period a year ago.  In addition, during the nine months endedSeptember 30, 2004 we utilized $38 million, net of cash acquired, foracquisitions compared to $12 million during the corresponding period in2003.  We also paid out $9 million forshares related litigation regarding our Travelocity acquisition in 2002.

 

**FinancingActivities.**  The $138 million increase in cash used forfinancing activities in the nine months ended September 30, 2004 as compared tothe same period a year ago was mainly due to dividends of $31 million paid in2004 compared to $20 million for the same period in 2003 and $165 million usedto repurchase our Common Stock during the nine months ended September 30, 2004as authorized by our Board of Directors, offset by a $10 million increase ofproceeds from the exercise of stock options in 2004 as compared to 2003 and $28million that was used in 2003 related to the termination of our syndicatedlease facility.  For the nine monthsended September 30, 2004, cash used in financing activities of $165 millionrelated to common stock repurchases differs from the comparable change inStockholder’s Equity of $171 million due to timing differences between therecognition of share repurchase transactions and their settlement for cash.

 

**CriticalAccounting Policies**

** **

The discussion andanalysis of our financial condition and results of operations is based on ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires us to make estimates and judgments thataffect our reported assets and liabilities, revenues and expenses, and otherfinancial information. Actual results may differ significantly from theseestimates, and our reported financial condition and results of operations couldvary under different assumptions and conditions. In addition, our reportedfinancial condition and results of operations could vary due to a change in theapplication of a particular accounting standard.

 

We regard an accountingestimate underlying our financial statements as a “critical accounting estimate”if the accounting estimate requires us to make assumptions about matters thatare highly uncertain at the time of estimation and if different estimates thatreasonably could have been used in the current period, or changes in theestimate that are reasonably likely to occur from period to period, would havehad a material effect on the presentation of financial condition, changes infinancial condition, or results of operations.

 

There have been nochanges to our critical accounting policies or significant changes inassumptions or estimates that would affect such policies in the three or ninemonths ended September 30, 2004.  Our significant accounting policies aredescribed in our Annual Report on Form 10-K for the year ended December 31, 2003.These policies are described under the caption “*Management’s Discussion and Analysis of Financial Condition and Resultsof Operations*” in our Annual Report on Form 10-K.

 

**SABREHOLDINGS CORPORATIONCAUTIONARY STATEMENT**

 

Statements in this reportwhich are not purely historical facts or which necessarily depend upon futureevents, including statements regarding our anticipations, beliefs,expectations, hopes, intentions or strategies for the future, may be forward-lookingstatements within the meaning of Section 21E of the Securities ExchangeAct of 1934, as amended. All forward-looking statements in this report arebased upon information available to us on the date of this report. We undertakeno obligation to publicly update or revise any forward-looking statements,whether as a result of new information, future events or otherwise. Any forward-lookingstatements made in this report involve risks and uncertainties that could causeactual events or results to differ materially from the events or resultsdescribed in the forward-looking statements. Readers are cautioned not to placeundue reliance on these forward-looking statements. In addition, oralstatements made by our directors, officers and employees to the investor andanalyst communities, media representatives and others, depending upon theirnature, may also constitute forward-looking statements.  As with the forward-looking statementsincluded in this report, these

 

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forward-lookingstatements are by nature inherently uncertain, and actual results may differmaterially as a result of many factors including, but not limited to, thosediscussed below.

 

**RISKFACTORS**

** **

Risks associated with aninvestment in our securities, and with achieving the forward-looking statementscontained in this report or in our news releases, websites, public filings,investor and analyst conferences or elsewhere, include, but are not limited to,the risk factors described below. Any of the risk factors described below couldhave a material adverse effect on our business, financial condition or resultsof operations. We may not succeed in addressing these challenges and risks.

 

**Ourrevenues are highly dependent on the travel and transportation industries, andparticularly on airlines, and a prolonged substantial decrease in travelbookings volumes could adversely affect us.**

 

Most of our revenue isderived from airlines, hotel operators, car rental companies, cruise operatorsand other suppliers in the travel and transportation industries. Our revenueincreases and decreases with the level of travel and transportation activityand is therefore highly subject to declines in or disruptions to travel andtransportation due to factors entirely out of our control. The travel industryis seasonal and our revenue varies significantly from quarter to quarter.Factors that may adversely affect travel and transportation activity include:

 

•                  economic downturns and recessions,

 

•                  global security issues, politicalinstability, acts of terrorism, hostilities and war,

 

•                  increased airport security that couldreduce the convenience of air travel,

 

•                  inclement weather, such as the recenthurricanes impacting travel in the Southeastern United States and theCaribbean,

 

•                  increased occurrence of travel-relatedaccidents,

 

•                  travelers’ concerns about exposure tocontagious diseases such as SARS,

 

•                  economic and political issues in theMiddle East, Asia, Latin America and elsewhere, and

 

•                  the financial condition of travelsuppliers.

 

The possibility offurther terrorist attacks, hostilities and war (in the Middle East, the Indiansubcontinent or elsewhere), the resulting security measures at airports, andthe financial instability of many of the air carriers may continue to adverselyaffect the travel industry. Airlines may reduce the number of their flights,making fewer offerings available to us. We depend on a relatively small number of airlines for a significantportion of our revenues.  Several majorairlines are experiencing liquidity problems, some (including United Air lines,Inc. and U.S. Airways, Inc.) have sought bankruptcy protection and still othersmay consider bankruptcy relief. Travelers’ perceptions of passenger security or airlines’ financialstability may have an adverse effect on demand. The financial instability of airlines or a prolonged substantialdecrease in travel bookings volumes could have an adverse impact on ourfinancial performance, operations, liquidity, or capital resources and couldimpair our ability to recover the carrying value of certain of our assets,including capitalized software, other intangible assets and goodwill.

 

**Wewill also encounter risks and difficulties frequently experienced in rapidlyevolving industries such as the travel industry, and particularly the onlinetravel industry.  Some of these risksrelate to our ability to:**

 

•                  attract and retain customers on acost-effective basis,

 

•                  expand and enhance our service offerings,

 

•                  operate, support, expand and develop ouroperations, our websites, our software and our communications and othersystems,

 

•                  diversify our sources of revenue,including by entering into agreements that may reflect changes to our  *Sabre*GDS business model,

 

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•                  maintain and develop our existing brandsand distribution channels, as well as to make cost-effective expenditures inconnection with these initiatives,

 

•                  manage our relationships with importanttravel suppliers and other partners,

 

•                  manage litigation, including our currentlitigation with Northwest, and

 

•                  respond to competitive market conditions.

 

If we are unsuccessful inaddressing these risks or in executing our business strategy, our business,financial condition or results of operations may suffer.

 

**Weface competition from established and emerging travel distribution channels,risks related to deregulation of the CRS industry and possible internal channelconflict, which could divert customers to our competitors and adversely affectour results of operations.**

 

Our business includeschannels of distribution that support the travel agency, business-direct andconsumer-direct segments of the global travel distribution market.  In all of these distribution channels, weface significant competition.  In thetravel agency channel, our *Sabre*GDS competes primarily against other large and well-established globaldistribution systems, but new GDS alternatives are being promoted in themarketplace.  With the deregulation ofthe CRS 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 or GDS alternativeoffering lower prices.  Furthermore, oneor more airlines (other than those participating in our DCA 3-Year PricingOption) may elect to discontinue or to lower their levels of participation inthe *Sabre* GDS.  Losing access to inventory from one or moremajor suppliers would make the *Sabre*GDS 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 further the fees charged to suppliers, which could reduce our bookingfee revenue.  In addition, we faceincreasing competition in the travel agency channel from travel suppliers thatdistribute directly to travel agencies as well as to consumers.

 

In the business-directchannel, *Travelocity Business* andour 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 orcost-effectiveness of our competitors’ bundled products and services, which mayincrease the pricing pressure on our *GetThere*product.

 

In the consumer-directchannel, our Travelocity offering competes not only against similar offeringsfrom affiliates of other global distribution systems, but also with travelsuppliers, online vertical search engines, and a large number of online travelagencies, including those operated by airlines and other travel suppliers.

 

Our Sabre AirlineSolutions business unit competes against several organizations offeringinternal reservation system and related technology services to airlines. Thissegment is highly competitive. If we cannot compete effectively to keep andgrow this segment of business, we risk losing customers and economies of scale,which could have a negative impact on our operating results.

 

We expect existingcompetitors, business partners and new entrants to the travel business toconstantly revise and improve their business models in response to challengesfrom competing businesses, including ours. If these or other travel industry participants introduce changes ordevelopments that we cannot meet in a timely or cost-effective manner, ourbusiness may be adversely affected.  Inaddition, consumers frequently use our websites for route pricing and othertravel information, and then choose to purchase travel offerings from a sourceother than our website, including travel suppliers’ own websites.   Such use may increase our costs withoutproducing revenue.

 

In addition,consolidation among our competitors may give our competitors increasednegotiating leverage with travel suppliers and corresponding competitiveadvantages over us. Consolidation among travel suppliers, including airlinemergers, may increase competition from distribution channels related to thosesuppliers and place more leverage in the hands of those suppliers to negotiatelower booking fees.  If we are unable tocompete effectively, competitors could divert our customers away from our traveldistribution channels and, unless we substitute alternative revenue streams, itcould adversely affect our results of operations.

 

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In certain limitedcircumstances, our business segments may compete with each other.  For example, both our *Travelocity.com*â and *Travelocity Business*Ôwebsites may compete with the travel-agency customers of Sabre Travel Networkto distribute travel to corporate or business customers.  Although we believe that our participation inboth the retail and distribution technology businesses is a distinct advantagefor Sabre Holdings due to synergies like greater scale to our technology,customer conflicts between our offerings across businesses could create issuesthat have the potential to adversely effect our results of operations.  For example, such conflict could cause someof our current or potential travel agency customers to consider competing GDSproviders (or online websites) or other direct or indirect channels of traveldistribution.

 

**Sometravel suppliers are seeking alternative distribution models, and alternativemodels of travel distribution are emerging, which may adversely affect ourresults of operations.**

 

Some travel suppliers areseeking to decrease their reliance on distribution intermediaries, includingglobal distribution systems such as our *Sabre*GDS. Travel suppliers may give advantages to distribution intermediaries inwhich they have an economic stake or may create or expand commercialrelationships with online travel services that work with travel suppliers todirectly book travel with those suppliers. Many airlines, hotels, car rental companies and cruise operators haveestablished their own travel distribution websites.  Several suppliers have formed joint venturesthat offer multi-supplier travel distribution websites.  From time to time, travel suppliers offeradvantages, such as bonus miles, lower transaction fees, or discounted prices,when their products and services are purchased from these supplier-relatedwebsites.  Some of these offerings arenot available to unrelated intermediaries, or those intermediaries must providelower distribution pricing in exchange for access to the offerings.  In addition, the airline industry hasexperienced a shift in market share from full-service carriers to low-costcarriers that focus primarily on discount fares to leisure destinations. Somelow-cost carriers do not distribute their tickets through the *Sabre* GDS or through other third-partyintermediaries.  In addition, onlinevertical search engines are attempting to enter the travel distributionbusiness through travel-related keyword searches of supplier and third partytravel agent websites.  These searchengines and alternative travel distribution channels pose a threat to ourbusinesses as they have the potential to divert customers from our online sitesand our *Sabre* GDS thereby puttingpressure on our revenues, pricing and operating margins.  See *BusinessTrends - Supplier Efforts to Control Travel Distribution*and*Business Trends- New Pricing Options for Suppliers*.

 

**Adverse changes in or interruptions to our relationships with travelsuppliers could affect our access to travel offerings and reduce our revenues.**

** **

We rely on participatingcarrier agreements, such as our DCA 3-Year Pricing Option, with our airlinesuppliers, and these agreements contain terms that could reduce ourrevenues.  None of these arrangements isexclusive and airline suppliers could enter into, and in some cases may haveentered into, similar agreements with our competitors.  In addition, most of the agreements we havewith airline suppliers will expire by their terms within the next two yearsunless they are extended or replaced.

 

We cannot assure youthat our arrangements with travel suppliers will remain in effect or that anyof these suppliers will continue to supply us with the same level of access toinventory of travel offerings in the future. Additionally, we cannot assure youthat potential disputes with our travel suppliers will not affect ourbusinesses.  If our access to inventoryor features is affected, or our ability to offer their inventory oncomparatively favorable economic terms is diminished, it could have a materialadverse effect on our business, financial condition or results of operations.

 

**Consolidationin the travel industry and increased competition for travel agency subscribersmay result in increased expenses, lost bookings and reduced revenue.**

 

GDSs compete to attract and retain travelagencies.  The number of bookingsproduced by our travel agency subscriber base is an important factor in oursuccess. Some travel suppliers have reduced or eliminated commissions paid totravel agencies (including consumer-direct travel sites like Travelocity).  The loss of commissions causes travelagencies to become more dependent on other sources of revenues, such astraveler-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.  See *BusinessTrends – Competition and Consolidation*.

 

**Travelocity’sgrowth cannot be assured.**

 

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The online travel spaceis highly competitive, with both independent online travel agencies andsuppliers’ proprietary websites competing for customers.  Our business strategy is dependent onexpanding Travelocity’s transaction revenues, increasing its percentage ofmerchant transactions, maintaining the breadth of its merchant suppliers,developing its brand in a cost-effective manner and increasing its site traffic(including direct distribution as well as through current and futuredistribution partners). Key components of this strategy include the growth ofrevenue from our merchant model hotel business, last-minute packaging and the *TotalTrip* dynamic packaging offering.  We also plan to expand the appeal of *Travelocity Business* to corporatetravelers and to invest strategically in growth opportunities such as theEuropean marketplace.  If any of theseinitiatives is not successful, Travelocity’s growth may be limited and it maybe unable to achieve or maintain profitability.

 

**Ourbusiness plans call for the significant growth of our merchant model business,and we may be unsuccessful in managing or expanding that business.**

** **

Our business strategy isdependent upon our merchant model business, primarily our merchant model hotelbusiness, as a significant source of revenue growth and increased margins. Ourmerchant model hotel strategy is particularly dependent upon our ability toobtain adequate access to hotel rooms to offer. Under the merchant model, we obtain from travel suppliers access totheir products, services and other content offerings at a pre-determinedprice.  Merchant model travel offeringscan include air travel, hotel stays, vacation packages and dynamically packagedcombinations (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.  We remain subject to numerousrisks in the operation and growth of the merchant model.  In particular, we cannot ensure that we willcontinue to be successful in adding and retaining hotel properties or othersuppliers in a sufficient number of domestic or international geographicmarkets.  Many hoteliers utilize merchantmodel arrangements with us and with our competitors as a channel to dispose ofexcess hotel rooms at discounted rates. Demand for supplier offerings mayincrease as a result of increased travel and competition from merchant modelofferings by our competitors.  If demandincreases for suppliers’ products, services and other content offerings,suppliers may limit our access to their offerings or may increase their priceof those offerings.  These types ofevents could exert downward pressure on the margins we expect to achieve in ourmerchant hotel business. We may be unable to achieve our financial objectivesfor the merchant model hotel program, especially if economic conditions improveor if competition increases.   Similarrisks could also impact any future merchant model programs we might explore forother types of supplier offerings, such as air travel.

 

**We may be unsuccessful in pursuing and integrating business combinations,strategic alliances, or products and technologies, which could result inincreased expenditures or cause us to fail to achieve anticipated cost savingsor revenue growth.**

** **

We are currently seekingto integrate the completed acquisitions described herein, including ouracquisition of the non-German operations of Travelocity Europe.  In addition, we plan to continue to examinepossible business combinations, investments, joint ventures or other strategicalliances with other companies in order to maintain and grow revenue and marketpresence.  As a result of these completedor proposed transactions, our businesses will be subject to new or increasedrisks related to the nature of the transactions.  We may be unable to successfully completepotential acquisitions due to multiple factors, such as issues related toregulatory review of the proposed transactions. In addition, there are risks inherent in these types of transactions,such as: difficulty in assimilating or integrating the operations, technologyand personnel of the combined companies; disruption of our ongoing business,including loss of management focus on existing businesses and marketdevelopments; problems retaining key technical and managerial personnel;expenses associated with the amortization of identifiable intangible assets;additional or unanticipated operating losses, expenses or liabilities ofacquired businesses; impairment of relationships with existing employees,customers and business partners; and fluctuations in value and losses that mayarise from equity investments.  Inaddition, we may not be able to: identify suitable candidates for additionalbusiness combinations and strategic investments; obtain financing on acceptableterms for such business combinations and strategic investments; or otherwiseconsummate such business combinations and strategic investments on acceptableterms.

 

**Weare not certain that our ongoing cost reduction plans will continue to besuccessful.**

** **

Our strategy depends, toa substantial degree, on reducing and controlling operating expenses. Infurtherance of this strategy, we have engaged in ongoing, company-wideactivities intended to reduce costs. These activities include personnel reductions, reductions inpersonnel-related costs, programs designed to reduce the growth rate ofincentive payments to travel agencies, and realigning and streamlining operationsand consolidating facilities.  We expect,but cannot assure you that our efforts will continue to result in the increasedprofitability, cost savings or other benefits that we expect.

 

Part of our costreduction strategy involves leveraging our status as a global company toconduct some of our operations outside the United States, such as customer callcenters and software development, either by contracting with foreign companiesthat work for us or by expanding our own operations outside the United States.  These foreign operations are

 

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subject to unique risks,including: business, political and economic instability in foreign locations;governments might adopt policies that could adversely affect business andeconomic conditions related to our operations or business; adverse political orconsumer reactions in the United Sates; disruptions to communication andtransportation services supporting globalization; actual or threatenedterrorist activities; and military action overseas.   Risks such as these could adversely affectour ability to effectively implement global sourcing.

 

**Rapidtechnological changes and new distribution channels or unauthorized use of ourintellectual property may adversely affect the value of our current or futuretechnologies to us and our customers, which could cause us to increaseexpenditures to upgrade and protect our technology or develop and protectcompeting offerings in new distribution channels.**

 

New distribution channelsand technology in our industry are evolving rapidly.  Our ability to compete and our future resultsdepend in part on our continued ability to maintain and to make timely andcost-effective enhancements, upgrades and additions to our technology in responseto changes in consumer preferences and increased demand for our products andservices.  We must also keep pace withrapid advancements in industry technology, standards and practices, and protectour technology.  Additionally, we mustmaintain our ability to ensure the security and privacy of personal informationtransmitted through our websites and other distribution channels.  Unauthorized use of our intellectual propertycould have a material adverse effect on us, and our legal remedies may not adequatelycompensate us for the damages to our business caused by such use.  Maintaining flexibility to respond totechnological and market dynamics may require substantial expenditures andlead-time.  We cannot assure you that wewill successfully identify and develop new products or services in a timelymanner, that offerings, technologies or services developed by others will notrender our offerings obsolete or noncompetitive, or that the technologies inwhich we focus our research and development investments will achieve acceptancein the marketplace and provide a return on our investment.

 

**Oursystems may suffer failures, capacity constraints and business interruptions,which could increase our operating costs and cause us to lose customers.**

 

Our businesses arelargely dependent on the computer data centers and network systems operated forus by Electronic Data Systems Corporation. We rely on several communications service suppliers and on the globalInternet to provide network access between our computer data center andend-users of our services.  Travelocityand *Site59*â aredependent upon GDS’s (the *Sabre*GDSand a third-party provider, respectively) to process their travelbookings.  Like any company in ourindustry, we occasionally experience system interruptions that make some or allof our global distribution system or other data processing servicesunavailable, which may prevent us from efficiently providing services to ourcustomers or other third parties and which could result in a material adverseeffect upon our businesses, financial condition or results of operations(particularly if such events occur at Travelocity).  System capacity limits or constraints arisingfrom unexpected increases in our volume of business could cause interruptions,outages or delays in our services, or a deterioration in their performance, orcould 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 fromproviding services.  We could be harmedby outages in, 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 besuccessful, we must provide reliable, real-time access to our systems for ourcustomers and suppliers. As our operations grow in both size and scope, we willcontinuously need to improve and upgrade our systems and infrastructure tooffer an increasing number of customers and travel suppliers enhanced products,services, features and functionality – all while maintaining the reliabilityand integrity of our systems and infrastructure.  The expansion of our systems andinfrastructure will require us to commit substantial financial, operational andtechnical resources before the volume of business increases, with no assurancethat the volume of business will increase. Consumers and suppliers will nottolerate 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 on our business, financialcondition or results of operations.

 

**Ourprocessing, storage, use and disclosure of personal data could give rise toliabilities as a result of governmental regulation, conflicting legalrequirements or differing views of personal privacy rights.**

 

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In our processing oftravel transactions, we receive and store a large volume of personallyidentifiable data.  This data isincreasingly subject to legislation and regulations in numerous jurisdictionsaround the world, including the Commission of the European Union (“E.U.Commission”) through its Data Protection Directive and variations of thatdirective 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 attacksof September 11, 2001 in the United States, government agencies have beencontemplating or developing initiatives to enhance national and aviation security,including the Transportation Security Administration’s Computer-AssistedPassenger Prescreening System, known as CAPPS II. These initiatives may resultin conflicting 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 to allegedlyimproper disclosure of passenger information. These and other privacy developments that are difficult to anticipatecould adversely impact our business, financial condition and results ofoperations.

** **

**Stateand local tax issues have the potential to have an adverse effect on ourfinancial condition and results of operations.**

** **

Some state and localtaxing authorities impose taxes on the sale, use or occupancy of hotel roomaccommodations, which are called transient, occupancy, accommodation, sales orhotel room taxes.  Hotel operatorsgenerally collect and remit these occupancy taxes.  Consistent with that practice, when acustomer books a merchant hotel room through one of our travel services, wecollect from the customer an amount sufficient to pay the hotel its room chargeand the occupancy taxes on that charge, as well as additional amountrepresenting our fee.

 

We do not collect orremit occupancy taxes on our fee.  Sometax authorities claim that occupancy taxes should be collected on some or allof that fee.  We believe there are strongarguments that our fee is not subject to occupancy taxes (although tax lawsvary among the jurisdictions).  We areattempting to resolve this issue with tax authorities in various jurisdictions,but we cannot predict the resolution in any particular jurisdiction.

 

We have established areserve for potential occupancy tax liability, consistent with applicableaccounting principles and in light of all current facts and circumstances.  The reserve represents our best estimate ofour contingent liability for occupancy taxes. A variety of factors could affect any actual liability for occupancytaxes, such as the number of jurisdictions that prevail in either assessingadditional occupancy taxes or negotiating a settlement with us, the feespotentially subject to tax in each jurisdiction, changes in applicable taxlaws, 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.

 

**Regulatorydevelopments abroad could limit our ability to compete by restricting ourflexibility to respond to competitive conditions, which could cause ourcustomers to be diverted to our competitors and adversely affect our revenueand results of operations.**

 

The E.U. Commission is engaged in a comprehensivereview of its rules governing CRS systems. It is unclear when the E.U. Commission will complete its review and whatchanges, if any, will be made to its CRS rules. We could be unfairly and adversely affected if, for example, these rulesare retained as to traditional global distribution systems used by travelagencies but are not applied to travel distribution websites owned by more thanone airline.  We could also be adverselyaffected if restrictions are imposed or continued on CRS advertising anddisplays or if additional limitations are placed upon our right to contractwith travel agents or airlines.

 

We could also beadversely affected if changes to any of the foregoing CRS rules increase ourcost of doing business or weaken the non-discriminatory participation rules toallow one or more large airlines owning a competing CRS to discontinue or tolower its level of participation in our global distribution system.

 

**Ourinternational operations are subject to other risks, which may impede ourability to grow internationally and adversely affect our overall results ofoperations.**

 

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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 from local businesses, whichmay have a better understanding of, and ability to focus on, local consumersand their preferences, as well as more established local brand recognition andbetter access to local financial and strategic resources,

 

•                  difficulty in developing, managing andstaffing international operations as a result of distance, language andcultural differences,

 

•                  local economic and political conditions,including conditions resulting from the existing and potential conflicts in theMiddle East,

 

•                  restrictive governmental actions, such astrade protection measures, including export duties and quotas and custom dutiesand tariffs,

 

•                  changes in legal or regulatoryrequirements,

 

•                  limitations on the repatriation of funds,

 

•                  consumer protection laws and restrictionson pricing or discounts,

 

•                  lack of, or the failure to implement, theappropriate infrastructure to support our technology,

 

•                  lesser protection in some jurisdictionsfor our intellectual property,

 

•                  laws and policies of the U.S. affectingtrade, foreign investment and loans; and

 

•                  foreign tax and other laws.

 

These risks may adverselyaffect our ability to conduct and grow business internationally, which couldcause us to increase expenditures and costs, decrease our revenue growth orboth.

 

**Item 3****. Quantitative andQualitative Disclosures about Market Risk**

** **

**InterestRate Risk**

** **

At September 30, 2004 our exposure to interest rateswas related primarily to our marketable securities portfolio.  Offsetting some of this exposure was thefixed to floating interest rate swaps on our public notes and capitallease.  The objectives of our marketablesecurities are safety of principal, liquidity maintenance, yield maximizationand full investment of all available funds. As such, our investment portfolio consists primarily of high creditquality money market mutual funds, certificates of deposit, bankers’acceptances, commercial paper, mortgage-backed and receivables-backed securitiesand corporate and government notes, including tax-exempt municipalsecurities.  If short-term interest rateshad been 10% lower during the nine months ended September 30, 2004, ourinterest income from marketable securities would have decreased by approximately$1 million.  This amount was determinedby applying the hypothetical interest rate change to our average balance ofmarketable securities during the nine months ended September 30, 2004.

 

At September 30, 2004 wehad obligations under fixed rate notes of $400 million (“Notes”) and a $168million capital lease obligation.  Weentered into fixed to floating interest rate swaps related to $300 million ofthe outstanding Notes, effectively converting $300 million of the $400 millionfixed rate Notes into floating rate obligations.  In September 2003, we also entered into afixed to floating interest rate swap that effectively converts $100 million ofthe capital lease obligation into a floating rate obligation (see Note 6 to theConsolidated Financial Statements for additional details on the swaps).  If short-term interest rates had been 10%higher during the nine months ended September 30, 2004, our interest expensewould have increased by approximately $0.4 million. This amount was determinedby applying the hypothetical interest rate change to our floating rateborrowings balance during the nine months ended September 30, 2004.

 

If our mix of interestrate-sensitive assets and liabilities changes significantly, we may enter intoadditional derivative transactions to manage our net interest rate exposure.

 

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**ForeignCurrency 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 nine months ended September 30, 2004,the increase in our foreign expenses can have a negative impact on ouroperating results.  To reduce the impactof this earnings volatility, we hedge a portion of our foreign currencyexposure by entering into foreign currency forward contracts on our threelargest foreign currency exposures. These contracts, totaling $89 million at December 31, 2003 and $106million at September 30, 2004, represent obligations to purchase foreigncurrencies at a predetermined exchange rate, to fund a portion of our expensesthat are denominated in foreign currencies. Beginning in March 2004 we also began to hedge a portion of our foreigncurrency exposure using option contracts, which give us the right to purchaseforeign currencies at predetermined exchange rates to fund a portion of ourexpenses that are denominated in foreign currencies.  As of September 30, 2004 $14 million ofoption contracts remain outstanding.  Theresult of an immediate 10 percent devaluation of the U.S. dollar in 2004from September 30, 2004 levels relative to our primary foreign currencyexposures would result in an increase in the U.S. dollar-equivalent of foreign currencydenominated expenses of approximately $0.1 million for the remainder of2004, net of hedge instruments outstanding. This sensitivity analysis was prepared based upon 2004 projections ofour primary foreign currency-denominated expenses and foreign currency forwardand options contracts outstanding as of September 30, 2004.

 

**Item 4****. Controls andProcedures**

*** ***

***Quarterly Controls Evaluation and Related CEO and CFOCertifications.****** ***We conducted an evaluation of theeffectiveness of the design and operation of our disclosure controls andprocedures as of the end of the period covered by this Quarterly Report. Thecontrols evaluation was conducted by our Disclosure Controls Council, comprisedof senior representatives from our Finance, Accounting, Internal Audit, Tax,Investor Relations, Corporate Communications and Legal Departments under thesupervision of our principal executive officer (“CEO”) and principal financialofficer (“CFO”).

 

Attached as exhibits tothis Quarterly Report are certifications of our CEO and our CFO, which arerequired in accordance with Rule 13a-14 of the Securities Exchange Act of 1934,as amended (“Exchange Act”). This “Controls and Procedures” section includesthe information concerning the controls evaluation referred to in thecertifications, and it should be read in conjunction with the certificationsfor a more complete understanding of the topics presented.

 

***Limitations on the Effectiveness of Controls*****.**    Our management,including our CEO and CFO, believes that our disclosure controls and proceduresare designed to provide, and effectively provide, reasonable assurance ofachieving their objectives.  We do notexpect that these controls and procedures will prevent all errors and all fraud.  A system of controls and procedures, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the system are met.  Because of the limitations in all suchsystems, no evaluation can provide absolute assurance that all control issuesand instances of fraud, if any, within the Company have been detected.  Furthermore, the design of any system ofcontrols and procedures 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 system of controls andprocedures, misstatements or omissions due to error or fraud may occur and notbe detected.

 

***Scope of the Controls Evaluation.*** The evaluation of our disclosure controls and procedures included areview of their objectives and design, the Company’s implementation of thecontrols and procedures and the effect of the controls and procedures on theinformation generated for use in this Quarterly Report. In the course of theevaluation, we sought to identify whether we had any data errors, controlproblems or acts of fraud and confirm that appropriate corrective action,including process improvements, were being undertaken if needed. This type ofevaluation is performed on a quarterly basis so that the conclusions ofmanagement, including the CEO and CFO, concerning the effectiveness of thedisclosure controls and procedures can be reported in our Quarterly Reports onForm 10-Q and to supplement our disclosures made in our Annual Report on Form10-K. Many of the components of our disclosure controls and procedures are alsoevaluated by our Internal Audit Department, our Legal Department and bypersonnel in our Finance organization. The overall goals of these variousevaluation activities are to monitor our disclosure controls and procedures onan ongoing basis, and to maintain them as dynamic systems that change asconditions warrant.

 

***Evaluationof disclosure controls and procedures*****. **As of the end of the period covered by this report, our CEO and CFOevaluated the effectiveness of our disclosure controls and procedures.  Based on these evaluations and subject to thelimitations noted above, our CEO and CFO believe (i) that our disclosurecontrols and procedures have been designed to provide reasonable assurance thatinformation required to be disclosed by us in this Report is recorded, processed,

 

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summarized and reported within the time periodsspecified in the SEC’s rules and forms and that such information is accumulatedand communicated to our management, including the CEO and CFO, as appropriateto allow timely decisions regarding required disclosure; and (ii) that ourdisclosure controls and procedures are functioning as designed as of September30, 2004.

 

***Changesin internal controls over financial reporting. ***Duringthe three months ended September 30, 2004, there was no change in our internalcontrol over financial reporting (or in other factors) that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting, including any corrective actions required with regardto significant deficiencies or material weaknesses.

 

***Conclusions regarding disclosure controls.*** Based upon the required evaluation of disclosure controls, the CEO andCFO have concluded***,******asof September 30, 2004******,*********that, subject to the limitations noted above, theCompany’s disclosure controls are effective to provide reasonable assurancethat material information relating to the Company and its consolidatedsubsidiaries is made known to management, including the CEO and CFO.

 

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

** **

***Item 1. Legal Proceedings***

*** ***

We are party to two lawsuits against Northwest relatedto Northwest’s August 24, 2004 announcement and implementation on September 1,2004 of a fare supplement for travel reservation bookings made through a GDS(including the *Sabre* GDS) bytraditional travel agencies and some online travel sites (such asTravelocity).  We notified Northwest thatit was in breach of the parties’ agreements, the DCA 3-Year Option Agreement,an amendment to their Participating Carrier Distribution and Services Agreement(“PCA”).  We also took commercial steps,which we believed were reasonable under the DCA 3-Year Option Agreement andPCA, in order to enforce both agreements.

 

The Company sued Northwest on August 24, 2004 in SabreInc. v. Northwest Airlines, Inc., Civil Action 4-04-CV-612-Y in the Fort WorthDivision of the United States District Court for the Northern District ofTexas.  We allege that Northwest breachedthe PCA, as amended by the DCA 3-Year Option Agreement.  Among other things, the DCA 3-Year OptionAgreement requires that Northwest provide us with fares and other content forthe *Sabre*GDS that Northwestmakes available through other channels of ticket distribution.  We believe that Northwest breached the DCA3-Year Option Agreement by imposing a fare supplement on tickets booked on the *Sabre* GDS and other competing GDSs but noton other channels of ticket distribution. We seek monetary damages, attorneys fees, and to compel Northwest toadhere to the terms of their agreements. On September 14, 2004, Northwest moved the Fort Worth court to dismissthe suit or transfer it to federal court in Minneapolis, Minnesota.  Briefing on the motion has been completed.

 

On August 25, 2004 Northwest sued Sabre HoldingsCorporation, Sabre Inc. and Sabre Travel International Ltd. in a separateaction styled Northwest Airlines Corporation v. Sabre Inc. et al., Cause No.04-CV-03889 in the same Minneapolis federal court to which Northwest latersought to transfer the Fort Worth action. This Minneapolis action relates tothe same factual events described above. In its complaint filed on August 25, 2004, Northwest asserted that webreached our PCA with Northwest by our commercial actions in response to Northwest’sAugust 24, 2004 breach of the PCA.  OnSeptember 27, 2004, Northwest filed an amended complaint in the same causenumber adding allegations that we had violated Section 2 of the Sherman Act,claiming that we had monopoly power and also asserting claims against us foralleged interference with prospective contractual relations, deceptive tradepractices, fraud, false advertising under the federal Lanham Act, and for adeclaratory judgment that Sabre, and not Northwest, is in breach of thePCA.  Northwest alleges that it hassuffered unspecified damages. Northwest seeks treble damages under theantitrust laws, attorneys fees, to have the court declare that we breached theparties’ agreement and violated federal and state statutes, and to enjoin usfrom certain conduct.  On September 1, 2004,we moved to dismiss, stay, or transfer Northwest’s Minneapolis action to thefederal court in Fort Worth.  That motionis scheduled to be heard by the Court in Minneapolis on November 10, 2004.

 

***Item 2. Unregistered Sales of EquitySecurities and Use of Proceeds***

*** ***

(a) – (b) None.

 

(c)          Thefollowing table provides information about purchases by the company (and itsaffiliated purchasers) during the three months ended September 30, 2004 ofequity securities that are registered by the company pursuant to Section 12 ofthe Exchange Act.

 

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### **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** | ** ** |
|-------------------------------------|------------|-----------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| July 07/01/04 –  07/31/04      |       | 806,600                                 |       | 26.06                                        |       | 806,600                                                                            |       | $                                                                                  | 43,973,770 |   |
| August 08/01/04  – 08/31/04    |       | 928,700                                 |       | 23.66                                        |       | 928,700                                                                            |       | $                                                                                  | 22,003,266 |   |
| September 09/01/04  – 09/30/04 |       | 887,100                                 |       | 23.68                                        |       | 887,100                                                                            |       | $                                                                                  | 993,159    |   |
| Total 3rd  Quarter 2004 Repurchases |       | 2,622,400                               |       | 24.41                                        |       | 2,622,400                                                                          |       |                                                                               |       |

 

On April 19, 2004 ourBoard of Directors approved a share repurchase program authorizing us torepurchase up to $100 million of our Common Stock.  As of September 30, 2004, we had purchasedapproximately $99 million of our Common Stock pursuant to thisauthorization.  In addition, on October26, 2004, our Board of Directors approved another share repurchase programauthorizing us to repurchase up to an additional $100 million of our CommonStock.  We will generally seek to makefuture share repurchases pursuant to 10b5-1 trading plans, unless such plansare supplemented or terminated at the discretion of management.

 

***Item 3. Defaults Upon Senior Securities***

None.

 

***Item 4. Submission of Matters to a Vote ofSecurity Holders***

None.

 

***Item 5. Other Information***

(a)  Ernst & Young LLP (“E&Y”), notifiedthe SEC, the Public Company Accounting Oversight Board and the AuditCommittee of our Board of Directors (the “Audit Committee”) that E&Yrecently determined that certain non-audit services that its Chineseaffiliate performed for affiliates of the Company raised a question asto E&Y’s independence with respect to its performance of auditservices for the Company.  E&Y disclosed the matter to the AuditCommittee for its consideration and informed the Audit Committee that itbelieves that these services did not impair E&Y’s independence with respectto its performance of audit services for the Company.

 

In 2003, theCompany and the E&Y audit engagement team discovered that duringthe period 1999 to April 2003, a China affiliate of E&Y paid invoices,disbursed payroll and calculated certain payroll tax liabilities for Chinabranch offices of Sabre Inc. and ABACUS International Ltd. (a Singapore-basedjoint venture company of which we own 35%). These services were discontinuedwhen the Company and the E&Y audit engagement team learned of them in2003.

 

As part of its ongoingoversight of E&Y’s independence, the Audit Committee of our Board ofDirectors determined that these services did not impair E&Y’s independentstatus as the Company’s external auditor. In making this determination, the Audit Committee considered the deminimis amount of money held by the E&Y China affiliate, the ministerialnature of the services, the lack of involvement by personnel of the E&YChina affiliate in the consolidated audit of the Company, the prompttermination of the services upon discovery by the audit teams, and that theactivities and offices involved were immaterial to the consolidated financialstatements of the Company.

 

(b)           None.

 

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***Item 6******. Exhibits***

 

The following 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               |       | Master Agreement dated August 20,2004 by and between  Otto GmbH, Otto Co KG, Otto Freizeit und Touristik GmbH, Travelocity.com LP,  Travelocity GmbH, Kommanditgesellschaft Travel Overland Flugreisen GmbH &  Co., and Travelocity Holdings Gmbh. (3) |
| 10.2               |       | Share Transfer Agreement dated October 1, 2004 by  Travelocity Holdings GmbH and Travelocity Sabre GmbH. (3)                                                                                                                                               |
| 10.3               |       | Share Purchase and Transfer Agreement dated October  1, 2004 between Travelocity Holdings GmbH and Kommanditgesellschaft Travel  Overland Flugreisen GmbH & Co. (3)                                                                                    |
| 10.4               |       | Share Transfer Agreement between  Kommanditgesellschaft Travel Overland Flugreisen GmbH & Co., Otto  Freizeit und Touristik GmbH and Travelocity GmbH. (3)                                                                                             |
| 10.5               |       | Share Purchase and Transfer Agreement dated October  1, 2004 between Otto Freizeit und Touristik GmbH and Travelocity GmbH. (3)                                                                                                                            |
| 10.6               |       | Form of Intellectual Property and Confidentiality  Agreement for Mark K. Miller. (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 November  5, 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  November 5, 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 November 5, 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 November 5, 2004, signed by Jeffery M. Jackson as Chief Financial  Officer (4)                                         |

 

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(1)                                                          Incorporated by reference to Exhibit 3.1to our report on Form 10-Q for the quarter ended September 30, 2000.

(2)                                                          Incorporated by reference to Exhibit 3.2to our report on Form 10-Q for the quarter ended September 30, 2001.

(3)                                                          Filed herewith.

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

 

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**Signature**

** **

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                   | SABRE HOLDINGS  CORPORATION |
|------------------------|-----------------------------|
|                   |                        |   |
|                   |                        |   |
|                   | By:                         | /s/ JEFFERY M. JACKSON |
| Date:November 5,  2004 |                        | Jeffery M. Jackson*Executive Vice President, Chief Financial Officer  and Treasurer  (Principal Financial Officer)* |

 

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